2024 (JANUARY)

Sr. No. of Question

Name of the Paper Paper : 1403
Name of the Course Financial Management
Semester B.Com. (Prog.)
Duration:3 I1ours Maximun Marks :90
Attempt All quesioIs.
lUse of siimple calculator and Table of PV/EV is
1. (a) Explain the concept of profit permitted.
Which one of these is a better maximisation and wealth maximisation.
(b) Determine the operational guide for finance manager? 6
(i) Book value weighted average cost of capital using: 12
(i) Market valueweights, and
weights based on the following
Book value structure information:
Debentures (100 per
Preference shares (R100Debenture)
per share)
8,00,000
Equity shares (?10 per share) 2.00 000
10.00,000
20,00,000
Recent market price of all these securities are:
Preference shares 120 per share and Equity shares Debentures 110 per debenture,
(22 per share.
External Financing opportunities are:
() 100 per debenture
redeemable at par, 10 year maturity, 13% coupon
rate, 4o Flotation cost and sale price
7100.
(i) 100 per Preference share
redeemable at par 10-year maturity, 14°o
dividend rate, 5%o flotation cost and sale price 100.
(iii) Equity shares 2 per share
flotation costs and sale price 22.
Dividend expected on equity shares at the end of the year
anticipated growth rate in dividend is 7%, the company pays isall2itsper share,
in the form of dividends,
corporate tax rate is 30%. earnings
Ans. (a) See Q. 14. Chapter 1.
[Page 8
(b) Cost of Debenture, (k) = 10-)+ (Ry - NP)N
(Ry + NP)/2
l= Interest on debentures, i.e., (100
Ry= Redeemable value 13°%) = 13
NP = Net Proceeds = Salei.e.,Price
100
- Floutation Cost
..where
={(100 - 4)(i.e., 4o of 100) = 96
t=Tax Rate, i.e., 30%
N= No. of Yearsof
Redemption i.e., 10 years
13(1 - 0.3) + 100 - 96
10 9,1 + 0.4
100 + 96 98 = 0.09694

P-41
P-42 Shivdas DELHI UNIVERSITY SERIES
Pb + (Ry - NP)/N
Cost of Preference Capital (k,) = (Ry + NP)/2
Pn = Preference Dividend i.e., (14% of ?100) =14
Ry = Redemption Value, i.e., 100
.where NP = Net Proceeds = Sales Price - Flotation Cost
= (100 - 5)\i.e., 50%% of 2100) = 795
N= No. of years to redemption = 10 years

14 +
100 95 )
10 14 + 0.5
= 0.1487 or 14.87/%
100 + 95 97.5
2

D = Dividend at the end of the year = ?2

Cost of Equity, (k) = PoD +g ...where = Net Proceeds i.e., 722 -2=20
g = Growth Rate = 7% = 0.07
2
+ 0.07 0.10 + 0.07 = 0.17
22 - 2

Calculation of WACC(Book Value)

Book Value Cost of Capital WACC
Capital Structure Weight (W) (KxW)
(K)
Debentures 8,00,000 0.09694 0.4 0.038776
Preference Shares 2,00,000 0.14870 0.1 0.014870
Equity Share Capital 10,00,000 0.17000 0.5 0.085000
Total 20,00,000 1.0 0.138646
Weighted Average Cost of Capital = 0.138646 or 13.87% (approx.)
Calculation of WACC (Market Value)
Market WACC
Capital Structure Cost of Capital (K) Weight (W)
Value () (KxW)
Debentures (8,000 x 110) 8,80,000 0.09694 0.2651 0.0257
Preference Shares (2,000 x 120) 2,40,000 0.14870 0.0723 0.0108
Equity Share Capital (1,000 x 22) 22,00,000 0.17000 0.6626 0.1126
Total 33,20,000 1.0 0.1491
:: Weight Average Cost of Capital (WACC) = 0.1491 or 14.91% (approx.)
Or
(a) Explain how the scope of finance function has changed over time. What
role does the finance manager play in a modern firm? 6
(b) The following is the capital structure of XYZ Ltd. 12
Sources Amt. (3) Specific c/c (cost of Captial)
Equity share capital (2,00,000 shares of 10 each) 20,00,000 11%
Preference share capital (50,000 shares of 10 each) 5,00,000 8%
Retained earnings 10,00,000 11%
7.5% Debentures of 1,000 each 15,00,000 4.5%
Presently the debentures are being traded at 94%, Preference shares at par
and Equity shares at 13 per share. Find out the weighted average cost of
Capital based on Book Value Weights and Market Value Weights. 12
 FINANCIAL MANAGEMENT-2024 (1ANUARY) P-43
Ans. (a) See Q. 3, 4 &5, Chapter 1.
[Pages 2-3
(b) Calculation of WACC (Book Value Weights)
Capital Structure Book Value Specific Cost WACC
R) of Capital (K) Weigltts (W) (KxW)
Equity Share Capital
Preference Share Capital
20,00,000 0.110 04 0.044
5,00,000 0.080 0.1 0.008
Retained Earnings 10,00,000 0.110 0.2 0.022
7.5% Debentures (1,500 x 1,000) 15,00,000 0.045 0.3 0.0135
Total 50,00,000 1.0 0.0875
Weighted Average Cost of Capital = 0.0875 or 8.75% (approx.)
Calculation of WACC (Market Value Weights)
Capital Structure Market Specific Cost Weiglhts Weiglhts Cost
Value () of Capital (K) (W) (KxW)
Equity Share Capital, 17,33,333 0.110 0.38433 0.0422763
Preference Share Capital (50,000 x10 x 94%) 5,00,000 0.080 0.11086 0.0088688
Retained Earnings" 8,66,667 0.110 0.19217 0.0211387
7.5% Debentures (1,500 x*94) 14,10,000 0.045 0.31264 0.0140688
Total 45,10,000 1.00000 0.0863526
.. Weighted Average Cost of Capital = 0.0863526 or 8.64% (approx.)
Working Note:
*, Market Value of Equity Shares = 2,00,00 x 13 = 26,00,000 has been divided into Equity
share capital and Retained earning in the ratio of 2:1.
2
.. Equity Share Capital =26,00, 000 x717,33,333
3

and Retained Earnings =26,00, 000 x -R8,66,667

Q. 2. (a) "Trading on equity is resorted to with aview to decrease EPs."

Comment on the statement. 6
(b) X Ltd. is considering replacing a machine having the written down
value of 1,60,000 and it will be fully depreciated at the end of Year 2. The
remaining economic life of the machine is 4 years after which it will have no
salvage value. But if it is sold today, it has a salvage value of 1,20,000. It will
generate revenue of 75,20,000 per annum for 4 years and incur expenses of
3,80,000 per annum. It can be replaced by a new machine costing 74,80,000.
The new machine will generate revenue of R9,20,000 per annum and incur
annual expenses of 15,80,000. Additional working capital of 32,00,000 will be
required if the new machine is bought. Depreciation on the new machine will
be charged at the rate of T80,000 per annum to make its book value equal to
its salvage value of 1,60,000 at the end of 4h year. Tax rate of the company is
30%. Advise the company if the cost of capital is 15. 12
2 3 4
Year
PVF at 15% 0.870 0.756 0.658 0.572
Ans. (a)See Q. 11, Chapter 3. |Page 31
(b) See O. 10, Unit II. |Page 79
Or
P-44 Shivdas DELHI UNIVERSITY SERIES
(a) "Cash flows of different periods in absolute terms are incomparable "
Explain the reasons and how they can be made comparable? 6
(b) YLtd. is considering an investment proposal requiring initial investmens
of 50,000. The corporate tax rate is 35% and the company uses Straight Lino
Method of depreciation. The estimated profit before depreciation and taxes
from the investment proposals are as follows: 12
PVE @ 11%
Year PBDT ) PVE @ 10% PVE@12%
1 11,000 0.909 0.901 0.893
2 20.000 0.826 0.812 0.797
3 18.000 0.751 0.731 0.712
15.000 0.683 0.659 0.636
5 12,000 0.621 0.593 0.567
Calculate:
(i) ARR (ii) NPV at 10% discount rate (iii) IRR
Ans. (a) Cash flows occurring at different points in time are not irectly
comparable because of the time value of money. The concept of the time value
of money states that the purchasing power of money changes over time due to
various factors such as inflation, interest rates and opportunity costs. As a result,
a certain amount of money today may have a different value or worth received
or paid in the future.
The reasons that Cash flows are not comparable over time are:
" Inflation. Inflation is the general increase in prices over time, which red
uces the purchasing power of money. A certain amount of money today
will likely buy fewer goods and services in the future due to inflation.
" Interest rates. Interest rates determine the return one can earn on
investments or the cost of borrowing money. Money invested today will
grow over time due to compounding interest, while money borrowed
will incur additional costs in the form of interest payments.
" Risk and uncertainty. Cash flows in the future are subject to greater risks
and uncertainty compared to Cash flows received or paid today. Future
events and economic conditions are uncertain, making future cash flows
less reliable and more speculative.
To make Cash flows occurring at different points in time
comparable, we use
a financial concept called discounting and compounding. Discounting is the
process of reducing future cash flows to their present value and Compounding is
the process of increasing present cash flows to their future value.
Present Value (PV). To make future Cash flows comparable to the present, we
calculate their present value by discounting them using an appropriate discount
rate. The discount rate reflects the time value of money and the level of risk
associated with the Cash flows.
The formula to calculate the present value is (P):
PV = Present Value
CF = (Future) Cash Flow
PV = CF (1 + ) .where r= Discount Rate
n =Number of Periods (Usually Years)
from the present to the Futúre Cash Flows
 FINANCIAL MANAGEMENT-2024 (JANUARY) P45
Future Value (FV). To make present Cash flows comparable to the future, we
calculate their future value by compounding them using an appropriate interest
rate.
The formula to calculate the future value is:
|FV= Future Value
PV = Present Value
FV = PV(1 + r" ...where r = Interest Rate
n = Number of Periods (Usually Years)
from the present to the Future Cash Flow

Byusing discountingand compounding, we can compare cash flows occurring

tdifferent points in time on an equal basis, taking into account the time value of
nmoney and making adjustments for inflation, interest rates and risk.
(b) Given. Cash Outlay: 750,000; Life (years): 5; Tax Rate: 35%;
Salvage Value: R0;
Year PBDT| Dep. PBT Tax (?) PAT Cash Flow PVE PV@ PVE PV@
@ 35% (PAT+ Dep.) (*)(10%, 5) 10% (12%, 5) 12%
(n) (3) (?) () ()
9,680.85 0.893 9,510.45
1 11,00010,000 1,000 350 650 10,650 0.909
13,150.05
20.00010,00010,000 3,500 6,500 16,500 0.826 13,629.00 0.797
11,415.20 0.712 10.822.40
18,000 10,000 8,000 2,800 5.200 15,200 0.751
0.683 9,049.75| 0.636 8,427.00
15,000 10,000 5,000 1,750 3,250 13,250 6,407.10
0.621 7.017.30 0.567
5 12,000 10,000 2,000 700 1,300 11.300
48,317.00
16,900 50,792.10
Total
Workinng Note:
Cost of Project 750,000
* Depreciation (SLM) = =10,000
Life in Years
Calculation of PVof Cash Inflows (Amount in )
Average Net Profit (PAT) x 100
(i) ARR = Average lnvestment
(650 + 6,500 + 5, 200 + 3, 250 + 1,300)
Average Net Profit = 5

716,900
= 73,380
5
Cost of Capital 750, 000
Average Investment 2
= 25,000
2
73,380
.. Average Rate of Return (AlRR) = 25. 000 x 100 = 13.52%
PVof Cash Inflows - PV of Cash Outflows
(ii) Net Present Value ==750,792.10 - 50,000 =7792.10
(iii) Internal Rate of Return (IRR) Positive NPV
= Lower discount rate + Positive NPV Negative NPV
x (Difference in discount rates]
750,792.10 - 50, 000 x 2% = 10% + 792.1
IRR 10% + 750,792.10 - 48, 317 x 2%
2,475.1
10.64%
= 10% + 0.640% =
P-46 E Shivdas DELHIUNIVERSITY SERIES
Q. 3. (a) "The payback period is more a method of liquidity rather than
profitability". Examine the statement explaining payback period method of
6
capital budgeting. provided to you about POR Ltd.:
(b) The following information, is 12
Earnings of the firm
No. of equityshares 3,00,000
36,00,000
Amoant of dividend paid 18,00,000
Return on equity 15%
Cost of Equity of the
10%
() Calculate the present price of the share and the value firm using
Walter's Model.
firm at L
(ii) is this the optimum pay-out ratio? What is the value of the
optimum pay-out ratio?
(iii) What should be the payout ratio if the firm wants to keep its shara
price at 160?
(iv) When will the firm be indifferent about dividend payment?
Ans. (e) Pay-back Period. Payback period is the time in which the initial
cash outflow of an investment is expected to be recovered from the cash inflows
generated by the investment. It is one of the simplest investment appraisa!
techniques. Payback period of a project depends on whether the cash flow per
period from the project is even or uneven.
Computation of the Payback period in two different situations:
(i) When annual inflows are equal. When the cash flows being generated
by a proposal are equal per time-period i.e., the cash flows are in the
form of an equity, the payback period is calculated as follows:
Payback Period = Initial Investment/CasBt lnflow per Period
Example: Company C is planning to undertake a project requiring initial
investment of 105 crore. The project is expected to generate (25 crore per
year for 7 years. The payback period of the project shall be:
Initial Investment 105 crore
Payback Period = AmmalCash Flow 725 crore = 4.2 years
(ü) When the annual cash inflows are unequal. In case the cash inflows from
the proposal are not in annuity form, the cumulative cash inflows are
used to compute the payback period.
Payback Period = A + B/C
...where A is the last period with a negative cumulative cash flow
B is the absolute value of cumulative cash flow at the end of the period A
Cis the total cash flows duringthe period after A
For Exanple, A proposal requires a cash outflow of 18,500 and is expected to
generate cash inflows of 7S,000, 76,000, 74,000, 72,000 and 2,000 over next 5years
respectively, then the payback period may be calculated as follows:
Annual CF () Cummulative CF (R)
Year
1 8,000 8.000
2 6.000 14.000
3 4,000 18.000
2.000 20,000
Pavback period =3 + 500/2,000 =3.25 years or 3 years 3 months
 FINANCIAL MANAGEMENI-2024 (|ANUARY) P47
The Pay-back method is an improvement over the ARR
approach. Its supremacy
arises due to the fact that it is based on Cash Flow analysis. Further, it is easy to
calculate andsimple to understand.
The Pay-back method can be gainfully employed under the following
circumstances:
(i Where the long-term (say in excess of three years) outlook is extrenely hazy.
(ii) In a politically unstable country, a quick return to rccover the investrnent
is the primary targel and subsequent profits are almost unexpected
surprises.
(iii) It is quite appropriate for firms suffering from a liquidity crisis. A firm
with limited liquid assets and no ability to raise additional funds might
use this pay-back method as an evaluation criterion because this method
putsemphasis on quick recovery of the firm's original outlay and litle
improvement of the already critical liquid situation.
(b)() Given. Cost of equity, k, =10% and ROI, r= 15%
Dividend Paid 18,00,000
Dividend Payout Ratio = Earning of tHhe firm 736,00,000
x 100 = 50%

Earnings available to equity shareholders

Earnings Per Share (E) =
No. of Equity Shares
736,00, 000 =12
3,00,000
Dividend Paid 18, 00,000
Dividend Per Share (DPS) = No. of Equity Shares =6
3,00,000
As per Walter's Model:
Market Price of the share when dividend payout ratio is 50%:
[P= Market price of equity share
D+ (E - D) D= Dividend per share
. . P= ke ...where E=Earnings per share
ke r= Rate of return on investment of the company
|k, =Cost of equity share capital
0.15
6+ 010 (12-6) 6+9 15
= 150
0.10 0.10 0.10

Thus,present price of share is 150 =74,50,00,000

Now, Value of Firm =150 x 3,00,000 shares
since ROI > k, The firm is a
(i) No, This is not the optimum payout ratio, is zero.
growth firm for which the optimum payout ratio
ratio is 0.
Market Price of Share Value when dividend payout
0.15 (12
0 + Q10 0 18
=180
P= 0.10 0.10
ratio = 180 x 3,00,000 shares
Now, Value of Firm at optimum pay-out - 75,40,00,000
calculate the payout ratio as follows:
(iii) Ifshare price is 160, we can
D(E-D)
As we know, P = k
P-48 Shivdas DELHI UNIVERSITY SERIES
D,015
160 =
010(12- D) ..P = 160 (Given)
0.10
16 = D + 18 - 1.5D
’ 16 = D + 1.5(12 - D)
-2 =-0,5D .. D= 4
DPS 74 x 100 = 33.3%
Payout ratio = EPS
x 100
12
Thus, when DPS is 33%, share price will be 160.
(ir) The firm willbe indifferent about dividend payment when it is a normal
firm with ROI = k.
Or
(a) Why do we focus on cash flows rather than on profits while evaluating
capitalbudgeting decisions? 6
(b) Aakarshan Textiles currently has outstanding 1,00,000 shares selling
@100 each. The firm is contemplating the declaration of dividend of 8 per
share at the end of the current financial year that has just started. The firm's
opportunity cost of capital is 10%. Given the assumptions of MM approach,
answer the following questions:
(i) What willbe the price of the share at the end of the year if (I)
is not declared, (II) dividend is declared?
dividend
(i) If the firm has net profits of 10,00,000 and makes new
investments of
?20,00,000during the period, how many new shares must be issued in
both the situations?
12
Ans. (a) See Q. 4, Chapter 2.
(b)() Given. Shares Outstanding (n)=1,00,000 shares [Page 13
Current Price of share (P)=100each
Opportunity Cost of Capital (k) =10%
I. When dividend is not declared,
1
P, =(1+ kj lP; +D]
’ 100 =
(1 +010) P, +0]
100 = ’ 100 x 1.10 =P,
1.10
.. P,=110
II. When dividend is declared at per share,
1

(1+kejl t D,]
(1+ 0.10) P,+8]
’100 =

’ 100 = 8+ ’ 100 x 1.10= 8+ P,

1.10
’110= 8+ P, P, =102
(i7) No. of shares to be isSued. ( ) = E t nDË I= Investment
...wherel E = Net Income (Earnings)
n = No. of shares
 FINANCIAL MANAGEMENT- 2024 (|ANUARY)) P49
L. When Dividend is not declared:
(20,00,000-10,00,000 +0
10,00,000
R110 = 9090.90 or 9,091 shares (approx.)
II. When Dividend is declared:
20,00, 000- 10, 00,000 +
R102
8(1,00,000)
10,00,000 +Z8,00,000 R18,00,000
R102 R102 -17,647.05 or 17,647 shares
0. 4. (a) How does Gordon's Model differ from
of dividends? Discuss Walter's Model to relevance
their similarities.
(b) XLtd. is considering changing its present credit policy. The
optionsare given below: details of the
12
Credit Policy Present A B C
Sales () 50,000 56,000 60,000 62,000
Variable Cost (@ 80%) (*) 40,000 44,800 48,000 49,600
Fixed Cost () 16,000 16,000 16,000 16,000
Average collection period (days) 30 45 60 75
Advise the best option if the rate of investment is 20%.
Ans. (a) See Q.9, Chapter 4. [Page 49
(b) Evaluation of Profitability Under Different Credit Periods
Particulars Present () A () B) CR)
Credit Period 30 days 45 days 60 days 75 days
Sales () 50,000 56,000 60,000 62,000
Less: Variable Cost @ 80% (40,000) (44.800) (48,000) (49,600)
Contribution 10,000 11,200 12,000 12,400
Less: Fixed Cost (16.000) (16,000) (16,000) (16,000)
Operating Loss (1) (6,000) (4,800) (4,000) (3,600)
Less: Cost of Inventory; (933.40) (1,520) (2.133.40) (2,733 40)
Net Loss (6.933.40) (6,320) (6,133.40) (6,333.40)
Incremental Loss -30 +613.40 +800 +600
Decision: The loss is minimum and the incremental loss is maximum under
Policy B, therefore it should be adopted.
Working Note:
Particulars Present R) A
(R) B(R) CR)
Cost of Sales = | +|| 56,000 60,800 64,000 65,600
Average Debtors = Cost of Sales 56,000 x 30+ 360 60,800 x45 +360 64,000 x60 +360 65.600xZ5 +360
xCredit Period +360 days = 4,667 =7.600 = 10,667 =13,667
Cost of Average inventory in 933.40 1,520 2,133.40
Debiors @20% 2,733.40
Or
P-50 Shivdas DELHI UNIVERSITY SERIES
3x2
(a) Write short notes on:
(i) Stock-Split
(i) Scrip-Dividend
(b) The production of a company during the year 2023 was 5,00,000 units.
maintained during the year 2024.
The same level of activity is expected to be
The expected ratios of cost of selling price are:
Overheads 20%.
Raw materials: 40%, Direct wages 20%,
store for three months before
The raw materials ordinarily remain in a
two months and is
production and the production remains in process for Finished
overheads.
assumed to be consisting of 100% raw materials, wages andallowed by creditors
Credit
goods remain in the warehouse for three months.
credit given to
is four months from the date of delivery of raw material and
debtors is three months from the date of the dispatch.
payment of
The estimated balance of cash to be held is 1,00,000. Lag in
unit.
wages and expenses is half month. Selling price is R8 per
You are required to make a provision of 10% for contingency (except cash). 12
Ans. (a)(i) Stock Split See Q. 4, Chapter 4. |Page 47
(ii) Scrip Dividend. A scrip dividend isa method through which companies
distribute dividends to the shareholders in the form of additional shares
instead of cash. It is an option given by a company to shareholders to
receive additional shares instead of cash dividend or an option to receive
cash dividend at a later stage or to receive additional shares instead of
cash dividend. It is different from scrip issue which is capitalisation
of reserves or popularly called Bonus issue. It may be at a discounted
price or for free. This allows the shareholders to reinvest their dividends
directly into thecompany without receiving cash. It helps the company
toconserve cash during periods of financial strain or when the company
wants to reinvest its earnings into business operations instead of paying
out cash dividends. It can also be a way to reward the shareholders by
providing them with more shares, thereby potentially increasing their
ownership in the company. Scrip dividend affects the shareholder equity
portion of the company's balance sheet. While it does not change the
overall market capitalization of the company, it increases the number ot
outstanding shares and can dilute the ownership percentage of existing
shareholders who do not participate in the scrip dividend program.
(b) Particulars )
Raw Material (78 x 40%) 3.2
Direct Wages (8 x 20%) 1.6
Overheads (*8 x 20%) 1.6
Total Cost 6.4
Add: Profit (Balancing Figure) 1.6
Sale
 FINANCIAL MANAGEMENT- 2024 (JANUARY) P-51
Estimation of Working Capital:
Particulars 8) R)
(A)Current Assets
Units to be produced x Cost of Raw Material per unit
Raw Material = xHolding Period
12
5.00,000x 3.2x3
4,00.000
12
Units to be produced x(Cost of Raw Material
Work-in-Process = +Wages +Overheads) per unit xConversion Period
12
5,00,000 x(3.2+ 1.6 +1.6) ×2 5,33,333
12
Units to be produced x(Cost of Raw Material
+Wages + Overheads) per unit xHolding Period
Finished Goods =
12
5,00,000 x(3.2 + 1.6 +1.6)x3 8,00,000
12
Units to be sold on credit x (Cost of Raw Material + Wages
Debtors =
+Overheads) per unit x Credit Allowed Period
12
5,00,000 x<(3.2+1.6+1.6) x3 8,00,000 25,33,333
12
(B) Currrent Liabilities
Units tobe produced xCost of Raw Material per unit
Creditors = x Credit allowed by Creditors Period
12
5,00,000 x *3.2 x 4
5,33,333.33
12
Units to be produced x Wage per unit x Time Lag
Wages =
12
5,00,000x 1.6x0.5
33,333.33
12

Overheads =
Units to be produced xOverheads per unit xTime Lag
12
5,00,000x 1.6x 0.5
33,333.33 (6,00,000)
12
Net Working Capital (A- B) 19,33,333
Add: Provision for contingency @ 10% 1,93,333
21.26.666
Add: Cash 1,00,000
Working Capital Requirement 22,26,666
Q. 5. (a) Discuss the consequences of lengthening and shortening of credit
period by firm.
(b) Discuss various approaches for financing the working capital require
ments. 6
P-52 Shivdas DELHI UNIVERSITY SERIES
is itimportant in assessing
(c) What do you mean by operating cycle? Why
the working capital requirements of a firm? [Page 59
Ans. (a) See Q. 18, Chapter 5. [Page 50
(b) See Q. 1, Chapter 5. [Page 58
(c) See Q. 16, Chapter 5.
Or
18
LMS Ltd. provides the following details:
1,50,000 Units
Installed Capacity 1,00,000Units
Actual production and sales
1
Selling price per unit 70.50
Variable cost per unit
Fixed cost 38,000
<1,00,000
Funds required Financial Plans
Capital Structure A B C
60% 40% 35%
Equity shares of 100 each to be issued at 25% premium 50%
40% 60%
15% Debt
10% Preference shares of F100 each NIL NIL 15%
Assume Income Tax rate is 30%.
and Combined
() Degree of Operating Leverage, Financial Leverage
Leverage for each plan.
(i) The indifference-point between plan A and plan B.
(iii)) The Financial break-even point for each plan.
Suggest which plan has more financial risk?
Ans. See Q. 17, Unit II. [Page 142