Corporate Finance 2marks

7/27/2019 Corporate Finance 2marks

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THE INDIAN ENGINEERING COLLEGE, VADAKKANGULAM.

DEPARTMENT OF MANAGEMENT STUDIES

II Year MBA- I Semester

Short Questions & Answers

BA 960 - Corporate Finance

UNIT I

INDUSTRIAL FINANCE

1. What do you meant by capital market?

Capital market denotes here all buyers and sellers of capital funds as

well as the entire mechanism for facilitating and effecting capital fund

transactions both primary and secondary market.

2. What are the features of Indian capital market?

i) Existence of National/State level Development Banks, Investment and

financial Institutions.

ii) Floatation of venture capital funds.

iii) Emergence of new Corporate Bodies for Innovative activities.

iv) Encouragement of NRIs Investment.

3. State any four basic problems of industrial finance in India?

i) Inappropriate finance structure.

ii) Under utilization of Assets

iii) Insufficient working capital

iv) Absence of financial planning and budgeting.


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4. Define Equity share?

Shares mean a portion of capital, which, in turn, refers to the amount of

money raised by issue of shares. Capital acquired through floatation of shares

is termed as ownership capital.

5. Write short note on Debenture

A debenture is merely a written instrument signed by the company

under its common seal, acknowledging the debt due by it to its shareholders.

Debenture include debenture stock, bonds and any other securities of a

company whether constituting a charge on the assets of the company or not.

6. List of the nature of Debentures

- Maturity

- Claims on Income

- Claims on Assets

- Controlling power

7. Give any two functions of SEBI?

i) To protect the interests of investors in securities.

ii) Registering and regulating the working of collective investment

schemes, including mutual funds.

8. State the disadvantages of SEBI?

i) The rules and regulations SEBI will cause unnecessary delays and

interference by the finance ministry.


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ii) SEBI will have to seek prior approval for filing criminal complaints

for violations of the regulations. This will again cause delays at government

level.

iii) SEBI has not been given autonomy.

9. What is cost of Capital?

The term cost of capital refers to the rate of return on investment

projects necessary to leave unchanged the market price of a firms stocks. It is

the rate of return required by those who supply then capital.

10. State the cost of various sources of finance?

11. What do you understand by cost of Equity share capital?

The cost of equity capital is the expected required or actual rate of return

on the firms equity share capital which, if earned, will leave the market value

of the share unchanged.

12. Write the various methods of cost of equity share capital?

a) Historical rate of return

Cost of various sources of finance

Cost of Equity Capital Cost of preferred

Capital

Overall cost of capital

weighted Average cost

of Capital

Cost of various

sources of finance

Cost of various

sources of finance


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b) Earning/ Price Ratio

c) Dividend growth model

d) Earning growth model.

13. Discuss about cost of preferred capital?

The cost per share of preferred stock may be divided into the proceeds

received from its sale and the dividend paid to its owners. The cost of preferred

stock is given with the help of the following formula.

Kp = D/P0

Where, kp = Cost per share of preferred stock

D= beginning Dividend

P0 = net proceeds from the sale of preferred stocks

14. State the formula for calculating cost of retained Earnings?

kr = ke (1-tp) (1-B)

where, kr= cost of retained earnings

ke- required rate of return to shareholders

tp = personal tax rate

B= Brokerage on purchase of securities.

15. Write short note on weighted Average cost of capital?

In the investment decisions the term cost of capital is used to denote

composite or weighted average or overall cost of capital. When specific costs

are combined to arrive at the overall cost of capital, it is called the composite or

weighted average cost of capital.


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16. What are the steps involved to calculate the weighted average cost of

capital?

- To calculate the cost of specific sources of funds.

- To multiply the cost of each sources by its proportion in the capital

structure.

- To add the weighted costs of all sources of funds to get the weighted

cost of capital.

17. What are the factors affecting the cost of capital of a firm?

Following are some of the factors which are relevant for the

determination of cost of capital of the firm.

i) Risk tree Interest Rate

ii) Business Risk

iii) Financial Risk and

iv) Other consideration

18. What is a financial market?

A financial market is a market for creation and exchange of financial

assets.

19. List out the functions of financial market?

i) Financial markets facilitate price discovery

ii) Financial markets provide liquidity to financial assets.

iii) Financial markets considerably reduce the cost of transacting.


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20. What are the sources of short - term finance?

The major sources of short-term finance in India are,

1) Lending Institutions

2) Public Deposits

3) Conditional sales contracts

4) Lease financing

5) Interval sources

21. State the different sources and instruments of long term finance?

i) Equity share capital

ii) Preference share capital

iii) Debentures

iv) Indian capital market

v) Right issue

22. Define commercial Banks?

According to Prof. Hart, A bank is one who in the ordinary course of

business receives money which he repays by honouring cheques of persons

from whom or on whose account he receives it.

23. Write any two operating agencies for sick units?

- Commercial banks provide various concessions to sick units in a bit to

rehabilitate them.

- The RBI has set up a special cell to monitor the performance of sick

units and to suggest corrective measures in regard to theirrehabilitation.


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24. Write short note on National Small Industries Corporation Limited

(NSIC)?

The NSIC was setup in 1955 with the objective of supplying machinery

and equipment to small enterprises on a hire purchase basis and assisting them

in procuring government orders for various items of stores.

25. List out any four functions of small Industries Development Bank of

India (SIDBI)?

- Refinancing of loans and advances extended by primary lending

institutions.

- Discounting and rediscounting of bills.

- Granting direct assistance and refinance for financing exports of SSI

sector.

- Proving of factoring and leasing services.


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UNIT- II

SHORT- TERM WORKING CAPITAL FINANCE

1. What do you meant by working capital?

Short-term funds are needed for payments of raw materials, payments of

wages and other daily expenses, these are known as working capital.

2. What are the concepts of working capital?

The following are the concepts of working capital.

i) Gross working capital and

ii) Net working capital

3. State any four merits of adequate working capital?

i) Profitable projects

ii) Ability to face abnormal situation

iii) Quick returns of investment

iv) Easy loans

v) Regular payments of salaries, wages and other day to day

commitments.

4. List out four dangers of Inadequate working capital

i) Post postponement of payments

ii) No cash discount facility

iii) Bad effects of market conditions

iv) More cost of output.


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5. Give the approaches of working capital financing

i) Hedging approach/ Matching approach

ii) Conservative approach

iii) Aggressive approach

6. What are the factors estimating working capital requirements?

1. Nature of Business

2. Size of Business

3. Credit policy

4. Business Cycles

5. Production policy

6. Manufacturing process

7. Seasonal variations

8. Rate of growth of business

9. Dividend policy

10. Price level Changes

7. State the principles of working capital management

The following are the general principles of a sound working capital

management.

i) Principle of Risk variation

ii) Principle of cost of capital

iii) Principle of Equity position

iv) Principle of maturity of payment

8. List out the techniques of working capital?

The following are the main techniques or tools of analysis or

measurement of working capital.


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a) Schedule of change in working capital

b) Ratio Analysis

c) Fund flow and cash flow statement

9. What is Ratio Analysis?

Ratio is an Arithmetic expression of the figure to the other, it is used to

study comparison between two figures.

10. What are the techniques of forecasting working capital?

Any one of the following techniques of forecasting working capital can

be used.

a) Operating Cycle method

b) Forecasting of current assets and current liabilities method

c) Cash forecasting method

d) Project Balance- Sheet method

e) Profit and loss Adjustment method

11. List out the sources of permanent or fixed working

1) Shares 2) Debentures 3) Public Deposits

4) Ploughing back of profits 5) Loans from finance Institution

12. State the sources of Temporary or variable working capital?

1) Commercial Banks 2) Indigenous Bankers

3) Trade Creditors 4) Installment credit

5) Advances 6) Accounts receivable

7) Accured expenses 8) Commercial paper


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13. What are the approaches adopted by commercial banks

i) Opportunities for Indian commercial banks

ii) Deregulation of interest rates

iii) Strength and weakness of Indian Commercial banks

iv) Deposit mobilization by banks

v) Industrial financing by commercial banks

vi) Industry wise distribution of bank credit

14. Give an outline about strength of Indian commercial banks

1) Tremendous branch network

2) High market coverage

3) Diversified operations

4) Intimate knowledge of local environment

15. List out any five weakness of Indian commercial Bank?

1) Low profitability 2) High operating costs

3) High NPAS 4) Low productivity

5) High provisioning 6) Complex orgn. structure

16. What is commercial paper?

Commercial paper is a short term money market instrument, consisting

of unsecured promissory notes with a fixed maturity, usually between sevendays and three months, issued in bearer form and on a discount basis.

17. What state are the potentiality of commercial paper as a source of

corporate finance?

i) Source of finance

ii) Lost cost of capitaliii) Flexibility in Business financing


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iv) Less reliable source of credit than bank loans

v) Short term financing at Minimum Risk.

vi) Over money market conditions.

18. What are the different types of bank credit?

1) Over draft

2) Cash credit

3) Bill purchased and bills discounting

4) Letter of credit

5) Working capital term loan

6) Funded Interest Term loan

19. What are the different forms of providing bank credit?

1) pledge

2) Mortgage

3) lien

20. State the committees of Bank finance in India?

1) Tandon Committee

2) Chore Committee

21. What are the kinds of working capital?

The changes in current assets, in short and long terms, have led to the

classification of working capital into two components.

a) Permanent or fixed working capital

b) Temporary or variable working capital


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22. What do you understand by management of working capital?

Working capital management is an integral part of overall corporate

management. It is concerned with the problems that arise in attempting to

manage the current assets current liabilities and the inter-relationship that exist

between them.

23. List out the need for capital?

The need for capital of a business are always for the following two

purposes.

a) For establishing a business unit and

b) For payment of routine expenses

24. Define Public Deposits.

The term deposits is defined under section 451 (62) of the RBI Act,.

1934, Deposit includes and shall be deemed always to have included any

receipt of money by way of deposit or loan or in any other form.

25. State any three inter-corporate Deposits

Year

Company Amount of

Deposits (Rs.

Increases)

Amount of written

of including

interest

1990

1991

1992

1992

Foremost ceramics Ltd. New Delhi

Unikol Bottlers Ltd, Bombay &Jaipur

Deva Annapoorna foods, Chennai &

Coimbatore

Ushma Investments Ltd,

Maharashtra.

2.50

0.50

2.50

0.70

4.21

1.00

5.47

1.33


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UNIT- III

ADVANCED FINANCIAL MANAGEMENT

1. Define Risk?

Risk may be defined as the likelihood that the actual return from an

investment will be less than the forecast return.

2. What are the appraisal of Risky Investments?

i) Beta Coefficient

ii) Standard deviation

iii) Subjective Estimates

iv) Informal method

v) Risk adjusted discount rate method

vi) Certainly equivalent approach

vii) Sensitivity Analysis

3. What is certainly equivalent of cash flows?

According to B. Banerjee, the certainly equivalent approach, as an

alternative to the risk adjusted rate method, to incorporate risk in evaluating

investment projects, overcomes some of the weakness of the latter method.

4. State the advantages at certainly Equality cash flows?

- Importance to each and every individual projects.

- It avoid double counting

- Theoretically superior to the use of risk adjusted discount rates.

- Most appropriate method for finalizing a project

- Flexible to NPV and IRR for calculating risk.


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5. List out the process in certainly Equivalent Approach?

i) Determine the degree of risk inherent in the cash flows by means of

standard deviation or co efficient of variation.

ii) Finding out certainly equivalent coefficient of each cash flow.

iii) Adjusting cash flows in terms of certainly equivalent coefficient.

iv) Reduce the adjusted cash flow to their present value by using the risk

free discount rate.

6. Give the formula of certainly equivalent coefficient of cash flow

CEC=lowRiskyCashF

ashFlowCertainlyC

7. Define Risk Adjusted Discount Rate?

According to Khan and Jain, the amount of risk inherent in a project is

incorporated in the discount rate employed in the present value calculations.

8. How will you calculate the risk Adjusted Discount Rate?

The risk adjusted rate method can be formally expressed as follows.

NPV = tfn

kt

A

*)1)(1( +=

Where k*= is a risk adjusted discount rate

That is k* = 1+

Where t= the risk free rate

= the risk premium.

9. What are the advantages of Risk Adjusted Discount Rate?

- This method is simple and easy to adopt


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- This method encourages intuitive appeal for risk average business

man.

- This method has an attitude towards uncertainty.

10. List out the disadvantages of Risk Adjusted Discount Rate?

- There is no easy way of deriving a risk adjusted discount rate.

- This method does not make any risk adjustment in the numerator for

the cash flow that are forecast over the future years.

- This method is based on the assumption that investors are risk avere.

11. What is Discounted Cash flow?

It takes into consideration the time value of money while evaluating the

costs and benefits of a project.

12. State the advantages of DCF Techniques?

i) Superior techniques

ii) Highly objective

iii) Weightage to money value

iv) Comparison

v) Quick decision

13. What are the methods of Discounted Cash flow?

- Net Present value (NPV)

- Internet rate of return (IRR)

- Profitability Distribution

14. what is Probability Distribution?

Probability is the likelihood that an event will take place. It varies

between the values 0 and 1, if the event definitely takes place, probability is

one.


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15. Give any two differences between NPV method and IRR method.

NPV method IRR method

1) Discount rate is known factor

2) This methods involves

computation of the amount that

can be invested in a given

project. So that the anticipated

earnings will be sufficient torepay the cost of capital.

1) Discount rate in a unknown factor.

2) This method attempts to find out

the maximum rate of interest at

which funds are invested in the

projects.

16. What is cash Flow?

Cash flow represents the cash transactions associated with the project

and helpful for investment decision analysis.

17. List out the features of cash flows?

i) Tax effect on capital Budgeting

ii) Effect on other projects

iii) Effect on Indirect expenses

iv) Working Capital Effect

v) Determination of relevant cash flows

vi) Estimating future Benefits

18. Discuss about sensitivity Analysis?

In the method explained so far we have considered only one figure of

cash flows for each year. However, there are chances of making some

estimation errors. The sensitivity analysis approach takes care of the aspect by


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providing more than one figure forecast since it gives a more precise idea about

the variability of the returns.

19. What do you understand by simulation?

Simulation implies that a model or techniques and tools followed to

analyze and evaluate the return of investment when we put such a huge fund in

any project.

20. What are the various tools and techniques available for investment

decisions?

1) Accounting/ Average rate of return (ARR)

2) Interval rate of return (IRR)

3) Pay back period

4) Post pay back period

5) Discounted pay back period

6) Sensitive techniques

7) Standard deviation

8) Decision tree analysis

21. Give the formula of average rate of return (ARR)?

It may be calculated using the following formula.

ARR= 100/

XestmentAverageInvOriginal

ingsAnnualEarnAverageNet

22. Describe about pay back period?

It is a traditional method of evaluating the profitability of capital

projects. It is one of the commonly used techniques while selecting the

investment proposals business concerns would consider the recovery of the cost


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of a proposal as the first and fore most concern, though earning of profits is

their ultimate goal.

23. State the merits of Payback period?

- It is easy to understand and simple to operate.

- It takes the liquidity into account

- It is more reliable and would be more accurate.

24. What do you meant by decision tree approach in investment decisions?

It is a graphic display of the relationship between a present decision and

future events, and future decisions.

25. List out the major steps in a decision tree process?

1) The investment decision defined clearly.

2) The decision alternatives are identified

3) The decision tree graph indicates decision points, chance events andother data.

4) It represents relevant data such as the projected cash flow, probability

distribution, expected present value, etc., on the decision tree branches.

5) Choosing the best alternative by analysis from the results displayed.


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UNIT - IV

FINANCING DECISION

1. Define Financial Decision?

Financial decisions refer to decisions concerning financial matters to a

business concern. Decisions regarding magnitude of funds to be invested to

enable a firm to accomplish its ultimate goal, kind of assets to be acquired,

pattern of firms income and similar other matters are included in financial

decisions.

2. State any four important issues/ factors involved in the financial

decisions?

- Sources are funds available

- Extent are funds available from these sources.

- Present cost of funds

- Expected cost of future financing

- Sources of funds and their cost.

3. What is simulation?

Stimulation implies that a model or techniques and tools followed to

analyze and evaluate the decisions and analysis of finance, when we are in theposition to measure and evaluate the source of finance and calculates the

earnings before two and after tax.

4. List out the steps of simulation Analysis?

i) Model the project

ii) Specify the values of parameters & probability distributions

iii) Select the value of random from the probability


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iv) Determine the NPV

v) Plot the frequency distribution of NPV.

5. Discuss about Current ratio?

Current ratio shows the relationship between current assets and current

liabilities, it is calculated by dividing current assets by current liabilities.

Current ratio =bilitiesCurrentLia

etsCurrentAss

6. What do you meant by cash Inadequacy?

Cash inadequacy, represents that enough money is not in the hands of

the company to meet out the expenses for a particular period of time.

7. What do you understand by cash Insolvency?

Cash insolvency exist when there is no sufficient current assets

particularly cash or bank balance in hand. The company can made an attempt torun the concern but not for longer period. It cannot be possible but in rare case

this concept put in practice.

8. What are the factors determining the probability of cash insolvency?

i) Credit Analysis

ii) Counter Partys Economic Incentive

iii) Large Obligations

iv) Comparison to the value of the counter party

v) Lambda Ratio

vi) Verifying the Ratios

vii) Insurance and Default Premiums

viii) Watching the Receivables


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9. Define Agency Costs?

In practice, there may exist a conflict of interest among shareholders,

debentures and management. These conflicts give rise to agency problems

which involve agency costs. Agency costs have their influence on a firms

capital structure.

10. What are the conflicts between shareholders and managers?

The conflict between shareholders and managers may arise on two counts.

- Managers may transfer shareholders wealth to their advantage by

increasing their compensation and perquisites.

- Managers may not act in the best interest of shareholders to protect

their jobs; managers may not undertake risk and foreign profitable

investments.

11. State the interdependence of Investment?

i) Maximization of wealth

ii) Availability of projects

iii) Based on profitability and liquidity position

iv) Productivity resources

v) better timing of assets

vi) Future earnings

vii) Legal factors

12. What is Dividend Decision?

Dividend decision decides about allocation of earnings between

payments to shareholders and retired earnings. Retained earnings constitute one

of the most potent sources of funds for financing corporate growth but

dividends constitutes the cash flows that accrue to equity investors.


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13. List out any five factors affecting dividend decision?

1) Stability of earnings

2) Financing policy of the company

3) liquidity position

4) Ability to borrow

5) Profitability

14. Give the approaches of Dividend Decision?

1) Walters approach

2) Gordons dividend approach

3) Modigliani and Millers approach

15. Write short note on Walters approach of dividend decision?

James E. Walter states that dividend policy affects the value of the

enterprise. The finance manager can use it to maximize the wealth of the

shareholders.

16. State the classification of firms

r > k (Growth firm)

r < k (Declining firm)

r = k (Normal firm)

Where; r- specifies return on investment or internal rate of return.

k- cost of capital or required rate of return.

17. Give the formula for determining the market value of a share under

Walters approach?

P= k

DEkrD )(/ +


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Where, P= market price of an equity share

D= Dividend per share

r= Internal rate of return

E= Earning per share

k= Cost of capital or capitalization rate.

18. Write short note on Gordons dividend approach?

Gordon supported the relevant approach on dividend determination, i.e.,

dividend policy of a company will influence its market value. Whenever there

is a change in dividends, the market value of the firm changes correspondingly.

19. State the equation of Gordons dividend approach for determining the

market value of a share?

P0=

)1()1()1(

2

21

+

+

+

+ k

D

k

D

k

D

Where *= Infinite

20. How will you solve the equation of Gordons dividend approach?

P0=gk

D

1

Where, P0 = Market value of the share of present

D1= Expected dividend in the next year.

k= Cost of capital

g= Growth rate.


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21. Discuss about the modigliani and Millers approach?

They have stated that the price of shares of a firm is determined by its

earning potentiality and investment policy, and never by the pattern of income

distribution i.e., dividend decision.

22. State the equation of Modigliani and Millers approach for

determining the Market price of the shares.

P0 =)1(

11

ke

PD

+

+

Where, P0 = Present market price of a shareke= cost of equity capital

D1= Dividend to be at received at the end of the period one.

P1 = Market price of a share at the end of the period one.

Or

[P1= P0(1+ke)-D1]

23. What are the different types of Dividends?

1) Cash dividend

a) Regular dividend

b) Interim Dividend

2) Stock dividend

3) Scrip dividend

4) Bond dividend

5) Property dividend

24. List out the basic issues involved in Dividend policy?

- Cost of capital

- Realization of objectives

- Shareholders Group

- Release of Corporate Earnings


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25. Write short note on irrelevance of Dividend policy?

The dividends that are not relevant is based on two pre-conditions.

i) That investment and financing decisions have already been made andthat these decisions will not be altered by the amount of dividends

payment.

ii) That the perfect capital market is there is which an investor can buy

and sell the shares without any transaction cost and that the companies

can issue shares with out any floatation cost.


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UNIT- V

CORPORATE GOVERNANCE

1. What is corporate Governance

Corporate Governance is the process where by people in power direct,

monitor and lead corporation, and thereby either create, modify or destroy the

structure and system under which they operate. Corporate governance are both

potential agents for change and also guardians of existing ways of working. As

such, they are therefore a significant part of the fabric of our society.

2. State any two objectives of Corporate Governance?

i) Holding balance between economics social goals.

ii) Efficient use of resources.

3. List out any four advantages of corporate Governance?

- Effective Control over a firm

- Safeguarding the interest of investors

- Allotment of promoters share

- System of guiding, reporting, monitoring & control.

4. Give any two SEBI guidelines?

i) Declaration of quarterly results.

ii) Issue of guidelines for preferential allotment at market related prices.

5. Give an outline about corporate Disasters?

- Wide approach

- Legal and contractual obligations

- need and stakeholders to deal

- Responsibility & accountability of firms


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11. State any two Code of fair business practices adopted by Council for

Fair business Practices (CTBP)?

- To charge only fair and reasonable prices and take every

possible step to ensure that the prices to be charged to the

consumer are brought to his notice.

- To take every possible step to ensure that the agents or dealers

do not charge prices higher than fixed.

- To invoice goods exported or imported at their correct prices

12. List out any two ethics of stakeholders.

The ethics of the stakeholders are as follows

i) Recognition to shareholders who have taken a great risk in making

investment in the business.

ii) The installation of an efficient grievance handling system.

iii) An opportunity for participating in managerial decisions.

13. Write any two ethics of Managers

i) The problems that caused managers the greatest concern were those

which involved buying business using gifts, bribes, personal

favours etc.,

ii) Most managers do take time in making a decision to consider the

ethical implications.

iii) Managers reiterated the importance of company policy influencing

ethical action.

14. What is profession?

Profession is any occupation or carrier must meet certain criteria.

15. Write short note on knowledge?


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Knowledge is based on skill and adjustment which involve well defined

goals and do the job in a systematic manner.

16. What do you understand by organization/ Association?

Organization/ Association is established to the members for practicing

the profession.

17. Define Public good?

The occupation should aim at promoting health of public.

18. What is meant by Professionalism?

It covers the various aspects of a profession namely, efficiency,

productivity, technology, self interest, act as social servant, saviour and so on.

If these key points exist to a profession list called as professionalism.

19. State the Role/ Responsibilities of Professionalism in Relation to

Ethics?

i) Saviour

ii) Guardian

iii) Bureacrat

iv) Social Servant

v) Social enables & Catalyst

vi) Game Player

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