KSLU Solved Question Papers
Financial Management
Previous Year Question Paper with Solution
B.Com. LL.B. (Five Years) · Sem 4
2021 Oct (100 marks) Examination
munotes.in
Mumbai
B.Com. LL.B. (Five Years) Sem 4 Financial Management 2021 Oct (100 marks) 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 2021 Oct (100 marks) examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2021 Oct (100 marks) examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2021 Oct (100 marks) 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 · 15 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 the scope and functions of Financial Management.[16]
Answer
For full marks, cover: the meaning and a working definition of financial management; its nature; how its scope grew from the traditional to the modern approach; the scope today under the investment, financing, dividend and liquidity decisions, with the links to other business functions; the functions of financial management, both executive (managerial) and routine (incidental); a worked illustration of the decisions in one project; the objective that ties them together; and a conclusion.
Meaning of financial management
Every business needs money to start, to run and to grow. It must decide how much money it needs, where to get it, how to use it and how to share the profit it earns. Financial management is the area of management that takes these decisions.
A working definition. Financial management is the planning, procurement, allocation and control of the financial resources of an enterprise. Its aim is to achieve the firm's objectives at the lowest cost and an acceptable risk. It is concerned both with raising funds and with using them well.
Nature of financial management
- It is a part of management. Finance is one of the main functional areas, along with production, marketing and personnel.
- It is continuous. Funds are needed every day, not only when a company is formed or expanded.
- It is central to every decision. Almost every business decision, from buying a machine to hiring staff, has a money side that the finance manager must judge.
- It is analytical. It uses tools such as budgets, ratios, present values and cost of capital to compare choices.
- It deals with risk and return. Every financial choice trades a higher expected return against a higher risk.
How the scope widened
1. The traditional approach. In the early years of the subject, finance meant mainly the raising of funds. It studied the sources of long-term capital and the working of financial institutions. It also covered the legal steps in special events: promoting a company, issuing shares, a merger, a reorganisation or a winding up. It looked at finance from the point of view of outsiders, such as bankers and investors.
Its limits. It ignored the day-to-day use of funds, working capital and the allocation of money inside the firm. It dealt with rare events rather than the routine problems of a running business.
2. The modern approach. From about the middle of the twentieth century, the subject came to cover the use of funds as well as their raising. The finance manager now asks three questions. In which assets should the firm invest? How should it finance them? How much of the profit should it pay out? Finance became a part of the whole management of the firm.
Scope of financial management today
The modern scope is usually grouped under four decisions.
1. The investment decision. This decides where the firm's funds will be put.
- Long-term investment (capital budgeting): new plant, machinery, buildings, a new product line or the purchase of another business. The cash a proposal will bring is estimated. Its worth is judged by methods such as payback, net present value and internal rate of return.
- Short-term investment (working capital): the amount of cash, stock and debtors to hold.
The aim is to put funds only into assets that earn more than their cost.
2. The financing decision. This decides how the funds are to be raised: from equity shares, preference shares, retained earnings, debentures, term loans or short-term credit. The mix of long-term debt and equity is the capital structure. Debt is cheaper, partly because interest saves tax, but it adds fixed charges and risk. The finance manager seeks the mix that keeps the overall cost of capital low and the risk acceptable.
3. The dividend decision. This decides how much of the profit after tax is paid to shareholders and how much is kept in the business. Retained profit is the cheapest source of growth, but shareholders also value a regular dividend. The right balance raises the value of the shares.
4. The liquidity decision. This decides how to keep the firm able to pay its short-term debts. Too much liquidity leaves money idle; too little risks default. The management of cash, receivables, inventory and short-term borrowing falls here.
Links with other areas
Financial management does not work alone.
- Production: a new machine is a production decision but needs a finance decision on its cost and return.
- Marketing: credit terms to customers and advertising budgets affect working capital and profit.
- Personnel: wage plans, bonuses and pension funds have a money cost.
- Accounting: accounts supply the data; finance uses them to plan and decide.
- Economics: concepts such as marginal analysis, interest rates and the business cycle guide financial decisions.
Functions of financial management
The functions are usually divided into two groups.
A. Executive (managerial) functions. These need skill and judgement.
- Estimating capital requirements. The finance manager estimates how much money the firm needs for fixed assets and working capital, both now and for future growth. Over-estimation leaves funds idle; under-estimation halts operations.
- Deciding the capital structure. Once the amount is known, the finance manager decides the share of each source: equity, preference capital and debt.
- Choosing the sources of funds. The finance manager compares the cost, risk, control and conditions of each source: share issues, debentures, banks, financial institutions, public deposits or retained earnings.
- Investing the funds. Funds are put into projects and assets that promise the best return for an acceptable risk, after a careful study of each proposal.
- Deciding the disposal of surplus. The finance manager recommends how much profit to pay as dividend and how much to retain.
- Managing cash and working capital. Cash must be available for wages, materials, taxes and creditors. Surplus cash must be invested for short periods.
- Financial control. Actual results are compared with plans through budgets, ratio analysis and internal audit, and corrective action is taken.
- Managing risk. The finance manager guards against interest rate, foreign exchange and credit risks, and arranges insurance.
B. Routine (incidental) functions. These are clerical in nature and are often handled by junior staff under the finance manager's supervision.
- Keeping financial records and preparing reports.
- Safe custody of cash, securities and important documents.
- Handling receipts and payments, and the work with banks.
- Supervising credit and collections.
- Keeping in touch with lenders, investors and regulators.
A worked illustration
A company plans to set up a new plant costing Rs 10 crore, with Rs 2 crore more needed as working capital.
| Decision | Question the finance manager asks | Example of the answer |
|---|---|---|
| Investment | Is the plant worth its cost? | Accept if the NPV at the cost of capital is positive |
| Financing | How to raise Rs 12 crore? | For instance, Rs 6 crore equity, Rs 4 crore debentures, Rs 2 crore bank credit |
| Dividend | How much profit to pay out while the plant is built? | Retain more for a few years |
| Liquidity | How much cash and stock to keep? | A cash budget and a credit policy |
The total funds needed are 10 + 2 = 12 crore, and the sources in the example add up to 6 + 4 + 2 = 12 crore. Each decision affects the others: more debt raises risk, which may call for a lower dividend and a higher cash balance.
The objective that ties them together
All four decisions are taken with one aim: to maximise the wealth of the shareholders, that is, the market value of their shares. This aim is preferred to plain profit maximisation, because it takes into account the timing of returns and their risk. Liquidity, the lowest cost of funds and the survival and growth of the firm support this main aim.
The finance manager's role today
The finance manager, often called the chief financial officer, now sits at the top level of management. Besides the traditional tasks, the role covers mergers and acquisitions and dealing with financial markets at home and abroad. It also includes managing risk through derivatives and guiding the firm's strategy with financial analysis.
Conclusion. Financial management is the planning, raising, use and control of a firm's funds. Its scope has grown from the traditional task of raising money to the modern concern with the investment, financing, dividend and liquidity decisions. Its executive functions include estimating needs, fixing the capital structure, choosing sources, investing funds, deciding on dividends, managing cash and controlling results. Its routine functions keep records, guard cash and handle receipts and payments. All of them serve the aim of maximising the wealth of the shareholders.
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