Theoretical Questions

1. Define financial management. What is its main objective? (5 marks)

2. What are the three decisions of a finance manager? (5 marks)

3. What are the five sources of finance? (5 marks)

4. What is the role of financial statements in financial management? Provide examples of key
financial statements used by businesses. (5 marks)

5. What is main objective of financial management & how does it differ from financial
accounting’s objective? (5 marks)

6. Explain Sourcing Decision, Investment decision & dividend decision (5 marks)

7. Define and differentiate between internal and external sources of finance. Provide
examples of each (5 marks)

8. What are three types of liquidity ratios? (5 marks)

9. What is WACC? How do we calculate WACC? (5 marks)

10. Define and differentiate between internal and external sources of finance. Provide
examples of each (5 Marks)

11. What is capital budgeting? On what basis do companies take the decision of investing in
an project in capital budgeting (5 marks)

12. What is main objective of financial management & how does it differ from financial
accounting’s objective? (5 marks)

Numerical Questions
1. ABC Corporation is considering an investment project that requires an initial outlay
of $50,000. The expected cash inflows for the next five years are as follows:
Year 1: $15,000
Year 2: $20,000
Year 3: $25,000
Year 4: $18,000
Year 5: $12,000
The company's required rate of return is 10%.
 Calculate the Net Present Value (NPV) of the investment and advise whether the
company should proceed with the project

2. ABC Company is planning to undertake a new project that requires an investment of

$500,000. The company's capital structure consists of 60% equity and 40% debt. The
cost of equity is 12%, and the cost of debt is 6%. The corporate tax rate is 30%.

Required:

a. Calculate the Weighted Average Cost of Capital (WACC) for ABC Company.
b. What is the relation between WACC & NPV

3. XYZ Co has 4000 debentures amounting to 600,000$ issued at a premium of 10% and
floatation cost of 3$. The interest rate is 15%. The corporate tax rate is 30%.
The market rate of return is 12% & risk-free rate of return is 7%. Beta is 1.21
Required:
a. Calculate the cost of debt (kd)
b. Calculate the cost of equity (ke)

4. XYZ Corporation has a capital structure where the company 5000 14% preference
shares of 100 each issued at a discount of 15% and flotation cost of 5%. The corporate
tax rate is 30%.The company also has a loan of 100,000$ at 11% and tax rate is 30%
Required:
• Calculate the cost of term loan (kt)
• Calculate the cost of preference (kp)

5. XYZ Co has 2000 debentures amounting to 350,000$ issued at a discount of 5% and

floatation cost of 3%. The interest rate is 14%. The corporate tax rate is 33%.
The market rate of return is 12,5% & risk-free rate of return is 5.75%. Beta is 1.314
The company also has 6500 15% preference shares of 100 each issued at a premium
of 12% and flotation cost of 5$. The corporate tax rate is 33%. The company also has
a loan of 255,000$ at 7.9% and tax rate is 33%
Required:
• Calculate the cost of term loan (kt)
• Calculate the cost of preference (kp)
• Calculate the cost of debt (kd)
• Calculate the cost of equity (ke)
6.
Aqua company is evaluating two mutually exclusive investment projects, Project A
and B. The cash flows for each project over a five-year period are as follows:

Project A:
Initial 100,000 $
Investment:
Cashflows Year 1 30,000$
after tax
Year 2 35,000$
Year 3 40,000$
Year 4 45,000$
Year 5 50,000$

Project B:
Initial 120,000 $
Investment:
Cashflows Year 1 40,000$
after tax
Year 2 45,000$
Year 3 50,000$
Year 4 55,000$
Year 5 60,000$

The company's cost of capital is 12%.

Required:
i. Calculate the Net Present Value (NPV) for each project and
ii. recommend which project the company should choose based on NPV analysis.

7. Alpha company invested in a project worth 28 lakhs which produces 50000 units at
100 Percent capacity. But expected capacity is as follows:
Year 1: 30% capacity
Year 2: 40% capacity
Year 3: 80% capacity
Year 4: 100% capacity
 Selling price per unit is 200 Rs. Variable Cost per unit is 115 Rs. Fixed Cost is
300,000 per annum there is no borrowing. Depreciation is charged on WDV Method
@ 20% & tax rate is 30%. WACC 8.5%
Required:
Calculate NPV & suggest the company whether to accept the project

8.
Flexi company has gained enough surplus in last couple of years and wants to use this
excess money for the purpose of investment rather than keeping it in the form of Cash
& Cash Equivalent. So, the company is evaluating two investment proposal, Project X
and Project Y. The company's cost of capital is 8% The cash flows for each project
over a five-year period are as follows:

Project X:
Initial investment: $200,000
Cash flows for next 5 years are: $50,000, $60,000, $70,000, $80,000, $90,000

Project Y:
Initial investment: $250,000
Cash flows for next 5 years are: $70,000, $75,000, $80,000, $85,000, $90,000

Required:
Calculate the Net Present Value (NPV) for each project and recommend which project
the company should choose based on NPV analysis.

9. Brexa Corporation, a manufacturing company, provides you with its financial

statements for the year. Using the given data, perform a ratio analysis and provide
insights into the company's financial performance. The relevant financial data is as
follows:
Income Statement:
Sales: $1,500,000
Cost of Goods Sold (COGS): $800,000
Operating Expenses: $300,000
Net Income: $400,000
Balance Sheet:
Total Assets: $1,200,000 out of which 70% are Fixed assets and 30% are current
assets
Liabilities: $600,000 out of which 40% are current liabilities
 Shareholder's Equity: $600,000
Using the information above, calculate and analyze the following ratios:
a. Gross Profit Margin
b. Net Profit Margin
c. Return on Assets (ROA)
d. Return on Equity (ROE)
e. Current Ratio
Provide interpretations for each ratio and comment on the overall financial
health of Brexa Corporation based on the results.

10. ABC Corporation is considering an investment project that requires an initial outlay
of $100,000. The expected cash inflows for the next five years are as follows:
Year 1: $30,000
Year 2: $40,000
Year 3: $50,000
Year 4: $36,000
Year 5: $24,000
The company's required rate of return is 8.5%.
Calculate the Net Present Value (NPV) of the investment and advise whether
the company should proceed with the project

11. Gamma Corporation, a manufacturing company, provides you with its financial
statements for the year. Using the given data, perform a ratio analysis and provide
insights into the company's financial performance. The relevant financial data is as
follows:
Income Statement:
Sales: $ 6,000,000
Cost of Goods Sold (COGS): $2,600,000
Office & Administration Expenses: $300,000
Selling & Distribution Expenses: $350,000
Interest: $200,000
Tax: $ 300,000
Balance Sheet:
Total Assets: $2,400,000 out of which 65% are Fixed assets and 35% are current
assets
Liabilities: $1,200,000 out of which 40% are current liabilities
 Shareholder's Equity: $1,200,000
Using the information above, calculate and analyze the following ratios:
a. Gross Profit Margin
b. Operating Profit Margin
c. Net Profit Margin
d. Return on Assets (ROA)
e. Current Ratio
Provide interpretations for each ratio and comment on the overall financial
health of Gamma Corporation based on the results.