Mba Executive - I Year 2 Semester / January 2021

410921106
MBA EXECUTIVE – I Year 2nd Semester \ January 2021
Paper MBAEX 8106 – MANAGERIAL FINANCE
Time : 3 Hours Maximum Marks : 70
Answer any five questions. All questions carry equal marks.

Use four decimal Present Value tables provided by the Faculty.
You may use Excel but for working notes only.
Make suitable assumptions wherever necessary.
1) A) Compare and Contrast the Profit maximisation and Wealth maximisation as an objective of financial
management.
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B) What are the three Principles of Time Value of Money? Illustrate with the help of examples.
6
2) Raj Industries Ltd. is considering the replacement of one of its moulding machines. The existing machine
is in good operating condition but is smaller than required if the firm is to expand its operations. It is 4
years old, has a current salvage value of ₹ 2,00,000 and remaining life of 7 years. The machine was initially
purchased for ₹ 10 lakh and is being depreciated at 20 percent based on written down value method.
The new machine will cost ₹ 15 lakh and will be subject to the same method as well as the same rate of
depreciation. It is expected to have a useful life of 7 years, salvage value of ₹ 1,50,000 at the seventh-
year end. The management anticipates that with the expanded operations, there will be a need for an
additional net working capital of ₹ 1 lakh. The new machine will allow the firm to expand current
operations and thereby increase annual revenues by ₹ 5,00,000; variable cost to sales ratio is 30 percent.
Fixed costs (excluding depreciation) are likely to enhance by ₹ 10,000.
The corporate tax rate is 35 percent. Its cost of capital is 10 percent. Should the company replace its
existing machine? What course of action would you suggest, if there is no salvage value of the new
machine?
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3) Project ASW of Intercontinental Textiles Ltd. is doing poorly and is being considered for replacement.
Three mutually exclusive projects A, S and W have been proposed. The projects are expected to require
₹ 2,00,000 each, and have an estimated life of 5 years, 4 years and 3 years, respectively, and have no
salvage value. The company’s required rate of return is 10 percent. The estimated cash inflows after taxes
(CFAT) for the three projects are as follows:
Year CFAT (in ₹)
A S W
1 50,000 80,000 1,00,000
2 50,000 80,000 1,00,000
3 50,000 80,000 10,000
4 50,000 30,000 -
5 1,90,000 - -
(i) Rank each project applying the methods of Payback Period, NPV, IRR and Profitability Index.
(ii) What would the profitability index be if the IRR equalled the required return on investment? What is
the significance of a profitability index less than one?
(iii) Recommend the project to be adopted and give reasons.
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4) Avantika Batteries manufactures small batteries for electronic goods. The owner asks the finance officer
to chalk out a detailed production planning to maximise the profit in face of severe competition in the
market. The finance manager finds out the level of expenditures, and accordingly, she suggests the
measures. The present level of different costs and the sale price of three different groups of products are
as follows:
Variables Product A Product B Product C
Output (units) 2,50,000 70,000 3,00,000
Fixed cost (Rs) 3,00,000 6,00,000 7,00,000
Variable cost (Rs/unit) 20 80 15
Interest paid (Rs) 25,000 60,000 -
Sale price (Rs/unit) 30 70 15
There is a wide difference in the variables relating to the three groups of products. The finance manager
has to find out the different types of leverages to frame a sound financial policy under 25% tax incidence.
a) What are the operating, financial and combined leverages of each group of products?
b) Using the concept of Financial Leverage, by what percentage should EBIT increase if there is a 20 per
cent increase in earnings per share from Product B? Verify the result?
c) At what level of sales volume will the EBT of the product A equal to zero?
d) Using the concept of Operating Leverage, by what percentage will EBIT increase if there is a 10 per
cent increase in units sold of Product C? Verify the result.
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5) Manohar Zee Ltd. has the following book values of its Capital Structure:
Equity Share Capital (300 million shares of ₹ 10 par) ₹ 3,000 million
Reserve and Surplus ₹ 4,500 million
11% Preference Share Capital (2 million shares of ₹ 100 par) ₹ 200 million
10% Debentures (3 million debentures of ₹ 1,000 par) ₹ 3000 million
9% Term Loans from Financial Institutions ₹ 500 million
The debentures of Manohar Zee Ltd. are redeemable after three years and are quoting at ₹ 982.5 per
debenture. The applicable income tax rate for the company is 30%.
The current market price per equity share is ₹ 60. The prevailing default-risk free interest rate on 10-year
GOI Treasury Bonds is 5.5%. The expected market return is 13.5 %. The beta of the company is 1.1875.
The preferred shares of the company are redeemable after 5 years and are currently selling at ₹ 98.15
per preference share.
Required:
(i) Calculate the cost of each source of financing using the calculation method as far as possible.
(ii) Calculate the weighted average cost of capital of the company using the book value weights.
(iii) Calculate the weighted average cost of capital of the company using the market value weights.
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6) A) What are the properties of a good Capital Budgeting Evaluation technique? Evaluate the various
Capital Budgeting Project Evaluation techniques discussed in the class on these parameters and give your
opinion.
10
B) “Non-Conventional cashflows based projects are difficult to Evaluate”. Evaluate the statement with
examples.
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410921106

MBA EXECUTIVE – I Year 2nd Semester \ January 2021

Paper MBAEX 8106 – MANAGERIAL FINANCE

Time : 3 Hours Maximum Marks : 70

Answer any five questions. All questions carry equal marks.

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