# Financial Management-2

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SKU: AMSEQ-093 Category:

## Assignment – A

Question 1a: Should the titles of c ontroller and treasurer be adopted under Indian context? Would you like to modify their functions in v iew of the company practice in India? Justify your opinion?

Question 1b: firm purchases a machinery for Rs. 8,00,000 by making a down payment of Rs.1,50,000 and remainder in equal installments of Rs. 1,50,000 for six years. What is the rate of interest to the firm?

Question 2a: Explain the mechanism of calculating the present v alue of cash flows. What is annuity due? How can you calculate the present and future v alues of an annuity due? Illustrate

Question 2b: “The increase in the risk-premium of all stocks, irrespective of their beta is the same when risk av ersion increases” Comment with practical examples

Question 3a: How leverage is linked with capital structure? Take example of a MNC and analyse.

Question 3b: The following figures relate to two companies (10)

 P LTD. Q LTD. (In Rs. Lakhs) Sales 500 1,000 Variable costs 200 300 —– ——- Contribution Fixed costs 300 700 Fixed Cost 150 400 —– ——- 150 400 Interest 50 100 Profit before tax 100 200

You are required to:

(i) Calculate the operating, financial and combined leverages for the two companies; and Comment on the relative risk position of them

Question 4a: Define various concepts of cost of capital. Explain the procedure of calculating weighted average cost of capital.

Question 4b: The following items hav e been extracted from the liabilities side of the balance sheet of XYZ Company as on 31 December 2005.

Paid up capital:
4, 00,000 equity shares of Rs each                                                             40,00,000
Loans:
16% non-convertible debentures                                                                20,00,000
12% institutional loans                                                                                60,00,000
Other information about the company as relevant is given below:

 31st dec Dividend Earning average market price 2005 Per share per share per share 7.2 10.50 65

You are required to calculate the weighted average cost of capital, using book values as weights and earnings/price ratio as the basis of cost of equity. Assumel 9.2% tax rate

Question 5a: A company has issued debentures of Rs. 50 Lakhs to be repaid after 7 years. How much should the company invest in a sinking fund earning 12% in order to be able to repay debentures? Show the procedure of loan amortization and capital recovery through an example.

Question 5b: A bank has offered to you an annuity of Rs. 1,800 for 10 years if you invest Rs. 12,000 today. What is the rate of return you would earn?

## Assignment – B

Question 1: The proforma of cost-sheet of HLL provides the f ollowing data:

 Cost (perunit): Rs. Raw materials 52.0 Direct labour 19.5 Overheads 39.0 Total cost (per unit): 110.5 Profit 19.5 Selling price 130.0

The following is the additional information available:
Average raw material in stock: one month; Average materials in process: half month; Credit allowed by suppliers: one month; Credit allowed to debtors: two months; Time lag in payment of wages: one and half weeks; Overheads: one month. One-fourth of sales are on cash basis. Cash balance expected to be Rs. 12,000.
You are required to prepare a statement showing the working capital needed o finance a level of activity of 70,000 units of output. You may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly.

Question 2a: Through quantitative analysis prove that PI is a better technique than NPV in Capital Budgeting.

Question 2b: A company is considering the following investment projects:

 Projects Cash Flows (Rs.) Co C1 C2 C3 A −10,000 + 10,000 — — B −10,000 + 7,500 + 7,500 — C − 10,000 + 2,000 + 4,000 + 12,000 D −10,000 + 10,000 + 3,000 + 3,000

I. according to each of the following methods: (1.) Payback, (2.) ARR, (3.) IRR, (4.) NPV assuming discount rates of 10 and 30 percent.
II. Assuming the project is independent, which one should be accepted? If the projects are mutually exclusive, which project is the best?

Question 3a: “Firm should follow a policy of very high dividend pay-out”Taking example of two organization comment on this statement”

Question 3b: An investor gains nothing from bonus share “Critically analyse the statement through some real life situation of recent past.

## Case Study

Brown Metals Ltd.

Brown Metals Ltd. is considering the replacement of its existing machine which is obsolete and unable to meet the rapidly rising demand for its product. The company is faced with two alternatives:
(a) to buy machine A which is similar to the existing machine or
(b) To go in for machine B which is more expensiv e and has much greater capacity.

The cash flows at the present level of operations under the two alternatives are as follows:

 Yrs. 0 1 2 3 4 5 Machine A -25 -5 20 14 14 Machine B -40 10 14 16 17 15

The Company’s cost of capital is 10%. The Finance Manager tries to evaluate the machines by calculating the follow-ings for both the machines:
1. Net Present Value
2. Profitability Index
3. Pay Back Period
4. Discounted Payback Period.

At the end of his calculations, howev er, the finance manager is unable to make up his mind as to which machine to recommend.

Question: You are required to make these calculations and in the light thereof, advise the finance manager about the suitability, or otherwise, of machine A or machine B.

## Assignment – C

1. The main function of a finance manager is
(a) capital budgeting
(b) capital structuring
(c) management of working c apital
(d) (a),(b)and(c)

2. Earning per share
(a) refers to earning of equity and preference shareholders.
(b) refers to mark et v alue per share of the company.
(c) reflects the value of the firm.
(d) refers to earnings of equity shareholders after all other obligations of the company have been met.

3. If the cut off rate of a project is greater than IRR, we may
(a) accept the proposal.
(b) reject the proposal.
(d) wait for the IRR to increase and match the cut off rate.

4. Cost of equity share capital is
(a) equal to last dividend paid to equity shareholders.
(b) equal to rate of discount at which expected div idends are discounted to determine their PV.
(c) less than the cost of debt capital.
(d) equal to dividend ex pectations of equity shareholders for coming year.

5. Degree of the total leverage (DTL) can be calculated by the following formula
[Given degree of operating leverage (DOL) and degree of financial leverage (DFL)]
(a) DOL + DFL
(b) DOL /DFL
(c) DFL-DOL
(d) DOL x DFL

6. Risk- Return trade off implies
(a) increasing the profits of the firm through increased production
(b) not taking any loans which increase the risk of the firm
(c) taking decisions in a way which optimizes the balance between risk and return
(d) not granting credit to risky customers

7. The goal of a firm should be
(a) maximization of profit
(b) maximization of earning per share
(c) maximization of value of the firm
(d) maximization of return on equity

8. Current Assets minus current liabilities is equal to
(a) Gross working capital
(b) Capital employed
(c) Net worth
(d) Net working capital.

9. The indifference level of EBIT is one at which
(a) EPS increases
(b) EPS remains the same
(c) EPS decreases
(d) EBIT=EPS.

10. Money has time value since
(a) The value of money gets compounded as time goes by
(b) The value of money gets discounted as time goes by
(c) Money in hand today is more certain than money in future
(d) (b) and (c)

11. Net working capital is
(a) excess of gross current assets over current liabilities
(b) same as net worth
(c) same as capital employed
(d) same as total assets employed

12. The internal rate of return of a project is the discount rate at which NPV is
(a) positive
(b) negative
(c) zero
(d) negative minus positive

13. Compounding technique is
(a) same as discounting technique
(b) slightly different from discounting technique
(c) ex actly opposite of discounting technique
(d) one where interest is compounded more than once in a year.

14. For determining the value of a share on the basis of P/E ratio, information is required regarding:
(a) earning per share
(b) normal rate of return
(c) capital employed in the business
(d) contingent liabilities

15. Tandon committee suggested inventory and receivable norms for
(a) 15 major industries
(b) 20 minor industries
(c) 25 major and minor industries
(d) 30 major and minor industries

16. Capital structure of ABC Ltd. consists of equity share capital of Rs. 1,00,000 (10,000
share of Rs. 10 each) and 8% debentures of Rs. 50,000 & earning before interest and tax is
Rs. 20,000. The degree of financial leverage is
(a) 1.00
(b) 1.25
(c) 2.50
(d) 2.00

17. The following data is given for a company. Unit SP = Rs. 2, Variable cost/unit = Re. 0.70, Total fixed cost- Rs. 1,00,000 Interest Charges Rs. 3,668, Output-1,00,000 units. The degree of operating leverage is
(a) 4.00
(b) 4.33
(c) 4.75
(d) 5.33

18. Market price of equity share of a company is Rs. 25 and the dividend expected a year hence is
Rs. 10. The expected rate of dividend growth is 5%. The cost of equal capital to company will be
(a) 40%
(b) 45%
(c) 35%
(d) 50%

19. The dilemma of “liquidity Vs profitability” arise in case of
(a) Potentially sick unit
(c) Only public sector unites

20. The present value of Rs. 15000 receivable in 7 years at a discount rate of 15% is
(a) 5640
(b) 5500
(c) 5900
(d) 5940

21. A bond of Rs. 1000 bearing coupon rate of 12% is redeemable at par in 10 yrs. If the required rate of return is 10% the value of bond is
(a) 1000
(b) 1123
(c) 1140
(d) 1150

22. The EPS of ABC Ltd. is Rs. 10 & cost of capital is 10%.The market price of share at return rate of 15% and dividend pay out ratio of 40% is
(a) 100
(b) 120
(c) 130
(d) 150

23. The credit term offered by a supplier is 3/10 net 60.The annualized interest cost of not availing the cash discount is
(a) 22.58%
(b) 27.45%
(c) 37.75%
(d) 38.50%

24. The costliest of long term sources of finance is
(a) Preference share capital

(b) Retained earnings
(c) Equity share capital
(d) Debentures

25. Which of the following approaches advocates that the cost of equity capital & debit capital remains the degree of leverages varies
(a) Net income approach
(b) Net operating income approach
(d) Modigliani-Miller approach

26. Which of the following is not a feature of an optimal capital structure.
(a) Profitability
(b) Safety
(c) Flexibility
(d) Control

27. While calculating weighted average cost of capital
(a) Retained earnings are excluded
(b) Bank borrowings for working capital are included
(c) Cost of issues are included
(d) Weights are based on market value or on book value

28. Which of the following factors influence the capital structure of a business entity?
(a) Bargaining power with suppliers
(b) Demand for product of company
(c) Expected income

29. According to the Walters model, a firm should have 100% dividend pay-out ratio when.
(a) r = ke
(b) r < ke
(c) r > ke
(d) g > ke

30. Operating cycle can be delayed by
(a) Increase in WIP period
(b) Decrease in raw material storage period
(c) Decrease in credit payment period
(d) Both a & c above

31. If net working capital is negative, it signifies that
(a) The liquidity position is not comfortable
(b) The current ratio is less then 1
(c) Long term uses are met out of short- term sources
(d) All of a, b and c above

32. Which of the following models on dividend policy stresses on investors preference for the current dividend
(b) Walters model
(c) Gordon model
(d) MM model

33. Which of the following is a technique for monitoring the status of receivables
(a) ageing schedule
(b) outstanding creditors
(c) selection matrix
(d) credit ev aluation

34. Average collection period is equal to
(a) 360/ Receiv ables Turnover Ratio
(b) Average Creditors / Sales per day
(c) Sales / Debtors
(d) Purchases / Debtors

35. In IRR, the cash flows are assumed to be reinvested in the project at
(a) Internal rate of return
(b) cost of capital
(c) Marginal cost of capital
(d) risk free rate

36. In a capital budgeting decision, incremental cash flow mean
(a) cash flows which are increasing.
(b) cash flows occurring ov er a period of time
(c) cash flows directly related to the project
(d) difference between cash inflows and outflows for each and every expenditure.

37. The simple EOQ model will not hold good under which of the following conditions
(a) Stochastic demand
(b) constant unit price
(d) Fixed ordering costs

38. The opportunity cost of capital refers to the
(a) net present v alue of the investment.
(b) return that is foregone by inv esting in a project.
(c) required investment in a project.
(d) future value of the investments cash flows.

39. Which of the following factors does not influence the composition of Working Capital requirements
(b) seasonality of operations
(c) availability of raw materials
(d) amount of fixed assets

40. The capital structure ratio measure the
(a) Financial Risk  Financial Management-2