Advanced Financial Management (Elective II Finance)

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ST. JOSEPH’S COLLEGE OF AUTONOMOUS (AUTONOMOUS)
END SEMESTER EXAMINATION – OCTOBER 2013
B.COM – V SEMESTER
ADVANCED FINANCIAL MANAGEMENT (ELECTIVE P- II – FINANCE)
TIME : 3 HOURS MARKS: 100
SECTION – A
I) Answer any TEN of the following: (10x 2=20)
1. What is share exchange ratio?
2. Write the meaning of boot strapping.
3. What is feasibility study?
4. What are the non financial factors for capital investment decision?
5. How do you calculate free cash flows?
6. What are terminal cash flows?
7. Write two disadvantages of intrinsic value per share.
8. What is expected value?
9. Explain the cost of cost and gain to merger.
10. Explain Irving Fisher Model for computing risk premium adjusted discount rate
11. What is synergy?
12. What is economic feasibility?
SECTION – B
II) Answer any FOUR of the following: (4 x 5=20)
13. Better budgets ltd makes a sells a single product which has a unit variable cost of
Rs. 8. Fixed costs are Rs. 1, 00,000 per annum. The company’s management is
having a sales price review and has reduced the choice to a price of either Rs. 11
or Rs. 12 per unit. The volume of sales at each of these prices has been estimated
as probability distribution as follows
Sales volume (units) Probability Sales volume (units) Probability
30000
40000
50000
60000
70000
0.1
0.2
0.4
0.2
0.1
25000
30000
35000
40000
0.1
0.2
0.4
0.3
On the basis of EV of contribution and profit, which sales price should be
selected?
14. Explain the techniques for decision making under risk and uncertainty.
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15. The Indian Yacht 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, a 40% probability of 4000 annual
sales and a 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. 8, 00,000 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. Use decision tree approach.
16. What is project appraisal? Explain .
17. Builders ltd wishes to acquire Bricks and Mortars ltd. Basic information
Number of shares 2, 00,000
EPS Rs. 7.00
Current market price Rs. 63
PV of synergies Rs. 21, 55,000
What should be the gain to Bricks and Mortars, if the offer is payment of Rs. 75/-
per share for the first 1, 00,001 shares and Rs. 60 per share for the remainder?
18. Briefly describe the valuation methods under merger with its advantages and
disadvantages.
SECTION – C
III) Answer any THREE of the following (3 x 15 =45)
19. A company is considering investing in a new manufacturing project with the
following characteristics
• Initial investment Rs. 350 lakhs , Scrap nil
• Expected life 10 years
• Sales volume 20,000 units per year
• Selling price Rs. 2000 per unit
• Variable direct costs Rs. 1500 per unit
• Fixed costs excluding depreciation Rs. 25,00,000 per year
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The project shows an IRR of 17%. The MD is concerned about the viability of the
investment as the return is close to company’s threshold rate of 15%. He has
requested a sensitivity analysis
• Advice the MD of the most vulnerable area likely to prevent the project
meeting the company’s hurdle rate
• Re evaluate the situation if another company already manufacturing a similar
product, offered to supply the units at Rs. 1800 each, this would reduce the
investment to Rs. 25 lakhs and the fixed costs to Rs. 10 lakhs
20. Fast run automobiles spares ltd (FASL) is considering investment in one of the
three mutually exclusive projects Zeta 10, Meta 10 and Neta-10. The company’s
cost of capital is 15% and the risk free rate of the returns 10%. The income tax
rate for the company is 40%. FASL has gathered the following basic cash flow
and risk index data for each project.
Zeta 10 Meta 10 Neta 10
Initial investment
Cash inflows after tax
1
2
3
4
Risk index
15,00,000
6,00,000
6,00,000
6,00,000
6,00,000
1.80
11,00,000
6,00,000
4,00,000
5,00,000
2,00,000
1.00
19,00,000
4,00,000
6,00,000
8,00,000
12,00,000
0.60
Using the risk adjusted discount rate; determine the risk adjusted NPV for each of the
project. Which project should be accepted by the company?
21. The following information is provided related to the acquiring firm Mark limited
and the target firm Mask limited
Mark limited Mask limited
Profits after tax
Number of shares outstanding
P/E ratio (times)
Rs. 2,000 lakhs
200 lakhs
10
Rs. 400 lakhs
100 lakhs
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Required
• What is the swap ratio based on current market price
• What is the EPS of Mark limited after acquisition
• What is the expected market price per share of Mark limited after
acquisition, assuming PE ratio of Mark ltd remains unchanged
• Determine the market value of the merged firm
• Calculate gain/loss for shareholders of the two independent companies
after acquisition
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22. Vehicles ltd is the acquirer and Transporters ltd is a target company. Basic
information is as follows
Particulars Vehicles Transporters
EPS
Next year DPS
Market price Rs.
Number of shares
Present growth rate
Growth rate because of
improvement to be brought about by
Vehicles ltd
3.00
1.00
40
3000
–
–
1.20
0.75
15
1500
5%
8%
Proposals for merger are
• Either cash of 20/- per share or
• 1 share of Vehicles for every 3 shares of Transporters. Show the costs and gain
for the two alternatives.
23. Balance sheet of R ltd as on 31st March 2010
Liabilities Rs.
(lakhs)
Assets Rs. (lakhs)
Equity share capital
Fully paid up shares of Rs.
100 each
General reserve
Profit and loss account
Sundry creditors
Provisions for Income tax
200
40
32
128
60
Land and building
Plant and machinery
Patent
Stock
Sundry debtors
Bank
Preliminary expenses
110
130
20
48
88
52
12
460 460
The expert valuer valued the land and building at Rs. 240 lakhs. Goodwill at Rs.
160 lakhs and plant at Rs. 120 lakhs. Out of the total debtors, it is found that
debtors Rs. 8 lakhs are bad.
The profits of the company have been as follows.
2007-08- Rs. 92 lakhs
2008-09 – Rs. 88 lakhs
2009-2010 – Rs. 96 lakhs
The company follows the practice of transferring 25% of profits to general
reserve. Similar type of companies earn at 10% of the value of their shares. Plant
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and machinery and land and building have been depreciated at 15% and 10%
respectively
Ascertain the value of shares of the company under
Intrinsic value method
Yield value method
Fair value method
SECTION – D
IV) Compulsory question. (1 x 15=15)
24.
Dry twigs and fresh blossoms ltd is always discarding old lines and introducing new
lines of products and is at present considering at present three alternative promotional
plans for ushering in new products. Various combinations of prices, development
expenditure and promotional outlays are involved in these plans. High, medium and
low forecast of revenues under each plan have been formulated and their respective
probabilities of occurrence have been estimated. These budgeted revenues and
probabilities along with other relevant data are summarized below
Plan I Plan II Plan III
Budgeted revenue with
probability
High
Medium
Low
Variable cost as % of revenue
Initial investment
Life in years
30 (0.3)
20(0.3)
5(0.4)
60%
25
8
24(0.2)
20(0.7)
15(0.1)
75%
20
8
50(0.2)
25(0.5)
0(0.3)
70%
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The company’s cost of capital is 12% and the income tax rate is 40%. Investment in
promotional programmes will be amortized by the straight line method. The company
will have net taxable income each year, regardless of the success or failure of the new
products.
• Substantiating with figures, make a detailed analysis and find out which of the
promotional plans is expected to be the most profitable?
• In the worst event happened, which of the plans would result in maximizing the
profits.