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ASSIGNMENT QUESTIONS

Problems
Unit 1: Introduction to Financial Management
1) Find out from the following:
a) P.V. Ratio
b) Fixed cost
c) Sales volume to earn a profit of Rs.40,000
Sales
Profit
Variable Cost

Rs.1,00,000
Rs.10,000
70%

2) The sales turnover and profit during two years were as follows:
Year
Sales (Rs.)
2002
1,40,000
2003
1,60,000
You are required to calculate:

Profit (Rs.)
15,000
20,000

a) P/V Ratio
b) Sales required to earn a profit of Rs. 40,000
c) Profit when sales are Rs.1,20,000
3) From the following information, calculate the break-even point in units and in sales value:
Output
Selling price per unit
Variable Cost per unit
Total fixed cost

3,000 units
Rs.30
Rs.20
Rs.20,000

4) From the following particulars, calculate:


a) Break-even point in terms of sales value and in units.
b) Number of units that must be sold to earn a profit of Rs.90,000
Fixed factory overheads cost
Rs.60,000
Fixed selling overheads cost
Rs.12,000
Variable manufacturing cost per unit
Rs.12
Variable selling cost per unit
Rs.3
Selling price per unit
Rs.24

5) From the following data, you are required to calculate:


a) P/V Ratio
b) Break-even sales with the help of P/V Ratio
c) Sales required to earn a profit of Rs.4,50,000
Fixed expenses
Variable cost per unit: Direct material
Direct labour
Direct overheads
Selling price per unit
6) From the following information calculate:

Rs.90,000
Rs.5
Rs.2
100% of Direct labour
Rs.12

a) P/V Ratio
b) Break-even point
c) Margin of safety
Total Sales
Selling price per unit
Variable Cost per unit
Fixed cost

Rs.3,60,000
Rs.100
Rs. 50
Rs.1,00,000

7) If you deposit Rs. 5,000 today at 6% rate of interest, in how many years will this amount
double?
8) Calculate the compound value of Rs. 10,000 at the end of 3 years at 12% rate of interest,
when interest is calculated on (a) yearly basis and (b) quarterly basis.
9) A company offers 12% rate of interest on deposits. What is the effective rate of interest if
the compounding is done (a) half yearly (b) quarterly and (c) monthly?
10) Mr. A deposits Rs. 1,000 at the end of every year for 4 years and the deposit earns a
compound interest @ 10% p.a. Determine how much money he will have at the end of 4
years?
11) Mr. X is to receive Rs. 5,000 after 5 years from now. His time preference from money (rate
of interest) is 10% p.a. Calculate its present value by using discount factor tables.
12) Calculate present value of the following cash flows assuming a discount rate of 10%.
Year

Cash Flows (Rs.)

5,000

10,000

10,000

3,000

2,000

Unit 2: Capital Budgeting


Q.1. Determine the payback period for a project which requires a cash outlay of Rs. 10,000 and
generates cash inflows of Rs. 2,000, Rs. 4,000, Rs. 3,000 and Rs. 2,000, in the first, second, third and
fourth year respectively
Q.2. A project cost Rs. 5,00,000 and yields annually a profit of Rs. 80,000 after depreciation @ 12%
p.a. but before tax of 50%. Calculate the payback period.
Q.3. Calculate discounted payback period from the information given below:
Cost of project

Rs. 6,00,000

Life of the project

5 years

Annual cash inflow Rs. 2,00,000


Cut off rate

10%

Q.4. From the following information calculate the net present value of the two projects and
suggest which of the two projects should be accepted assuming a discount rate of 10%.
Particulars
Initial investment
Estimated life
Scrap value

Project X
Rs. 20,000
5 years
Rs. 1,000

Project Y
Rs. 30,000
5 years
Rs. 2,000

The profits before depreciation and after taxes (cash flows) are as follows:
Projects
Project X
Project Y

Year 1 (Rs.)
5,000
20,000

Year 2 (Rs.)
10,000
10,000

Year 3 (Rs.)
10,000
5,000

Year 4 (Rs.)
3,000
3,000

Year 5 (Rs.)
2,000
2,000

Q.5. No project is acceptable unless the yield is 10%. Cash inflows of a certain project alongwith
cash outflows are given below:
Years
Outflows (Rs.) Inflows (Rs.)
0
1,50,000
1
30,000
20,000
2
30,000
3
60,000
4
80,000
5
30,000
The salvage value at the end of the 5th year is Rs. 40,000.
Calculate Net Present Value.

Q.6. Calculate Internal Rate of Return from the following:


Initial investment
Life of the asset
Estimated net annual cash flows:
1st year
2nd year
3rd year
4th year

Rs. 60,000
4 years
15,000
20,000
30,000
20,000

Q.7. The initial cash outlay of a project is Rs. 50,000 and it generates cash inflows of Rs. 20,000,
Rs.15,000, Rs. 25,000 and Rs. 10,000 in four years.
Using present value index method, appraise profitability of the proposed investment assuming
10% rate of discount.
(Hint: First calculate Net present value and then calculate Profitability index)

Q.8. Using the information given below, compute the payback period under:
(a) Traditional payback method
(b) Discounted pay-back method
Initial outlay
Rs. 80,000
Estimated Life
5 years
Profit after tax:
End of 1st year
6,000
nd
End of 2 year
14,000
End of 3rd year
24,000
th
End of 4 year
16,000
th
End of 5 year
nil
Depreciation has been calculated under straight line method.
The cost of capital may be taken at 20% p.a. and the P.V. of Rupee 1 at 20% is given below:
Year
P.V. Factor

1
0.83

2
0.69

3
0.58

4
0.48

5
0.40

Q.9. X ltd. is considering the purchase of a machine. Two machines are available E and F. The cost
of each machine is Rs. 60,000. Each machine has an expected life of 5 years.
Net profits before tax and after depreciation during the expected life of the machines are given
below:
Year
Machine E (Rs.) Machine F (Rs.)
1
15,000
5,000
2
20,000
15,000
3
25,000
20,000
4
15,000
30,000
5
10,000
20,000
Total
85,000
90,000
Following the method of Average Return on Average Investment ascertain which of the
alternatives will be more profitable. The average rate of tax may be taken at 50%.

Unit 3: Cost of Capital


Q.1. (a) X Ltd. issues Rs. 50,000 8%debentures at par. The tax rate applicable to the company is
50%.compute the cost of debt capital.
(b) Y Ltd. issues Rs.50,000 8% debentures at a premium of 10%. The tax rate applicable to The
company is 60%. Compute cost of debt capital.
(c) A Ltd. Issues Rs. 50,000 08% debentures at a discount of 5%. The tax rate is 50%, compute the
cost of debt capital.
(d) B Ltd. Issues Rs. 1,00,000 9% debentures at a premium of 10%. The costs of floatation are 2%.
The tax rate applicable is 60%. Compute cost of debt-capital.
Q.2. A company issues Rs.10,00,000 10% redeemable debentures at a discount of 5 years. Calculate
before-tax and after-tax cost of debt assuming a tax rate of 50%.
Q.3. A 5-years Rs.100 debenture of a firm can be sold for a net price of Rs. 96.50. The coupon rate
of interest is 14 per cent per annum, and the debenture will be redeemed at 5 per cent premium on
maturity. The firms tax rate is 40%.compute the after-tax cost of debenture.
Q.4. A company issues 10,000 10% preference shares of Rs.100 each. Cost of issues is Rs.2 per
share. Calculate cost of preference capital if these shares are issued(a) at per,(b) at a premium of
10%,and (c) at a discount of 5%.
Q.5. A company issues 10,000 10% preference shares of Rs.100 each redeemable after 10 years at a
premium of 5%. The cost of issue is Rs. 2 per share. Calculate the cost of preference capital.
Q.6. A company issues 1,000 7% preference shares of Rs.100 each at premium of 10% redeemable
after 5 years at par. Compute the cost of preference capital.
Q.7. A company issues 1000 equity shares of Rs.100 each at a premium of 10%. The company has
been paying 20 % dividend to equity shareholders for the five years and expects to maintain the

same in the future also .Compute the cost of equity capital. Will it make any difference if the
market price of equity share is Rs.160 ?s
Q.8. (a) A company plan to issue 1000 new shares of Rs.100 each at par. The floatation costs are
expected to be 5% of the share price. The company pays a dividend of Rs.10 per share initially and
the growth in dividends is expected to be 5%. Compute the cost of new issue of equity shares.
(b)If the current market price of an equity share is Rs.150, calculate the cost of existing equity
share capital.
Q.9. The shares of a company are selling at Rs.40 per share and it had paid a dividend of Rs. 4 per
share last year. The investors market expects a growth rate of 5 per cent per year.
(a) Compute the companys equity cost of capital;
(b) If the anticipated growth rate is 7 per cent per annum, calculate the indicated market price per
share.
Q.10. A firm is considering an expenditure of Rs. 60 Lakhs for expanding its operations. The
relevant information is as follows:
Number of existing equity shares
10 Lakhs
Market value of existing shares
Rs.60
Net earnings
90 Lakhs
Compute the cost of existing equity share capital and of new equity capital assuming that new
shares will be issued at a price of Rs. 52 per share and the costs of new issue will be Rs.2 per share.
Q.11. You are given the following facts about a firm:
(i) Risk-free rate of return is 11%.
(ii) Beta co-efficient, i, of the firm is 1.25.
Compute the cost of equity capital using Capital Asset pricing Model (CAPM) assuming a
market return of 15 per cent next year. What would be the cost of equity if i rises to 1.75.
Q.12. A firm has the following capital structure and after tax costs for the different sources of
funds used:
Sources of funds
Amount (Rs.)
Proportion (%)
After tax cost (%)
Debt
15,00,000
25
5
Preference shares
12,00,000
20
10
Equity shares
18,00,000
30
12
Retained earnings
15,00,000
25
11
Total
60,00,000
100
You are required to compute the weighted average cost of capital.

Q.13. Continuing the above question, if the firm has 18,000 equity shares of Rs. 100 each
outstanding and the current market price is Rs. 300 per share, calculate the market value weighted
average cost of capital assuming that the market values and book values of the debt and
preference capital are the same.

Q.14. In considering the most desirable capital structure for a company, the following estimates of
the debt and equity capital (after tax) have been made at various levels of debt-equity mix:
Debt as a percentage of total
Cost of debt Cost of
capital employed
(%)
equity (%)
0
5.00
12.00
10
5.00
12.00
20
5.00
12.50
30
5.50
13.00
40
6.00
14.00
50
6.50
16.00
60
7.00
20.00
You are required to determine the optimal debt equity mix for the company by calculating
composite cost of capital.
Q.15. The following is the capital structure of Saras Ltd. as on 31st December, 2003:
Particulars
Equity shares- 20,000 shares of Rs. 100 each
10% Preference shares of Rs. 100 each
12% Debentures

Rs.
20,00,000
8,00,000
12,00,000
40,00,000

The market price of the companys share is Rs. 110 and it is expected that a dividend of Rs.10 per
share would be declared after 1 year. The dividend growth rate is 6%.
(i) If the company is in the 50% tax bracket, compute the weighted average cost of capital
(ii) Assuming that in order to finance an expansion plan, the company intends to borrow a fund of
Rs. 20 lakhs bearing 14% rate of interest, what will be the companys revised weighted average
cost of capital? This financing decision is expected to increase dividend from Rs. 10 to Rs. 12 per
share. However, the market price of equity share is expected to decline from Rs. 110 to Rs. 105 per
share.

Unit 4: Leverage Analysis


Q.1. A ltd. Company has equity share capital of Rs. 5,00,000 divided into shares of Rs. 100 each. It
wishes to raise further Rs. 3,00,000 for expansion cum modernization plans. The company plans
the following financing schemes:
a) All Equity stock
b) Rs. 1,00,000 in equity shares and Rs. 2,00,000 in 10% debentures
c) All debt at 10% per annum
d) Rs. 1,00,000 in equity shares and Rs. 2,00,000 in preference capital with the rate of dividend
at 8%

The companys existing earnings before interest and tax (EBIT) is Rs. 1,50,000. The corporate rate
of tax is 50%.
You are required to determine the earnings per share (EPS) in each plan and comment on the
implications of financial leverage.
Q.2. XYZ company has currently an equity share capital of Rs.40,00,000 consisting of 40,000 equity
shares of Rs.100 each. The management is planning to raise another Rs.30,00,000 to finance a
major programme of expansion through one of the four possible financing plans.
The options are:
a) Entirely through equity shares
b) Rs. 15,00,000 in equity shares of Rs.100 each and the balance in 8% debentures
c) Rs. 10,00,000 in equity shares of Rs.100 each and the balance through long-term borrowing
at 9% interest p.a.
d) Rs. 15,00,000 in equity shares of Rs.100 each and the balance through preference shares
with 5% dividend
The companys expected earnings before interest and taxes (EBIT) will be Rs.15,00,000. Assuming
corporate tax rate of 50%, you are required to determine the earnings per share (EPS) and
comment on the financial leverage that will be authorized under each of the above scheme of
financing.
Q.3. A company has sales of Rs.5,00,000, variable costs of Rs.3,00,000, fixed costs of Rs.1,00,000
and long term loans of Rs.4,00,000 at 10% rate of interest. Calculate the composite leverage.
Q.4. The following figures relate to two companies:
Particulars
Sales
Variable costs
Contribution
Fixed costs
Interest
Profit before Tax

P ltd (in Rs. Lakhs)


500
200
300
150
150
50
100

Q ltd (in Rs. Lakhs)


1,000
300
700
400
300
100
200

You are required to:


a) Calculate the operating, financial and combined leverages for the two companies; and
b) Comment on the relative risk position of them
Q.5. A firm has sales of Rs.20,00,000, variable cost of Rs.14,00,000 and fixed costs of Rs.4,00,000
and debt of Rs.10,00,000 at 10% rate of interest. What are the operating, financial and combined
leverages? If the firm wants to double its earnings before interest ans tax (EBIT), how much of a
rise in sales would be needed on a percentage basis?

Q.6. From the following, prepare Income Statement of company A, B and C.


Particulars
Financial Leverage
Interest
Operating Leverage
Variable cost as a %age of sales
Income-tax rate

Company A
3:1
Rs.200
4:1
66 2/3 %
45%

Company B
4:1
Rs.300
5:1
75%
45%

Company C
2:1
Rs.1,000
3:1
50%
45%