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Summer  2016








1 Explain the differences between wealth maximization and profit maximization.

Explain relation between finance and accounting

Differences between wealth maximization and profit maximization

Explanation of relation between finance and accounting


Answer: Wealth maximisation vs. profit maximisation

  • Wealth maximisation is based on cash flow. It is not based on the accounting profit as in the case of profit maximisation.
  • Through the process of discounting, wealth maximisation takes care of the quality of cash flow. Converting uncertain distant cash flow into comparable values at base period facilitates better comparison of projects. The risks that are associated with cash flow are adequately reflected when present



2 Explain about the doubling period and future value. Solve the below given problem:

Under the ABC Bank’s Cash Multiplier Scheme, deposits can be made for periods ranging from 3 months to 5 years and for every quarter, interest is added to the principal. The applicable rate of interest is 9% for deposits less than 23 months and 10% for periods more than 24 months. What will be the amount of Rs. 1000 after 2 years?

Explanation of doubling period

Solving the problem

Explanation of future value


Answer: Doubling period

Doubling period is the period which makes the investment as “Doubled”, that is the amount invested fetches 100% return.



3 Write short notes on:

  1. a) Irredeemable bonds
  2. b) Zero coupon bonds
  3. c) Valuation of Shares


Answer: Irredeemable bonds or perpetual bonds

Bonds which will never mature are known as irredeemable or perpetual bonds. Indian Companies Act restricts the issue of such bonds and therefore, these are very rarely issued by corporates these days. In case of




4 Explain the factors affecting Capital Structure. Solve the below given problem:

Given below are two firms, A and B, which are identical in all aspects except the degree of leverage, employed by them. What is the average cost of capital of both firms?

Details of Firms A and B

  Firm A Firm B
Net operating income EBIT Rs. 1, 00, 000 Rs. 1, 00, 000
Interest on debentures I Nil Rs.25,000
Equity earnings E Rs.1,00,000 Rs.75,000
Cost of equity Ke 15% 15%
Cost of debentures Kd 10% 10%
Market value of equity S = E/Ke Rs. 6, 66, 667 Rs.5,00,000
Market value of debt B Nil Rs.2,50,000
Total value of firm V Rs. 6, 66, 667 Rs,7,50,000

Explanation of factors affecting capital structure

Solution for the problem



Answer: Factors Affecting Capital Structure

Leverage: The use of sources of funds that have a fixed cost attached to them, such as preference shares, loans



5 Explain the capital Budgeting process and its appraisals

Solve the below given problem:

Given below are the details on the cash flows of two projects A and B. Compute payback period for A and B.

Cash flows of A and B

Year Project A cash flows (Rs.) Project B cash flows (Rs.)
0 (4,00,000) (5,00,000)
1 2,00,000 1,00,000
2 1,75,000 2,00,000
3 25,000 3,00,000
4 2,00,000 4,00,000
5 1,50,000 2,00,000

Explanation of capital budgeting process and its appraisals.

Solution for the problem


Answer: Capital budgeting process

After the screening of proposals for potential involvement is over, the company should take up the following aspects of capital budgeting process:

  • A




6 Explain the concepts of working capital. Explain the determinants of working capital.

Explanation of concepts of working capital

Explanation of determinants of working capital


Answer: Concepts of Working Capital

Gross working capital: Gross working capital refers to the amounts invested in various components of current





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