Prelim paper Question Paper 2014 of Financial Management

Marks: 75

Solve all questions

1. What do you mean by “Trading on Equity”. What impact would this have on the capital structure and earnings of the company (5 marks)
2. A company is going through a tough financial crisis and wishes to realign the current portfolio of Rs 1 cr of capital employed. The existing structure is as follows:-

Equity Capital (FV 10)= Rs 30 lacs

10% Preference capital= Rs 20 lacs

12 % Debentures= Rs 50 lacs.

Existing share holders require a 15% dividend.

The company currently has two options:-

1. Convert all the preference shares into debentures carrying 10% interest
2. Convert 50% of the preference shares into 11% debentures and the remaining as present.

Help the company identify a correct option based on the WACC and also on EPS. Tax rate is 50% and the company earns 40% of capital employed. (10 marks)

2. What is MPBF. How is it computed. (5 marks)
3. MN Ltd. is commencing a new project for manufacture of electric toys. The following cost

information has been ascertained for annual production of 60,000 units at full capacity:

Amount per                                                       Rs

Raw materials                                                    20

Direct labour                                                      15

Manufacturing overheads:

Variable                                                               15

Fixed                                                                     10

Selling and Distribution overheads:

Variable                                                               3

Fixed                                                                      1

Total cost                                                             64

Selling price                                                        80

To assess the need of working capital, the following additional information is available:

(i) Stock of Raw materials……………………………………3 months consumption.

(ii) Credit allowable for debtors…………………………..…1½  months.

(iii) Credit allowable by creditors……………………………4 months.

(iv) Lag in payment of wages………………………………..1 month.

(v) Lag in payment of overheads…………………………..½  month.

(vi)Cash is expected to be Rs. 60,000.

(vii) Provision for contingencies is required @ 10% of working capital requirement

Bank balance is 10 percent of working capital

Prepare a working capital statement assuming all factory cost on production and debtors on actual sales.

3. A company is contemplating investment in a project that would have an initial cost of Rs 1 crs. Since the project is based out of a backward area, the company would be eligible for a cash subsidy of Rs 20 lacs which would be realized in the second year of the production process. Also the company get a 50% tax exemption in the first 3 years after the commencement of production. Subsidy would be exempt from tax.  After the tax free period is over, the company would still enjoy a 50% concession in taxes. The project life is 6 years with a salvage value of Rs 10 lacs. The Sales generated by the company is the first year would be 3 lac units that would increase by 20% every year. The PV ratio is 40%. Fixed cost excluding depreciation is Rs 8 lacs every year. SP is Rs 10 per unit. Normal corporate tax rate is 40%. Evaluate the project based on  Discounted payback period and NPV method assuming the cost of funds to be 12%. (15 Marks)

4. What are the short term sources of capital generation (5 marks)
5. Prepare a schedule for cash inflows and outflow for Jan, Feb and Mar based on the following information of Pandeji and co. (10 marks)

1. 20% sales are cash and received in the same month. Of the balance 50% comes in next month and the rest after 2 months. The last installment of sales which is supposed to come generally has a bad debt of 5%.
2. 50% Purchases are paid 1 month in advance after a 10% cash discount and the rest after 1 month. Factory expenses are paid in the same month.
3. Wages are paid with a lag of 1 week.
4. Opening balance on Jan 1 was Rs 100000.
5. Pandeji had taken a loan of Rs 10 lacs in October last year and is liable to pay interest at 12% per annum accuring monthly.

5. A company has a sales of Rs 50 lacs and gives a 3 months credit. Due to such liberal credit, the company has a bad debt of 5% on sales. The company plans to tighten the credit period and ensure that debtors are correctly monitored. It is planning to have a 1 month credit period and the sales are expected to drop by 5%. There would not be any bad debts. The company has a PV ratio of 40% and expects a 20% return on investment. Advice the company if the new plan can be adopted. (5 marks)
6. The balance sheet of M/s Bulbul is available. Another company M/s Sunita wishes to acquire the same. Sunita is willing to offer a maximum of Rs 35 per share. Please check approach if the offer can be accepted. Tax rate is 50%(10 marks)

All the best

Vipin Saboo