II SEMESTER ENDTERM EXAMINATION MARCH 2016

PGDM-AICTE BATCH 2015-17

CORPORATE FINANCE
Time: 3 Hours Max. Marks 100
Section A: Answer all questions. Question 12 compulsory carries 3 marks. (11 X 2=22)
1. Briefly explain any two financial intermediaries.
2. Explain two basic functions of Financial Management.
3. Explain the relevance of time value of money in financial decisions.
4. Give some examples of financial assets.
5. How is the cost of debt calculated?
6. What is NPV?
7. Discuss the liquidity vs profitability issue in management of working capital.
8. What are the factors that determine the dividend policy of a company?
9. What is optimum capital structure?
10. Explain the types of Preference capital.
11. What is financial leverage.
12. The fixed deposit scheme of Andhra Bank offers the following interest rates :
Period of deposit Rate per annum
46 days to 179 days 10.0%
180 days to < I year 10.5%
1 year and above 11.0%
Calculate how much an investment of Rs 10,000 invested today will grow to after 3 years. (1x3)
Section B: Answer all questions. Each question carries 5 marks. (5X5=25)
13. (a) The data relating to two companies are given below:
Particulars Company A Company B
Equity Capital Rs 6,00,000 Rs 3,50,000
12% Debentures Rs 4,00,000 Rs 6,50,000
Output (units) per annum 60,000 15,000
Selling Price per unit Rs 30 Rs 250
Fixed cost per annum Rs 7,00,000 Rs 14,00,000
Variable cost per unit Rs 10 Rs 75
You are required to calculate the Operating Leverage, Financial Leverage and Combined Leverage of the two
companies.
OR
(b) “Operating risk is associated with cost structure, whereas financial risk is associated with capital structure of a
business concern.” Critically examine this statement.
14. (a) Explain as to how wealth maximization objective is superior to the profit maximization objective.
OR
(b) “The profit maximization is not an operationally feasible criterion.” Comment on it.
15. (a) A company issues Rs 10,00,000 12% debentures of Rs 100 each. The debentures are redeemable after the
expiry of fixed period of 7 years. The company is in 35% tax bracket and assume brokerage paid is 2%.
Required:
Calculate the cost of debt after tax, if debentures are issued at par .
OR
(b) SK Limited has obtained funds from the following sources, the specific cost are also given against them:
Source of funds Amount (Rs) Cost of Capital
Equity shares 30,00,000 15%
Preference shares 8,00,000 8%
Retained Earnings 12,00,000 11%
Debentures 10,00,000 9 % (before tax)
You are required to calculate the weighted average cost of capital. Assume the corporate tax rate is 30%.
16. (a) Discuss the estimation of working capital need based on operating cycle process.
OR
(b) Discuss the risk – return consideration in financing current assets.
17. (a) What is weighted average cost of capital? Examine the rationale behind the use of weighted average cost of
capital.
OR
 (b) Discuss the approach to determine the cost of retained earnings. Also explain the rationale behind treating
retained earnings as a fully subscribed issue of equity shares.
Section C: Case Study (20 Marks)
18. Q Ltd sells goods at a uniform rate of gross profit of 20% on sales including deprecation as part of cost of
production Its annual figures are as under :
Rs
Sales ( at 2 months credit) 24,00,000
Materials consumed (Suppliers credit 2 months) 6,00,000
Wages paid ( monthly at the beginning of the subsequent month) 4,80,000
Manufacturing expenses ( cash expenses are paid – one month in arrear) 6,00,000
Administration expenses ( cash expenses are paid – one month in arrear) 1,50,000
Sales promotion expenses ( Paid quarterly in advance) 75,000
The company keeps one month stock each of raw materials and finished goods. A minimum cash balance of Rs
80,000 is always kept. The company wants to adopt a 10% safety margin in the maintenance of working
capital.
The company has no work in progress.
Find out the requirement of working capital of the company on cash cost basis.
Section D: Case Study (Compulsory) (20 Marks)
19. A company is considering the proposal of taking up a new project which requires an investment of Rs 400
lakhs on machinery and other assets. The project is expected to yield the following earnings (before
depreciation and taxes) over the next five years.
Year Earnings (Rs in lakhs)
1 160
2 160
3 180
4 180
5 150
The cost of raising the additional capital is 12% and assets have to be depreciated at 20% on written down value
basis. The scrap value at the end of five year’s period may be taken as zero. Income tax applicable to the company
is 50%.
You are required to calculate the net present value of the project and advise the management to take appropriate
decision. Also calculate the Internal Rate of Return of the project.
Note Present values of Rs 1 at different rates of interest are as follows :
Year 10% 12% 14% 16%
1 0.91 0.89 0.88 0.86
2 0.83 0.80 0.77 0.74
3 0.75 0.71 0.67 0.64
4 0.68 0.64 0.59 0.55
5 0.62 0.57 0.52 0.48
OR
20. A firm can make an investment in either in either of the following two projects. The firm anticipates its cost of
capital to be 10% and the net ( after tax) cash flows of the projects for five years are as follows:
Figures in Rs ‘000)
Year 0 1 2 3 4 5
Project A (500) 85 200 240 220 70
Project B (500) 480 100 70 30 20
The discount factors are as under:
Year 0 1 2 3 4 5
PVF (10%) 1 0.91 0.83 0.75 0.68 0.62
PVF (20%) 1 0.83 0.69 0.58 0.48 0.41
Required:
1) Calculate the NPV and IRR of each project
2) State with reasons which project you would recommend

Section E: (10 Marks)

21. “The information age has given a fresh perspective on the role of finance management and finance managers.
With the shift in paradigm it is imperative that the role of Chief Financial Officer changes from a controller to a
facilitator”. Comment on the statement.