LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
B.Com. DEGREE EXAMINATION – COMMERCE
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SIXTH SEMESTER – April 2009
CO 6604 – FINANCIAL MANAGEMENT
Date & Time: 18/04/2009 / 9:00 – 12:00 Dept. No. Max. : 100 Marks
SECTION-A(10*2=20 marks)
ANSWER ALL QUESTIONS
- Give the meaning of finance function?
- What is optimum capital structure?
- Explain the concept of cost of capital
- What is cost of Retained earnings?
- What is operating cycle of business?
- If you deposit Rs.1,000 to-day in a bank which pays 10% interest compounded
annually,how much will the deposit grow to after 8 years?
- A project costs Rs.1,00,000 and yields an annual cash inflow of Rs.20,000 for 7
years.Calculate pay-back period?
- Calculate operating leverage from the following details
Sales – 2,00,000 units @Rs.8 per unit
Variable costs-Rs.2 per unit
Fixed cost-Rs.30,000
- Initial outlay-Rs.50,000;Life of asset-5 years;Estimated cash flow Rs.12,500.Calculate
internal rate of return.
- Estimated cost of goods sold Rs.600 lakhs;Expected operating cycle in 90
days,desired cash balance Rs.1 lakh. What is expected working capital
requirement?(Assume 360 days in a year)
SECTION-B(5*8=40 marks)
ANSWER ANY FIVE QUESTIONS
- A company wishes to determine the optimal capital structure,from the following
selected information supplied to you,determine the optimal capital structure of the
company.
Structure Dept.amt Equity.amt After tax cost of dept. Ke
Rs. % %
- 4,00,000 1,00,000 9 10
- 2,50,000 2,50,000 6 11
- 1,00,000 4,00,000 5 14
- A finance company advertises that it may pay a lumpsum of Rs.8000 at the end of 6
years to the investors who deposits anually Rs.1000 for 6 years.What interest rate is
implicit in this offer?
- A company’s current earnings areRs.1,25,000 to be distributed among 8000
shares.The market price of each share is Rs.150 and the growth rate of dividend is
estimated at 9%.compute the cost of equity capital.
- From the following information ,you are required to find out the extent of operating
leverage in the year 2008
EBIT(2007) Rs.30,000;sales(2007) 1,50,000 units
EBIT(2008) Rs.35,000;sales(2008) 1,80,000 units
- Project X initially costs Rs.2,50,000.It generates the following cash flows:
Year cash inflows Present value of
Rs Re.1 @10%
1 90,000 0.909
2 80,000 0.826
3 70,000 0.751
4 60,000 0.683
5 50,000 0.621
Taking cut off rate as 10% Suggest whether the project should be accepted or not.
- Explain the meaning of financial management. What are its objectives?
- Explain the factors which should be taken into account while making a capital
investment decision.
- Describe in brief the various factors which are taken into account in determining the
working capital needs of a firm.
SECTION-C(2×20=40 MARKS)
ANSWER ANY TWO QUESTIONS
- Discuss the various factors influencing the capital structure of a corporation
- A choice is to be made between two competing projects which require an equal
investment of Rs.50,000 and are expected to generate net cash flows as under:
Year Project I Project II
Rs. Rs.
1 25,000 10,000
2 15,000 12,000
3 10,000 18,000
4 NIL 25,000
5 12,000 8,000
6 6,000 4,000
The cost of capital of the company is 10%. The following are the present value @10%
per annum:
Year PV factors @ 10%p.a.
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621
6 0.564
Which project proposal should be chosen and why?
Evaluate the projects proposals under;
(a) pay-back period and
(b)Discounted cash flow methods.
- A co require Rs 20,00,000/- for a new project. It has identified 3 financing options
for the same.
- Issue 20,000/ equity shares of Rs. 100/ each.
- Issue 10,000/ equity share of Rs. 100/ each and raise a bank loan @ 15% per annum for the balance
- Issue 15,000/ equity share of Rs. 100/ each and Rs. 5,00,000/ 14% Debentures.
The company expects to earn a profit of Rs. 5,00,000/ before interest and tax. If the tax rate is 50% which financing option would you recommend..
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