Hindustan Institute of Management & Computer Studies

Department of MBA
Class Test - II
MBA I Yr / NMBA 024 - Financial Management
Duration: 1 Hour

Total Marks: 30

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Section A
Question 1 Write short notes on:
a) Capital Budgeting decisions
b) Difference in NPV and IRR
c) Opportunity Cost
d) Difference in Profitability Index and Average rate of Return.
e) Meaning of Leverage

(5*2=10 marks)

Section B
Question 2 Case Study

(10 marks)
Leverage is any technique that amplifies investor profits or losses. It's most commonly used to
describe the use of borrowed money to magnify profit potential (financial leverage), but it can also
describe the use of fixed assets to achieve the same goal (operating leverage).
How it works/Example:
Financial Leverage
Let's look at selected balance sheet and income statement information for Company XYZ.

Company XYZ has invented a new product that will revolutionize the widget market, but it needs to
build a new $1,000,000 factory. It must choose between using equity or long-term debt to build the
factory. We can see the impact on profits of both decisions.

Why it Matters:
Too much leverage can be bad, but there's no hard and fast rule as to how much is too much. No
matter what its use, leverage can be a powerful tool when used responsibly. Savvy investors and
companies use leverage to expand, hedge and speculate, but the overly aggressive can easily get in
over their heads by losing money or going into bankruptcy.
For investors considering companies with debt, one of the most popular evaluations of a company's
leverage is the debt-to-equity ratio (D/E). The interest coverage ratio, also known as times interest
earned, is also a measure of how well a company can meet its interest-payment obligations. In
general, these ratios suggest whether a company is "too safe" and is neglecting opportunities to
magnify earnings through leverage or is overleveraged and at serious risk of default or bankruptcy.
After reading the above description, what do you think about leverage? Is it right to call
it a double edged sword? Justify your answer with a hypothetical example showing
calculations of all types of leverages.
Section C
Question 3 is COMPULSORY; Attempt any ONE from rest.
(2*5=10 marks)
Question 3
Explain Various Techniques of Capital Budgeting. Does different methods mean different? Elaborate
with help of their examples.
Question 4
Explain the relationship of DPS and EPS.
Question 5
Leverage analysis helps in maintaining fixed expenses of a company. Do you think it is reasonable to
hold this issue critical in financial management?

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