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Section A
Objective Type Questions (10*2) 20 Marks
Q1.
(i). The adjustment for time value of money is made through:
a) Interest rate b) Inflation rate c) Growth rate d) None of the above
(ii). Maximization of wealth of shareholders is reflected in:
a) Sales maximization b) No. of shareholders c) Market price of equity shares d) SENSEX
(iii). Capital budgeting decisions are based on:
a) Incremental profits b) Incremental cash flows c) Incremental assets d) Incremental capital
(iv). Which of the following is not a relevant factor in EBIT-EPS analysis of capital structure?
a) Rate of interest on debt b) tax rate c) amount of pref. share capital d) DPS
(v). Permanent working capital:
a) Includes fixed assets c) minimum level of current assets
b) varies with seasonal pattern d) includes equity capital
(vi). Cash budget does not include:
a) Dividend payable b) capital expenditure c) issue of capital d) total sales figure
(vii).Which of the following is not included in cost of inventory?
a) Purchase cost b) transport cost c) import duty d) selling cost
(viii).NPV technique is based on:
Name of the Program:E-MBA (O&G)
Course Title: Financial Management
This question paper has 5 pages.

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a) Discounting procedure b) compounding procedure c) average procedure d) None of the above
(ix). ABC analysis is used in :
a) Inventory management. b) Debtors management. c) Accounting policies d) corporate governance
(x). In IRR method, the cash inflows from the project are assumed to be reinvested at the rate equal to:
a) IRR b) risk free rate c) cost of capital d) rate of interest
Section B
Short Questions (Conceptual / Theory) (5*4) 20 Marks

Q2. Define capital structure. Discuss the factors which influence the planning of capital structure?

Q3. What are the important determinants of Working Capital Management?

Q4. What is the relevance of Time value of money in financial decision making?

Q5. What do you understand by Cost of Capital, describe how to calculate the specific cost of Capital ?

Q6. A company is considering taking up of one of two Petroleum Projects :X and Y. Both projects have
the same life, require equal investments of Rs.100 lakhs each and both are estimated to have almost
the same yield. As company is new to this type of infrastructure project the cash flows arising from the
projects cannot be estimated with certainty. An attempt was, therefore, made to use probability to
analyze the pattern of cash flows from either project during the first year of operation. This pattern is
likely to continue during the life of these projects. The results of the analysis are as follows:
PROJECT X PROJECT Y
CASH FLOWS PROBABILITY CASH FLOWS PROBABILITY
12 LACS 0.10 8 LACS 0.10
14 LACS 0.20 12 LACS 0.25
16 LACS 0.40 16 LACS 0.30
18 LACS 0.20 20 LACS 0.25
20 LACS 0.10 24 LACS 0.10

Which Project should the company take up? Show your working to Justify your Answer.


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Section C
Descriptive Type Analytical Questions (10*3) 30 Marks
Q7 (a) What do you mean by financial leverage? Write the importance and limitations of it.

(b) The capital structure of Microsoft Ltd. is as follows:
Rs. (lakhs)
Equity Share Capital 400
12% Debentures 400
18% Term Loan 1200
(1) Determine the weighted average cost of capital of Microsoft Ltd. It has been paying
dividend at a consistent rate of 20% p.a.
(2) What difference will it make in the weighted average cost of capital if the current market price of
the Rs. 100 equity share is Rs. 160?

Q8. One of the Office of XYZ Ltd. is located in Srinagar. It has received a Quotation for Rs.4400 for
replacing the Heating system. The following information is available:
(i) Currently the Fuel bill for Heating system is Rs. 10,000 p.a.
(ii) The bank provides loan @12%p.a.
(iii) Fuel prices are expected to increase 5% p.a.
(iv) The replacement system will save 10% fuel consumption.
In 6 years time, the firm is expected to shift the office to some other location so it is decided to Evaluate
the proposal for a life of 6 years only. Because of the uncertainties involved, the firm has decided to ignore
any effect of the replacement on the sale value of the building.
The firm requires a risk premium of 2% above interest cost for investment evaluation.
Should the firm accept the offer for replacement?




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Q9. Following information is related to two machines M and N:
Particulars Machine M Machine N
Cost Rs. 1,12,250 Rs. 1,12,250
Estimated Life 5 Years 5 Years
Estimated Salvage Value Rs. 6,000 Rs. 6,000
Working Capital Required in beginning Rs. 20,000 Rs. 40,000
Annual Income after tax and depreciation: Rs. Rs
Year 1 6750 22,750
Year 2 10,750 18,750
Year 3 14,750 14,750
Year 4 18,750 10,750
Year 5 22,750 6,750

Overhauling charges at the end of third year are Rs. 50,000 on machine M. Depreciation has been charged
at SLM and cost of capital is 10%.
Answer the following question:
A. Which method of project evaluation shall you consider and why?
B. Suggest which machine should be preferred and why?

Section D
Case Study 30 Marks
Q10. XYZ Ltd. plans to extend assets by 50%. To finance the expansions, it is choosing between a
straight 12% debt issue and equity shares. Its balance sheet and profit and loss account are shown below:
Balance Sheet as at 31
st
March 2011
Liabilities Rs. (lakhs) Assets Rs. (lakhs)
11% debentures 40.00
Equity shares of Rs. 10 each 100.00
Retained earnings 60.00 Total assets 200.00
200.00 200.00

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Contd. (Case study)
P & L Account of XYZ Ltd. for the year ended March 31
st
2011
Particulars Rs. (in lakhs)
Sales 600.00
Total cost (excluding interest) 540.00
Net income before interest and taxes (EBIT) 60.00
Interest on debentures @ 11% 4.40
Income before taxes (EBT) 55.60
Taxes @ 40% 22.24
Profit after tax (PAT) 33.36
Earnings per share (Rs. 33.36/10.00) Rs. 3.336
Market price (7.5 3.336) Rs. 25.02

If XYZ Ltd. finance Rs. 1 crore expansion with debt, the rate of the incremental debt will be 12% and the
price/ earning ratio of the quity shares will be 5 times. If the expansion is financed by equity, the new
shares can be sold at Rs. 12 per share and the price/earning ratio will remain at 7.5 times.
Required :
(i) Assuming that net income before interest and taxes (EBIT) is 10% of sales. Calculate,
Earnings per share at sales levels of Rs. 4 crores, Rs. 8 crores and Rs. 10 crores, when
financing is with (a) equity shares, and (b) debt.
(ii) Using the P/E ratio, calculate the market value per share for each sales level for both the
debt and the equity financing.
(iii) At what level of earnings before interest and taxes (EBIT), after the new capital is
acquired, would earnings per share (EPS) be the same whether new funds are raised by
issuing equity shares or raising debt?