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PG-612 12 393
II Sen1ester MBA (CBCS) Examination, July - 2019
MANAGEMENT
Paper - 2.5 : Financial Management
Time 3 Hours Max. Marks : 70

SECTION - A

• 1.
Answer any five questions, each question carries 5 marks.
D efine Financial Management. Explain its functions .
5x5=25

2. D efin e Working Capital. What are the factors determining working capital
structure in an organization ?

3. What is Time Value of Money ? What is its relevance in financial decision

making?

4. The following are the details regarding the operation of a firm during a
period of 12 months :

• Sale s
Selling price p er unit
Variable cost per unit
~ 12,00,000
10
7

Total cost per unit 9

Credit period allowed to customers One month
The firm is considering a proposal for a more liberal credit by increasing the
average collection p eriod from one month to two months. This rela.'<:ation is
expect e d to increase sales by 25%.
You are required to a dvise the firm regarding adopting of the new c redit
poli cy, pre suming that the firm's required return on investment is
25 p e r cent.

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5. A company has on its books thet fo]lc,,;,.;ng am ounts and specific cuat r>f ca.ch
~ oC capital : '•
Type of Capital, f, )Jqok Value f .Market Val~ f Speclflc Coat %
I
Debt ',I
400000 I 380000 5
Preference 100000 110000 8
F,quity 600000 t 15
1200000
, 13
Retained earnings 200000
,

,,
TotaJ 1300000 1690000 ' / /
Determine the weighted average cost of capital usin g (a) Book value weightH,
and (b) Market. :value weights.

6. Excel Ltd. is considering three finan cial p lans. The key information is as
follows :
(a) Total funds to be raised f 200000
(b) Financing Plans :

Plans Equity% Debt% Preference %

A, ,,. ' , ., ' I 100 ----- -----
B 50 50 -----
C 50 ----- 50
(c) Cost of debt 8%, Cost of preference shares 8%
(d) Tax rate 35%
(e) Equity shares of the face value off 10 each will be issued at a premium
off 10 per share.
(f) Expected EBIT f 80000
Determine for each plan EPS and Financial BEP.

7. Northern Chemicals Ltd., OWRS a machine with ,the ,foUowing char~ c s :

Book Value ,,, 1 / ! ' . .?)-JOOOO
Current Market Value f 80000
Expected salvage value at th'e end of 5 years remaining useful life · NlL
Annual cash operating cost t 36000
The firm's cost of capital is ._15%, ,}~ ~ rate .~~ 3~~ '1, The coml?~Y follows
the straight line method of depreciat10n and the same is accepted for tax
purpose. The management ·of the company is t0nsidering selling the machine.
If it does so, total cash OJ>CTatin~ f OSt to perform ,tp~ work n ow don e by the
machine will increase
•
by f 40000 per year Ito f 76000 • ••
p er year. Advise
whether ;tne machine 'Sho<l1d be sold. • · ' ·
I ■IIIIIIIUII 3 PG-612

,, I UC'J'ION .. B C

Answer any th1'11t quC'stions, eoch question carries 10 marks .'· 3x10=30
8.
Dd',hc V~ntt\J'(' ·~twluui·r itxplain $tag~~\ dr ven'Utre tapitAl•.J1 <ei~ctts~rnfe
t'~cc'nt trends in vet,turft). c:up!tnl linnncins J,1 India. 1 1

I
I), I\ )I ' I II I I I
9. A firm ·s soles, vnk-inble cost tHtd fixel'I cost amounts to t 75,00,000,
• -~ ) 00 000 , 't1 h ,
' -,. · und , 6.00,µ00 respectively. It has borrnwed t 45,00,000 at 9%
at~d ,ts equity cnpitul totul t 55,00,000. , t
(n) What is firm 's ROI ? u, 1
I
(b) . I l
Doc~ ,t hove fovourHblc financial leverage ? ,v,. 1 1I 1 I , .. 1 ,, ' I

(c) lf the fir.m belongs to tID industry whose a ~-' tUtlA01/<:H" is ,(l, does ·it
hnve n high or low asset leverage ?
tl
ld) What are the operating, fi11a11cial and combined leverages of the firm ?
(e) If the sales drops to ~ 50,00,000, what will new EBIT be ?
(f) At what level will the EBT of the firm be equal to zero ?
- -- r
pJl -m1:fl
1

10. ~BC Ltd., wishes to raise addition~l finance of 100 Jtkhs fo~ meetiig its
investment plans. It hast 20,00,000 111 the form of retained earnings avrulable
for investment purposes. The following are further details :
(a) D~bt/Equity Mix 30%/70%
(b) Cost of debt :
(l I l I ~) I I; I ,)I
(i) Up to 20 lakhs 10%
,l ·• rl I i ll , : 1 I 11(" .,
(ii) Beyond 20 lakhs 14% . , Jl,d ' ' 11./ I' '

~ 4 q ) () ()~ ·I" T! ,., " , • 11

(c) Earnings per share
(d) Dividend payout 50% of earnings
(e l >iJ ,Expocted growtb ,llilto ,in :dividend - 1I I, ,li(i),% If H i )
I

ii
(f) 10 ~ 1rent Market price per share
'I
~ 44
10 }-, ' JI Ii,:'. h·,h, '\11 I
(g) Tax ~'flte 1i·11 11i :,·, ,, , - I' I I S'9f{ci I i i )I i• ', .. ,:· I,. · 1, I 'I

Vouc,ar~ required: 1-:, ,•i :p 111, ., " i'> r 1 ,, , , ,,,, ,,

(i) )111r'let~tff\ine the patt~th
11':f ! ) ' Ill) 11 1:: •
'df raising
JI I
adc:H tioµaJ 'firiance,
" I i lj •I ,,
1
/' ' '
Ii t'

(iii I i1-'to, d¢~rmine th~ ,pos.t,.~ average co.st,,of ·additional debt. , 1

(iiil (fo 1 'd1e~ermine the

·tli /1 11, '
c~~t1 or retained earnii-W~r t:tnd equity. ,)/
' ) ,) \ ' ,,
1
1 I )1)\)\ i f.' ,' ~· 1,' ) I •il l l,1 I
l
' : ,I J, ,•

(ivl Compute the overall weighted averag~..after 1t~~pst pf 1adcUtion:~ fu.i:an~e.

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11. The following information is available in resfect of a firm :
Capitalisation rate = 10%
Earnings per share = ~ 50
Assumed rate of return on Investment :
•
(a) 12% (b) 8 % (c) 10%
Show the effect of dividend policy on market price of shares applying Walter's
formula when dividend payout ratio is :
(a) 20% (b) 40% (c) 80%

SECTION - C
Compulsory question. lxl5=15
12. ABC Ltd. , is considering investing in a project that costs ~ 10,00,000. The
estimated salvage value is zero; tax rate is 35 percent. The c~mpany uses
e
straight line depreciation for tax purposes and the proposed proJect has cash
Flows Before Tax (CFBT) as follows :

Year 1 2 3 4 5

CFBT (t) 2,00,000 3,00,000 4,50,000 4,50,000 6 ,50,000

Determine the following :

(a) Pay back period
(b) Average rate of return
(c) NPV at 14% required rate of return
(d) IRR, and
(e) PI at 14% required rate of return
Suggest the company whether it should accept this or not with necessary
working notes assuming standard pay back period of 3 years and minimum
rate of return of 15%.

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- Q.P. Code: 61315

Second Semester (DAY) M.B.A. Degree Examination, July 2019

(CBCS - 2 014 Scheme)

Management

Paper 2.5 - FINANCIAL MANAGEMENT

Time : 3 Hours] [Max. Marks : 70

Instruction : Answer All the Sections.

• 1.
SECTION -A
Answer any FIVE of the following. Each question carries 5 marks :
Explain the "Emerging role of finance manager in India".
(5 x 5 = 25)

2. Discuss the importance of venture capital to developing countries.

3. "D epreciation is an important source of working capital". Do you agree? Defend

your answer.

4. The following information relates to XYZ Ltd. :

Rs.
Paid-up equity capital 20,00,000
Earnings of the company 2,00,000

• Dividend paid
Price-earning ratio
Number of shares outstanding
1,60,000
125
20,000

You are required to find out whether the company's divide nd pay out r atio 1s
optimal, using Walter's Model.

5. The following data are available for X Ltd. :

Selling Price per unit = ~ 120
Variable cost per unit = ~ 70
Fixed cost = ~ 2,00,000
(a) What is the operating leverage when X Ltd. produces and sells 6,000 units?
(b) What is the percentage c hange that will occur in the EBIT of X Ltd. if
output increases by 5 % ?

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Q.P. Code : 61315

6. Vi shnu Stee ls Ltd . has issu ed 30,000 irredeemable J 4'% Deben ture(3 of Rs. 15()
each . Th e cost of noa ta ti on of Debentures is 5% of th e totaJ issued amoun t. The
•
company's taxati on rate is 40%. Calcu late the cost of debt.

7. A firm has two alte rn ative pl ans for raising additional fund s oH J 0 ,00 ,000 :
(a) Issue of 10,000 deben tures oH 100 each bearing 10% interest per annum.
(b) Issu e of 4 ,000 debentures of < 100 each bearing 10% in terest per annum
and balan ce by the issue of 12% preference shares.
You are required to calculate th e Financial Break Even Point for each plan
assuming a tax rate of 50%.

SECTION - B
Answer any THREE of the followin g. Each question carries 10 marks :
(3 X 10 = 30)

8. "Wealth Maximisation of the organisation leads to Economic growth of the

country". Discuss.

9. A company proposes to install a machine involving a capital cost of < 1,80,000.

The life of the machine is 5 years and its salvage value at the end of the life is nil.
The machine will produce the net operating income after depreciation of < 34,000
per annum. The company's tax rate is 45%.
The net present value factors for 5 years are as under :
Discounting rate: 14 15 16 17 18
Cumulative factor : 3.43 3.35 3.27 3.20 3. 13

You are required to calculate the internal rate of return of the proposal.

10. A company has the following capital structure:

(Rs . lakhs)
•
Equity Capital 1,00,000 shares of Rs . 10 each 10
Reserves and surplus (retained earnings) 8
12% debentures 5,000 numbers of Rs. 100 each 5
23
(a) If the company is paying dividend at 27%, calculate the cost of equity and
weighted average cost of capital, based on book values.
(b) If the market value of equity shares is Rs. 15 each and if the debentu res are
quoted at Rs. 95 each , what is the weighted average cost of capital , based
on market values?
Note : Tax rate in both cases is 50%.

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 Q.P. Code : 61315

11 . Compu te the market vaJu e of the firm vaJue of shares and the average cost of
capitaJ :
~
Net operating income 2,00,000
TotaJ investment 10,00,000
Equ ity capitaJisation rate :
(a ) If the firm uses no debt 10%
(b) If the firm uses~ 4 ,00,000 debentures
(c) If the firm uses~ 6 ,00,000 debentures
Assume that t 4 ,00 ,000 debentures can be raised at 5% interest, whereas

•
~ 6,00,000 debentures can be raised at 6% interest .

SECTION - C
12. Case Study (Compulsory) : (1 X 15 = 15)
The Board of Directors of Nanak Engineering Company Private Ltd. requests you
to prepare a statement showing the Working Capital Requirements for a level of
activity of 1,56,000 units of production.
The following information is available for your calculations :
Per unit
t
(a) Raw materiaJs 90
Direct labour 40
Overheads 75
205
Profit 60
Selling price per unit 265
(b) (i) Raw materials are in stock, on average one month.
(ii) Materials are in process, on average 2 weeks.
(iii) Finished goods are in stock, on average one month.
(iv) Credit allowed by suppliers, one month.
(v) Time lag in payment from debtors, 2 months.
(vi) Lag in payment of wages, 1½ weeks.
(vii) Lag in payment of overheads is one month.
20% of the output is sold against cash. Cash in hand and at bank is
expected to be t 60,000. It is to be assumed that production is carried on
evenly throughout the ·year, wages and overheads accrue similarly and a
time period of 4 weeks is equivaJent to a month.

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