Financial Management Sample paper

Module 1

MCQ

1)Finance Functions are

a) Planning of Funds b) Raising of Funds c) Allocation of Resources d) All of a b and c

2)In his traditional role the finance manager is responsible for

a) Proper utilization of funds b) Arrangement of financial resources c) acquiring capital assets for
the organization d) efficient management of organization

3)Working capital management is managing

a) Short term assets and liabilities b) long term assets c) long term liabilities d) only short term
assets

4)If preference shares are cumulative , this means _______

a. Dividends are paid at the end of the year

b. Dividends are legally binding on the company
c. Unpaid dividends will be paid in future
d. Unpaid dividends are never paid

5)The modern objective of financial management is ______

a. To maximize return
b. To minimize risk
c. To maximize profit
d. To maximize shareholder wealth

Fill in the blanks

1)In profit maximization objective of financial management the emphasis is on _____ term. ( short)

2)_______ maximization objective of financial management considers time value of money ( Wealth)

3)______ holders are treated as creditors of the company ( Debenture)

4)_______ are shares of a single foreign company issued in the U.S.(ADR or American Depository Receipt)

5)Collection and monitoring of cash is an important function of a _______ ( Treasurer)

2 mark question

1)State any 2 sources of short term finance

3 marks question

1)State any three differences between share and debenture

5 marks question

1)Explain the functions/activities of a finance controller in an organization

Module 2

MCQ

1)Time value of money indicates that

a) A unit of money obtained today is worth more than a unit of money obtained in future

b) A unit of money obtained today is worth less than a unit of money obtained in future

c) There is no difference in the value of money obtained today and tomorrow

d) None of the above

2) present value of a future amount:

a. will always be less than the future amount

b. can be calculated precisely if the discount rate and number of periods is known

c. is worth less than the future value

d. both a. and b. above are true

3)The minimum rate of return that an investor must receive in order to invest in a project is most likely
known as the:

A. required rate of return.

B. real risk free interest rate.

C. inflation rate.

D. None of a b and c

4)The future or present value of an amount depends upon:

a. the interest rate.

b. the number of periods.

c. number of times per year compounding occurs.

d. all of the above.

5)If Mr.M puts Rs.100 in the bank today at 6%, how much he will have in three years?

a. 106 b. 119.10 c. 112 d. None of a b and c

Fill in the blanks

1.If a person wants to know what an amount deposited today at 4% will be worth in 4 years, he is asking
its________________________ value.( Future)

2. Debt is ________________________ when the principal is paid off during the life of the loan.
( amortized)

3.If future value is ________ we get present value ( discounted)

4.The value of money declines due to the combined effect of opportunity cost of captital delayed, risks
involved and _____ (Inflation)

5.Interest on interest is known as ______ interest ( compound)

2 mark questions

1)Find the value of Rs.10,000 earning 5% interest per year after two years.

Ans: 10,000 x (1.05)2 = 11,025.

3 mark question

1)You invest 10,000. During the first year the investment earned 20% for the year. During the
second year, it earned only 4% for that year. How much is your original deposit worth at the
end of the two years?

Ans: FV = PV x (1+i1) x (1+i2) = 10,000 x (1.20 ) x (1.04) = 12,480.

5 mark question

1)Given the uneven streams of cash flows shown in the following table, Answer question a and b

End of year Cash flow Stream A Cash flow Stream B

1 50,000 10,000
2 40,000 20,000
3 30,000 30,000
4 20,000 40,000
5 10,000 50,000
Total 1,50,000 1,50,000

a. Find the present value of each stream using 15% discount rate
b. Which cash flow stream is better and why?
Annuity

An annuity is a series of periodic payments that are received/paid at a future date. .

Annuities are essentially a series of fixed payments required from you, or paid to you, at a
specified frequency over the course of a fixed time period. Payment frequencies can be
yearly, semi-annually (twice a year), quarterly, and monthly. There are two basic types of
annuities: ordinary annuities and annuities due.

Ordinary Annuity

Each cash flow is at the end of each period

Annuity Due

Each cash flow is at the beginning of each period

Formulas

Future Value of ordinary Annuity

How much money will you accumulate by the end of year 10 if you deposit Rs.3000 each year for next 10
years in a savings account that earns 5% per year?

Ans: FV = 3000 { (1 +.05)10 – 1) / (.05)}

= 3000 { (0.63) /(.05)}
= 3000 {12.58}
= 37,740

Present Value of ordinary Annuity

Suppose you would like to have Rs.25,000 saved 6 years from now to pay towards down payment of a
new house. If you are going to make equal annual end of the year payments to an investment account
that pays 7% interest, what should be your annual payments ?

25000 = PMT { ( 1+.07)6 - 1)} / (.07)}

25000= PMT{ (.50) / (.07)}
25000=PMT { 7.153}
PMT = 25000 / 7.153 = 3495.03
Perpetuity

A stream of cash payments that never ends. Annuity that goes on forever.
Compounding yearly, half yearly and quarterly

Find the compound interest on Rs 80,000 for 3 years if the rates 4%, 5% and 10% respectively.

Ans: 80,000 x 1.04 x 1.05 x 1.10 = 96,096

Find the amount and the compound interest on 8,000 at 10 % per annum for 1.5 years if the interest is
compounded half-yearly.

Ans: 8000 ( 1+0.10/2)3 = 9261 Compound interest 1261

Taking Rs.10,000 and interest rate at 10%, if the number of compounding periods is quarterly, monthly
future value calculations are:

Quarterly compounding FV = 10,000 ( 1+0.10/4)4 = 11,038

Monthly compounding FV = 10,000 ( 1+0.10/12)12 = 11047

You decide to put 12,000 in a money market fund that pays interest at the annual rate of 8.4%,
compounding it monthly. You plan to take the money out after one year and pay the income tax on the
interest earned. You are in the 15% tax bracket. Find the total amount available to you after taxes.

Soln: The monthly interest rate is .084/12 = .007. Using it as the growth rate, the future value of money
after twelve months is FV = 12000(1.007)12 = 13,047.73
The interest earned = 13,047.73 – 12,000 = 1047.73. You have to pay 15% tax on this amount. Thus after
paying taxes, it becomes =1047.73(1 – .15) = 890.57
Total amount available after 12 months = 12,000 + 890.57 = 12,890.57

Interest Rate

You have borrowed 10,000 from a bank with the understanding that you will pay it off with a lump sum of
12,000 after 2 years. Find the annual rate of interest on this loan.
n
Soln: Here the future value is 12,000, present value 10,000, and n = 2. Use FV = PV (1 + r)
This gives 12,000 = 10,000 (1 + r) 2 Or, r = √12‚000/ 10‚000 − 1 = .09545 = 9.545%

Rule 72

Rule 72 is a rule-of-thumb method used to determine how many years it takes to double the investment
money.

Rule 69

Rule 69 is similar to Rule 72 which states how long it takes an amount of money invested at r percent per
period to double.

Both these Rules as mentioned are handy rules of thumb to determine how long it takes to double money
in an investment. They are useful for investors who require some quick references to see the number of
years for their investment to double WITHOUT referring to any present value and future value tables or
using a financial calculator.

If you deposit Rs. 5,000 today at 6 per cent rate of interest, in how many years will this amount double?
Work out this problem by using the Rule of 72 and Rule of 69.
Solution:
According to Rule of 72 Doubling Period = 72/Rate of Interest = 72/6 = 12 years
According to Rule of 69 Doubling Period = 0.35 + 69/Rate of Interest
= 0.35 + 69/6 = 0.35 + 11.50 = 11.85 years.

Annuity

An annuity is a series of periodic payments that are received/paid at a future date. .

Annuities are essentially a series of fixed payments required from you, or paid to you, at a specified
frequency over the course of a fixed time period. Payment frequencies can be yearly, semi-annually
(twice a year), quarterly, and monthly. There are two basic types of annuities: ordinary annuities and
annuities due.

Ordinary Annuity : Each cash flow is at the end of each period

Annuity Due: Each cash flow is at the beginning of each period

Formulas

Future Value of ordinary Annuity

How much money will you accumulate by the end of year 10 if you deposit Rs.3000 each year for next 10
years in a savings account that earns 5% per year?

Ans: FV = 3000 { (1 +.05)10 – 1) / (.05)}

= 3000 { (0.63) /(.05)}
= 3000 {12.58}
= 37,740

Present Value of ordinary Annuity

Suppose you would like to have Rs.25,000 saved 6 years from now to pay towards down payment of a
new house. If you are going to make equal annual end of the year payments to an investment account
that pays 7% interest, what should be your annual payments ?

25000 = PMT { ( 1+.07)6 - 1)} / (.07)}

25000= PMT{ (.50) / (.07)}
25000=PMT { 7.153}
PMT = 25000 / 7.153 = 3495.03

Perpetuity

A stream of cash payments that never ends. Annuity that goes on forever.