ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

End Semester Examinations – April 2015

M.I.B. – ii semester

P2 11 202: FINANCE FOR MANAGERS

Duration: 3 Hours Max. Marks: 100

SECTION – A

Answer any SEVEN questions. Each carries 5 marks. (7×5=35)

Define the scope of financial management. What role should the financial manager play in a modern enterprise?

What is risk? How can risk of a security be calculated? Explain your answer with the help of an example.

Despite its weaknesses, the payback period method is popular in practice? What are the reasons for its popularity?

Paramount produces ltd wants to raise Rs. 100 lakhs for a diversification project. Current estimate of EBIT from the new projects is Rs. 22 lakhs per annum. Cost of debt will be 15% for amounts upto and including Rs. 40 lakhs, 16% for additional amounts up to and including Rs. 50 lakhs and 18% for additional amount above Rs. 50 lakhs.

The equity shares (face value Rs. 10) of the company have a current market value of Rs. 40. This is expected to fall to Rs. 32 if debt exceeding Rs. 50 lakhs are raised. The following options are under consideration of the company

Determine the EPS for each option and state which option the company should exercise. Tax rate applicable to the company is 50%.

Option

Equity

Debt

III

50%

60%

40%

50%

40%

60%

Explain the sources of Working capital finance.

Explain the concept of lease financing. What are the types of lease financing?

A firm has sales of Rs. 1000000 variable cost of Rs. 700000 and fixed costs of Rs. 200000 and debt of Rs. 500000 @ 10% rate of interest. What are the Operating, financial and combined leverages? If the firm wants to double its EBIT how much of a rise in sales would be needed on a percentage basis?

Discuss the functions of Chief financial officer.

Calculate the present value of Rs. 600

Received one year from now
Received at the end of five years
Received at the end of fifteen years

Assume a 5% preference rate

10.

Explain the functions of financial management.

SECTION – B

II)

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

11.

ABC limited has under consideration two mutually exclusive proposals for the purchase of new equipment. Assuming tax rate to be 50% suggest the management the best alternative using

Payback period
ARR
NPV @ 10%

Particulars

Machine X

Machine Y

Net cash outlay (Rs)

Salvage value

Life (years)

PBDT (Rs)

100000

Nil

25000

30000

35000

25000

20000

75000

Nil

18000

20000

22000

20000

16000

12.

Company X and Company Y is in the same risk class and identical in all respects except that the company X uses debts while company Y does not. Levered company has Rs. 9 lakhs debentures carrying 10% rate on interest. Both companies earn 20% before interest and tax on their total assets Rs. 15 lakhs, Assume perfect capital markets tax rate of 50% and capitalization rate of 15% for an all equity company

Compute the value of both the companies using Net income approach.
Compute the value of both the companies using Net Operating income approach.
Using net operation income approach calculate the overall cost of capital for both the companies.

13.

ABC ltd wants to raise Rs. 500000 as additional capital. It has two mutually exclusive alternative financial plans. The current EBIT is Rs. 1700000 which is likely to remain unchanged. The relevant information is

Present capital structure 300000 equity shares of Rs. 10 each and 10% bonds of Rs. 200000

Tax rate 50%

Current EBIT Rs. 1700000

Current EPS Rs. 2.50

Current MPS Rs. 25 per share

Financial plan I 20000 equity shares of Rs. 25 per share

Financial Plan II 12% debentures of Rs. 500000

What is the indifference level of EBIT? Identify the financial breakeven levels and plot the EBIT and EPS on graph paper. Which alternative financial plan is better?

14.

What is a dividend policy? What are the determinants of dividend policy?

15.

JKL ltd has the following book value capital structure

Equity share capital 200000 shares

11.5% preference shares

10% debentures

40,00,000

10,00,000

30,00,000

Total

80,00,000

The equity shares of the company sell for Rs. 20. It is expected that the company will pay a dividend of Rs. 2 per share next year; this dividend is expected to grow at 5% p.a forever. Assume 35% corporate tax rate.

Compute the company’s WACC based on the existing capital structure
Compute the new WACC if the company raises an additional Rs. 20 lakhs debt by issuing 12% debentures. This would result in increasing the expected equity dividend to Rs. 2.40 and leave the growth rate unchanged, but the price of equity share will fall to Rs. 16 per share

SECTION – C

III)

Case Study (1×20=10)

16.

The following figures of Krish ltd are presented to you

Earnings before interest and tax

23,00,000

Less: Debenture interest @8%

Long term loan interest @11%

Earnings before tax

Less Tax

EAT

80000

220000

2000000

1000000

NO of equity shares Rs. 10 each 500000

EPS Rs. 2

Market price of share Rs. 20

PE ratio 10

The company has undistributed reserves and surplus of Rs. 20 lakhs. It is in need of Rs. 30 lakhs to pay off debentures and modernize its plant. It seeks your advice on the following alternative modes of raising finance

Alternative I – Raising entire amount as term loan from banks @ 12%

Alternative II – Raising part of the funds by issue of 100000 shares of Rs. 20 each and the rest by term loan @12%

The company expects to improve its rate of return by 2% as a result of modernization but PE ratio is likely to go down to 8 if the entire amount is raised as term loan

Advice the company on the financial plan to be selected
If it is assumed that there will be no change in the PE ratio if either of the two alternatives are adopted, would you advice still hold good?

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