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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034 B.Com. DEGREE EXAMINATION – COMMERCE SUPPLEMENTARY EXAMINATION – JUNE 2009 CO 6604 - FINANCIAL MANAGEMENT Date & Time: 27/06/2009 / 10:00 - 1:00 Dept. No. Max. : 100 Marks PART A Answer ALL questions Marks:10x2=20 Explain the following: 1. Time value of money 2. Trading on equity 3. Operating leverage 4. Earnings per share 5. Price earnings ratio 6. Internal rate of return 7. Net working capital 8. Operating cycle 9. Retained earnings 10. Cost of capital PART B Answer any FIVE questions 11. 12. 13. 14. 15. Marks:5x8=40 Define Capital Budgeting. Explain its significance in Financial Management. The goal of Financial Management is Wealth Maximisation. Explain. Evaluate Debt and equity as sources of funds for a firm. Define working capital. What are the factors that determine the amount of working capital of a firm. Output 6000 units; Fixed Cost Rs.12000; Variable Cost Rs.2 per unit; interest Rs.4000; Selling price per unit Rs.6. Calculate Degree of operating leverage, Financial leverage, and Combined leverage and interpret the results. 16. A new project under consideration requires a capital outlay of Rs.300 lakhs. The required funds can be raised either fully by equity shares of Rs.100 each or by the equity shares of the value of Rs.200 lakhs and a 15% loan of Rs.100 lakhs. Assuming the tax rate is 50%, calculate the EBIT level at which investors would be indifferent to the two options. 17. A Ltd plans to purchase a machine for Rs2,00,000. The machine has a life of 5 years and no scrap value. The machine is expected to yield the following profits before depreciation and tax: YEAR PBDT Rs.) PV of Re.1 @ 10% I 50,000 0.91 II 80,00 0.83 III 100,000 0.75 IV 120,000 0.68 V 50,000 0.62 Assume a tax rate of 50%. Calculate : a) Pay back period b) Net present value (cost of capital 10%) c) 18. (a) A deposits Rs.10000 in a bank, which gives an interest of 12% per annum. What will be the value of the deposit at the end of 5 years? (b) Calculate the present value of an annuity of Rs.5000 received at the end of every year for the next 5 years, if the interest rate is 10% per annum. d) A company issues 12% RS.100 debenture at a discount of 5% repayable at the end of 5 years at a premium of 5%. Calculate the cost of the debenture assuming a tax rate of 15%. (d) The market price of an equity share is Rs.40. The last dividend paid is Rs.4 per share. Dividend is expected to grow at 10% per annum. Calculate the cost of equity. 1 PART C Answer ANY TWO questions Marks:2x20=40 19. The existing capital structure of X Ltd. is as follows: Equity shares of Rs.10 each Rs.2,00,000 Retained earnings Rs.1,00,000 9% Preference shares Rs. 50,000 7% debentures Rs.1,50,000 The company requires a sum of Rs.2,00,000 to finance its expansion program, for which it is considering the following options: a) Issue 20,000 equity shares of Rs.10 at par. b) Issue 10% Preference shares of Rs.50,000 and 15000 equity shares of Rs.10 each.. c) Issue 8% debentures of Rs. 1,00,000 and 10,000 equity shares of Rs.10 each. After expansion the EBIT is expected to be Rs.2,10,000. Tax rate is 50%. It is estimated that the Price Earnings Ratio (P/E) in the above three financing options would be 20, 17 and 16 respectively, which option would you recommend. 20. The following is the capital structure of Simons company Ltd. as on 31st March: Equity share: 10,000 shares (of Rs.100 each) Rs.10,00,000 Reserves 4,00,000 14% Preference shares (of Rs.100 each) 2,00,000 12% Debentures Rs.100 each 3,00,000 15% IDBI Bank loan 1,00,000 -------------Rs.20,00,000 The market price of the company’s share is Rs.120 and it is expected that a dividend of Rs.12 per share would be declared at the end of the current year. The dividend growth rate is 8%. Debentures have a market price of Rs.90, repayable at par at the end of 5 years. If the company is in the 40% tax bracket, compute the weighted average cost of capital, using: a) book value as weights. b) Market value as weights. 21.. AB Ltd provides the following particulars relating to its working: (i) Cost and profit per unit: Raw material cost Direct labour cost Overheads Total cost Profit Selling price (ii) Stock holding period: Raw material Work-in-progress Finished goods (iii) Credit allowed by suppliers – 1 month (iv) Credit allowed to customers – 2 months (v) Average time lag in the payment of: Wages Overhead expenses (vi) Work in progress is assumed to be 50% complete. (vii) Required cash and bank balance Rs.50,000. (Rs.) 8 3 2 13 2 15 2 months ½ month 1 month ½ month 1½ month For an expected production and sale of 1,20,000 units per annum, calculate the working capital required. @@@@ 2