Description
Financial Management
Dec 2025 Examination
Q1. Minds Ltd., an electronics manufacturing company, is evaluating two financing alternatives for raising Rs.50 lakhs to fund a new project. The company expects a constant EBIT of Rs.20,00,000 per year from the project.
The two financing plans are:
– Plan A (Equity Financing): Issue 50,000 equity shares at Rs.100 each.
– Plan B (Debt-Equity Mix): Issue 25,000 equity shares at Rs.100 each and raise Rs.25 lakhs through 10% debt. The corporate tax rate is 30%. Required:
- a) Calculate the EPS under both financing plans.
- b) Identify the financial leverage break-even point for EBIT (i.e., the level of EBIT where both options result in the same EPS).
- c) Which option should the company prefer at the given EBIT level of Rs.20,00,000 and why? (10 Marks)
Ans 1.
Introduction
Financial management decisions are not only about arranging funds but also about choosing the most efficient financing structure that maximizes shareholder wealth. When a company has to select between equity financing and a debt-equity mix, the decision must be based on factors such as earnings per share, tax benefits, and the impact of financial leverage. In the case of Minds Ltd., the company has two financing options for raising fifty lakhs to support a new project: either by issuing equity shares or by using a combination of equity and debt. Since the project is expected to generate a constant level of earnings before interest and tax, the company
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Q2 (A). Ananya, a 21-year-old recent BBA graduate in India, receives two job offers. One offers her a joining bonus of Rs.1,00,000 today, while the other offers Rs.1,20,000 after 2 years. She wants to make a financially sound decision based on the Time Value of Money. Assume that the average bank interest rate (compounding annually) is 9% per annum.
Question:
As a financial advisor, help Ananya understand the time value of money and advise her which option is better. Show your working using the concept of present value (PV) and explain why time plays a crucial role in this decision. (5 Marks)
Ans 2b.
Introduction
Financial decisions often involve choosing between money available today and money receivable in the future. The concept of the time value of money explains that a rupee today is more valuable than a rupee in the future because it can be invested to earn interest. In Ananya’s case, she has to decide between receiving a joining bonus now or a larger amount after two
Q2 (B). Zeon Ltd. is evaluating a project that requires an initial investment of Rs.5,00,000. The project is expected to generate the following yearly cash inflows:
| Year | Cash Inflow (Rs.) |
| 1 | 1,00,000 |
| 2 | 1,20,000 |
| 3 | 1,30,000 |
| 4 | 1,10,000 |
| 5 | 1,50,000 |
The company’s cost of capital is 10%.
Question:
- a) Calculate the Net Present Value (NPV) of the project.
- b) Based on your result, should the company accept the project? Justify your answer (5 Marks)
Ans 2b.
Introduction
Investment appraisal is a vital part of financial management, as it guides companies in deciding whether a project adds value or not. One of the most reliable techniques is Net Present Value, which compares the present value of expected cash inflows with the initial investment. If the inflows exceed the outflow, the project creates wealth; otherwise, it should be rejected. In the case of Zeon Ltd., the company must evaluate whether the expected inflows justify the
