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DRIVE
SUMMER 2015
PROGRAM
MBA/ MBADS/ MBAFLEX/ MBAHCSN3/ PGDBAN2
SEMESTER
II
SUBJECT CODE & NAME
MB0045
FINANCIAL MANAGEMENT
Qus:1 Critically analyze the four broad areas of strategic financing decision.
 Four broad areas of strategic financing decision
Answer:
Strategic financing decision:
An important decision which finance manager has to take is deciding source of finance. A
company can raise finance from various sources such as by issue of shares, debentures or by
taking loan
Qus:2 What is FVIFA ? Is it different from Sinking fund factor ?
A finance company offers to pay Rs. 44,650 after five years to investors who deposit
annually Rs. 6,000 for five years. Calculate the rate of interest implicit in this offer.
 What is FVIFA ? Differentiate FVIFA and Sinking Fund factor
 Solve the case
Answer:
FVIFA:
The expression
is called the Future Value Interest Factor for Annuity (FVIFA).
This represents the accumulation of Re.1 invested at the end of every year for n number of years
at “i” rate
Qus:3 A firm owns a machine furnishes the following information :
The firm follows straight line method of depreciation (permitted by the Income-tax
authorities).
The management of the company is now considering selling of the machine. If it does so,
the total operating costs to perform the work, now done by the machine, will increase by
Rs. 40,000 p.a.
Advise the management.
Solve the case.
Solution:
Cash Inflows(if machine is sold)
Selling price of the old machine
Rs. 80,000
Add Tax service (0.35xRs 30,000, short-term capital loss) 10500
------------------90,500
Present value of cash outflows saved if machine is not sold(PV of keeping machine)
Particulars
Amount before tax
Amount after tax
Qus:4 How will you compute the cost of equity capital using CAPM ?
The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a
long-run level of future earnings of Rs. 7 per share. The current market price of Xavier’s
share is Rs. 55.45. Floatation costs for the sale of new equity shares would average about 10
% of the price of the shares. What is the cost of new equity capital to Xavier Corporation ?
 How will you compute the cost of equity capital using CAPM ?
 Solve the case
Answer:
The cost of equity capital using CAPM:
This model establishes a relationship between the required rate of return of a security and its
systematic risks expressed as “β”. According to this
Qus:5 Jharkhand Mining ltd. has to select one of the two alternative projects whose
particulars are furnished below :
The company can arrange necessary funds @ 8 %. Compute the NPV and IRR of each
project and comment on the results.
Is there any contradiction in the results ? If so, state the reason for such contradictions.
How would you propose to resolve the contradictions ?
Solve the case
Solution:
The PV of Re. 1, to be received at the end of each year, at different cost of capital, is the
following:
YEAR
1
8%
0.926
10%
0.909
12%
0.893
14%
0.877
Qus:6 Premier Steel Ltd. has a present annual sales turnover of Rs. 40,00,000. The unit sale
price is Rs. 20. The variable costs are Rs. 12 per unit and fixed costs amount to Rs. 5,00,000
per annum. The present credit period of 1 month is proposed to be extended to either 2 or 3
months whichever is profitable. The following additional information is available :
Fixed costs will increase by Rs. 75,000 when sales increase by 30 %. The company requires
a pre-tax return on investment of 20 %.
Evaluate the profitability of the proposals and recommend the best credit period for the
company.
Solve the case 10
Solution:
Sales
1 month
4000000
2 month
4400000
3 month
5200000
40000
88000
260000
Bad debt to sales
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