LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
B.Com.,B.B.A. DEGREE EXAMINATION – COMMERCE & BUS.ADMIN.
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THIRD SEMESTER – April 2009
CO 3201 – FINANCIAL MANAGEMENT
Date & Time: 16/04/2009 / 1:00 – 4:00 Dept. No. Max. : 100 Marks
SECTION – A
Answer all the following questions: (10 x 2 = 20)
- Explain the term “operating cycle”.
- List out any four sources of short-term loan financing.
- Define the term “dividend policy”.
- How does the nature of enterprise affects the capital structure of the company?
- Explain the meaning of Trading on equity.
- Calculate the Raw material holding period in days from the following:
Raw material on 1.1.2007 Rs.300
Raw material on 31.12.2007 Rs.250
Raw material purchased during the year Rs.500
Period covered 365 days
- Cee Ltd. has issued Rs.200 preference shares redeemable at a premium of 5% with 12 years maturity. Coupon rate is 10%. Floatation cost is 2%. Calculate the cost of preference shares.
- The degree of operating leverage is 2.5 and degree of combined leverage is 4. By what percentage will EBIT increase if sales increase by 5 per cent?
- A project requires Rs.30,000 as initial investment and it will generate an annual cash inflow of Rs.6,000 for ten years. Compute the pay-back period.
- State true or false:
- Pay-back technique takes into consideration cash flows after the pay-back period.
- In case of trading firm, the operating cycle is longer than that for a manufacturing firm.
SECTION – B
Answer any five questions: (5×8=40)
- Explain the term “security financing”. State the merits of different types of security financing?
- What are “Bonus shares”? Explain the advantages of issuing bonus shares.
- Write short note on: a) Cost of retained earnings b) optimum capital structure c) working capital management d) Financial leverage
- The existing capital structure of Cassel Ltd is as follows:
Equity shares of Rs.100 each Rs.4,00,000
Retained earnings Rs.1,00,000
7% preference shares Rs.2,50,000
5% debentures Rs.2,50,000
The existing rate of return on the company’s capital employed is 12% and tax rate 50%. The company requires a sum of Rs.3,00,000 to finance its expansion program, for which it is considering the following options:
- Issue 3,000 equity shares
- b) Issue 10% preference shares
It is estimated the Price Earnings Ratio in the above two financing options would be 16 and 14 respectively, which option would you recommend.
- Rai Ltd plans a production of 78000 units per annum. Selling price is Rs.100 per unit. Raw material, direct wages and overheads comprise of 40%, 15% and 25% of selling price. Raw material is in stock for 3 months and finished goods for 2 months. Production process takes 1 month. Credit allowed by suppliers is 1 month and credit given to debtors is 2 months.
Raw material is introduced at the beginning of the process. Wages and overheads in WIP may be assumed to be 50%.
Lag in payment of wages is 1.5 months. Calculate the working capital required at cash cost.
- Calculate the Degree of operating leverage, degree of financial leverage and the degree of combined leverage from the following data and interpret the results:
| Output (in units) | 30,000 |
| Fixed costs | Rs.3,50,000 |
| Variable cost per unit | Re.1.00 |
| Interest expenses | Rs.25,000 |
| Selling price per unit | Rs.300 |
- X Ltd is contemplating investment in a project which requires an initial investment of Rs.1,40,000. The cost of capital is 8%. The Cash flow after tax are as under:
| Year | Rs. |
| 1 | 30,000 |
| 2 | 40,000 |
| 3 | 60,000 |
| 4 | 30,000 |
| 5 | 20,000 |
Calculate the Internal rate of return and suggest whether the project should be accepted or not.
- The balance sheet of Apple Ltd is given below:
| Liabilities | Rs. | Assets | Rs. |
| Equity capital Rs.10 each | 9,00,000 | Fixed assets | 22,50,000 |
| 10% long term debt | 12,00,000 | Current assets | 7,50,000 |
| Reserves | 3,00,000 | ||
| Current liabilities | 6,00,000 | ||
| 30,00,000 | 30,00,000 |
Tax rate is 50%. Determine the likely level of EBIT, if EPS should be a) Re.1 b) Rs.3 c) Rs.0.
SECTION – C
Answer any two questions: (2×20=40)
- What is meant by financial management? What are its objectives? Explain its functions.
- Philips Ltd is proposing to take up a project which will need an investment of Rs. 4,00,000. The plant and machinery required under the project will have a scrap value of Rs. 20,000 at the end of its useful life of 5 years. The cost of capital is 10%. Depreciation is to be charged according to the straight line method. Tax rate is 50%. The earnings before tax are estimated to be as follows:
| Year | Rs. |
| 1 | 1,00,000 |
| 2 | 1,75,000 |
| 3 | 2,00,000 |
| 4 | 1,50,000 |
| 5 | 90,000 |
Calculate: a) Average rate of return b) Pay back period c) Net present value d) Profitability index
- Quest Ltd. has the following book value capital structures:
Rs.
Equity capital Rs.100 each 200 lakhs
12% preference capital Rs.100 each 20 lakhs
14% debentures Rs.100 each 100 lakhs
Retained earnings 240 lakhs
10% Term loan 160 lakhs
The next expected dividend is Rs. 30 per share. The dividend is expected to grow at 5% per annum. Market price of the share is Rs. 200. Tax rate is 50%. Calculate Weighted Average cost of capital using book value as weights.
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