Reg. No.

NOVEMBER 2024 U/639/21-22/05518/2104625/

21-22/63522/2162522/
2262523/2106623(B)

PRINCIPLES OF FINANCIAL MANAGEMENT

(For B.Com (General), BBM, BCMM, BCFT, BCS)

Time : Three hours Maximum : 100 marks

SECTION A — (10 × 2 = 20 marks)

Answer ALL the questions.

1. State the objectives of Financial Management.

2. What are the features of Capital Budgeting?

3. Define Cost of Capital.

4. What is meant by Dividend Policy?

5. Explain the concept of Working Capital.

6. What do you understand by Trading on Equity?

7. Calculate Pay Back Period for a project which requires a cash

outlay of 1,00,000 and generates cash inflows of 25,000,
35,000, 30,000 and 25,000 in the first, second, third and
fourth years respectively.

8. Vivek Ltd. has issued 12,000 12% Preference shares of 100

each. The shares are redeemable after 10 years at a premium of
10%. Floatation costs are 4%. Calculate the effective Cost of
Preference Share Capital.

9. Super Power Ltd., gives you the following information:

Earnings Per Share: 45
Cost of Capital 18%
Return on Investment 18%
Ascertain the Market Value Per Share using Gardon’s Model if
the Payout Ratio is 30%.
10. Kamalesh limited is engaged in customer retailing. You are
required to forecast its working capital requirements from the
following information.
Projected Annual Sales – 6,50,000
Net profit on Cost of Sales – 25%
Average credit allowed to Customers – 10 weeks
Average credit allowed by Suppliers – 4 weeks
Average Stock carrying (in terms
of sales requirements) – 8 weeks

SECTION B — (5 × 7 = 35 marks)

Answer ALL the questions.

11. (a) ABC Ltd., is finance a project costing of 10,00,000 the

capital structure consists of the following securities
Sources of Funds Amount

10% Debentures 5,00,000

12% Preference Shares 1,00,000
Equity Share Capital of 100 4,00,000

Sales for the year of operation are projected at 8,00,000.

The EBIT is expected to be 20% on sales. Corporate tax
50%. You required to determine the Company’s Earnings
Per Share (EPS).

Or
(b) Calculate (i) Operating Leverage (ii) Financial Leverage
and (iii) Combined Leverage.
Particulars Firm A Firm B Firm C

Output (units) 3,00,000 75,000 5,00,000

Fixed cost ( ) 3,50,000 7,00,000 75,000
Variable cost per unit ( ) 1.00 7.50 0.10
Interest expenses ( ) 25,000 40,000 –
Selling price per unit ( ) 3.00 25.00 0.50
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12. (a) Discuss the factors influencing the Capital Budgeting
Decisions.

Or
(b) It is proposed to introduce a new machine to increase the
production capacity of department X. Two machines are
available Type ‘A’ and Type ‘B’. The following information
is available
Details Type ‘A’ Type ‘B’

Cost of machine 3,50,000 6,30,000

Estimate life (years) 7 years 10 years
Estimate savings in scrap p.a. 20,000 32,000
Additional cost of indirect 10,000 16,000
material p.a.
Estimate savings in wages :
Employees not required 15 20
Wages per employee p.a. 10,000 16,000
Addition cost of maintenance p.a. 7,200 12,000
Addition cost of supervision p.a. 24,000 36,000
The rate of taxation can be regarded as 50% of profit.
Which machine can be regarded as recommended for
purchase? State your reasons.

13. (a) Build the factors determining the Cost of Capital.

Or
(b) Balan Ltd., has a stable income and stable dividend policy.
The average annual payout is 25 per share (face value:
100). You are required to ascertain:
(i) Cost of Equity Capital
(ii) Cost of Equity capital if the market price of the share
is 150.
(iii) Expected market price in year 2 if cost of equity is
expected to rise to 20%.
(iv) Dividend payout in year 2 if the company were to
have an expected market price of 160 per share at
the existing cost of equity.

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14. (a) Classify the different types of Dividend policy of a firm.

Or
(b) Joy Ltd., has 40,000 shares outstanding. The current
market price of these shares is 15 each. The Board of
Directors of the company has recommended 2 per share
as dividend. The rate of capitalization appropriate to the
risk class to which the company belongs is 20%.
Based on the MM Approach, calculate the market price of
the share of the company when the recommended dividend
is (i) declared and (ii) not declared.

15. (a) Prepare an Estimate of working capital requirements for

the coming year from the following information of a trading
concern.
Projected annual sales - 2,00,000 units
Selling price per unit - 8
Percentage of net profit on sales = 25%
Average credit period allowed to customers – 6 weeks.
Average credit period allowed by suppliers – 4 weeks
Average stock holding in terms of sales requirements – 10
weeks.
Allow 10% for Contingencies.

Or
(b) From the following information relating to Manish Ltd.,
calculate
(i) Operating Cycle
(ii) Number of operating cycles in a year assuming a 360
days.
(iii) Average working capital required, if annual cash
operating expenses are 15 Lakhs.
Stock holding: Raw Materials : 2 month
Work – in – progress : 15 days
Finished goods : 1 month
Average Debt collection period : 2 months
Average payment period : 45 days

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 SECTION C — (3 × 15 = 45 marks)

Answer ALL the questions.

(Q.No. 16 is compulsory).

16. The following is the Capital Structure of Millers Ltd., Calculate

the Weighted Average Cost of Capital using Book Value Weights
and Market Value Weights:
Source of funds Book Market Cost of Capital
Value Value After Tax ( )
( ) ( )
14% Preference 2,00,000 2,30,000 14%
Share Capital
Equity Capital 5,00,000 7,50,000 17%
16% Debt 3,00,000 2,70,000 8%
Total 10,00,000 12,50,000

17. (a) Golden Ltd.. is considering investing in project requiring a

capital outlay of 8,00,000. Forecast for annual net
incomes after depreciation but before tax and the present
value of 1 @ 10% are as follows:
Year 1 2 3 4 5
Profits ( ) 4,00,000 4,00,000 3,20,000 3,20,000 1,60,000
P.V. factor 0.909 0.826 0.751 0.683 0.621

Depreciation may be taken as 20% on original cost and

taxation at 50% of net income.
You are required to evaluate the project according to each
of the following methods:

(i) Payback Period

(ii) Rate of Return on Original Investment method

(iii) Net Present Value

(iv) Profitability Index

Or

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 (b) Kaveri Ltd., needs 10,00,000 for installation of a new
factory which would yield an annual EBIT of 1,80,000.
The company has the objective of maximizing the earnings
per share. It is considering the possibility of issuing equity
shares plus raising debt of 1,50,000. 4,50,000 or
7,50,000. The current market price per share is 25 which
is expected to drop to 20 per share if the market
borrowings were to exceed 6,00,000. Cost of borrowings
are indicated as under:
Upto 2,00,000 - 8% per annum

Between 2,00,000 and 5,00,000 - 10% per annum

Between .5,00,000 and 7,50,000 - 12% per annum

Assuming the tax rate to be 40%. Determine Earnings Per

share (EPS) and suggest the scheme which would meet the
objective of the management.

18. (a) Following are the details regarding three companies A

Ltd., B Ltd.. and C Ltd.,
Details A Ltd.. B Ltd., C Ltd.,
Internal Rate of Return 15% 5% 10%
Cost of Capital 10% 10% 10%
Earnings Per Share 8 8 8

Calculate the value of all equity share of each of these

companies applying Walter’s Model when dividend Payout
Ratio is (i) 25% (ii) 50% and (iii) 75% Comment on the
result drawn.

Or
(b) Cost sheet of a company provides the following data.
Elements of cost Per unit ( )
Raw Materials 50
Direct Wages 20
Overheads (including depreciation of 10) 40
Total Cost 110
Add: Profit 20
Selling Price 130

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Additional information:
(i) Raw materials are in Stock on an average for one
month.
(ii) Average materials in progress are for half-a-month.
(iii) Credit allowed to Debtors – one month.
(iv) Average time lag in payment of wages – 10 days.
(v) Average time lag in payment of overheads – 30 days.
(vi) 25% of the sales on Cash basis.
(vii) Finished goods lie in the warehouse for one month.
(viii) Cash balance expected to be 1,00,000.
You are required to prepare a statement of working capital
needed to finance a level of activity of 54,000 units of
output. Production is carried evenly throughout the year
and wages and overheads accrue similarly.

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21-22/63522/2162522/
2262523/2106623(B)