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.
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