CUSTOMER_CODE
SMUDE
DIVISION_CODE
SMUDE
EVENT_CODE
OCTOBER15
ASSESSMENT_CODE BB0011_OCTOBER15
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
31339
QUESTION_TEXT
What are the significances of cost of capital?
Ans:
Capital budgeting decisions: Cost of capital is a basic input information
required in investment decisions. Under NPV method, a project is accepted if it
has a positive NPV, when cash flows are discounted at cost of capital. Under
IRR method, a project is accepted if it has a return greater than the cost of
capital. (2 marks)
SCHEME OF
EVALUATION
Designing debt policy:
While designing debt policy and determining the debt equity proportions, the
firm aims at minimizing the overall cost of capital. Cost of capital of different
sources is not same. Therefore the firm should always aim at raising the source
of finance which is cheap, in an effort to reduce overall cost of capital. (2
marks)
Performance appraisal: Cost of capital figure is used as a benchmark to
measure the performance of the management in rising finance. Actual cost of
capital is compared with the standard cost of capital to evaluate the
performance of the management. (2 marks)
Dividend decision: Cost of capital is also very
useful while taking dividend decision. Whether the earnings of the company
should be retained or distributed also depends on cost of capital.(2 amrks)
Leasing, hire-purchase, working capital managent etc.: The cost of capital is
also used in case of leasing, hire-purchase and working capital management
decisions. (2 marks)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
31343
QUESTION_TEXT
Briefly explain the important sources of Working capital.
Ans:
Long Term Financing:
a) Loan from Financial Institutions: The option is normally ruled out, because
financial institutions do not provide finance for working capital requirements.
Further this facility is not available to all companies.
SCHEME OF
EVALUATION
b) Floating of Debentures: The probability of a successful floatation of
debentures seems to be rather meager.
c) Accepting Public Deposits: The issue of tapping public deposits is directly
related to the image of the company seeking to invite public deposits. But, the
problem of low profitability in many industries is very common.
d) Issue of Shares: With a view to financing additional working capital needs,
issue of equity shares could be considered. Low profit margin and the lack of
knowledge about company make the success of a capital issue very dim.
e) Raising funds by Internal Financing: Raising funds from Operational profits
poses problems for many companies, because prices of their end-products are
controlled and do not permit companies to earn profits sufficient to pay
reasonable dividend and retain profits to cover margin money requirements to
finance additional working capital.
Short-term Financing:
Short-term Financing refers to those sources of short-term credit that the
firm must arrange in advance. These sources include short-term bank
loans, commercial papers and factoring receivables.
Spontaneous Financing:
Spontaneous Financing refers to the automatic sources of short-term funds.
The major sources of such financing are trade credit (creditors & bills payable)
and outstanding expenses. Spontaneous sources of finance are cost free.
Therefore, a firm would like to finance its current assts from spontaneous
sources as much as possible.
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
73865
QUESTION_TEXT
Comment on profit maximization v/s wealth maximization.
SCHEME OF
EVALUATION
Both profit and wealth maximization are the basic objectives of
financial management. Trading profit maximization was the basic
objective but now greater emphasis is laid on wealth maximization.
1. Profit maximization.
(3 marks)
2. Merits of profit maximization.
(2 marks)
3. Drawbacks of profit maximization.
(2 marks)
4. Wealth maximization.
(3 marks)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
73867
QUESTION_TEXT
Discuss the traditional methods of capital budgeting appraisal?
1. Payback period method.
(5 marks for Explanation)
SCHEME OF EVALUATION
2. Accounting rate of return method.
(5 marks for Explanation)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
73868
QUESTION_TEXT
Discuss the external factors determining the working capital.
Factors: one mark each
1. Nature of business
2. Size of business
3. Firm’s production policy
4. Firm’s credit policy
5. Access to money market
SCHEME OF EVALUATION
6. Growth and expansion of business
7. Profit margin and dividend policy
8. Depreciation policy
9. Operating efficiency of firm
10. Co- ordination of activities in firm
(1 mark each)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
103631
QUESTION_TEXT
What are the important financial tools used by financial managers in
performance of his job?
1.
2.
SCHEME OF
EVALUATION
3.
4.
5.
Cost of Capital: Cost of capital helps the finance manager in deciding about the
sources from which the funds are to be raised. In case of different sources of
finance viz., shares, debentures, loans from financial institutions, banks, deposits,
etc., the financial manager takes into account the cost of capital and opts for that
source which is the cheapest to him.
Funds Flow Analysis and Cash Flow Analysis: This technique helps the finance
manager in determining whether the funds have been procured from the best
available source and they have been utilized in the best possible way. Projected
fund flow analysis and cash flow analysis helps in estimating or arranging for the
future working capital or cash needs.
Capital Budgeting Appraisal: Methods such as payback period, average rate of
return, internal rate of return, net present value, profitability index, etc., helps the
finance manager in selecting the best among alternative capital investment
proposals.
Trading on Equity: Trading on equity is another tool which helps the finance
manager in incresing the return to equity shareholders.
Ratio Analysis: Ratio analysis is another method for evaluating different aspects of
the firm. Different ratio’s serves different purposes to finance manager.
(2 × 5 = 10 marks)