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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATIONS – OCTOBER 2013
M.COM – III SEMESTER
STRATEGIC FINANCIAL MANAGEMENT
Duration: 3 hrs Max. Marks: 100
SECTION – A
I) Answer any SEVEN questions. Each question carries 5 marks. (7 x 5 =35)
1) What do you understand by interface of financial policy and strategic
management?
2) “Financial planning is the backbone of the business planning and corporate
planning”. Comment.
3) Explain the importance of the study of SFM in business decision making?
4) “A well conceived incentive compensation plan goes a long way in aligning the
interest of managers and shareholders”. Comment.
5) Explain the five sins of acquisitions
6) Write short answers to the following (One or two sentences):
What is ROIC?
What is Leveraged Buyout?
What is strategic cost management?
What is Demergers?
What is TBR?
7) Explain the key steps involved in using the cash flow approach to valuing a firm.
8) Mahesh International earns a return on equity of 30 percent. Its dividend payout
ratio is 0.35. Equity shareholders of Mahesh require a return of 20 percent. The
book value per share is Rs. 40.
(i) What is the market price per share, according to the Marakon model?
(ii) If the return on equity falls to 25 percent, what should be the payout ratio to ensure
that the market price per share remains unchanged?
9) An equipment costs Rs. 10,00,000 and has an economic life of 4 years, at the end
of which its expected salvage value is Rs. 2,00,000. If the cost of capital is 14
percent, what will be the depreciation schedule under the sinking fund method?
10) ABC Ltd. plans to acquire XYZ Ltd. The relevant financial details of the two
firms, prior to merger announcement, are given below:
ABC Ltd. XYZ Ltd.
Market price per share
Rs. 60 Rs. 25
Number of shares 3,00,000 2,00,000
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The merger is expected to bring gains which have a present value of Rs. 4 million. Firm
ABC Ltd. offers one share in exchange for every two shares to the shareholders of firm
XYS Ltd.
Required:
(a) What is the true cost acquisition?
(b) What is the present value of the mergers to ABC Ltd. and XYZ Ltd.
SECTION – B
II) Answer any THREE questions. Each carries 15 marks (3 x 15 = 45)
11) Explain in detail some of the specific issues of financial policy of a firm.
12) Explain the strategic aspects of investment and dividend policies of a firm.
13) Explain the plausible and dubious reasons for merger.
14) A new plant entails an investment of Rs. 300 million (250 million in fixed assets
and Rs. 50 million in net working capital). The plant has an economic life of 14
years and is expected to produce a NOPAT of Rs. 21.085 million every year. After
14 years, the net working capital will be realized at par whereas fixed assets will
fetch nothing. The cost of capital for the project is 10%. The straight line method
of depreciation is used.
(a) What will be the ROCE for year 5? Assume that the capital employed is
measured at the beginning of the year.
(b) What will be the ROGI for year 5?
(c) What will be the Economic Depreciation for year 5?
15) The accounts of Joel Ltd. engaged in manufacturing business are summarized
below:
Income statement for the year ended March 31. 2013. (Amount in Rs. Million)
Sales Revenue
Less: Cost of goods sold
General expenses
Administrative expenses
Selling and distribution
expenses
Interest on loan
EBT
Less: Corporate Taxes (35%)
Earnings after taxes
59.10
6.80
7.80
2.90
1.80
95.00
78.40
16.60
5.81
10.79
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Balance Sheet as at March 31, 2013 (Amount in Rs. Million)
Liabilities Rs. Assets Rs.
Equity share capital(10 Lakh
shares of Rs. 10 each)
Reserves and surplus
10%Loan
Creditors and other liabilities
10.00
31.50
18.00
18.00
Freehold Land and
Buildings(net)
P&M (net)
Current Assets:
Stock
Debtors
Bank and cash balances
20.00
28.50
10.00
15.00
4.00
Total 77.50 Total 77.50
Additional Information:
1. The risk free rate of return in the economy is 8% and the premium expected
from business in general is 5%. The beta of Joel Ltd. shares is currently 1.27.
2. The equity shares of this company quoted in the market as on 31.03.2013 are
Rs. 50 per share.
3. General expenses include R&D expenses of Rs. 0.50 million (For EVA
computation R&D expenses are to be considered as an investment.
Requirements:
(i) Determine the EVA for the year ended March 31, 2013; and
(ii) Determine the amount of MVA for the year ended March 31, 2013
SECTION – D
III) Compulsory question carries ( 20 marks)
ABC Corporation is expected to grow at a higher rate for 4 years; thereafter the growth
rate will fall and stabilize at a lower level. The following information has been
assembled:
Base year (year 0) information
Revenues : Rs. 3000 million
EBIT : Rs. 500 million
Capital expenditure : Rs. 350 million
Depreciation : Rs. 250 million
Working capital as a percentage of revenues : 25%
Corporate tax rate (for all time) : 30%
Paid up equity capital (Rs. 10 par) : Rs. 400 million
Market value of debt : Rs. 1200million
Inputs for the High Growth Period
Length of the high growth phase : 4 years
Growth rate in revenues, depreciation, EBIT and capital expenditure : 20%
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Working capital as a percentage of revenues : 25%
Cost of debt(pre-tax) : 13%
Debt equity ratio : 1:1
Risk-free rate : 11%
Market risk premium : 7%
Equity beta : 1.129
Inputs for the stable growth period
Expected growth rate in revenues and EBIT : 10%
Capital expenditures are offset by depreciation
Working capital as a percentage of revenues : 25%
Cost of debt : 12.14% (pre-tax)
Risk-free rate : 10%
Debt-equity ratio : 2:3
Market risk premium : 6%
Equity beta : 1.00
Required:
(i) What is the WACC for the high growth phase and the stable growth phase?
(ii) What is the value of the firm?
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