LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

B.Com.,B.B.A. DEGREE EXAMINATION – COMMERCE & BUS.ADMIN.

KP 09

THIRD SEMESTER – April 2009

CO 3201 – FINANCIAL MANAGEMENT

 

 

 

Date & Time: 16/04/2009 / 1:00 – 4:00        Dept. No.                                                       Max. : 100 Marks

 

 

SECTION – A

Answer all the following questions:                                                             (10 x 2 = 20)

 

1. Explain the term “operating cycle”.
2. List out any four sources of short-term loan financing.
3. Define the term “dividend policy”.
4. How does the nature of enterprise affects the capital structure of the company?
5. Explain the meaning of Trading on equity.
6. Calculate the Raw material holding period in days from the following:

Raw material on 1.1.2007                               Rs.300

Raw material on 31.12.2007                           Rs.250

Raw material purchased during the year        Rs.500

Period covered                                                365 days

1. Cee Ltd. has issued Rs.200 preference shares redeemable at a premium of 5% with 12 years maturity.  Coupon rate is 10%.  Floatation cost is 2%.  Calculate the cost of preference shares.
2. The degree of operating leverage is 2.5 and degree of combined leverage is 4.  By what percentage will EBIT increase if sales increase by 5 per cent?
3. A project requires Rs.30,000 as initial investment and it will generate an annual cash inflow of Rs.6,000 for ten years. Compute the pay-back period.
4. State true or false:

1. Pay-back technique takes into consideration cash flows after the pay-back period.
2. In case of trading firm, the operating cycle is longer than that for a manufacturing firm.

 

SECTION – B

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

 

1. Explain the term “security financing”.  State the merits of different types of security financing?
2. What are “Bonus shares”?  Explain the advantages of issuing bonus shares.
3. Write short note on:   a) Cost of retained earnings  b) optimum capital structure                         c) working capital management           d) Financial leverage

 

1. The existing capital structure of Cassel Ltd is as follows:

Equity shares of Rs.100 each              Rs.4,00,000

Retained earnings                               Rs.1,00,000

7% preference shares                          Rs.2,50,000

5% debentures                                                Rs.2,50,000

The existing rate of return on the company’s capital employed is 12% and tax rate 50%.  The company requires a sum of Rs.3,00,000 to finance its expansion program, for which it is considering the following options:

1. Issue 3,000 equity shares
2. b) Issue 10% preference shares

It is estimated the Price Earnings Ratio in the above two financing options would be 16 and 14 respectively, which option would you recommend.

 

1. Rai Ltd plans a production of 78000 units per annum.  Selling price is Rs.100 per unit.  Raw material, direct wages and overheads comprise of 40%, 15% and 25% of selling price.  Raw material is in stock for 3 months and finished goods for 2 months.  Production process takes 1 month.  Credit allowed by suppliers is 1 month and credit given to debtors is 2 months.

Raw material is introduced at the beginning of the process.  Wages and overheads in WIP may be assumed to be 50%.

Lag in payment of wages is 1.5 months.  Calculate the working capital required at cash cost.

 

 

1. Calculate the Degree of operating leverage, degree of financial leverage and the degree of combined leverage from the following data and interpret the results:

 

Output (in units)	30,000
Fixed costs	Rs.3,50,000
Variable cost per unit	Re.1.00
Interest expenses	Rs.25,000
Selling price per unit	Rs.300

1. X Ltd is contemplating investment in a project which requires an initial investment of Rs.1,40,000.  The cost of capital is 8%.  The Cash flow after tax  are as under:

 

Year	Rs.
1	30,000
2	40,000
3	60,000
4	30,000
5	20,000

Calculate the Internal rate of return and suggest whether the project should be accepted or not.

 

1. The balance sheet of Apple Ltd is given below:

 

Liabilities	Rs.	Assets	Rs.
Equity capital Rs.10 each	9,00,000	Fixed assets	22,50,000
10% long term debt	12,00,000	Current assets	7,50,000
Reserves	3,00,000
Current liabilities	6,00,000
	30,00,000		30,00,000

 

Tax rate is 50%.  Determine the likely level of EBIT, if EPS should be                                  a) Re.1                   b) Rs.3             c) Rs.0.

SECTION – C

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

 

1. What is meant by financial management?  What are its objectives?  Explain its functions.

 

1. Philips Ltd is proposing to take up a project which will need an investment of Rs. 4,00,000.  The plant and machinery required under the project will have a scrap value of Rs. 20,000 at the end of its useful life of 5 years.  The cost of capital is 10%.  Depreciation is to be charged according to the straight line method.  Tax rate is 50%.  The earnings before tax are estimated to be as follows:

 

Year	Rs.
1	1,00,000
2	1,75,000
3	2,00,000
4	1,50,000
5	90,000

Calculate:        a) Average rate of return         b) Pay back period      c) Net present value                                        d) Profitability index

 

1. Quest Ltd. has the following book value capital structures:

     Rs.

Equity capital Rs.100 each                             200 lakhs

12% preference capital Rs.100 each                 20 lakhs

14% debentures Rs.100 each                          100 lakhs

Retained earnings                                           240 lakhs

10% Term loan                                                160 lakhs

 

The next expected dividend is Rs. 30 per share.  The dividend is expected to grow at 5% per annum.  Market price of the share is Rs. 200.  Tax rate is 50%.  Calculate Weighted Average cost of capital using book value as weights.

 

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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

B.Com. DEGREE EXAMINATION – COMMERCE

KP 32

SIXTH SEMESTER – April 2009

CO 6604 – FINANCIAL MANAGEMENT

 

 

 

Date & Time: 18/04/2009 / 9:00 – 12:00       Dept. No.                                                       Max. : 100 Marks

 

 

 

SECTION-A(10*2=20 marks)

 

ANSWER ALL QUESTIONS

 

1. Give the meaning of finance function?

 

2. What is optimum capital structure?

 

3. Explain the concept of cost of capital

 

4. What is cost of Retained earnings?

 

5. What is operating cycle of business?

 

6. If you deposit Rs.1,000 to-day in a bank which pays 10% interest compounded

annually,how much will the deposit grow to after 8 years?

 

7. A project costs Rs.1,00,000 and yields an annual cash inflow of Rs.20,000 for 7

years.Calculate pay-back period?

 

8. Calculate operating leverage from the following details

Sales   – 2,00,000 units @Rs.8 per unit

Variable costs-Rs.2 per unit

Fixed cost-Rs.30,000

 

9. Initial outlay-Rs.50,000;Life of asset-5 years;Estimated cash flow Rs.12,500.Calculate

internal rate of return.

 

10. Estimated cost of goods sold Rs.600 lakhs;Expected operating cycle in 90

days,desired cash balance Rs.1 lakh. What is expected working capital

requirement?(Assume 360 days in a year)

 

 

 

 

 

 

 

SECTION-B(5*8=40 marks)

 

ANSWER ANY FIVE QUESTIONS

 

11. A company wishes to determine the optimal capital structure,from the following

selected information supplied to you,determine the optimal capital structure of the

company.

Structure     Dept.amt       Equity.amt         After tax cost of dept.    Ke

Rs.                                               %                          %

1. 4,00,000 1,00,000                  9                             10
2. 2,50,000 2,50,000                  6                             11
3. 1,00,000         4,00,000                  5                             14

 

12. A finance company advertises that it may pay a lumpsum of Rs.8000 at the end of 6

years to the investors who deposits anually Rs.1000 for 6 years.What interest rate is

implicit in this offer?

 

13. A company’s current earnings areRs.1,25,000 to be distributed among 8000

shares.The market  price of each share is Rs.150 and the growth rate of dividend is

estimated at 9%.compute the cost of equity capital.

 

14. From the following information ,you are required to find out the extent of operating

leverage in the  year  2008

EBIT(2007) Rs.30,000;sales(2007) 1,50,000 units

EBIT(2008) Rs.35,000;sales(2008) 1,80,000 units

 

15. Project X initially costs Rs.2,50,000.It generates the following cash flows:

Year                    cash inflows        Present value of  

Rs                           Re.1 @10%

1                             90,000                         0.909

2                             80,000                         0.826

3                             70,000                         0.751

4                             60,000                         0.683

5                             50,000                         0.621

Taking cut off rate as 10%  Suggest whether the project should be accepted or not.

 

16. Explain the meaning of financial management. What are its objectives?

 

17. Explain the factors which should be taken into account while making a capital

investment decision.

 

18. Describe in brief the various factors which are taken into account in determining the

working capital needs of a firm.

 

 

 

 

 

 

SECTION-C(2×20=40 MARKS)

 

ANSWER ANY TWO QUESTIONS

 

19. Discuss the various factors influencing the capital structure of a corporation

 

20. A choice is to be made between two competing projects which require an equal

investment of Rs.50,000 and are expected to generate net cash flows as under:

Year                      Project I              Project II

Rs.                      Rs.

1                            25,000               10,000

2                            15,000               12,000

3                            10,000               18,000

4                               NIL                  25,000

5                            12,000               8,000

6                            6,000                 4,000

The cost of capital of the company is 10%. The following are the present value @10%

per annum:

Year                          PV factors @ 10%p.a.

1                                 0.909

2                                 0.826

3                                 0.751

4                                 0.683

5                                 0.621

6                                 0.564

Which project proposal should be chosen and why?

Evaluate the projects proposals under;

(a) pay-back period and

(b)Discounted cash flow methods.

 

21. A co require Rs 20,00,000/- for a new project. It has identified 3 financing options

for the same.

• Issue 20,000/ equity shares of Rs. 100/ each.
• Issue 10,000/ equity share of Rs. 100/ each and raise a bank loan @ 15% per annum for the balance
• Issue 15,000/ equity share of Rs. 100/ each and Rs. 5,00,000/ 14% Debentures.

 

The company expects to earn a profit of Rs. 5,00,000/ before interest and tax. If the tax rate is 50% which financing option would you recommend..

 

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