ADL 13 Financial Management V2

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ADL 13 Financial Management V2
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)
Sales5001,000
Variable costs200300
————
Contribution Fixed costs300700
Fixed Cost150400
————
150400
Interest50100
Profit before tax100200

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 decDividendEarningaverage market price
2005Per shareper shareper share
7.210.5065

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 materials52.0
Direct labour19.5
Overheads39.0
Total cost (per unit):110.5
Profit19.5
Selling price130.0

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:
ProjectsCash Flows (Rs.)
CoC1C2C3
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:
Cash flow (Rs in lakhs) at the end of year
Yrs.012345
MachineA-25-5201414
MachineB-401014161715

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.
(c) be neutral about it.
(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
(b) Any business organization
(c) Only public sector unites
(d) Purely trading companies
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
(c) Traditional approac h
(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
(d) Technology adopted
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
(a) Traditional model
(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
(c) Zero lead time
(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
(a) Nature of the business
(b) seasonality of operations
(c) availability of raw materials
(d) amount of fixed assets
40. The capital structure ratio measure the
(a) Financial Risk
(b) Business Risk
(c) Market Risk
(d) operating risks
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