PREVIOUS YEAR SOLVED PAPERS - UGC NET Management July 2018

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87. Debt Service Coverage Ratio indicates which one of the following?

  • Option : D
  • Explanation : Debt Service Coverage Ratio (DSCR) Debt Service Coverage Ratio (DSCR) ratio is the key indicator to the lender to assess the extent of the ability of the borrower to service the loan in regard to the timely payment of interest and repayment of loan installment. The ratio is calculated as follows:

    The greater debt service coverage ratio indicates the better debt servicing capacity of the organization. A ratio of 2 is considered satisfactory by the financial institutions. By means of cash flow projection, the borrower should work DSCR for the entire duration of the loan. This will be useful to the lender to take correct view of the borrower’s repayment capacity. This ratio indicates whether the business is earning sufficient profits to pay not only the interest charges but also the installments due to the principal amount.
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89. Match the items of List-II with the items of List-I and select the correct matching.

List-IList-II
(a) Liquidity Risk(i) Refers to the chance that the firm will be unable to
recover its dues from its debtors.
(b) Financial Risk(ii) Refers to the possibility of adverse effect on the firm’s
assets, liabilities, and income due to movement of interest rates.
(c) Exchange Risk(iii) Refers to the firm’s inability to pay its dues
towards creditors.
(d) Default Risk(iv) Refers to the inability of the firm to meet its financial obligations on time owing to the nonavailability of ready cash.

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90. Which one of the following is related to control function of the financial manager?

  • Option : B
  • Explanation : Functions of Financial Manager are discussed below:
    1. Estimating the Amount of Capital Required: This is the foremost function of the financial manager. Business firms require capital for:
    (i) purchase of fixed assets,
    (ii) meeting working capital requirements, and
    (iii) modernization and expansion of business.
    The financial manager makes estimates of funds required for both short-term and long-term.
    2. Determining Capital Structure: Once the the requirement of capital funds has been determined, a decision regarding the kind and proportion of various sources of funds has to be taken. For this, financial manager has to determine the proper mix of equity and debt and short-term and long-term debt ratio. This is done to achieve a minimum cost of capital and maximize shareholders wealth.
    3. Choice of Sources of Funds: Before the actual procurement of funds, the finance the manager has to decide the sources from which the funds are to be raised. The management can raise finance from various sources like equity shareholders, preference shareholders, debenture- holders, banks and other financial institutions, public deposits, etc.
    4. Procurement of Funds: The financial the manager takes steps to procure the funds required for the business. It might require negotiation with creditors and financial institutions, the issue of the prospectus, etc. The procurement of funds is dependent not only upon the cost of raising funds but also on other factors like general market conditions, choice of investors, government policy, etc.
    5. Utilization of Funds: The funds procured by the financial manager are to be prudently invested in various assets so as to maximize the return on investment: While making investment decisions, management should be guided by three important principles, viz., safety, profitability, and liquidity.
    6. Disposal of Profits or Surplus: The the financial manager has to decide how much to retain for plowing back and how much to distribute as dividend to shareholders out of the profits of the company. The factors which influence these decisions include the trend of earnings of the company, the trend of the the market price of its shares, the requirements of funds for self-financing the future programs and so on.
    7. Management of Cash: Management of cash and other current assets is an an important task of the financial manager. It involves forecasting the cash inflows and outflows to ensure that there is neither shortage nor surplus of cash with the firm. Sufficient funds must be available for the purchase of materials, payment of wages, and meeting day-to-day expenses.
    8. Financial Control: Evaluation of financial performance is also an important function of a financial manager. The overall measure of evaluation is Return on Investment (ROI). The other techniques of financial control and evaluation include budgetary control, cost control, internal audit, breakeven analysis, and ratio analysis. The financial manager must lay emphasis on financial planning as well.
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