Subject code-PFM1F Subject- Financial Management General Instructions: The Student should submit this assignment in the handwritten

n form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept Each Question mentioned in this assignment should be answered within the word limit specified corresponding to each question. The student should only use the Rule sheet papers for answering the questions. The student should attach this assignment paper with the answered papers. Failure to comply with the above Five instructions would lead to rejection of assignment. Specific Instructions: There are four Questions in this assignment. The student should answer all the four questions. Marks allotted 100. Each Question carries equal marks unless specified explicitly.
Question No 1:
A ) A firm is comptemplating stricter collection policies. The following details are

available: i) At present the firm is selling 36000 units on credit at a price of Rs 32; the variable cost per unit is Rs 25 while the average cost per unit is Rs 29; average collection period is 68 days ; and collection expenses amount to Rs 10,000; bad debts are 3% If the collection procedures are tightened , additional collection charges amounting to Rs 20000 would be required , bad debts will be 1 %; the collection period will be 40 days ; sales volume is likely to decline by 500 units.

ii)

Assuming a 20% rate of return on investments, what would be your recommendations? Should the firm implement the decision? B ) The Hypothetical limited is contemplating to have an access to a machine for a period of 5 years. Discussions with various financial institutions have shown that the company can have the use of machine for the stipulated period through leasing arrangement or the requisite amount can be lent at 14 % to buy the machine. The firm is in the 50% tax bracket. In case of leasing , the firm would be required to pay annual end of the year lease rent of Rs 120000 for 5 years. All maintenance , insurance and other costs are to be borne by the lessee. In the case of purchase of the machine (which costs Rs 343000), the firm would have 14% five year loan to be paid in 5 equal annual installments, each installments becoming fue at the end of each year. The machine would be depreciated on a straight line basis , with no salvage value. Advise the company which option it should go for, assuming lease rents are paid (a) at the end of the year (b) in advance

Question 2
a) A company is using a machine the original cost of which was Rs 3,70,000 . the machine is 2 years old and has a remaining useful life of 10 years . It is expected that scrapping the old amchine in 10 years from now will fetch Rs 10,000 but if it is sold now to another firm in the industry it would receive Rs 1,00,000 : the straight line method of depreciation is in effect. The management is contemplating replacing it with a newer and more efficient machine which costs Rs 420000 and has an estimated salvage value of Rs 20000 after its useful life of 10 years. The new machine will have a greater capacity and annual returns are expected to go up by Rs 40,000 per year. The operatinf efficiency of the new machine will also produce an expected savings of Rs 50,000 a year. The companys tax rate 55%. A 25% investment allowance will apply if the new machine is purchased. Additionally , if the new machine is purchased, inventories will increase by Rs 50,000 receivables by Rs 25000 and payables by Rs 20000 during the life of the project. Determine the economic desirability of the purchase of the machine, assuming the cost of capital to be 12 % b) What is meant by the term leverage? What are its types? With what type of risk is each leverage generally associated ? why is the increasing leverage ratio indicative of increasing risk? State the situation when there is neither a financial risk nor business risk.

Question 3
A company is considering the possibility of raising Rs 100 million, by issuing debt, preference capital, and equity and retaining earnings. The book values and the market values of the issues are as follows:

(Rs in millions) Book Value Ordinary Shares Preference Shares Debt 40 20 40 100 Market Value 60 24 36 120

The following costs are expected to be associated with the above mentioned issues of capital. (Assume a 30 per cent tax rate.) i The debt is in the form of Rs 1,000 face value debenture with a 16 per cent rate of interest. ii The 11 per cent Rs 100 face value preference shares currently sell at Rs 120 per share. iii The firms ordinary share is currently selling for Rs 150. It is expected that the firm will pay a dividend of Rs 12 per share at the end of the next year, which is expected to grow at a rate of 7 per cent. Compute the weighted average cost of capital using (i) book value weights (ii) market value weights.

Question 4
a) Mr. Sundaram is planning to retire this year. His company can pay him a lump sum retirement payment of Rs 2,00,000 or Rs 25,000 lifetime annuity-whichever he chooses. Mr. Sundaram is healthy and estimates to live for another 20 years. If his interest rate is 12 per cent, which alternative should he choose? b) Ms. Punam is interested in a fixed annual income. She is offered three possible annuities. If she could earn 8 per cent on her money elsewhere, which of the following alternatives, if any, would she choose? Why? (i) Pay Rs 80,000 now in order to receive Rs 14,000 at the end of each year for the next 10 years. (ii) Pay Rs 1,50,000 now in order to receive 14,000 at the end of each year for the next 20 years.

(iii) Pay Rs 1,20,000 now in order to receive Rs 14,000 at the end of each year for the next 15 years.