Financial

Management
MBA Semester II
Section A (3 x 5 Marks)
1. Calculate Point of indifference (indifference point) from the following information of Gucci Ltd.
Company can raise $ 500,000 either by all Equity shares or by 50% equity shares and remaining
by 8% preference shares. The face value of equity share is Rs. 10. Corporate tax rate 50%.
Make necessary assumptions if required. (Negative marks for invalid assumptions).

2. What is the relevance of having a Financial Goal for a firm? What do you mean by share holders
wealth Maximization (SWM)? How SWM is superior to Profit maximization? discuss.

3. Consider the following information for TM Ltd.
Particulars
Contribution
Fixed cost
PBT

Rs. in million
1820
700
320

Calculate the percentage change in EPS if sales increased by 10 %.

Section B (10 marks)
4. The following are the likely returns from investments in ice-cream and in umbrellas, together
with the associated probabilities:

Weather
Sun
Cloud
Rain

Return from ice-cream

20%

15%

10%

Return from umbrellas

10%

15%

20%

Probability

a. what is the average return and the total risk for each investment separately? (5 marks)
b. what is the average return and the total risk if an equal amount were to be invested in
each?







(5 marks)

Section C (Mini cases 15 Marks)
5. (a) Securities X and Y are equally Risky, but they have different expected returns:

Expected return (%)

Proportion in the portfolio
Standard deviation

Security X

Security Y

8
0.5
10

12
0.5
10

What is the portfolio risk (Variance) if Correlation between X and Y security is 0 (zero)?
What would be your answer if Correlation is +1.0?


(5 Marks)
(b) You plan to attend a business school and you have decided to take up the loan for $
100,000 at 10%. Calculate the yearly payments required considering you have 5 years to
repay the loan.
Also prepare the loan amortization schedule showing principle amount payment and
Interest payment for each year. (Present value of annuity at 10% for 5 years - 3.79079,
Future value of annuity at 10% for 5 years 6.10510)


(10 Marks)


6. The following are the likely returns from Z plc, and the associated probability of each of the
returns:
Return
Probability
10%
0.2
15%
0.5
20%
0.3

Answer the following:
a. Calculate the average return, and the total risk using standard deviation.
b. Explain the answer you have calculated using standard deviation.


7. The following are the likely returns from investments in ice-cream and in umbrellas, together
with the associated probabilities:

Weather
Sun
Cloud
Rain

Return from ice-cream

20%

15%

10%

Return from umbrellas

10%

15%

20%

Probability

a. what is the average return and the total risk for each investment separately?
b. what is the average return and the total risk if an equal amount were to be invested in
each?






1. Discuss the concept of compounding and discounting with the help of example.
2. What is the relevance of having a Financial Goal for a firm? What do you mean by share holders
wealth Maximization (SWM)? How SWM is superior to Profit maximization? discuss.
3. What do you mean by Risk? How can the risk of a security be computed? Explain your answer
with the help of an example.
4. What is return? How the return on an asset is calculated? What do you mean by unrealized
capital gain or loss?
5. When investor hold their investment for more than 1 year, then the ideal mean is Geometric
mean? Discuss. Explain with the help of an example. (Use Geometric Mean formula)
6. Short note on
a. Risk preference,
b. Risk and return trade- off
7. What do you mean risk-free security? What is risk premium?
8. Securities X and Y are equally Risky, but they have different expected returns:
Security X

Security Y

Expected return (%)

12

Proportion in the portfolio

0.5

0.5

Standard deviation

10

10

What is the portfolio risk (Variance) if Correlation between X and Y security is 0 (zero). What
would be your answer if Correlation is +1.0?
9. Consider the following information for TM Ltd.

Particulars

Rs. in million

Contribution

1820

Fixed cost

700

PBT

320

Calculate the percentage change in EPS if sales increased by 10 %.

10. Calculate Point of indifference (indifference point) from the following information of Gucci Ltd.
Company can raise $ 500,000 either by all Equity shares or by 50% equity shares and remaining
by 8% preference shares. The face value of equity share is Rs. 10. Corporate tax rate 50%.
Make necessary assumptions if required. (Negative marks for invalid assumptions).

8. Securities X and Y are equally Risky, but they have different expected returns:

Expected return (%)

Proportion in the portfolio
Standard deviation

Security X

Security Y

8
0.5
10

12
0.5
10

What is the portfolio risk (Variance) if Correlation between X and Y security is 0 (zero)? What
would be your answer if Correlation is +1.0 and -1.0?