| ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS) | ||||||||||||||||||||||||||||||||||||||||
| END SEMESTER EXAMINATION – SEPT/OCT. 2015 | ||||||||||||||||||||||||||||||||||||||||
| B.COM. – III SEMESTER | ||||||||||||||||||||||||||||||||||||||||
| C2 12 303: FINANCIAL MANAGEMENT | ||||||||||||||||||||||||||||||||||||||||
| Duration: 3 Hours Max. Marks: 100 | ||||||||||||||||||||||||||||||||||||||||
| SECTION – A | ||||||||||||||||||||||||||||||||||||||||
| I) | Answer ALL the questions. Each carries 2 marks. (10×2=20) | |||||||||||||||||||||||||||||||||||||||
| 1. | “In the business the cash flows of different periods in absolute terms are incomparable.” Discuss. | |||||||||||||||||||||||||||||||||||||||
| 2. | Bring out the effects of a highly geared company? | |||||||||||||||||||||||||||||||||||||||
| 3. | What is the importance of adequate working capital? | |||||||||||||||||||||||||||||||||||||||
| 4. | State whether the following are true or false:
i. Capitalisation, capital structure and financial structure do not mean the same. ii. Cost of capital is not a cost as such. iii. A firm will not have a favourable leverage if its earnings are more than the debt cost. iv. Rate of return method takes into account the time value of money. |
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| 5. | What is capital rationing? | |||||||||||||||||||||||||||||||||||||||
| 6. | A firm should always keep a large balance of cash so as to meet the contingencies. Comment. | |||||||||||||||||||||||||||||||||||||||
| 7. | Fill in the blanks:
i. There are two types of corporate securities (a) ownership securities and (b) ————————— securities. ii. Preference shares are entitled to a fixed —————————— irrespective of the level of earnings. iii. Fixed cost securities should be mixed with equity when the rate of earnings is ———————– than ———————-. |
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| 8. | Write a note on scrip dividend and bonus issue? | |||||||||||||||||||||||||||||||||||||||
| 9. | Mention four essentials of a sound financial plan. | |||||||||||||||||||||||||||||||||||||||
| 10. | Explain briefly two tools of receivables management. | |||||||||||||||||||||||||||||||||||||||
| SECTION – B | ||||||||||||||||||||||||||||||||||||||||
| II) | Answer any FOUR questions. Each carries 5 marks. (4×5=20) | |||||||||||||||||||||||||||||||||||||||
| 11. | Why is maximizing wealth a better goal than maximizing profits? | |||||||||||||||||||||||||||||||||||||||
| 12. | The following information is available for ABC & Co.
Calculate % change in EPS if the Sales are expected to increase by 5%.
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| 13. | The shares of a company are being currently sold at Rs 20 per share. It has just paid a dividend Rs 2 for the last year. The profits of the company are expected to show a growth of 10% p.a. and the company maintains a 100% payout ratio. Determine the cost of equity capital of the company.
What is the expected current price of the share if the growth rate is (i) 8% or (ii) 12%? |
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| 14. | A company has to consider the following Project: Cost Rs 10,000 Cash Inflows: Year 1 Rs 1,000 Year 2 Rs 1,000 Year 3 Rs 2,000 Year 4 Rs 10,000 Compute the internal rate of return and comment on the project if the opportunity cost is 14%.
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| 15. | Discuss the various types of dividend policies of companies. | |||||||||||||||||||||||||||||||||||||||
| 16. | The earnings per share of a company are Rs 10. It has rate of return of 15% and the capitalization rate of risk class is 12.5%. If Walter’s model is used: (i) What should be the optimum payout ratio of the firm? (ii) What would be the price of the share at this payout? (iii) How shall the price of the share be affected if a different payout was employed? | |||||||||||||||||||||||||||||||||||||||
| SECTION – C | ||||||||||||||||||||||||||||||||||||||||
| III) | Answer any THREE questions. Each carries 15 marks. (3×15=45) | |||||||||||||||||||||||||||||||||||||||
| 17. | ABC Co. has the following balance sheet and income statement:
Balance Sheet
Income Statement
(i) Determine the OL, FL and CL at the current sales level given that all operating expenses (excluding depreciation of Rs 52,000) are variable, and (ii) If total assets remain at the same level but (a) sales increases by 20% and (b) sales decreases by 10%, draw up the Income Statements and calculate the % change in EPS. |
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| 18. | XYZ Limited has the following capital structure:
The expected dividend per share is Rs 1.40 and the dividend per share is expected to grow at a rate of 8 percent forever. Preference shares are redeemable after 5 years at par whereas debentures are redeemable after 6 years at par. The tax rate for the company is 40 percent. You are required to compute the weighted average cost of capital for the existing capital structure using book value and market value weights. Use the market price per share to compute specific costs. |
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| 19. | Pioneer Steels Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of Rs 10,000 each and have a life of five years. The company’s required rate of return is 10% and pays tax at a 50% rate. The projects will be depreciated on a straight line basis. The profits before depreciation and tax expected to be generated by the projects are as follows:
You are required to calculate: (i) Payback Period of each project (ii) Profitability Index at 10% for each project (iii) Which project should be accepted and why? |
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| 20. | The management of Royal Industries has called for a statement showing the working capital to finance a level of activity of 1,80,000 units of output for the year. The cost structure for the company’s product for the above mentioned activity level is detailed below:
Additional Information: (a) Minimum Desired cash balance is Rs 20,000 (b) Raw materials are held in stock, on an average, for two months (c) Work-in-progress (assume 50% completion stage for all elements) will approximate to half-a-month’s production. (d) Finished goods remain in warehouse, on an average, for a month. (e) Suppliers of materials extend a month’s credit and debtors are provided two month’s credit; cash sales are 25% of total sales. (f) There is a time-lag in payment of wages of a month; and half-a-month in the case of overheads. From the above facts, you are required to prepare a statement showing working capital requirements. |
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| 21. | Write short notes on the following:
i. Point of Indifference ii. Pay-Back Period vs. NPV iii. ABC analysis iv. Six factors affecting the working capital of a company v. Cost of Retained Earnings |
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| SECTION – D | ||||||||||||||||||||||||||||||||||||||||
| IV) | Case Study (1×15=15) | |||||||||||||||||||||||||||||||||||||||
| 22. | Textrol Ltd. has 10,00,000 equity shares outstanding at the start of the year. The ruling market price per share is Rs 150. The Board of Directors of the company contemplates declaring Rs 8 share as dividend at the end of the current year. The rate of capitalization appropriate to the risk class to which the company belongs is 12%.
(a) Based on Modigliani-Miller Approach, calculate the market price per share of the company when the contemplated dividend is (i) declared and (ii) not declared. (b) How many new shares are to be issued by the company at the end of the accounting year on the assumption that the net income for the year is Rs 2 Crore? Investment budget is Rs 4 Crore and (i) the above dividends are distributed and (ii) they are not distributed? (c) Show that the total market value of the shares at the end of the accounting year will remain the same whether the dividends either distributed or not distributed. (d) Also explain the arguments put forth by Modigliani and Miller in support of their theory. |
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