TIME: 2.5 HR                 FINANCIAL MANAGEMENT          PRELIMINARY II                     MARKS: 75

Q.1. (a) Answer each of the following in not more than 2-3 lines—- 5mks

  1. What is meant by profitability index of a project ?
  2. What do you understand by Precautionary cash holding ?
  3. What is meant by financial break even point ?
  4. What is Gross Working Capital ?
  5. State the meaning of wealth maximisation?


(b) Emway ltd desires to plan its capital structure with total outlay of Rs 1 crore. Its anticipates the profit before interest and tax @ 20% on capital. The tax rate applicable is 40%. The following three alternatives capital structures are as follows:

Source I II III
Equity capital 30% 50% 60%
14% debentures 70% 50% 40%

All shares and debentures will have FV of Rs 100 are to be fully called up with application.

The co. except to have pay out ratio of 75%. The reasonable return(dividend) on equity shares is 10%.

You are required to:

  1. Suggest the structure to be adopted to maximize returns to equity holders
  2. Calculate market price of equity shares. 10mks


Q.2 Swayam siddha limited is setting up a project at a cost of Rs 300 lakhs. It has to decide whether to locate the plant in urban area (UA) or backward area (BA). Locating in backward areas means a cash subsidy of Rs 15 lakhs from the central government. Besides taxable profits to the extent of Rs 20% is exempted for 20 years. The project envisages a borrowing of Rs 20 lakhs in either cases. The cost of borrowing will be 12% in Urban areas and 10% in backward areas. However the revenue costs are bound to be higher in backward areas. The borrowings have to be repaid in 4 equal annual installments beginning from the end of the 4th year with the help of the following information and by using DCF techniques. You are required to suggest the proper location for the project.

Profit (loss) before interest and depreciation(Rs in lakhs) Present value factor @ 15%
Year Urban area Backward area
1 (6 -00) (50-00) .87
2 34-00 20-00 .76
3 54-00 10-00 .66
4 74-00 20-00 .57
5 108-00 45-0 .50
6 142-00 100-00 .43
7 156-00 155-00 .38
8 230-00 190-00 .33
9 330-00 230-00 .28
10 430-00 330-00 .25


The annual depreciation may be taken at Rs 30 lakhs. Interest on borrowings may be worked out at the respective rates. Average rate of tax may be taken at 50%. 15mks



Q.2 Excel ltd provides you with the following information with the request to prepare a statement of working capital

  1. Total cost of product is Rs. 10 per unit of which 50% is accounted by materials overhead are 2/3 of the labour cost per unit.
  2. Sales Target Rs                         Term


Zone A (cost+ 50%)    6,00,000                    Cash

Zone B (cost+ 25%)     5,00,000                   One month credit

Zone C (cost+20%)      1,92,000                    Two month credit

  1. Other details
  • Stocks of both Raw material & finished goods are to be kept for two months, while processing takes one month.
  • 20% of suppliers of material are ensured on cash payment, 20% of suppliers are taken on advance payment for 15 days & remaining supplier have agreed to extend one month credit.
  • Time lag in payment of wages & O/H is ½ month
  • Debtors are valued at cost.
  • Cash balance is always kept at 10% of Net working capital inclusive of cash. 15mks


Q.3. Tata corporation Ltd is considering relaxing its present credit policy and is in the process of evaluating 2 proposed policies. Currently the firm had annual credit sales of RS.50 lakh and accounts receivable turnover of 4 times a year. The current level of loss due to bad debts is        Rs 1,50,000. The firm is required to give a return of 25 % on the investment in new accounts receivable. The companys variable costs are 70% of the selling price. Given the following information, which is a better option 15mks

Present policy         Policy option-1                Policy option-2

Annual credit sales          Rs.50,00,000         Rs.60,00,000                     Rs.67,50,000

A/c’s receivable                          4                      3                                            2.4

turnover (times)

Bad debts losses              Rs.1,50,000           Rs.3,00,000                        Rs.4,50,000


Q.3 A. Aim Ltd is considering  merger with MAX ltd. There are no Synergy gains from the merging. Complete the following table if Aim wishes an EPS of Rs.2.80 after the merger.

Particulars AIM Ltd. MAX Ltd. Merged Entity
EAT Rs.0.1 million Rs.0.25 million ?
Outstanding shares 50,000 1,00,000 ?
EPS (Rs) 2 2.5 2.8
P/E ratio 10 5 ?
Market price Rs.20 Rs.12.5 ?
Total Market Price ? ? ?
  • Complete the above table. 5mks


Q.3.B The following is the sales forecast for a corporation. The sales are offered net 30 days, 80% of receivable are collected in the month following the month actual sale and 10% are collected each month thereafter, 15% of sales are cash sales. You are requested to prepare a schedule of cash inflow for the month of September, October ,November and December 2009.


Q.3 C Explain the role of finance manager? 5mks


Q.4 .A Transworld Textile equity shares currently sells for Rs.23 per share. The company’s finance maner anticipates a constant growth of 10.5% and at the end of the year dividend of Rs.2.50.

(a) What is the expected rate of return?

(b) If the investors requires 17% return, should he purchase the stocks? 8mks

  1. Explain Risk & Return Trade off in working capital management? 7mks


Q.4. Write Short notes on: Any 3 15mks

  1. a) Tools of cash management.
  2. b) Equity is a free source of capital.
  3. c) Rationale of capital Expenditure decision.

Q.5. Himesh Ltd agreed to acquire the business of Dhoni Ltd as at 30th June 2010 on which date the Balance Sheet of Dhoni Ltd was as under;

   Liabilities Amt Assets Amt
Equity share capital Fully paid up 300000 Goodwill 70000
General Reserve 100000 L/Bldg 140000
P/L A/c 20000 P/M 160000
Dividend Equilisation Reserve 20000 Debtors 18000
6% Debentures 50000 Stock 84000
Creditors 10000 Cash / Bank 28000
Total 500000 500000


The consideration payable by Himesh Ltd was agreed as under-

  1. Issue of 45000 equity shares of Rs10 each in Himesh Ltd at an agreed value of Rs 15 per share.
  2. Cash payment of Rs 2.50 for every Equity Share of Rs10 each in Dhoni Ltd.

The Directors of Himesh Ltd valued Land & Building at Rs 300000, Plant & Machinery at Rs 300000, Stock in Trade at Rs 70000 and Debtors at Book value subject to allowance of 5% for doubtful Debts.

  • Show – 1. Statement of Computation of Purchase Consideration
  1. Journal Entries in the book of Himesh. 15mks
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