# CU 2021 Solved paper| BBA Hons| Financial Management Solved question paper of Calcutta University

1. (a) Z Ltd. takes a loan of Rs. 3,00,000 from a financial institution at 8% p.a. The loan is to be repaid in five equal annual instalments. Calculate the amount of each instalment.

To calculate the amount of each instalment for a loan of Rs. 3,00,000 at 8% per annum, to be repaid in five equal annual instalments, we can use the formula for the equal annual instalment for an amortizing loan. The formula is as follows:

Equal Annual Instalment = Loan Amount / Present Value Annuity Factor

The Present Value Annuity Factor can be calculated using the formula:

Present Value Annuity Factor = PVIFA = (1 – (1 + r)^-n) / r.

=(1 – (1 + interest rate)^(-number of instalments)) / interest rate

Let’s calculate the amount of each instalment step by step:

Loan Amount = Rs. 3,00,000 Interest Rate = 8% per annum = 0.08 Number of Instalments = 5

Present Value Annuity Factor = (1 – (1 + 0.08)^(-5)) / 0.08 = (1 – 1.469328) / 0.08 = 0.656541 / 0.08 = 8.206763

Equal Annual Instalment = Loan Amount / Present Value Annuity Factor = Rs. 3,00,000 / 8.206763 = Rs. 36,540.82 (rounded to the nearest rupee)

Therefore, the amount of each instalment for the loan of Rs. 3,00,000 at 8% per annum, to be repaid in five equal annual instalments, is approximately Rs. 36,540.

(b) Shyam Co. Ltd. has 10% Debentures of Rs. 6,00,000 which are to be redeemed after 6 years. Shyam Co. Ltd. is contemplating on creating a sinking fund for the purpose of redemption of the debentures after 6 years. The sinking fund investments earn interest at the rate of 12% p.a. You are required to calculate the amount of annual contribution to the sinking fund.

To calculate the amount of annual contribution to the sinking fund for the redemption of 10% debentures of Rs. 6,00,000 after 6 years, we can use the sinking fund method.

The sinking fund method involves accumulating a fund over a period of time to cover the future liability. In this case, we need to accumulate enough funds to redeem the debentures of Rs. 6,00,000 after 6 years, considering an interest rate of 12% per annum for the sinking fund investments.

The formula to calculate the amount of annual contribution to the sinking fund is:

Annual Contribution = Redemption Amount / Sinking Fund Annuity Factor

The Sinking Fund Annuity Factor can be calculated using the formula:

Sinking Fund Annuity Factor = (1 – (1 + interest rate)^(-number of years)) / interest rate

Let’s calculate the amount of annual contribution step by step:

Redemption Amount = Rs. 6,00,000 Interest Rate = 12% per annum = 0.12 Number of Years = 6

Sinking Fund Annuity Factor = (1 – (1 + 0.12)^(-6)) / 0.12 = (1 – 1.790847) / 0.12 = -0.790847 / 0.12 = -6.590392

(Note: The negative sign arises because the sinking fund annuity factor is a cash outflow.)

Annual Contribution = Redemption Amount / Sinking Fund Annuity Factor = Rs. 6,00,000 / (-6.590392) ≈ Rs. 91,174.15 (rounded to the nearest rupee)

Therefore, the amount of annual contribution to the sinking fund for the redemption of 10% debentures of Rs. 6,00,000 after 6 years, with sinking fund investments earning interest at a rate of 12% per annum, is approximately Rs. 91,174.

2. What is the Scope of Financial Management? What is the difference between Profit Maximization and Wealth Maximization in the context of Financial Management?

The scope of financial management refers to the various areas and activities that fall under the domain of financial management within an organization. The scope of financial management includes:

1. Financial Planning: Developing financial objectives, strategies, and plans to achieve the organization’s goals.
2. Capital Budgeting: Evaluating and selecting investment projects that yield long-term benefits and align with the organization’s objectives.
3. Capital Structure Management: Determining the optimal mix of debt and equity financing to fund the organization’s operations and investments.
4. Working Capital Management: Managing the organization’s short-term assets and liabilities to ensure smooth day-to-day operations and maximize liquidity.
5. Financial Analysis and Reporting: Analyzing financial data, preparing financial statements, and providing accurate and timely financial information to stakeholders for decision-making.
6. Risk Management: Identifying and managing financial risks through techniques such as insurance, derivatives, and risk assessment.
7. Dividend Policy: Deciding on the distribution of profits to shareholders in the form of dividends and retained earnings.
8. Corporate Finance: Managing financial activities related to mergers, acquisitions, and other corporate transactions.

Now, let’s discuss the difference between profit maximization and wealth maximization in the context of financial management:

1. Profit Maximization: Profit maximization is a traditional approach to financial management that focuses on maximizing short-term profits or earnings. The primary objective is to generate the highest possible profits for the organization’s shareholders or owners. It emphasizes increasing revenue, reducing costs, and optimizing operational efficiency. However, profit maximization does not consider the time value of money or the risk associated with achieving those profits.
2. Wealth Maximization: Wealth maximization is a modern and comprehensive approach to financial management. It aims to maximize the long-term wealth or value of the organization for its shareholders. Wealth is measured by the market value of the organization’s shares, which incorporates factors such as the timing and risk of expected cash flows. Wealth maximization takes into account the time value of money, considers the organization’s cost of capital, and evaluates investment decisions based on their impact on shareholder value.

In summary, profit maximization focuses on short-term profits, while wealth maximization takes a broader and long-term perspective by considering the time value of money, risk, and the market value of the organization. Wealth maximization aligns better with the goal of maximizing shareholder wealth and creating sustainable value for the organization.

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