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FT FT FT FT- -- -203C FINANCIAL MANAGEMENT 203C FINANCIAL MANAGEMENT 203C FINANCIAL MANAGEMENT 203C FINANCIAL MANAGEMENT

Unit 1: Introduction to Financial Management
1) Define Financial Management. Discuss the nature and scope of financial
management. What role should the financial manager play in a modern organization?
2) Define the scope of Financial Management. What is the objective of financial
management-Profit Maximization or Wealth Maximization? Discuss.
3) What is finance function? Is it a risk-return trade off? What is the role of a modern
financial manager?
4) What is the importance of finance function in the management of an organization?
5) Why the Wealth Maximization objective of financial management is superior to
Profit Maximization? Explain in detail.
6) Explain the significance of Financial Management in detail.
7) Distinguish between Financial Management and Management Accounting with clear
mention of basis of differences.
8) How does the modern financial manager differ from the traditional financial
manager? Discuss.
9) The basic rationale for the objective of wealth maximization is that it reflects the most
efficient use of the societys economic resources and thus leads to a maximization of
societys economic wealth. Comment critically.
10) Finance function is closely related to other functions in a business organization.
Explain giving the suitable examples of this relationship in respect of each other
function.
11) What are the various sources of financial information? How are they helpful in
making a better financial plan?
12) Write short notes on:
a. Finance Function
b. Sources of financial information
c. Executive functions of a modern finance manager
13) Define the following:
a. Annuity
b. Discount Rate
c. Future Value
d. Present Value
e. Annuity Discount Factor
14) What is the concept of time value? Examine the various techniques employed to
adjust the time value of money.

15) If you deposit Rs. 5,000 today at 6% rate of interest, in how many years will this
amount double?
16) Calculate the compound value of Rs. 10,000 at the end of 3 years at 12% rate of
interest, when interest is calculated on (a) yearly basis and (b) quarterly basis.
17) A company offers 12% rate of interest on deposits. What is the effective rate of
interest if the compounding is done (a) half yearly (b) quarterly and (c) monthly?
18) Mr. A deposits Rs. 1,000 at the end of every year for 4 years and the deposit earns a
compound interest @ 10% p.a. Determine how much money he will have at the end
of 4 years?
19) Mr. X is to receive Rs. 5,000 after 5 years from now. His time preference from money
(rate of interest) is 10% p.a. Calculate its present value by using discount factor
tables.
20) Calculate present value of the following cash flows assuming a discount rate of 10%.
Year 1 2 3 4 5
Cash Flows (Rs.) 5,000 10,000 10,000 3,000 2,000

21) X deposits Rs.1,00,000 on retirement in a bank which pays 10% annual interest. How
much can he withdraw annually for a period of 10 years if PVIFA 10% is 6.145.


Unit 2: Capital Budgeting:
1) What is Capital Budgeting? Explain its significance for a firm.
2) What is Capital Budgeting? Describe the steps of Capital Budgeting.
3) Capital expenditure decisions are by far the most important decisions in the field of
financial management. Illustrate.
4) Explain the factors affecting capital expenditure decisions.
5) Give a comparative description of various methods of ranking investment proposals.
6) Discuss and explain the salient features of the following methods for ascertaining the
profitability of capital expenditure projects:
a. Pay-back period method
b. Return on Investment method
7) Discuss briefly the Net Present Value method and state its merits and demerits in
evaluating capital expenditure.
8) Determine the payback period for a project which requires a cash outlay of Rs. 10,000
and generates cash inflows of Rs. 2,000, Rs. 4,000, Rs. 3,000 and Rs. 2,000, in the
first, second, third and fourth year respectively
9) A project cost Rs. 5,00,000 and yields annually a profit of Rs. 80,000 after
depreciation @ 12% p.a. but before tax of 50%. Calculate the payback period.
10) Calculate discounted payback period from the information given below:
Cost of project Rs. 6,00,000
Life of the project 5 years
Annual cash inflow Rs. 2,00,000
Cut off rate 10%
11) From the following information 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%.
Particulars Project X Project Y
Initial investment Rs. 20,000 Rs. 30,000
Estimated life 5 years 5 years
Scrap value Rs. 1,000 Rs. 2,000



The profits before depreciation and after taxes (cash flows) are as follows:
Projects Year 1 (Rs.) Year 2 (Rs.) Year 3 (Rs.) Year 4 (Rs.) Year 5 (Rs.)
Project X
Project Y
5,000
20,000
10,000
10,000
10,000
5,000
3,000
3,000
2,000
2,000

12) No project is acceptable unless the yield is 10%. Cash inflows of a certain project
along with cash outflows are given below:
Years Outflows(Rs.) Inflows (Rs.)
0 1,50,000 -
1 30,000 20,000
2 30,000
3 60,000
4 80,000
5 30,000
The salvage value at the end of the 5
th
year is Rs. 40,000. Calculate Net Present Value.

13) Calculate Internal Rate of Return from the following:
Initial investment
Life of the asset
Estimated net annual cash flows:
1
st
year
2
nd
year
3
rd
year
4
th
year
Rs. 60,000
4 years

15,000
20,000
30,000
20,000

14) The initial cash outlay of a project is Rs. 50,000 and it generates cash inflows of Rs.
20,000, Rs.15,000, Rs. 25,000 and Rs. 10,000 in four years.
Using present value index method, appraise profitability of the proposed investment
assuming 10% rate of discount.

15) Using the information given below, compute the payback period under:
(a) Traditional payback method
(b) Discounted pay-back method
Initial outlay
Estimated Life
Profit after tax:
End of 1
st
year
End of 2
nd
year
End of 3
rd
year
End of 4
th
year
End of 5
th
year
Rs. 80,000
5 years

6,000
14,000
24,000
16,000
nil
Depreciation has been calculated under straight line method.
The cost of capital may be taken at 20% p.a. and the P.V. of Rupee 1 at 20% is given
below:
Year 1 2 3 4 5
P.V. Factor 0.83 0.69 0.58 0.48 0.40

16) X ltd. is considering the purchase of a machine. Two machines are available E and F.
The cost of each machine is Rs. 60,000. Each machine has an expected life of 5 years.
Net profits before tax and after depreciation during the expected life of the machines are
given below:
Year Machine E (Rs.) Machine F (Rs.)
1 15,000 5,000
2 20,000 15,000
3 25,000 20,000
4 15,000 30,000
5 10,000 20,000
Total 85,000 90,000

Following the method of Average Return on Average Investment ascertain which of the
alternatives will be more profitable. The average rate of tax may be taken at 50%.

17) The following details relate to the two machines X and Y:
(Amount in Rs.)
Particulars Machine X Machine Y
Cost 56,125 56,125
Estimated Life 5 years 5 years
Estimated Salvage Value 3,000 3,000
Annual Income After Tax and
Depreciation:
Year I
Year II
Year III
Year IV
Year V


3,375
5,375
7,375
9,375
11,375


11,375
9,375
7,375
5,375
3,375
Overhauling charges at the end of 3
rd
year is Rs.25,000 in case of Machine X.
Depreciation has been charged at Straight Line Method. Discount rate @ 10% for five
years are:
Year I II III IV V
P.V. Factor 0.909 0.826 0.751 0.683 0.621
Using Net Present Value method, suggest which machine should be chosen?

Unit 3: Cost of Capital
1) What is cost of capital? Explain the significance of cost of capital.
2) What is the importance of cost of capital? Discuss the problems in determining it.
3) Define the concept of cost of capital. State how you would determine the weighted
average cost of capital of a firm.
4) What is the relevance of cost of capital in capital budgeting and capital structure
planning decisions?
5) Examine critically the different approaches for computing the cost of equity. Discuss
the merits and demerits of each.
6) Write note on Average or Composite cost of capital.
7) What is weighted average cost of capital? Examine the rationale behind the use of
weighted average cost of capital.
8) Explain the various assumptions of Capital Asset Pricing Model.
9) (a) X Ltd. issues Rs. 50,000 8%debentures at par. The tax rate applicable to the
company is 50%.compute the cost of debt capital.
(b) Y Ltd. issues Rs.50,000 8% debentures at a premium of 10%. The tax rate
applicable to The company is 60%. Compute cost of debt capital.
(c) A Ltd. Issues Rs. 50,000 08% debentures at a discount of 5%. The tax rate is 50%,
compute the cost of debt capital.
(d) B Ltd. Issues Rs. 1,00,000 9% debentures at a premium of 10%. The costs of
floatation are 2%. The tax rate applicable is 60%. Compute cost of debt-capital.

10) A company issues Rs.10,00,000 10% redeemable debentures at a discount of 5 years.
Calculate before-tax and after-tax cost of debt assuming a tax rate of 50%.

11) A 5-years Rs.100 debenture of a firm can be sold for a net price of Rs. 96.50. The
coupon rate of interest is 14 per cent per annum, and the debenture will be redeemed
at 5 per cent premium on maturity. The firms tax rate is 40%.compute the after-tax
cost of debenture.

12) A company issues 10,000 10% preference shares of Rs.100 each. Cost of issues is
Rs.2 per share. Calculate cost of preference capital if these shares are issued (a) at
per, (b) at a premium of 10%, and (c) at a discount of 5%.

13) A company issues 10,000 10% preference shares of Rs.100 each redeemable after 10
years at a premium of 5%. The cost of issue is Rs. 2 per share. Calculate the cost of
preference capital.

14) A company issues 1,000 7% preference shares of Rs.100 each at premium of 10%
redeemable after 5 years at par. Compute the cost of preference capital.

15) A company issues 1000 equity shares of Rs.100 each at a premium of 10%. The
company has been paying 20 % dividend to equity shareholders for the five years and
expects to maintain the same in the future also .Compute the cost of equity capital.
Will it make any difference if the market price of equity share is Rs.160?

16) (a) A company plan to issue 1000 new shares of Rs.100 each at par. The floatation
costs are expected to be 5% of the share price. The company pays a dividend of Rs.10
per share initially and the growth in dividends is expected to be 5%. Compute the cost
of new issue of equity shares.
(b)If the current market price of an equity share is Rs.150, calculate the cost of
existing equity share capital.

17) The shares of a company are selling at Rs.40 per share and it had paid a dividend of
Rs. 4 per share last year. The investors market expects a growth rate of 5 per cent per
year.
(a) Compute the companys equity cost of capital;
(b) If the anticipated growth rate is 7 per cent per annum, calculate the indicated
market price per share.

18) A firm is considering an expenditure of Rs.60 Lakhs for expanding its operations.
The relevant information is as follows:
Number of existing equity shares 10 Lakhs
Market value of existing shares Rs.60
Net earnings 90 Lakhs
Compute the cost of existing equity share capital and of new equity capital assuming that
new shares will be issued at a price of Rs. 52 per share and the costs of new issue will
be Rs.2 per share.

19) You are given the following facts about a firm:
(i) Risk-free rate of return is 11%.
(ii) Beta co-efficient, i, of the firm is 1.25.
Compute the cost of equity capital using Capital Asset pricing Model (CAPM)
assuming a market return of 15 per cent next year. What would be the cost of
equity if i rises to 1.75.

20) A firm has the following capital structure and after tax costs for the different sources
of funds used:
Sources of funds Amount (Rs.) Proportion (%) After tax cost (%)
Debt 15,00,000 25 5
Preference shares 12,00,000 20 10
Equity shares 18,00,000 30 12
Retained earnings 15,00,000 25 11
Total 60,00,000 100
You are required to compute the weighted average cost of capital.

21) Continuing the above question, if the firm has 18,000 equity shares of Rs. 100 each
outstanding and the current market price is Rs. 300 per share, calculate the market
value weighted average cost of capital assuming that the market values and book
values of the debt and preference capital are the same.

22) In considering the most desirable capital structure for a company, the following
estimates of the debt and equity capital (after tax) have been made at various levels of
debt-equity mix:
Debt as a percentage of total capital
employed
Cost of debt
(%)
Cost of equity (%)
0 5.00 12.00
10 5.00 12.00
20 5.00 12.50
30 5.50 13.00
40 6.00 14.00
50 6.50 16.00
60 7.00 20.00
You are required to determine the optimal debt equity mix for the company by
calculating composite cost of capital.

23) The following is the capital structure of Saras Ltd. as on 31
st
December, 2003:
Particulars Rs.
Equity shares- 20,000 shares of Rs. 100 each 20,00,000
10% Preference shares of Rs. 100 each 8,00,000
12% Debentures 12,00,000
Total 40,00,000

The market price of the companys share is Rs. 110 and it is expected that a dividend of
Rs.10 per share would be declared after 1 year. The dividend growth rate is 6%.
(i) If the company is in the 50% tax bracket, compute the weighted average cost of
capital
(ii) Assuming that in order to finance an expansion plan, the company intends to
borrow a fund of Rs. 20 lakhs bearing 14% rate of interest, what will be the
companys revised weighted average cost of capital? This financing decision is
expected to increase dividend from Rs. 10 to Rs. 12 per share. However, the
market price of equity share is expected to decline from Rs. 110 to Rs. 105 per
share.

24) Agro Industries Ltd. has assets of Rs.3,20,000 which have been financed by
Rs.1,04,000 of debt, Rs.1,80,000 of equity shares and general reserve of Rs.36,000.
The companys total profits after interest and taxes for the year ended 31
st
March,
2004 were Rs.27,000. It pays 8% interest on debt capital and is in 50% tax bracket. It
has 1,800 equity shares of Rs.100 each selling at a market price of Rs.120 per share.
What is the weighted average cost of capital?
25) Your companys share is quoted in the market at Rs.20 currently. The company pays
a dividend of Rs.1 per share and the investors market expects a growth rate of 5%
per year.
a. Compute the companys equity cost of capital;
b. If the anticipated growth rate is 6% p.a., calculate the indicated market price
per share;
c. If the companys cost of capital is 8% and the anticipated growth rate is 5%
p.a., calculate the indicated market price if the dividend of Rs.1 per share is to be
maintained.

26) A company has on its books the following amounts and specific costs of each type of
capital:
Type of Capital Book value Market value Specific cost
Debt
Preference
Equity
Retained Earnings
4,00,000
1,00,000
6,00,000
2,00,000
3,80,000
1,10,000
-
12,00,000
5.0%
8.0%
-
13.0%
Total Rs.13,00,000 Rs.16,90,000
Determine the weighted average cost of capital using:
a. Book value weights
b. Market value weights
How are they different?

27) The following is the capital structure of XYZ Ltd:
Source Amount (Rs.) Market value (Rs.) Cost of capital (%)
16% Debt
14% Preference capital
Equity capital
3,00,000
2,00,000
5,00,000
2,70,000
2,30,000
7,50,000
8
14
17
Total 10,00,000 16,90,000
Calculate the weighted average cost of capital using book value weights and market value
weights.



Unit 4: Leverage Analysis
1) What do you understand by Cost-Volume-Profit relationship? Why is this relationship
important in business management?
2) Profit Volume Analysis is a technique of analyzing the costs and profits at various
levels of volume. Explain how such analysis helps management.
3) What is Break-Even Analysis? Discuss the uses and limitations of this technique.
4) What is Profit-Volume Ratio? Explain its uses.
5) Write short notes on:
a. Margin of safety
b. Contribution
c. Break Even Point
d. Profit-Volume Ratio
6) Explain the concept of Break-Even Analysis. Present it graphically. Also, discuss the
important assumptions and various limitations of Break-Even Analysis.

7) Find out P/V Ratio, Fixed Cost, Sales volume to earn a profit of Rs.40,000 from the
following data:
Sales Rs.1,00,000
Profit Rs.10,000
Variable Cost 70%

8) Find out Break-Even Point from the following data:
Selling price per unit Rs.20
Variable Cost per unit Rs.15
Fixed Overheads Rs.20,000
If sales are 20% above break-even level, determine net profits.

9) In a period, sales amount to Rs.2,00,000 and net profits Rs.20,000. fixed overheads are
Rs.30,000. find out:
a. P/V Ratio
b. Profit when sales will be Rs.3,00,000
c. Sales to earn a profit of Rs.30,000
d. Contribution when sales will be Rs.1,50,000
e. Variable costs for sales of Rs.2,00,000

10) R.S. Manufacturing Ltd. Budgets production of 3,00,000 units at a Variable cost of
Rs.10 each. The Fixed costs are Rs.20, 00,000. The selling price is fixed to yield 20%
profit on cost. You are required to calculate:
a. P/V Ratio
b. Break-Even Production units

11) The Anand Trading Ltd. manufactures one identical product Y. The following figures
are available for two successive years:
Particulars Year I Year II
Sales 3,00,000 3,60,000
Fixed Cost 90,000 1,20,000
Variable Costs 1,50,000 2,16,000
The Directors are interested to know for the two years:
a. The Profit-Volume Ratio
b. Break-Even Point
c. Margin of Safety
d. Margin of Safety Ratio

12)A company gives you following information about its product. Calculate:
Year Sales Profit
2003 15,000 400
2004 19,000 1,150
a. P/V Ratio
b. Profit or loss when sales are Rs.12,000
c. Sales required to earn a profit of Rs.2,000
d. Break-Even Point



13) AB Ltd. places before you the following trading results:
Year Sales Profit
2003 80,000 4000
2004 72,000 1,600
Find out:
a. P/V Ratio
b. Fixed Costs
c. B.E.P
d. The amount of profit if sales are Rs.1,00,000
e. Sales in Rs. when desired profit is Rs.3,000
f. Margin of Safety at a profit of Rs.4,500

14) Find out from the following:
a. P.V. Ratio
b. Fixed cost
c. Sales volume to earn a profit of Rs.40,000
Sales Rs.1,00,000
Profit Rs.10,000
Variable Cost 70%

15) The sales turnover and profit during two years were as follows:
Year Sales (Rs.) Profit (Rs.)
2002 1,40,000 15,000
2003 1,60,000 20,000
You are required to calculate:
a. P/V Ratio
b. Sales required to earn a profit of Rs. 40,000
c. Profit when sales are Rs.1,20,000
16) From the following information, calculate the break-even point in units and in sales
value:
Output 3,000 units
Selling price per unit Rs.30
Variable Cost per unit Rs.20
Total fixed cost Rs.20,000

17) From the following particulars, calculate:
a) Break-even point in terms of sales value and in units.
b) Number of units that must be sold to earn a profit of Rs.90,000
Fixed factory overheads cost Rs.60,000
Fixed selling overheads cost Rs.12,000
Variable manufacturing cost per unit Rs.12
Variable selling cost per unit Rs.3
Selling price per unit Rs.24

18) From the following data, you are required to calculate:
a) P/V Ratio
b) Break-even sales with the help of P/V Ratio
c) Sales required to earn a profit of Rs.4,50,000
Fixed expenses Rs.90,000
Rs.5
Rs.2
Variable cost per unit: Direct material
Direct labour
Direct overheads 100% of Direct labour
Selling price per unit Rs.12

19) From the following information calculate:
a) P/V Ratio
b) Break-even point
c) Margin of safety
Total Sales Rs.3,60,000
Selling price per unit Rs.100
Variable Cost per unit Rs. 50
Fixed cost Rs.1,00,000

20) Define Leverage. Explain its types. Discuss its significance.
21) Define Operating Leverage. Write its significance and impact on profits.
22) Which combination of operating and financial leverages constitutes (a) risky situation
and (b) ideal situation
23) Explain the concept of financial leverage. Show the impact of financial leverage on
the earnings per share.
24) How does trading on equity relate to financial leverage?
25) What is combined leverage? Examine its significance in financial planning of a firm.
26) Leverages are double edged weapons and should be used with great care. Explain
this statement with suitable illustrations.
27) Discuss the relation between debt financing and financial leverage.
28) How does operating leverage help in magnifying revenue of a concern?
29) What is meant by financial leverage? How does it magnify the revenue available for
equity shareholders?
30) Distinguish between operating leverage and financial leverage.
31) A ltd. Company has equity share capital of Rs. 5,00,000 divided into shares of Rs.
100 each. It wishes to raise further Rs. 3,00,000 for expansion cum modernization
plans. The company plans the following financing schemes:
a) All Equity stock
b) Rs. 1,00,000 in equity shares and Rs. 2,00,000 in 10% debentures
c) All debt at 10% per annum
d) Rs. 1,00,000 in equity shares and Rs. 2,00,000 in preference capital with the
rate of dividend at 8%
The companys existing earnings before interest and tax (EBIT) is Rs. 1,50,000. The
corporate rate of tax is 50%.
You are required to determine the earnings per share (EPS) in each plan and comment on
the implications of financial leverage.

32) XYZ company has currently an equity share capital of Rs.40,00,000 consisting of
40,000 equity shares of Rs.100 each. The management is planning to raise another
Rs.30,00,000 to finance a major programme of expansion through one of the four
possible financing plans.
The options are:
a) Entirely through equity shares
b) Rs. 15,00,000 in equity shares of Rs.100 each and the balance in 8% debentures
c) Rs. 10,00,000 in equity shares of Rs.100 each and the balance through long-term
borrowing at 9% interest p.a.
d) Rs. 15,00,000 in equity shares of Rs.100 each and the balance through preference
shares with 5% dividend
The companys expected earnings before interest and taxes (EBIT) will be Rs.15,00,000.
Assuming corporate tax rate of 50%, you are required to determine the earnings per share
(EPS) and comment on the financial leverage that will be authorized under each of the
above scheme of financing.

33) A company has sales of Rs.5,00,000, variable costs of Rs.3,00,000, fixed costs of
Rs.1,00,000 and long term loans of Rs.4,00,000 at 10% rate of interest. Calculate the
composite leverage.

34) The following figures relate to two companies:
Particulars P ltd (in Rs. Lakhs) Q ltd (in Rs. Lakhs)
Sales
Variable costs
Contribution
Fixed costs

Interest
Profit before Tax
500
200
300
150
150
50
100
1,000
300
700
400
300
100
200
You are required to:
a) Calculate the operating, financial and combined leverages for the two companies;
b) Comment on the relative risk position of them
35) A firm has sales of Rs.20,00,000, variable cost of Rs.14,00,000 and fixed costs of
Rs.4,00,000 and debt of Rs.10,00,000 at 10% rate of interest. What are the operating,
financial and combined leverages? If the firm wants to double its earnings before
interest ans tax (EBIT), how much of a rise in sales would be needed on a percentage
basis?

36) From the following, prepare Income Statement of company A, B and C.
Particulars Company A Company B Company C
Financial Leverage
Interest
Operating Leverage
Variable cost as a %age of sales
Income-tax rate
3:1
Rs.200
4:1
66
2/3
%
45%
4:1
Rs.300
5:1
75%
45%
2:1
Rs.1,000
3:1
50%
45%
Unit 5: Ratio Analysis:
1) What do you mean by Ratio Analysis? Explain the various objectives or uses of Ratio
Analysis.
2) Ratios are the symptoms of health of an organization like the blood pressure, the
pulse or the temperature of an individual. Explain. Also state and explain the
fundamental ratios and their uses.
3) Ratio Analysis is a tool to examine the health of a business with a view to make the
financial results more intelligible. Comment.
4) Discuss the significance of Ratio Analysis in the context of Management Accounting.
5) What ratio would you like to compute to show profitability and solvency of a firm?
Explain these ratios and write formulae for computing such ratio.
6) Explain the following terms and show their importance:
a. Trading on Equity
b. Operating Leverage
c. Price Earning Ratio
d. Financial Leverage
e. Creditors Turnover Ratio
f. Operating Profit Ratio
7) What do you mean by liquidity of a firm? How can the liquidity of a firm be
assessed?
8) Ratio Analysis is only a technique for making judgments and not a substitute for
judgments. Examine.
9) Ratios are good tools for analysis but should not be taken mechanically. Explain
this statement using examples.
10) Describe with illustrations the following:
g. Current Ratio
h. Interest Coverage Ratio
i. Debt to Equity Ratio
j. Capital Gearing Ratio
k. Return on Capital
l. Total Assets Turnover
11) The following figures relate to the trading activities of Vinay Traders Ltd., for the
year ended 31
st
March, 2010:
Rs. Rs.
Sales
Purchases
Opening stock
Closing stock
Sales returns
Selling & Distribution
Expenses:
Salaries
Advertising
5,20,000
3,22,250
76,250
98,500
20,000

15,300
4,700
2,000
Administrative Expenses:
Salaries
Rent
Stationery
Depreciation
Other Charges
Provision for Tax
Non-operating Income:
Dividend on shares

27,000
2,700
2,500
9,300
16,500
40,000

9,000
Travelling Profit on sale of shares
Non-operating Expenses:
Loss on sale of assets
3,000

4,000
You are required to show Statement of Revenue of Vinay Traders Ltd., and find out the
following ratios:
a. Gross Profit Ratio
b. Operating Ratio
c. Stock Turnover Ratio

12) Following is the balance sheet of Sunderlal Ltd. for the year ending December 31,
2010:
Liabilities Rs. Assets Rs.
Equity Share Capital
5% Debentures
Bank Loan
Sundry Creditors
Bills Payable
Outstanding Expenses
5,00,000
2,00,000
1,50,000
75,000
50,000
5,000
Land & Building
Plant & Machinery
Cash in hand
Cash at bank
Sundry Debtors
Bills Receivables
Stock
Prepaid Expenses
3,50,000
2,50,000
25,000
55,000
85,000
1,05,000
1,00,000
10,000
9,80,000 9,80,000
From the information given above, calculate:
a. Current Ratio
b. Acid test Ratio
c. Debt Equity Ratio
d. Capital Gearing Ratio
e. Interest Coverage Ratio

13) Given: Equity Share Capital 10,00,000
10% Preference Share Capital 5,00,000
18% Debentures 8,00,000
Loan (@ 15%) 1,40,000
Current Liabilities 3,00,000
General Reserve 8,00,000
Find out Capital Gearing from the above particulars.

14) Balance Sheet of ABC Ltd. as on 31
st
March, 2009 is given below:
Liabilities Rs. Assets Rs.
5% Preference Share Capital
Equity Share Capital
5% Debentures
General Reserve
P&L A/c
Creditors
Bank overdraft (Short term)
30,000
50,000
70,000
5,000
10,000
12,000
13,000
Fixed Assets
Stock
Debtors
Bank
1,40,000
20,000
16,000
14,000

1,90,000 1,90,000
Find out the following ratios:
a. Capital Gearing Ratio
b. Solvency Ratio
c. Liquidity Ratio

15) Using the following accounting variables, construct the balance sheet:
Gross profit (20% of Sales) Rs.60,000
Shareholders Equity Rs.50,000
Credit sales to total sales 80%
Total assets turnover 3 times
Stock turnover 8 times
Average collection period 18days
(Assume 360 days in a year)
Current Ratio 1.6:1
Long tem debt to Equity 40%

Balance Sheet as on.
Liabilities Rs. Assets Rs.
Creditors
Long term debt
Shareholders fund
?
?
?
Cash
Debtors
Inventory
Fixed Assets
1,40,000
20,000
16,000
14,000
? ?

16) The following are the ratios relating to the activities of A Ltd:
Debtors turnover 3 months
Stock turnover 8 months
Creditors turnover 2 months
Gross profit ratio 25%
Gross profit for the current year ended 31
st
December amounts to Rs.5,00,000.
Closing stock of the year is Rs.10,000 above the opening stock. Bills receivables
amount to Rs.25,000 and Bills payable to Rs.11,667.
Find out:
a. Sales
b. Closing stock
c. Sundry Debtors
d. Sundry Creditors

17) (a) If A Company Ltd.s Current Ratio is 5.5:1, Quick Ratio is 4:1, Inventory is
Rs.30,000; what are its current liabilities?
(b) If B Company Ltd.s inventory is Rs.60,000; total current liabilities are
Rs.1,20,000; Quick Ratio is 2:1, calculate Current Ratio.
(c) If C Company Ltd.s Current Liabilities are Rs.25,000; Quick Ratio is 1.5:1,
inventory is Rs.12,500; calculate current assets.

18) Assuming that the current ratio is 2, state in each of the following cases, whether the
ratio will improve, or decline, or have no change.
a. Payment of current liabilities
b. Purchase of fixed assets
c. Cash collected from customers
d. Bills receivables dishonoured
e. Issue of new shares

19) Following is the Balance Sheet of Arvind Mills Limited as on 31
st
December, 2008:

Liabilities Rs. Assets Rs.
Equity Share Capital
12% Preference Share Capital
Reserve Fund
14% Debentures
Sundry Creditors
Bills payable
Tax provision
Outstanding Expenses
5,00,000
1,00,000
4,00,000
7,00,000
60,000
1,00,000
1,30,000
10,000
Fixed Assets 18,00,000
Less Depreciation 5,00,000
Investment (short term)
Stock
Debtors
Bank

13,00,000
1,50,000
3,00,000
2,00,000
50,000

20,00,000 20,00,000
Other information supplied is as follows:
a. Net Sales 30,00,000
b. Cost of Goods Sold 25,80,000
c. Net Income before Taxes 2,00,000
d. Net Income After Taxes 1,00,000
You are required to calculate the following:
i. Liquidity Ratio
ii. Proprietary Ratio
iii. Current Ratio
iv. Gross Profit Ratio
v. Net Profit Ratio

20) The following is the Income Statement of M/s Kanti Babu Brothers for the year ended
31
st
March, 2008:
Particulars Rs. Rs.
Net Sales
Less: Cost of goods sold
Opening stock
Add: Purchases

Less: Closing Stock


5,00,000
20,00,000
25,00,000
7,00,000
3,00,000




18,00,000
Gross Profit
Less: Operating Expenses
Operating Profit
Less: Interest charges
Profit Before Taxation
12,00,000
4,80,000
7,20,000
1,80,000
5,40,000
Additional Information as on 31
st
March, 2008:
Current Assets Rs.9,75,000
Current Liabilities Rs.6,00,000
Fixed Assets Rs.5,25,000
From the above information, calculate the following ratios:
a. Operating Ratio
b. Operating Profit Ratio
c. Stock Turnover Ratio
d. Assets Turnover Ratio
e. Return on Capital Employed

21) You have been furnished with the financial information of Aditya Mills Ltd:
Liabilities Rs. Assets Rs.
Equity Share Capital (Rs.100 each)
Retained Earnings
Sundry Creditors
Bills payable
Other current liabilities
10,00,000
3,68,000
1,04,000
2,00,000
20,000
Plant & Equipment
Land & Building
Cash
Sundry Debtors Rs.3,60,000
Less: Allowances Rs.40,000
Stock
Prepaid Insurance
6,40,000
80,000
1,60,000

3,20,000
4,80,000
12,000
16,92,000 16,92,000
Statement of Profit for the year ended December 31:
Sales Rs.40,00,000
Less: Cost of Goods Sold 30,80,000
9,20,000
Less: Operating Expenses 6,80,000
2,40,000
Less: Taxes @ 50% 1,20,000
Net Profit After Taxes 1,20,000
Sundry Debtors and Stock at the beginning of the year were Rs.3,00,000 and
Rs.4,00,000 respectively.
Determine the following Ratios:
a. Current Ratio
b. Acid test ratio
c. Stock turnover
d. Debtors turnover
e. Gross profit ratio
f. Net profit ratio
g. Operating ratio
h. Earnings per share
i. Return on capital employed
j. Market value of the shares if Price Earnings Ratio is 10 times

22) The Balance Sheet of X Ltd. is given below:
Liabilities Rs. (in lakhs) Assets Rs. (in lakhs)
Equity Share Capital
General Reserve
P&L A/c (current year)
Secured loans (Long term)
Secured Loans (Short term)
Creditors
Other Liabilities
250
280
30
300
360
150
30
Fixed Assets
Investments
Stock
Debtors
Cash in hand
400
50
460
460
30
1,400 1,400
From the P&L A/c Rs.90 lakhs were transferred to General Reserve during the year.
Interest cost amounted to Rs.120 lakhs.
Taxation is @ 40%.
You are required to calculate:
a. Debt-Equity Ratio
b. Current Ratio
c. Quick Ratio
d. Interest Coverage Ratio

23) From the following information, prepare a summarized Balance Sheet as on 31
st

March, 2009:
a. Working Capital Rs.1,20,000
b. Reserves & Surplus Rs.80,000
c. Bank Overdraft Rs.20,000
d. Fixed assets to Proprietary Ratio 0.75
e. Current Ratio 2.5
f. Liquid Ratio 1.5

24) The following data is available in respect of Mahindra Ltd:
Profit before Tax Rs.2,44,600
Tax Rate 60%
Proposed dividend 20%
Market Price of Equity share Rs.20
Capital consists of:
9% Preference Shares of Rs.1,00,000
Equity Shares of Rs.10 each Rs.3,00,000
Reserves at the beginning of the year Rs.2,20,000

You are required to compute with reference to Equity Shares:
a. Earnings per share
b. Price earnings ratio
c. Dividend payout ratio
d. Retention ratio

25) Show the effect of the following transactions on the (a) Current Ratio and (b) Net
Working Capital of the company:
i. Long term investments were purchased for cash Rs.5,000
ii. Rs.3,000 of Sundry debtors were written off as bad debts
iii. Declared a dividend of Rs.10,000 to be paid during the next accounting
year
iv. Inventory worth Rs.2,000 was considered absolutely worthless
v. Purchased a three years Insurance policy for Rs.3,000
vi. A cheque of Rs.1,500 received from a customer and deposited in the bank
was dishonoured
vii. New Equity shares were subscribed Rs.50,000


















Unit 6: Cash Flow and Fund Flow
1. Distinguish between Funds Flow and Cash Flow statements. What are the
advantages of preparing Cash Flow statements?
2. What do you understand by flow of cash? Enumerate the sources of cash.
3. Explain the objects of cash flow analysis. What are the limitations of cash flow
statement?
4. Write note on importance of Funds Flow Statement.
5. What are the basic objectives for compiling a statement of Sources and Application
of Funds?
6. How would each of the following items be reflected in Funds statement? Classify
each one as a use of fund, a source of fund or as non-fund item.
a. Construction of building
b. Issue of debentures for cash
c. Depreciation on building
d. Payment of dividend
e. Purchase of machinery
f. Sale of land
g. Conversion of loan into debentures

Cash Flow Statement
7. From the following summary cash account of X Ltd. prepare cash flow statement for
the current year ended 31
st
March, 2010 using the direct method. The company does
not have any cash equivalents. (Rs. in 000)
Summary of Cash Account for the Current Year ended 31
st
March, 2010
Particulars (Rs.) Particulars (Rs.)
Opening balance
Issue of equity shares
Receipts from customers
Sale of fixed assets

50
300
2,800
100
Payment to suppliers
Purchase of fixed assets
Overhead expenses
Wages and salaries
Taxation
Dividend
Repayment of bank loan
Closing balance
2,000
200
200
100
250
50
300
150
3,250 3,250
8. The following are the comparative balance sheets of ABC Ltd., as on 31
st
December
2009 and 2010.
Liabilities 2009 2010 Assets 2009 2010
Share Capital (share of
Rs.10 each)
Profit & Loss A/c
9% Debentures
Creditors


3,50,000
50,400
60,000
51,600

3,70,000
52,800
30,000
59,200
Land
Stocks
Goodwill
Cash and Bank
Temporary Investments
Debtors
1,00,000
2,46,000
50,000
42,000
3,000
71,000
1,50,000
2,13,500
25,000
35,000
4,000
84,500
5,12,000 5,12,000 5,12,000 5,12,000
Other particulars provided to you are:
a. Dividends declared and paid during the year Rs.17,500
b. Land was revalued during the year at Rs.1,50,000 and the profit on revaluation
transferred to profit and loss account
c. Debentures redeemed at the end of year 2010.
You are required to prepare a Cash Flow Statement for the year ended 31
st
December
2010 using Indirect method.

9. From the following balance sheets of Akshay Company Limited as on December 31,
2009 and 2010, you are required to prepare cash flow statement for the year ended
December 31, 2010.
Liabilities 2009 2010 Assets 2009 2010
Share Capital
General Reserve
Profit & Loss A/c
Sundry Creditors
Bills Payable
Provision for Taxation
Provision for Doubtful Debts

1,00,000
14,000
16,000
8,000
1,200
16,000
400
1,00,000
18,000
13,000
5,400
800
18,000
600
Goodwill
Building
Plant
Investments
Stock
Bills Receivable
Debtors
Cash at Bank
12,000
40,000
37,000
10,000
30,000
2,000
18,000
6,600
12,000
36,000
36,000
11,000
23,400
3,200
19,000
15,200
1,55,600 1,55,800 1,55,600 1,55,800
Additional Information:
a. Depreciation charged to Plant Rs.4,000
b. Provision for taxation of Rs.19,000 was made during the year 2010

10. The Balance Sheet of PQR Ltd. is as follows:
Liabilities 1-1-04
(Rs.)
31-12-04
(Rs.)
Assets 1-1-04
(Rs.)
31-12-04
(Rs.)
Equity Capital
General Reserve
Profit & Loss A/c
1,00,000
1,00,000
96,000
1,00,000
1,00,000
98,000
Cash
Debtors
Stock
10,000
70,000
50,000
7,200
76,800
44,000
Current Liabilities
Loan from Associate Company
Loan from Bank
72,000
-
62,000
82,000
40,000
50,000
Land
Buildings
Machinery
40,000
1,00,000
1,60,000
60,000
1,10,000
1,72,000
Total 4,30,000 4,70,000 Total 4,30,000 4,70,000
During the year Rs.52,000 was paid as dividends. The provision for depreciation against
machinery as on 1-1-04 was Rs.54,000 and on 31-12-04 Rs.72,000.
You are required to prepare the Cash Flow Statement using Indirect method.

11. The comparative Balance Sheets of a company are given below:
Balance Sheet of a company
Year Year
Liabilities
2002 2003
Assets
2002 2003
Share Capital
Debentures
Creditors
Provision for Doubtful Debts
Profit & Loss
35,000
6,000
5,180
350
5,020
37,000
3,000
5,920
400
5,280
Cash
Book Debts
Stock
Land
Goodwill
4,500
7,450
24,600
10,000
5,000
3,900
8,850
21,350
15,000
2,500
51,550 51,600 51,550 51,600
Additional information:
a. Dividends paid amounted to Rs.1,750.
b. Land was purchased for Rs.5,000 and amount provided for the amortization of
Goodwill amounted to Rs.2,500.
c. Debentures were repaid to the extent of Rs.3000.
You are required to prepare a Cash Flow Statement.

12. Given below are the Balance Sheets of V.R. Ltd. for the year ended 31
st
March, 2009
and 2010:
Liabilities
31-03-09 31-03-10
Assets
31-03-09 31-03-10
Share Capital
General Reserve
P&L Appropriation A/c
Mortgage Loan
Sundry Creditors
Provision for Tax
2,25,000
1,35,000
40,200
-
57,300
45,000
3,00,000
1,47,000
60,750
90,000
63,750
73,500
Fixed Assets
Investment
Sundry Debtors
Stock
Cash
1,57,500
1,20,000
1,05,000
67,500
52,500
2,40,000
1,95,000
93,000
79,500
1,27,500
5,02,500 7,35,000 5,02,500 7,35,000
Additional information:
a. Depreciation charged during the year Rs.31,500
b. Dividend paid during the year Rs.22,500
c. Provision for tax made during the year was Rs.57,000
d. Investment costing Rs.37,500 was sold for Rs.42,000
e. Fixed assets costing Rs.75,000 (Accumulated depreciation Rs.30,000) was sold
for Rs54,000.
Prepare Cash Flow Statement as per AS-3 using Indirect Method;

Fund Flow Statement
13. From the following Balance Sheets of Alpha Ltd. on 31
st
December, 2009 and 2010,
you are required to prepare Funds Flow Statement:
Liabilities 2009 2010 Assets 2009 2010
Share Capital
General Reserve
Profit & Loss A/c
Sundry Creditors
Bills Payable
Provision for Taxation
Provision for Doubtful Debts

1,00,000
14,000
16,000
8,000
1,200
16,000
400
1,00,000
18,000
13,000
5,400
800
18,000
600
Goodwill
Building
Plant
Investments
Stock
Bills Receivable
Debtors
Preliminary Expenses
12,000
40,000
37,000
10,000
30,000
2,000
18,000
6,600
12,000
36,000
36,000
11,000
23,400
3,200
19,000
15,200
1,55,600 1,55,800 1,55,600 1,55,800

14. From the following Balance Sheets of S.M. Industries, prepare a Funds Flow
Statement showing your workings clearly:
Liabilities 2008 2009 Assets 2008 2009
Share Capital
Profit & Loss A/c
Current Liabilities
60,000
34,000
12,000
65,000
26,000
3,000
Goodwill
Plant & Machinery
Current Assets
30,000
60,000
16,000
25,000
50,000
19,000
1,06,000 94,000 1,06,000 94,000
Additional information:
a. Depreciation of Rs.20,000 on plant and machinery was charged to Profit & Loss
A/c.
b. Dividends of Rs.12,000 were paid during the year.

15. The following are the summarized Balance Sheets of XYZ Ltd. on 31
st

December,2008 and 31
st
December,2009:
Liabilities 2008 2009 Assets 2008 2009
Share Capital
Debentures
Profit & Loss A/c
Creditors
Provision for bad and
6,00,000
2,00,000
1,25,000
1,15,000

8,00,000
3,00,000
2,50,000
90,000

Plant & Machinery (at cost)
Land & Building (at cost)
Stock
Bank
Preliminary Expenses
4,00,000
3,00,000
3,00,000
20,000
7,000
6,45,000
4,00,000
3,50,000
40,000
6,000
doubtful debts
Provision for depreciation
on Land & Building
on Plant Machinery
6,000

20,000
30,000
3,000

24,000
35,000
Debtors

69,000 61,000
1,06,000 94,000 1,06,000 94,000
Additional information:
a. During the year, a part of machinery costing Rs.70,000 (accumulated depreciation
thereon Rs.2,000) was sold for Rs.6,000.
b. Dividends of Rs.50,000 were paid during the year.
You are required to ascertain:
i. Changes in Working Capital for 2009
ii. Funds Flow Statement

16. Ahead are the Balance Sheets of a limited company as on 31
st
December, 2008 and
2009:
Liabilities 2008 2009 Assets 2008 2009
Share Capital
Reserves
P&L A/c
Creditors
Bank Loan
Provision for Taxation
61,000
13,000
8,600
28,000
18,000
8,000
74,000
15,500
8,800
24,000
-
8,500
Plant
Building
Stock
Debtors
Cash
Bank
Goodwill
38,000
50,950
25,500
22,000
150
-
-
43,000
48,000
18,800
16,200
180
2,100
2,520
1,36,600 1,30,800 1,36,600 1,30,800
Taking into account the following additional information, prepare a statement of Funds
and Schedule of Changes in Working Capital:
a. Dividend was paid Rs.6,000.
b. Provision of Rs.9,000 for Income-Tax was made during the year.
c. Rs.3,600 was written off as Depreciation on Plant.










Unit 7: Sources of Finance and Introduction to Working Capital

1. Explain the various short-term sources of financing current assets with suitable
examples. What is the significance of these sources?
2. What do you mean by working capital finance? Describe the short term sources of
financing working capital.
3. What are the long term sources of finance? Explain the main factors of these sources.
4. Explain and distinguish between equity finance and debt finance. As an investor,
when will you prefer buying debentures of a company to buying shares of the same
company?
5. Discuss the main features of ordinary shares and preference shares.
6. Describe the various long term sources of finance to corporate enterprises in India.
7. Explain the various factors determining long term financial requirements.
8. Explain the various classifications of sources of finance.
9. Write short notes on:
a. Trade Credit
b. Bank Finance
c. Commercial Paper
10. What do you mean by working capital? Explain the various factors determining
working capital needs of a firm.
11. Explain the characteristics of Preference shares. Discuss the various types of
preference shares.
12. What is trade credit? Discuss the advantages and disadvantages of trade credit as a
source of short-term finance.
13. What are Debentures? What type of debentures can a joint stock company issue?
Evaluate debentures as a source of funds.
14. What do you understand by retained earnings? Discuss the merits and limitations of
ploughing back of profits as a source of finance.
15. Explain public deposits as a source of finance in the light of meaning, advantages and
limitations.
16. What are corporate bonds? Discuss their significance in detail in relation to the
financial structure of a company.
17. Distinguish the problems of short-term financing in relation to long-term financing
for meeting current needs of firm.
18. What are term loans? What are their features?
19. Write short notes on:
a. Rights issue of Equity shares
b. Buy-back of Equity shares
c. Public deposits
20. Discuss the concept of working capital. Distinguish between permanent and variable
working capital. What is the significance of such distinction in financing working
capital needs of an enterprise?
21. Explain the concept of working capital cycle. Why is it important in working capital
management? Illustrate.
22. Write short note on: Estimation of Working Capital Needs.
23. What do suppliers look for in granting trade credit?
24. Define working capital management. Why is it important to study the management of
working capital as a separate area in financial management?
25. Distinguish gross and net working capital in the light of meaning, merits and
demerits.
26. How is working capital affected by (a) Sales (b) Technology and Production Cycle
and (c) Inflation? Explain with examples.