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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXMAINATION – OCTOBER 2013
B.COM – III SEMESTER(TRAVEL & TOURISM)
FINANCIAL MANAGEMENT
TIME: 3 HOURS Max. Marks: 100
SECTION – A
I) ANSWER ALL THE FOLLOWING QUESTIONS. (10X2=20)
1. What is under capitalization?
2. Differentiate between a low geared and a high geared firm.
3. How is the term capitalization different from the term capital structure?
4. Mention any four factors that are considered while rating the credit worthiness
of a customer.
5. Why does a company resort to issuing stock dividend?
6. What is factoring?
7. Briefly explain the motives of holding cash?
8. A company operates at a production level of 5,000 units. The contribution is Rs.
60 per unit. Operating leverage is 6, combined leverage is 24. If the tax rate is
30%. What would be its earnings after tax?
9. A company issues 10,000, 10% preference shares of Rs. 100 each, redeemable
after 10 years at a premium of 5%. The cost of issue is Rs. 2 per share. Calculate
the cost of preference capital.
10. The EBIT –EPS relationship suggests that the higher the debt ratio, the higher are
the earnings per share for any level of EBIT above the indifference point. Why
then do firms sometimes choose financing alternatives that do not maximize
EPS?
SECTION – B
II) Answer any FOUR questions. (4×5=20 )
11. A company plans to raise Rs. 30 lakhs for its new project, it can raise the same by
two options.
Option 1 – Entire amount by equity
Option 2 – Rs. 15 lakhs by 10% debt and the balance by equity.
Calculate the Point of Indifference assuming tax rate @ 35% and par value of a
share is Rs. 100.
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12. X Ltd issues Rs. 10 lakhs , 10% redeemable debentures @ a discount of 5%. The
cost of flotation amounts to Rs. 30,000. The debentures are redeemable after 5
years. If the tax rate is 50%, Compute the before tax and after tax cost of debt.
13. Milroy ltd is planning to introduce mechanization to replace the labour the
force. Two alternatives are available. Advise the management to select the
machine under payback period method.
Cost of the machine
Estimated life of the machine
Estimated scrap savings per year
Estimated cost of materials p.a.
Maintenance cost p.a.
Additional cost of supervision p.a
Estimated savings in wages p.a
Depreciation will be taken on straight line
basis
Assume tax rate 50%
Machine X
50000
10yrs
1000
2000
2500
1500
10000
Machine Y
40000
8yrs
1000
3000
3100
2000
12500
14. A company is contemplating investment in a project which requires an initial
investment of Rs. 40,000 generating cash flows of Rs. 16,000 every year for 4
years. Calculate the Internal Rate of Return.
15. “The scientific process of implementing inventory management provides
inventory at the Right time, from the Right source and at Right prices’. In this
context explain the tools of inventory management.
16. Explain the different types of dividend polices.
SECTION – C
III) Answer any THREE of the following: (3×15=45 )
17. “ The profit maximization is not an operationally feasible criterion”. In what
aspect is the objective of wealth maximization superior to profit maximization?
Illustrate your views.
18. KPMG Ltd has currently an ordinary share capital of Rs. 25 Lakhs, consisting of
25,000 shares of Rs. 100 each. The management is planning to raise another Rs. 20
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lakhs to finance a major programme of expansion through one of the four
possible financial plans.
(i) Entirely through ordinary shares,
(ii) Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through long-term
borrowings at 8% interest,
(iii) Rs. 5 lakhs through ordinary shares and Rs. 15 lakhs through long-term
borrowing at 9% interest,
(iv) Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through preference
shares with 5% dividend.
The company’s expected EBIT will be Rs. 8 lakhs. Assuming a corporate
tax rate of 46%. Determine the EPS in each alternative and comment
which alternative is best and why? Which alternative results in the highest
financial risk? Why?
19. The following is the capital structure of Simons Company Ltd. as on 31/12/2012.
Equity shares: 10,000 shares of Rs. 100 each 10, 00,000
10% Preference Shares (of Rs. 100 each) 4, 00,000
12% Debentures 6, 00,000
20, 00,000
The market price of the company’s equity share is Rs. 110 and it is expected that
a dividend of Rs. 10 per share would be declared for the year 2012. The dividend
growth rate is 6%.
(i) If the company is in the 35% tax bracket, compute the weighted average
cost of capital.
(ii) Assuming that in order to finance an expansion plan, the company
intends to borrow a fund of Rs. 10 lakh bearing 14% rate of interest, what
will be the company’s revised weighted average cost of capital? This
financing decision is expected to increase dividends from Rs. 10 to Rs. 12
per share. However, the market price of the equity share is expected to
decline from Rs. 110 to Rs. 105 per share.
20. Proforma Cash sheet of a Company provides the following particulars.
Materials 40%
Direct Labour 20%
Overheads 20%
The following information is also available :
(a) It is proposed to maintain in a level of activity of 2, 00,000 units.
(b) Selling price is Rs. 12 per unit.
(c) Raw materials are expected to remain in store for an average period of one
month.
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(d) Materials will be in process on an average half a month.
(e) Finished goods are required to be in stock on average period of one month.
(f) Credit allowed by debtors is two month.
(g) Credit allowed by suppliers is one month.
Estimate Working Capital required.
21 a) Lincoln Enterprise can make either of two investments at the beginning of
2012. Evaluate the investment proposal by using the Payback period
method.
(5 marks)
Proposal X Proposal Y
Cost of the Investments Rs. 25,000 Rs. 30,000
Life 5 years 6 years
Scrap Value — —
Net Income (after Depreciation and Tax)
Year Rs Rs
2012 600 3,800
2013 1,000 4,500
2014 2,500 5,000
2015 3,000 4,500
2016 3,500 5,500
2017 —– 6,000
Depreciation is provided under the straight line method
21. b) From the following data of company A and company B .Prepare
their Income statements. (10 marks)
Particulars Company A Company B
Variable cost 56,000 60% of sales
Fixed cost 20,000 —-
Interest expenses 12,000 9,000
Financial Leverage 5:1 —-
Operating Leverage —- 4:1
Income tax rate 30% 30%
Sales —- 1,05,000
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SECTION – D
IV) Compulsory question (15 Marks)
22.
Tejas Ltd. has under consideration the following two projects. The details are as
under.
Particulars 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 the Machinery 4 years 6 years
Scrap Value of Machinery 10% 10%
Tax rate 50% 50%
Income before depreciation and tax
Year Rs Rs
1 8,00,000 15,00,000
2 8,00,000 9,00,000
3 8,00,000 15,00,000
4 8,00,000 8,00,000
5 — 6,00,000
6 — 3,00,000
Depreciation is provided under the straight line method
• Calculate the accounting rate of return for both project X and Y
• What would be the net present value of both the projects if the P V factor
is at @ 10 %.
• Which proposal would you recommend and why?
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