FM12

Financial Management

Assignment I

Assignment Code: 2010FM12A1 Last Date of Submission: 31st March 2010

Maximum Marks: 100

Attempt all the questions. All questions are compulsory and carry equal marks.

Section A

1. (a) What is the prime goal of a business organization – profit maximization or shareholders’ wealth
maximization? Explain.
(b) What are the functions of financial management?

2. (a) What do you understand by time value of money? Explain any one method where it is applied in capital
budgeting.
(b) Explain IRR method with an example.

3. (a) Explain the meaning of capital structure. How does it affect the EPS? Explain with an example
(b) Explain the following theories of Capital structure.
i. Net Income approach
ii. Miller and Modigliani approach.

4. Explain the cost of:

(i) Degree of Operating Leverage
(ii) Degree of Financial Leverage
(iii) Composite leverage.
 Section B

5. Case Study

M/s Gemini Limited has the following book value capital structures as on March 31, 2005

Rs
Equity share capital (1,00,000 shares) 20,00,000
11.5 % Preference shares 10,00,000
10% debentures 30,00,000
60,00,000

The equity share of the company sells for Rs.30. It is expected that the company will pay next year a
dividend of Rs.3/- per equity share, which is expected to grow at 5% per annum. Assume 40% corporate
tax rate. You are required to calculate:

i. Weighted average cost of capital (WACC) of the company based on the existing capital structure.
ii. New weighted average cost of capital, if the company raises an additional Rs.10 lakhs debt by
issuing 12% debentures. This would result in increasing the expected equity dividend to Rs.3.60
and leave the growth rate unchanged, but the price of equity share will fall to Rs 24/- per share.

FM12
 Financial Management

Assignment II

Assignment Code: 2010FM12A2 Last Date of Submission: 15th May 2010

Maximum Marks: 100

Attempt all the questions. All questions are compulsory and carry equal marks.

Section A

1. a) Explain the types and sources of risk in capital budgeting decision.

b) What are the steps involved in sensitivity analysis?

2. a) What are the costs associated with maintaining receivable?

b) Explain the variables of credit policy.

3. Explain the meaning of inventory management. Discuss the techniques of inventory control.

4. Assume perfect capital market. An all equity firm has Rs.6,000 in cash and assets worth Rs 28,000. The
firm has 1200 shares outstanding and no investment opportunities..
a. If the firm pays no dividend today, what is the stock price and the wealth of stockholders?
b. If the firm pays a dividend of Rs.6000 today.
i. What is the stock price before dividend?
ii. What is the stock price after dividend?
iii. What is the wealth of stockholders after the dividend?

c. If the firm pays a dividend of Rs.9000 today.

i. What is the stock price before dividend?
ii. What is the stock price after dividend?
iii. How many new shares must be issued?
iv. How does the dividend affect stockholder wealth?

Section B
5. Case Study

The following accounting information and financial ratio of M/s Rukamani Limited relate to the year ended
31st March’2006.

Accounting information : 2006

Gross profit : 15% of sales
Net profit : 8% of sales
Raw material consumed : 20% of works cost
Direct wages : 10% of works cost
Stock of raw material : 3 month’s usage
Stock of finished goods : 6% of works cost
Debt collection period : 60 days

Financial ratio
Fixed assets to sales : 1:3
Fixed assets to current assets : 13:11
Current ratio : 2:1
Long term loan to current liabilities : 2:1
Capital to reserves and surplus : 1:4

All sales are on credit.

If value of fixed assets as on 31st March’2006 amounted to Rs.26 lakhs, prepare a summarized profit
and loss account of the company for the year ended 31st March’2006 and also the balance sheet as on
31st March’2006.