LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

M.Com. DEGREE EXAMINATION – COMMERCE

KP 36

FIRST SEMESTER – April 2009

CO 1807 – FINANCIAL MANAGEMENT

Date & Time: 17/04/2009 / 1:00 – 4:00 Dept. No. Max. : 100 Marks

PART-A

Answer ALL questions (10 x 2 = 20)

What is Financial Leverage?
Illustrate the point of indifference.
Discuss the features of an appropriate capital structure.
Explain the Traditional approach to cost of capital.
Classify the different form of Dividend.
What are the advantages issues of bonus shares to the investors.
How do you classify the working capital policy?
What are the significance of capital budgeting?
Write short note on Operating Lease.
Analyze the Implication of capital Rationing.

PART – B

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

Discuss the factors affecting Working Capital Management.
State the SEBI Guidelines for Bonus Issue.
Explain the cost benefit identification of a project.
The following annual figures relate to XYZ Co.

Rs.

Sales(at two months ‘ credit) 36,00,000

Materials consumed (suppliers extend two months credit) 9,00,000

Wages paid (monthly in arrear) 7,20,000

Manufacturing expenses outstanding at the end of the year 80,000

(Cash expenses are paid one month in arrear)

Total administrative expenses, paid as above 2,40,000

Sales promotion expenses, paid quarterly in advance 1,20,000

The company sells its products on gross profit of 25 percent counting depreciation as part of the cost of production. It keeps one month’s stock each of raw materials and finished goods, and a cash balance of Rs.1,00,000.

Assuming a 20 percent safety margin, calculate the working capital requirements of the

company on cash cost basis. Ignore work – in – process.

A Ltd. has been buying items in lots of 1,200 quantity units which is 6 months requirement.

Cost per unit is Rs.12, ordering cost Rs.8 per order and carrying cost is 25%.

Calculate the saving per year by buying in economic lot quantity.

Following are the details regarding three companies A Ltd., B Ltd., and C Ltd.:

A Ltd. B Ltd. C Ltd.

r = 15% r = 5% r = 10%

Ke = 10% Ke = 10% Ke = 10%

E = Rs.8 E = Rs.8 E = Rs.8

Calculate the value of an equity share of each of these companies applying Walter’s formula when dividend payment ratio (D/P ratio) is: (a) 50%, (b) 75%, (c) 25%. What conclusion do you draw?

A company has sales of Rs.1lakh. 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 and illustrate its a impact if

sales increase by 5%.

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 finance expansion programme and as identify four options for

raising funds.

Issued Equity shares of Rs.100 each.
Issue 1,000 Equity shares of Rs.100 each and 2,000, 8% preference shares of Rs.100 each.
Borrow of Rs.3,00,000 at 10% interest p.a.
Issued 1,000 Equity shares of Rs.100 each and Rs.2,00,000, 10% Debentures.

The company has EBIT of Rs.1,50,000 of its expansion. Tax Rate is 50%

Suggest the source in which funds should be raised.

PART – C

Answer any two questions. (2 x 10 = 20)

X Ltd. has an existing sales of 10,000 units at Rs.300 per unit, variable cost is Rs.200 per

unit and Fixed cost is Rs.3,00,000 per annum. Present credit policy is 1 month credit period.

The company plans to increase credit period for 2 months or 3 months and has made to

following estimates.

Existing Proposed

Credit period 1 month 2 months 3 months

Increase in sales – 15% 30%

% of bad debts 1% 3% 5%

There will be on increased in fixed cost by Rs.50,000 if sales increases beyond 25% of the present level. The cost of capital is 20%

Suggest the suitable credit period to be adopted.

From the following details relating to K Ltd.

Rs.

EBIT 23,00,000

Less: 8% Debenture Interest 80,000

22,20,000

Less: 11% Loan Interest 2,20,000

EBT 20,00,000

Less: Tax @ 50% 10,00,000

EAT 10,00,000

No. of Equity shares (Rs.10 each) = 5,00,000 shares.

Market price per share = Rs.20.

PE Ratio = 10

The company has undistributed Reserves of Rs.20,00,000. It requires Rs.30,00,000 to redeem the debentures and modernize its plant which has the following financial options –

Borrow 12% loan from Banks.
Issue 1,00,000 Equity shares of Rs.20 each and the balance from a 12% Bank loan.

The company expects to improve its rate of return by 2% as a result of modernization. However,

the PE Ratio is likely to reduce 8 if the entire amount is borrowed. Advice the company.

A Limited company has the following capital structure:

Rs.

Equity Share Capital (2,00,000 shares) 40,00,000

6% Preference shares 10,00,000

8% Debentures 30,00,000

80,00,000

The market price of the company’s equity shares is Rs.20. It is expected that company will pay a current dividend of Rs.2 per share which will grow at 7 per cent for ever. The tax rate may be presumed at 50 per cent. You are required to compute the following:

(a) A weighted average cost of capital based on existing capital structure.

(b) The new weighted average cost of capital if the company raises an additional Rs.20,00,000 debit

by issuing 10 per cent debentures. This would result in increasing the expected dividend to Rs.3

and leave the growth rate unchanged but price of share will fall to Rs.15 per share.

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