DEPARTMENT OF MANAGEMENT SCIENCE SREE SARASWATHI THYAGARAJA COLLEGE (AUTONOMOUS), THIPPAMPATTI, POLLACHI 642 107 MASTER OF BUSINESS ADMINISTRATION

N SEMESTER II FINANCIAL MANAGEMENT Course Code: MBAAA2T94 Unit I Part A (5 x 6 = 30 marks) Answer all questions. All questions carry equal marks 1. a). Describe the relationship between risk and return (or) b). Explain the concept of Time value of money with an illustration. 2. a). What are the tasks of Financial Management? b). What is Capital Market? 3. a). Define Financial Management. Explain its functions. b). What are the features of present Indian Money Market? (or) (or)

4. a). Discuss briefly the scope of Financial Management (or) b). Explain the superiority of wealth maximization as the goal of Financial Management. 5. a), Describe the three broad areas of financial decision making b). Distinguish between Money Market and Capital Market. 6. a). What is meant by risk return trade-off? b). What are the sources of long term finance? 7. a). Explain the components of Indian Financial System. b). What are the functions of modern finance manager? (or) (or) (or)

8. a). What are the objectives of Financial Management? (or) b). What are the risks associated with finance decision? Explain them with examples. 9. a). What are the characteristics of Indian Capital Market? b). Discuss the role of SEBI. 10. a). Briefly explain the goals of Financial Management. b). Explain the legal aspects of Indian Financial Management. (or) (or)

Part B (3x 10 = 30 marks) Answer any three questions. All questions carry equal marks 1. Discuss Systematic and unsystematic risks. 2. Explain in detail the various finance functions in a Modern Organization. 3. Enumerate the recent trends of Indian Capital Market and bring out the role of SEBI in regulating it. 4. Explain the major types of financial decisions that a firm makes. How do they involve risk-return trade off? 5. In what ways is the wealth maximization objective superior to the profit maximization objective? Explain. 6. Discuss the risk return relationship and its significance to an organization. 7. Identify the sources of long term finance for large scale seasonal industry. 8. Discuss the recent trends in Indian Capital Market. 9. Explain the features of capital market development in India. 10. What are the functions of money markets and capital markets? Critically review their Functioning.

UNIT II Part A (5 x 6 = 30 marks) Answer all questions. All questions carry equal marks

1. a). Explain Capital Rationing b). Explain the importance of investment decisions. 2. a). Discuss the types of investment decisions. b). What is Capital Budgeting? 3. a). Discuss the significant of Capital Budgeting. b). Explain the merits of pay back period method.

(or) (or) (or)

4. a). How do you calculate the accounting rate of return? (or) b). Explain the merits and demerits of the time adjusted method. 5. a). What are the limitations of rate of return? (or) b). Under what circumstances of the net present value and internal rate of return methods differ? 6. a). Explain the steps involved in the evaluation of an investment. (or) b). Why the NPV method is the true measure of an investments profitability. 7. a). Explain the steps involved in the evaluation of IRR method. b). What are the phases of Capital Budgeting Process? (or)

8. a). Compare and contrast different capital budgeting techniques. b). Explain the risk analysis in capital budgeting with an example.

(or)

9. a). Explain the factors affecting Capital Investment Decisions. (or) b). What is discounting? What is Compounding? Distinguish between the two.
10. a) A project requires a cash outlay of Rs. 20,000 and generate cash in flows of Rs. 8,000,

Rs. 7,000, Rs. 4,000 and Rs. 3,000 during the next 4 years. What is the projects pay back? (or) b). What is profitability index? Which is a superior ranking criterion, profitability index or the net present value? UNIT II Part B (3x 10 = 30 marks) Answer any three questions. All questions carry equal marks

1. How do you calculate the accounting rate of return? What are its limitations? 2. Compare and contrast NPV and IRR methods of project appraisal with suitable example. 3. A company is considering purchase of a machine. Two machines A and B, are available and each one requiring an initial investment of Rs. 50,000. Earnings after taxation are expected to be as follows. Year Machine A Rs. 15,000 20,000 25,000 15,000 10,000 Machine B Rs. 5,000 15,000 20,000 30,000 20,000

1 2 3 4 5

Evaluate the two alternatives according to (i). NPV Method (Cost of Capital @10%) (ii). IRR Method 4. Which project will be selected under NPV method? Cost of Capital is 10% Project A Rs. Cash out flow 10,00,000 Project B Rs. 10,00,000
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Cash inflows 1 year 2 year 3 year 5,00,000 6,00,000 7,00,000 6,00,000 7,00,000 5,00,000

5. Which project will be selected under pay back method? Project A Rs. Cash out flow Cash inflows 1 year 2 year 3 year 4 year 5 year 2,00,000 7,00,000 6,00,000 3,00,000 7,00,000 4,00,000 4,00,000 4,00,000 2,00,000 2,50,000 15,00,000 Project B Rs. 15,00,000

6. Which project will be selected under NPV method? Cost of Capital is 10% Project A Rs. Cash out flow Cash inflows 1 year 2 year 3 year 1,00,000 1,50,000 1,50,000 1,50,000 2,00,000 2,50,000 2,50,000 2,00,000 1,50,000 2,00,000 B Rs. 3,00,000 C Rs. 3,00,000

7. The cash flows associated with three projects P, Q and R are given below: Year P (2000 ) 1400 600 400 Q (2000) 500 1100 900 R (2000) 500 500 1600

1 2 3

Calculate the net present value of each project at discount rates of 15 percent and 25 percent. 8. State and explain various capital budgeting techniques and their advantages and limitations. 9. Explain the risk analysis in capital budgeting with an example. 10. What are the advantages of the risk-adjusted discount rate? What is the major problems in using this approach to handle risk in capital budgeting?

UNIT III Part A 1. a). Explain why a low level of operational leverage and high level of financial leverage is good for the organization (or) b). Discuss Cost of Capital and its importance. 2. a). Discuss the approaches suggested for determining the cost of retained earnings. (or) b). Enumerate the steps in calculating weighted average cost of capital. 3. a). Explain the factors that determine the cost of capital. b). Explain Operating Leverage. 4. a). Explain Financial Leverage. b). Explain EBIT-EPS analysis. 5. a). What is EPS analysis? b). Explain the concept of WACC. (or) (or) (or)

6. a). Explain the various approaches for WACC and their merits b). Is equity capital free of cost? 7. a). How will you calculate cost of preference share? b). How leverage concepts are used in financial management? 8. a). What is Leverage? Compare operating and financial leverage. b). Explain the concept marginal cost of capital.

(or) (or) (or)

9. a). What is cost of capital? Discuss its uses in financial decision making. (or) b). Explain the advantages and disadvantages of financial leverage. 10. a). Calculate EPS. Operating Profit 7% debentures Tax rate No of equity shares Rs. 1,00,000 Rs. 3,00,000 40% Rs. 10,000

b). The current market price of a companys share is Rs. 90 and the expected dividend per share next year is RS. 4.5. If the dividends are expected to grow at a constant rate of 8 percent, what is the share holders required rate of return?

Part B 1. Distinguish between the weighted average cost of capital and the marginal cost of capital, which one should be used in capital budgeting and valuation of the firm? Why? 2. Define the term weighted average cost of capital and explain how the cost of individual components of it is computed. 3. A Company issues Rs. 10,00,000, 16% debentures of Rs.100 each. The company is in 35% tax bracket. You are requires to calculate the cost of debt after tax, if the debentures are issued at (i) Par (ii) 10% discount (iii) 10% premium. 4. A texile company has EBIT of Rs. 1,60,000. The capital structure is as follows: 10% debentures 12% preference shares - Rs. 50,000 -Rs. 1,00,000
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Equity shares (Rs. 100 each) -Rs. 4,00,000 The company is in the 35% tax bracket a). Determine EPS b). Determine the Degree of Financial Leverage 5. Pradhan Enterprises is currently selling 400 units per year. If the selling price per unit is Rs. 1000, variable cost per unit is Rs. 600 and fixed costs are Rs. 1,00,0000. what is Pradhans degree of operating leverage at its current level of operations. What will be the DOL, if the quantity manufactured and sold rises to 600 units? 6. Mr. X, an investor, purchases an equity share of a growing company for 210. He expects the company to pay dividends of Rs. 10.50, Rs. 11.025 and Rs. 11.575 in years 1,2 and 3 respectively. He expects to sell the shares at a price of Rs. 243.10 at the end of 3 years. (i). Determine the growth rate of dividend (ii). What is the required rate of return of Mr. X on his equity investment. 7. Calculate a). Operating Leverage b). Financial Leverage c). Combined Leverage Firm A Rs. Sales Fixed cost Interest Variable cost 15,00,000 3,00,000 2,00,000 7,50,000 Firm B Rs. 16,00,000 4,00,000 3,00,000 6,00,000

8. Examine the relevance of cost of capital for long term investment and financing decisions. What are the problems in its determination? 9. The capital structure of Keerthi Enterprises Ltd., is as follows: Source Debenture Preference share Equity share Amount (Rs.) 20,00,000 2,00,000 6,00,000 Specific Cost (%) 7% (before tax) 8% 10%

Calculate the weighted average cost of capital. 10. Calculate weighted average cost of capital from the following information: Rs. 4,500 equity shares (fully paid) 3000 nos of 8% debentures 2000 nos of 6% preference shares Retained earnings 4,00,000 3,00,000 2,00,000 1,00,000

Unit IV Part A 1. a). Explain the factors that are relevant for determining the dividend payout ratio (or). b). Briefly explain different types of dividends declared by the companies. 2. a). Briefly explain the concept of Net Income Approach. b).Explain the traditional approach to capital structure theory. 3. a). What is dividend? Explain its importance on share prices. b). Explain Net operating income approach. (or) (or) (or)

4. a). Explain the major considerations in capital structure planning. b). What is Informational Content of dividend payments? Explain.

5. a). What is meant by optimum capital structure? (or) b). What are the basic assumptions of Gordons model of dividend and valuations of firm? Does dividend policy affect the value of the firm under this model? 6. a).The M-M approach is based on unrealistic assumptions. Evaluate the reality of the assumptions made by M-M. (or) b). Explain the nature of the factors which influence the dividend of a firm. 7. a). What are the different types of dividend policy? b). What are the assumptions used in CAPM. 8. a). Define Capital Structure. Explain its significance. b). Bring out the principal propositions of M-M approach. (or) (or)

9. a). Explain the effect of capital structure on the value of the firm when both corporate and personal income taxes are considered? (or)
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b).. How do the considerations of control and size affect the capital structure decision of a firm? 10. a).How valuations of share is done using CAPM (or) b). What are the important factors affecting capital structure decision of a firm? Part B 1. What is an optimum capital structure? Discuss the important approaches to different theories of capital structure. 2. What is dividend policy? Discuss the factors that affect dividend policy of a firm. 3. Discuss briefly the various theories of Dividend Policy of a corporate body. 4. Explain the NI and NOI approach in detail. 5. The MM approach is effective or not Discuss. 6. What do you understand by capital structure of a corporation? Discuss the qualities which a sound capital structure should possess. 7. Explain the different models of the dividend valuations. 8. Describe the traditional view on the optimum capital structure. Compare and contrast this view with the NOI approach and the NI approach. 9. Assuming the existence of the corporate income taxes, describe MMs position on the issue of an optimum structure. 10. What is meant by financial flexibility? Is a flexible capital structure costly? Unit V Part A 1. a). Explain in detail the various determinants of working capital requirements of a manufacturing firm. (or) b). Explain the salient features of various committees recommendations of working capital financing. 2. a). What are the factors affecting working capital? b). Explain the three principal motives for holding cash. (or)

3. a). Explain the techniques that can be used to accelerate the firms collection. (or) b). What are the advantages of decentralized collection over a centralized collection? 4. a). Explain the importance and objectives of inventory management. b). Define EOQ. How is it computed? (or)

5. a). Define safety stock. How can safety stock be computed? b). How is the re-ording point determined? Illustrate with an example.

(or)

6. a). Explain the objectives of credit policy. What is an optimum credit policy? Discuss. (or) b). What are the objectives of the collection policy? How should it be established? 7. a). Explain the concept of working capital. Are gross and net concepts of working capital exclusive? Discuss. (or) b).What is the concept of working capital cycle? Why it is important? Give an example to illustrate. 8. a). How would you determine the optimum level of current assets? Illustrate you answer? (or) b). Explain the methods do you suggest for estimating working capital needs? Illustrate. 9. a). Explain the risk-return trade-off of current assets financing. (or) b). What is the role of credit terms and credit standards in the credit policy of a firm? 10. a). How would you monitor receivables? Explain the pros and cons of various methods. (or) b) What are ordering and carrying costs? What is their role in inventory control?

Part B 1. Prepare a working capital forecast Raw materials Labour Expenses Rs. 120 / Unit Rs. 60 / Unit Rs. 30 / Unit 210 Profit Selling price Annual production 1000 units Cash in hand 10,000 Raw materials stock Work in process Financial goods 3 months 1 month 2 months 30 240 / Unit

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Customer credit Supplier credit Outstanding wages Outstanding expenses

1 month 2 months 1 month 15 days

2. Cheran Corporation requires 2000 units of a cretin item per year. The purchase price per unit is Rs. 30, the carrying cost of inventory is 25% of inventory value and fixed cost per order is Rs. 1000. Determine EOQ. 3. A proforma cost sheet of a company provides the following data: Cost per unit Raw Materials Direct labour Overheads Total Cost (per unit) Profit Selling price Rs. 52.0 19.5 39.0 110.5 19.5 130.0

Average raw material in stock Average materials in process Credit allowed by suppliers Credit allowed to customers Time log in payment of wages Overheads

One month Half a month One month Two months One and a half weeks One month

One-fourth of sales are on cash basis. Cash balance is expected to be Rs. 1,20,000. You are required to prepare a statement showing the working capital needed to finance a level of activity of 70000 units of output. You may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly.

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4. A Manufacturing company has an expected usage of 50,000 units of certain product during the next year. The cost of processing an order is Rs.20 and the carrying cost per unit is Re. 0.50 for one year. Lead time on an order on an order is five days and the company will keep a reserve supply of two days usage. You are required to calculate. a). the EOQ b). The reordering point (Assume 250 days years)

5. Explain the factors that determine the working capital needs of a firm. 6. How is working capital affected by (a) Sales b). Technology c). Production Policy d). Inflation. Explain. 7. Do you recommend that a firm should finance its current assets entirely with short term financing? Explain your answer. 8. What is factoring? What functions does it perform? And also explain the various types of factoring. 9. How does factoring differ from bill discounting and short term financing?
10. Explain the importance of inventory management and also explain the objectives of it.

PART C (1x15=15 marks) Compulsory: 1. XYZ Ltd., has an average selling price of Rs. 10 per unit. Its variable unit cost are Rs. 7 and fixed cost amount to Rs. 1,70,000. It finances all its assets by equity funds. It pays 50% tax on its income. ABC Ltd., is identical to XYZ Ltd., except in respect of the pattern of financing. The latter finances its assets 50% by equity and 50% by debt, the interest on which amounts to Rs. 20,000. Determine the degree of operating, financial and combined leverages at Rs. 7,00,000 sales for both the firms and interpret the results. 2. Consider the following information for a company. EBIT PBT Fixed cost Calculate: a). Degree of Operating leverage b). Degree of Financial Leverage c). Degree of Combined Leverage Rs. In lakhs 1,120 320 700

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d). Percentage change in EPS if sales increased by 5% 3. A Company is contemplating to purchase a machine. Two machines A and B are available each costing Rs. 5 lakhs. In comparing the profitability of the machines, a discounting rate of 10% is to be used and machine is to be written off in five years by straight line method of depreciation with nil residual value. cash inflows after tax are expected as follows Year Machine A (Rs in lakhs) 1 2 3 4 5 1.5 2.0 2.5 1.5 1.0 Machine B (Rs in lakhs) 0.5 1.5 2.0 3.0 2.0

Indicate which machine would be profitable using the following methods of ranking investment proposals. a). Payback method b). Net present value method c). Profitability index method and d). Average rate of return method. 4. Calculate the degree of operating leverage, degree of financial leverage and combined leverage from the following data: Sales 1,00,000 units of Rs. 2 per unit Variable cost per unit :Rs. 0.70 Fixed cost :Rs. 1,00,000 Interest charges :Rs. 3,668 b). Which combinations of operating and financial leverages constitute: a). Risky Situation and b). Ideal Situation 5. Dhanvantary company has the following capital structure Rs. Equity Capital (5000 shares of Rs. 100 each) 5,00,000 9% preference shares 1,50,000 12% debentures 3,50,000 The equity shares of the company have current market price at Rs. 105 and the company declares a dividend of Rs. 9 per share for the next year. The dividend growth rate is 5%. The tax rate is 50%. The company can also raise additional loan at 10% for Rs. 5,00,000 to finance its expansion. Calculate the WACC.

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6. Calculate

a). Operating Leverage b). Financial Leverage A B 75,000 30,000 10,000 30,000

Sales Fixed cost Interest Variable cost

1,00,000 20,000 5,000 50,000

7. Prepare a working capital forecast from the following data: Raw material Direct Labour Direct expenses Total cost Selling price Annual Sales Cash in hand Customers Credit Suppliers credit Stock of Raw Materials Stock of Finished goods Stock of WIP Rs. 50 per unit Rs. 15 per unit Rs. 10 per unit -------------------------Rs. 75 per unit -------------------------- Rs. 90 per unit - Rs. 10,000 units - Rs. 25,000 - 1 month - 15 days - 45 days - 1 month - 15 days -

8. From the following data calculate the Degree of operating leverage, Degree of financial leverage and the Degree of combined leverage for the three firms and interpret the results. P Out put (in units) Fixed cost (in Rs.) Variable cost / unit in Rs. Interest Expenses 3,00,000 3,50,000 1 25,000 Q 75,000 7,00,000 7.5 40,000 R 5,00,000 75,0000 0.10 Nil

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Unit selling price Rs.

2.5

0.50

9. Pradhan Enterprises is currently selling 400 units per year. If the selling price per unit is Rs. 1,000, variable cost per unit is Rs. 600 and fixed cost are Rs. 1,00,000 what is Pradhans degree of operating leverage at its current level of operations? What will be the DOL, if the quantity manufactured and sold rises to 600 units? 10.A Company is considering the following investment projects. Cash flows (Rs) Projects A B C D C0 -10,000 -10,000 -10,000 -10,000 C1 + 10,000 +7,500 +2,000 +10,000 C2 +7500 +4000 +3000 C3 +12000 +3000

a). Rank the project according to each of the following methods: 1. Payback 2. ARR 3. 1RR 4. NPV b). Assuming the projects are independent, which one should be accepted? If the projects are mutually exclusive, which project is the best?

Sree Saraswathi Thyagaraja College (Autonomous), Pollachi PG DEPARTMENT OF MANAGEMENT SCIENCE First MBA *Second Semester*Cycle Test - II*March 2010
Subject: Financial Management * 2 hours * 50 marks
Section A 4 x 5 = 20

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Answer all questions. All questions carry equal marks. 1. a) What is Capital Budgeting Decision? Give Examples b) Write the importance of Investment Decisions 2. a) What are the types of Investment Decisions? b) Write the significance of cost of capital. 3. a) Write short notes on ARR with formula b) Write short notes on Profitability Index. 4. a) Write short notes on Cost of Debt Capital. b) What are the uses of Cost of Capital? Section B Answer any TWO questions. 5. What are the steps involved in capital budgeting decision? 6. Write a detailed note on the concepts of cost of capital. 7. Assume that a project requires a cash outlay of Rs 20,000, and generates cash inflows of Rs 8,000; Rs 7,000; Rs 4,000; and Rs 3,000 during the next 4 years. What is the projects payback? 8. Write a detailed note on discounted cash flow techniques. 2 x 10 = 20 (or) (or) (or) (or)

Section C

1 x 10= 10

9. Assume that an investment would cost Rs 40,000 and provide annual cash inflow of Rs 10,860 for 6 years. Calculate the Internal Rate of Return.

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