Financial Management Prelims Questions 2012

PRELIMINARY EXAMINATION

00000012 / 2521 / 0003 / BMS / Financial Management (FM) / V Semester / Marks 60 M     / 2.00 Hrs. Seat ________

Note:

1. Attempt both the sections on same answer sheet
2. All the questions are compulsory in Section I and attempt any three questions from Section II
3. Working notes should be part of the answers
4. Figures to indicate right will give you full Marks

SECTION I

Q1 a. Concept Testing                                                                                                                                    05

1)      ICD (Inter Corporate Deposits)                        3) MM Approach

2)      Motives of Holding the Cash                           4) Opportunity Cost

5)      Purchase Consideration in Amalgamation

Q1 b. Attempt any two                                                                                                                                   10

1)      The Operating information of Nidhi Limited is as follows:

Sales                            –                       Rs. 1, 50,000

Variable Cost               –                       Rs. 1, 05,000

Fixed Cost                   –                       Rs. 30,000 (Including Interest 10% on 75000)

You are required to Calculate:

1)      a) DOL                                    b) DFL                                     c) DCL

2)      Determine the Sales to double the EBIT

2)      SATISH Company issues 10 % Debenture of Rs. 100 each at premium of 10% flotation cost is 2% on par value, to be redeemed after 10 years; at a premium of 10%, .Calculate the cost of debt (After Tax). Tax rate is 50%

3)      Potato Ltd. intending to acquire Onion Ltd. by exchanging 0.5 of its shares for every share of Onion Ltd. The relevant financial information is given below:

I)                   The no. of shares required to be issued by Potato Ltd. for acquiring Onion Ltd.

II)                 EPS of Potato Ltd. after Merger (if there is a synergy Loss of 10 %)

Q2. ‘Satish’ Ltd. is considering the possibility of purchasing a Multipurpose Machine Costing Rs. 10 Lakhs. The machine has an expected life of 5 years. The machine will generate Rs. 6 Lakhs per year before depreciation and Tax.  The management wishes to dispose of the machine at the end of 5 years for Rs. 1 Lakh. The depreciation allowable for the machine is 25% on W.D.V. and the company’s tax rate is 40%. The company has approached first leasing company Ltd. for a 5 year lease for financing the machine which quoted a rate of Rs. 10 per thousand per month. The company wants you to evaluate the proposals. The cost of capital of the company is 10 per cent and for lease option it wants you to consider discount rate of 15 per cent. The present value factors are as follows:                                                                                                                                                             15

SECTION II (Any Three)

Q3. NIDHI Ltd. has an annual sale of Rs. 50, 00,000. It is currently extending 30 days credit to the dealers. It is felt that sales can pick up considerably if the dealers are willing to carry increased stocks, but the dealers have difficulty in financing their inventory. The company is, therefore, considering shift in credit policy. The following information is available:                                                                                                                     10

The average collection period is now 30 days.,           Variable costs are 80% on sales, Fixed costs Rs. 6, 00,000 per annum., Required (pre – tax) return on investment is 20% p.a.

Determine which policy the company should adopt, assuming that year = 360 days and Debtors are valued at Total Cost, (for the purpose of calculation of investment in debtors).

Q4.Nidhi a company needs Rs. 12, 00,000 for the installation of a new factory which would yield an annual EBIT of Rs. 2, 00,000. The company has the objective of maximizing the Earnings per share. It is considering the possibility of issuing Equity shares plus raising a debt of Rs. 2, 00,000 or Rs. 6, 00,000 or Rs. 10, 00,000. The current market price per share is Rs. 40 which is expected to drop to Rs. 25 per share. If the market borrowings were exceeds Rs. 7, 50,000. Costs of borrowings are indicated as under: Up to Rs. 2, 50,000                                                     10% p.a                                               10

Between Rs. 2, 50,001 and Rs. 6, 25,000                  14% p.a

Between Rs. 6, 25,001 and Rs. 10, 00,000                16% p.a

Assuming the tax rate to be 50% work out the EPS and the Scheme which would meet the objective of management

Q5. Estimate the amount of Working Capital from the following particulars of M/s. Nano Enterprises.

Annual Sales                                                                                                 36000 units

Cost Structure (P.u.)                        Raw Material                                                            Rs.  25.00

Man Power                                                    Rs.  22.00

Other Expenses                                            Rs.  21.75

Total cost                                                       Rs.  68.75

Profit                                                              Rs.  31.25

Sales                                                               Rs.100.00

Customers are given 60 days credit and 50 days’ credit is available from the suppliers. 40 days of supply of raw materials and 15 days’ supply of finished goods are kept as stock. The production cycle is 20 days. Cash in hand Rs.20, 000 is required. You may assume that the year consists of 360 working days. And also calculate MPBF (Low Risk Category)

Q6.a) Plugging Back of Profits                                    b) Profit Maximization V/s Wealth Maximization        10