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Financial Management
Subject Code-B-103 Section A: Objective Type & Short Questions (30 marks)
 This section consists of multiple choice & Short Notes. 

 Answer all the questions. 

 Part One carries 1 mark each & Part two carries 5 marks each.
Part one: Multiple choices:
1. The approach focused mainly on the financial problems of corporate enterprise.
a. Ignored non-corporate enterprise
b. Ignored working capital financing
c. External approach
d. Ignored routine problems
2. These are those shares, which can be redeemed or repaid to the holders after a lapse of the stipulated period.
a. Cumulative preference shares
b. Non-cumulative preference shares
c. Redeemable preference shares
d. Perpetual shares
3. This type of risk arises from changes in environmental regulations, zoning requirements, fees, licenses and most frequently taxes.
a. Political risk
b. Domestic risk
c. International risk
d. Industry risk
4. It is the cost of capital that is expected to raise funds to finance a capital budget or investment proposal.
a. Future cost
b. Specific cost
c. Spot cost
d. Book cost
5. This concept is helpful in formulating a sound & economical capital structure for a firm.
a. Financial performance appraisal
b. Investment evaluation
c. Designing optimal corporate capital structure
d. None of the above
6. It is the minimum required rate of return needed to justify the use of capital.
a. From investors
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b. Firms point
c. Capital expenditure point
d. Cost of capital
7. It arises when there is a conflict of interest among owners, debenture holders and the
management.
a. Seasonal variation
b. Degree of competition
c. Industry life cycle
d. Agency costs
8. Some guidelines on shares & debentures issued by the government that are very important for the
constitution of the capital structure are:
a. Legal requirement
b. Purpose of finance
c. Period of finance
d. Requirement of investors
9. It is that portion of an investments total risk that results from change in the financial integrity of
the investment.
a. Bull- bear market risk
b. Default risk
c. International risk
d. Liquidity risk
10. _____________ measure the systematic risk of a security that cannot be avoided through
diversification.
a. Beta
b. Gamma
c. Probability distribution
d. Alpha
Part Two:
1. What do you understand by wealth maximization?
2. Discuss the concept of factoring.
3. Define Annuity.
4. What is the Difference between NPV and IRR?
END OF SECTION A
Section B: Case lets (40 marks)
 This section consists of Case lets. 
 Answer all the questions. 
 Each Case let carries 20 marks.
 Detailed information should form the part of your answer (Word limit 150 to 200 words).
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IIBM Institute of Business Management
Caselet 1
Case1: Credit Decision – Agarwal Case
On August 30, 2006, Agarwal Cast Company Inc., applied for a $200,000 loan from the main office
of the National bank of New York. The application was forwarded to the bank’s commercial loan
department. Gupta, the President and Principal Stockholder of Agarwal cast, applied for the loan in
person. He told the loan officer that he had been in business since February 1976, but that he had
considerable prior experience in flooring and carpets since he had worked as an individual contractor
for the past 20 year. Most of this time, he had worked in Frankfert and Michigan. He finally decided
to “work for himself” and he formed the company with Berry Hook, a former co-worker. This
information seemed to be consistent with the Dun and Bradstreet report obtained by the bank
According to Gupta, the purpose of the loan was to assist him in carrying his receivables until they
could be collected. He explained that the flooring business required him to spend considerable cash
to purchase materials but his customers would not pay until the job was done. Since he was relatively
new in the business, he did not feel that he could compete if he had to require a sizeable deposit or
payment in advance. Instead, he could quote for higher profits, if he were willing to wait until
completion of the job for payment. To show that his operation was sound, he included a list of
customers and projects with his loan application. He also included a list of current receivables.
Gupta told the loan officer that he had monitored his firm’s financial status closely and that he had
financial reports prepared every six months. He said that the would send a copy to the bank. In
addition, he was willing to file a personal financial statement with the bank.
Question:
1. Prepare your recommendation on Agarwal Cast Company
Caselet 2
This case has been framed in order to test the skills in evaluating a credit request and reaching a
correct decision. Perluence International is large manufacturer of petroleum and rubber-based
products used in a variety of commercial applications in the fields of transportation, electronics, and
heavy manufacturing. In the northwestern United States, many of the Perluence products are
marketed by a wholly-owned subsidiary, Bajaj Electronics Company. Operating from a headquarters
and warehouse facility in San Antonio, Strand Electronics has 950 employees and handles a volume
of $85 million in sales annually. About $6 million of the sales represents items manufactured by
Perluence. Gupta is the credit manager at Bajaj electronics. He supervises five employees who handle
credit application and collections on 4,600 accounts. The accounts range in size from $120 to
$85,000. The firm sells on varied terms, with 2/10, net 30 mostly. Sales fluctuate seasonally and the
average collection period tends to run 40 days. Bad-debt losses are less than 0.6 per cent of sales.
Gupta is evaluating a credit application from Booth Plastics, Inc., a wholesale supply dealer serving
the oil industry. The company was founded in 1977 by Neck A. Booth and has grown steadily since
that time. Bajaj Electronics is not selling any products to Booth Plastics and had no previous contact
with Neck Booth. Bajaj Electronics purchased goods from Perluence International under the same
terms and conditions as Perluence used when it sold to independent customers. Although Bajaj
Electronics generally followed Perluence in setting its prices, the subsidiary operated independently
and could adjust price levels to meet its own marketing strategies. The Perluence’s cost-accounting
department estimated a 24 per cent markup as the average for items sold to Pucca Electronics. Bajaj
Electronics, in turn, resold the items to yield a 17 per cent markup. It appeared that these percentages
would hold on any sales to Booth Plastics. Bajaj Electronics incurred out-of pocket expenses that
were not considered in calculating the 17 per cent markup on its items. For example, the contact with
Booth Plastics had been made by James, the salesman who handled the Glaveston area. James would
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IIBM Institute of Business Management
receive a 3 per cent commission on all sales made Booth Plastics, a commission that would be paid
whether or not the receivable was collected. James would, of course, be willing to assist in collecting
any accounts that he had sold. In addition to the sales commission, the company would incur variable
costs as a result of handling the merchandise for the new account. As a general guideline,
warehousing and other administrative variable costs would run 3 per cent sales. Gupta Holmstead
approached all credit decisions in basically the same manner. First of all, he considered the potential
profit from the account. James had estimated first-year sales to Booth Plastics of $65,000. Assuming
that Neck Booth took the, 3 per cent discount. Bajaj Electronics would realize a 17 per cent markup
on these sales since the average markup was calculated on the basis of the customer taking the
discount. If Neck Booth did not take the discount, the markup would be slightly higher, as would the
cost of financing the receivable for the additional period of time. In addition to the potential profit
from the account, Gupta was concerned about his company’s exposure. He knew that weak customers
could become bad debts at any time and therefore, required a vigorous collection effort whenever
their accounts were overdue. His department probably spent three times as much money and effort
managing a marginal account as compared to a strong account. He also figured that overdue and
uncollected funds had to be financed by Bajaj Electronics at a rate of 18 per cent. All in all, slow –
paying or marginal accounts were very costly to Bajaj Electronics. With these considerations in mind,
Gupta began to review the credit application for Booth Plastics.
Questions:
1. How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth
Plastics and give your views to increase 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.
END OF SECTION B
Section C: Applied Theory (30 marks)
 This section consists o  f Applied Theory Questions. 
 Answer all the questions. 
 Each question carries 15 marks. 
 Detailed information should form the part of your answer (Word limit 200-250 words). 
1. Define Capital Structure. Discuss the important factors that should be considered while
determining Capital Structure.
2. What is the concept of working capital? Discuss the dangers of inadequate as well as excessive
working capital.
END OF SECTION C
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