Questions and Answers of Financial Management Theory

6.20 If the interest rate is 12 percent how much investment is required now to yield an income of Rs. 12,000 per year from the beginning of the 10th year and continuing thereafter forever?
6.21 You have a choice between Rs. 5,000 now and Rs. 20,000 after 10 years. Which would you choose? What does your preference indicate?
6.22 Mr. Raghu deposits Rs. 10,000 in a bank now. The interest rate is 10 percent and compounding is done semi-annually. What will the deposit grow to after 10 years? If the inflation rate is 8
6.23 How much should be deposited at the beginning of each year for 10 years in order to provide a sum of Rs. 50,000 at the end of 10 years?
question no 10.4 10.4 Prabhu Limited has a current value of 10,000. The face value of its outstanding bonds (the only debt on its balance sheet) is 8000. These are 1year discount bonds with an
6.24 A person requires Rs. 20,000 at the beginning of each year from 2005 to 2009. How much should he deposit at the end of each year from 1995 to 2000? The interest rate is 12 percent.
6.25 What is the present value of Rs. 2,000 receivable annually for 30 years? The first receipt occurs after 10 years and the discount rate is 10 percent.
6.26 After five years Mr. Ramesh will receive a pension of Rs. 600 per month for 15 years. How much can Mr. Ramesh borrow now at 12 percent interest so that the borrowed amount can be paid with 30
6.27 Mr. Prakash buys a scooter with a bank loan of Rs. 6,000. An instalment of Rs. 300 is payable to the bank for each of 24 months towards the repayment of loan with inter- est. What interest rate
6.28 South India Corporation has to retire Rs. 10 million of debentures each at the end of 8, 9, and 10 years from now. How much should the firm deposit in a sinking fund account annually for 5
6.29 Mr.Longman receives a provident fund amount or Rs. 1,00,000. He deposits it in a bank which pays 10 percent interest. If he withdraws annually Rs. 20,000, how long can he do so?
6.30 Phoenix Company borrows Rs. 500,000 at an interest rate of 14 percent. The loan is to be repaid in 4 equal annual instalments payable at the end of each of the next 4 years. Prepare the loan
6.31 You want to borrow Rs. 1,500,000 to buy a flat. You approach a housing company which charges 13 percent interest. You can pay Rs. 200,000 per year toward loan amortisation. What should be the
6.32 You are negotiating with the government the right to mine 100,000 tons of iron ore per year for 15 years. The current price per ton of iron is Rs. 3000 and it is expected to increase at the rate
6.33 As a winner of a competition, you can choose one of the following prizes:a. Rs. 500,000 nowb. Rs. 1,000,000 at the end of 6 yearsc. Rs. 60,000 a year foreverd. Rs. 100,000 per year for 10
6.34 Pipe India owns an oil pipeline which will generate Rs. 120 million of cash income in the coming year. It has a very long life with virtually negligible operating costs. The volume of oil
6.35 An oil well presently produces 50,000 barrels per year. It will last for 15 years more, but the production will fall by 5 percent per year. Oil prices are expected to increase by 3 percent per
6.36 An oil well presently produces 80,000 barrels per year. It will last for 20 years more, but the production will fall by 6 percent per year. Oil prices are expected to increase by 4 percent per
6.37 You are considering whether your savings will be enough to meet your retirement needs. You saved Rs. 100,000 last year and you expect your annual savings to increase by 8 percent per year for
6.38 A bank offers an interest rate of 8 percent on deposits made with it. If the compound- ing is done on a weekly basis, what is the effective interest rate?
1. How is the rate of return on an asset defined?
2. What is standard deviation? What are its important features?
3. Why is standard deviation employed commonly in finance as a measure of risk?
4. Describe the key features of normal distribution.
5. Explain how diversification influences risk.
6. Distinguish between unique risk and market risk.
7. Define the standard deviation of the return on a two-security portfolio.
8. How is beta calculated?
9. What is the relationship between risk and return as per CAPM?
10. What is a defensive security, neutral security, and aggressive security?
11. What is the effect of change in risk aversion on the security market line?
12. "The increase in the risk-premium of all stocks, irrespective of their beta, is the same, when risk aversion increases". Comment.
13. What are the investment implications of CAPM?
8.1 The stock of Box Limited performs well relative to other stocks during recessionary periods. The stock of Cox Limited, on the other hand, does well during growth periods. Both the stocks are
1. What is the risk of a 2-security portfolio? n-security portfolio?
2. What is covariance? coefficient of correlation?
3. What is an efficient portfolio?
4. Explain the nature of a risk-return indifference curve.
5. What is the efficient frontier, when investors can lend or borrow at the risk-free rate?
6. State the assumptions underlying the CAPM.
7. What is the capital market line? Security market Line?
8. What is the empirical evidence on the CAPM?
9. Define the return-generating process and the equilibrium risk-return relationship as per the APT.
10. What is a multifactor model? Describe the types of multifactor models used in practice?
1. Contrast the salient features of the traditional and modern approaches to financial management.
2. Discuss the three broad areas of financial decision making.
3. What is the justification for the goal of maximising the wealth of shareholders?
4. What do the critics of the goal of maximising shareholder wealth say? What is the rebuttal provided by the advocates of maximising shareholder wealth?
5. Critically evaluate the goals of maximisation of profit and maximisation of return on equity.
6. What forces are prodding companies in India to accord greater importance to the goal of shareholder wealth maximisation?
7. Discuss the risk-return tradeoff in financial decisions.
8. What are the advantages and disadvantages of the following forms of business organisation: sole proprietorship, partnership, cooperative society, private limited company, and public limited
9. Why is there a separation of ownership and management in large companies?
10. What are agency costs and how can they be mitigated?
11. "Financial management is in many ways an integral part of the jobs of managers." Comment.
12. How is the finance function typically organised in a large company?
13. Discuss the relationship of financial management to economics and accounting.
14. Comment on the emerging role of the financial manager in India.
1. Discuss the functions performed by the financial system.
2. Give some examples of financial assets.
3. Discuss the important functions performed by financial markets.
4. What are the different ways of classifying financial markets?
5. Define the relationship between real rate, nominal rate, and inflation rate.
6. Discuss the factors that determine the rates of return in a market economy.
7. Which interest rates are regulated in India?
8. What were the key interest rates in India at the end of 2006?
9. What is the rationale of financial intermediaries?
10. Describe briefly various financial intermediaries in India.
11. What functions are performed by the Reserve Bank of India?
12. What are the principal tasks of the Securities Exchange Board of India?
2.1 As a rule of thumb, real rates of interest are calculated by subtracting the inflation rate from the nominal rate. What is the error from using this rule of thumb for calcu- lating real rates of
1. List the important functions performed by the financial statements.
2. Present the account form as well as the report form of the balance sheet.
3. Describe the various asset accounts and liability accounts found on a company's bal- ance sheet.
4. "Accounting and economic values tend to differ". Why?
5. Discuss the important items found on the profit and loss account.
6. Explain the sources of divergence between accounting income and economic income.
7. What are the sources of cash and what are the uses of cash?
8. Give the format for the classified cash flow statement.
9. What devices are commonly employed to manage the bottom line?
10. Why do companies manipulate earnings?
11. What are the salient features of corporate income tax?
12. What are the salient features of individual income tax?
13. Explain the cash flow identity.
1. What are the different types of financial ratios?
2. Discuss the important liquidity ratios.
3. Define and evaluate various leverage ratios.
4. Discuss the important turnover ratios.
5. Explain the important profit margin ratios.
6. Compare the following rate of return ratios: return on assets, earning power, return on capital employed, and return on equity.
7. Discuss the key valuation ratios.
8. "If the market price per share is equal to the book value per share, the following are equal: return on equity, earnings price ratio, and total yield." Prove.
9. What is the difference between common size analysis and common base year analy- sis?
10. Discuss the Du Pont analysis.
11. Carry out the Du Pont analysis for a company of your choice.
12. Describe the Altman model for predicting corporate bankruptcy.
13. Discuss the problems and issues faced in financial statement analysis.
14. What guidelines would you follow in financial statement analysis?
15. What issues are regarded as important be the American Association of Individual Investors?
4.1 Premier Company's net profit margin is 5 percent, total assets turnover ratio is 1.5 times, debt to total assets ratio is 0.7. What is the return on equity for Premier?

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