1. JOSEPHS COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – OCTOBER 2014

BCOM – III SEMESTER

 FINANCIAL MANAGEMENT

Duration: 3 Hours                                                                                         Max. Marks: 100

SECTION – A

1. Answer ALL the questions. Each carries 2 marks.                                       (10 x2 =20)

 

1. “Financial Management is something more than an art of Accounting and Book Keeping”.
2. How does the concept of Trading on Equity help the owners of the company?
3. ‘Cost of Capital is used by a company as a minimum benchmark for its yield’.
4. State with reasons the appropriate capital structure for start-up companies.
5. The Gross Profitability Index of a proposal is 0.5. Can the proposal be accepted, why?
6. Explain Permanent and Temporary Working Capital.
7. A firm’s BEP is 200 units. The selling price is Rs. 20 p.u. and variable cost is Rs. 5 p.u.  Find its Operating Leverage at 400 units.
8. Explain the relationship between earnings of a growth company and its dividend payout according to Walter’s Theory.
9. Write two points of difference between Bonus Issue and Stock-Split.
10. As the Finance Manager of a company state two concrete points to be considered while declaring dividends of the company.

 

SECTION – B

 

1. Answer any FOUR Each carries 5 marks.                                (4×5=20)

 

11. Write short notes on the interrelationship between asset mix, capital mix and profit allocation decisions.
12. Explain some of the factors to be considered while formulating the financial plan of a company.
13. The financial data furnished for A Ltd. for the year ended 31^st March, 2009 as follows:

Operating Leverage = 3:1; Financial Leverage = 2:1; Interest charges = Rs. 12 lakhs; Corporate tax rate is 40%.  The variable cost as % of sales is 60%.  Calculate the Sales of the company.

14. Business Machines Ltd. has raised funds through issue of 10,000 debentures of Rs. 150 each at a discount of Rs. 10 per debenture with 10 yrs. maturity. The coupon rate is 16%.  The flotation cost is Rs. 5 per debenture.  The debentures are redeemable with a 10% premium.  The corporate taxation rate is 40%.  Calculate the cost of debentures.
15. Discuss the advantages and disadvantages of Bonus Issue for a company.
16. Consider the following investment opportunity:

A machine is available for purchase at a cost of Rs. 80,000.  Its expected life is 5 yrs. with a scrap value of Rs. 10,000.  Estimated profits over its life:

Year	1	2	3	4	5
Amount (Rs.)	20,000	40,000	30,000	15,000	5,000

These are estimated profits before depreciation.  Assume a tax of 30%.  Calculate ARR.

 

SECTION – C

 

III)      Answer any THREE questions.    Each carries 15 marks.                    (3×15=45)

 

17. Orient Enterprises Ltd. has under consideration two projects A and B. Details regarding the two projects are given below:

(Rs. in lakhs)

Particulars	Project A	Project B
Investment required Estimated cash flow – 1 yr. Estimated cash flow – 2 yr. Estimated cash flow – 3 yr.	95 40 40 45	200 80 80 120

The cost of capital of the company is 12%.  Using net present value method,    which project would you recommend?  Also calculate the internal rate of return of the two projects.

18. The Board of Directors of Ruby Ltd. requests you to prepare a statement showing the working capital requirements forecast for a level of activity of 1,56,000 units of production. The following information is available for your calculation:                              (Rs. per unit)

Raw Materials                                           90

Direct Labour                                            40

Overheads                                                  75

205

Profit                                                           60

Selling Price per unit                               265

1. Raw materials are in stock on average one month.
2. Materials are in process, on average 2 weeks.
3. Finished goods are in stock, on average one month.
4. Credit allowed by suppliers – one month.
5. Time lag in payment from customers – 2 months.
6. Lag in payment of wages – 1^1/₂
7. Lag in payment of overheads – one month.

20% of output is sold against cash.  Cash in hand and at bank is expected to be Rs. 60,000.  It is to be assumed that production is carried on evenly throughout the year.  A time period of 4 weeks is equivalent to a month.

 

19. Write short notes on the following: (3 marks each)
20. Profit Maximisation vs. Wealth Maximisation
21. Financial Leverage vs. Operating Leverage

• Price of the Share vs. Dividend Payout

1. Liquidity vs. Profitability
2. Payback Period vs. NPV

 

20. A company is considering the following to raise additional capital for its expansion schemes:                                                                          (5 marks)

Equity (% of total capital)	Debt (% of total capital)	Cost of Equity %	Cost of Debt %
75 50 25	25 50 75	16 18 24	12 14 18

Tax rate is 50%.  Which option would you recommend?  Show workings.

 

1. One-Up Ltd. has equity share capital of Rs. 5,00,000 divided into shares of Rs. 100 each. It wishes to raise further Rs. 3,00,000 for expansion-cum-modernisation scheme.  The company plans the following financing alternatives:
2. By raising term loan only at 10% p.a.
3. 1,00,000 by issuing equity shares and Rs. 2,00,000 by issuing 8% preference shares.

You are required to suggest the best alternative giving your comment assuming that the estimated earnings before interest and taxes after expansion is Rs. 1,50,000 and the corporate rate of tax is 35%.                               (10 marks)

21. Briefly explain :                          (5 marks each)
22. Tools of Inventory Management (any five)
23. Factors determining the Optimal Capital Structure (any five)

• Types of Dividend Policy of a Company (any five)

 

 

 

 

SECTION – D

 

1. IV) Case study- Compulsory questions. (15 marks)

 

22. As a newly recruited CFO of Best Buy Auto Ltd. you are required to make a decision with regard to payment of dividend of the company for the current year. You are an advocate of the theory of irrelevance as far as declaration of dividends is concerned.  On the other hand, the CEO believes in the theory of relevance.  Convince him by answering the following:
23. The justification of the theory of irrelevance and
24. Prove that the value of the company remains the same before and after paying dividends, from the following information:

Best Buy Auto Ltd. has outstanding 1,20,000 shares selling at Rs. 20 per share.  The company hopes to make a net income of Rs. 3,50,000 during the year ended 31^st March, 2009.  The company is capable of paying a dividend of Rs. 2 per share at the end of current year.  The capitalisation rate for risk class of this company has been estimated to be 15% and the company needs Rs. 7,40,000 for an approved investment expenditure during the year.

 

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