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05MBA23

Second Semester MBA Degree Examination , July 2007 Ru smess Administration

Financial Management
Time: 3 hrs.] [Max. 7. o . Marks: 100 : I. Answer any FOUR questions out of Q.no.1 t Q.No. 8 Case Study is compulsory. Q.No. 7. 2. Present value and future value tables to be provided. 1 a. What is Financial Management?
b. Mention any 4 merits and 3 demerits of discounted cash flow methods . (03 Marks) c. The selected financial data for A,B, and C companies for the year ended 31(07 Marks)

are as follows :

-12-2005

Variable expenses as a percentage of sales 66.66 7B5 C Interest Expenses 50 Degree of Operating Leverage 5 200 Rs 300 Rs 1,000 - 1 Degree of Financial Leverage 3- 1 - 1 2- 1 1 2 Income tax rate 4-1 - 1 Prepare income statements for A, B and C companies. 0 50 0.50
(10 Marks)

2 a. What is Time Value of Money? k W hat are the objectives of Financial Management? (03 Marks) (07 Marks) c. From the following capital structure of a company, calculate t capital using i) Book value wei ghts an d ii ) Market value weights. Source Equity share capital (Rs 10 shares) Retained earnings Preference share capital Debentures Book value Rs 45,000 Rs 15,000 Market value Rs 90,000 Rs 10,000

Rs 10,000

Equity share capital 14%, Retained earnings 13%, Preference Debentures 5%. capital 10%,
(10 Marks)

The after tax cost of different sources of finance is0as follow 30,000 s

a. What are sweat equity shares? (03 b. Alpha company is contemplating conversion of 500, 14% convertible bon Marks) ds of Rs 1000 each. Market price of the bond is Rs 1,080. Bond indenture provides that one Bond will be exchanged for 10 shares. Price earnings ratio before redemption is 20:1 and anticipated price earning ratio after redemption is 25:1. Number of shares outstanding prior to redemption are 10,000. EBIT anounts to Rs 2,00,000. The company is in Give reasons. the 35% tax bracket. Should the company convert Bonds to shares?
c.

Briefly explain the factors

affePH;, - n,'-:a___

(07 Marks)

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05MBA23

03 Marks) 4 a. Differentiate between Trading on equity and financial leverage. ( b. The market price of a Rs 1,000 par value bond carrying a coupon rate of 14% and maturing after 5 years is Rs 1,050. What is the yield to maturity on this bond? What will be the realized yield to maturity if the re-investment rate is 12%. (07 Marks) 10 Marks) c. What is the scope of Financial Management? ( 5 a. What is Securitisation? b. The following data for X ltd for the year ended 2005 is given below : Profit and Loss a/c data : (Rs in millions) Sales 80 Cost of good sold 56
(03 Marks)

01-01-2000

31-12-2000

Marks) year. c. An Engineering company is considering the purchase of a new machine for its immediate expansion needs. There are 3 possible models details of which are as follows : Particulars Capital cost (Rs) Sales at standard prices (Rs) Machine 1 3,00,000 5,00,000 Machine 2 3,00,000 4,00,000 Machine 3 3,00,000 4,50,000

12 9 Inventory 16 12 Accounts receivable 10 7 Accounts payable What is the length of the operating cycle and the cash cycle., Assumes

Net factory cost (Rs) Administration cost (Rs)

Selling and dist cost (Rs)

1,50,000 20,000
10,000

1,30,000 10,000
10,000

1,42,000 15,000
10,000

The life of machine no 1 is 2 years and it is 3 years for the other two. The scrap value is Rs.40,000, Rs.25,000 and Rs.30,000 respectively. Sales are expected to be at the rates shown for each year during the economic life of the machine. Tax is paid at 50% of the net earnings each year. It is assumed that all the receivables and payables are settled promptly strictly in cash. Interest on loan is 8% Pa. You are required to show which machine would be the most profitable using PAY BACK . (10 Marks) PERIOD METHOD 03 Marks) 6 a. What are options? ( 07 Marks) b. What is leasing? Briefly explain various types of lease agreements. ( c. After conducting a survey that cost Rs.20,00,000, Z Ltd., decided to undertake a project for putting a new product in the market. The Company's cut off rate is 12%. It was estimated that the project would have a life of 5 years. The project would cost Rs.40,00,000 in Plant and Machinery in addition to working capital of Rs.10,00,000. The scrap value of Machinery at the end of 5 years was estimated at Rs.5,00,000. After providing depreciation on straight line basis profits after tax were as follows: PV factor 12% PAT (Rs) Year 0.8929 3,00,000 1 0.7972 8,00,000 2 0.7118 13,00,000 3 0.6355 5,00,000 4 0.5674 4,00,000 5 Acrprtain the net present value of the probe

(10 Marks)

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05MBA23
7 a. What is CAPM? Mention its assumptions.
(05 Marks) b. A firm whose cost of capital is 10% is considering two mutually exclusively projects X and Y the details of which are : PARTICULARS PROJECT X PROJECT Y

INVESTMENT Cash Flow 1 year

Cash Flow 2 year

Rs Rs
Rs

70, 000 10,000

20, 000

70,000 50,000
40,000

Cash Flow 3 year Cash Flow 4 year

Cash Flow 5 year

Rs Rs
Rs

30,000 45,000

20,000 10,000

-------------

60,000

-------- ---(15 Marks)

10,000

1,65,000 1,30,000 Compute the Internal rate of the projects. 8 CASE STUDY (COMPULSORY) A Company has been operating on single shift basis to manufacture its product with the following cost structure : Raw Materials per unit Wages (60% variable) per unit' Overheads (20% variables) per unit Rs 12.00 Rs 10.00 Rs 10.00

------------Profit Rs 32 . 00 Rs 4.00

Sellin rice g p Rs 36.00 Sales for the year ending 30-06-05 amounted to Rs 8,64,000 As on 30-06-05 the Company held : Stock of Raw Materials at cost Rs 72,000 Work in progress (valued at Prime cost) Rs 44,000 Finished Goods (valued at Total cost) Rs 1,44,000 Sundry Debtors Rs 2,16,000

-------------

At present the company receives 2 months credit from the Suppliers of materials and there is a time lag of payment of wages and expenses at half the month. In view of increased market demand it is proposed to double the production by working an extra shift. It is expected that a 10% discount will be available from the suppliers of Raw Materials in view of the increased volume of production. Extra production can be sold at the existing price. There will not be any change in the credit policy. Credit from the suppliers of materials and the time lag in payment of wages and expenses will continue to remain at present level. You are asked by the management to ascertain the effects on working capital of introducing shift working.
(20 Marks)