LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
B.Com. DEGREE EXAMINATION –COMMERCE
SUPPLEMENTARY EXAMINATION – JUNE 2007
CO 6604 - FINANCIAL MANAGEMENT
Date & Time: 26/06/2007 / 1:00 - 4:00
Dept. No.
Max. : 100 Marks
SECTION – A
Answer ALL questions:
( 10 x 2 = 20 )
1. What do you mean by investment decision under Modern Financial Management?
2. Explain the term ‘point of indifference’ in capital structure.
3. What do you mean by Leverage?
4. Define the concept of ‘Cost of Equity’.
5. Distinguish between permanent and temporary working capital.
6. What are the drawbacks of Net present value method?
7. What is the concept ‘operating cycle’?
8. ABC Ltd. has just declared and paid a dividend at the rate 15% on the enquiry share of Rs.100
each. The expected future growth rate in dividends is 12%. Find out the cost of capital of equity
shares given that the present market value of the share is Rs.168.
9. A project requires investment of Rs.1,00,000 initially. It is estimated to provide annual net cash
inflows of Rs.40,000 for a period of 8 years. The company's cost of capital is 10%.
Ascertain the net present value of the project. Reference to annuity table shows present value of
Re.1 for 8 years at 10% p.a. interest is Rs.5,335.
10. Find the financial leverage from the following data :
Net worth
Rs.25,00,000
Debt / Equity
3/1
Interest rate
12%
Operating profit
Rs.20,00,000
SECTION – B
Answer any FIVE questions:
( 5 x 8 = 40 )
11. What is the significance of Financial Management?
12. Explain what is meant by ‘Weighted Average Cost of Capital’.
13. Explain any four factors that determine the capital structure of a firm.
14. Discuss the discounting techniques used for evaluating and ranking of investment proposals.
15. From the following selected data, determine the value of the firms, P and Q belonging to the
homogeneous risk class under (a) the Net Income (NI) approach, and (b) the Net Operating
Income (NOI) approach.
Firm P
Firm Q
EBIT
Rs.2,25,000
Rs.2,25,000
Interest at 15%
75,000
Equity capitalization rate, ke,
20%
Corporate tax rate
50%
Which of the two firms has an optimal capital structure under the (i) NI approach, and (ii) NOI
approach?
16. The following information is available for Swagat Ltd. (Rs.million)
Average stock of raw materials and stores
Average work-in-process inventory
Average finished goods inventory
Average accounts receivable
Average accounts payable
200
300
180
300
180
Average raw materials and stores purchased on credit and consumed per day
10
Average work-in-process value of raw materials committed per day 12.5
Average cost of goods sold per day
18
Average sales per day
20
You are required to calculate: (a) Duration of raw material stage (b) Duration of work-in-progress
stage (c) Duration of finished goods stage (d) Duration of accounts receivable stage (e) Duration of
accounts payable stage, and (f) Duration of the operating cycle.
17. Calculate the operating leverage, financial leverage and combined leverage from the following
data under situations I and II and financial plans A and B :
Installed capacity
4,000 units
Actual production and sales
75% of the capacity
Selling price
Rs.30 per unit
Variable cost
Rs.15 per unit
Fixed cost : Under situation I - Rs.15,000, Under situation II - Rs.20,000.
Capital Structure
(Rs.)
Particulars
Financial Plan
A
B
Equity
10,000
15,000
Debt (rate of interest at 20%)
10,000
5,000
20,000
20,000
18. Calculate discounted pay-back period from the details given below:
Cost of project Rs.6,00,000; Life of the project 5 years; Annual cash inflow Rs.2,00,000; Cut-off
rate 10%.
Year
1
2
3
4
5
Discounting factor (10%) .909 .826 .751 .683 .621
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SECTION – C
Answer any TWO questions:
( 2 x 20 = 40 )
19. A company has to select one of the two alternative projects, the particulars in respect of which
are given below :
Project A
Project B
Rs.
Rs.
Initial outlay
1,20,000
1,10,000
Net Cash Flow
End of Year 1
70,000
20,000
2
50,000
40,000
3
30,000
50,000
4
20,000
40,000
5
10,000
20,000
6
Nil
10,000
The Company can arrange fund at 15%. Compute the Net present Value and Internal Rate of Return
of each project and comment on the result.
Present value of Re.1 payable or receivable at the end of each period is as under:
Year
1
2
3
4
5
6
15%
.8696
.7561
.6575
.5718
.4972
.4323
16%
.8621
.7432
.6407
.5523
.4761
.4104
17%
.8547
.7305
.6244
.5337
.4561
.3898
18%
.8475
.7182
.6086
.5158
.4371
.3704
19%
.8403
.7062
.5934
.4987
.4191
.3521
20%
.8333
.6944
.5787
.4823
.4019
.3349
21%
.8265
.6830
.5645
.4665
.3855
.3186
22%
.8197
.6719
.5507
.4514
.3700
.3033
23%
.8130
.6610
.5374
.4369
.3552
.2888
20. The management of Royal Industries has called for a statement showing the working capital
needs to finance a level of activity of 1,80,000 units of output for the year. The cost structure for the
company's product for the above mentioned activity level is detailed below :
Cost per unit (Rs.)
Raw materials
20
Direct labour
5
Overheads (including depreciation of Rs.5 per unit)
15
40
Profit
10
Selling Price
50
Additional Information:
a) Minimum desired cash balance is Rs.20,000.
b) Raw materials are held in stock, on an average, for 2 months.
c) Work-in-progress (assume 50% completion stage) will approximate to half month's
production.
d) Finished goods remain in warehouse, on an average, for a month.
e) Suppliers of materials extend a month's credit and debtors are provided two month's
credit; cash sales are 25% of total sales.
f) There is a time lag in payment of wages of a month and half-a-month in case of
overheads.
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From the above data, you are required to:
1) Prepare a statement showing working capital needs, and
2) Determine the maximum working capital finances available under the first two methods
suggested by Tandon Committee.
21. The ZBB Ltd. needs Rs.5,00,000 for construction of a new plant. The following three financial
plans are feasible :
i)
The company may issue 50,000 equity shares at Rs.10 per share.
ii)
The company may issue 25,000 equity shares at Rs.10 per share and 2,500 debentures of
Rs.100 denomination bearing 8% rate of interest.
iii)
The company may issue 25,000 equity shares at Rs.10 per share and 2,500 preference shares
at Rs.100 per share bearing 8% rate of dividend.
If the company's earnings before interest and taxes are Rs.10,000, Rs.20,000, Rs.40,000, Rs.60,000
and Rs.1,00,000, what are the earnings per share under each of the three financial plans? Which
alternative would you recommend and why? Assume corporate tax rate to be 50%
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