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Monday, May 20, 2019

Gauhati University Question Papers: Financial Management (Nov-Dec’ 2016)

Full Marks: 80
Time: 3 hours
(The figures in the margin indicate full marks for the questions)
1. Answer the following as directed:                                                    1x10=10

a)         EPS is calculated as:
1)         Earnings available to preferred and equity shareholders.
Number of preferred and equity shares outstanding.
2)         Earnings available to equity shareholders.
Number of equity shares outstanding.
3)         Profit available to shareholders.
Market price per share
4)         Earnings to shareholders.
Number of shares issued to promoters and shareholders.
b)         For investment decision purpose, when(beta) = 1, the investment is considered to be of average (normal) risk, the greater the value of beta:
1)         The greater would be the risk and vice versa.
2)         The lesser would be the risk and vice versa.
3)         The lesser would be the risk with greater return.
4)         The greater would be the return with lessor risk.
c)          Modigliani and Miller in capital structure theory argue:
1)         That it does not support the net operating income approach.
2)         That in the absence of corporate tax, the cost of capital and the market value of the firm remains invariant to the changes in capital structure.
3)         Investment may not have homogeneous expectations.
4)         There shall be a uniform tax rate followed by all firms.
d)         Market capitalization is a measure of:
1)         Wealth created by equity.
2)         Share price indicator of the entity.
3)         Market price indicator of the securities.
4)         Cost of equity as compared to market price of the equity.
e)         Financial leverage refers to:
1)         The use of debt pay dividend.
2)         The use of fixed income securities to meet deficiency in dividend payment.
3)         The use of fixed income securities to increase the EPS.
4)         The use of equity to increase the EPS.
f)          The size of debtors of a firm is determined by its:
1)         Level of sales, credit terms, asset-liability mix.
2)         Level of sales, credit terms, collection policy.
3)         Level of purchase, credit terms, collection policy.
4)         Both (1) and (3).
g)         Dividend yield is computed as:
1)         Dividend per share divided by the market price per share.
2)         Dividend per share divided by face value per share.
3)         Total profit divided by EPS.
4)         Total profit divided by number of shares outstanding.
h)         Payout ratio in dividend decision refers to:
1)         Total earnings divided by number of shares outstanding.
2)         Dividend as a percentage of earnings.
3)         Profit after tax divided by market price per share.
4)         Market price per share divided by number of shares outstanding.
i)           The Internal Rate of Return (IRR) is:
1)         The rate of return received on original capital invested in a project.
2)         The return left for equity investors after payment of interest on long-term securities.
3)         The rate that equates the investment outlay with the present value of cash inflow received after, one period.
4)         The rate that is equal to cash inflow received over a period with total equity and debt investment.
j)           The relationship between return and risk can be simply expressed as:
1)         Return = risk free rate – cost of investment.
2)         Risk premium – cost of investment.
3)         Return = risk free rate + risk premium.
2. Answer the following questions in about 30 words each:                                2x5=10
a)         State the objective of wealth maximization.
b)         State the meaning of ‘risk’ in financial management.
c)          State the use of credit policy in the context of working capital.
d)         State the meaning of accounting rate of return.
e)         State the meaning of EPS.
3. (a) Answer the following within 150-200 words each:                                  5x4=20
(1) Take the following case:

Year I
Year II
Credit sales
Rs. 12,00,000
Rs. 18,00,000
Credit to debtors
3 months
3 months
Find the average debtors; and show the impact of credit policy on sales and debtors in year II over year I.
Define opportunity cost of capital. How is it computed?
(b) Discuss EBIT-EPS analysis of capital structure.
Explain the factors determining the capital structure.
(c) State the manner of computation of degree of financial leverage.
Describe the various perspectives of financial goals.
(d) State the manner of computation of the cost of equity and debt capital.
4. Answer the following questions in about 600 words each:                                10x4=40
(a) From the following information in respect of Hatidhura Tea Company, calculate the net present value of the two projects and suggest which of the two projects should be accepted assuming a discount rate of 10%.

Project X
Project Y
Initial investment
Rs. 20,000
Rs. 30,000
Estimated life
5 years
5 years
Scrap value
Rs. 700
Rs. 1,200
The profits before depreciation and after taxes (cash flow) are as follows:

Year 1
Year 2
Year 3
Year 4
Year 5
Project X
Project Y

Elaborate the Modigliani and Miller hypothesis of dividend decisions. Examine its validity.
(b) From the following information extracted from the books of Jagiroad Enterprise Ltd., compute the operating cycle in days in respect of working capital.                                                10
Period covered
Average period of credit
Average total debtors outstanding
Raw materials consumption
Total production cost
Total cost of sales
Sales of the year
Value of average stock maintained:
Raw materials
Work in progress
Finished goods
365 days
16 days
Rs. 4,80,000
Rs. 42,00,000
Rs. 160,00,000

Rs. 3,20,000
Rs. 3,50,000
Rs. 2,60,000

Give a critical analysis of Net Present Value (NPV) vs. Internal Rate of Return (IRR).                                                                                                                                                   10
(c) Describe any two theories of capital structure.                        10
Describe the scope and functions of financial management.
(d) Jagan Coal Company is considering the following investment projects:
Cash flows (Rs.)

– 10,000
– 10,000
– 10,000
– 10,000
+ 10,000
+ 7,500
+ 2,000
+ 10,000
+ 7,500
+ 4,000
+ 3,000
+ 12,000
+ 3,000
Rank the project according to pay back method.                                     10
Discuss the investment evaluation criteria for investment decisions in financial management.


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