Financial Management- Prelim 1

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Marks: 60

Solve all questions

  1. A. 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.

The current WACC of the company is 9.5%. 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)

OR

  1. A. What is the difference between operating and financial leverage. (5 marks)
  2. B.  Find out all the leverages, PE and EPS and comment (10 marks)
Particulars A B C
Sales (Units)

40000

50000

45000

SP per unit

15

12

14

VC per unit

8

7.2

8.1

Fixed cost

45000

42000

34000

MPS

12

15

13.5

No of shares

50000

50000

50000

Debentures

600000

800000

650000

Interest rate

14%

13%

14%

Tax rate

35%

35%

35%

 

  1. A. What is MPBF. How is it computed. (5 marks)

B. 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 unit Rs.

Raw materials  20

Direct labour  15

Manufacturing overheads: Rs.

Variable  15

Fixed 10

Selling and Distribution overheads:Rs.

Variable 3

Fixed  1

Total cost 64

Profit 16

Selling price 80

In the first year of operations expected production and sales are 40,000 units and 35,000 units

respectively. 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 in hand and Bank is expected to be Rs. 60,000.

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

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

 

OR

2 A.  What is the meaning of securitization? (5 marks)

Particulars Rs(lacs)
Equity (FV 10)

25

9% preference shares

25

10% debentures

30

2 B.  A company’s existing capital structure is as follows (10 marks)

 

 

 

 

MPS per share is Rs 35 and Tax rate is 40%. The dividend paid was Rs 2 per share and shareholders assume a 10% growth in dividend rate. What would be the effect in the WACC under:-

  1. Additional 20 lacs raised via 12% debentures after a flotation cost of 1%
  2. Additional 20 lacs via equity issued after the market price falls by 20%. Dividend remains constant.

 

3 a. What are the benefits of NPV over the other methods of project evaluation (5 marks)

3B. 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%. (10 Marks)

 

Or

 

3a. what do you mean by float and del carde commission agents (5 marks)

3b. Prepare a schedule for cash inflows and outflow for Jan, Feb and Mar based on the following information of Pandeji and co.           (10 marks)

  Oct Nov Dec Jan Feb Mar
Sales

100000

150000

200000

250000

300000

300000

Purchases

20000

25000

27000

28000

50000

50000

Wages

25000

26000

30000

32000

33000

40000

Factory expenses

20000

25000

30000

25000

25000

25000

  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. Purchases and factory expense 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.

 

4a. What are the types of merger. (5 marks)

4b. The balance sheet of M/s Pokle is available. Another company M/s Pednekar wishes to acquire the same. Pednekar is willing to offer a maximum of Rs 35 per share. Please check via NAV, Yield approach and Fair value approach if the offer can be accepted.(10 marks)

Equity (FV 10)

500000

Retained earnings

200000

10% debt

300000

12% PS

250000

Current liability

250000

Total

1500000

FA

1000000

Investment

200000

Current asset

300000

Total

1500000

EBIT

2000000

Industry dividend average

20%

 

Or

 

4a. Explain the various factors affecting the requirement of working capital (7 marks)

 

4b. What are the various short term sources of finance for the company (8 marks)

 

For any queries, you can contact Prof. Vipin Saboo – 9820779873

 

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Education Qualification: BMS- N M College (University Rank Holder) PGDBM- Sydenham College M Com- College topper Mr Vipin Saboo has been associated with the following institutes as a visiting faculty Lords college, Malad Patkar College, Goregoan Saraf college, Malad Dalmia college, Malad St Andrews College, Bandra Wilson College, Grant Road Thakur college, Kandivili L N College, Kandivili N K College, Malad Dhanukar College, Vile Parle St Xaviers College, Marine Lines Shroff College, Kandivili KES College, Khar Mr.Vipin Saboo also has more than 5 years of industry expertise with corporate like CRISIL, Motilal Oswal Investment Banking and Yes Bank. Mr. Saboo has also published a text book on Logistics and Supply Chain Management for TYBMS Students.
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