IMT 59 Financial Management M3

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IMT 59 Financial Management M3

Question 1: “The profit maximization is not an operationally feasible criterion”. Do you agree? Illustrate your views.

Question 2: Exactly ten years from now Sri Chand will start receiving a pension of Rs 3000/- a year .The payment will continue for sixteen years. How much is the pension worth now, if rate of interest is 10%

Question 3: The following facts are available:

a. Risk free rate, 9%

b. Required rate of return on market portfolio,18%

c. Beta coefficient of shares of ABC Ltd.,1.5

d. Expected dividend during the next year, Rs 3

e. Growth rate in dividends/earnings, 8%

Compute the price at which the shares of ABC Ltd. Should sell.

Question 4: A Rs 100 perpetual bond is currently selling for Rs 95. The coupon rate of interest is 13.5% and the appropriate discount rate is 15%. Calculate the value of bond. Should it be bought? What is its yield to maturity?

Question 5: Differentiate between:

a. Basic & diluted earnings per share

b. Operating and Financial leverage




Question 1: A firm is considering the following project:


0 1 2 3 4 5

-50000 +11300 +12769 +14429 +16305 +18421

Calculate the NPV for the project if the cost of capital is 10%.What is the project’s IRR?

Question 2: What are the critical factors to be observed while making capital budgeting decisions under capital rationing?

Question 3: Orchid Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9% and the company’s tax rate is 40%. Orchid Motors CFO has calculated the company’s
weighted average cost of capital as 9.96%. What is the company’s cost of equity capital?

Question 4: Explain the assumptions and implications of the Net Income approach and the Net Operating Income approach. Illustrate your answer with hypothetical examples.

Question 5: ‘The assumptions underlying the MM dividend irrelevance hypothesis are unrealistic’. Explain and illustrate



Question 1: What is stable dividend policy? Why should it be followed? What can be the consequences of changing a stable dividend policy?

Question 2: X Ltd sells goods at a gross profit of 20%. It includes depreciation as a part of cost of production.

The following figures for the 12 month period ending March 31, current year are given to enable you to ascertain the requirements of working capital of the company on a cash cost basis.


In your working, you are required to assume that:

A safety margin of 15% will be maintained;

Cash is to be held to the extent of 50% of current liabilities;

There will be no work-in-progress;

Tax is to be ignored;

Finished goods are to be valued at manufacturing costs. Stocks of raw materials and finished goods are kept at one month’s requirements.

Sales at 2 month’s credit, Rs 27,00,000

Materials consumed (suppliers’ credit is for 2 months), Rs 6,75,000

Wages (paid on the last day of the month), Rs 5,40,000

Manufacturing expenses outstanding at the end of the year (cash expenses are paid one month in arrear), Rs 60,000

Total administrative expenses (paid as above), Rs 180,000

Sales promotion expenses (paid quarterly in advance), Rs 90,000


Question 3: Differentiate between:

a. Mutually Exclusive and Independent Investment

b. Aggressive & matching approach of financing working capital

Question 4: A finance company advertises that it will pay a lump sum of Rs44650 at the end of 5 years to investors who deposit annually Rs 6000 for 5 years. What is the interest rate implicit in this offer?

Question 5: A company’s bonds have a par value of Rs 100, maturity in seven years, and carry a coupon rate of 12% payable semi-annually. If the appropriate discount rate is 16%, what price should the bond command in the market place?


Case Study – 1


Metcalf Engineers is considering a proposal to replace one of its hammers. The following information is available:

a) The existing hammer was bought 2 years ago for Rs 10 lakh. It has been depreciated at the rate 33.33 percent per annum. It can be presently sold at its book value. It has remaining life of 5 years after which on disposal, it would
fetch a value equal to its the then book value.

b) The new hammer costs Rs 16 lakhs , it will subject to a depreciation rate of 33.33%. After 5 years it is expected to fetch a value equal to its book value. The replacement of the old hammer would increase revenues by Rs 2 lakhs per
year and reduce operating cost (excluding depreciation) by Rs 1.5 lakh per year.

Compute the incremental post tax cash flows associated with the replacement proposal, assuming the tax rate of 50%

Case Study – 2


The following is the capital structure of Simon co. as on 31st March 2008

Equity Shares: 10000 shares (of Rs 100 each) 10,00,000

12% Preference Shares (of Rs 100 each) 4,00,000

10% Debentures 6,00,000


The market price of the company’s share is Rs 110 & it is expected that a dividend of Rs 10 per share would be declared at the end of current year. The dividend growth rate is 6%.

(i) If the tax rate is 35% compute the WACC by book value & market value weights

(ii) For expansion the company intends to borrow a fund of Rs 10 lakh bearing 12% rate of interest, what will be revised WACC? The financing decision is expected to increase dividend from Rs 10 to Rs 12 per share & the market price of
share will reduce to Rs 105 per share


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