Maximum Marks: 100
Time: 3 Hours
Instructions:
- Answer all questions.
- Show detailed workings wherever required.
- Use relevant financial formulas, strategic frameworks, and reasoning in your answers.
Section A: Theory & Conceptual Questions (20 Marks)
Answer any 4 questions. Each carries 5 marks.
- Explain the objectives of financial management and how they influence corporate decision-making.
- Discuss the concepts of risk and return and their interrelationship in investment decisions.
- Define capital structure. Explain the factors affecting a company’s choice of capital structure.
- Explain the Balanced Scorecard approach and its relevance in strategic management.
- Discuss Porter’s Five Forces Model and how it helps in strategic decision-making.
Section B: Problem-Solving / Numerical Questions (50 Marks)
Answer any 5 questions. Each carries 10 marks.
- XYZ Ltd. is considering a project requiring an investment of ₹ 50 lakh. The project is expected to generate annual cash inflows of ₹ 12 lakh for 6 years. The cost of capital is 10%. Required:
a) Compute Net Present Value (NPV).
b) Compute Internal Rate of Return (IRR) and comment on acceptability. - ABC Ltd. has the following capital structure:
- Equity Capital: ₹ 60 lakh (Cost of Equity = 12%)
- 10% Debentures: ₹ 40 lakh (Tax Rate = 30%)
- A company has the following data:
- Sales: ₹ 5,00,000
- Variable Cost: ₹ 3,00,000
- Fixed Cost: ₹ 1,00,000
a) Compute Break-Even Point in units and sales value.
b) Determine Margin of Safety if expected sales are ₹ 6,00,000. - The market price of a stock is ₹ 120. Expected dividend next year is ₹ 10. Required rate of return is 12%. Required: Determine the value of the stock using the Gordon Growth Model assuming a constant growth rate of 5%.
- A company is considering two mutually exclusive projects: ProjectInvestment (₹)Cash Inflows (₹)Life (years)A20,00,0007,00,0004B25,00,0008,00,0004 Required: Advise which project to select using Profitability Index (PI).
Section C: Case Study / Analytical Questions (30 Marks)
Answer any 2 questions. Each carries 15 marks.
- Case Study: Capital Budgeting & Risk A company plans to launch a new product. Initial investment is ₹ 1 crore. Expected cash inflows are ₹ 30 lakh per year for 5 years. Management is concerned about market volatility. Required:
a) Evaluate the project using NPV and Payback Period.
b) Discuss how risk analysis can be incorporated in financial decision-making.
c) Suggest strategic considerations for long-term sustainability. - Case Study: Strategic Management & Competitive Advantage ABC Ltd. operates in a highly competitive industry. Market share is declining due to new entrants and changing customer preferences. Required:
a) Conduct a SWOT analysis for the company.
b) Suggest strategic initiatives to regain competitive advantage.
c) Discuss how financial decisions (capital allocation, cost management) support strategy. - Case Study: Dividend & Funding Decisions XYZ Ltd. has accumulated profits of ₹ 2 crore. Management is considering paying dividends of 40% of profits or reinvesting in a growth project with IRR of 15%. Cost of equity is 12%. Required:
a) Evaluate the decision using financial management principles.
b) Discuss the impact of dividend policy on shareholder wealth.
c) Suggest a balanced strategy integrating both growth and shareholder returns.
Solutions – Group II: Financial Management & Strategic Management
Section A: Theory & Conceptual Questions (20 Marks)
- Objectives of Financial Management:
- Profit Maximization: Ensure sustainable earnings.
- Wealth Maximization: Maximize shareholder value.
- Liquidity Management: Ensure enough cash to meet obligations.
- Efficient Resource Allocation: Optimal use of funds in projects.
- Risk Management: Balance risk and return.
Influence: These objectives guide capital budgeting, financing, dividend, and working capital decisions.
- Risk and Return:
- Risk: Possibility of deviation from expected outcome.
- Return: Gain expected from investment.
- Relationship: Higher risk requires higher expected return (e.g., equity vs debt). Used in investment appraisal and portfolio management.
- Capital Structure:
- Definition: Mix of debt, equity, and preference capital to finance operations.
- Factors Affecting Choice:
- Cost of capital
- Risk tolerance
- Cash flow stability
- Tax considerations
- Market conditions
- Balanced Scorecard (BSC):
- Framework measuring financial, customer, internal process, learning & growth perspectives.
- Aligns strategy with performance metrics.
- Helps monitor both financial and non-financial outcomes.
- Porter’s Five Forces:
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitutes
- Industry rivalry
Use: Helps companies identify competitive pressures and inform strategic choices.
Section B: Problem-Solving / Numerical Questions (50 Marks)
Q1: NPV and IRR
- Investment: ₹ 50,00,000
- Cash inflow: ₹ 12,00,000 per year for 6 years
- Cost of capital: 10%
Step 1: NPV Calculation
NPV = ∑ (Cash inflow / (1 + r)^t) – Initial Investment
Present value factor at 10% for 6 years ≈ 4.355 (from PV annuity table)
NPV = 12,00,000 × 4.355 – 50,00,000
NPV = 52,26,000 – 50,00,000 = ₹ 2,26,000 → Accept
Step 2: IRR
IRR is the rate where NPV = 0
12,00,000 × PV factor = 50,00,000 → PV factor = 50,00,000 / 12,00,000 ≈ 4.167
From PV tables, PV factor 4.167 corresponds to IRR ≈ 11% → higher than cost of capital → project acceptable
Q2: WACC
- Equity: ₹ 60,00,000, Ke = 12%
- Debt: ₹ 40,00,000, Kd = 10%, Tax = 30% → After-tax Kd = 10 × (1 – 0.3) = 7%
WACC = (E/V) × Ke + (D/V) × Kd × (1 – T)
V = 60 + 40 = 100
WACC = (60/100 × 12%) + (40/100 × 7%) = 7.2% + 2.8% = 10%
Q3: Break-Even & Margin of Safety
- Sales = ₹ 5,00,000, VC = ₹ 3,00,000, FC = ₹ 1,00,000
Contribution = Sales – VC = 5,00,000 – 3,00,000 = 2,00,000
BEP (Sales) = Fixed Cost ÷ Contribution Ratio
Contribution Ratio = 2,00,000 ÷ 5,00,000 = 0.4
BEP (Sales) = 1,00,000 ÷ 0.4 = ₹ 2,50,000
Margin of Safety = Expected Sales – BEP = 6,00,000 – 2,50,000 = ₹ 3,50,000
Q4: Gordon Growth Model (Stock Valuation)
- Price = D1 / (Ke – g)
D1 = 10, g = 5%, Ke = 12%
Value = 10 / (0.12 – 0.05) = 10 / 0.07 ≈ ₹ 142.86
Q5: Profitability Index (PI)
PI = PV of inflows / Investment
- Project A: PV = 7,00,000 × PV factor for 4 years @ 10% ≈ 7,00,000 × 3.169 = 22,18,300
PI = 22,18,300 / 20,00,000 ≈ 1.11 - Project B: PV = 8,00,000 × 3.169 ≈ 25,35,200
PI = 25,35,200 / 25,00,000 ≈ 1.014
Decision: Choose Project A (higher PI)
Section C: Case Study / Analytical Questions (30 Marks)
Q1: Capital Budgeting & Risk
- Investment = ₹ 1 crore, Cash inflow = ₹ 30 lakh × 5 years, Cost of capital 10%
NPV: 30 × PV factor (10%,5yrs=3.791) – 100 = 1,13,73,000 – 1,00,00,000 ≈ 13.73 lakh → Accept
Payback Period: 1,00,00,000 ÷ 30,00,000 ≈ 3.33 years
Risk Analysis:
- Sensitivity analysis (how cash flows vary with sales)
- Scenario analysis (best, worst, most likely)
- Incorporate probability-weighted outcomes
Strategic Considerations:
- Market positioning
- Competitor response
- Long-term profitability and brand value
Q2: Strategic Management & Competitive Advantage
SWOT Analysis:
| Strength | Weakness |
|---|---|
| Strong brand | Declining market share |
| Skilled workforce | High costs |
| Opportunity | Threat |
|---|---|
| New market segments | New entrants |
| Digital transformation | Price competition |
Strategic Initiatives:
- Product diversification
- Cost optimization
- Marketing and digital transformation
- Strategic alliances
Financial Alignment:
- Allocate capital to high ROI projects
- Monitor cost efficiency
- Fund strategic initiatives via WACC and cash reserves
Q3: Dividend & Funding Decisions
- Profit = ₹ 2 crore, Dividend = 40% → 0.8 crore payout
- Reinvest 1.2 crore → IRR 15% > Ke 12% → value accretive
Financial Evaluation:
- Reinvestment adds shareholder value if IRR > cost of equity
- Dividend satisfies investors’ liquidity preference
Balanced Strategy:
- Pay moderate dividend
- Retain sufficient earnings for growth projects
- Communicate policy clearly to investors