SUBJECT : FINANCIAL MANAGEMENT
Total Marks: 80
Note :All
Questions are Compulsory
Each
Question Carries Equal Marks 10 Marks
1. Compare and contrast the
potential liability of owners of proprietorships, partnerships (general
partners), and corporations.
2. What is meant by Working
capital? How is it calculated? Explain the determinants of working capital
requirements.
3. Are the share holders of a
company likely to gain with a debt component in the capital employed ? Explain
with the help of an example?
4. What do you mean by yield
to maturity (YTM) of a bond? Explain briefly.
5. What can a financial
institution often do for a deficit economic unit (DEU)that it would have
difficulty doing for itself if the DEU were to deal directly with an SEU?
6. Why would an analyst use
the Modified Du Pont system to calculate ROE when ROE may be calculated more
simply? Explain.
7. How are financial trades
made in an over-the-counter market? Discuss the role of a dealer in the OTC
market.
8. What is a portfolio? Why an
investor should invest his/her funds in a portfolio rather than in the stocks
of a single corporation.
SUBJECT : FINANCIAL INSTITUTION
Total Marks: 80
Note : All Questions are
Compulsory
Each
Question Carries Equal Marks (10 Marks)
1.
What is the implication for
cross-border trades if it can be shown that interest rate parity is maintained
consistently across different markets and different currencies ?
2.
What forms of protection and
regulation are imposed by regulators of CBs to ensure their safety and
soundness ?
3.
How has the composition of the
assets of U.S. life insurance companies changed over time ?
4.
Describe the difference between a
defined benefit pension fund and a defined contribution pension fund.
5.
Why is the length of time
selected for repricing assets and liabilities important when using the
repricing model ?
6.
Contrast the use of financial
futures options with the use of options on cash instruments to construct
interest rate hedges.
8. What is
the difference between loan participations and loan assignments ?
Finance
Management
1.
A stock is expected to pay a dividend of Rs.0.75 at the end of the year.
The required rate of return is ks = 10.5%, and the expected constant growth
rate is g = 6.4%. What is the stock's current price?
2.
Suppose
you approach a bank for getting loan. And the bank offers to lend you Rs.1,
000,000 and you sign a bond paper. The bank asks you to issue a bond in their
favor on the following terms required by the bank: Par Value = Rs 1,00,000
Maturity = 3 years, Coupon Rate = 15% p.a, Security = Machinery
You are required to calculate the
cash flow of the bank which you will pay every month as well as the present
value of this option.
3.
How
negatively correlated investments behave in a market?
4.
Why does
diversification reduce risk?
5.
State the
decisions involved in Financial management
6.
What is
meant by capital budgeting decision?
7.
Discuss how Working capital affects both the liquidity and profitability
of a business
8.
What is meant by Working capital? How is it calculated? Explain the
determinants of working capital requirement
1. Briefly define the terms proprietorship, partnership, and
corporation.
2. Why do we add back non cash
items to net profit while calculating cash flow from operating activities
3. “To avoid the problem of
shortage and surplus of funds, what is
required in Financial
management? Name the concept and explain
four points of importance.
4. Explain the impact of
interest rate on long term and short term
bonds?
5. What is
Merger ? Is it harmful or beneficial? Explain n Justify
6. Suppose Govt. pay coupon on
its bond quarterly; calculate the
intrinsic value of bond under following circumstances:
10 Year
bond with 10% coupon rate
is selling at Rs. 1050 face value of
bond is Rs. 1000. Required rate of return is 12%.
7. What are Strike Price and Option Price?
8. Define the Diversifiable
Risk and Market Risk and Causes of Risk.
Finance Management
Q1. Briefly explain what call
provision is and in which case companies use this option.
Q2. Define the Diversifiable Risk
and Market Risk and Causes of Risk.
Q3. List and explain the three
financial factors that influence the value of a business
Q4. State the decisions involved in Financial management
Q5. “To
avoid the problem of shortage and surplus of funds, what is required in
Financial management? Name the concept and explain four points of importance.
Q6. Suppose Govt. pay coupon on
its bond quarterly; calculate the intrinsic value of bond under following
circumstances: 10 Year bond with 10% coupon rate is selling at Rs. 1050 face
value of bond is Rs. 1000. Required rate of return is 12%.
Q7. What can a financial institution
often do for a deficit economic unit (DEU)that it would have difficulty doing
for itself if the DEU were to deal directly with an SEU?
Q8. Suppose you approach a bank
for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a
bond paper. The bank asks you to issue a bond in their favor on the following
terms required by the bank: Par Value = Rs 1,00,000 Maturity = 3 years Coupon
Rate = 15% p.a, Security = Machinery You are required to calculate the cash
flow of the bank which you will pay every month as well as the present value of
this option.
Finance Management
Q1. Discuss how Working capital affects both the liquidity and
profitability of a business
Q2. Suppose you approach a bank for getting loan. And the bank offers to
lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a
bond in their favor on the following terms required by the bank: Par Value = Rs
1,00,000 Maturity = 3 years Coupon Rate
=
15% p.a, Security = Machinery You
are required to calculate the cash flow of the bank which you will pay every
month as well as the present value of this option.
Q3. A stock is expected to pay a dividend of Rs.0.75 at the end of the
year. The required rate of return is ks = 10.5%, and the expected constant
growth rate is g = 6.4%. What is the stock's current price?
Q4. What can a financial institution often do for a
deficit economic unit (DEU)that it would have difficulty doing for itself if
the DEU were to deal directly with an SEU?
Q5. Suppose Govt. pay coupon on its bond quarterly; calculate the
intrinsic value of bond under following circumstances: 10 Year bond with 10%
coupon rate is selling at Rs. 1050 face value of bond is Rs. 1000. Required
rate of return is 12%.
Q6. “To avoid the problem of shortage and surplus of funds, what is
required in Financial management? Name the concept and explain four points of
importance.
Q7. What is a portfolio? Why an investor should invest his/her funds in
a portfolio rather than in the stocks of a single corporation.
Q8. Calculate the market value of equity for a 100% equity firm using
the following information extracted from its financial statements: EBIT = Rs.
50, 000, return on equity is 12%, amount of equity is Rs. 100, 000. tax rate is
35%.
Finance
Management
Q1. What is meant by capital
budgeting decision?
Q2. Why does diversification
reduce risk?
Q3. Why are trend analysis and industry comparison important to
financial ratio analysis?
Q4. Every Manager has to take three major decisions while performing the
finance function’ briefly explain them.
Q5. Define the Diversifiable Risk
and Market Risk and Causes of Risk.
Q6. Why do we add back non cash items to net profit while calculating
cash flow from operating activities
Q7. Explain why financial
planning is important to today’s chief executives?
Q8. Briefly explain what call provision is and in which case companies
use this option.
SUB : FINANCIAL MANAGEMENT
Attempt any 8 questions (10 marks each )
Marks 80
1.
What is meant by financing decisions? Mention two
limitations of accounting rate of return.
2. Explain
Financial Risk.
3. Mention
the utility of public deposits as a source of fund.
4. Explain
operating Lease.
5. Discuss
the relation between debt financing and financial leverage.
6. Differentiate
between Bonus issue and stock split.
7. Define
the term 'take over.'
8. What is
Capital Asset pricing model?
9. How cost
of preference share capital is calculated?
10.What
is dividend pay-out Ratio?
11.Explain
the concept of Capital Rationing.
12.Define Economic Value added in relation to
shareholder's value criteria
FINANCE MANAGEMENT
Attempt any 8 questions (10 marks each )
Marks 80
a) What is
meant by financing decisions? Mention two limitations of accounting rate of
return.
b) Explain
Financial Risk.
c) Mention
the utility of public deposits as a source of fund.
e) Discuss the relation between debt financing and financial leverage. F) What is a letter of credit
g) Differentiate between Bonus issue and stocksplit. H) Define the term
'take over.'
i) What is
Capital Asset pricing model?
j) How cost
of preference share capital is calculated?
K) What is dividend pay-out Ratio?
l) Explain
the concept of Capital Rationing.
m) Mention
two advantages of Lease financing.
n) Define
Economic Value added in relation to shareholder's value criteria.
SUB :
FINANCIAL MANAGEMENT
Total Marks: 80
Note : All Questions are
Compulsory
Each
Question Carries Equal Marks
1. What is the future of Financial Risk Management?
2. Why the
companies prefer to raise money through debt not through equity?
3. Briefly explain what call
provision is and in which case companies use this option.
4. Calculate the market value
of equity for a 100% equity firm using the following information extracted from
its financial statements: EBIT = Rs. 50, 000, return on equity is 12%, amount
of equity is Rs. 100, 000. tax rate is 35%.
5. What is correlation of coefficient?
6. Differentiate the real assets and securities.
7. Explain why financial
planning is important to today’s chief executives?
8.
What is a portfolio? Why an investor should invest his/her funds in a
portfolio rather than in the stocks of a single corporation.
SUB : FINANCIAL Management
MARKS : 80
N.B.: 1) Attempt any Four Questions
2)
All questions carries equal marks. NO. 1
ZIP ZAP
ZOOM CAR COMPANY
Zip Zap Zoom Company Ltd is into manufacturing cars
in the small car (800 cc) segment. It was set up 15 years back and since its
establishment it has seen a phenomenal growth in both its market and
profitability. Its financial statements are shown in Exhibits 1 and 2
respectively.
The company enjoys the confidence
of its shareholders who have been rewarded with growing dividends year after
year. Last year, the company had announced 20 per cent dividend, which was the
highest in the automobile sector. The company has never defaulted on its loan
payments and enjoys a favourable face with its lenders, which include financial
institutions, commercial banks and debenture holders.
The competition in the car industry has increased
in the past few years and the company foresees further intensification of
competition with the entry of several foreign car manufactures many of them
being market leaders in their respective countries. The small car segment
especially, will witness entry of foreign majors in the near future, with
latest technology being offered to the Indian customer. The Zip Zap Zoom’s
senior management realizes the need for large scale investment in up gradation
of technology and improvement of manufacturing facilities to pre-empt
competition.
Whereas on the one hand, the
competition in the car industry has been intensifying, on the other hand, there
has been a slowdown in the Indian economy, which has not only reduced the
demand for cars, but has also led to adoption of price cutting strategies by
various car manufactures. The industry indicators predict that the economy is
gradually slipping into recession.
(Amount
in Rs. Crore)
|
Source
of Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
350
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and surplus
|
250
|
|
|
600
|
|
|
|
||||
|
Loans :
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
(@ 14%)
|
50
|
|
|
|
|
|
|
|
|
|
|
|
Institutional borrowing (@ 10%)
|
100
|
|
|
|
|
|
|
||||
|
Commercial loans (@ 12%)
|
250
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
|
|
400
|
|
|||||
|
Current liabilities
|
|
|
|
|
|
200
|
|
||||
|
|
|
|
|
|
1,200
|
||||||
|
Application
of Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross block
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
Less :
Depreciation
|
|
|
|
|
250
|
|
|
|
|
|
|
|
Net block
|
|
|
|
|
750
|
|
|
|
|
|
|
|
Capital
WIP
|
|
|
|
|
190
|
|
|
|
|
|
|
|
Total Fixed Assets
|
|
|
|
|
|
940
|
|
||||
|
Current
assets :
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
200
|
|
|
|
|
|
|
|
Sundry
debtors
|
|
|
|
|
40
|
|
|
|
|
|
|
|
Cash and bank balance
|
|
|
|
|
10
|
|
|
|
|
|
|
|
Other current assets
|
10
|
|
|
|
|
|
|
|
|
||
|
Total current assets
|
|
|
|
|
|
260
|
|
|
|
||
|
|
|
|
|
|
-1200
|
||||||
Exhibit 2 Profit and Loss Account for the year ended March 31, 200x
(Amount
in Rs. Crore)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue (80,000 units x Rs. 2,50,000)
|
|
|
2,000.0
|
|
|
|
|||||
|
Operating expenditure :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
cost :
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw material and manufacturing expenses
|
1,300.0
|
|
|
|
|
|
|
|
|
|
|
|
Variable
overheads
|
|
|
100.0
|
|
|
|
|
|
||
|
Total
|
|
|
|
1,400.0
|
|||||||
|
Fixed
cost :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R & D
|
|
|
20.0
|
|
|
|
|
|
||
|
|
Marketing
and advertising
|
|
|
25.0
|
|
|
|
|
|
||
|
|
Depreciation
|
|
|
250.0
|
|
|
|
|
|
||
|
|
Personnel
|
|
|
70.0
|
|
|
|
|
|
||
|
Total
|
|
|
|
365.0
|
|||||||
|
Total operating expenditure
|
|
|
1,765.0
|
|
|
|
|
||||
|
Operating
profits (EBIT)
|
|
|
|
|
|
235.0
|
|||||
|
Financial
expense :
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debentures
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on institutional borrowings
|
11.0
|
|
|
|
|
|
|
|
|
||
|
Interest on commercial loan
|
33.0
|
|
51.7
|
|
|
|
|
|
|||
|
Earnings
before tax (EBT)
|
|
|
|
|
183.3
|
|
|||||
|
Tax (@
35%)
|
|
|
|
64.2
|
|
||||||
|
119.1
|
||
|
Dividends
|
|
70.0
|
|
Debt
redemption (sinking fund obligation)**
|
40.0
|
|
|
Contribution
to reserves and surplus
|
9.1
|
|
*
Includes the cost of inventory
and work in process (W.P) which is dependent on demand (sales).
*
The loans have to be retired in
the next ten years and the firm redeems Rs. 40 crore every year.
The
company is faced with the problem of deciding how much to invest in up
gradation of its plans and technology. Capital investment up to a maximum
of Rs. 100 crore is required. The problem areas are three-fold.
The company cannot forgo the capital investment as that could lead to
reduction in its market share as technological competence in this industry is a
must and customers would shift to manufactures providing latest in car
technology.
The company does not want to issue new equity shares and its retained
earning are not enough for such a large investment. Thus, the only option is
raising debt.
The company wants to limit its additional debt to a level that it can
service without taking undue risks. With the looming recession and uncertain
market conditions, the company perceives that additional fixed obligations
could become a cause of financial distress, and thus, wants to determine its additional
debt capacity to meet the investment requirements.
Mr. Shortsighted, the company’s Finance Manager, is
given the task of determining the additional debt that the firm can raise. He
thinks that the firm can raise Rs. 100 crore worth debt and service it even in
years of recession. The company can raise debt at 15 per cent from a financial
institution. While working out the debt capacity. Mr. Shortsighted takes the
following assumptions for the recession years.
a)
A maximum of 10 percent reduction in sales volume
will take place.
b)
A maximum of 6 percent reduction in sales price of
cars will take place.
Mr. Shorsighted prepares a
projected income statement which is representative of the recession years.
While doing so, he determines what he thinks are the “irreducible minimum”
expenditures under recessionary conditions. For him, risk of insolvency is the
main concern while designing the capital structure. To support his view, he
presents the income statement as shown in Exhibit 3.
|
Exhibit
3 projected Profit and Loss account
|
|
|
|
|
|
|
(Amount in Rs. Crore)
|
|
|
|
|
|
|
|
Sales revenue (72,000 units x Rs. 2,35,000)
|
1,692.0
|
|
|
|
Operating
expenditure
|
|
|
|
|
|
Variable
cost :
|
|
|
|
|
Raw
material and manufacturing expenses
|
1,170.0
|
|
|
90.0
|
|
|
|
|
|
|||
|
Total
|
|
|
|
1,260.0
|
||||
|
Fixed
cost :
|
|
|
|
|
|
|
|
|
|
R & D
|
---
|
|
|
|
|
|
|
|
|
Marketing
and advertising
|
15.0
|
|
|
|
|
|
||
|
Depreciation
|
187.5
|
|
|
|
|
|
||
|
Personnel
|
70.0
|
|
|
|
|
|
||
|
Total
|
|
|
|
272.5
|
||||
|
Total
operating expenditure
|
|
|
|
1,532.
|
5
|
|
|
|
|
EBIT
|
|
|
|
159.5
|
||||
|
Financial
expenses :
|
|
|
|
|
|
|
|
|
|
Interest on existing Debentures
|
7.0
|
|
|
|
|
|
||
|
Interest
on existing institutional borrowings
|
10.0
|
|
|
|
|
|
|
|
|
Interest on commercial loan
|
30.0
|
|
|
|
|
|
|
|
|
Interest on additional debt
|
15.0
|
|
62.0
|
|||||
|
EBT
|
|
|
|
97.5
|
||||
|
|
|
|
||||||
|
Tax (@
35%)
|
|
|
|
|
34.1
|
|||
|
EAT
|
|
|
|
63.4
|
||||
|
Dividends
|
|
|
|
--
|
||||
|
Debt
redemption (sinking fund obligation)
|
|
|
|
50.0*
|
|
|
||
|
Contribution
to reserves and surplus
|
|
|
|
13.4
|
|
|
|
|
* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)
Assumptions of Mr. Shorsighted
R & D expenditure can be done away with till
the economy picks up. Marketing and advertising expenditure can be reduced by
40 per cent.
Keeping in mind the investor confidence that the
company enjoys, he feels that the company can forgo paying dividends in the
recession period.
He goes with his worked out statement to the
Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt
to finance the intended capital investment. Mr. Arthashatra does not feel
comfortable with the statements and calls for the company’s financial analyst,
Mr. Longsighted.
Mr. Longsighted carefully analyses Mr. Shortsighted’s
assumptions and points out that insolvency should not be the sole criterion
while determining the debt capacity of the firm. He points out the following :
Apart from debt servicing, there are certain expenditures like those on
R & D and marketing that need to be continued to ensure the long-term
health of the firm.
Certain management policies like those relating to
dividend payout, send out important signals to the investors. The Zip Zap Zoom’s
management has been paying regular dividends and discontinuing this practice
(even though just for the recession phase) could raise serious doubts in the
investor’s mind about the health of the firm. The firm should pay at least 10
per cent dividend in the recession years.
Mr. Shortsighted has used the accounting profits to determine the amount
available each year for servicing the debt obligations. This does not give the
true picture. Net cash inflows should be used to determine the amount available
for servicing the debt.
Net Cash inflows are determined by an interplay of many variables and
such a simplistic view should not be taken while determining the cash flows in
recession. It is not possible to accurately predict the fall in any of the
factors such as sales volume, sales price, marketing expenditure and so on.
Probability distribution of variation of each of the factors that affect net
cash inflow should be analyzed. From this analysis, the probability
distribution of variation in net cash inflow should be analysed (the net cash
inflows follow a normal probability distribution). This will give a true
picture of how the company’s cash flows will behave in recession conditions.
The management recognizes that
the alternative suggested by Mr. Longsighted rests on data, which are complex and
require expenditure of time and effort to obtain and interpret. Considering the
importance of capital structure design, the Finance Director asks Mr.
Longsighted to carry out his analysis. Information on the behaviour of cash
flows during the recession periods is taken into account.
The methodology undertaken is as
follows :
(a)
Important factors that affect
cash flows (especially contraction of cash flows), like sales volume, sales
price, raw materials expenditure, and so on, are identified and the analysis is
carried out in terms of cash receipts and cash expenditures.
(b)
Each factor’s behaviour
(variation behaviour) in adverse conditions in the past is studied and future
expectations are combined with past data, to describe limits (maximum
favourable), most probable and maximum adverse) for all the factors.
(c)
Once this information is
generated for all the factors affecting the cash flows, Mr. Longsighted comes
up with a range of estimates of the cash flow in future recession periods based
on all possible combinations of the several factors. He also estimates the
probability of
occurrence
of each estimate of cash flow.
Assuming
a normal distribution of the expected behaviour, the mean expected
value of net cash inflow in adverse conditions came
out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.
Keeping in mind the looming recession and the
uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm
should factor a risk of cash inadequacy of around 5 per cent even in the most
adverse industry conditions. Thus, the firm should take up only that amount of
additional debt that it can service 95 per cent of the times, while maintaining
cash adequacy.
Hence, the expected available net
cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)
Analyse the debt capacity of the
company.
NO. 2
COOKING
LPG LTD
DETERMINATION
OF WORKING CAPTIAL
Introduction
Cooking LPG Ltd, Gurgaon, is a private sector firm
dealing in the bottling and supply of domestic LPG for household consumption
since 1995. The firm has a network of distributors in the districts of Gurgaon
and Faridabad. The bottling plant of the firm is located on National Highway –
8 (New Delhi – Jaipur), approx. 12 kms from Gurgaon. The firm has been
consistently performing we.” and plans to expand its market to include the
whole National Capital Region.
The production process of the plant consists of receipt of the bulk LPG
through tank trucks, storage in tanks, bottling operations and distribution to
dealers. During the bottling process, the cylinders are subjected to
pressurized filling of LPG followed by quality control and safety checks such
as weight, leakage and other defects. The cylinders passing through this
process are sealed and dispatched to dealers through trucks. The supply and
distribution section of the plant prepares the invoice which goes along with
the truck to the distributor. Statement of the Problem :
Mr. I. M. Smart, DGM(Finance) of the company, was
analyzing the financial performance of the company during the current year. The
various profitability ratios and parameters of the company indicated a very
satisfactory performance. Still, Mr. Smart was not fully content-specially with
the management of the working capital by the company. He could recall that
during the past year, in spite of stable demand pattern, they had to, time and
again, resort to bank overdrafts due to non-availability of cash for making
various payments. He is aware that such aberrations in the finances have a cost
and adversely affects the performance of the company. However, he was unable to
pinpoint the cause of the problem.
He discussed the problem with Mr. U.R. Keenkumar,
the new manager (Finance). After critically examining the details, Mr.
Keenkumar realized that the working capital was hitherto estimated only as
approximation by some rule of thumb without any proper computation based on
sound financial policies and, therefore, suggested a reworking of the working
capital (WC) requirement. Mr. Smart assigned the task of determination of WC to
him. Profile of Cooking LPG Ltd.
1)
Purchases
: The company purchases LPG in bulk from various importers ex-Mumbai and
Kandla, @ Rs. 11,000 per MT. This is transported to its Bottling Plant at
Gurgaon through 15 MT capacity tank trucks (called bullets), hired on annual
contract basis. The average transportation cost per bullet ex-either location
is Rs. 30,000. Normally, 2 bullets per day are received at the plant. The
company make payments for bulk supplies once in a month, resulting in average
time-lag of 15 days.
2)
Storage and Bottling : The bulk
storage capacity at the plant is 150 MT (2 x 75 MT storage tanks) and the plant
is capable of filling 30 MT LPG in cylinders per day. The plant operates for 25
days per month on an average. The desired level of inventory at various stages
is as under.
LPG in bulk (tanks and pipeline quantity in the plant) – three days
average production / sales. Filled Cylinders – 2 days average sales.
3)
Marketing : The LPG is supplied
by the company in 12 kg cylinders, invoiced @ Rs. 250 per cylinder. The rate of
applicable sales tax on the invoice is 4 per cent. A commission of Rs. 15 per
cylinder is paid to the distributor on the invoice itself. The filled cylinders
are delivered on company’s expense at the distributor’s godown, in exchange of
equal number of empty cylinders. The deliveries are made in truck-loads only,
the capacity of each truck being 250 cylinders. The distributors are required
to pay for deliveries through bank draft. On receipt of the draft, the
cylinders are normally dispatched on the same day. However, for every truck
purchased on pre-paid basis, the company extends a credit of 7 days to the distributors
on one truck-load.
4)
Salaries and Wages : The following payments are
made :
Direct
labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the
month. Security agency – Rs. 30,000 per month paid on 10th of subsequent month. Administrative
staff and managers – Rs. 3.75 lakh per annum, paid on monthly basis on the last
working day.
5)
Overheads :
Administrative (staff, car, communication etc) – Rs. 25,000 per month –
paid on the 10th of subsequent month.
Power (including on DG set) – Rs. 1,00,000 per month paid on the 7th Subsequent month. Renewal of
various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000 per annum
paid at the beginning of the year.
Insurance
– Rs. 5,00,000 per annum to be paid at the beginning of the year.
Housekeeping
etc – Rs. 10,000 per month paid on the 10th of the
subsequent month.
Regular maintenance of plant – Rs. 50,000 per month paid on the 10th of every month to the vendors.
This includes expenditure on account of lubricants, spares and other stores.
Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per
annum – paid on monthly basis on the 15th of the subsequent month.
All
transportation charges as per contracts – paid on the 10th
subsequent month.
Sales tax
as per applicable rates is deposited on the 7th of the
subsequent month.
6)
Sales : Average sales are 2,500
cylinders per day during the year. However, during the winter months (December
to February), there is an incremental demand of 20 per cent.
7) Average
Inventories : The average stocks maintained by the company as per its policy
guidelines
:
Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh. This
amounts to 15 days consumption.
Maintenance spares – Rs. 1 lakh Lubricants – Rs. 20,000
Diesel (for DG sets and fire engines) – Rs. 15,000
Other stores (stationary, safety items) – Rs. 20,000
8)
Minimum cash balance including bank balance
required is Rs. 5 lakh.
9)
Additional Information for Calculating Incremental
Working Capital During Winter.
No increase in any inventories take place except in
the inventory of bulk LPG, which increases in the same proportion as the
increase of the demand. The actual requirements of LPG for additional supplies
are procured under the same terms and conditions from the suppliers.
The labour cost for additional production is paid at double the rate
during wintes. No changes in other administrative overheads.
The expenditure on power consumption during winter
increased by 10 per cent. However, during other months the power consumption
remains the same as the decrease owing to reduced production is offset by
increased consumption on account of compressors /Acs.
Additional amount of Rs. 3 lakh is kept as cash balance to meet
exigencies during winter. No change in time schedules for any payables /
receivables.
The storage of finished goods inventory is restricted to a maximum 5,000
cylinders due to statutory requirements.
M/S
HI-TECH ELECTRONICS
M/s. Hi – tech Electronics, a consumer electronics outlet, was opened
two years ago in Dwarka, New Delhi. Hard work and personal attention shown by
the proprietor, Mr. Sony, has brought success. However, because of insufficient
funds to finance credit sales, the outlet accepted only cash and bank credit
cards. Mr. Sony is now considering a new policy of offering installment sales
on terms of 25 per cent down payment and 25 per cent per month for three months
as well as continuing to accept cash and bank credit cards.
Mr. Sony feels this policy will
boost sales by 50 percent. All the increases in sales will be credit sales. But
to follow through a new policy, he will need a bank loan at the rate of 12
percent. The sales projections for this year without the new policy are given
in Exhibit 1. Exhibit 1 Sales Projections and Fixed costs
|
|
Month
|
Projected
sales without instalment
|
Projected
sales with instalment
|
|
|
|
option
|
option
|
|
|
|
|
|
|
|
January
|
Rs. 6,00,000
|
Rs. 9,00,000
|
|
|
February
|
4,00,000
|
6,00,000
|
|
|
March
|
3,00,000
|
4,50,000
|
|
|
April
|
2,00,000
|
3,00,000
|
|
|
May
|
2,00,000
|
3,00,000
|
|
|
June
|
1,50,000
|
2,25,000
|
|
|
July
|
1,50,000
|
2,25,000
|
|
|
August
|
2,00,000
|
3,00,000
|
|
|
September
|
3,00,000
|
4,50,000
|
|
|
October
|
5,00,000
|
7,50,000
|
|
|
November
|
5,00,000
|
15,00,000
|
|
|
December
|
8,00,000
|
12,00,000
|
|
|
Total Sales
|
43,00,000
|
72,00,000
|
|
|
Fixed
cost
|
2,40,000
|
2,40,000
|
He further expects 26.67 per cent of the sales to
be cash, 40 per cent bank credit card sales on which a 2 per cent fee is paid,
and 33.33 per cent on installment sales. Also, for short term seasonal
requirements, the film takes loan from chit fund to which Mr. Sony subscribes @
1.8 per cent per month.
Their success has been due to
their policy of selling at discount price. The purchase per unit is 90 per cent
of selling price. The fixed costs are Rs. 20,000 per month. The proprietor
believes that the new policy will increase miscellaneous cost by Rs. 25,000.
The
business being cyclical in nature, the working capital finance is done on trade
– off basis.
The
proprietor feels that the new policy will lead to bad debts of 1 per cent.
(a)
As a
financial consultant, advise the proprietor whether he should go for the
extension of credit facilities.
(b)
Also prepare cash budget for one
year of operation of the firm, ignoring interest. The minimum desired cash
balance & Rs. 30,000, which is also the amount the firm, has on January 1.
Borrowings are possible which are made at the beginning of a month and repaid
at the end when cash is available.
NO.4
SMOOTHDRIVE
TYRE LTD
Smoothdrive Tyre Ltd manufacturers tyres under the
brand name “Super Tread’ for the domestic car market. It is presently using 7
machines acquired 3 years ago at a cost of Rs. 15 lakh each having a useful
life of 7 years, with no salvage value.
After extensive research and
development, Smoothdrive Tyre Ltd has recently developed a new tyre, the ‘Hyper
Tread’ and must decide whether to make the investments necessary to produce and
market the Hyper Tread. The Hyper Tread would be ideal for drivers doing a
large amount of wet weather and off road driving in addition to normal highway
usage. The research and development costs so far total Rs. 1,00,00,000. The
Hyper Tread would be put on the market beginning this year and Smoothdrive Tyrs
expects it to stay on the market for a total of three years. Test marketing
costing Rs. 50,00,000, shows that there is significant market for a Hyper Tread
type tyre.
As a financial analyst at
Smoothdrive Tyre, Mr. Mani asked by the Chief Financial Officer (CFO), Mr.
Tyrewala to evaluate the Hyper-Tread project and to provide a recommendation or
whether or not to proceed with the investment. He has been informed that all
previous investments in the Hyper Tread project are sunk costs are only future
cash flows should be considered. Except for the initial investments, which
occur immediately, assume all cash flows occur at the year-end.
Smoothedrive Tyre must initially invest Rs.
72,00,00,000 in production equipments to make the Hyper Tread. They would be
depreciated at a rate of 25 per cent as per the written down value (WDV) method
for tax purposes. The new production equipments will allow the company to
follow flexible manufacturing technique, that is both the brands of tyres can
be produced using the same equipments. The equipments is expected to have a
7-year useful life and can be sold for Rs. 10,00,000 during the fourth year.
The company does not have any other machines in the block of 25 per cent
depreciation. The existing machines can be sold off at Rs. 8 lakh per machine
with an estimated removal cost of one machine for Rs. 50,000. Operating
Requirements
The operating requirements of the existing machines and the new
equipment are detailed in Exhibits 11.1 and 11.2 respectively.
Exhibit 11.1 Existing Machines
Labour
costs (expected to increase 10 per cent annually to account for inflation) :
(a)
20 unskilled labour @ Rs. 4,000 per month
(b)
20 skilled personnel @ Rs. 6,000 per month.
(c)
2 supervising executives @ Rs. 7,000 per month.
(d)
2 maintenance personnel @ Rs.
5,000 per month. Maintenance cost :
Years 1-5
: Rs. 25 lakh
Years 6-7
: Rs. 65 lakh
Operating expenses : Rs. 50 lakh expected to increase at 5 per cent
annually. Insurance cost / premium :
Year 1 :
2 per cent of the original cost of machine
After
year 1 : Discounted by 10 per cent.
Exhibit 11.2 New production Equipment
Savings
in cost of utilities : Rs. 2.5
lakh
Maintenance costs :
Year 1 –
2 : Rs. 8 lakh
Year 3 –
4 : Rs. 30 lakh
Labour
costs :
9 skilled
personnel @ Rs. 7,000 per month
1
maintenance personnel @ Rs. 7,000 per month.
Cost of
retrenchment of 34 personnel : (20 unskilled, 11 skilled, 2 supervisors and 1
maintenance personnel) : Rs. 9,90,000, that is
equivalent to six months salary. Insurance premium
Year 1 :
2 per cent of the purchase cost of machine
After
year 1 : Discounted by 10 per cent.
The opening expenses do not change to any considerable extent for the
new equipment and the difference is negligible compared to the scale of
operations. Smoothdrive Tyre intends to sell Hyper Tread of two distinct
markets :
1.
The
original equipment manufacturer (OEM) market : The OEM market consists
primarily of the large automobile companies who buy tyres for new cars. In the
OEM market, the Hyper Tread is expected to sell for Rs. 1,200 per tyre. The
variable cost to produce each Hyper Tread is Rs. 600.
2.
The replacement market : The
replacement market consists of all tyres purchased after the automobile has
left the factory. This markets allows higher margins and Smoothdrive Tyre
expects to sell the Hyper Tread for Rs. 1.500 per tyre. The variable costs are
the same as in the OEM market.
Smoothdrive
Tyre expects to raise prices by 1 percent above the inflation rate.
The variable costs will also increase by 1 per cent
above the inflation rate. In addition, the Hyper Tread project will incur Rs.
2,50,000 in marketing and general administration cost in the first year which
are expected to increase at the inflation rate in subsequent years.
Smoothdrive Tyre’s corporate tax
rate is 35 per cent. Annual inflation is expected to remain constant at 3.25
per cent. Smoothdrive Tyre uses a 15 per cent discount rate to evaluate new product
decisions.
The Tyre Market
Automotive industry analysts expect automobile
manufacturers to have a production of 4,00,000 new cars this year and growth in
production at 2.5 per year onwards. Each new car needs four new tyres (the
spare tyres are undersized and fall in a different category) Smoothdrive Tyre
expects the Hyper Tread to capture an 11 per cent share of the OEM market.
The industry analysts estimate
that the replacement tyre market size will be one crore this year and that it
would grow at 2 per cent annually. Smoothdrive Tyre expects the Hyper Tread to
capture an 8 per cent market share.
You also decide to consider net
working capital (NWC) requirements in this scenario. The net working capital
requirement will be 15 per cent of sales. Assume that the level of working
capital is adjusted at the beginning of the year in relation to the expected
sales for the year. The working capital is to be liquidated at par, barring an
estimated loss of Rs. 1.5 crore on account of bad debt. The bad debt will be a
tax-deductible expenses.
As a finance analyst, prepare a
report for submission to the CFO and the Board of Directors, explaining to them
the feasibility of the new investment.
COMPUTATION
OF COST OF CAPITAL OF PALCO LTD
In October 2003, Neha Kapoor, a recent MBA graduate and newly appointed
assistant to the Financial Controller of Palco Ltd, was given a list of six new
investment projects proposed for the following year. It was her job to analyse
these projects and to present her findings before the Board of Directors at its
annual meeting to be held in 10 days. The new project would require an
investment of Rs. 2.4 crore.
Palco Ltd was founded in 1965 by Late Shri A. V.
Sinha. It gained recognition as a leading producer of high quality aluminum,
with the majority of its sales being made to Japan. During the rapid economic
expansion of Japan in the 1970s, demand for aluminum boomed, and palco’s sales
grew rapidly. As a result of this rapid growth and recognition of new
opportunities in the energy market, Palco began to diversify its products line.
While retaining its emphasis on aluminum production, it expanded operations to
include uranium mining and the production of electric generators, and finally,
it went into all phases of energy production. By 2003, Palco’s sales had
reached Rs. 14 crore level, with net profit after taxes attaining a record of
Rs. 67 lakh.
As Palco expanded its products
line in the early 1990s, it also formalized its caital budgeting procedure.
Until 1992, capital investment projects were selected primarily on the basis of
the average return on investment calculations, with individual departments
submitting these calculations for projects falling within their division. In
1996, this procedure was replaced by one using present value as the decision
making criterion. This change was made to incorporate cash flows rather than
accounting profits into the decision making analysis, in addition to adjusting
these flows for the time value of money. At the time, the cost of capital for
Palco was determined to be 12 per cent, which has been used as the discount
rate for the past 5 years. This rate was determined by taking a weighted
average cost Palco had incurred in raising funds from the capital market over
the previous 10 years.
It had originally been Neha’s
assignment to update this rate over the most recent 10-year period and
determine the net present value of all the proposed investment opportunities
using this newly calculated figure. However, she objected to this procedure,
stating that while this calculation gave a good estimate of “the past cost” of
capital, changing interest rates and stock prices made this calculation of
little value in the present. Neha suggested that current cost of raising funds
in the capital market be weighted by their percentage mark-up of the capital
structure. This proposal was received enthusiastically by the Financial
Controller of the Palco, and Neha was given the assignment of recalculating
Palco’s cost of capital and providing a written report for the Board of
Directors explaining and justifying this calculation.
To determine a weighted average
cost of capital for Palco, it was necessary for Neha to examine the cost
associated with each source of funding used. In the past, the largest sources
of
funding had been the issuance of new equity shares and internally
generated funds. Through conversations with Financial Controller and other
members of the Board of Directors, Neha learnt that the firm, in fact, wished
to maintain its current financial structure as shown in Exhibit 1. Exhibit 1
Palco Ltd Balance Sheet for Year Ending March 31, 2003
|
|
Assets
|
|
|
|
|
|
|
Liabilities and Equity
|
||||
|
|
Rs.
|
|
|
|
|
|
|
Accounts payable
|
Rs.
|
8,50,000
|
||
|
Cash
|
90,00,000
|
|||||||||||
|
Accounts receivable
|
3,10,00,000
|
|
Short-term debt
|
|
1,00,000
|
|||||||
|
Inventories
|
|
|
1,20,00,000
|
|
Accrued taxes
|
|
11,50,000
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total current assets
|
|
|
5,20,00,000
|
|
Total current liabilities
|
|
1,20,00,000
|
|||||
|
Net fixed assets
|
|
|
|
19,30,00,000
|
|
|
Long-term debt
|
|
|
7,20,00,000
|
||
|
Goodwill
|
|
70,00,000
|
|
Preference shares
|
|
|
4,80,00,000
|
|||||
|
Total assets
|
|
|
|
|
|
|
|
Retained earnings
|
|
1,00,00,000
|
||
|
|
25,20,00,000
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
Equity shares
|
|
11,00,000
|
||
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity shareholders
|
|
25,20,00,000
|
||
fund
She further determined that the strong growth patterns
that Palco had exhibited over the last ten years were expected to continue
indefinitely because of the dwindling supply of US and Japanese domestic oil
and the growing importance of other alternative energy resources. Through
further investigations, Neha learnt that Palco could issue additional equity
share, which had a par value of Rs. 25 pre share and were selling at a current
market price of Rs. 45. The expected dividend for the next period would be Rs.
4.4 per share, with expected growth at a rate of 8 percent per year for the
foreseeable future. The flotation cost is expected to be on an average Rs. 2
per share.
Preference shares at 11 per cent
with 10 years maturity could also be issued with the help of an investment
banker with an investment banker with a per value of Rs. 100 per share to be
redeemed at par. This issue would involve flotation cost of 5 per cent.
Finally, Neha learnt that it
would be possible for Palco to raise an additional Rs. 20 lakh through a 7 –
year loan from Punjab National Bank at 12 per cent. Any amount raised over Rs.
20 lakh would cost 14 per cent. Short-term debt has always been usesd by Palco
to meet working capital requirements and as Palco grows, it is expected to
maintain its proportion in the capital structure to support capital expansion.
Also, Rs. 60 lakh could be raised through a bond issue with 10 years maturity
with a 11 percent coupon at the face value. If it becomes necessary to raise
more funds via long-term debt, Rs. 30 lakh more could be accumulated through
the issuance of additional 10-year bonds sold at the face value, with the
coupon rate raised to 12 per cent, while any additional funds raised via
long-term debt would necessarily have a 10 – year maturity with a 14 per cent
coupon yield. The flotation cost of issue is expected to be 5 per cent. The
issue price of bond would be Rs. 100 to be redeemed at par.
In the past, Palco had calculated a weighted average of these sources of
funds to determine its cost of capital. In discussion with the current
Financial Controller, the point was raised that while this served as an
appropriate calculation for external funds, it did not take into account the
cost of internally generated funds. The Financial Controller agreed that there
should be some cost associated with retained earnings and need to be
incorporated in the calculations but didn’t have any clue as to what should be
the cost.
Palco Ltd
is subjected to the corporate tax rate of 40 per cent.
From the facts outlined above,
what report would Neha submit to the Board of Directors of palco Ltd?
NO. 6
ARQ LTD
ARQ Ltd is an Indian company based in Greater Noida, which manufactures
packaging materials for food items. The company maintains a present fleet of
five fiat cars and two Contessa Classic cars for its chairman, general manager
and five senior managers. The book value of the seven cars is Rs. 20,00,000 and
their market value is estimated at Rs. 15,00,000. All the cars fall under the
same block of depreciation @ 25 per cent.
A German multinational company (MNC) BYR Ltd, has
acquired ARQ Ltd in all cash deal. The merged company called BYR India Ltd is
proposing to expand the manufacturing capacity by four folds and the
organization structure is reorganized from top to bottom. The German MNC has the
policy of providing transport facility to all senior executives (22) of the
company because the manufacturing plant at Greater Noida was more than 10 kms
outside Delhi where most of the executives were staying.
Prices of the cars to be provided
to the Executives have been as follows :
|
Manager
(10)
|
Santro
King
|
Rs.
3,75,000
|
|
DGM and
GM (5)
|
Honda
City
|
6,75,000
|
|
Director
(5)
|
Toyota Corolla
|
9,25,000
|
|
Managing
Director (1)
|
Sonata
Gold
|
13,50,000
|
|
Chairman
(1)
|
Mercedes
benz
|
23,50,000
|
The company is evaluating two
options for providing these cars to executives
Option 1 : The company will buy the cars and pay
the executives fuel expenses, maintenance expenses, driver allowance and
insurance (at the year – end). In such case, the ownership of the car will lie
with the company. The details of the proposed allowances and expenditures to be
paid are as follows :
|
Particulars
|
Fuel
expenses
|
Maintenance allowance
|
|
Manager
|
Rs. 2,500
|
Rs. 1,000
|
|
DGM and
GM
|
5,000
|
1,200
|
|
Director
|
7,500
|
1,800
|
|
Managing
Director
|
12,000
|
3,000
|
|
Chairman
|
18,000
|
4,000
|
b)
Driver Allowance: Rs. 4,000 per
month (Only Chairman, Managing Director and Directors are eligible for driver
allowance.)
c)
Insurance cost: 1 per cent of the cost of the car.
The useful life for the cars is assumed to be five
years after which they can be sold at 20 per cent salvage value. All the cars
fall under the same block of depreciation @ 25 per cent using written down
method of depreciation. The company will have to borrow to finance the purchase
from a bank with interest at 14 per cent repayable in five annual equal
instalments payable at the end of the year.
Option 2 : ORIX, The fleet management company has
offered the 22 cars of the same make at lease for the period of five years. The
monthly lease rentals for the cars are as follows (assuming that the total of
monthly lease rentals for the whole year are paid at the end of each year.
|
Santro
Xing
|
Rs. 9,125
|
|
Honda
City
|
16,325
|
|
Toyota
Corolla
|
27,175
|
|
Sonata
Gold
|
39,250
|
|
Mercedes
Benz
|
61,250
|
Under this lease agreement the
leasing company, ORIX will pay for the fuel, maintenance and driver expenses
for all the cars. The lessor will claim the depreciation on the cars and the
lessee will claim the lease rentals against the taxable income. BYR India Ltd
will have to hire fulltime supervisor (at monthly salary of Rs. 15,000 per
month) to manage the fleet of cars hired on lease. The company will have to
bear additional miscellaneous expense of Rs. 5,000 per month for providing him the
PC, mobioe phone and so on.
The company’s effective tax rate is 40 per cent and
its cost of capital is 15 per cent. Analyse the financial viability of the two
options. Which option would you recommend? Why?
Finance Management
1. Define current assets and Give four examples
2. Every Manager has to take
three major decisions while
performing the finance function’ briefly explain them.
3. Where will you show
purchase of furniture in cash flow statement ?
4. Determination of capital
structure of a company is influenced by a number of factors’ explain six such
factors.
5. List and explain the three
financial factors that influence the value of a business
6. What can a financial
institution often do for a deficit economic
unit (DEU)that it would
have difficulty doing for itself if the DEU
were to deal directly with an SEU?
7. Who owns a credit union? Explain.
8. Why are trend analysis and
industry comparison important to
FINANCIAL INSTITUTIONS
COURSE: CFM Total Marks: 80
N.B. : 1) All questions are
compulsory
2) All questions
carry
equal marks.
Q1) What are derivatives? What are
their features?
Q2) What is a financial system? What is the role in the economic development
of a country?
Q3) How does the Central Bank regulate the quantity and direction of the
flow of credit?
Q4) What are the measures initiated
by the SEBI to build investor confidence?
Q5) What is a Call Money market? What
is the importance of Call Money market?
Who are
the participants in the Call Money market?
Q6) What is the commercial paper?
What are its advantages?
Q7) What is a Certificate of deposit?
How is it different from bank deposit?
Q8) What is a discount market? What
are its services?
Q9) What is a stock exchange? What
are its function?
Q10) Write short notes on:
a)Put
Option
b)Hedging
Financial Management
Q1. A stock is expected to
pay a dividend of Rs.0.75 at the end of the year. The required rate of return
is ks = 10.5%, and the expected constant growth rate is g = 6.4%. What is the
stock's current price?
(10 marks)
Q2. Hammad Inc. is
considering two alternative, mutually exclusive projects. Both projects require
an initial investment of Rs. 10,000 and are typical, average risk projects for
the firm. Project A has an expected life of 2 years with after tax cash inflow
of Rs. 6,000 and Rs. 8,000 at the end of year 1 and 2, respectively. Project B
has an expected life of 4 years with after tax cash inflow of Rs. 4,000 at the
end of each of next 4 years. The firm’s cost of capital is 10
percent. If the projects
cannot be repeated, which project will be selected, and what is the net present
value?
(10 marks)
Q3. What is correlation of coefficient? (10 marks)
Q4. Define Financial Management. (10 marks)
Q5. What do you mean by floatation cost? (10 marks)
Q6. Why is the cash flow
statement not a suitable judge of profitability ? (10 marks)
Q7. What is the basic goal of a business? (10 marks)
Q8. Define intermediation.
SUBJECT:- FINANCIAL
MANAGEMENT
Total Marks : 80
N.B.: 1)Attempt any Four Questions 2)All
questions carries equal marks.
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(A). (1).Mr. Nimish holds the following
portfolio.
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(10 marks)
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Share
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Beta
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Investment
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Alpha
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0.9
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Rs.12, 00,000
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Beta
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1.5
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Rs. 3, 50,000
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Carrot
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1.0
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Rs. 1, 00,000
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What is the expected rate of
return on his portfolio, if the risk rate is 7 per cent and the expected return
on the market portfolio is 16 per cent?
(A). (2).
A share is selling for Rs.60 on which a dividend of Rs.4 per share is expected
at the end of the year. The expected market price after dividend declaration is
to be Rs.70. Compute the following: -
(10 marks)
(i)
The
return on investment ® in shares.
(ii)
Dividend
yield
(iii)
Capital
Gain Yield
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(B) DIC Ltd. provides the following data:
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(20
marks)
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Comparative
trial balance
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March 31 year 2
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March
31 year 1
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Increase(Decrease)
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Debit Balance
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20
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10
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10
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Cash
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Rs.190
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Rs. 90
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Rs.100
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Working capital (other than cash)
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100
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200
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(100)
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Investment (Long term)
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500
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400
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100
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Building and equipment
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40
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50
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(10)
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Total
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850
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750
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100
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Credit
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Accumulated Depreciation
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200
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160
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40
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Bonds
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150
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100
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50
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Reserves
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350
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350
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---
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Equity Shares
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150
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140
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10
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Total 850 750 100
For the
period ending March 31, year 2
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(Amount in Rs lakh)
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Sales
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Rs.1000
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Cost of Goods Sold
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500
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Selling Expense
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Rs.50
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Administrative Expenses
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50
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100
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Operating Income
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400
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Other charges
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Gain on sale of building and equipment
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Rs 5
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Loss on sale of investments
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(10)
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Interest
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(6)
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Taxes
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(189)
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(200)
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Net Income after taxes
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200
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Notes: (a) The depreciation charged for the year was
Rs.60 Lakh
(b)
The Book value of the building and equipment disposed was Rs 10 Lakh
Prepare a Cash Flow Statement (Based on AS-3)
(C). (1). A. Ltd. produces a product which has a
monthly demand of 4,000 units. The product requires a component X which is
purchased at Rs.20. For every finished product one unit of component is
required. The ordering cost is Rs.120 per order and the holding cost is 10 per
cent per annum.
(10
marks)
You are required to calculate:
(i)
Economic
order quantity
(ii)
If the minimum lot size to be supplied is 4, 000 units, what is the
extra cost, the company has to incur?
(iii)
What is
the minimum carrying cost, the company has to incur?
(C). (2). 4. Master Tools Ltd. Is
currently operating its business at 75% level, producing 38275 units of a tools
component and proposes to increase capacity utilization in the coming year by
33 1/3 % over the existing level of production. (10 marks)
The following data has been supplied:
(1)Unit cost structure of the product at current level:
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Rs.
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Raw Material
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5
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Wages
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2
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Overheads
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3
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Fixed Overhead
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2
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Profit
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3
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_____
15
(i)
Raw Material will remain in stores for 1 month before issued for
production. Material will remain in process for further 1 month. Suppliers
grant 4 months credit to the company.
(ii)
Finished goods remain in godown for 2 months
(iii)
Debtors
are allowed credit for 2 months.
(iv)
Lag in wages and overheads payments in 1 month, and these expenses
accrue evenly throughout the production cycle.
(v)
No
increase either in cost of inputs or selling price is envisaged
You are
required to prepare a Projected Profitability statement and the Working Capital
Requirement at new level, assuming that a minimum cash balance of Rs.20000 has
to be maintained.
(D). A stock is currently trading
for Rs.29. The risk less interest is 7 % p.a continuously compounded. Estimate
the value of European call option with a strike price of Rs.30 and a time of
expiration of 4 months. The standard deviation of the stock’s annual return is
0.45. Apply BS model.
(20
marks)
Year EPS Year EPS
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10
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Rs.30
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5
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Rs.16
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9
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20
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4
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15
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8
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19
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3
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14
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7
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18
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2
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18
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6
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17
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1
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(12)
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(i)
Determine
the annual dividend paid each year in the following cases:
(a)
If the firm’s dividend policy is based on a constant dividend payout
ratio of 40 per cent for all years
(b)
If the
firm pays at Rs 10 per share, and increases it to Rs 12 per share when earnings
exceed Rs.14 per share for the previous 2 consecutive years.
(c)
If the firm pays dividend at Rs 7 per share each except when EPS exceeds
Rs 14 per share, when an extra dividend equal to 80 per centof earnings beyond
Rs.14 would be paid.
(ii)
Which
type of dividend policy will you recommended to the company and why?
(F). (1). A US MNC has its
subsidiary in India. The subsidiary has issued 15 pr cent preference shares of
the face value of Rs.100, to be redeemed at year-end 9. Flotation costs are
expected to be 5 per cent; these costs can be amortized for tax purpose during
8 years at a uniform rate. The corporate tax rate is 35 per cent. Determine the
costs of preference shares from the perspective of the subsidiary.
(10 marks)
(F). (2) The US inflation rate is
expected to be Rs.3 per cent annually and that of India is expected to be 4.5
per cent annually. The current spot rate of US $ in India is Rs.47.4060/US $.
(10
marks)
Find the expected rate of US $ in
India after one year and after 5 years from now using purchase power theory of
exchange rate.
Finance Management
Q1. What is accumulated
depreciation?
Q2. Who owns a credit union?
Explain.
Q3. What can a financial institution often do for a
deficit economic unit (DEU)that it would have difficulty doing for itself if
the DEU were to deal directly with an SEU?
Q4. Why is the cash flow statement not a suitable judge of profitability
?
Q5. What are the objectives of
financial planning?
Q6. Why a person should invest in
shares? Give reasons.
Q7. Explain the equation of EBIT when it is equal to Break Even Point
Q8. What is the relationship
between standard deviation & Risk
Financial Management
Answer the following question.
Q1. What is Merger>Is it
harmful or beneficial? Explain n Justify.
Q2. How negatively correlated
investments behave in a market?
Q3. How does production cycle
effect working capital?
Q4. What are the determinant of
capital structure of a company?
Q5. Explain briefly five factors determining the amount of fixed
capital.
Q6. Briefly define the terms proprietorship, partnership, and
corporation.
Q7. Why are trend analysis and industry comparison important to
financial ratio analysis?
Q8. What is international
business environment?
Financial Management
Q1. What is the definition
of management fraud?
Q2. Different types of
investments time horizons.
Q3. What are efficient
portfolios?
Q4. What is meant by capital
budgeting decision?
Q5. Define current assets
and Give four examples
Q6. To avoid the problem of shortage and surplus of funds, what is
required in Financial management? Name the concept and explain four points of
importance.
Q7. Compare and contrast a defined benefit and a defined contribution
pension plan.
Q8. Define depreciation expense as it appears on the income statement.
How does depreciation affect cash flow
Financial
Management
Q1. What is meant by ‘Financial
management’ Explain its importance.. (10 marks)
Q2. Define current assets and Give four examples (10 marks)
Q3. What is capital structure of a company? (10 marks)
Q4. What is meant by Financial Planning? (10 marks)
Q5. State the decisions involved in Financial management. (10 marks)
Q6. Different types of investments time horizons. (10 marks)
Q7. What types of shares are available in the market? (10 marks)
Q8. Why we use WACC?
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