LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

 B.B.A.,B.Com. DEGREE EXAMINATION – BUS.ADM.COMMERCE

RO 9

THIRD SEMESTER – APRIL 2008

CO 3201 – FINANCIAL MANAGEMENT

 

 

 

Date : 05/05/2008                Dept. No.                                        Max. : 100 Marks

Time : 1:00 – 4:00

SECTION – A

 Answer all questions:                                                          (10 x 2 = 20)

Explain the following:

1. Wealth maximization
2. Working capital
3. Pay back period
4. Net present value
5. Indifference point EBIT
6. Annuity
7. Operating Leverage
8. Cost of capital
9. Earning per share

10. Net operating income

SECTION – B

 Answer any five questions:                                                (5 x 8 = 40)

11 Explain the factors that determine the Capital Structure?

12. Define Cost of Capital? explain its features and importance?
13. Explain the functions of financial manager in large manufacturing firm?

14 Ramco ltd is considering a major expansion of its production facilities involving

a cost of Rs 50 lakhs and the following alternatives financing options are

available

Particulars                              Rs in Lakhs

A              B

Share Capital                      20             10

14% Debentures                 20             15

Loan @ 18%                       10             25

—-           —

Total                                 50             50

Expected rate of return on total Capital Employed is 25% and corporate tax @50%. Compute EPS and choose the best alternative two models.

 

15. HLL is considering purchasing of new machineries A and B have been suggested.

Details of which are as follows

Particulars

A(Rs)                   B(Rs

Cash out flows            400000              500000

Cash inflows

1                      40000                120000

2                      120000              160000                                             3                        160000              200000                                                              4                        240000              120000

5                      160000              80000

The cost of capital is 15% state which machine you consider

financially preferable using NPV Method.

 

16. A company issues 10% Debentures of Rs 100000 the company is in 55% tax

bracket. Calculate the cost of the debt (before as well as after tax) if the

debentures are issued 1) issued at par 2) 15% discount 3) 20% Premium

 

 

 

 

 

 

17. A choice is to be made between two competing project which required an investment of Rs 50000 and expected to generate net cash inflow as under:

Yrs                            A (Rs)                B (Rs)

1                              25000                10000

2                              15000                12000

3                              10000                18000

4                              ——-                25000

5                              12000                8000

6                              6000                 4000

Evaluate the project proposal under pay- back period.

18. M&M has sales of Rs 1000000, variable cost of Rs 700000 and fixed cost of

Rs 200000 and debt of Rs 500000 at 10 % interest. What are the operating,

financial and combined leverage? If the firm wants to double its EBIT, how much

of a raise in sales would be needed as a percentage?

SECTION – C

 Answer any two questions:                                                (2 x 20 = 40)

19. Rack & co has the following capital structure:

Particulars                                  Rs

4000 Equity shares of Rs 100 each         400000

10% preference shares                        100000

11% Debentures                         500000

The current market price of the share is Rs 102. the company is

expected to declare a dividend if Rs 10 in the current year, with an expected

growth rate of 10%. The applicable tax rate is 50%

1. a) Find out the cost of equity capital and the WACC
2. b) Assuming that the company can raise Rs 300000 12% Debentures, find out

the new WACC if the dividend rate is increased from 10% to 12% growth rate is

reduced from 10 to 8% and the market price is reduced to Rs 98

 

20. Sain Gobain provides the following particulars relating to its Capital:

Particulars                  Amount in Rs per unit

Raw material                              84

Direct Labour                              36

Over heads                                36

Profit                                         44

Average stock holding period:

Raw material 1 month, Work in Progress (50% completed), 1/2 month, finished goods 1 month

Credit allowed by Suppliers and Customers 1 and 2 months respectively

Average time lag in the payment of wages and overheads ½ months Required cash in hand and at bank Rs 300000

25% of the out put is sold for cash. For an expected sale of 120000 units.

Work out the working capital requirement if the firm.

 

21. ITC has the capital Structure consist of the following:

Particulars                                   Rs

Equity Share of Rs 100 each         2000000

Retained Earnings                                1000000

9% Preference Shares                 1200000

7% Debentures of Rs 100 each              80000

The company requires an additional capital of Rs 1200000 to finance its expansion it expects to earn 12% on its total capital employed after expansion. It has the following financing options:

1. 20000 equity shares at a premium of Rs 25 per share
2. 10% preference shares of Rs 100 each
3. 8% Debentures of Rs 100 each

It is estimated that the P/E ratio in the case of equity shares, preference and debentures finance would be 15, 12, and 10 respectively. If the tax rate is 50% which financial option would you recommend?

 

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