# Financial Management Prelims Question Paper 2014 – Jinall Classes

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JINALLÂ  CLASSES

TYBMS

TIME: 2.5 HOUR Â Â Â Â PRELIMINARY EXAMS Â FINANCIAL MANAGEMENTÂ Â Â Â Â Â  MARKS: 75

Q.1. A.i) State whether the following statement is true or false (5m)

• Income tax is excluded from the computation of working capital required.
• Receivables are the asset accounts representing amounts owed to the firm as a results of sale of goods & services
• Financial structure includes both long term sources & short term sources.
• Kp = PD + Mv- Np

__n__

Â½_(mv-np)

• Leverage is relative change in profits due to change in sales

1. ii)Â  Answer the following (5m)

• State the qualities of a successful finance manager?
• What is capital asset pricing model?
• State the factors affecting capital structure?
• State any 4 sources of credit information?
• What is zero working capital?

1. i) State relationship between operating and financial leverage (5m)

OR

1. i) Calculate the working capital .

Stock Rs 10000, receivables Rs30000, bank o/d Rs 3900 ,creditors Rs 4500, cash Rs 5000 payables Rs 4900, Debtors Rs 3000.Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  (5m)

Q.2. A.The selection financial data for A.B& c companies for the year ended 31/12/02 were as follow

AÂ Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â Â BÂ Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â C

Variable Cost as aÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  66 2/3 Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â 75Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â  50

Percentage of sales

Income tax rate (%)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  40Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â  40Â Â  Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â 40

Interest Expenses (Rs)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  200Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â  300Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â 1000

Degree of operating leverageÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  5Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â  6Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â  2

Degree of financial leverageÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â  4Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â  2

Prepare an income statement for each of the three companies. (10m)

B.(i) The following data is furnished to you regarding 2 companies A & B operating in same industry

ParticularsÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  AÂ Â Â Â Â Â Â Â Â  B

Raw Material remains in stock (in term of days purchases)Â Â Â Â Â Â Â Â Â Â Â Â Â  75Â Â Â Â Â Â Â  72

W I P (in term of days of cost of goods sold)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  36Â Â Â Â Â Â Â  30

Finished goods in stock (in term of days of cost of goods sold)Â Â Â Â Â Â Â  54Â Â Â Â Â Â Â  40

Average collection periods in daysÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  72Â Â Â Â Â Â Â  90

Average payment periods in daysÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  60Â Â Â Â Â Â Â  48

Calculate the operating cycle in case of each of the 2 companies. (5m)

OR

(i) Q Ltd issues Rs 10 lac by the way of 10% debentures without any maturity date. Find the cost of debt if the debentures are issued at 10% premium by both pre-tax and post tax of the debt. Assume tax at 50%. (5m)

Q.3. A. From the following information prepare a monthly cash budget for the quarter ended 31st march 2010. (10m)

 Month Sales Purchases Wages Expenses November 50000 10000 20000 40000 December 60000 20000 20000 40000 January 40000 30000 22000 50000 February 50000 20000 22000 50000 March 60000 10000 24000 50000

Other information:

• 10% of sales and purchases are on cash, balance on credit.
• Credit to debtors: 1 month, on an average 40% of debtors will make payment on due date while the rest will make payment one month thereafter.
• Credit from creditors: 2 month, 10% cash discount will be received if payment is made within one month and it is estimated that 50% of purchases advantage of cash discount will be taken.
• Wages: to be paid twice in a month on the 1st and 16th
• Expenses generally paid within the month.
• Planting costing Rs 10000 will be installed in February on payment of 25% of the cost in addition to the installation cost of Rs 500. Balance to be paid in three equal monthly installments from the following month.
• Opening cash balance Rs 20000.

Q.3 (i) A company decides to invest Rs 1 lakh in a new machine. It is at present using a machine which can be sold at Rs 8000. The new machine has an estimated life of 5 years and salvage value of Rs 6000. The expected rate of return is 10%. The cash profit for next 5 years are estimated as Rs 10000; Rs 25000; Rs 70000; Rs 40000; Rs 30000. Calculate value of cash inflow and cash outflow investment required in WC is Rs 25000.Calculate Net Present Value, Profitability Index.(5m)

OR

(i) A small sized firm feels that itâ€™s credit sales are too high, it is contempleting to tighten the credit standards, as a result of which is expected that bed debts losses will reduce to 1% from the present level of 4%. However cr. Standards assuming itâ€™s contribution to volume ratio is 40% itâ€™s total fixed costs are Rs. 2 lakh and the average investment in debtors (receivables) does not change?(5m)

Q.4.A. State the Significance of Capital Budgeting. (8m)

1. (i) Answer each of the following in not more than 2-3 lines:- (7m)
2. What do you understand by Financial breakeven Point?
3. What is meant by De-Merger in business restructuring?
4. What is meant by Ploughing back of profits?
5. What is Capital Restructuring?
6. What do you mean by Operating Cycle?
7. What do you mean by indifferent Point?
8. State the method of calculating Purchase Consideration?

OR

(i) What are factors determining working capital requirements? (7m)

Q.5 The management of a company is planning to purchase machine required for a special operation. They are considering two different machines. The following data have been developed.

 Machine X Machine Y Cost of machine 240000 240000 Estimated life of machine 10 15 Estimated average annual income before Tax 48000 48000

Income tax at 50%.

You are required to evaluate the above proposal according to the following methods assuming that the cost of capital of the firm is 15%.

(1) Payback method.

(2) Average return on investment on the basis of earning after depreciation and taxes. Â Â Â Â (a) on average investment and (b) on original investment

(3) Discounted Payback period

(4) Net present value.

(5) Profitability indexÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â (15m)

ALLÂ Â  THE Â Â BEST

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