1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER Examination – OCTOBER 2014

B.B.M – III semester

FINANCIAL MANAGEMENT

Duration: 3 Hrs                                                                                                          Marks: 100  Section – A

1. Answer ALL the questions. Each carries 2 marks.                                (10 x 2 = 20)

 

1. Explain the concept of ‘wealth’ in the context of wealth maximization objective.
2. Mention four major responsibilities of the finance manager in a modern business organization.
3. Explain two features of debt capital. Mention two examples of sources of debt capital of a company.
4. What is the cost of capital to a company from investor’s point of view and from the company’s point of view?
5. Explain the differences between business risk and financial risk.
6. Write a note on cost of retained earnings.
7. Write two advantages of the modern methods that are used to evaluate an investment proposal of a company.
8. “A firm should follow a policy of very high dividend pay-out.” Do you agree?  Why or why not?
9. Explain the motives of holding cash by a company.
10. Mention four factors that have to be considered while estimating the working capital requirement of a company.

 

Section – B

1. Answer any FOUR Each carries 5 marks.                         (4 x 5 = 20)

 

11. a) Ten year 10 per cent debentures of a firm are sold at a rate of Rs. 80.  The face value of a debenture is Rs.100.  40 per cent tax rate is assumed.  Find out the cost of debt capital.

 

85. b) The current market price of a company’s share is Rs.85. The company’s anticipated earnings of Rs. 1 lakh is to be distributed among 10,000 shareholders. The shareholders’ tax rate is 30 per cent.  Find out the cost of the equity shares.

 

12. Explain ten factors affecting Optimal Capital Structure of the company.

 

13. Prepare an estimate of working capital requirement from the following information of a trading concern.
14. Projected annual sales 1,20,000 units.
15. Selling price Rs.10 per unit.
16. Percentage net profit on sales 30%.
17. Average credit period allowed to customers – 10 weeks.
18. Average credit period allowed to suppliers – 5 weeks.
19. Average stock holding in terms of sales requirement – 5 weeks.
20. Allow 15% for contingencies.

 

14. Explain Capital Budgeting and its significance.

 

15. Following information is available with regard to a particular company.

• Cost of capital of the Company is 12%
• Earnings per share is Rs.10
• The Retention ratio is 0%

Determine the value of its shares using Gordon’s Model if:

Rate of return on investment is (i) 15%, (ii) 12% and (iii) 10% and

comment on the results.

 

16. A project costs Rs.25,000 and has a scrap value of Rs.5,000 after 5 yrs. The net profits before depreciation and taxes for the five yrs. period are expected to be Rs.5,000, Rs.6,000, Rs.7,000, Rs.8,000 and Rs.10,000.  You are required to calculate the accounting rate of return assuming 50% rate of tax and depreciation on straight line method.

 

Section – C

• Answer any THREE Each carries 15 marks.                             (3 x 15 = 45)

 

17. M/S Mohan Ltd. wishes to raise additional finance of Rs.20,00,000 for meeting its investment plans. It has Rs.4,20,000 in the form of retained earnings available for investment purposes.  Following are the further details:
18. a) Debt Equity mix 30% – 70%,
19. b) Cost of debt up to Rs.3,60,000 – 12% (before tax)

beyond Rs.3,60,000 – 18% (before tax),

1. c) Earnings per share Rs.4,
2. d) Dividend payout 50% of earnings,
3. e) Expected growth of dividend 10%,
4. f) Current market Price per share Rs.44,
5. g) Tax rate 50%.

You are required to calculate:

1. Pattern of raising additional finance
2. Overall weighted average cost of additional finance.

 

18. The capital structure of the Progressive Corporation Ltd., consists of an equity share capital of Rs.10,00,000 (shares of Rs.10 par value) and Rs.10,00,000 of 20% debentures.  Sales increased by 25% from 2,00,000 units to 2,50,000 units, the selling price is Rs. 10 per unit, variable costs amounts to Rs. 6 per unit and fixed expenses amounts to Rs.2,50,000, income tax rate is assumed to be 50%.  You are required to calculate the following:
19. a) The percentage increase in Earnings per share;
20. b) Degree of Financial Leverage
21. c) Degree of Operating Leverage

 

19. X Ltd. has under consideration the following two projects. The details are as under:

	Project X	Project Y
Investment in Machinery	Rs.10,00,000	Rs.15,00,000
Working Capital	Rs.5,00,000	Rs.5,00,000
Life of the Machinery	4 years	6 years
Scrap Value of Machinery	10%	10%
Tax rate	50%	50%

Income before depreciation and tax:

	Rs.	Rs.
1st year	8,00,000	15,00,000
2nd year	8,00,000	9,00,000
3rd year	8,00,000	15,00,000
4th year	8,00,000	8,00,000
5th year	—-	6,00,000
6th year	—–	3,00,000

Calculate the ARR and NPV at 10% discount rate and comment.

 

20. XYZ Ltd. has a capital of Rs.10,00,000 in equity shares of Rs.100 each. The shares are currently quoted at par.  The company proposes declaration of a dividend of Rs.10 per share at the end of the current financial year.  The capitalisation rate for the risk class to which the company belongs is 12%.  Assuming that the company’s net profits are Rs.5,00,000 and has new investment opportunity of Rs.10 lakhs during the period, calculate:
21. The market price of the share at the end of the year and
22. The number of new shares to be issued if:
23. Dividend is not declared.
24. Dividend is declared.

Use the MM model.

 

21. a) Explain the advantages of stock dividend to the shareholders.
22. b) Mention eight sources of working capital of a firm.
23. c) Explain Receivables Management.                    (4+4+7)

Section – D

1. Answer the following question.                                                 (1 x 15 = 15)
2. An automobile industry is considering investing in a project that costs Rs.6,00,000. The estimated salvage value is zero, tax rate is 50%.  The company uses Straight line depreciation and the proposed project has the following income:

Year               Income after depreciation before tax (Rs.)

• —–
• 20,000
• 60,000
• 80,000
• 1,30,000

Determine:

(a) Payback period;  b) Calculate the IRR;    c)  Profitability Index

and interpret the results.

 

 

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