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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034 B.B.A. DEGREE EXAMINATION –BUSINESS ADMINISTRATION SUPPLEMENTARY EXAMINATION – JUNE 2007 BU 3201 - FINANCIAL MANAGEMENT Date & Time: 25/06/2007 / 9:00 - 12:00 Dept. No. Max. : 100 Marks PART A Answer all the questions: Write short notes of the following: 1. Operating cycle 2. Time value of money 3. Risk and uncertainty 4. Financial leverage 5. Capital structure 6. Net operating income 7. Pay back period 8. Trading on equity 9. Cost of capital 10. Net present value (2x10=20) PART B Answer any five of the following: (5x8=40) 11. Explain the factors that determine the capital structures of a firm? 12. Explain the patterns of financing in corporate securities? 13. Explain in brief the operating cycle of a manufacturing firm? 14. The capital structure of a company consists of the following securities: 10%preferance share capital Rs 10, 00,000 Equity share capital (Rs10 per share) Rs 1,00,000 The amount of operating profit is Rs 60,000. The company is in 50% tax bracket. You are required to calculate the financial leverage of the company, what would be the new financial leverage of the operating profit if it increases to Rs 90,000 and interpret your results. 15. A company issues 10% irredeemable debentures of Rs5, 00,000. The company is in 55%tax bracket. Calculate the cost of debt (before and after tax) if the debentures are issued at (i) par (ii) 10% discount (iii) 10% premium 16. A and B who wants to buy a business seek your advice about the average working capital requirements in the first years trading. The following estimated are available: (i) Average amount locked up in stocks: Rs Stock of finished products and work in progress 5,000 Stoke of stores, material, ect 8,000 (ii) Average credit given: Local sales, 2 weeks credit 78,000 Outside the state, 6weeks credit 3,12,000 (iii) Time available for payment: For purchase, 4 weeks 96,000 For wages, 2 weeks 2,60,000 Calculate the average amount of working capital required. 17. Wealth maximization is only decision criterion and not a goal”-explain 18. From the following capital structure of a company, calculate the overall cost of capital, using (a) book value weights (b) market value weights Source book value market value Equity share value Rs 10 per share 45,000 90,000 Retained earnings 15,000 ---Preference share capital 10,000 10,000 Debentures 30,000 30,000 The after tax cost of different sources of finance is as follows: Equity share capital 14%, Retain earnings 13%, 5% reference shares capital 10%, Debentures PART C Answer any two of the following: (2x20=40) 19) Sony Company now capitalized with Rs 50,00,000 consisting of 10,000 ordinary shares of Rs 500 each. Additional finance of Rs 50,00,000 is required for a major expansion program lunched by the company. Four major financing plans are under consideration. They are 1) entirely through additional share capital issuing 10000 ordinary shares of Rs 500 each 2) Rs 25 lakhs through ordinary shares capital and Rs 25 lakhs through borrowing from term lending institution at 12% interest 3) Entirely though borrowings from the term lending institutions at 13%interst 4) Rs 25 lakhs through ordinary shares capital and Rs 25lakhs through 10% preference shares of Rs500 each. The company’s existing EBIT amounted to Rs 12 lakhs. Compute the EPS of the company, which has 50% tax rate 20) International foods limited has the following capital: Particulars book value Equity capital (25,000 shares of Rs10 each) 2,50,0000 13% Preference capital (500 shares of Rs 100 each) 50,000 Reserves and surplus 1,50,000 14%debentures (1,500 of 100 each) 1,50,000 market value 4,50,000 45,000 ---1,45,000 The expected dividend per share is Rs 1.40 and the dividend per share is expected to grow at a rate of 8% forever. Preference shares are redeemable after 5 years at par. Where as debentures are redeemable after 6 years at par, the tax rate for the company is 50%. You are required to calculate the weighted average cost of capital for existing capital structure using market value as weights. 14) Alpha and company is considering the purchase of a new machine for its immediate expansion programme. There are three possible machines suitable for the purpose. Their details are as follows. Particulars A Rs 3,00,000 5,00,000 B Rs 3,00,000 4,00,000 C Rs 3,00,000 4,50,000 40,000 50,000 60,000 20,000 10,000 50,000 30,000 50,000 10,000 10,000 48,000 36,000 68,000 15,000 10,000 Capital cost Sales Net cost of production: Direct material Direct labour Factory overheads Administration cost Selling and distribution cost The economic life of machine 1, 2, and 3 years the scrap value are Rs 40,000,25,000, and 30,000 respectively. The sales are expected to be at the rates shown for each year during the full economic life of the machines. The costs relates to annual expenditure resulting from each machine. Tax to be paid at 50% of the net earnings of each year. It may be assumed that all payables and receivables will be settled promptly, strictly on cash basis with no outstanding from one accounting year to another. Interest on capital has to be paid at 8% per annum. You are requested to show which machine would be the most profitable investment on the principle of pay back period. **************** 2