KSLU Solved Question Papers
Financial Management
Previous Year Question Paper with Solution
B.B.A. LL.B. (Five Years) · Sem 4
2016 Dec Examination
munotes.in
Mumbai
B.B.A. LL.B. (Five Years) Sem 4 Financial Management 2016 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2016 Dec examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2016 Dec examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2016 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1What is Financial Management ? Explain significance and scope of financial management.[16]
Answer
For full marks, cover: what financial management is; its significance to the business itself, to its owners, to lenders and other parties, and to the economy, with a worked illustration of value created or lost; its scope, traced from the traditional to the modern view and set out under the investment, financing, dividend and liquidity decisions and the wider areas now covered; and a conclusion.
What is financial management?
Financial management is the area of business management concerned with money. It asks how much a firm needs, where the money comes from, where it goes and what it earns. It plans the firm's financial needs and obtains the funds on suitable terms. It then directs them to their most productive uses and watches that they earn an adequate return. All the while, the firm must stay able to meet its obligations. Its guiding aim is to increase the wealth of the owners.
Significance of financial management
A. To the business
- Survival. A firm that runs out of cash cannot pay wages, suppliers or lenders, however good its products. Sound financial management keeps it solvent.
- Growth. Expansion needs funds at the right time and cost. Planning ahead lets the firm grow without strain.
- Profitability. By choosing profitable investments and cheap sources of funds, financial management raises the return on capital.
- Efficient use of resources. Money is directed away from idle stock, slow debtors and unprofitable assets towards productive uses.
- Better decisions throughout the firm. Production, marketing and personnel decisions all have a money side. Financial analysis shows their cost and benefit.
- Control. Budgets, ratios and reports show where results fall short of plans, so that action can be taken early.
- Coping with risk. Changes in interest rates, prices and exchange rates are anticipated and managed.
B. To the owners
Shareholders look for a fair dividend and a rising share price. Financial management decides the dividend and, through sound investment and financing, raises the value of their shares. It also keeps them informed through accounts and reports, so that they can judge how their money is being used.
C. To lenders, suppliers and employees
Lenders and suppliers want to be paid on time; employees want secure jobs and regular wages. A financially well-managed firm can meet these claims and earns their confidence.
D. To the economy
Sound financial management channels savings into productive investment, encourages capital formation, and avoids the waste of resources that business failures cause. Healthy firms also pay taxes, create employment and support the many smaller businesses that supply them.
E. To other departments of the firm
Every department depends on finance. The production manager needs funds for machines and materials. The marketing manager needs a budget for advertising and a credit policy for customers. The personnel manager needs money for wages, training and welfare. Financial management decides how much each can have, judges whether the spending pays for itself, and co-ordinates their plans within one budget.
F. In difficult times
The value of financial management is clearest in hard times. In a recession, sales fall and debtors pay slowly. A firm with a cash reserve and moderate debt survives, while one that has borrowed heavily may fail. In inflation, the cost of replacing assets rises; a firm that retains enough profit and controls its working capital can keep its capacity intact.
An illustration of its significance
Two companies each employ Rs 10 crore of capital, and investors expect a return of 12 per cent.
| Particulars | Company P | Company Q |
|---|---|---|
| Capital employed (Rs crore) | 10 | 10 |
| Return earned | 15% | 10% |
| Particulars | Company P | Company Q |
|---|---|---|
| Return required by investors | 12% | 12% |
| Value added or lost each year (Rs crore) | 0.30 | (0.20) |
For P, (15 - 12) / 100 × 10 = 0.30 crore, that is Rs 30 lakh, of value is added each year. For Q, (10 - 12) / 100 × 10 = -0.20 crore, so Rs 20 lakh is lost each year. With the same capital, the quality of financial decisions makes the difference between creating and destroying wealth.
Scope of financial management
1. The traditional view. The early view limited the subject to raising funds. It studied financial institutions and instruments, and the legal and financial steps in events such as promotion, expansion, mergers and reorganisation. It looked at finance from an outsider's angle and ignored the use of funds within the firm and the day-to-day problems of working capital.
2. The modern view. Today the subject covers the whole of the firm's financial decisions, both raising and using funds. It is usually set out under four heads.
(a) The investment decision. Which long-term assets and projects should the firm acquire? This is capital budgeting. Each proposal is judged by comparing its expected cash flows, adjusted for risk and time, with its cost. The same head covers the replacement of old assets and the withdrawal of funds from unprofitable lines of business.
(b) The financing decision. How should the funds be raised? The firm must choose between owners' funds and borrowed funds, and between particular sources. The resulting capital structure should keep the cost of capital low and the risk acceptable.
(c) The dividend decision. How much of the profit should be distributed and how much retained? The choice affects the shareholders' income, the funds available for growth and the market price of the shares.
(d) The liquidity decision. How should current assets and current liabilities be managed? The firm must keep enough cash, stock and credit to run smoothly without tying up excessive funds.
3. Wider areas now included. The modern scope also covers:
- Financial planning and forecasting: budgets and projected statements.
- Financial analysis: ratio analysis and the study of cash flows.
- Risk management: the use of insurance and hedging.
- International finance: foreign exchange, overseas investment and multinational operations.
- Corporate restructuring: mergers, acquisitions and reorganisations.
Financial management in a small and in a large firm
The principles are the same in a small shop and in a large company, but the scale differs. A small trader is concerned mainly with keeping enough cash, managing credit to customers and getting a bank loan when needed. A large company deals in addition with share issues, long-term borrowing, major projects, dividends to thousands of shareholders and, often, operations abroad. In both, poor financial management is one of the commonest causes of failure.
Who performs the finance function?
In a large company the board of directors approves the major financial decisions, such as large investments, borrowing and dividends. Below it, a chief financial officer or finance director heads the function. The treasurer usually looks after raising funds, cash, banking and investments, while the controller looks after accounting, budgets, costing and internal control. In a small business the owner may do all of this personally, but the decisions to be made are the same.
Signs of weak financial management
- Frequent cash shortages and delayed payments.
- Heavy borrowing at high cost, or idle funds earning nothing.
- Projects started without proper appraisal and abandoned midway.
- Rising stocks and debtors without a matching rise in sales.
- Erratic dividends that unsettle the shareholders.
Each of these signs raises the firm's cost of funds and lowers the value of its shares. Correcting them is often the quickest way to improve a struggling business.
The decisions are linked
The four decisions affect one another. A large investment programme may need more debt, which raises risk and may call for a lower dividend and a larger cash balance. A high dividend leaves less internal finance and may force the firm to borrow. Financial management weighs these links so that together the decisions maximise the value of the firm.
Conclusion. Financial management is the management of a firm's funds, from planning and raising them to using and controlling them. It is significant because it keeps the business solvent and growing and raises its profitability. It also guides decisions throughout the firm, protects owners, lenders and employees, and supports the economy. Its scope has widened from the traditional task of raising funds to the modern investment, financing, dividend and liquidity decisions. Planning, analysis, risk management, international finance and restructuring now come within it too.
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