Accounting and Finance
Answer all of the following questions (4 X 10 = 40)
- Answer both sub-questions a and b OR both c and d
- “…the function of financial management is to review and control decisions to commit or recommit funds to new or ongoing uses. Thus, in addition to raising funds, financial management is directly concerned with production, marketing and other functions within an enterprise whenever decisions are made about the acquisition or destruction of assets” (Ezra Solomon). Elucidate.
- “The profit maximisation is not an operationally feasible criterion”. Do you agree? Illustrate your views.
OR
- “The basic rationale for the objective of wealth maximisation is that it reflects the most efficient use of society’s economic resources and thus leads to a maximisation of society’s economic wealth”. Comment critically.
- Your client is 40 years old and wants to begin saving for retirement. You advise the client to put Rs. 5,000 a year into the stock market. You estimate that the market’s return will be on average of 12% a year. Assume the investment will be made at the end of the year. How much money will she have by age 65 by factor formula and table?
- Answer both sub-questions a and b OR both c and d
- ‘An individual’s time preference for money may be expressed as a rate.’ Explain.
- Mr. Simpson engages in a part time job for 5 years to finance for his studies in a part time college. His employer fixes an annual salary of Rs. 24,000 with the provision that he will get an annual increment of 10 %. Ascertain the increment that he will get from year 1 through year 5. What will be the present value of the incremented salary? Assume the discounting rate to be 16%.
OR
- Harry pays a monthly instalment of Rs. 2,000 towards a recurring deposit with a financier. The rate of interest is 6% per year compounded monthly. What is the maturity value of this recurring deposit after the 10 months?
- Discounting and compounding help in determining the sinking fund and capital recovery, do you agree? Justify your answer.
- Answer both sub-questions a and b OR both c and d
- The internal rate of return show accuracy of the financial strength of the firm. Do you agree? Justify
- A project requires an initial investment of Rs. 210,000 and is expected to generate the following net cash inflows:
| Year | 1 | 2 | 3 | 4 |
| Cash inflow | Rs.90,000 | Rs.85,000 | Rs.70,000 | Rs.60,000 |
Compute Net Present Value of the project & Profitability index if the minimum desired rate of return is 12% pa.
OR
- Explain why the NPV method is considered to be superior to other methods? Elaborate on the demerits of NVP.
- A company has a required investment of Rs. 30,000 and has to be depreciated on a straight line basis. Tax at the rate of 50% is to be provided.
| Year | Profit before depreciation and taxes (Rs.) |
| 1 | 8, 400 |
| 2 | 9,000 |
| 3 | 8,000 |
| 4 | 10,000 |
| 5 | 20,000 |
Calculate the Payback period and the ARR of the project.
- Answer both sub-questions a and b OR both c and d
- Briefly elucidate on the factors determining the working capital requirements
- Amish Ltd. plans to sell 30,000 units next year. The expected cost of goods sold is as follows:
Rs. (Per Unit)
Raw material 100
Wages 40
Selling, administration and financial expenses 20
Selling price 200
The duration of various stages of the operating cycle is expected to be as follows:
Raw material stage 2 months,
Work-in-progress stage 1 month,
Finished stage 2 months,
Debtors stage 2 months.
Assuming the monthly sales level of 3,000 units, estimate the gross working capital requirement. Desired cash balance is 5% of the gross working capital requirement.
OR
- Show the significance of the concept of EOQ for Inventory management. Elaborate on the 2 most important factor influencing the EOQ decision.
- From the following information, calculate (a) Debtors turnover ratio; (b) Average collection period. Rs. Total sales during the year 4,20,000 Cash sales during the year 1,50,000 Returns inward 20,000 Debtors in the beginning 55,000 Debtors at the end 45,000 Provision for bad debts 5,000
Section – B
Compulsory question (1 X 10 = 10)
- Answer both sub-questions a and b
ABC ltd. is planning an investment in an expansion project with an initial investment of Rs.1,00,000. The project is expected to shows the following cash-flows for next 5 years.
| Year | Cash flow (Rs.) | Present value @10% |
| 1 | 20,000 | 0.909 |
| 2 | 20,500 | 0.826 |
| 3 | 24,000 | 0.751 |
| 4 | 25,000 | 0.683 |
| 5 | 35,000 | 0.621 |
- Calculate the (i) NPV; (ii) IRR; (iii) PI and (iv) Payback period of the above investment
- With the above calculations, justify your decision of accepting or rejecting the project.
