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Con. 5922-10.

(3 HOURS)

Advanced Financial Management -2010 (FURTHER REVISED COURSE )

MR-5892 Total Marks : 60

Instruction to Students : 1) Answer any five questions. All questions carry equal marks 2) Presentation should be neat and clean. Marks will be deducted for poor presentation 3) All the sub-questions of the main question should be attempted together 4) If students attempt more than five questions, only first five will be considered 5) Every new question should start on a new page 1. Explain the important function of either Credit Rating Information Services of India Ltd (CRISIL) or Information & Credit Rating Services Ltd (ICRA) a) Discuss the P/E ratio approach to stock valuation b) Describe and evaluate the adjusted book value approach to corporate valuation. A firm has total sales of Rs.15lacs with 40% variable cost and total cost of Rs.900,000 it also has debt of Rs.800,000 at 10% rate of interest. If the tax rate is 45%, calculate: a) Operating Leverage b) Financial Leverage c)Combined Leverage A Ltd. Paid a dividend of Rs.5 per share for 2009-2010. the company follows a fixed dividend payout ratio of 30% and earns a return on 18% on its investments. Cost of capital is 12%. What is the price of the shares of A Ltd. As per Walters model? Explain in brief any three of the following : a) Revival programme for a sick industrial unit b) Procedure pertaining to IPOs c) Regulation of financial markets in India d) Rationale of disinvestment in public Sector Enterprise e) Important sources of financing long term projects in India f) Financial interest rate Swaps The following is the data regarding two Companies X and Y belonging to the same equivalent risk class: Number of ordinary shares Market price per share 6% Debentures Profit before interest Company X 90,000 Rs.1.20 60,000 Rs.18,000 Company Y 150,000 Rs.1.00 ------Rs.18,000

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All profit after debentures interest are distributed as dividends. Explain how under Modigliani & Miller approach, an investor holding 10% of shares in Company X will be better off in switching his holding to Company Y 7. The balance sheet of Deepak Ltd. On December 31,2009 us shown below: Particulars Share Capital Retained Earnings Term Loans Rs. 150 180 80 Particulars Fixed Assets Inventories Receivables Rs. 400 200 150

Short Term Bank Borrowings Accounts Payable Provisions

200 140 50 800

Cash

50

800

The sales of the firm for the year ending on December 31,2009 were 1,000. its profit margin on sales was 6% and its dividend payout ratio wad 50%. The tax rate was 60%Deepak Ltd. Expects its sales to increase by 30% in the year 2010. the ratio of assets to sales and spontaneous current liabilities to sales would remain unchanged. Linkwise the profit margin ratio, the tax rate and the dividend payout ratio would remain unchanged. Required: a) Estimate the external funds requirement for the year 2010 b) Prepare Projected balance sheet and Projected Profit & Loss Account assuming that the external funds requirement would be raised equally from term loans and short term bank borrowings. 8. Acme Ltd is considering a capital project for which the following information is available Investment Outlay Project life Salvage value Annual Revenues Cost of equity Cost of debt (post tax) 1,000 10 Yrs 0 2,000 18% 10% Debt equity ratio Depreciation (for tax purpose) Tax rate Annual cost (excluding depreciation ,Interest and taxes) 1:1 SLM 40% 1,400 --

a) Calculate the EVA of the project over its life: b) Compute the NPV of the project ****************************************

Con. 5190-09 (3 HOURS)


Instruction to Students :

Advanced Financial Management -2009 (FURTHER REVISED COURSE )

DS-5735 Total Marks : 60

Answer any five questions. All questions carry equal marks Presentation should be neat and clean. Marks will be deducted for poor presentation All the sub-questions of the main question should be attempted together If students attempt more than five questions, only first five will be considered Every new question should start on a new page 1. There are two main regulators to regulate the Indian Financial system RBI and SEBI. Explain the role of SEBI in detail . do you think that these two agencies can be merged to create a super regulatory body for an effective regulation of the financial system? a) Explain the different ways is which a venture capitalist can finance an investment proposal. b) What do you understand by financial derivatives? Explain in detail. Write short notes any Three of the following : a) Credit ration methodology for a financial instrument b) Book building process for IPO

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c) Revival programme for a sick industrial unit d) functions of investment bank e) Rationale of disinvestment in Public Sector Enterprise f) Sources of foreign currency finance for a company 4. Following information is available form the books of XYZ Ltd. (Rs.In lakh ) Sales 500 Cost of Raw Materials 200 Labour cost for manufacturing 100 Interest on borrowings 60 The capitalization rate for debt is 10% and the capitalization rate for the entire firm is 12.5%. assuming that the firm does not retain any earning and there is no tax, as per net operating income approach a) What is the total market value of the firm? b) What is the market value of the debt of the firm? c) What is the market value of the equity of the firm? d) What is the equity capitalization rate? 5. A firm has sales of Rs.10,00,000. variable cost is 70%, total cost is Rs.9,00,000 and Debt of Rs.5,00,000 at 10% rte of interest. If tax rate is 40% calculate : a) Operation Leverage b) Financial leverage c) Combined leverage d) If the firm wants to double up its earning before interest and tax (EBIT), how much of a raise in sales would be needed on a percentage basis? a) ABC company Ltd. Is expecting 10% return on total assets of Rs.50lakh. the company has outstanding shares 20,000. the directors of the company have decided to pay 40% of earning as dividends. The rate of return required by shareholders is 12.5% Rate of return expected on investment is 15%. You are required to determine the price of the shares using Walters model. b) The current market price of the shares of X ltd. Is rs.120 per share. The company is considering Rs.6.40 per share as dividend. The company belongs to a risk class for which the capitalization rate is 9.60%. Based on M and M approach calculate the market price of the share of the company when the dividend is declared and not declared. What is your learning out of it? 7. The income statement of Modern Electronics Limited for years I and II is given below (All figures are in Rs.Lakh) :Income Statement Year I (Rs.) Year II (Rs) Net Sales 2,400 2,670 Gross Profit 1,830 2,040 Cost of goods sold 570 630 Selling expenses 180 195 General and administration expenses 180 156 Depreciation 150 192 Operating Profit 60 87 Non-operating surplus/ deficit 24 30 Earnings before interest and tax 84 117 Interest 30 33 Earnings before tax 54 84 Tax 21 30 Earnings after tax 33 54 Dividends 18 21 Retained earnings 15 33 The balance sheet of Modern Electronics Ltd. as of the end of years I and II is given below: -

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Balance Sheet Assets : Fixed assets (net) Investments Current assets, loans and advances Cash and bank Receivables Inventories Prepaid expenses Miscellaneous expenditures and losses Liabilities Share capital Equity Reserves and surplus Secured loans Term loans Bank borrowings Current liabilities Trade creditors Provisions

Year I (rs) 900 60 36 540 519 123 45 2,223

Year II (Rs) 1,140 60 42 600 576 135 42 2,595

450 354 432 489 378 120 2,223

450 387 525 597 501 135 2,595

a) Using the per cent of sales method (except, assume that dividends are raised to 24, depreciation ot 180 and interest to 36) prepare the pro forma income statement for year III. Assume that the sales will be Rs.3,060 in year III. b) Assume that all items on the assets side, except investment and miscellaneous expenditures and losses, will grow proportionally to sales. Likewise, trade credit will be proportional to sales. Finally estimate the amount of external financing needed for year III.

c) The tax rate expected is 35%. This will be the only provision in year III. 8. The following is the balance sheet of a corporate firm as on March 31, current year :____________________________________________________________________________ Liabilities Amount (Rs) Assets Amount (Rs.) ____________________________________________________________________________ Share capital (Rs.100 Fully paid up) 200 Reserves and surplus 80 Sundry creditors & Other Liabilities 60 Land & Buildings Plant and machinery 80 160

Marketable securities 20 Stock 40 Debtors 30 Cash and bank balance 10 ______________________________________________________________________ 340 340 _____________________________________________________________________ Profit before tax for current year end amount to Rs.128 lakh, including Rs.8 lakh as extraordinary income Of Rs,2 lakh in the current year form investments in marketable securities . it is not usual for the firm to have excess cash and invest in marketable securities. However, an additional amount of Rs.10 lakh per annum, in terms of advertisement and other expenses, will be required to be spent for the smooth running of the business in the years to come. Market values of land and buildings, and plant and machinery are estimated at Rs.180 lakh and Rs.200 lakh respectively. In order to match the revalued figures of these fixed assets, additional respectively in order to match the revalued figures of these fixed assets additional depreciation of Rs.12 lakh is required to be taken into consideration. Effective corporate tax rate may be taken at 30 percent. The capitalization rate applicable to businesses of such risks is 15 percent. a) From the above information. Compute the value of business, value of equity and price per equity share, based on the capitalization method b) Assuming everything to be the same as given above calculate the expected market price of the share given the P/E multiple of ---(i) 8 times and (ii) 5 times ******************************

Con. 5321-08 (3 HOURS)

Advanced Financial Management -2008 (FURTHER REVISED COURSE )

BB-8528 Total Marks : 60

Instruction to Students: 1) The question paper has two section : A and B. students must attempt questions form only One of these two sections. 2) Total 5 questions are to be attempted. All Five questions must be either from section A or from Section B 3) On the Top of the answer sheet the students must mention which section they have chosen 4) Correct and to the point answers to theoretical questions will be assessed like practical problems. Thus, students attempting more theoretical questions will not be at a disadvantage 5) it students attempt more than five questions, only first five will be considered 6) All questions carry equal marks. SECTION A 1. Ellite India Ltd. A four year young company, is growing rapidly presently it has 80,000 equity shares of Rs.50 each and 10% debentures of Rs.20,00,000.

The summary of income statement for last year is given below:Sales Less : V Expenses F Expenses EBIT Interest EBT Tax (35%) PAT EPS 50,00,000 25,00,000 9,00,000 34,00,000 16,00,000 2,00,000 14,00,000 4,90,000 9,10,000 11.38

The company further wants to expand its activities for which it is planning to make an additional investment of Rs.20,00,000 There are two financing options: either 40,000 equity shares of Rs.50 each, or debt funds of Rs.,20,00,000 at 12% interest The company wants to assess its position for two levels of sales projection for next year viz. Rs.70,00,000 and Rs.1,20,00,000 The ratio of variable expenses to sales will remain the same next year and fixed expenses will be Rs.13,00,000 at Rs.70,00,000 sales and Rs.26,00,000 at Rs.1,20,00,000 sales. For both the levels of sales projections the P/E ration is expected to be 2:5 in case of debto option and 3 in case of equity option. If the objective of the company is to maximize the market price of its shares then which financing option should it go for if the sales are Rs.70,00,000 and if the sales are Rs.1,20,00,000? 12 Marks 2. A company wants to assess the feasibility of a new project. It is not able to estimate the sales revenue and expenses and is not clear about sensitivity analysis. Using hypothetical figures explain to the company how it can do feasibility analysis of the project for three different levels viz. Pessimistic, expected and optimistic. 12 Marks Explain with examples any two method of corporate valuation which can be used to calculate the value of a company. 12 Marks Explain the various financing options in respect of infrastructure projects 12 Marks

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What are the benefits to investors because of the existence of financial intermediaries ? Which are the important financial intermediaries in the Indian financial system? Explain. 12 Marks a) Explain the important function of an investment banker and his role in primary issues management b) Explain in brief the process and methodology followed by a rating agency to rate a financial instrument 12 Marks What are the possible causes of an industrial unit becoming a sick unit? What according to you, can be a typical revival programme to revive a sick unit? 12 Marks Answer any two of the following :a) Explain the role of SEBI, in brief as the regulator of financial markets b) Explain in simple worlds Financial interest Rate Swaps c) Explain offshore/onshore instruments and multiple option bonds Explain in brief, any Three of the following a) Due diligence b) FIPB and joint venture formulation c) Loan syndication d) Process of bond valuation

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12 Marks 12 Marks

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e) Procedure of IPO f) Any five factors which determine the capital structure of a company SECTION -- B 1. The balance sheet of International Trade Ltd. As on 31st March,2008 is as under :All figures are in lacs) Liabilities Equity Captial (Rs.10 Per share) 10% Long Term debt Retained Earnings Current liabilities Rs. 90 120 30 60 300 Assets Building Machinery Stock Debtors Cash Rs. 150 75 50 20 5 300 12 Marks

The total assets turnover ratio of the company is 3, its fixed operating cost is 1/6 of sales and variable operating cost is 50% of sales. The corporate tax rate is 35% You are required to : i) Calculate the operating financial and combined leverage ii) Calculate the market price of the share if the P/E multiple is 2.5 iii) Calculate the level of EBIT if the EPS is (a) Rs.15 (b) Rs.25 2. The exiting capital structure of Textile India Ltd. is as under :Equity shares of Rs.100 each Retained Earnings 9% Preference shares 7% Debentures 40,00,000 10,00,000 25,00,000 25,00,000

The company wants to raise Rs.25,00,000 for its expansion project for which it is considering the following options :a) Issues of 20000 equity shares at a premium of Rs.25 per share OR b) Issue of 10% preference shares OR c) Issue of 9% debentures. Companys return on capital employed is 12% (on exiting as well as new funds) and corporate tax rate is 35% It is expected that the P/E multiples in case of the above three options would be 16, 13 and 12 respectively. Suggest the company, which alternative it should select and why? 3. a) ABC Co. Ltd has net present value of net assets Rs.100 lac which includes cash balance of Rs.10lac. it has to make the decision about declaring dividend. At the same time it is also exploring the possibility of investing in a new project. The company has three options : -

i) Do not declare any dividend and invest the available cash of Rs.10 lac in the new projects. The present Rs. (in lacs) Sales Interest on investment Profit on sale of old assets Total income Less: Manufacturing cost Admn. Cost Selling and distribution cost Depreciation Loss on sale of an old M/C EBIT Less : Interest EBT Less : Tax (30%) PAT EPS 119 lac/5lac P/E ratio 500 10 2 180 60 50 30 5 515

325 190 20 170 51 119 Rs/23.8 2 value of the future cash flows generated by this projects is Rs.20 lac OR ii) Pay Rs.10 per share as dividend. This will take away the entire cah balance of Rs.10lac OR iii) Pay dividend as suggested in the second option and also invest in a new project through a fresh equity issue of 1 lac shares of Rs.10 each. This investment will have the same effect of the company as in the first option, i. e. Rs.20 lac NPV from the project Give your recommendation to the company as to which is the best option if the company wants to maximize the shareholder value. b) The following information is available in respect of a company: Capitalization rate (Ke) = 0.12 EPS = Rs.15 Rate of return on investment (r) : (i) 0.15 (ii) 0.10 The company wants to know the effect on the market price of its shares under the two possibilities of (i.e. 0.15 and 0.10 ) under the two options (i) if it does not declare any dividend and (ii) if it declares Rs.15 as dividend. Using Walters model explain the results obtained by you. 4. The income statement and balance sheet of Five Star Ltd. is given below:Income Statement

Balance Sheet Liabilities Equity Capital (Rs.10 share) Retained earnings Long term loan Creditors Provisions Rs. 50 40 60 15 13 Assets Building Machinery Stock Debtors Bank Rs 80 70 10 12 6

178 178 The cost of equity and cost of debt is 10% and 12% respectively. The company pays 30% corporate tax. From the information given you are required to calculate the EVA. Also calculate MVA on the basis of Market value of equity capital 5. Describe the important sources of financing long term projects which can be used by the Indian companies. If they approach the financial institutions for long term finances, what important norms and policies financial institutions would apply to provide such finances? 12 Marks The Balance sheet for the current year of a company is given below (all the figures are in Rs.lacs) :Liabilities Equity Capital Retained Earnings Term Loan Short Term Borrowings Creditors Provisions Rs. 100 120 160 120 100 40 640 Assets Land & Building Machinery Furniture Bills Receivables Debtors Stock Bank Rs. 200 30 30 100 60 180 40 640

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Other information : Sales Rs.800 V. Expenses Rs.560 F.Expenses Rs.160 The following are the projections for the next year :1) The sales are expected to be Rs.1,000 2) F. expenses will increase by 25% 3) No Change in the ratio of variable expenses to sales 4) Interest expenses will be Rs.20 5) No change in fixed assets. Ignore depreciation. 6) Bank balance and other current assets will increase in proportion to sales 7) Tax to be provided at 35%. This will be the only provision next year. 8) Creditors will increase in proportion to sales. You are requires to prepared the projected income statement and balance sheet of the company for the next year.

If the company is required to raise funds (i.e. if liability side is less) they will be raised in the order of short term borrowings, term loan and if required equity capital. It is a policy of the company to maintain current ratio of minimum 1.25 : 1 and ensure that that long term loans do not exceed 40% of total long term funds. If the asset side is less then the difference will be considered as cash balance available 7. 8. 9. Explain the important functions of either Credit Rating Information Services of India Ltd. (CRISIL) or information and Credit Rating Services Ltd. (ICRA) 12 Marks Which are the important financial intermediaries in the Indian financial system? How are they beneficial to the investors? Explain Explain in brief, any three of the following a) important financial derivatives b) MOU between government and a PSU c) Venture capital funding in India d) Revival of a sick unit and viability study e) Regulation of financial markets in India f) Procedure pertaining to IPOs ********************************* 12 Marks