Financial Management Prelims 2012

FINANCIAL MANAGEMENT

N.B.:   1) Section I is compulsory.                                                                          (60 marks)

2) In Section II solve any 3 out of 4 questions.                                         2hrs.

Section I

1.    (a) Concepts:                                                                                                                   (5)

1. Distinguish between permanent and temporary working capital.
2. Distinguish between hypothecation and pledge.
3. What is Float?
4. What do you mean by purchase consideration in case of business restructuring?
5. Compare Interest and Dividend.

(b) Solve any two of the following:

  i.    The operating information of Thane enterprises are as follows:

Calculate the firms operating, financial and combined leverage.                                          (5)

1. ii.    Income tax rate @40%. Face value per debenture is `50. Interest rate @10%. Floatation Cost @5%. Premium @ 2½ %. Redeemable after 4 years. Calculate cost of debt after tax.                                                                                                                                 (5)

iii.    A project requires an investment of ` 60,000. The plant and machinery required under the project will have a scrap value of ` 3,000 at the end of its useful life of 5 years. The profits after tax and depreciation are estimated to be as follows:

Calculate the Accounting Rate of Return.                                                                        (5)

1. 2.    A company needs ` 50, 00,000 for construction of new plant. It considers 3 alternatives:
2. Issue Equity Capital for ` 50 lacs.
3. Issue Equity Capital – 50% of cost and 15% Debentures – 50% of cost.
4. Issue Equity Capital –50% of cost and 12% Preference capital – 50% cost

You are required to suggest suitable plan to maximize return for equity given that tax rate is 50% and expected earnings before interest and tax is (i) ` 10 lacs, (ii) ` 20 lacs, (iii) ` 25 lacs, (iv) ` 30 lacs.                                                                                                 (15)

Section II

(Any 3, 10 marks each)

3.    M/s Sneha & Co (P) Ltd. is considering two different projects. Project A and B are mutually exclusive projects each requiring an initial cash outflow of ` 1,00,000 having life of 5 years. The company pays tax @50% and its rate of return is at 10%. The projects will be depreciated on a straight line basis. The net cash flows before taxes and depreciation is expected to be generated by the projects are as follows:

You are required to calculate:

a.The Payback period of each project.

b.The average rate of return for each project

1. The net present value of each project
2. The profitability index for each project.

Which project should be accepted? Give reasons.

4.    Quest Ltd is considering relaxing its credit policy. At present it has annual credit sales of ` 20lacs and has an accounts receivable turnover ratio of 6 times a year. Bad debts at present accounts to ` 50,000. The firm is required to give a return of 30% on the investment in accounts receivables. The company’s variable cost are 60% of selling price.

Which is the better option from the two options given?

5.    Quoin Ltd. a newly started company wishes to prepare cash budget from April 2010. Prepare a cash budget for the six months from the following estimated revenue and expenses:

1. Sales include cash sales which is 50% of total sales.
2. New machinery is to be installed in the month of May and July. Therefore provisions should be made for the payment of ` 800 and ` 2,500 respectively.
3. A grant of Bank loan is expected in the month of August of ` 3,000. It was anticipated that a dividend of ` 3,500 will be paid by the company in September.
4. Period of credit allowed by suppliers is one month.
5. Period of credit allowed to customers is one month.
6. Delay in payment of both overheads is one month.
7. Sales commissions to agents at 3% on total sales is paid in each month.
8. Cash balance in hand on 1^st April, 2010 is ` 7,250.

6.    Write Short Notes on (Any 2)

1. Need for Capital budgeting.
2. Short term sources of Finance.
3. Qualities of a successful Finance Manager.