PRELIM-I/FM/30/09/2014
2 ½ Hours Ganesha Classes Total Marks:75
N.B.: 1) Q.2. to Q.4. having internal option.
2) All Questions are compulsory
3) Specify notes and assumption (if any)
Q.1. TREVENI Ltd Co.is considering the replacement of its existing machine which is obsolete and unable to meet the rapid demand for its product. The company is faced with two alternatives to buy Machine A which is similar to the existing machine or to go in for Machine B which is more expensive and has much great capacity. The cash flow at present level of operation under the two alternatives are as follows:
| Machine | Immediate Cash outflow | Cash inflow
(in lakhs of Rs. at the end of ) |
|||||
|
|||||||
| A
B |
25
40 |
|
The company’s cost of capital is 10%
The Finance manager tries to appraise the machine by calculating the following:
- NPV 2) Profitability Index 3) Payback Period 4) Discount Payback Period
At the end of his calculation, however the Finance Manager is unable to make up his mind as to which machine to recommend. You are required to make these calculations and in light thereof to advise the Finance Manager about the proposed investment.
| Years | 0 | 1 | 2 | 3 | 4 | 5 |
| Present value@ 10% | 1.00 | 0.91 | 0.83 | 0.75 | 0.68 | 0.62 |
(15)
Q.2.a) Prepare a Cash Budget of a Ganesha Co, for April, May and June, 2014 in a columnar form using the following information.
| Month ( 2014) | Sales (Rs) | Purchases (Rs) | Wages (Rs) | Expenses (Rs) |
| January
February March April May June |
80,000
80,000 75,000 90,000 85,000 80,000 |
45,000
40,000 42,000 50,000 45,000 35,000 |
20,000
18,000 22,000 24,000 20,000 18,000 |
5,000
6,000 6,000 7,000 6,000 5,000 |
You are further informed that-
- 10% of the purchases and 20% of sales are1 for cash.
- The average collection period of the company is 1/2th Month and the credit purchases are paid off regularly after one month.
- Wages are paid half monthly and the rent of Rs.500 included in expenses is paid monthly.
- Cash and Bank balance as on 1st April, was Rs.15,000 and the company wants to keep it on the end of every month below this figures, the excess cash being put in fixed deposit. (08)
Q.2.b) The Balance Sheet of Shaw and Co. is as follows –
| Liabilities | Rs | Assets | Rs |
| Equity Share capital
Retained Earning 10% Long term borrowing Current Liabilities |
60,000
20,000 80,000 40,000 |
Fixed Assets
Current Assets |
1,50,000
50,000 |
| 2,00,000 | 2,00,000 |
The Co’s total assets turnover ratio is 3. Its fixed Operating Cost are Rs.1,00,000 and the variable cost ratio is 40%. The Income tax rate is 50%. Calculate for the company the different types of leverages assuming face value of share is Rs.10. (07)
OR
Q.2.(a) COCA COLA Co. has various alternatives of capital – debt mix and cost thereof as under:-
| Debt as % Total Capital | Cost of Debt | Cost of Equity | Debt as % Total Capital | Cost of Debt | Cost of Equity |
| 0
10 20 30 40 50 |
5.0
5.0 5.0 5.50 5.50 6.00 |
12.00
12.00 12.50 13.00 13.00 13.50 |
60
70 80 90 100 |
6.00
7.00 7.00 7.50 7.50 |
14.00
14.50 15.00 15.00 15.00 |
Suggest optional debt equity mix. (08)
(b) Expected PBIT Rs.20 lakh
Option of Capital Structure – (Rs. in lacs)
| A | B | C | |
| Equity
10% Debt 15% Preference |
20
80 – |
20
60 20 |
40
40 20 |
Tax rate 40% Equity dividend into share of face value of Rs.10. Which option is preferred? (07)
Q.3. Aakash Ltd sells on credit term “2/15 net 45 days”. Its present sales are Rs.100 lakh p.a., variable cost are 70% of sales and fixed cost are Rs.12 lakh p.a.. The company cost of fund is 24% and it is observed that 40% of the customers avail the discount, while the rest pay on the due date.
The company is considering relaxing its credit terms to 3/18 net 45 days”. The relaxation is expected to increase sales by 25% and fixed costs by 3 lakh p.a. Due to economy of operations, variable cost will be reduced to 60% on all sales. It is expected that 80% of the customers will avail the discount, the rest paying on the due date. Advice whether the relaxation in credit terms worthwhile. Show workings clearly. (15)
OR
Q.3. a) What are the Scope of Financial Management? (08)
- b) Write a Short note on: Profit Maximization. (07)
Q.4. REX Ltd sells goods in Domestic market at 25% gross profit. Its annual figures are as follows:
Sales -Domestic at 1 month credit 12,00,000
-Export at 3 month credit sales price below domestic price by 10% 5,40,000
Materials used by supplier extent two month credits 4,50,000
Wages paid – ½ month arrears 3,60,000
Administrative expenses ( 1 month in arrears) 1,20,000
Manufacturing Expenses ( 1 month in arrears) 5,40,000
Sales promotion expenses ( payable quarterly in advance) 60,000
Income tax payable in four instalment of which one fall in the next financial years 1,50,000
The company keeps one month stock of each Raw material and Finished goods and believes in keeping Rs.50,000 as cash balance. Assuming a 15% safety margin ascertain the requirement of the working capital of the company. Ignore work in progress. (15)
OR
Q.4. a) What is Weighted Average Cost of Capital (WACC)? (08)
- b) Explain the Reason for Business Re-structuring. (07)
Q.5. Write Short notes on any THREE:-. (15)
(a) Factor affecting working capital. (b) Accounting Rate of Return.
(c) Financial Implications Valuation in Business Re-structuring. (d) Motive of Holding Cash
All the best…..
……. Ganesha Classes
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