ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – SEPT /OCT. 2015

BBM – III SEMESTER

M1 11 302: FINANCIAL MANAGEMENT

Duration: 3 Hours Max. Marks: 100

SECTION – A

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

“The Finance manager should take into consideration the time value of money in order to take correct financial decisions.” Elucidate.

What are the effects of over-capitalisation of a company?

Write a note on stable dividend policy of a company.

The following data relate to DEL Ltd.

EBIT 20,00,000

Fixed Cost 40,00,000

EBT 16,00,000

Calculate (i) Contribution (ii) Combined Leverage.

What is operating leverage? How does it help in magnifying revenue of a concern?

State if the following are true or false:

i. Ploughing back of profits results in dilution of ownership.

ii. Due to the merits of ploughing back of profits, a company should not pay any dividends.

iii. Capital structure is the mix of preference and equity share capital.

iv. Retained earnings do not involve a cost.

Give a brief on two types of working capital.

Inventory management is essential because investments in stocks are high. Explain.

Mention two considerations while forming the credit policy of a company.

10.

Explain point of indifference.

SECTION – B

II)

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

11.

“Investment, financing and dividend decisions are all interrelated.” Comment.

12.

A firm has sales of Rs 20,00,000, variable costs of Rs 14,00,000 and fixed costs of Rs 4,00,000 inclusive of interest of Rs 1,00,000.

(i) Calculate its Operating, Financial and Combined Leverages.

(ii) If the firm decides to double its EBIT, how much of a rise in sales would be needed on a percentage basis?

13.

Enlist the factors that affect the dividend policy of a company.

14.

Calculate the cost of capital in each of the following cases:

(i) A company issues 10% Irredeemable Preference Shares at Rs 105 each (FV=100).

(ii) The current market price of a share is Rs 100. The firm needs Rs 1,00,000 for expansion and the new shares can be sold only at Rs 95. The expected dividend at the end of current year is Rs 4.75 with a growth rate of 6%. Also calculate the cost of capital of new equity.

15.

The earnings per share of a share of the face value of Rs 100 of PQR Ltd. is Rs 20. It has a rate of return of 25%. Capitalization rate of its risk class is 12.5%. If Walter’s model is used:

(a) What should be the optimum payout ratio?

(b) What should be the market price per share if the payout ratio is zero?

16.

The company belongs to a risk-class for which the appropriate capitalization rate is 10%. It currently has outstanding 25,000 shares selling at Rs 100 each. The firm is contemplating the declaration of dividend of Rs 5 per share at the end of the current financial year. The company expects to have a net income of Rs 2.5 Lakhs and a proposal for making new investments of Rs 5 Lakhs.

Using the MM assumptions, calculate the number of new shares required for the proposed investments if the company declares dividend.

SECTION – C

III)

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

17.

A company needs Rs 12,00,000 for the installation of a new factory which is expected to earn an EBIT of Rs 2,00,000 per annum. The company has the objective of maximizing the earnings per share. It is considering the possibility of issuing equity shares plus raising a debt of Rs 2,00,000 or Rs 6,00,000 or Rs 10,00,000. The current market price of the share is Rs 40 and will drop to Rs 25 if the borrowings exceed Rs 7,50,000. The cost of borrowing are indicated as under:

Up to Rs 2,50,000	10%
Rs 2,50,000 – Rs 6,25,000	14%
Rs 6,25,000 – Rs 10,00,000	16%

Assuming the tax rate to be 50%, find out the EPS under the three options and comment.

18.

PQR Co. has the following capital structure:

Equity Share Capital (5000 shares of Rs 100 each)	Rs 5,00,000
9% Preference Shares	Rs 2,00,000
10% Debentures	Rs 3,00,000

The equity shares of the company are quoted at Rs 102 and the company is expected to declare a dividend of Rs 9 per share for the next year. The company has registered a dividend growth rate of 5% which is expected to be maintained.

(i) Assuming the tax rate applicable to the company at 30%, calculate the weighted average cost of capital, and

(ii) Assuming that the company can raise additional term loan at 12% for Rs 5,00,000 to finance its expansion, calculate the new WACC. The company’s expectation is that the business risk associated with new financing may bring down the market price from Rs 102 to Rs 96 per share.

19.

A company is considering an investment proposal to install new milling controls. The project will cost Rs 50,000. The facility has a life expectancy of 5 years and no salvage value. The company tax rate is 35%. The firm uses straight line depreciation. The estimated profit before depreciation and tax from the proposed investment proposal are as follows:

Year	Profit (Rs.)
1	10,000
2	11,000
3	14,000
4	15,000
5	25,000

Compute the following:

(i) Average rate of return.

(ii) Net Present Value at 10% discount rate.

20.

Estallia Garment Co. Ltd. is a famous manufacturer and exporter of garments to the European Countries. The finance manager of the company is preparing its working capital forecast for the next year. After carefully screening all the documents, he collected the following information:

Production during the previous year was 15,00,000 units. The same level of activity is intended to be maintained during the current year. The expected ratios of cost to selling price are:

Raw Materials	40%
Direct Wages	20%
Overheads	20%

The raw materials ordinarily remain in stores for 3 months before production. Every unit of production remains in the process for 2 months. Finished goods remain in warehouse for 3 months. Credit allowed by the creditors is 4 months from the date of the delivery of raw material and credit given to debtors is 3 months from the date of dispatch.

The estimated balance of cash to be held: Rs 2,00,000. Lag in payment of Wages ½ month. Lag in payment of Expenses ½ month. Selling price is Rs 10 per unit. Both production and sales are in regular cycle. You are required to make a provision of 10% for contingency.

21.

Write short notes on the following:

i. Business Risk vs. Financial risk

ii. Six factors affecting Optimal Capital Structure of a company

iii. Advantages of Bonus Issue to company and investors (3 each)

iv. Ageing Schedule

v. Circulating Capital

SECTION – D

IV)

Case Study (1×15=15)

22.

ITC Limited has decided to purchase a machine to augment the company’s installed capacity to meet the growing demand for its products. There are two machines under consideration of the management. The relevant details including estimated yearly expenditure and sales are given below: All sales are on cash. Corporate Income Tax rate is 40%.

Particulars	Machine 1(Rs.)	Machine 2(Rs.)
Initial Investment Required	3,00,000	3,00,000
Estimated Annual Sales	5,00,000	4,00,000
Cost of Production (Estimated):	40,000	50,000
Direct Materials	50,000	30,000
Direct Labour	60,000	50,000
Factory Overheads	20,000	10,000
Administration Costs	20,000	10,000
Selling and distribution costs	10,000	10,000

The economic life of Machine 1 is 2 years, while it is 3 years for the other. The scrap values are Rs 40,000 and Rs 25,000 respectively.

You are required to find out the most profitable investment based on:

a) ‘Pay Back Period’ b) Discounted Pay Back Period at 10%.

************************************

Latest Govt Job & Exam Updates:

St. Joseph’s College of Commerce B.B.A. 2015 Financial Management Question Paper PDF Download

View Full List ...