S % Prof. ¥.K. Bhushan 2, fi *'ormstion & Knowledge | & Hesouce Cente. 6) ey mas ‘SVKM's NMIMS SCHOOL OF BUSINESS MANAGEMENT Mid Term Examination - Term - II] (Academic Year 2016-17) Program: MBA-FT ‘Trimester: Il Module Name: Financial Management Marks: 25 Date: 23-01-2017 ‘Time: 3:00 pm to 4.30 pm Duration: 1% Hrs. Instructions: 1 All questions are compulsory It is is closed book, closed laptop and closed network examination. Use of Scientific calculator is permitted. Financial calculator is not allowed Make necessary assumptions if and only when required. 8 marks NewTech Enterprises offers “1/10 net 40 days” credit terms to its existing customers. The existing sales of the firm are Rs. 10 million and 40% of the customers currently avail the cash discount. The average collection period is 28 days. The variable cost ratio is 85%. The current level of bad debt losses stands at 2% of sales. The firm is considering change in credit terms. offered to its customers from current “1/10 net 40 days” to “2/10 net 60 days”. Such change will increase sales by Rs. 3 million without any further inerease in fixed costs. It is expected that proportion of eustomers availing discount will go up from current 40% to 70 The average collection period will drop to 25 days. The bad debt losses are expected to come down to 1% of sales, Pretax cost of working capital finance is 12% on an annual basis. The marginal tax rate faced by the company is 30%. What is the net impact of such policy change on net income of NewTech Enterprises? Do you recommend change in redit terms to NewTech Enterprses? 4 marks Maxis Manufacturing Industries (MMI) produces and sells 20,000 units of machine tool each year. All sales are on credit, and MMI charges all its customers $ 500 per unit. Variable cost ratio the MMI is 80%, MMIs top managers are evaluating a proposal from the firm's CFO that the firm relax its eredit standards to increase its sales and profits. The CFO believes this change will increase unit sale by 4%, Currently MMI’s average collection period is 40 days. The CFO expects this to increase to 60 days under the new policy. Bad debt losses are also expected to increase from 1.5% to 3% of annual sales. The cost of working capital Financing is 12% on a pretax basis. The marginal tax rate faced by the firm is 30%, What isthe incremental net income by adopting new credit standards? Should MMI relax its credit standards? 4 marksQn 8 marks 1. Modern Pharma has issued bond with face value of Rs. 1000, carries coupon of 8% per annum and the residual maturity of 7 years. The prevailing interest rate in the market for similar quality bond is 10% per annum, a) What should be intrinsic value of this bond? b). Given the bond is trading at Rs.900, what isthe yield to maturity of the bond? 3marks 2. A common stock pays a current dividend of $2. The dividend is expected to grow at an 8- percent annual rate for the next three years; then it will grow at 4 percent in perpetuity. The appropriate discount rate is 12 percent. What isthe price of tis stocks? 3 marks 3. Youneed $25,000 five years from now. You budget to make equal payments at the end of every Q3 ‘year into an account that pays an annual interest rate of 12 percent. a, What are your annual payments to achieve your goal? b. Your rich uncte recently died and left you $20,000, given this, how much lump sum amount that you need t0 invest in the same account to meet your goal’? 2 marks 9 marks 1. A firm is considering the introduction of a new product which will have @ fi ‘Two alternatives of promoting the product have been identified: of five years Alternative | This will involve employing a number of agents. An immediate expenditure of Rs. $,00,000 Will be required to advertise the product. This will produce net annual cash inflows of Rs. 3,00,000 at the end of the each of the subsequent five years. However, the agents will have to bee paid Rs. 50,000 each year. On termination of the contract, the agents will have to be paid a ump sum of RS, 1,00,000 at the end of the fifth year Alternative 2 Under this alternative, the firm will not employ ayents but will sell directly to the consumers. ‘The initial expenditure on advertising will be Rs. 2,50,000. This will bring in cash at the end of each year of Rs.1,50,000. However, this alternative will involve out-of-pocket costs for sales ‘administration to the extent of Rs. 50,000, The firm also proposes to allocate fixed costs worth Rs. 20,000 per year to this product if this alternative is pursued, Required: Advise the management as to the method of promotion to be adopted using NPV criteria.. You ‘may assume that the firm’s cost of capital is 12% 4 marks 2. National Bottling Company is contemplating to replace one of its bottling machines with a new ‘more efficient machine. The old machine had a cost of Rs, 10 lacs and a useful life often years. ‘The machine was bought five years back. The company does not expect to realize any return trom scrapping the old machine at the end of 10 years but if it is sold at present to another company in the industry, National Bottling Company would receive Rs. 6 laes for it. The new machine has a purchase price of Rs. 20 lacs. It has an estimated salvage value of Rs. 6 lacs and has useful life of five years. ‘The new machine will have a greater capacity and annual sales are expected to increase from Rs. 10 lacs to Rs, 12 lacs. Operating efficiencies with the new machine will also produce savings of Rs. 2 aes a year. Depreciation is on a straight-line basis over a ten year life, The cost sapital is 8% and a 50% tax rate is applicable to both revenue and capital gains, S marks dFormula For: ‘Annual Compounding Future Value of an (itky" Annuity. FVA= ona =] (EVIFAK.n) k Present Value oF a an Annuity. evaenr| EG ky | (PVIFAk,n) —* Present value of growing perpetuity PVGP=PMT(k-2) ‘Yield to Maturity (GPP PRT = Annuity, Kedise@unt fi Mematucity valu, P=curent ma ‘OF yous, C=coupon iw Ri. pr Perod]t ]2 [3 |4 |5 [6 |? 8 Particulars PVIF of Re @B% | 0.926 | 0.857 | 0.794 | 0.735 | 0.681 | 0.630 | 0.583 | 0.540 @10% | 0.909 | 0.826 | 0.751 | 0.683 | 0.621 | 0.564 | 0.513 | 0.467 @12% _| 0.893 | 0.797 | 0.712 | 0.636 | 0.567 | 0.507 | 0.452_| 0.404 PVIFA of Ret @8% | 0.926| 1.783 | 2.577 3.312 | 3.993 | 4.623 | 5.206 | 5.747 @10% | 0.909 | 1.736 | 2.487] 3.170) 3.791 | 4.355 | 4.868 | 5.335 @12% _| 0.893 | 1.690 | 2.402 | 3.037 | 3.605 | 4.111 | 4.564 _| 4.968 FVIF of Re @8% | 1.080 | 1.166] 1.260] 1.360 | 1.469] 1.587] 1.714 | 1.851 @10% | 1.100 1.210] 1.331 | 1.464] 1611 | 1.772) 1.949. | 2.144 —@12% _| 1.120 | 1.254 | 1.405 | 1.574 | 1.762 | 1.974 | 2.211 | 2.353 FVIFA of Re 1 @8% | 1.000 | 2.080 3.246 | 4.506 | 5.867 | 7.336 | 8.923 | 10.637 @10% | 1.000 | 2.100 | 3.310 | 4.641 | 6.105 | 7.716 | 9.487. | 11.436 @12%_| 1,000 | 2.120 | 3.374 | 4.779 | 6.353 | 8.115 | 10.089 | 12.300