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IIBM – Financial Management_1 Answer sheet

IIBM – Financial Management_1 Answer sheet


Part one:

Multiple choices:

  1. The approach focused mainly on the financial problems of corporate enterprise
  2. Ignored non-corporate enterprise
  3. Ignored working capital financing
  4. External approach
  5. Ignored routine problems
  1. These are those shares, which can be redeemed or repaid to the holders after a lapse of the stipulated period
  2. Cumulative preference shares
  3. Non-cumulative preference shares
  4. Redeemable preference shares
  5. Perpetual shares
  1. This type of risk arises from changes in environmental regulations, zoning requirements, fees, licenses and most frequently taxes
  2. Political risk
  3. Domestic risk
  4. International risk
  5. Industry risk
  1. It is the cost of capital that is expected to raise funds to finance a capital budget or investment proposal
  2. Future cost
  3. Specific cost
  4. Spot cost
  5. Book cost
  1. This concept helps formulate a sound & economical capital structure for a firm
  2. Financial performance appraisal
  3. Investment evaluation
  4. Designing optimal corporate capital structure
  5. None
  1. It is the minimum required rate of return needed to justify the use of capital
  2. From Investors
  3. Firms point
  4. Capital expenditure point
  5. Cost of capital
  1. It arises when there is a conflict of interest among owners, debenture holders, and the management
  2. Seasonal variation
  3. Degree of competition
  4. Industry life cycle
  5. Agency costs
  6. Some guidelines on shares & debentures issued by the government that are very important for the constitution of the capital structure are
  7. Legal requirement
  8. Purpose of Finance
  9. Period of finance
  10. Requirement of investors
  1. It is that portion of an investment\’s total risk that results from the change in the financial integrity of the investment
  2. Bull-bear market risk
  3. Default risk
  4. International risk
  5. Liquidity risk
  1. _____________ measure the systematic risk of a security that cannot be avoided through diversification
  2. Beta
  3. Gamma
  4. Probability distribution
  5. Alpha

Part Two:

  1. What is an Annuity kind of cash flow?
  2. What do understand by Portfolio risk?
  3. What do you understand by ‘Loan Amortization’?
  4. What is the Difference between NPV and IRR?

Section B: Case lets (40 marks)

Case let 1


  1. Which type of financing is appropriate to each firm?
  2. What types of securities must be issued by a firm that is in the growing stage to meet the financial requirements?

Case let 2


  1. How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views on increasing the profit?
  2. Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics?


Section C: Applied Theory (30 marks)

  1. Honey Well Company is contemplating liberalizing its collection effort. Its present sales are Rs. 10 lakh, its average collection period is 30 days, its expected variable cost-to-sales ratio is 85 percent and its bad debt ratio is 5 percent. The Company’s cost of capital is 10 percent and tax is 40 percent. He proposed liberalization in collection efforts to increase sales to Rs. 12 lakh increase the average collection period by 15 days, and increase the bad debt ratio to 7 percent. Determine the change in net profit.
  1. Explain the concept of working capital. What are the factors which influence the working capital?

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