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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATION – OCTOBER 2013
B.COM. – III SEMESTER
FINANCIAL MANAGEMENT
Duration: 3 Hrs Max. Marks: 100
Section – A
I) Answer the following questions. Each question carries 2 marks. (10 x 2 = 20)
1. What is the significance of computing WACC?
2. The profit ability Index of a project is 1.26 however its Net profitability index
is 0.26. Can this project be accepted? Why?
3. Consider the following information for Omega Ltd.
Particulars Rs. in lakhs
EBIT 15,750
EBT 7000
Fixed operating costs 1575
Required:
Calculate percentage change in EPS if sales increase by 5%.
4. When is a firm said to maintain “aggressive working capital policy”?
5. How does an “ageing schedule” help the management.
6. What is the significance and need for determining “safety stock” by a
business firm.
7. What do you understand by capital structure? How does it differ from
financial structure?
8. Elaborate on the nature of financial planning that a firm-subject to high
degree of operating uncertainty should resort to.
9. Explain “Interest Tax Shield”
10. Explain flotation costs?
Section – B
II) Answer any FOUR questions. Each question carries 5 marks. (4 x 5 = 20)
11. A new project is under consideration in Zip Ltd., which requires a capital
investment of Rs.4.50 crore. Interest on term loan is 12% and Corporate Tax
rate is 50%. If the Debt Equity ratio insisted by the financing agencies is 2:1,
calculate the point of indifference for the project.
12. P Ltd. has the following balance sheet and income statement information:
Balance Sheet as on March 31st
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Liabilities Rs. Assets Rs.
Equity capital (Rs.10 per share) 8,00,000 Net fixed assets 10,00,000
10% Debt 6,00,000 Current asset 9,00,000
Retained earnings 3,50,000
Current Liabilities 1,50,000
19,00,000 19,00,000
Income statement for the year ending March 31
Sales
Less: Operating expenses(including Rs.60,000 depreciation)
3,40,000
(1,20,000)
EBIT 2,20,000
Less: Interest (60,000)
Earnings before tax 1,60,000
Less: Taxes (56,000)
Net Earnings (EAT) 1,04,000
a) Determine the degree of operating, financial and combined leverages at
the current sales level, if all operating expenses, other than depreciation,
are variable costs.
b) If total assets remain at the same level, but sales i) increase by 20 percent
and ii) decrease by 20 percent, what will be the earnings per share at the
new sales level?
13. What is capital rationing? When is it resorted to? Suggest ways of
implementing capital rationing.
14. What is stock dividend? When do firms declare such dividends? Draw up
the balance sheet (extract) of a company, before and after the issue of stock
dividend.
15. A hospital is considering to purchase a diagnostic machine costing Rs.80,000.
The projected life of the machine is 8 years and has an expected salvage value
of Rs.6,000 at the end of 8 years. The annual operating cost of the machine is
Rs.7,500. It is expected to generate revenues of Rs.40,000 per year for eight
years. Presently, the hospital is outsourcing the diagnostic work and is
earning commission income of Rs. 12,000 per annum; net of taxes.
Required:
Whether it would be profitable for the hospital to purchase the machine?
Give your recommendation under:
i) Net Present Value method ii) Profitability Index method.
PV factors at 10% are given below:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467
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16. a) A company’s shares are quoted at Rs.250. The dividend just paid was
Rs.50. Face value per share Rs.100. No growth in dividends is expected.
Compute Ke.
b)Presume in the above question the anticipated growth rate in dividends
is 10% p.a. Compute Ke.
c) Presume in part (a), investors in the company have a required rate of
return of 15%. Current dividends of Rs.30 per share have just been paid.
No increase is anticipated. Estimate the share price today.
d) Presume in part (c), dividend are expected to grow @5% p.a. Calculate
share price today.
Section – C
III) Answer any THREE questions. Each question carries 15 marks. (3 x 15 = 45)
17. Consider the following mutually exclusive projects:
Projects Cash Flows(Rs)
C0 C1 C2 C3 C4
A -10,000 6,000 2,000 2,000 12,000
B -10,000 2,500 2,500 5,000 7,500
C -3,500 1,500 2,500 500 5,000
D -3,000 0 0 3,000 6,000
Required:
i) Calculate the payback period for each project.
ii) If the standard payback period is 2 years, which project will you
select?
iii) If the cost of capital is 10%, compute the discounted payback
period for each project. Which projects will you recommend, if
standard discounted payback period is i) 2 years; ii) 3 years?
iv) Compute NPV of each project. Which project will you recommend
on the NPV criterion? The cost of capital is 10%. What will be
appropriate choice criteria in this case? The PV factor at 10% are:
Year 1 2 3 4
PV factor at 10% 0.9091 0.8262 0.7513 0.6830
18. Cost sheet of the company provides the following data:
Cost per unit in Rs.
Raw material
Direct Labour
Overheads (including depreciation of Rs.10)
50.00
20.00
40.00
Total Cost 110.00
Profit 20.00
Selling Price 130.00
Additional information:
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Average raw material in stock is for one month. Average material in
progress is for half month. Credit allowed by suppliers: one month; credit
allowed to debtors; one month.
Average time lag in payment of wages; 10 days; average time lag in payment
of overheads 30 days. 25% of the sales are on cash basis. Cash balance
expected to be Rs.1,00,000. Finished goods lie in the warehouse for one
month.
You are required to prepare a statement showing the cash cost of working
capital needed to finance a level of the activity of 50,000 units of output.
Production is carried on evenly throughout the year and wages and
overheads accrue similarly. State your assumptions, if any, clearly.
19. A) A company had the following Balance Sheet as on March 31, 2006:
Liabilities & Equity Rs.(in Crores) Assets Rs.(in Crores)
Equity Share Capital
(one crore shares of
Rs.10 each)
10
Fixed Assets (Net)
Current Assets
25
15
Reserves & Surplus 2
15% Debentures 20
Current Liabilities 8
40 40
The additional information given is as under:
Fixed Costs per annum (excluding interest) Rs. 8 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income – tax rate 40%
Required:
Calculate the following and comment:
i) Earnings per share ii) Operating Leverage
iii) Financial Leverage iv) Combined Leverage
B) You are a Finance Manager in Big Pen Ltd. The degree of operating
leverage of your company is 5.0. The degree of financial leverage of your
company is 3.0. Your Managing Director has found that the degree of
operating leverage and the degree of financial leverage of your competitor
Small Pen Ltd. are 6.0 and 4.0 respectively. In his opinion, the Small Pen Ltd.
is better than that of Big Pen Ltd. because of higher value of degree of
leverages. Do your agree with the opinion of you Managing Director? Give
reasons.
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20. A) A Limited Company has under consideration the following two projects.
Their details are follows:
Project X (Rs.) Project Y (Rs.)
Investment in machinery 10,00,000 15,00,000
Working capital 5,00,000 5,00,000
Life of machinery (Years) 4 6
Scrap value of machinery (%) 10 10
Tax rate (%) 50 50
Income before depreciation and tax at the end of
Year 1 2 3 4 5 6
X(Rs) 8,00,000 8,00,000 8,00,000 8,00,000 – –
Y (Rs) 15,00,000 9,00,000 15,00,000 8,00,000 6,00,000 3,00,000
You are required to calculate the average rate of return and suggest
which project is to be preferred.
B) A company has to select one of the following two projects:
Year 0 1 2 3 4
Project X(Rs) 11,000 6,000 2,000 1,000 5,000
Project Y (Rs) 10,000 1,000 1,000 2,000 10,000
Calculate IRR. Suggest the best alternative on the above basis.
21. A) Draw a detailed account of the factors affecting the dividend policy of a
firm.
B) What are the factors to be considered in devising a sound management
policy for Accounts receivable?
Section – D
IV) Answer the following question. (1 x 15 = 15)
22. The R & G Company has following capital structure at 31st March 2004,
which is considered to be optimum:
Rs.
13% debenture 3,60,000
11% preference share capital 1,20,000
Equity share capital (2,00,000 shares) 19,20,000
The company’s share has a current market price of Rs.27.75 per share. The expected
dividend per share in next year is 50 percent of the 2004 EPS. The EPS of last 10
years is as follows. The past trends are expected to continue:
Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
EPS
Rs. 1.00 1.120 1.254 1.405 1.574 1.762 1.974 2.211 2.476 2.773
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The company can issue 14 percent new debenture. The company’s debenture is
currently selling at Rs.98. The new preference issue can be sold at a net price of
Rs.9.80, paying a dividend of Rs.1.20 per share. The company’s marginal tax rate is
50%.
i) Calculate the after tax cost (a) of new debts and new preference share
capital, (b) of ordinary equity, assuming new equity comes form retained
earnings.
ii) Calculate the marginal cost of capital
iii) How much can be spent for capital investment before new ordinary share
must be sold? Assuming that retained earnings available for next year’s
investment are 50% of 2004 earnings.
iv) What will be marginal cost of capital (cost of fund raised in excess of the
amount calculated in part (iii) if the company can sell new ordinary shares to
net Rs.20 per share? The cost of debt and of preference capital is constant.
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