LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
B.B.A.,B.Com. DEGREE EXAMINATION – BUS.ADM.COMMERCE
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:
- Wealth maximization
- Working capital
- Pay back period
- Net present value
- Indifference point EBIT
- Operating Leverage
- Cost of capital
- Earning per share
- Net operating income
SECTION – B
Answer any five questions: (5 x 8 = 40)
11 Explain the factors that determine the Capital Structure?
- Define Cost of Capital? explain its features and importance?
- 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
Particulars Rs in Lakhs
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.
- HLL is considering purchasing of new machineries A and B have been suggested.
Details of which are as follows
Cash out flows 400000 500000
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.
- 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
- 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.
- 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)
- Rack & co has the following capital structure:
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%
- a) Find out the cost of equity capital and the WACC
- 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
- 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
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.
- ITC has the capital Structure consist of the following:
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:
- 20000 equity shares at a premium of Rs 25 per share
- 10% preference shares of Rs 100 each
- 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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