Financial Management- Prelim 1
Solve all questions
- What do you mean by “Trading on Equity”. What impact would this have on the capital structure and earnings of the company (5 marks)
- 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:-
- Convert all the preference shares into debentures carrying 10% interest
- 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)
- What is MPBF. How is it computed. (5 marks)
- 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
Selling and Distribution overheads:
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.
- 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)
- What are the short term sources of capital generation (5 marks)
- Prepare a schedule for cash inflows and outflow for Jan, Feb and Mar based on the following information of Pandeji and co. (10 marks)
- 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%.
- 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.
- Wages are paid with a lag of 1 week.
- Opening balance on Jan 1 was Rs 100000.
- 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.
- 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)
- 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)
|Equity (FV 10)||500000|
|P E ratio||20|
All the best
Prof Vipin Saboo 9820779873
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