2020

FINANCIAL MANAGEMENT — HONOURS

Course: DSE 6.2A
Full Marks: 80
Group - A
Answer any two questions. 15×2
1. You are working in a firm having ROI 18% and Cost of Capital 12%. For a proposed project
with effective life of 3 years, the inflows are estimated as ₹67,500, ₹76,500 and ₹56,700.
Calculate the present value of benefits from the project. 15

2. Discuss Matching and aggressive approaches in the context of Working Capital Financing
strategies. 15

3. Y Ltd. started a project with the initial investment of ₹5,00,000. The life of the project is 5
years. It is expected that cash inflows starting from first year to fifth year will be ₹1,10,000,
₹1,40,000, ₹1,80,000, ₹2,50,000 and ₹3,80,000 respectively. What will be the Pay-back period
of the project? 15

4. From the following information, determine the theoretical market price of each equity
share of a company as per Walter’s Model:
Earnings of the Company ₹10,00,000
Dividend paid ₹5,00,000
No. of equity shares outstanding ₹2,00,000
Cost of Equity capital 12%
Rate of return on investment 15%
15
Group - B
Answer any two questions. 25×2
5. Calculate weighted average cost of capital (WACC) considering market values for AD Ltd.
from the following details:
Sources of Capital
Equity share capital (10 each) 12,00,000
Retained Earnings 28,00,000
14% Preference shares (issued at a premium of 8%) 90,000
15% Debentures 3,60,000
Other information:
* Applicable corporate tax rate 30%
* Market price per share ₹50, Dividend per share is expected to be ₹6. AD Ltd. maintains a
growth of 5% in this regard.
* Debentures of face value ₹1000 each were issued at 3% discount (with an additional
underwriters’ commission of 1.5% on face value). Tenure of Debenture 10 years. 25
6. PP Construction Ltd. is considering the five possible projects to invest in, as shown below:
Project Cash Outflow (₹) PV of Cash Inflows (₹)
A 5,00,000 7,50,000
B 2,00,000 2,10,000
C 5,00,000 8,00,000
D 1,00,000 80,000
E 3,00,000 3,30,000
Available fund is ₹12,00,000. Apply Capital rationing decision concept and select the projects.
All the projects are divisible in nature. 25

7. Relevant information about two companies are given below:

X Y
Annual production capacity (Units) 1,00,000 1,50,000
Capacity utilisation and sales 75% 75%
Unit selling price (₹) 40 50
Unit variable cost (₹) 15 15
Fixed cost for the year (₹) 2,00,000 3,00,000
Equity capital (₹10 per share) 5,00,000 7,00,000
10% Preference share capital (₹) 50,000
15% Debentures (₹) 1,00,000 2,00,000
Determine the degree of Operating Leverage, degree of Financial Leverage, degree of
Financial Leverage and Earning per Share of two companies. (Tax rate 40%). 25

8. The capacity of your company is to produce 40,000 units of valve per annum. The company
expects to operate at 60% of the capacity level. You are required to ascertain the working
capital requirement at the current level of operation.
The following information on the cost-price structure of valves at the current level of
production is available:
Elements of costs Per unit (₹)
Raw-material 6
Direct labour 3
Overhead 4
Total cost 13
Profit 3
Selling price 16
Raw-materials are in stock, on an average, for 2 months. The duration of the production
process is half a month. Finished goods are in stock, on an average for 1 month. Credit allowed
to customers is 3 months and that obtained from suppliers is 1.5 months, lag in payment of
wages is half a month. There is usually no lag in payment of overhead. 25
9. X Ltd. wants to purchase one machine out of two mutually exclusive machines under
consideration. Other information related to these machines are as below:
Particulars Machine 1 Machine 2
Purchase price (₹) 3,00,000 2,80,000
Estimated life (years) 5 5
Net cash flows (₹)
Year 1 80,000 60,000
Year 2 1,20,000 80,000
Year 3 90,000 1,20,000
Year 4 85,000 1,50,000
Year 5 1,58,000 92,000
Compute the NPV of each machine assuming a cost of capital of 10%. Which machine should
the company buy?
The present value of ₹1 to be received at the end of each year at 10% is given below:
Year 1 2 3 4 5
P.V. (₹) 0.909 0.826 0.751 0.683 0.621
25

10. (a) Mention any five important factors that a firm should consider in formulating dividend
policy.
(b) Discuss financial leverage with reference to the formulae. 13+12
 2020
FINANCIAL MANAGEMENT — GENERAL
Course: DSE 6.2A
Full Marks: 80
Group – A
Answer any two questions. 15×2
1. What is the function of Financial Management? 15
2. Discuss the role of retained earnings as a source of corporate finance? 15
3. A company has issued debenture of Rs. 51 lakhs to be repaid after 7 years. How much
should the company invest at the end of each years in a sinking fund earning 12%, to repay
the debenture? (CVIFA 12%, 7 = 10.089) 15
4. The current market price of an equity shares of Rs. 10 each is Rs. 40. The current divided
per share is Rs.6. If the dividend is expected to grow at the rate of 5%, find out the case of
equity capital. 15
Group – B
Answer any two questions. 25×2
5. (a) What is Trading on equity?
(b) Calculate the degree of operating leverage, degree of financing leverage and combined
leverage from the following data:
Sales 1,00,000 units @ 2 per unit = RS. 2,00,000
Variable cost per unit 2 Rs. 0.70
Fixed cost Rs. 1,00,000
Interest charges Rs. 3,000 10+15

6. You are required to prepare a statement showing the working capital needed to finance a
level of annual activity of 52,000 units of capital. The following information are available.
Element of cost Amount per unit (Rs.)
Raw Material 8
Direct labour 2
Overhead 6
Selling price 20
Raw material is in stock, on an average for 4 weeks. Materials in process, on an average for
2 weeks. Finished goods are in stock, on an average for 6 weeks. Credit allowed to customer
is for 8 weeks, credit allowed by supplier of goods is 4 weeks. Lag in payment of wages is in
and half weeks. It is necessary to hold cash in hand and at bank amounting Rs. 80,000. 25

7. (a) What do you meant by working capital? Why is working capital necessary for a business?
(b) Write about the financial policy of current assets pf a firm which follows conservative
policy of maintaining current assets. 13+12

8. Details regarding three companies are given below:

X Ltd. Y Ltd. Z Ltd.
Return on investment 15% 10% 8%
Cost of Capital 10% 10% 10%
EPS Rs. 10 Rs. 10 Rs. 10
By Walter’s Models, you are required to calculate the value of an equity share each of the
companies when dividend pay-out ratio is (a) 20% and (b) 0%. 13+12

9. X Ltd. is presently considering two machines for possible purchase. Other information
related to the machines is as follows:
Machine – 1 Machine – 2
Purchase Price Rs. 50,000 Rs. 60,000
Estimated Life 4 Years 4 Years
Cash Flow before Depreciation and Tax:
Year 1 Years 2 Year 3 Year4
Machine – 1 25,000 25,000 25,000 25,000
Machine – 2 45,000 19,000 25,000 27,000

Rate of Tax is 40%

Compute net present value of each machine assuming cost of capital is %. Which machine the
company should buy? The present value of Rs. 1 at 8% is as follows:
Y1 = 0.926, Y2 = 0.857, y3 = 0.794, and y4 = 0.735 (Assume straight line method of
Depreciation). 10+10+5

10. Write Short notes on the following: 13+12

(a) Accounting rate of return.
(b) Capital rationing.
 2021
FINANCIAL MANAGEMENT — GENERAL
Course: DSE 6.2A
Full Marks: 80
Group – A
Answer any four questions:
1. Explain the functions of the Chief Financial Officer or Manager in the Modern Business
Environment. 10

2. Sugata borrows from a bank Rs.1,00,000 at 12% rate of interest to be paid in 5 equal
annual installments at the end of each year. What will be the size of the installment?
[Given (PVIFA) (12, 5) = 3.605] 10

3. A sum of Rs.5,000 is invested for 2 years at 10% interest rate compounded biannually.
Find the maturity amount. 10

4. (a) What do you mean by Capital Budgeting?

(b) What do you mean by Discounted Pay-back Period Method? 5+5

5. The following data relate to a firm:

(i) Earnings per share = Rs. 25
(ii) Capitalization rate = 12%
(iii) Retention ratio = 40%
Determine the share price using Gordon’s Model if IRR is 15%. 10

6. Discuss the features of Optimum Capital Structure. 10

7. A firm has sales of Rs.5,00,000, variable cost of Rs.3,50,000 and fixed cost of Rs.1,00,000
and debt of Rs.2,50,000 at 10% rate of interest. You are required to calculate operating and
financial leverages of the company. If the firm wants to double its EBIT, how much of a rise
in sales would be needed on a percentage basis? 7+3

8. Discuss the Role of Debenture in Company Financing. 10

Group – B
Answer any two questions.

9. RIL Ltd. opts for the following capital structure:

Equity Shares (1,00,000 shares) Rs.50,00,000
15% Debentures Rs.50,00,000
Total Rs.100,00,000
The company is expected to declare a dividend of Rs.5 per share. The market price per share
is Rs.50. The dividend is expected to grow by 10%.
Compute Weighted Average Cost of Capital of RIL Ltd. assuming 50% tax rate. 20
10. From the following information prepare a statement showing the Estimated Working
Capital requirement.
Projected Annual Sales: 26,000 units. Selling price per unit Rs.60

Analysis of Selling Price:

Material: 40%, Labour: 30%, Overhead: 20%, Profit: 10%

Time lag (on average):

Raw materials in stock – 3 weeks. Production process – 4 weeks. Credit to debtors – 5 weeks
Credit from suppliers– 3 weeks. Lag in payment of wages and overheads – 2 weeks. Finished
goods are in a warehouse – 2 weeks.
Cash in hand is expected to be 10% of the Net Working Capital. 20

11. (a) What do you mean by Internal Rate of Return? Discuss its accept and reject rule.
(b) Write a short note on Dividend Policy and Retained Earnings. 10+10

12. (a) Compute the Pay-back Period for the project:

End of the year 1 2 3 4 5

Book Value of fixed assets (Rs.) 90 80 70 60 50

Profit after tax 20 22 24 26 28

(b) What do you mean by Profitability Index? 15+5

 2021
FINANCIAL MANAGEMENT — HONOURS
Course: DSE 6.2A
Full Marks: 80
Group – A
Answer any four questions.
1. Discuss the important functions of Financial Management? 10

2. What do you mean by wealth maximization objective of a firm? How can it be achieved by
the firm? Why is it considered superior to the profit maximization objective of the firm?
2+3+5

3. (a) What do you mean by the time value of money? What are its reasons? 5

(b) X decides to invest Rs.6,000 at the end of each year at the compound rate of interest of
12% p. a. for 8 years. What total amount he will get at the end of 8th year?
[FVAF at 12% for 8 years 12.30] 5

4. (a) Calculate the Payback Period from the following information:

Cost of machine: Rs.1,00,000; Depreciation: 10% p.a., under reducing balance method.
Corporate tax rate 40%.
Year 1 2 3 4 5
Excepted PBT (Rs. ‘000) NIL 54 88 104 125

(b) What are the distinguishing features of Capital Budgeting Decisions? 6+4

5. A firm is considering the proposal of buying a machine with installation cost Rs.5,00,000.
The machine will have a useful life 4 years after which it can be sold for Rs.70,000.
Depreciation is to be charged under straight line method. Additional working capital of
Rs.50,000 will be introduced. Profits before depreciation and tax are expected to be
Rs.1,72,000, Rs.1,98,000, Rs.2,18,000 and Rs.1,80,000 in those four years. If application tax
rate is 30%, calculate ARR of the project. 10

6. Discuss the various sources of finance to meet working capital requirement? 10

7. A firm has sales of Rs.10,00,000, variable cost of Rs.7,00,000 and fixed cost of Rs.2,00,000.
The company has debt capital of Rs.3,00,000 at 10% rate of interest. Compute operating,
financial and combined leverages. If the firm wants to double its earnings before interest
and tax (EBIT), how much rise in sales would be required? 10
8. You are given the following information in respect of ABC Ltd.

Earning Rs.1,00,000
Equity capital 5,000 shares of Rs.10 each
Cost of capital 10%
Expected rates of return (i) 9%, (ii) 10% and (iii) 12%
Assuming that dividend pay-out ratio are 0%, 50% and 100% respectively, determine the
effects of the different dividend policies on the share price of ABC Ltd. for the above
mentioned three alternative levels of rate of returns using Gordon’s model. 10

Group – B
Answer any two questions.

9. (a) Discuss the relevance of Cost of Capital. What do you mean by Implicit and Explicit
Cost of Capital? 5+5

(b) A Company’s share is currently quoted in the market at Rs.30. The company paid a
dividend of Rs.5 per share last year and the investors expect a growth rate of 5% per year.
You are required to calculate: (i) Cost of Equity Share Capital of the Company and (ii) The
Market Price per share, if the anticipated growth rate of dividend is 10%. 10

10. (a) What do you mean by EBIT – EPS Analysis? Discuss its importance in Financing
Decision? 10

(b) Discuss the significance of Operating Leverage and Financial Leverage? 10

11. Following details are available from the management of BAS Ltd:
Particulars Amount per unit (Rs.)
Raw materials 120
Direct labour 45
Overhead 90
The company wants to make 15% profit on sales price.
The following further particulars are available:
Raw material are kept in stock, on average, for one month. Processing time can be taken as,
on average, half a month; Finished goods in stock, on average, for 30 days. Credit enjoyed
by BAS Ltd. in one month; Credit allowed is for two months; Average time – lag in payment
of wages and overhead is one month. Cash in hand and at bank is desired to be maintained
at Rs.30,000. BAS Ltd. prefers to value debtors at sales value. Compute the working capital
required for BAS Ltd. with necessary assumptions to finance a level of activity of 24,000
units of production in the next year. 20
12. (a) SMB Ltd. has considered two projects with economic life of 6 years having
following cash inflows after tax:
End of the 1 2 3 4 5 6 Total
year (Rs.)
Project 1 1,00,000 80,000 75,000 70,000 68,000 62,000 4,55,000
Project 2 62,000 68,000 70,000 75,000 80,000 1,00,000 4,55,000
As the total cash inflows are identical and investment amount is Rs.3,30,000 for the both
projects, the management of SMB Ltd. has decided to go for any one of the given projects.
Do you support their decision? Justify your answer?

The post – tax cost of capital of SMB Ltd. Is calculated as 10%, and the required
discounting factors are given below:
Year 1 2 3 4 5 6
DF @ 10% 0.909 0.826 0.751 0.683 0.621 0.564

(b) Project A and Project B are the two mutually exclusive projects under consideration.
While Project A has a higher NPV, Project B has a higher IRR. Which project should be
selected and why? 12+8