1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – SEPT /OCT 2014

B.COM (Travel & Tourism) – 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. Define Financial Management.
2. What is capital gearing? Differentiate between high and low capital gearing.
3. What is the significance of ascertaining the Cost of Capital of a firm?
4. Explain Optimum Capital Structure.
5. “The Time Adjusted Techniques (Modern Methods) of evaluating investment proposals are far superior compared to the Traditional Methods”.
6. Explain the concept of Circulating Capital with a diagram.
7. Write a short note on ABC analysis.
8. Bright Star Ltd. having its equity shares of Rs. 10 each quoted in a stock exchange has market price of Rs. 56. A constant expected annual growth rate of 6% and a dividend of Rs. 3.60 per share has been paid.  Calculate the cost of capital.
9. Can a proposal be accepted when its NPV is 0, why?
10. Mention two strategies that can be adopted by the Finance Manager for declaration of dividends at times of weak cash position.

 

SECTION – B

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

 

11. ‘Financial management is nothing but managerial decision making on asset mix, capital mix and profit allocation’.
12. What are the factors affecting the working capital of a firm?
13. Consider the figures available for ABC Ltd.:

Net Sales = Rs. 2,400 lakhs; EBIT as % of Sales = 10%; Corporate tax rate =40%

Capital Employed: Equity Share Capital (Rs. 10 each) Rs. 400 lakhs; 10% Preference Shares of Rs. 100 each Rs. 250 lakhs; 12% Secured Debentures Rs. 180 lakhs.  Compute the EPS of the company.

14. Explain the various types of Dividend Policies.
15. A firm can invest Rs. 10,000 in a project with a life of three years. The projected cash inflows are: Yr. 1 – Rs. 4,000; Yr. 2 – Rs. 5,000 and Yr. 3 – Rs. 4,000.  The cost of capital is 10% p.a.  Should the investment be made?  Base the decision using the Net Present Value of the project.
16. Good Health Ltd. has a gearing ratio of 30%. The cost of equity is computed at 21% and the cost of debt 14%.  The corporate tax rate is 40%.  Calculate WACC of the company.

 

SECTION – C

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

 

17. ITC Ltd. has decided to purchase a machine to meet the growing demand of its products. There are two machines under consideration by the management.  Relevant details including estimated yearly expenditure and sales are given below.  All sales are on cash.  Corporate income tax rate is 40%.  The company is planning to fund the machine through 10% debt.

Particulars	Machine 1	Machine 2
Initial investment required Estimated annual sales Cost of production (estimated): Direct materials Direct Labour Factory overheads Administration costs Selling and distribution costs	3,00,000 5,00,000   40,000 50,000 60,000 20,000 10,000	3,00,000 4,00,000   50,000 30,000 50,000 10,000 10,000

The economic life of Machine 1 is 2 years, while it is 3 years for the second.  The scrap values are Rs. 40,000 and Rs. 25,000 respectively.  Find the most profitable investment based on Payback Method.

 

18. From the following details you are required to make an assessment of the average amount of working capital requirement of Ruby Ltd.:

Particulars	Average period of credit	Estimated for the  1st year (Rs.)
Purchase of material Wages Overheads: Rent, rates, etc. Salaries Other overheads Cash sales Credit sales Average amount of stocks and work-in-progress Average amount of undrawn profit	6 weeks 11/2 weeks   6 months 1 month 2 months   2 months	26,00,000 19,50,000   1,00,000 8,00,000 7,50,000 2,00,000 60,00,000 4,00,000   3,00,000

It is to be assumed that all expenses and income were made at even rate for the year.

 

19. Write short notes on the following: (3 marks each)
20. Concept of Wealth Maximisation
21. Financial Risk and Business Risk

• Tools of inventory management.

1. Significance of Capital Budgeting
2. Motives of holding cash.

 

20. The capital structure of Bright Ways Ltd. as on 31-3-2009 is as follows:

(Rs. crores)

Equity capital (100 lakhs equity shares of Rs. 10 each)                           10

Reserves                                                                                                             2

14% Debentures of Rs. 100 each                                                                    3

For the year ended 31-3-2009 the company has paid equity dividend at 20%.  As the company is a market leader with good future, dividend is likely to grow by 5% every year.  The equity shares are now traded at Rs. 80 per share.  corporate tax rate applicable to the company is 50%.

You are required to find:

1. The current weighted average cost of capital.
2. The company has plans to raise a further Rs. 5 crores by way of long term loan at 16% interest. When this takes place the market value of the equity shares is expected to fall to Rs. 50 per share leaving the dividend and growth rate unchanged.  What will be the new weighted average cost of capital of the company?

 

21. Briefly explain TEN factors:
22. Affecting the Dividend Decisions of a Company and
23. Capital Structure of a Company.

 

SECTION – D

 

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

 

22. You are a leading Financial Analyst in the city of Bangalore. Kuppuswamy, a high net worth individual and your client seeks your expert opinion on his next investment.  From the Financial Statements of two leading companies in Bangalore you have arrived at the following:

 

 

 

 

Particulars	Lee Ltd.	Levi Ltd.
Operating Leverage Financial Leverage Interest charges p.a. Corporate tax rate Variable cost as % of Sales	3 : 1 2 : 1 Rs. 12 lakhs 40% 60%	4 : 1 3 : 1 Rs. 10 lakhs 40% 50%

 

You are required to:

 

1. Analyse the companies risks by finding out the one with high Financial Risk and Business Risk.                                   (3 marks)

 

1. By preparing the Income Statement of both the companies suggest the best option for Mr. Kuppuswamy’s investment. (12 marks)

 

 

 

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