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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXMAINATION – OCTOBER 2013
B.B.M – III SEMESTER
FINANCIAL MANAGEMENT
TIME: 3 HOURS Max. Marks: 100
SECTION – A
I) ANSWER ALL THE QUESTIONS. (10X2=20)
1. “Profit maximization ignores the time value on money”. Explain this statement
with an example.
2. Why capital budgeting decisions are considered highly significant?
3. What is meant by capital rationing?
4. How do you calculate Profitability Index? If the Gross Profitability Index of a
project is 0.125, should the project be accepted?
5. Mention the different motives of holding cash.
6. Name any four factors that are considered while rating the credit worthiness of a
customer.
7. Expand the following tools of inventory management.
i) VED Analysis ii) FSN Analysis
8. What is meant by Scrip Dividend?
9. Draw a self explanatory diagram of an operating cycle.
10. If the combined leverage and operating leverage figures of a company are 2.5 and
1.25 respectively, find the financial leverage. Given that the interest payable per
year is Rs 1,00,000 total fixed cost is Rs 50,000 and sales Rs 10,00,000 , calculate
i) EBIT ii) Variable cost
SECTION – B
II) ANSWER ANY FOUR QUESTIONS. (4×5=20)
11. A new project is under consideration in MRB 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 of the project.
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12. Biocon Ltd. has furnished the following information:
Particulars Rs.
Earnings per share (EPS) 4
Dividend payout ratio 25%
Market price per share 40
Rate of tax 30%
Growth rate of dividend 8%
The company wants to raise additional capital of Rs. 10 lakhs including debt of Rs. 4
lakhs. The cost of debt (before tax) is 10% upto Rs 2 lakhs and 15% beyond that.
Compute
(i) Cost of equity.
(ii) After tax average cost of debt.
13. A project needs an investment of Rs. 1,38,500. The cost of capital is 12 per cent. The
net cash inflows are as follows:
Year 1 2 3 4 5
Cash flow after tax
(Rs.)
30,000 40,000 60,000 30,000 20,000
Calculate Internal Rate of Return and suggest whether the project should be
accepted or not.
14. Examine the factors that affect the working capital of a firm.
15. What is meant by Factoring? Explain its chief characteristics.
16. ABC Ltd has under consideration two mutually exclusive proposals for the
purchase of new equipment.
Particulars Machine X Machine Y
Net cash outlay (Rs) 1,00,000 75,000
Salvage value —– ——
Life (years) 5 5
Profit before depreciation & tax Rs. Rs.
1 25,000 18,000
2 30,000 20,000
3 35,000 22,000
4 25,000 20,000
5 20,000 16,000
Assuming the tax rate to be 50 %,suggest to the management the best alternative using
Accounting Rate of Return.
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SECTION – C
III) ANSWER ANY THREE QUESTIONS. (4×5=20 )
17. PR Engineering Ltd. is considering the purchase of a new machine which will carry
out some operations which are at present performed by manual labour. The
following information related to the two alternative models ‘MX and MY ‘ are
available:
Particulars Machine X Machine Y
Cost of Machine Rs. 8,00,000 Rs. 10,20,000
Expected Life 6 years 6 years
Scrap Value Rs. 20,000 Rs. 30,000
Corporate tax rate for this company is 30% and company’s required rate of
return on investment proposals is 10%. Depreciation will be charged on straight line
basis.
Estimated net income before depreciation and tax:
Years Rs. Rs
1 2,50,000 2,70,000
2 2,30,000 3,60,000
3 1,80,000 3,80,000
4 2,00,000 2,80,000
5 1,80,000 2,60,000
6 1,60,000 1,85,000
You are required to :
(i) Calculate the pay-back period of each proposal.
(ii) Calculate the net present value of each proposal, if the P.V. factor @ 10% is
0.909., 0.826, 0.751, 0.683, 0.621 and 0.564.
(iii) Which proposal would you recommend and why?
18. Delta Ltd. currently has an equity share capital of Rs. 10, 00,000 consisting of 1,
00,000 Equity shares of Rs. 10 each. The company is going through a major
expansion plan requiring to raise funds to the tune of Rs. 6, 00,000. To finance the
expansion the management has the following plans.
Plan I – Issue 60,000 Equity shares of Rs. 10 each.
Plan II – Issue 40,000 Equity shares of Rs. 10 each and the balance through longterm
borrowing at 12% interest p.a
Plan III – Issue 30,000 Equity shares of Rs. 10 each. And 3,000 Rs. 100, 9%
Debentures.
Plan IV – Issue 30,000 Equity shares of Rs. 10 each and the balance through 6%
preference shares.
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The EBIT of the company is expected to be Rs. 4, 00,000 p.a. Assume corporate tax
rate of 40%. You are required to:
(i) Calculate EPS in each of the above plans.
(ii) Ascertain the degree of financial leverage in each plan.
19. From the following information of VSGR Company Ltd. estimate the working
capital needed to finance a level of activity of 1,44,000 units of production after
adding a 10% safety contingency.
Particulars Cost per unit (Rs.)
Raw materials 45
Direct labour 20
Overheads 40
Total cost 105
Profit 15
Selling price 120
Additional Information:
• Average raw materials in stock : Two months
• Average materials—in- process (50 per cent completion stage): Four weeks
• Average finished goods in stock: One month
• Credit allowed by suppliers: One month
• Credit allowed to customers: Two months
• Time lag in payment of wages: One and half weeks
• Time lag in payment of overhead expenses: One and half weeks
• One fifth of the sales is on cash basis.
• Cash balance is expected to be Rs. 1,00,000 . You may assume that
production is carried on evenly throughout the year.
20. JKL Ltd. has the following book value capital structure as on March 31 2013.
Particulars Amount
Equity share capital (2,00,000 shares) 40,00,000
11.5% preference shares 10,00,000
10% debentures 30,00,000
The equity share of the company sells for Rs. 20. It is expected that the company will
pay next year a dividend of Rs. 2 per equity share, which is expected to grow at 5%
p.a forever. Assume a 35% corporate tax rate.
Required:
(i) Compute weighted average cost of capital (WACC) of the company based on
the existing capital structure.
(ii) Compute the new WACC , if the company raises an additional Rs. 20 lakhs
debt by issuing 12% debentures. This would result in increasing the expected
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equity dividend to Rs. 2.40 and leave the growth rate unchanged, but the
price of equity share will fall to Rs. 16 per share.
21. (A) What is meant by stock dividend? Discuss its objectives and
Benefits to the company and shareholders (5 marks)
21. (B) The following information is available in respect of a firm:
Earnings per Share (EPS) Rs. 40
Capitalization rate (Ke) 10%
Assumed rate of return on investment (R)
(a) 13% (b) 10 % (c) 8 %
You are required to show the effect of dividend payment on the market price per
share using Walter’s model, when dividend payout ratio is (a) 0 % (b) 50% (c)
100 % (10 marks)
SECTION – D
IV) Compulsory question – Case study. (15 Marks)
22. A company belongs to a risk class for which the appropriate capitalization rate is
10%. It currently has 25,000 shares current market price is Rs. 100 each. The firm is
contemplating the declaration of dividend of Rs. 5 per share at the end of the current
financial year.
(a) Applying the MM model. Compute the market price of the share when
recommended dividend is (i) paid (ii) not paid
(b) Assuming the firm has a net income of Rs. 2.5 lakhs and a proposal for
making new investments of Rs. 5 lakhs. Find the number of shares to be
issued.
(c) Show that under Modigliani Miller hypotheses the payment of dividend does
not affect the value of the firm.
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