Financial Management

 Section A – Short Notes on 4 topics/questions (5 marks each) – Total 20 marks

Q1. Define capital structure. Discuss the factors which influence the planning of capital

structure?

Q2. Explain various methods of capital budgeting. Which method in your opinion is the best and why?

Q3. "Working Capital Management plays a vital role in the smooth running of day to day operations of a business." Discuss.

Q4. A company has to make a choice between two projects namely A and B. The initial capital outlays of two Projects are Rs. 1, 35,000 and Rs. 2, 40,000 respectively for A and B. There will be no scrap value at the end of the life of both the projects. The opportunity Cost of Capital of the company is 16%. The annual income areas under:.

Year	Project A	Project B
1		Rs. 60,000
2	Rs. 30,000	84,000
3	1,32,000	96,000
4	84,000	1,02,000
5	84,000	90,000

You are required to calculate for each project:

(i) Discounted Payback period

(ii) Profitability Index

(iii) Net Present Value

Section B – Long Notes on 3 topics/questions (10 Marks each) – Total 30 marks

Q5. Determine the market value of equity shares of the company from the following information:

Earnings of the company Rs. 5,00,000

Dividend paid 3,00,000

Number of shares outstanding 1,00,000

Price –earning ratio 8

Rate of return on investment 15%

Are you satisfied with the current dividend policy of the firm ?

If not , what should be the optimal dividend payout ratio ? Use Walter's Model .

Q6. Following information is available in respect of XYZ Ltd.

Earnings for Equity Shareholders Rs. 5400000

Dividends distributed Rs. 2140000

Debt-Equity Ratio (Debt is risk-free) 1:2

No. of Equity shares 100000

Market Price per equity share Rs. 321

Tax rate 35%

Standard deviation of market returns 10%

Standard deviation of market returns 20%

Correlation between company equity and market 0.7

Growth rate in earnings 11%

Dividend Yield, Present 7%

Stock market return on equity 16%

Return on Govt. securities 12%

Estimate the WACC using (i) Dividend Valuation model, (ii) CAPM.

Q7. As a financial analyst of a large oil company, you are required to determine the weighted average cost of capital of the company using (i) book value weights and (ii) market value weights.The following information is available for your perusal:

The company's present book value capital structure is:

Preference shares(Rs. 100 per share) Equity shares(Rs.10 per share) Debentures(Rs.100 per debenture)

200000 1000000 800000

All these securities are traded in the capital market. Recent prices are:

Debentures @ Rs.110 per debenture

Preference Shares@ Rs.120 per share

Equity shares@Rs.22 per share

Anticipated external financing opportunities are:

(i) Rs.100 per debenture redeemable at par; 10 year- maturity, 13% coupon rate,4 % flotation costs, sale price Rs. 100

(ii) Rs 100 preference share redeemable at par, 10 year maturity, 14% dividend rate, 5% flotation cost, sale price Rs.100

(iii) Equity shares: s 2 per share flotation costs, sale price@ rs.22

In addition, the dividend expected on the equity share at the end of the year is rs2 and the earnings are expected to increase by 75 p.a. the firm has a policy of paying all its earnings in the form of dividends. The corporate tax rate is 50%.

Section C– Case Studies/Caselets/Situational questions (25 Marks each) – Total 50 marks

Q8. ABC ltd is currently producing 2000 units per month. It is contemplating to increase the monthly production to 4000 units by working an extra shift in such a way that work started in the first shift will continue in the extra shift. A quantity discount of 10% on all purchases of raw material is expected from the supplier. The selling price, Variable cost and fixed cost would remain the same. Following is the income statement for current year:

Income Statement

Sales(24,000*18)				4,32,000
Less:	Raw Material (24,000*Rs 6)		1,44,000
	Wages	Variable(24,000*3)	72,000
		Fixed	48,000
	Overheads	Variable(24,000*1)	24,000
		Fixed	96000	3,84,000
	Profit			48,000

Other Information:

a) The credit period allowed to customer is 3 months and would remain the same

b) The lag period for payment of suppliers would remain the same at 2 months

c) Wages and overheads are paid with a lag of half a month and would be same

d) Finished goods stocks at present is maintained at 4500 units. Raw material holding period is 3 months.

e) The work in progress period id one months and is valued at the prime cost

You are required to prepare the income statement for next year after the increase in monthly production is introduced. Also find out the working capital requirement both at present and for next year.

Q9. Oil Trading Company is engaged in the expansion of its production capacity which is expected to increase the operating profits from 20% to 25%. The proposal requires additional fund of Rs. 1,00,00,000 for which different alternatives of raising funds are being evaluated. These are:

	Option I	Option II	Option III	Option IV
14% Pref. Sh. Capital	Rs. 20,00,000	Rs. 20,00,000	-----	Rs. 10,00,000
Equity Share Capital	40,00,000	20,00,000	20,00,000	50,00,000
14% partly Conv. Debenture	-----	-----	30,00,000	-----
16% Debenture	-----	20,00,000	-----	40,00,000
20% Term Loan	-----	40,00,000	50,00,000	-----
22% Term Loan	40,00,000	-----		-----
	1,00,00,000	1,00,00,000	1,00,00,000	1,00,00,000

Additional Information:

(i) The company belongs to 30% tax bracket

(ii) The 50% of the partly convertible debentures are to be converted into Equity Share capital at par at the end of 4^th year.

Evaluate different options of raising the required funds in view of the fact that the firm wants to maximize the dividends to the shareholders (100% payment ratio) and the period of 3 years is considered sufficient for capital structure division.

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