Easy2Siksha Sample Papers
(GNDU) MOST REPETED (IMPORTANT) QUESTIONS
B.COM 3
rd
SEMESTER
FINANCIAL MANAGEMENT
Repeated Quesons
1. Time Value of Money (importance/techniques/adjustment)
2021 (Q1), 2023 (Q1)
2. Weighted Average Cost of Capital (WACC) and relevance of cost of capital
2021 (Q2i), 2023 (Q2), 2024 (Q2)
2025 Smart Predicon Table
Based on 3–4 Year Queson Paper Analysis
Queson Topic
Repeats
Years Appeared
Priority
WACC and relevance of cost of capital
3 Times
2021, 2023, 2024
Very High
Working capital: denion and esmaon
3 Times
2021, 2023, 2024
Very High
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(GNDU) MOST REPETED (important) Answers
B.COM 3
rd
SEMESTER
FINANCIAL MANAGEMENT
Solved Answer Paper
1. Time Value of Money (importance/techniques/adjustment)
2021 (Q1), 2023 (Q1)
Ans: The Story of Time Value of Money (TVM)
A Fresh Beginning
Imagine you are sitting in your college canteen with your best friend. You both just finished
your lunch, and suddenly your friend says:
“Hey, if I give you ₹1,000 right now, or ₹1,000 after one year, which one would you
choose?”
You laugh and reply instantly,
“Of course, right now! Who wants to wait for one whole year for the same money?”
But then your friend asks,
“Why though? It’s the same ₹1,000, right? What difference does it make whether you get it
today or a year later?”
Now, this simple question takes you into a deeper journey of finance, investments, and
smart decision-making.
This journey is what we call Time Value of Money (TVM).
The Heart of the Idea
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At its core, Time Value of Money means that money you have today is worth more than
the same amount of money you will receive in the future.
Why?
Because money is not just paper. It has potential. If you hold ₹1,000 today, you can:
• Invest it, and it will grow.
• Spend it, and it will give you utility now.
• Save it, and it can earn interest.
But if you receive the same ₹1,000 after a year, you lose the opportunity to grow or use it in
this period.
So, money has a time dimension. It’s like saying: “Money today is more powerful than
money tomorrow.”
Importance of Time Value of Money
Let’s break down why TVM is so important in real life and financial decision-making. I’ll
explain through stories:
1. Investment Decisions
Suppose you are planning to invest ₹50,000 in a small business. The owner promises you will
get back ₹70,000 after 5 years. Sounds good?
But wait! What if you could invest the same ₹50,000 in a bank FD and get ₹90,000 after 5
years?
Only by applying TVM calculations can you compare which option is truly better.
Without TVM, you might make the wrong choice.
2. Loan and Debt Management
When you take a loan, the bank doesn’t just want its money back. It charges interest
because it is giving up its money today and expects compensation for the future value.
So, TVM is the backbone of banking, loans, EMIs, and credit systems.
3. Retirement Planning
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Imagine you are 25 today and want to retire at 60. You start saving ₹5,000 every month.
Over time, thanks to compound interest (a TVM concept), this small saving can grow into
crores by the time you retire.
TVM shows us the magic of compounding and why starting early is the smartest financial
decision.
4. Business Valuation
Companies are bought and sold not just based on what they earn today, but also on what
they will earn in the future.
TVM helps calculate the present value of future cash flows. That’s why investors rely on it
to decide whether a business is worth buying.
5. Daily Life Decisions
Even in daily life, TVM matters:
• Should you take a lump-sum lottery of ₹10 lakh today, or installments of ₹1 lakh
every year for 15 years?
• Should you buy something on EMI or full cash now?
All these questions can be answered only with TVM.
Techniques of Time Value of Money
Now let’s talk about the main techniques used in TVM. Don’t worry, I’ll explain each one in
a story-like simple way.
1. Present Value (PV)
Present Value asks: “How much is future money worth today?”
Think like this: If your friend promises to give you ₹1,100 one year from now, and you know
the bank interest rate is 10%, would you prefer to wait or take money now?
If you had ₹1,000 today and put it in the bank, it would become ₹1,100 after a year. That
means, ₹1,100 in the future = ₹1,000 today.
Formula:
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where,
• FV = Future Value
• r = Rate of interest
• n = Time period
So, ₹1,100 after 1 year (with 10% interest) is worth only ₹1,000 today.
This is Present Value.
2. Future Value (FV)
Future Value asks: “If I invest money today, how much will it grow into in the future?”
Imagine you put ₹10,000 in a fixed deposit at 8% annual interest for 3 years.
Future Value = 10,000 × (1 + 0.08)^3 = ₹12,597 approx.
So, your ₹10,000 today will grow to ₹12,597 in 3 years.
Formula:
This is why parents invest early for their children’s education—because money grows with
time.
3. Discounting
Discounting is the reverse of compounding. It’s like saying: “If I know the future amount,
how do I bring it back to today’s value?”
Suppose you are told you’ll get ₹50,000 after 5 years, and the discount rate is 12%. By
discounting, you’ll know how much it’s worth today.
This is crucial in business deals, where companies compare today’s investments with
tomorrow’s returns.
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4. Annuities
An annuity is a series of equal payments made over time. Examples:
• Your monthly SIP in mutual funds
• Your EMI payments
• Pension payments after retirement
There are two main types:
• Ordinary Annuity: Payments are made at the end of each period. (e.g., loan EMIs)
• Annuity Due: Payments are made at the beginning of each period. (e.g., rent
payments)
Formulas exist for both, but the logic is simple: TVM helps us calculate the total present or
future value of these streams of payments.
5. Perpetuities
A perpetuity is like an annuity that never ends. For example, if a government bond promises
to pay you ₹1,000 every year forever, TVM can calculate how much that bond is worth
today.
Formula:
where C = annual payment, r = discount rate.
6. Compounding Frequency
Money grows differently based on how often interest is added.
• Annual Compounding
• Half-Yearly Compounding
• Quarterly or Monthly Compounding
For example, ₹1,000 at 12% annual rate compounded monthly grows faster than the same
amount compounded annually.
This is why banks love to use compound interest—it maximizes growth.
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Adjustment in TVM
In real life, TVM is not always straightforward. We need adjustments for different situations:
1. Inflation Adjustment
Money loses value due to inflation. ₹100 today may buy you 5 cups of tea, but after
10 years, maybe only 2 cups.
So, when calculating TVM, we must adjust returns with inflation to know the real
value.
2. Risk Adjustment
If you invest in a government bond, the risk is low, so the discount rate is low.
But if you invest in a startup, the risk is high, so the discount rate should be higher.
This adjustment ensures fair comparison.
3. Different Cash Flow Patterns
Sometimes, money doesn’t come regularly (like a salary). Businesses often have
uneven cash flows, and TVM techniques are adjusted to calculate present values in
such cases.
4. Taxes and Transaction Costs
If an investment gives you 10% return but 2% goes in tax, the effective rate is 8%.
So, adjustments are made for real-world conditions like tax, brokerage, or service
charges.
Wrapping it All Together
So, let’s step back and see the big picture:
• Importance: TVM is everywhere—investments, loans, business valuation, daily
decisions, and retirement planning.
• Techniques: Present Value, Future Value, Discounting, Annuities, Perpetuities, and
Compounding.
• Adjustments: Inflation, risk, irregular cash flows, taxes.
Ultimately, TVM teaches us one golden rule:
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“Money today is more valuable than the same money tomorrow, because of its earning
potential.”
2. Weighted Average Cost of Capital (WACC) and relevance of cost of capital
2021 (Q2i), 2023 (Q2), 2024 (Q2)
Ans: A Fresh Beginning: The Tale of “The Big Café Expansion”
Imagine there’s a young entrepreneur named Aarav who owns a small but popular café in
his city. His café serves amazing cold coffee and snacks, and customers love it so much that
he dreams of opening three more outlets across town.
But there’s one big problem: money. Aarav doesn’t have enough savings to fund the
expansion. So, he has to decide:
• Should he borrow money from a bank (debt)?
• Should he invite investors who will take part ownership in his café (equity)?
• Or should he use a mix of both?
This is where the concept of Cost of Capital and more specifically, the Weighted Average
Cost of Capital (WACC), enters the story.
Because for Aarav, just like for any business, the cost of capital is not just a boring financial
formula—it’s like the price tag of getting money for growth. And the WACC is like a compass
that guides him to make the best financial decision.
Now, let’s slowly unfold this story and explain everything step by step.
Part 1: What is Cost of Capital?
Think of capital as fuel for a car. Without fuel, no car can move; without capital, no business
can grow.
But here’s the catch: fuel is never free. Similarly, capital is never free.
• If Aarav takes a bank loan, he must pay interest.
• If he invites investors, he must share profits (dividends) or allow them a claim on
future growth.
• Even if he uses his own savings, he’s giving up the chance to invest that money
elsewhere. That’s called opportunity cost.
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So, the cost of capital is basically:
The minimum return a company needs to earn from its investments, so that the
providers of capital (banks, investors, even owners themselves) are satisfied.
Part 2: Types of Cost of Capital
1. Cost of Debt (Kd)
o If Aarav borrows ₹10 lakh from a bank at 10% interest, his cost of debt is
10%.
o But wait—because interest reduces taxable profit, the effective cost is lower.
That’s why we adjust it with (1 – tax rate).
2. Cost of Equity (Ke)
o Investors don’t give money for free. They expect a return.
o How much? That depends on the risk of investing in Aarav’s café.
o Equity cost is often estimated with models like CAPM (Capital Asset Pricing
Model), but in simple words: It’s what shareholders expect in return for the
risk they’re taking.
3. Cost of Retained Earnings
o If Aarav reinvests his profits instead of paying dividends, it’s still a cost.
Because shareholders lose the chance of using those dividends elsewhere.
So, each source of money—debt, equity, or retained earnings—has its own “price tag.”
Part 3: Why Do We Need Weighted Average Cost of Capital (WACC)?
Now imagine Aarav is not just using debt or equity alone. He plans to borrow ₹5 lakh from a
bank (debt) and raise ₹5 lakh from investors (equity).
Here’s the problem: Which cost should he consider when deciding if the café expansion is
worth it?
• Only the cost of debt?
• Only the cost of equity?
• Or both?
The answer is: both. But not just simply added together—rather, in proportion to how much
of each he is using.
That’s why we use Weighted Average Cost of Capital (WACC).
Part 4: Formula of WACC
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The formula looks like this:
Simply put:
WACC is the average cost of getting money, considering both debt and equity, weighted by
how much of each you use.
Part 5: WACC in Aarav’s Café Story
Suppose:
• He borrows ₹5 lakh from the bank at 10% interest. Tax rate = 30%.
• He raises ₹5 lakh from investors who expect 15% return.
Now:
• Cost of Debt after tax = 10% × (1 – 0.3) = 7%
• Cost of Equity = 15%
• Weight of Debt = 5/10 = 0.5
• Weight of Equity = 5/10 = 0.5
So,
WACC = (0.5 × 15%) + (0.5 × 7%) = 11%
This means Aarav’s café expansion project must generate at least 11% return to satisfy
both bank and investors.
If his business earns less than 11%, he’s actually losing wealth.
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Part 6: Relevance of Cost of Capital
Now that we know what WACC is, let’s see why it’s relevant—why businesses, investors,
and examiners care about it.
1. Investment Decisions (Capital Budgeting)
When Aarav evaluates his café expansion, he will calculate the Expected Return. If the
return is higher than WACC, he should go ahead. If not, he should drop the idea.
Cost of capital becomes the benchmark or cut-off rate for projects.
2. Financing Decisions
Should a company use more debt or more equity?
• Debt is cheaper (due to tax benefits), but too much debt is risky.
• Equity is safer, but more expensive.
WACC helps companies strike a balance (called the optimal capital structure).
3. Valuation of Firms
Investors use WACC as a discount rate when calculating the present value of future cash
flows.
Lower WACC = higher firm value.
4. Performance Measurement
If a company earns returns higher than WACC, it’s creating wealth. If not, it’s destroying
wealth.
Part 7: The Human Angle – Why This Matters
Let’s return to Aarav.
Imagine he ignores WACC and just borrows money without checking whether his café can
generate higher returns. Soon, he might find himself drowning in debt, unable to pay
investors, and his dream expansion may collapse.
But by carefully calculating WACC, he knows exactly the minimum profit margin he must aim
for. It gives him confidence, clarity, and direction.
In real life, multinational giants like Tata, Infosys, Apple, or Google use WACC in exactly the
same way—to decide whether to launch new projects, open new branches, or invest in new
technologies.
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Part 8: Limitations of WACC
Of course, WACC is not perfect:
• Estimating cost of equity is tricky (investor expectations are not visible).
• Capital structures change over time.
• Market conditions (like interest rates) fluctuate.
But despite limitations, WACC remains one of the most practical and widely used tools in
finance.
Part 9: Wrapping the Story
So, the story of Aarav’s café shows us that:
• Cost of capital is the price of money.
• WACC is the average price of money when it comes from both debt and equity.
• It matters because it decides whether a project is profitable, whether the company’s
financing is smart, and whether the business is actually creating value.
In simple words: WACC is like the heartbeat of financial decision-making.
If it’s ignored, businesses risk failure. But if it’s understood, it can guide entrepreneurs (big
or small) toward growth and sustainability.
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