St. Joseph’s College of Commerce (Autonomous) |
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| End Semester Examination – March /April 2016 | ||||||||||||||||||||
| M.COM(I.B.) – II SEMESTER | ||||||||||||||||||||
| P4 15 MC 201: FINANCE FOR MANAGERS | ||||||||||||||||||||
| Duration: 3 Hours Max. Marks: 100 | ||||||||||||||||||||
| SECTION – A | ||||||||||||||||||||
| I. | Answer any SEVEN questions. Each carries 5 marks. (7×5=35) | |||||||||||||||||||
| 1. | The Indian yatch company has developed a new cabin cruiser which they have earmarked for the medium to large boat market. A market analysis has a 30% probability of annual sales being 5000 boats, 40% probability of 4000 annual sales and 30% probability of 3000 annual sales. This company can go into limited production, where variable costs are Rs. 10000 per boat, and fixed costs are Rs. 800000 annually. Alternatively, they can go into full scale production, where variable costs are Rs. 9000 per boat, and fixed costs are Rs. 50, 00,000 annually. If the new boat is to be sold for Rs. 11000 should the company go into limited or full scale production when their objective is to maximize the expected profits? | |||||||||||||||||||
| 2. | From the following project details calculate the sensitivity of the
Project cost Annual cash flows Cost of capital
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| 3. | XYZ ltd intends to set up a project with capital cost of rs. 50,00,000. It is considering the three alternative proposals of financing
Alternative 1 100% equity financing Alternative 2 debt equity 1:1 Alternative 3 debt equity 3:1 The estimated annual net cash inflow is @ 24% i.e. Rs. 12, 00,000 on the project. The rate of interest on debt is 15%. Calculate WACC for three different alternatives and analyze the capital structure decision. |
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| 4. | Write short notes on Gilt edged securities and call/notice money market | |||||||||||||||||||
| 5. | ABC ltd was started a year back with a paid up equity capital of Rs. 40, 00,000. The other details are as under
Earnings of the company Rs. 4,00,000 Price earnings ratio 12.5 Dividend paid Rs. 3,20,000 Number of shares 40000 You are required to find out the company’s dividend payout ratio is optimal using Walter’s formula.
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| 6. | Z ltd is foreseeing a growth rate of 12% per annum in the next 2 years. The growth rate is likely to fall to 10% for the third year and fourth year. After that the growth rate is
Expected to stabilize at 8% per annum. If the last dividend paid was Rs. 1.50 per share and the investors required rate of return is 16%. Find out the intrinsic value per share of Z ltd as of date. |
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| 7. | Consider the figures available for Greaves ltd
Net sales Rs. 16 crores EBIT as a percentage of sales 10% Tax rate 40% Capital employed Equity share capital Rs 10 each Rs. 4 crores 10% Preference shares of Rs. 100 each Rs. 3 crores 12% secured debentures Rs. 2 crores You are required to calculate EPS of Greaves ltd The % change in EPS if EBIT increases by 10% |
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| 8. | How do you ascertain the risk and return of a portfolio | |||||||||||||||||||
| 9. | Describe how RADR can be computed under Irving Fisher model? | |||||||||||||||||||
| 10. | An investor holds two equity shares X and Y in equal proportion with the following risk and return characteristics
E ( R x) 24% E ( R y) 19% Std of X = 28% Std of Y = 23% The returns of these securities have a positive correlation of 0.6. You are required to calculate the portfolio return and risk. Further, suppose the investor wants to reduce the portfolio risk to 15%. How much should the correlation coefficient be to bring the portfolio risk to the desired level? |
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| SECTION – B | ||||||||||||||||||||
| II. | Answer any THREE questions. Each carries 15 marks. (3×15=45) | |||||||||||||||||||
| 11. | The Shcrisight company is attempting to decide whether or not to invest in a project that requires an initial outlay of Rs. 4 lakhs. The cash flows of the project are known to be made up of two parts, one of which varies independently overtime and the other one which display positive correlation. The cash flows of the six year life of the project are:
Find out the expected value of the NPV and its standard deviation, using a discount rate of 10% Also find the probability that the project will be successful i.e. NPV>0 and state the assumptions under which the probability can be determined. |
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| 12. | Given below is information of market rates of returns and data from two companies A and B
Determine the Beta co efficient of the shares of company A and Company B |
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| 13. | A new product is being introduced by XYZ ltd at a cost of Rs. 100000. The following cash flows have been projected for the life of the project
The company feels that cash flows over time are perfectly correlated. Assume a risk free rate of 8%. Compute the expected value and standard deviation of the probability distribution of possible NET present values Assuming a normal distribution what is the possibility of the project providing a net present value of
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| 14. | Salvations and solutions have been in IT business for six years and enjoy a favorable market reputation. Corporate tax is 30%. They anticipate that the demand for IT solutions would increase sizably since many foreign firms are setting up their BPO shops in India. For an expansion project, they propose to invest Rs. 22 crores to be funded by new debt and equity on 50: 50 bases. Enquiries with merchant bankers reveal hat funds can be raised as under.
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| 15. | Describe the traditional view on the optimum capital structure. Compare and contrast this view with the NOI approach and NI approach. | |||||||||||||||||||
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SECTION – C |
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| III. | Case Study (1×20=20) | |||||||||||||||||||
| 16. | AC company ltd has improved its profitability in 2014 and is on a growth path after poor performance in the preceding two years. The following is the summary of the company’s operations during the preceding three years.
The company’s focus in 2014 was on cost reduction and funds management rather than growth in sales. Operating and interest costs fell by 3.3% and 60% respectively. According to the company’s managing director. The turnover in 2014 dipped because of a drop in volumes. However the sales are not strictly comparable because in the previous year, there was a large order worth Rs.15 crores from a public sector oil company. On the other hand, the net profit growth was higher because of better asset management. This resulted in reduced borrowings and lowered the financial charges. The company was able to bring down its inventory holding period to 46 days from 81 days and debtors holding period to 95 days from 119 days. The company is changing its debt policy to a conservative policy. The debt equity ratio of 1.8:1 in 2012 has been brought down to 0.5:1 in 2014. Operating performance (Rs. In crores)
The prospects of the company for increased business in 2015 are estimated to be good. According to the managing director. The general industrial activity as such has picked up which should result in a better demand for the company’s products from sectors such as automobiles, mining and chemicals. Experts think that compressor industry will grow at 10% in 2015. The company is anticipating a sales growth of 15-20% in 2015. The company’s strategy of cost reduction and improving marketing efficiency will continue. The company operates in the compressor industry and drilling and mining equipment industry. It is number two in the compressor industry after Inger Soll rand. The product profile of the company in the years has shifted in favor of the compressor sector. In 2014 the company’s gross block increased to rs. 22 crores from Rs. 20 crores. The company has planned for an investment of Rs 5 crores in its Poona factory. The company’s share enjoys good liquidity and its PE ratio is 32. In the expectation of good performance the company’s share price started rising since January 2009 and sharply increased to Rs. 285 just before the budget from Rs. 190 in January. The current price (after technical correction) is around Rs. 225 -35. In the last two years the company paid a dividend of 10%. The company was wondering if it should declare a higher dividend in 2014. Questions:
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