ANSWERS

 

PART – A:

10 × 2 = 20 Marks | Answer All Questions

1. Clarify the concept of Wealth Maximisation.

Wealth maximisation refers to maximising the market value of shareholders' investment in a company. It aims to increase the share price and shareholders' wealth by making sound financial decisions.

2. Give your arguments in favour of profit maximisation.

The arguments in favour of profit maximisation are:

  1. It ensures the survival and growth of the business.
  2. It helps in measuring the efficiency of management.
  3. It increases the earning capacity of the organisation.
  4. It helps in maximising the returns to shareholders.

3. Mention the forms of capital structure.

The major forms of capital structure are:

  1. Equity Share Capital.
  2. Preference Share Capital.
  3. Debentures or Debt Capital.
  4. Retained Earnings.

4. Define Arbitrage Process.

Arbitrage is the process of purchasing and selling the same or equivalent securities in different markets to earn risk-free profits from price differences.

5. Name the various methods of computing Cost of Equity Capital.

The various methods are:

  1. Dividend Yield Method.
  2. Dividend Growth Model (Gordon's Model).
  3. Earnings Yield Method.
  4. Capital Asset Pricing Model (CAPM).

6. What is Explicit Cost?

Explicit cost refers to the actual cost incurred by a company for obtaining funds from various sources. It includes interest on loans, debenture interest and dividends on preference shares.

7. A project has an initial investment of Rs. 2,00,000. It will produce cash flows after tax of Rs. 40,000 p.a. for eight years. Compute the Payback Period for the project.

Solution:

Pay back period = Initial Investment/ cash-in-flow

= 2,00,000/40,000= 5 years                                     

8. List any two merits of the Net Present Value Method.

  1. It considers the time value of money.
  2. It considers all cash inflows and outflows throughout the project's life.

9. Name the various kinds of Working Capital.

The various kinds of working capital are:

  1. Gross Working Capital: Total investment in current assets.
  2. Net Working Capital: Excess of current assets over current liabilities.
  3. Permanent Working Capital: Minimum working capital required to run the business continuously.
  4. Temporary Working Capital: Additional working capital required to meet seasonal or special needs.

10. State the meaning of Working Capital.

Working capital refers to the funds required for the day-to-day operations of a business. It is calculated as the difference between current assets and current liabilities.

Working Capital =Current Assets- Current liabilities

 


 

 

      B.Com. Degree Examination – April 2026

Sixth Semester – Financial Management

PART – A: Model Answers

10 × 2 = 20 Marks | Answer All Questions

1. What do you mean by Wealth Maximization?

Wealth maximisation refers to maximising the market value of shareholders' investment in a company. It aims to increase the market price of shares and shareholders' wealth.

2. State any four short-term sources of finance.

The four short-term sources of finance are:

1.      Trade Credit.

2.      Bank Overdraft.

3.      Cash Credit.

4.      Commercial Paper.

3. Define Capital Structure.

Capital structure refers to the proportion of different sources of long-term finance used by a company to finance its assets and operations. It includes equity shares, preference shares and debentures.

4. What is Leverage?

Leverage refers to the use of fixed-cost funds or fixed-cost expenses to increase the potential returns to shareholders. It is classified into operating leverage, financial leverage and combined leverage.

5. Write a note on Cost of Capital.

Cost of capital refers to the minimum rate of return that a company must earn on its investments to satisfy the expectations of investors and providers of funds. It is used as a discount rate in investment decisions.

6. Give the formula for Weighted Average Cost of Capital.

The formula for Weighted Average Cost of Capital (WACC) is:

\[ WACC = \sum (W_i \times K_i) \]

Where:

·         \(W_i\) = Proportionate weight of each source of capital.

·         \(K_i\) = Specific cost of each source of capital.

7. Define the term Capital Budgeting.

Capital budgeting is the process of evaluating and selecting long-term investment projects that involve huge investments and generate benefits over several years.

8. List out the methods of Capital Budgeting.

The methods of capital budgeting are:

1.      Payback Period Method.

2.      Accounting Rate of Return (ARR).

3.      Net Present Value (NPV).

4.      Internal Rate of Return (IRR).

5.      Profitability Index (PI).

9. Mention the kinds of Working Capital.

The kinds of working capital are:

1.      Gross Working Capital.

2.      Net Working Capital.

3.      Permanent Working Capital.

4.      Temporary or Variable Working Capital.

10. What is Operating Cycle Method?

The operating cycle method is a method of estimating working capital requirements based on the time taken to convert raw materials into finished goods, sell them and collect cash from customers.

The operating cycle generally consists of:

1.      Raw Material Storage Period.

2.      Work-in-Progress Period.

3.      Finished Goods Storage Period.

4.      Debtors Collection Period.

5.      Creditors Payment Period.

 

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