Gujarat Technological University: Instructions

Seat No.
: _____
Enrolment No.______
GUJARAT TECHNOLOGICAL UNIVERSITY

M.B.A. Sem-II Examination May 2011
Subject code: 820003

Date:25/05/2011
Subject Name: Financial Management

Time: 10.30 am 01.30 pm Total Marks: 70
Instructions:
1. Attempt all questions. 2. Make suitable assumptions wherever necessary. 3. Figures to the right indicate full marks. Q.1 (a) The importance of finance function as a management activity has increased in 07 modern time Explain. (b) The Hero limited has to make a choice between debt issue and equity issue for 07 raising capital for the expansion of its business. Its current position is as follows. Particulars Amount in Rs. Debt 5% 40,000 Equity capital (Rs.10/Share) 1,00,000 Surplus 60,000 __________ Total capitalisation 2,00,000 __________ Sales 6,00,000 Less: Total costs 5,38,000 Income before interest and tax 62,000 Less: Interest 2,000 __________ Income before tax 60,000 Income tax @ 50% 30,000 __________ Income after tax 30,000 __________ The expansion is estimated to cost Rs.1, 00,000. If this is financed through debt, the rate of new debt will be 7% and the price earning ratio will be 6 times. If the expansion is financed through equity shares, the new shares can be sold at Rs.25 per share, and price earning ratio will be 7 times. The expansion will generate additional sales of Rs.3,00,000 with a return of 10% on sales before interest and tax. If the company is to follow a policy of maximising the market value of its shares, which form of financing should it choose?
Q.2 (a) Explain the factors which determine the amount of working capital in a business.
07
(b) Maximisation of profit is regarded as the main objective of investment decision, 07 but it is not as exclusive as maximising shareholders wealth. Comment. OR
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(b) Why does money have time value? Explain compounding and discounting 07 terms in time value of money. Q.3 (a) Asha Limited issued 12 percent callable bonds with a par value of Rs.300. The 07 bond currently selling for Rs.285. Maturity period is 8 years. Due to reduction in interest rates company called back bonds after 4 years and paid Rs.315. Determine YTC. (b) Ajay limited uses a 10 percent discount rate for project appraisal. It is considering 07 purchasing a machine which, when it comes to the end of its economic life, is expected to be replaced by an identical machine and so on, continuously. The machine has a maximum life of 3 years but, as its productivity declines with age, it could be replaced after either one or two years. The financial details are as follows. (Rs. In 000) Year 0 1 2 3 Purchase of (5000) Machine Sales 4500 4000 3500 Cost (2000) (1750) (1750) Scrap value 3300 2000 750 of machine Note: figure in bracket indicates cash outflows. Decide when the machine is to be replaced. OR Q.3 (a) G limited has invested Rs.500 lacs in assets. There are 50 lacs shares outstanding. 07 The par value per share is Rs.10. It earns a rate of 15% on its investment and has a policy of retaining 50% of earnings. If the appropriate discount rate of the company is 10%, what is the price of its shares using the Gordons model? What will happen to the price of the share if the company has a payout of 80% or 20%? (b) A company is considering an investment proposal to install a new machine. This 07 project will cost Rs.1,00,000 and will have 5 years life with no salvage value. Tax rate is 50 percent; the company follows straight line method of depreciation. The earnings before depreciation and tax as follows. Years EBDT(Rs.) 1 20,000 2 22,000 3 28,000 4 30,000 5 50,000
Evaluate the project using (1) Pay Back Period (2) Profitability Index at 10% (3) Accounting Rate of Return
Q.4 (a) Critically examine the assumptions underlying the Irrelevance hypothesis of 07 Modigliani and Miller (MM) regarding dividend distribution.
(b) Prepare a Cash budget for the months of May, June and July 2009 on the basis of 07 the following information: (1) Income and Expenditure forecasts: Months Credit Credit Sales Purchases Rs. Rs. March 1,20,000 72,000 April 1,24,000 76,000 May 1,30,000 66,000 June 1,16,000 70,000 July 1,12,000 78,000 August 1,20,000 68,000 Wages Manufacturing Office Selling Expenses Expenses Expenses Rs. Rs. Rs. Rs. 18,000 8,000 4,000 8,000 16,000 6,000 3,000 10,000 20,000 9,000 5,000 9,000 17,000 7,000 4,000 7,000 19,000 8,000 2,000 9,000 16,000 6,000 3,000 9,000
(2) Cash balance on 1st May 2009, Rs.16,000. (3) Plant costing Rs.32,000 is due for delivery in July, payable 10% on delivery and the balance after 3 months. (4) Advance tax of Rs.16,000 each is payable in March and June. (5) Period of credit allowed (i) by suppliers- two months and (ii) to customersone month. (6) Time lag in payment of manufacturing expenses- month. (7) Time lag in payment of office and selling expenses- 1 month.
OR
Q.4 (a) Explain net income approach (NI) and net operating income (NOI) approach of 07 capital structure in brief. (b) From the following data, prepare a statement showing working capital requirement 07 for the year 2009. (i) Estimated output for the year 1,30,000 units (52 weeks). (ii) Stock of raw materials 2 weeks and material in process for 2 weeks, 50%of wages and overheads are incurred. (iii) Finish goods remain in storage for 2 weeks. (iv) Creditors 2 weeks. (v) Debtors 4 weeks. (vi) Outstanding wages and overheads 2 weeks each. (vii) Selling price per unit Rs.15. (viii) Analysis of cost per unit is as bellows. Raw materials Rs. 5 per unit. Labour Rs. 3 per unit Overheads Rs. 2 per unit. Profit Rs. 5 per unit. Assume the operations are evenly spread throughout the year. Q.5 (a) Give meaning of leasing, hire purchase and venture capital. Distinguish between 07 leasing and hire purchase. (b) Define working capital. Distinguish between permanent and temporary working 07 capital. OR Q.5 (a) What do you understand by term internal rate of return? Is it the same as the value 07 determine under net present value method?
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(b) From the following capital structure of Anand Limited, calculate weighted average 07 cost of capital, using (i) book value weights (ii) market value weights. Particulars Equity shares, each of Rs.10 Retained earnings Preference share capital Debentures Book value (Rs.) 90,000 30,000 20,000 60,000 Market Value (Rs.) 1,80,000 20,000 60,000
The after tax cost of capital for different source is as follows: Equity share capital: 14%, Retained earnings: 13%, Preference share capital: 10% and Debentures: 5%.
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Seat No.

GUJARAT TECHNOLOGICAL UNIVERSITY

Subject code: 820003

Subject Name: Financial Management

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