LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

 B.B.A.,B.Com. DEGREE EXAMINATION – BUS.ADM.COMMERCE

RO 9

THIRD SEMESTER – APRIL 2008

CO 3201 – FINANCIAL MANAGEMENT

 

 

 

Date : 05/05/2008                Dept. No.                                        Max. : 100 Marks

Time : 1:00 – 4:00

SECTION – A

 Answer all questions:                                                          (10 x 2 = 20)

Explain the following:

1. Wealth maximization
2. Working capital
3. Pay back period
4. Net present value
5. Indifference point EBIT
6. Annuity
7. Operating Leverage
8. Cost of capital
9. Earning per share

10. Net operating income

SECTION – B

 Answer any five questions:                                                (5 x 8 = 40)

11 Explain the factors that determine the Capital Structure?

12. Define Cost of Capital? explain its features and importance?
13. Explain the functions of financial manager in large manufacturing firm?

14 Ramco ltd is considering a major expansion of its production facilities involving

a cost of Rs 50 lakhs and the following alternatives financing options are

available

Particulars                              Rs in Lakhs

A              B

Share Capital                      20             10

14% Debentures                 20             15

Loan @ 18%                       10             25

—-           —

Total                                 50             50

Expected rate of return on total Capital Employed is 25% and corporate tax @50%. Compute EPS and choose the best alternative two models.

 

15. HLL is considering purchasing of new machineries A and B have been suggested.

Details of which are as follows

Particulars

A(Rs)                   B(Rs

Cash out flows            400000              500000

Cash inflows

1                      40000                120000

2                      120000              160000                                             3                        160000              200000                                                              4                        240000              120000

5                      160000              80000

The cost of capital is 15% state which machine you consider

financially preferable using NPV Method.

 

16. A company issues 10% Debentures of Rs 100000 the company is in 55% tax

bracket. Calculate the cost of the debt (before as well as after tax) if the

debentures are issued 1) issued at par 2) 15% discount 3) 20% Premium

 

 

 

 

 

 

17. A choice is to be made between two competing project which required an investment of Rs 50000 and expected to generate net cash inflow as under:

Yrs                            A (Rs)                B (Rs)

1                              25000                10000

2                              15000                12000

3                              10000                18000

4                              ——-                25000

5                              12000                8000

6                              6000                 4000

Evaluate the project proposal under pay- back period.

18. M&M has sales of Rs 1000000, variable cost of Rs 700000 and fixed cost of

Rs 200000 and debt of Rs 500000 at 10 % interest. What are the operating,

financial and combined leverage? If the firm wants to double its EBIT, how much

of a raise in sales would be needed as a percentage?

SECTION – C

 Answer any two questions:                                                (2 x 20 = 40)

19. Rack & co has the following capital structure:

Particulars                                  Rs

4000 Equity shares of Rs 100 each         400000

10% preference shares                        100000

11% Debentures                         500000

The current market price of the share is Rs 102. the company is

expected to declare a dividend if Rs 10 in the current year, with an expected

growth rate of 10%. The applicable tax rate is 50%

1. a) Find out the cost of equity capital and the WACC
2. b) Assuming that the company can raise Rs 300000 12% Debentures, find out

the new WACC if the dividend rate is increased from 10% to 12% growth rate is

reduced from 10 to 8% and the market price is reduced to Rs 98

 

20. Sain Gobain provides the following particulars relating to its Capital:

Particulars                  Amount in Rs per unit

Raw material                              84

Direct Labour                              36

Over heads                                36

Profit                                         44

Average stock holding period:

Raw material 1 month, Work in Progress (50% completed), 1/2 month, finished goods 1 month

Credit allowed by Suppliers and Customers 1 and 2 months respectively

Average time lag in the payment of wages and overheads ½ months Required cash in hand and at bank Rs 300000

25% of the out put is sold for cash. For an expected sale of 120000 units.

Work out the working capital requirement if the firm.

 

21. ITC has the capital Structure consist of the following:

Particulars                                   Rs

Equity Share of Rs 100 each         2000000

Retained Earnings                                1000000

9% Preference Shares                 1200000

7% Debentures of Rs 100 each              80000

The company requires an additional capital of Rs 1200000 to finance its expansion it expects to earn 12% on its total capital employed after expansion. It has the following financing options:

1. 20000 equity shares at a premium of Rs 25 per share
2. 10% preference shares of Rs 100 each
3. 8% Debentures of Rs 100 each

It is estimated that the P/E ratio in the case of equity shares, preference and debentures finance would be 15, 12, and 10 respectively. If the tax rate is 50% which financial option would you recommend?

 

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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

B.Com. DEGREE EXAMINATION – COMMERCE

RO 31

SIXTH SEMESTER – APRIL 2008

CO 6604 – FINANCIAL MANAGEMENT

 

 

 

Date : 16/04/2008                Dept. No.                                        Max. : 100 Marks

Time : 9:00 – 12:00

SECTION A

Answer All questions:                                                                       (10×2=20 marks)

1. List out the objectives of financial management.
2. What is financial forecasting?
3. What do you mean by indifference point EBIT?
4. Define the term optimum capital structure.
5. Define the concept of ‘cost of capital’.
6. A company offers for public subscription equity shares of Rs. 10 each at a premium of 10%. The company pays 5% of the issue price as underwriting commission. The rate of dividend expected by the equity shareholders is 20%. You are required to calculate the cost of equity capital.
7. A company has sales of Rs. 1 lakh. The variable costs are 40% of the sales while the fixed operating costs amount to Rs. 30,000. The amount of interest on long-term debt is Rs.10,000. You are required to calculate the composite leverage.
8. What is trading on equity?
9. Fixed Cost – 10,000

Operating Leverage – 2

Interest – 2,000

Calculate Financial Leverage.

1. A limited company is considering investing in a project requiring a capital outlay of Rs. 2,00,000. Forecast for annual income after depreciation but before tax is as follows:

Year                1                      2                      3                      4                      5

Amount in Rs. 1,00,000          1,00,000          80,000             80,000             40,000

Depreciation may be taken as 20% on original cost and taxation at 30% of net income.

You are required to calculate payback period.

 

SECTION B

Answer any Five Questions:                                                             (5×8=40 marks)

1. What are the main functions of the modern finance manager?
2. What are the various features of on appropriate capital structure?
3. “Capital Expenditure decisions are by far the most important decisions in the field of financial management” Elucidate.
4. Calculate the working capital required for the production 1,80,000 units per annum. Cost per unit of the product comprises of

Material           –           Rs. 20

Labour             –           Rs. 15

Overhead        –           Rs. 5

Selling price    –           Rs. 50

Raw material is in stock for one month, processing time \month, finished stock storage

period – 1\Months, period of credit to customers – 2 Month, Credit received from suppliers – 1

Month, lag in payment of wages – \ Month.

Cash in hand to be maintained at Rs. 40,000. Raw material is introduced at the beginning of the

process. Wages and overhead accrue evenly throughout the process.

 

 

1. A company has the following capital structure:

10,000 Equity shares of Rs. 10 each               Rs. 1,00,000

2,000 10% Pref. shares of Rs. 100 each         Rs. 2,00,000

2,000 10% Debentures of Rs. 100 each          Rs. 2,00,000

Calculate the EPS for each of the following levels of EBIT: Level under (i) Rs.

1,00,000; (ii) Rs. 60,000 and (iii) Rs. 1,40,000. The company is in 30% tax bracket. Calculate the financial leverage taking EBIT level under (i) base.

 

 

1. A ltd. Intends issue new equity shares. It’s present equity shares are being sold in the market at Rs. 125 a share. The company’s part record regarding payment of dividends is as follows:

1994: 10.70%; 1995: 11.45%; 1996:12.25%;1997:13.11%; 1998:14.03%. The floatation costs are estimated at 3% of the current selling price of the shares. You are required to calculate:

• Growth rate in dividends. (refer compound factor table 14.03/10.70=1.3112)
• Cost of funds raised by issue of equity shares assuming that the growth rate as calculated under (a) above will continue for ever.
• Cost of new equity shares.

 

 

1. S Ltd., is considering the purchase of a new machine. Two alternative machine (A and B) have been suggested. Each having an initial cost of Rs.4,00,000 and requiring Rs.20,000 as additional working capital at the end of 1^st year. Cash inflows after taxation are expected to be as follows:

Cash Inflows

Year                             Machine A                  Machine B          PV of Rs.1/- @10%

at 10%                                           Rs.                               Rs.                                  Rs.

1                                     40,000                      1,20,000                             0.91

2                                  1,20,000                      1,60,000                             0.83

3                                  1,60,000                      2,00,000                             0.75

4                                  2,40,000                      1,20,000                             0.68

5                                  1,60,000                      1,80,000                             0.62

The company has target of return on capital of 10% and on this basis, you are required to

compare  the profitability of the machines and state which alternative you consider using NPV

method preferable.

 

 

1. Calculate the cost for the following sources of funds

1. A Limited issued Rs. 1,000, 12% debentures of a discount of 5% redeemable at the end

of 5 years at par Tax rate 50%.

1. X Limited issued Rs.100, 14% preference shares redeemable at the end of Five years at

5% premium. Floatation cost is Rs.2/- per preference share and the Tax rate is 40%.

1. An equity share has a current market price of Rs. 25/-. The next expected dividend is

Rs.2/-. per issue and the growth rate of dividend is 8%.

1. A company’s capital structure consists of 10,000 equity share of Rs.10/- and Rs. 50,000

10% Debentures. The market price of the share is Rs.20/-. EBIT – 45,000 Tax rate – 50%.

 

SECTION C

Answer any TWO questions:                                                           (2×20=40 marks)

 

1. Explain various determinants of working capital of a concern.

 

1. From the following capital structure of a company, calculate the overall cost of capital, using (a) book value weights and (b) market value weights.

Source                                     Book Value                 Market Value

Equity share capital                 Rs. 45,000                   Rs. 90,000

(Rs. 10 per share)

Retained earnings                   Rs. 15,000                      –

Preference share capital          Rs. 10,000                   Rs. 10,000

Debentures                              Rs. 30,000                   Rs. 30,000

The after tax cost of different sources of finance is as follows:

Equity share capital 14%; Retained earnings: 13%; preference share capital; 10%

Debentures:5%.

 

1.  A company is considering two mutually exclusive projects. Both require an initial investment of Rs. 50,000 each and have a life of five years. The cost of capital of the company is 10% and tax rate is 35%. The depreciation is charged on straight – line method. The estimated profit before depreciation and tax of the two projects are as follows:

Year                Project A         Project B         Present Value

at 10%

1                      Rs. 20,000       Rs. 30,000                0.91

2                      Rs. 22,000       Rs. 27,000                0.83

3                      Rs. 28,000       Rs. 22,000                0.75

4                      Rs. 25,000       Rs. 25,000                0.68

5                      Rs. 30,000       Rs. 20,000                0.62

 

Calculate for each project

• Pay Back period.
• Return on average investment.
• Net present value.

 

 

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