LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
B.Com. DEGREE EXAMINATION – BUS.ADMIN&CORP.SECRE.
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THIRD SEMESTER – November 2008
CO 3201/BU 3201 – FINANCIAL MANAGEMENT
Date : 13-11-08 Dept. No. Max. : 100 Marks
Time : 9:00 – 12:00
SECTION – A
Answer all the following questions: (2×10=20)
- What is financial management?
- State any two factors that determine the capital structure of a firm.
- What is time value of money?
- Explain the cost of equity.
- Give any two merits of debenture issue.
- The capital structure of Reena Ltd. consists of Equity and debenture in the proportion of 70% and 30% respectively. The cost of equity is 15%. The cost of debenture is 10%. Calculate weighted average cost of capital.
- The capital structure of a company consists of 10% preference share capital of Rs.1,00,000 , 10% debenture of Rs.2,00,000 and equity share capital @ Rs.10 each of Rs.1,00,000. It has an EBIT of Rs.60,000. The company is in 50% tax bracket. Calculate financial leverage of the company.
- A project requires an investment of Rs.10,00,000. The plant required under the project will have a scrap value of Rs.80,000 at the end of its useful life of 5 years. The profits after tax are as follows:
| Year | 1 | 2 | 3 | 4 | 5 |
| Rs. | 50,000 | 75,000 | 1,25,000 | 1,30,000 | 80,000 |
Calculate Accounting rate of return.
- Calculate the Debtors collection period in days from the following:
Debtors on 1.1.2006 Rs.400
Debtors on 31.12.2006 Rs.220
Credit sales during the year Rs.3000
Period covered 365 days
- State True or false:
- The optimum capital structure is obtained when the market value per equity share is the maximum.
- A company cannot make a bonus issue without making the existing partly paid shares as fully paid up.
SECTION – B
Answer any five questions: (5×8=40)
- The following data pertain to Forge Limited:
Existing capital structure: 10 lakh equity shares of Rs.10 each.
Tax rate: 50%
Forge limited plans to raise additional capital of Rs.100 lakhs for financing an expansion project. It is evaluating two alternative financing plans: (i) issue of 10,00,000 equity shares of Rs.10 each and (ii) issue of Rs.100 lakh debentures carrying 14% interest. Calculate the EBIT level at which investors would be indifferent to the two options.
- a) Abu Ltd has raised funds through issue of 20,000 debentures of Rs.100 each at a discount of Rs.10 per debenture with 10 year maturity. The coupon rate is 16%. Floatation cost is Rs.2 per debenture. The debentures are redeemable at a premium of 10%. Tax rate is 30%. Calculate the cost of debentures.
- b) Xyz ltd issued 1,00,000 equity shares of Rs.10 each at a premium of Rs.5 each. The company incurred Rs.15,000 expenses on issue. The shareholders expect a dividend of 18% per annum. Calculate the cost of equity.
- The following is the balance sheet of zee co.,
| Liabilities | Rs. | Assets | Rs. |
| Equity capital(Rs.10 per share) | 60,000 | Net fixed assets | 1,50,000 |
| 10% Long-term debt | 80,000 | Current assets | 50,000 |
| Retained earnings | 20,000 | ||
| Current liabilities | 40,000 | ||
| 2,00,000 | 2,00,000 |
The company’s total assets turnover ratio is 3. Its fixed operating cost are Rs.1,00,000 and its variable operating costs ratio to sales is 40%. The income tax rate is 50%. Calculate operating, financial and combined leverages.
- Compute the pay-back period under a) traditional pay-back method and b) discounted pay-back method.
Initial investment Rs.80,000
Estimated life 5years
Earnings after tax: Rs.
End of year 1 6,000
2 14,000
3 24,000
4 16,000
5 Nil
Depreciation has been calculated under straight-line method. The cost of capital can be taken at 20% p.a.
- The directors of Bata Company wishes to ascertain the working capital required to meet the planned production of 275600 units during the year. The cost of production is Rs. 180 per unit, comprising of raw material – Rs.90, direct labour – Rs.40 and overheads Rs.50. Selling price is Rs.200 per unit. Raw material is in stock for 4 weeks.
Work in progress (assume 50% completion) is in stock for 3 weeks
Finished good is in stock for 5 weeks. Credit allowed by suppliers is 4 weeks
Credit allowed to debtors is 6 weeks
Lag in payment of wages is 2.5 weeks and overheads is 2 weeks
Cash at bank is expected to be Rs. 50,000. 60% of the company’s sales are for credit.
- “The financial goal of a firm should be to maximize profit and not wealth”. Do you agree with this statement? Comment.
- What are the different sources of internal financing? Explain them with its merits.
- What is working capital management? What are the factors that determine the working capital needs of an enterprise?
SECTION – C
Answer any two questions: (2×20=40)
- Explain the meaning of the terms “dividend” and “dividend policy”. Discuss the main determinants of dividend policy of a firm.
- The following is the figures of Kline Ltd:
Rs.
EBIT 20,00,000
Less: debenture interest@5% 50,000
Loan interest @ 10% 1,50,000 2,00,000
EBT 18,00,000
Less: Tax@ 50% 9,00,000
EAT 9,00,000
Number of equity shares @ Rs.10 each 4,50,000
Earnings per Share 2
Market price per share 24
P/E ratio 12
The company has undistributed reserves of Rs.10,00,000. It is in need of Rs. 20,00,000 to modernize the plant. It has identified the following financial options:
- Raise a long term loan at 11%
- Issue 1,00,000 equity share of Rs.20 each
The company expects to increase its rate of return by 2% as a result of modernization, but the P/E ratio is likely to reduce to 10 if the entire amount is raised through term loan.
- A company is considering to purchase a machine. Two machines are available X and Y costing Rs.90,000 each. The Cash flow after tax are expected to be as follows:
| Year | ‘X’ machine
Rs. |
‘Y’ machine
Rs. |
| 1 | 25,000 | 15,000 |
| 2 | 30,000 | 25,000 |
| 3 | 35,000 | 30,000 |
| 4 | 25,000 | 40,000 |
| 5 | 20,000 | 30,000 |
Evaluate two alternatives & suggest which machinery should be purchased according to:
- Internal rate of return
- Net present value method (cost of capital 10%).