IMT 59 Financial Management M4

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IMT 59 Financial Management M4

SECTION – A

Q1: Discuss briefly meaning and purpose of internal financial control.

Q2: Assume that a 10-year savings annuity of Rs. 2,000 per year is
beginning at the end of current year. The payment of retirement annuity is
to begin 16 year from now (the first payment is to be received at the end
of year 16) and will continue to provide a 20-year payment annuity. If
this plan is arranged through a saving bank that pays interest @ 7% per
year on the deposited funds, what is the size of the yearly retirement
annuity that will result?

Q3: Explain Capital Asset Pricing Model and its assumptions.

Q4: Differentiate between bullet bond and amortizing bond.

Q5: a. An investor has purchased 11% Bond of Rs. 100 repayable after 5
years at 99. Coupon is payable annually. Find out its yield to maturity.

b. An investor has purchased 11% Bond of Rs. 100 repayable 25% at the end
of each year beginning from second year at 99. Find out its yield to
maturity.

SECTION – B

Q1: Explain revenue based, asset based and capital based profitability
ratios.

Q2: What do you mean by Capital Planning and Investment Control? Explain
its phases also.

Q3: ABC Ltd. manufactures toys and other gift items. The research and
development department has come up with an item that would make a good
promotional gift for office equipment dealers. As a result of efforts by
the sales personnel, the firm has commitments for this product.

To produce the quantity demanded, ABC Ltd. will need to buy additional
machinery and rent additional space. It appears that about 25,000 sq. feet
will be needed; 12500 sq. feet of presently unused space but leased at the
rate of Rs. 3 per square foot per year, is available. There is another
12500 sq. feet available at the annual rent of Rs. 4 per square foot.

The equipment will be purchased for Rs. 9,00,000. It will require Rs.
30,000 in modification, Rs. 60,000 for installation and Rs. 90,000 for
testing. The equipment will have a salvage value of about Rs. 1,80,000 at
the end of the 3rd year. No additional general overhead costs are expected
to be incurred.

The estimated revenues and costs for the product for the 3 years have been
developed as follows

IMT SOLUTION

If the company sets a required rate of return of 20% after taxes, should
this project be accepted?

Q4: What do you mean by cost of capital? Explain its significance also.

Q5: A ltd. needs finance of Rs. 10 lakhs for meeting its investment plans.
It has Rs. 2,10,000 in the form of retained earnings available for
investment purposes. The following are the future details.

IMT CDL ANSWERS

Compute over all weighted average after tax cost of additional finance.

SECTION – C

Q1: What are the causes of financial leverage? How is degree of financial
leverage measured?

Q2: Explain arbitrage theory of capital structure. State two important
shortcomings of the theory.

Q3: Explain the assumptions of Modigliani’s dividend irrelevance theory.
Critically analyze how far those assumptions are tenable?

Q4: What do you mean by working capital? Explain objectives of working
capital management.

Q5: Explain major sources of short term financing.

CASE STUDY – 1

The selected financial data for A, B, C companies for the year ended Dec.
1999 are as follows: –

Prepare income statement of A, B, C.

CASE STUDY – 2

A performa cost sheet of a company provide the following particulars:
The following further particulars are available:

Raw material in stock, on average one month; materials are in process, on
average half a month; finished goods in stock, on average one month.
Credit allowed by suppliers is one month; credit allowed to debtors is two
months; lag in payment of wages is 1 ½ weeks; lag in payment of overhead
expenses is one month; one fourth of the output is sold against cash; cash
in hand and at bank is expected to be Rs. 25,000. You are required to
prepare a statement showing the working capital needed to finance a level
of activity of 1,04,000 units of production.

You may assume that production is carried on evenly throughout the year,
and wages and overheads accrue similarly.

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