LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
M.Com. DEGREE EXAMINATION – COMMERCE
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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)
- What are financial decisions taken by the modern financial manager?
- 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.
- Distinguish capital structure from financial structure.
- What do you mean by leverage in financial management?
- Define Explicit and Implicit cost of capital.
- 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?
- Define the term ‘Capital Budgeting’.
- What do you mean by working capital management?
- 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.
- Distinguish Bonus shares from right shares.
SECTION-B
Answer any FIVE of the following. Each question carries EIGHT marks. (5×8=40)
- Explain the benefits and Risks of holding inventories.
- Briefly explain the factors affecting Dividend policy.
- 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%.
- 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:
- growth rate in dividends
- 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.
- 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.
- 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 |
- 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.
- Explain the advantages of leasing.
SECTION-C
Answer any TWO questions (2×20=40)
- 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 |
- 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%.
- 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.