LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

TH 56

M.Com. DEGREE EXAMINATION – COMMERCE

FOURTH SEMESTER – APRIL 2007

CO 4801 / 4800 / 1807 – FINANCIAL MANAGEMENT

 

Date & Time: 25/04/2007 / 9:00 – 12:00      Dept. No.                                       Max. : 100 Marks

 

 

SECTION – A

Answer ALL questions:                                                                        ( 10 x 2 = 20 )

 

1. Give any four advantages of financial forecasting?
2. Under what situations investment decisions are mainly guided by payback period method?

 

3. What do you mean by Combined Leverage?
4. How ABC analysis enables in controlling inventory?
5. What is permanent working capital?
6. What are the components of cost of capital?
7. What is meant by ‘capital rationing’?
8. A company has the following capital structure:

Equity share capital                             Rs. 1,00,000

10% Preference share capital                     1,00,000

8% Debentures                                                      1,25,000

The present EBIT is Rs.50,000.  Calculate the financial leverage assuming that company is in 50% tax bracket.

 

9. A project costs Rs.15,60,000 and yields annually a profit of Rs.2,70,400 after depreciation of 12% p.a but before tax at 25%. Calculate pay-back period.

 

10. MNR Ltd. has the following capital structure: (Rs.lakhs)

Equity capital                                                                     30

Debt (16%)                                                                        60

90

Corporate tax rate is 40%. The cost of equity is assumed to be 24%.  Calculate the weighed average cost of capital of the company.

SECTION – B

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

 

11. 11. How would you justify the adoption of present value maximization as an apt substitute for it?

 

12. Examine the inter-relationship among the investment, financing and dividend decisions.
13. What are the objectives of cash management?
14. What do you mean by optimal capital structure? Make out a list of factors determining optimum capital structure.

 

15. Write note on (a) M-M Theory and (b) Trading on equity

 

16. X Ltd. is expecting an annual EBIT of Rs.1 lakh. The company has Rs.4.00 lakhs in 10% debentures. The cost of equity capital is 12.5%. You are required to calculate the value of the firm.

 

 

17. A company is considering raising of funds of about Rs.100 lakhs by one of two alternative

methods – 14% institutional term loan and 13% non-convertible debentures.  The term loan option would attract no major incidental cost.  The debentures would have to be issued at a discount of 2.5% and would involve cost of issue of Rs.1 lakh.  Advice the company as to the better option based on the effective cost of capital in each case.  Assume a tax rate of 50%.

 

18. The earnings per share of a company are Rs.16. The market rate of discount applicable to the company is 12.5%. Retained earnings can be employed to yield a return of 10%. The company is considering a pay-out of 25%, 50% and 75%.  Which of these would maximize the wealth of shareholders?

 

SECTION – C

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

 

19. A firm can purchase for Rs.2,500 an asset having life of 5 years after which its salvage value is Rs.500. The firm provides depreciation on straight line method.  Purchasing and using the asset will increase the firm’s expected revenues by Rs.1,500 per year and will raise its expected operating expenses (not including depreciation and interest) by Rs.700 per year.  The corporate tax is 50% and the cost of capital of the firm is 10%.

 

The firm can also lease the asset for a yearly rental of Rs.650.  The incremental revenue will be same at Rs.1,500 per year and the increase in firm’s expected non-depreciation expense is Rs.600 per year only.  Evaluate the proposals.

 

20. Two projects M and N which are mutually exclusive are being under consideration. Both of them require an investment of Rs.1,00,000 each. The net cash inflows are estimated as under :

 

Year	M Rs.	N Rs.
1 2 3 4 5	10,000 40,000 30,000 60,000 90,000	30,000 50,000 80,000 40,000 60,000

 

The company’s targeted rate of return on investments is 12%. You are required to assess the projects on the basis of their present values, using (1) NPV method and (2) Profitability index method.

Present values of Re.1 at 12% interest for five years are given below:

1^st year : 0.893; 2^nd year : 0.797; 3^rd year : 0.712; 4^th year : 0.636; 5^th year : 0.567.

 

 

21. The cost sheet of PQR Ltd. provides the following data :

	Cost per unit
Raw material	Rs.50
Direct Labour	20
Overheads (including depreciation of Rs.10)	40
Total cost	110
Profits	20
Selling price	130

 

Average raw material in stock is for one month.  Average material in work-in-progress is for  ½ 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 of the working capital needed to finance a level of the activity of 54,000 units of output.  Production is carried on evenly throughout the year and wages and overheads accrue similarly.  State your assumptions, if any, clearly.

 

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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

M.Com. DEGREE EXAMINATION – COMMERCE

RO 35

FIRST SEMESTER – APRIL 2008

CO 1807 – FINANCIAL MANAGEMENT

 

 

 

Date : 28-04-08                  Dept. No.                                        Max. : 100 Marks

Time : 1:00 – 4:00

SECTION-A

Answer all questions: Each question carries TWO marks.                                               (10×2=20) 

 

1. What are financial decisions taken by the modern financial manager?
2. Mr. X intends to have return of Rs.10,000 per annum for perpetuity.  In case the discount rate is 20%.  Calculate the present value of this perpetuity.
3. Distinguish capital structure from financial structure.
4. What do you mean by leverage in financial management?
5. Define Explicit and Implicit cost of capital.
6. The current market price of an equity share of a company is Rs.90.  The current dividend per share is Rs.4.50.  In case the dividends are expected to grow at the rate of 7%. Calculate the cost of equity capital?
7. Define the term ‘Capital Budgeting’.
8. What do you mean by working capital management?
9. Calculate the optimum production quantity per production run from the following information:

Estimated annual production              90,000 units.

Setup cost per production run             Rs. 50

Carrying cost per unit per annum        Rs.1.

1. Distinguish Bonus shares from right shares.

 

SECTION-B

 

Answer any FIVE of the following.  Each question carries EIGHT marks.                   (5×8=40)

 

1. Explain the benefits and Risks of holding inventories.
2. Briefly explain the factors affecting Dividend policy.
3. A company has sales of Rs.1 lakh.  The variable costs are 40% of the sales while fixed operating costs amount to Rs.30,000. The amount of inter on long-term debt is Rs.10,000.

You are required to calculate the composite leverage and illustrate its impact if sales increased by 5%.

1. A Ltd intends to issue new equity shares.  It’s present equity shares are being sold in the market at Rs.125 a share.  The company’s past record regarding payment of dividend 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:

1. growth rate in dividends
2. cost of funds raised by issue of equity shares assuming that the growth rate as calculated under (a) above will continue for ever.
3. cost of new equity shares.

1. Good company 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 lakhs to finance a major programme of expansion through one of four possible financing plans.  The option are:

• Entirely through ordinary shares
• 10 lakhs through ordinary shares and Rs.10 lakhs through long-term borrowings at 8% interest per annum.
• 5 lakhs through ordinary shares and Rs.15 lakhs through long-term borrowings at 9% interest per annum.
• 10 lakhs through ordinary shares and Rs.10 lakhs through preference shares with 5% dividend.

The company’s expected earnings before interest and Tax will be Rs.8 lakhs.  Assuming corporate Tax of 50% determine the Earnings per share in each alternative.

 

 

 

 

1. From the following information determine the optimal combination of projects assuming that the projects are divisible.  The total funds available Rs.3,00,000.

Project	Required Initial Investment	NPV at the appropriate cost of capital
A——	1,00,000	20,000
B——	3,00,000	35,000
C——	50,000	16,000
D——-	2,00,000	25,000
E——-	1,00,000	30,000

 

1. A firm is considering pushing up its sales by extending credit facilities to the following categories of customers:

• Customers with a 10% risk of non-payment, and
• Customers with a 30% risk of non-payment.

The incremental sales expected in case of category (a) are Rs.40,000 while incase of category   (b) they are Rs.50,000.

The cost of production and selling costs are 60% of sales while the collection costs amount to 5% of sales in case of category (a) and 10% of sales in case of category (b).

You are required to advise the firm about extending credit facilities to each of the above categories of customers.

 

1. Explain the advantages of leasing.

SECTION-C

 Answer any TWO questions                                                                                               (2×20=40)                                                                                                                                                             

 

1. From the following information extracted from the books of a manufacturing company, compute the operating cycle in days and the amount of working capital required:

Period covered……….                          365 days.

Average period of credit by suppliers……                   16 days

Rs.

Average total of debtors outstanding	4,80,000
Raw materials consumption	44,00,000
Total production cost	1,00,00,000
Total cost of sales	1,05,00,000
Sales for the year	1,60,00,000

 

Value of Average stock maintained:

Raw material	3,20,000
Work in Progress	3,50,000
Finished goods	2,60,000

 

1.  You are required to determine the weighted average cost of capital (Ko) of the K.C. Ltd using (i) book value weights; and (ii) Market value weights. The following information is available for your perusal:

Book value capital structure                                                                                Rs

Debentures (Rs. 100 per debenture)	8,00,000
Preference Shares (Rs. 100 per share)	2,00,000
Equity shares (Rs. 100 per share)	10,00,000
	20,00,000

All these securities are traded in the capital markets. Recent prices are debentures @ Rs. 110, Preference Shares @ Rs. 120 and Equity Shares @ Rs.22. Anticipated external financing opportunities are:

• 100 per debenture redeemable at par: 20 year maturity, 8% Coupon rate, 4% floatation costs, sale price Rs. 100.
• 100 preference share redeemable at Par: 15 year maturity, 10% dividend rate, 5% floatation costs, sale price Rs. 100.
• Equity shares Rs.2 per share floatation costs, sale price Rs.22.

In addition, the dividend expected on the equity share at the end of the year Rs.2 share, the anticipated growth rate in dividends is 5% and the company has the practice of paying all its earning in the form of dividends. The corporate tax rate is 50%.

1. Write notes on the following:

• Importance of financial management.
• Factors determining working capital
• Modigilani-Miller approach of capital structure.
• Significance of operating and Financial leverages.

 

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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

QB 16

M.Com. DEGREE EXAMINATION – COMMERCE

FIRST SEMESTER – November 2008

    CO 1807 – FINANCIAL MANAGEMENT

 

 

 

Date : 04-11-08                 Dept. No.                                        Max. : 100 Marks

Time : 1:00 – 4:00

PART-A

Answer ALL questions.                                                                                 (10 x 2 = 20)

 

1. Explain the term operating leverage?
2. Classify the patterns of capital structure?
3. What are the importance of K.
4. Discuss the purpose of issue of right shares.
5. What are the advantages to the company at the time of issue of Bonus Shares?
6. How do you view the operating cycle in Working Capital Management.
7. Illustrate the motive for holding cash.
8. What are the credit polices available in working capital management.
9. How do you process the Capital Budgeting?
10. Write short note on Finance Lease.

 

PART – B

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

 

11. Explain the factors affecting Capital Structure.
12. State the SEBI Guidelines for Right Issue.
13. Discuss the Factors Affecting Dividend Policy.
14. The relevant financial information for Xavier Limited for the year ended

2007 is given below.

Profit and Loss Account                                        Balance Sheet Data (Rs. million)                                       Beginning of 2007     End of 2007 Sales                          80                      Inventory                         9                    12 Cost of goods sold    56                      Accounts receivable        12                   16 Accounts payable             7                    10 What is the length of the operating cycle? The cash cycle? Assume 365 days to a year. 15. M Ltd. is considering relaxing its collection efforts. Existing sales are Rs.50,00,000, Average collection period is 25 days, P/V Ratio 25%, Cost of Capital 15% and Bad debts 4%. The relaxation of the collection effort will increase sales by Rs.6,00,000, increase average collection period to 40 days and increase bad debts to 6%. The company can save collection expenses of Rs.10,000. Advice the company. 16. A Ltd. issued Rs.100, 15% debt at par repayable in 3 annual installments of Rs.30, Rs.30 and Rs.40 at the end of the 7th, 8thand 9th years respectively. The issued cost is 3% and the tax rate 60% Calculate kd.   17. A Ltd. has a share capital of Rs.1,00,000 divided into shares of Rs.10 each. It has major expansion programme requiring an investment of another Rs.50,000. The management is considering the following alternatives for raising this amount: (i) Issue of 5,000 equity shares of Rs.10 each. (ii) Issue of 5,000, 12% preference shares of Rs.10 each. (iii) Issue of 10% debentures of Rs.50,000. The company’s present earnings before interest and tax (EBIT) are Rs.40,000 p.a. You are required to calculate the effect of each of the above modes on financing of the earnings per share (EPS) presuming: (a) EBIT continues to be the same even after expansion. (b) EBIT increases by Rs.10,000. 18. Operating Leverage = 2; Combined Leverage = 3, at present sales level of 10,000 units; selling price = Rs.12; Variable cost = 50% of sales; Tax Rate = 50% The company has no preference share capital. If the rate of interest of the company’s debt is 16% Calculate the amount of debt to the capital structure. PART – C Answer any two questions                                                                         (2 x 2 = 40) 19. A project requires investment of Rs.1,00,000 and the working capital of Rs.20,000 at the end of the first year. The project has a life of 5 years and the scrap value of Rs.20,000.  The project yields the following profits before tax. Year                   Profit before Tax (PBT) Rs. 1                           20,000 2                           40,000 3                           60,000 4                           50,000 5                            30,000 Calculate (i) pay back period, (PBP), (ii) Average Rate of Return (ARR), (iii) Net present value (NPV) and (iv) Profitability Index PI (v) Discounted pay back period Assume cost of capital is 10% and tax @ 50% 20. A Ltd, is presently operating at 60% capacity and producing 36,000 units per annum. In the next year it plans to operate at 90% capacity. The present cost price structure per unit is – Raw Material Rs.4; Wages Rs.2; Variable overheads Rs.2; Fixed overheads Re.1 and selling price Rs.10 1. Raw material will remain in stores for 2 month. 2. WIP for 1 month. 3. Finished goods for 2 months. 4. Debtors are allowed 2 months credit and creditors are allowed 3 months credit. 5. Lag in payment of wages and overheads = 1 month each. Ascertain the profit at 90% capacity level and the working capital necessary to sustain this  production, assuming that the cash balance of 5% of the gross working capital is required. Calculate the Cash Cost of Working Capital . 21. You are required to determine the weighted average cost of capital (Ko) of the K.C. Ltd. using (i) book value weights; and (ii) market value weights. The following is available for your perusal: The K.C. Ltd.’s present book value capital structure is : Rs. Debentures (Rs.100 per debenture)                  8,00,000 Preference Shares (Rs.100 per share)               2,00,000 Equity Shares (Rs.10 per share)                      10,00,000 20,00,000 All these securities are traded in the capital markets. Recent prices are, debentures @ Rs.100, preference shares @ Rs.120 equity shares@ Rs.22. Anticipated external financing opportunities are – (i) Rs.100 per debentures redeemable at par: 20-year maturity, 8% coupon rate, 4% floatation costs, sale price Rs.100. (ii) Rs.100 preference share redeemable at par: 15-year maturity, 10% dividend rate,     5% floatation costs, sale price Rs.100. (iii) Equity shares: Rs.2 per share floatation costs, sale price Rs.22. In addition, the dividend expected on the equity share at the end of the year in Rs.2 per share; the anticipated growth rate in dividends is 5% and the company has the practice of paying all its earning in the form of dividends. The corporate tax rate is 50%.

 

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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

M.Com. DEGREE EXAMINATION – COMMERCE

FIRST SEMESTER – NOVEMBER 2010

    CO 1807  – FINANCIAL MANAGEMENT

 

 

 

Date : 30-10-10                 Dept. No.                                        Max. : 100 Marks

Time : 1:00 – 4:00

Section – A         

Answer all questions:-                                                                                                                     10 x 2 = 20

1. Define Financial Management.
2. Discuss the features of an appropriate capital structure.
3. What do you mean by indifferent point?
4. Explain the term “Operating Cycle”.
5. List out the factors affecting cost of capital?
6. what is IRR?
7. Annual requirement 10,000 units

Cost per unit Rs.6

Ordering cost Rs. 120 per order

Rent , insurance etc per unit per annum Rs.3

Rate of return on investment 20%.

Calculate EOQ.

8. What is concentration banking?
9. A company has 15% perpetual debt of Rs. 1,00,000. The tax rate is 35%. Determine the cost of Debt (Kd), assuming (a) debt is issued at par (b) issued at 10% discount
10. A company has sales of Rs. l lakhs. 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.

 

Section – B

Answer any FIVE questions:                                                                                                            5 x 8 = 40

11. Explain the following theories of capital structure.
12. a) Net Income Approach
13. b) Net Operating Income Approach
14. Discuss the goals of financial management.
15. Explain the factors affecting dividend policy.

 

14. Variable Expenses as a percentage of sales is 75%, Interest Rs.300: Operating

Leverage= 6, Financial Leverage = 4 Tax rate = 50%

Prepare Income statement

15. From the following data compute the operating cycle in days.

Rs.

Average Debtors                                 4,80,000

Raw materials consumed                  44,00,000

Total production cost                        1 crore

Total cost of sales                         1,05,00,000

Sales                                                1,60,00,000

Average stock of Raw materials          3,20,000

Average stock of WIP                         3,50,000

Average stock of Finished goods        2,60,000

Creditors payment period                     16 days

 

 

16. A Ltd has an equity capital consisting of 5,000 Equity shares of Rs 100 each. It plans

to raise Rs. 3,00,000 for the financial expansion programme and as to identify four

options for raising funds.

1. Issue  Equity shares of Rs 100 each.
2. Issue 1,000 Equity shares of Rs.100 each and 2,000  8% Preference shares of Rs 100 each
3. Borrow of Rs 3,00,000 at 10% interest p.a
4. Issue 1000 Equity shares of Rs.100 each and Rs. 2,00,000, 10% debentures

This company has EBIT of Rs 1,50,000 of its expansion. Tax rate is 50%. Suggest the

source in which funds should be raised.

 

17. X Ltd. has the following projects available for investment

 

Projects	Investments in Rs.	NPV in Rs.
A	1,00,000	20,000
B	3,00,000	35,000
C	50,000	16,000
D	2,00,000	25,000
E	1,00,000	30,000

 

The total funds available for investment is Rs. 3,00,000 which project will you choose

if a) Projects are divisible  b) Projects are indivisible

 

18.Calculate the value of an equity shares of company X Ltd. and Y Ltd. from the

following particulars by applying Walters formula when dividend payment ratio (D/P

ratio) is (a)60% and (b)70%

 

X Ltd.                Y Ltd.

r       =       10%                      25%

Ke     =       20%                      20%

E       =        Rs.10                    Rs. 10

 

Section – C

 

2 x 20 = 40

Answer any TWO questions:

 

19. AB ltd gives you the following figures

EBIT                        3,00,000

Less: 12 % Debenture Interest    60,000

2,40,000

Less:  Income tax @ 50%          1,20,000

EAT                           1,20,000

 

No. of Equity shares = 40,000

1,20,000

EPS = ————   =  Rs 3 per share

40000

 

Market price per share = Rs.30

Market Price Per share               30

Price Earning Ratio (PE) =      ————————       =    —— = 10

EPS                                 3

 

The company has undistributed reserves of Rs.6,00,000 It requires

Rs.2,00,000 for expansion. This amount will earn the same rate of return on funds

employed as it is earned now.

You are informed that the Debt-Equity ratio = (Debt/ Debt + Equity) higher than

35% will reduce the PE ratio to 8 and raise the interest rate on additional funds

borrowed to 14%. The company would prefer to raise the entire funds required

through equity or through debt. Which would you recommend?

 

 

 

 

20. R ltd has the following capital structure.

Equity capital ( Rs. 20 each)                                        40 Lakhs

6% preference share capital( Rs. 100 each)                  10 lakhs

8% debentures                                                              30 lakhs

Market price of equity is Rs. 20

The current dividend is Rs. 2 per share which is expected to grow at 7% per annum.

The tax rate is 50%.

Calculate.

1. Weighted average COC based on book value.
2. The new weighted average COC if the company an additional Rs. 20 lakhs as 10% debentures to finance for expansion. This would result in increasing expected dividend per share to Rs. 3 and increase growth rate of dividend to 10% But the market price of equity share will fall to Rs. 15.

 

21.   X Ltd. manufactures T.V. sets. From the credit period and likely sales of TV’s are

given below. Recommend the credit period to be adopted each of the customers A, B &C.

 

Credit period                                 No. of T.V. sets likely to be sold

A                       B                     C

30 days                                       1,000                 1,500                  –

60 days                                        1,000                 2,300               1,000

90 days                                        1,000                 2,500               1,500

Selling price of T.V. is Rs. 9,000, PV Ratio 20% and the cost of capital is 20%. Assume the

number days in a year as 360.

 

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