Chapter 1: Introduction to Financial Management

5 Mark Questions
●​ Q: Explain the key functions of a Financial Manager.
●​ A: A Financial Manager's key functions include:
○​ Investment Decisions (Capital Budgeting): Evaluating and selecting profitable
long-term investments.
○​ Financing Decisions (Capital Structure): Determining the optimal mix of debt and
equity to finance the firm's assets.
○​ Dividend Decisions: Deciding how much of the profits to distribute as dividends
and how much to retain for reinvestment.
○​ Working Capital Management: Managing short-term assets and liabilities to
ensure smooth day-to-day operations.
○​ Financial Analysis & Planning: Analyzing financial data, forecasting performance,
and developing financial plans.
●​ Q: Discuss the importance of Financial Management in a modern business.
●​ A: Financial Management is crucial in modern business for:
○​ Resource Allocation: Efficiently allocating scarce financial resources to maximize
returns.
○​ Profitability & Growth: Ensuring profitability and sustainable growth through
sound financial decisions.
○​ Value Creation: Enhancing shareholder wealth by increasing the firm's value.
○​ Risk Management: Identifying and mitigating financial risks.
○​ Survival & Competitiveness: Adapting to dynamic market conditions and
maintaining a competitive edge.
10 Mark Questions
●​ Q: "The primary objective of Financial Management is Wealth Maximization, not Profit
Maximization." Discuss.
●​ A: Wealth maximization is superior to profit maximization because:
○​ Time Value of Money: Wealth maximization considers the time value of money,
discounting future cash flows to their present value. Profit maximization ignores
this.
○​ Risk Consideration: Wealth maximization incorporates risk by discounting future
cash flows at a rate that reflects the project's risk. Profit maximization often
overlooks risk.
○​ Long-Term Perspective: Wealth maximization focuses on long-term value
creation, while profit maximization may encourage short-sighted decisions that
sacrifice long-term growth for immediate profits.
○​ Shareholder Returns: Wealth maximization directly aims at maximizing
shareholder returns by increasing the value of their investment. Profit maximization
may not always translate to increased shareholder value.
Chapter 2: Time Value of Money
5 Mark Questions
●​ Q: Explain the concept of compounding and discounting with suitable examples.
●​ A:
○​ Compounding: The process of calculating the future value of a present sum of
money by reinvesting the interest earned over time. Example: Investing ₹1,000
today at 5% compounded annually will grow to ₹1,050 in one year, ₹1,102.50 in two
years, and so on.
 ○​ Discounting: The process of calculating the present value of a future sum of
money. Example: The present value of ₹1,000 to be received one year from now at
a 5% discount rate is ₹952.38.
●​ Q: What are the different types of annuities?
●​ A:
○​ Ordinary Annuity: Payments are made at the end of each period.
○​ Annuity Due: Payments are made at the beginning of each period.
○​ Perpetuity: An annuity that continues indefinitely.
10 Mark Questions
●​ Q: A person invests ₹5,000 annually for 10 years at an 8% interest rate. Calculate the
future value of the investment if it is an ordinary annuity and an annuity due.
●​ A: (Show calculations for both ordinary annuity and annuity due using the appropriate
formulas. Explain the difference in future values due to the timing of payments.)
Chapter 3: Capital Budgeting
5 Mark Questions
●​ Q: Explain the Net Present Value (NPV) method with its advantages and disadvantages.
●​ A:
○​ NPV: The difference between the present value of cash inflows and the initial
investment. A positive NPV indicates a worthwhile project.
○​ Advantages: Considers time value of money, provides a direct measure of value
creation.
○​ Disadvantages: Requires accurate cash flow forecasts, can be complex to
calculate for complex projects.
●​ Q: What is the Internal Rate of Return (IRR)? How is it calculated?
●​ A: IRR is the discount rate that makes the NPV of a project equal to zero. It's the project's
expected rate of return. It's usually calculated through trial and error or using financial
calculators/software.
10 Mark Questions
●​ Q: A company is evaluating two mutually exclusive projects. Project A requires an initial
investment of ₹200,000 and generates cash flows of ₹60,000 per year for 5 years. Project
B requires an initial investment of ₹300,000 and generates cash flows of ₹80,000 per year
for 5 years. The company's cost of capital is 12%. Evaluate both projects using the NPV
and IRR methods and recommend which project should be accepted.
●​ A: (Calculate NPV and IRR for both projects. Compare the results and make a
recommendation, considering the limitations of each method.)
Chapter 4: Cost of Capital
5 Mark Questions
●​ Q: Explain the concept of the Weighted Average Cost of Capital (WACC).
●​ A: WACC is the average cost of all the capital (debt and equity) a company uses,
weighted by the proportion of each type of capital. It's used as the discount rate in capital
budgeting decisions.
●​ Q: How do you calculate the cost of debt?
●​ A: Cost of Debt = (Interest Rate on Debt) * (1 - Tax Rate)
10 Mark Questions
●​ Q: A company has the following capital structure:
○​ Equity: ₹500,000 (Cost of Equity = 15%)
○​ Debt: ₹300,000 (Cost of Debt = 10% before tax) The company's tax rate is 30%.
Calculate the WACC.
 ●​ A: (Show the WACC calculation using the formula and explain the significance of WACC.)
Chapter 5: Working Capital Management
5 Mark Questions
●​ Q: What is working capital? Explain its importance.
●​ A: Working capital is the difference between current assets and current liabilities. It's
crucial for day-to-day operations, maintaining liquidity, and ensuring smooth business
functioning.
●​ Q: Discuss the various components of working capital.
●​ A: Components include:
○​ Inventory: Raw materials, work-in-progress, finished goods.
○​ Accounts Receivable: Money owed by customers.
○​ Cash: Cash on hand and in bank accounts.
○​ Marketable Securities: Short-term investments.
10 Mark Questions
●​ Q: Explain the various techniques of inventory management.
●​ A: Techniques include:
○​ Economic Order Quantity (EOQ): Minimizes total inventory costs.
○​ ABC Analysis: Categorizes inventory based on value.
○​ Just-in-Time (JIT) Inventory: Minimizes inventory by receiving goods only when
needed.
○​ Perpetual Inventory System: Tracks inventory levels continuously.