Financial Management

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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXMAINATION – OCTOBER 2013
B.COM – III SEMESTER(TRAVEL & TOURISM)
FINANCIAL MANAGEMENT
TIME: 3 HOURS Max. Marks: 100
SECTION – A
I) ANSWER ALL THE FOLLOWING QUESTIONS. (10X2=20)
1. What is under capitalization?
2. Differentiate between a low geared and a high geared firm.
3. How is the term capitalization different from the term capital structure?
4. Mention any four factors that are considered while rating the credit worthiness
of a customer.
5. Why does a company resort to issuing stock dividend?
6. What is factoring?
7. Briefly explain the motives of holding cash?
8. A company operates at a production level of 5,000 units. The contribution is Rs.
60 per unit. Operating leverage is 6, combined leverage is 24. If the tax rate is
30%. What would be its earnings after tax?
9. A company issues 10,000, 10% preference shares of Rs. 100 each, redeemable
after 10 years at a premium of 5%. The cost of issue is Rs. 2 per share. Calculate
the cost of preference capital.
10. The EBIT –EPS relationship suggests that the higher the debt ratio, the higher are
the earnings per share for any level of EBIT above the indifference point. Why
then do firms sometimes choose financing alternatives that do not maximize
EPS?
SECTION – B
II) Answer any FOUR questions. (4×5=20 )
11. A company plans to raise Rs. 30 lakhs for its new project, it can raise the same by
two options.
Option 1 – Entire amount by equity
Option 2 – Rs. 15 lakhs by 10% debt and the balance by equity.
Calculate the Point of Indifference assuming tax rate @ 35% and par value of a
share is Rs. 100.
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12. X Ltd issues Rs. 10 lakhs , 10% redeemable debentures @ a discount of 5%. The
cost of flotation amounts to Rs. 30,000. The debentures are redeemable after 5
years. If the tax rate is 50%, Compute the before tax and after tax cost of debt.
13. Milroy ltd is planning to introduce mechanization to replace the labour the
force. Two alternatives are available. Advise the management to select the
machine under payback period method.
Cost of the machine
Estimated life of the machine
Estimated scrap savings per year
Estimated cost of materials p.a.
Maintenance cost p.a.
Additional cost of supervision p.a
Estimated savings in wages p.a
Depreciation will be taken on straight line
basis
Assume tax rate 50%
Machine X
50000
10yrs
1000
2000
2500
1500
10000
Machine Y
40000
8yrs
1000
3000
3100
2000
12500
14. A company is contemplating investment in a project which requires an initial
investment of Rs. 40,000 generating cash flows of Rs. 16,000 every year for 4
years. Calculate the Internal Rate of Return.
15. “The scientific process of implementing inventory management provides
inventory at the Right time, from the Right source and at Right prices’. In this
context explain the tools of inventory management.
16. Explain the different types of dividend polices.
SECTION – C
III) Answer any THREE of the following: (3×15=45 )
17. “ The profit maximization is not an operationally feasible criterion”. In what
aspect is the objective of wealth maximization superior to profit maximization?
Illustrate your views.
18. KPMG Ltd has currently an ordinary share capital of Rs. 25 Lakhs, consisting of
25,000 shares of Rs. 100 each. The management is planning to raise another Rs. 20
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lakhs to finance a major programme of expansion through one of the four
possible financial plans.
(i) Entirely through ordinary shares,
(ii) Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through long-term
borrowings at 8% interest,
(iii) Rs. 5 lakhs through ordinary shares and Rs. 15 lakhs through long-term
borrowing at 9% interest,
(iv) Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through preference
shares with 5% dividend.
The company’s expected EBIT will be Rs. 8 lakhs. Assuming a corporate
tax rate of 46%. Determine the EPS in each alternative and comment
which alternative is best and why? Which alternative results in the highest
financial risk? Why?
19. The following is the capital structure of Simons Company Ltd. as on 31/12/2012.
Equity shares: 10,000 shares of Rs. 100 each 10, 00,000
10% Preference Shares (of Rs. 100 each) 4, 00,000
12% Debentures 6, 00,000
20, 00,000
The market price of the company’s equity share is Rs. 110 and it is expected that
a dividend of Rs. 10 per share would be declared for the year 2012. The dividend
growth rate is 6%.
(i) If the company is in the 35% tax bracket, compute the weighted average
cost of capital.
(ii) Assuming that in order to finance an expansion plan, the company
intends to borrow a fund of Rs. 10 lakh bearing 14% rate of interest, what
will be the company’s revised weighted average cost of capital? This
financing decision is expected to increase dividends from Rs. 10 to Rs. 12
per share. However, the market price of the equity share is expected to
decline from Rs. 110 to Rs. 105 per share.
20. Proforma Cash sheet of a Company provides the following particulars.
Materials 40%
Direct Labour 20%
Overheads 20%
The following information is also available :
(a) It is proposed to maintain in a level of activity of 2, 00,000 units.
(b) Selling price is Rs. 12 per unit.
(c) Raw materials are expected to remain in store for an average period of one
month.
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(d) Materials will be in process on an average half a month.
(e) Finished goods are required to be in stock on average period of one month.
(f) Credit allowed by debtors is two month.
(g) Credit allowed by suppliers is one month.
Estimate Working Capital required.
21 a) Lincoln Enterprise can make either of two investments at the beginning of
2012. Evaluate the investment proposal by using the Payback period
method.
(5 marks)
Proposal X Proposal Y
Cost of the Investments Rs. 25,000 Rs. 30,000
Life 5 years 6 years
Scrap Value — —
Net Income (after Depreciation and Tax)
Year Rs Rs
2012 600 3,800
2013 1,000 4,500
2014 2,500 5,000
2015 3,000 4,500
2016 3,500 5,500
2017 —– 6,000
Depreciation is provided under the straight line method
21. b) From the following data of company A and company B .Prepare
their Income statements. (10 marks)
Particulars Company A Company B
Variable cost 56,000 60% of sales
Fixed cost 20,000 —-
Interest expenses 12,000 9,000
Financial Leverage 5:1 —-
Operating Leverage —- 4:1
Income tax rate 30% 30%
Sales —- 1,05,000
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SECTION – D
IV) Compulsory question (15 Marks)
22.
Tejas Ltd. has under consideration the following two projects. The details are as
under.
Particulars Project X
(Rs)
Project Y (Rs)
Investment in Machinery 10,00,000 15,00,000
Working Capital 5,00,000 5,00,000
Life of the Machinery 4 years 6 years
Scrap Value of Machinery 10% 10%
Tax rate 50% 50%
Income before depreciation and tax
Year Rs Rs
1 8,00,000 15,00,000
2 8,00,000 9,00,000
3 8,00,000 15,00,000
4 8,00,000 8,00,000
5 — 6,00,000
6 — 3,00,000
Depreciation is provided under the straight line method
• Calculate the accounting rate of return for both project X and Y
• What would be the net present value of both the projects if the P V factor
is at @ 10 %.
• Which proposal would you recommend and why?

1
ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATION – OCTOBER 2013
B.COM. – III SEMESTER
FINANCIAL MANAGEMENT
Duration: 3 Hrs Max. Marks: 100
Section – A
I) Answer the following questions. Each question carries 2 marks. (10 x 2 = 20)
1. What is the significance of computing WACC?
2. The profit ability Index of a project is 1.26 however its Net profitability index
is 0.26. Can this project be accepted? Why?
3. Consider the following information for Omega Ltd.
Particulars Rs. in lakhs
EBIT 15,750
EBT 7000
Fixed operating costs 1575
Required:
Calculate percentage change in EPS if sales increase by 5%.
4. When is a firm said to maintain “aggressive working capital policy”?
5. How does an “ageing schedule” help the management.
6. What is the significance and need for determining “safety stock” by a
business firm.
7. What do you understand by capital structure? How does it differ from
financial structure?
8. Elaborate on the nature of financial planning that a firm-subject to high
degree of operating uncertainty should resort to.
9. Explain “Interest Tax Shield”
10. Explain flotation costs?
Section – B
II) Answer any FOUR questions. Each question carries 5 marks. (4 x 5 = 20)
11. A new project is under consideration in Zip Ltd., which requires a capital
investment of Rs.4.50 crore. Interest on term loan is 12% and Corporate Tax
rate is 50%. If the Debt Equity ratio insisted by the financing agencies is 2:1,
calculate the point of indifference for the project.
12. P Ltd. has the following balance sheet and income statement information:
Balance Sheet as on March 31st
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Liabilities Rs. Assets Rs.
Equity capital (Rs.10 per share) 8,00,000 Net fixed assets 10,00,000
10% Debt 6,00,000 Current asset 9,00,000
Retained earnings 3,50,000
Current Liabilities 1,50,000
19,00,000 19,00,000
Income statement for the year ending March 31
Sales
Less: Operating expenses(including Rs.60,000 depreciation)
3,40,000
(1,20,000)
EBIT 2,20,000
Less: Interest (60,000)
Earnings before tax 1,60,000
Less: Taxes (56,000)
Net Earnings (EAT) 1,04,000
a) Determine the degree of operating, financial and combined leverages at
the current sales level, if all operating expenses, other than depreciation,
are variable costs.
b) If total assets remain at the same level, but sales i) increase by 20 percent
and ii) decrease by 20 percent, what will be the earnings per share at the
new sales level?
13. What is capital rationing? When is it resorted to? Suggest ways of
implementing capital rationing.
14. What is stock dividend? When do firms declare such dividends? Draw up
the balance sheet (extract) of a company, before and after the issue of stock
dividend.
15. A hospital is considering to purchase a diagnostic machine costing Rs.80,000.
The projected life of the machine is 8 years and has an expected salvage value
of Rs.6,000 at the end of 8 years. The annual operating cost of the machine is
Rs.7,500. It is expected to generate revenues of Rs.40,000 per year for eight
years. Presently, the hospital is outsourcing the diagnostic work and is
earning commission income of Rs. 12,000 per annum; net of taxes.
Required:
Whether it would be profitable for the hospital to purchase the machine?
Give your recommendation under:
i) Net Present Value method ii) Profitability Index method.
PV factors at 10% are given below:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467
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16. a) A company’s shares are quoted at Rs.250. The dividend just paid was
Rs.50. Face value per share Rs.100. No growth in dividends is expected.
Compute Ke.
b)Presume in the above question the anticipated growth rate in dividends
is 10% p.a. Compute Ke.
c) Presume in part (a), investors in the company have a required rate of
return of 15%. Current dividends of Rs.30 per share have just been paid.
No increase is anticipated. Estimate the share price today.
d) Presume in part (c), dividend are expected to grow @5% p.a. Calculate
share price today.
Section – C
III) Answer any THREE questions. Each question carries 15 marks. (3 x 15 = 45)
17. Consider the following mutually exclusive projects:
Projects Cash Flows(Rs)
C0 C1 C2 C3 C4
A -10,000 6,000 2,000 2,000 12,000
B -10,000 2,500 2,500 5,000 7,500
C -3,500 1,500 2,500 500 5,000
D -3,000 0 0 3,000 6,000
Required:
i) Calculate the payback period for each project.
ii) If the standard payback period is 2 years, which project will you
select?
iii) If the cost of capital is 10%, compute the discounted payback
period for each project. Which projects will you recommend, if
standard discounted payback period is i) 2 years; ii) 3 years?
iv) Compute NPV of each project. Which project will you recommend
on the NPV criterion? The cost of capital is 10%. What will be
appropriate choice criteria in this case? The PV factor at 10% are:
Year 1 2 3 4
PV factor at 10% 0.9091 0.8262 0.7513 0.6830
18. Cost sheet of the company provides the following data:
Cost per unit in Rs.
Raw material
Direct Labour
Overheads (including depreciation of Rs.10)
50.00
20.00
40.00
Total Cost 110.00
Profit 20.00
Selling Price 130.00
Additional information:
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Average raw material in stock is for one month. Average material in
progress is for half month. Credit allowed by suppliers: one month; credit
allowed to debtors; one month.
Average time lag in payment of wages; 10 days; average time lag in payment
of overheads 30 days. 25% of the sales are on cash basis. Cash balance
expected to be Rs.1,00,000. Finished goods lie in the warehouse for one
month.
You are required to prepare a statement showing the cash cost of working
capital needed to finance a level of the activity of 50,000 units of output.
Production is carried on evenly throughout the year and wages and
overheads accrue similarly. State your assumptions, if any, clearly.
19. A) A company had the following Balance Sheet as on March 31, 2006:
Liabilities & Equity Rs.(in Crores) Assets Rs.(in Crores)
Equity Share Capital
(one crore shares of
Rs.10 each)
10
Fixed Assets (Net)
Current Assets
25
15
Reserves & Surplus 2
15% Debentures 20
Current Liabilities 8
40 40
The additional information given is as under:
Fixed Costs per annum (excluding interest) Rs. 8 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income – tax rate 40%
Required:
Calculate the following and comment:
i) Earnings per share ii) Operating Leverage
iii) Financial Leverage iv) Combined Leverage
B) You are a Finance Manager in Big Pen Ltd. The degree of operating
leverage of your company is 5.0. The degree of financial leverage of your
company is 3.0. Your Managing Director has found that the degree of
operating leverage and the degree of financial leverage of your competitor
Small Pen Ltd. are 6.0 and 4.0 respectively. In his opinion, the Small Pen Ltd.
is better than that of Big Pen Ltd. because of higher value of degree of
leverages. Do your agree with the opinion of you Managing Director? Give
reasons.
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20. A) A Limited Company has under consideration the following two projects.
Their details are follows:
Project X (Rs.) Project Y (Rs.)
Investment in machinery 10,00,000 15,00,000
Working capital 5,00,000 5,00,000
Life of machinery (Years) 4 6
Scrap value of machinery (%) 10 10
Tax rate (%) 50 50
Income before depreciation and tax at the end of
Year 1 2 3 4 5 6
X(Rs) 8,00,000 8,00,000 8,00,000 8,00,000 – –
Y (Rs) 15,00,000 9,00,000 15,00,000 8,00,000 6,00,000 3,00,000
You are required to calculate the average rate of return and suggest
which project is to be preferred.
B) A company has to select one of the following two projects:
Year 0 1 2 3 4
Project X(Rs) 11,000 6,000 2,000 1,000 5,000
Project Y (Rs) 10,000 1,000 1,000 2,000 10,000
Calculate IRR. Suggest the best alternative on the above basis.
21. A) Draw a detailed account of the factors affecting the dividend policy of a
firm.
B) What are the factors to be considered in devising a sound management
policy for Accounts receivable?
Section – D
IV) Answer the following question. (1 x 15 = 15)
22. The R & G Company has following capital structure at 31st March 2004,
which is considered to be optimum:
Rs.
13% debenture 3,60,000
11% preference share capital 1,20,000
Equity share capital (2,00,000 shares) 19,20,000
The company’s share has a current market price of Rs.27.75 per share. The expected
dividend per share in next year is 50 percent of the 2004 EPS. The EPS of last 10
years is as follows. The past trends are expected to continue:
Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
EPS
Rs. 1.00 1.120 1.254 1.405 1.574 1.762 1.974 2.211 2.476 2.773
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The company can issue 14 percent new debenture. The company’s debenture is
currently selling at Rs.98. The new preference issue can be sold at a net price of
Rs.9.80, paying a dividend of Rs.1.20 per share. The company’s marginal tax rate is
50%.
i) Calculate the after tax cost (a) of new debts and new preference share
capital, (b) of ordinary equity, assuming new equity comes form retained
earnings.
ii) Calculate the marginal cost of capital
iii) How much can be spent for capital investment before new ordinary share
must be sold? Assuming that retained earnings available for next year’s
investment are 50% of 2004 earnings.
iv) What will be marginal cost of capital (cost of fund raised in excess of the
amount calculated in part (iii) if the company can sell new ordinary shares to
net Rs.20 per share? The cost of debt and of preference capital is constant.

1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – SEPT /OCT 2014

B.COM (Travel & Tourism) – III SEMESTER

 FINANCIAL MANAGEMENT

Duration: 3 Hours                                                                                       Max. Marks: 100

SECTION – A

1. Answer ALL the questions. Each carries 2 marks.                                (10 x2 =20)

 

1. Define Financial Management.
2. What is capital gearing? Differentiate between high and low capital gearing.
3. What is the significance of ascertaining the Cost of Capital of a firm?
4. Explain Optimum Capital Structure.
5. “The Time Adjusted Techniques (Modern Methods) of evaluating investment proposals are far superior compared to the Traditional Methods”.
6. Explain the concept of Circulating Capital with a diagram.
7. Write a short note on ABC analysis.
8. Bright Star Ltd. having its equity shares of Rs. 10 each quoted in a stock exchange has market price of Rs. 56. A constant expected annual growth rate of 6% and a dividend of Rs. 3.60 per share has been paid.  Calculate the cost of capital.
9. Can a proposal be accepted when its NPV is 0, why?
10. Mention two strategies that can be adopted by the Finance Manager for declaration of dividends at times of weak cash position.

 

SECTION – B

1. Answer any FOUR Each carries 5 marks.                           (4×5=20)

 

11. ‘Financial management is nothing but managerial decision making on asset mix, capital mix and profit allocation’.
12. What are the factors affecting the working capital of a firm?
13. Consider the figures available for ABC Ltd.:

Net Sales = Rs. 2,400 lakhs; EBIT as % of Sales = 10%; Corporate tax rate =40%

Capital Employed: Equity Share Capital (Rs. 10 each) Rs. 400 lakhs; 10% Preference Shares of Rs. 100 each Rs. 250 lakhs; 12% Secured Debentures Rs. 180 lakhs.  Compute the EPS of the company.

14. Explain the various types of Dividend Policies.
15. A firm can invest Rs. 10,000 in a project with a life of three years. The projected cash inflows are: Yr. 1 – Rs. 4,000; Yr. 2 – Rs. 5,000 and Yr. 3 – Rs. 4,000.  The cost of capital is 10% p.a.  Should the investment be made?  Base the decision using the Net Present Value of the project.
16. Good Health Ltd. has a gearing ratio of 30%. The cost of equity is computed at 21% and the cost of debt 14%.  The corporate tax rate is 40%.  Calculate WACC of the company.

 

SECTION – C

III)      Answer any THREE questions.    Each carries 15 marks.                    (3×15=45)

 

17. ITC Ltd. has decided to purchase a machine to meet the growing demand of its products. There are two machines under consideration by the management.  Relevant details including estimated yearly expenditure and sales are given below.  All sales are on cash.  Corporate income tax rate is 40%.  The company is planning to fund the machine through 10% debt.

Particulars	Machine 1	Machine 2
Initial investment required Estimated annual sales Cost of production (estimated): Direct materials Direct Labour Factory overheads Administration costs Selling and distribution costs	3,00,000 5,00,000   40,000 50,000 60,000 20,000 10,000	3,00,000 4,00,000   50,000 30,000 50,000 10,000 10,000

The economic life of Machine 1 is 2 years, while it is 3 years for the second.  The scrap values are Rs. 40,000 and Rs. 25,000 respectively.  Find the most profitable investment based on Payback Method.

 

18. From the following details you are required to make an assessment of the average amount of working capital requirement of Ruby Ltd.:

Particulars	Average period of credit	Estimated for the  1st year (Rs.)
Purchase of material Wages Overheads: Rent, rates, etc. Salaries Other overheads Cash sales Credit sales Average amount of stocks and work-in-progress Average amount of undrawn profit	6 weeks 11/2 weeks   6 months 1 month 2 months   2 months	26,00,000 19,50,000   1,00,000 8,00,000 7,50,000 2,00,000 60,00,000 4,00,000   3,00,000

It is to be assumed that all expenses and income were made at even rate for the year.

 

19. Write short notes on the following: (3 marks each)
20. Concept of Wealth Maximisation
21. Financial Risk and Business Risk

• Tools of inventory management.

1. Significance of Capital Budgeting
2. Motives of holding cash.

 

20. The capital structure of Bright Ways Ltd. as on 31-3-2009 is as follows:

(Rs. crores)

Equity capital (100 lakhs equity shares of Rs. 10 each)                           10

Reserves                                                                                                             2

14% Debentures of Rs. 100 each                                                                    3

For the year ended 31-3-2009 the company has paid equity dividend at 20%.  As the company is a market leader with good future, dividend is likely to grow by 5% every year.  The equity shares are now traded at Rs. 80 per share.  corporate tax rate applicable to the company is 50%.

You are required to find:

1. The current weighted average cost of capital.
2. The company has plans to raise a further Rs. 5 crores by way of long term loan at 16% interest. When this takes place the market value of the equity shares is expected to fall to Rs. 50 per share leaving the dividend and growth rate unchanged.  What will be the new weighted average cost of capital of the company?

 

21. Briefly explain TEN factors:
22. Affecting the Dividend Decisions of a Company and
23. Capital Structure of a Company.

 

SECTION – D

 

1. IV) Case study- Compulsory question. (15 marks)

 

22. You are a leading Financial Analyst in the city of Bangalore. Kuppuswamy, a high net worth individual and your client seeks your expert opinion on his next investment.  From the Financial Statements of two leading companies in Bangalore you have arrived at the following:

 

 

 

 

Particulars	Lee Ltd.	Levi Ltd.
Operating Leverage Financial Leverage Interest charges p.a. Corporate tax rate Variable cost as % of Sales	3 : 1 2 : 1 Rs. 12 lakhs 40% 60%	4 : 1 3 : 1 Rs. 10 lakhs 40% 50%

 

You are required to:

 

1. Analyse the companies risks by finding out the one with high Financial Risk and Business Risk.                                   (3 marks)

 

1. By preparing the Income Statement of both the companies suggest the best option for Mr. Kuppuswamy’s investment. (12 marks)

 

 

 

1. JOSEPHS COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – OCTOBER 2014

BCOM – III SEMESTER

 FINANCIAL MANAGEMENT

Duration: 3 Hours                                                                                         Max. Marks: 100

SECTION – A

1. Answer ALL the questions. Each carries 2 marks.                                       (10 x2 =20)

 

1. “Financial Management is something more than an art of Accounting and Book Keeping”.
2. How does the concept of Trading on Equity help the owners of the company?
3. ‘Cost of Capital is used by a company as a minimum benchmark for its yield’.
4. State with reasons the appropriate capital structure for start-up companies.
5. The Gross Profitability Index of a proposal is 0.5. Can the proposal be accepted, why?
6. Explain Permanent and Temporary Working Capital.
7. A firm’s BEP is 200 units. The selling price is Rs. 20 p.u. and variable cost is Rs. 5 p.u.  Find its Operating Leverage at 400 units.
8. Explain the relationship between earnings of a growth company and its dividend payout according to Walter’s Theory.
9. Write two points of difference between Bonus Issue and Stock-Split.
10. As the Finance Manager of a company state two concrete points to be considered while declaring dividends of the company.

 

SECTION – B

 

1. Answer any FOUR Each carries 5 marks.                                (4×5=20)

 

11. Write short notes on the interrelationship between asset mix, capital mix and profit allocation decisions.
12. Explain some of the factors to be considered while formulating the financial plan of a company.
13. The financial data furnished for A Ltd. for the year ended 31^st March, 2009 as follows:

Operating Leverage = 3:1; Financial Leverage = 2:1; Interest charges = Rs. 12 lakhs; Corporate tax rate is 40%.  The variable cost as % of sales is 60%.  Calculate the Sales of the company.

14. Business Machines Ltd. has raised funds through issue of 10,000 debentures of Rs. 150 each at a discount of Rs. 10 per debenture with 10 yrs. maturity. The coupon rate is 16%.  The flotation cost is Rs. 5 per debenture.  The debentures are redeemable with a 10% premium.  The corporate taxation rate is 40%.  Calculate the cost of debentures.
15. Discuss the advantages and disadvantages of Bonus Issue for a company.
16. Consider the following investment opportunity:

A machine is available for purchase at a cost of Rs. 80,000.  Its expected life is 5 yrs. with a scrap value of Rs. 10,000.  Estimated profits over its life:

Year	1	2	3	4	5
Amount (Rs.)	20,000	40,000	30,000	15,000	5,000

These are estimated profits before depreciation.  Assume a tax of 30%.  Calculate ARR.

 

SECTION – C

 

III)      Answer any THREE questions.    Each carries 15 marks.                    (3×15=45)

 

17. Orient Enterprises Ltd. has under consideration two projects A and B. Details regarding the two projects are given below:

(Rs. in lakhs)

Particulars	Project A	Project B
Investment required Estimated cash flow – 1 yr. Estimated cash flow – 2 yr. Estimated cash flow – 3 yr.	95 40 40 45	200 80 80 120

The cost of capital of the company is 12%.  Using net present value method,    which project would you recommend?  Also calculate the internal rate of return of the two projects.

18. The Board of Directors of Ruby Ltd. requests you to prepare a statement showing the working capital requirements forecast for a level of activity of 1,56,000 units of production. The following information is available for your calculation:                              (Rs. per unit)

Raw Materials                                           90

Direct Labour                                            40

Overheads                                                  75

205

Profit                                                           60

Selling Price per unit                               265

1. Raw materials are in stock on average one month.
2. Materials are in process, on average 2 weeks.
3. Finished goods are in stock, on average one month.
4. Credit allowed by suppliers – one month.
5. Time lag in payment from customers – 2 months.
6. Lag in payment of wages – 1^1/₂
7. Lag in payment of overheads – one month.

20% of output is sold against cash.  Cash in hand and at bank is expected to be Rs. 60,000.  It is to be assumed that production is carried on evenly throughout the year.  A time period of 4 weeks is equivalent to a month.

 

19. Write short notes on the following: (3 marks each)
20. Profit Maximisation vs. Wealth Maximisation
21. Financial Leverage vs. Operating Leverage

• Price of the Share vs. Dividend Payout

1. Liquidity vs. Profitability
2. Payback Period vs. NPV

 

20. A company is considering the following to raise additional capital for its expansion schemes:                                                                          (5 marks)

Equity (% of total capital)	Debt (% of total capital)	Cost of Equity %	Cost of Debt %
75 50 25	25 50 75	16 18 24	12 14 18

Tax rate is 50%.  Which option would you recommend?  Show workings.

 

1. One-Up Ltd. has equity share capital of Rs. 5,00,000 divided into shares of Rs. 100 each. It wishes to raise further Rs. 3,00,000 for expansion-cum-modernisation scheme.  The company plans the following financing alternatives:
2. By raising term loan only at 10% p.a.
3. 1,00,000 by issuing equity shares and Rs. 2,00,000 by issuing 8% preference shares.

You are required to suggest the best alternative giving your comment assuming that the estimated earnings before interest and taxes after expansion is Rs. 1,50,000 and the corporate rate of tax is 35%.                               (10 marks)

21. Briefly explain :                          (5 marks each)
22. Tools of Inventory Management (any five)
23. Factors determining the Optimal Capital Structure (any five)

• Types of Dividend Policy of a Company (any five)

 

 

 

 

SECTION – D

 

1. IV) Case study- Compulsory questions. (15 marks)

 

22. As a newly recruited CFO of Best Buy Auto Ltd. you are required to make a decision with regard to payment of dividend of the company for the current year. You are an advocate of the theory of irrelevance as far as declaration of dividends is concerned.  On the other hand, the CEO believes in the theory of relevance.  Convince him by answering the following:
23. The justification of the theory of irrelevance and
24. Prove that the value of the company remains the same before and after paying dividends, from the following information:

Best Buy Auto Ltd. has outstanding 1,20,000 shares selling at Rs. 20 per share.  The company hopes to make a net income of Rs. 3,50,000 during the year ended 31^st March, 2009.  The company is capable of paying a dividend of Rs. 2 per share at the end of current year.  The capitalisation rate for risk class of this company has been estimated to be 15% and the company needs Rs. 7,40,000 for an approved investment expenditure during the year.

 

ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATION – SEPT/OCT. 2015
B.COM. – III SEMESTER
C2 12 303: FINANCIAL MANAGEMENT
Duration: 3 Hours                                                                                             Max. Marks: 100
SECTION – A
I)	Answer ALL the questions.  Each carries 2 marks.                                        (10×2=20)
	1.	“In the business the cash flows of different periods in absolute terms are incomparable.”  Discuss.
	2.	Bring out the effects of a highly geared company?
	3.	What is the importance of adequate working capital?
	4.	State whether the following are true or false: i.                    Capitalisation, capital structure and financial structure do not mean the same. ii.                 Cost of capital is not a cost as such. iii.               A firm will not have a favourable leverage if its earnings are more than the debt cost. iv.               Rate of return method takes into account the time value of money.
	5.	What is capital rationing?
	6.	A firm should always keep a large balance of cash so as to meet the contingencies.  Comment.
	7.	Fill in the blanks: i.                    There are two types of corporate securities (a) ownership securities and     (b) ————————— securities. ii.                 Preference shares are entitled to a fixed —————————— irrespective of the level of earnings. iii.               Fixed cost securities should be mixed with equity when the rate of earnings is ———————– than ———————-.
	8.	Write a note on scrip dividend and bonus issue?
	9.	Mention four essentials of a sound financial plan.
	10.	Explain briefly two tools of receivables management.
SECTION – B
II)	Answer any FOUR questions.  Each carries 5 marks.                                      (4×5=20)
	11.	Why is maximizing wealth a better goal than maximizing profits?
	12.	The following information is available for ABC & Co. EBIT Rs 11,20,000 Profit Before Tax Rs 3,20,000 Fixed Costs Rs 7,00,000   Calculate % change in EPS if the Sales are expected to increase by 5%.
	13.	The shares of a company are being currently sold at Rs 20 per share. It has just paid a dividend Rs 2 for the last year. The profits of the company are expected to show a growth of 10% p.a. and the company maintains a 100% payout ratio. Determine the cost of equity capital of the company. What is the expected current price of the share if the growth rate is (i) 8% or (ii) 12%?
	14.	A company has to consider the following Project: Cost                                                                Rs 10,000 Cash Inflows: Year 1                                                             Rs 1,000 Year 2                                                             Rs 1,000 Year 3                                                             Rs 2,000 Year 4                                                             Rs 10,000 Compute the internal rate of return and comment on the project if the opportunity cost is 14%.
	15.	Discuss the various types of dividend policies of companies.
	16.	The earnings per share of a company are Rs 10. It has rate of return of 15% and the capitalization rate of risk class is 12.5%. If Walter’s model is used: (i) What should be the optimum payout ratio of the firm? (ii) What would be the price of the share at this payout? (iii) How shall the price of the share be affected if a different payout was employed?
SECTION – C
III)	Answer any THREE questions.  Each carries 15 marks.                                (3×15=45)
	17.	ABC Co. has the following balance sheet and income statement:                                                      Balance Sheet Liabilities Amount (Rs) Assets Amount(Rs) Equity Capital (Rs.10 per share) 8,00,000 Fixed Assets 10,00,000 Retained Earnings 3,50,000 Current Assets 9,00,000 10% Debt 6,00,000     Current Liabilities 1,50,000       19,00,000   19,00,000   Income Statement Sales Rs 3,40,000 – Operating Expenses (including Dep.) Rs 1,20,000 EBIT Rs 2,20,000 – Interest Rs 60,000 Profit Before Tax Rs 1,60,000 – Tax @ 50% Rs 80,000 Profit After Tax Rs 80,000 (i)               Determine the OL, FL and CL at the current sales level given that all operating expenses (excluding depreciation of Rs 52,000) are variable, and (ii)            If total assets remain at the same level but (a) sales increases by 20% and (b) sales decreases by 10%, draw up the Income Statements and calculate the % change in EPS.
	18.	XYZ Limited has the following capital structure:   Book Value Market Value Equity Capital (25,000 shares of Rs 10 each) Rs 2,50,000 Rs 4,50,000 13% Preferences Capital (500 shares of Rs 100 each) Rs 50,000 Rs 45,000 Reserves and Surplus Rs 1,50,000 —– 12% Debentures (1500 debentures of Rs 100 each) Rs 1,50,000 Rs 1,45,000   Rs 6,00,000 Rs 6,40,000 The expected dividend per share is Rs 1.40 and the dividend per share is expected to grow at a rate of 8 percent forever. Preference shares are redeemable after 5 years at par whereas debentures are redeemable after 6 years at par. The tax rate for the company is 40 percent. You are required to compute the weighted average cost of capital for the existing capital structure using book value and market value weights.  Use the market price per share to compute specific costs.
	19.	Pioneer Steels Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of Rs 10,000 each and have a life of five years. The company’s required rate of return is 10% and pays tax at a 50% rate. The projects will be depreciated on a straight line basis. The profits before depreciation and tax expected to be generated by the projects are as follows: Year 1 2 3 4 5 Project 1 Rs 4,000 Rs 4,000 Rs 4,000 Rs 4,000 Rs 4,000 Project 2 Rs 6,000 RS 3,000 Rs 2,000 Rs 5,000 Rs 5,000     You are required to calculate: (i)                 Payback Period of each project (ii)              Profitability Index at 10% for each project (iii)            Which project should be accepted and why?
	20.	The management of Royal Industries has called for a statement showing the working capital to finance a level of activity of 1,80,000 units of output for the year. The cost structure for the company’s product for the above mentioned activity level is detailed below:   Cost per Unit (Rs.) Raw Material 20 Direct labour 5 Overheads (including depreciation of Rs 5 per unit 15   40 Profit 10 Selling Price 50 Additional Information: (a)   Minimum Desired cash balance is Rs 20,000 (b)   Raw materials are held in stock, on an average, for two months (c)    Work-in-progress (assume 50% completion stage for all elements) will approximate to half-a-month’s production. (d)  Finished goods remain in warehouse, on an average, for a month. (e)   Suppliers of materials extend a month’s credit and debtors are provided two month’s credit; cash sales are 25% of total sales. (f)     There is a time-lag in payment of wages of a month; and half-a-month in the case of overheads. From the above facts, you are required to prepare a statement showing working capital requirements.
	21.	Write short notes on the following: i.                    Point of Indifference ii.                 Pay-Back Period vs. NPV iii.               ABC analysis iv.               Six factors affecting the working capital of a company v.                  Cost of Retained Earnings
SECTION – D
IV)	Case Study                                                                                                              (1×15=15)
	22.	Textrol Ltd. has 10,00,000 equity shares outstanding at the start of the year. The ruling market price per share is Rs 150. The Board of Directors of the company contemplates declaring Rs 8 share as dividend at the end of the current year. The rate of capitalization appropriate to the risk class to which the company belongs is 12%. (a)   Based on Modigliani-Miller Approach, calculate the market price per share of the company when the contemplated dividend is (i) declared and (ii) not declared. (b)   How many new shares are to be issued by the company at the end of the accounting year on the assumption that the net income for the year is Rs 2 Crore? Investment budget is Rs 4 Crore and (i) the above dividends are distributed and (ii) they are not distributed? (c)    Show that the total market value of the shares at the end of the accounting year will remain the same whether the dividends either distributed or not distributed. (d)  Also explain the arguments put forth by Modigliani and Miller in support of their theory.

 

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