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Financial Management

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Financial Management

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Uploaded by

shinuanusha50
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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SIES SCHOOL OF BUSINESS STUDIES, NERUL, NAVI MUMBAI – 400 706

PGDM Trimester II General/Core Batch


PGDM (Pharmaceutical 2022-24
Management) &
PGDM (Biotechnology)
Financial Management
End Term Examination
Maximum Marks: 50 Date: January 18, 2023 Duration: 2 hours Time: 2 PM to 4PM
Part A: (CO1, CO2, CO3) (3 * 5 = 15 marks)
Instruction: Answer any 03 questions carrying 05 marks each from the following:

Q1. Describe the three broad areas of financial decision making.


Q2. Explain any two capital budgeting techniques. Illustrate with the help of an example.
Q3. Discuss the various short-term sources of finance in detail.
Q4. Why must the finance manager keep in mind the degree of financial leverage in
evaluating various financial plans? When does the financial leverage become favorable?
Q5. “Dividend decision does affect the value of the firm”. Explain using Walter’s Model
giving suitable illustrations.

Part B: (CO4) (2 * 10 = 20 marks)


Instruction: Answer any 02 questions carrying 10 marks each from the following:
Q6. Grow More Ltd. is presently operating at 60% level, producing 36,000 units per annum
(p.a.). In view of favorable market conditions, it has been decided that from 1st January
2023, the company would operate at 90% capacity. The following information are
available:
i) Existing cost-price structure is given below:

Raw material cost per unit Rs. 4/-


Wages cost per unit Rs. 2/-
Overheads (variable) cost per unit Rs. 2/-
Overheads (Fixed) cost p.a. Rs. 36,000/-
Selling price per unit Rs. 10/-
ii) It is expected that the cost of raw material, wages rate, expenses and sales per unit
will remain unchanged in 2023.
iii) Raw materials remain in stores for 2 months before they are issued to production.
These units remain in production process for 1 month.
iv) Finished goods remain in factory godown for 2 months.
v) Credit allowed to debtors is 2 months. Credit allowed by creditors is 3 months.
vi) Lag in wages and overhead payments is 1 month. It may be assumed that wages and
overhead accrue evenly throughout the production cycle.
You are required to:
a) Prepare profit statement at 90% capacity level, and
b) Calculate the working requirements on an estimated basis to sustain the
increased production level.
Assumptions made if any, should be clearly indicated.

Q7. As a financial analyst of a large electronics company, you are required to determine

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the weighted average cost of capital of the company using book value weights.
The following information is available for your perusal:
The company's present book value capital structure is:
Preference share (Rs.100 per share) Rs. 2,00,000
Equity shares (Rs.10 per share) Rs. 10,00,000
Debentures (Rs.100 per debenture) Rs. 8,00,000

Anticipated external financing opportunities are:


i) Rs.100 per debenture redeemable at par; 10 year-maturity, 13% coupon rate, 4%
flotation costs, sale price Rs.100.
ii) Rs.100 preference share redeemable at par; 10 year-maturity, 14% dividend rate, 5%
flotation costs, sale price Rs.100.
iii) Equity shares: Rs.2 per share flotation costs, sale price @ Rs.22.
In addition, the dividend expected on the equity share at the end of the year is Rs.2 and
the earnings are expected to grow @ 7% p.a. The firm has a policy of paying all its
earnings in the form of dividends.
The corporate tax rate is 50%.

Q8. XYZ Ltd. presently has 40,000 equity shares. The sales and EBIT for the company
during the year 2020 were Rs 17,50,000 and Rs 4,50,000 respectively. During the year, the
expenses on account of interest was Rs. 4,000 and on Preference Dividend was Rs. 10,000.
These fixed charges are expected to continue during 2021. For the year 2021, the company is
planning an expansion which will cost Rs 175,000 which is expected to increase EBIT to Rs.
550,000. The company is considering the following alternatives to finance its expansion:
Alternatives:
I. Issue of additional 5,000 equity shares at Rs 35 each.
II. Issue of additional debt - 15-year bond @ 8%
III. Issue of additional preference shares - @ 8.5%.
Assume a tax rate of 35%.
You are required to calculate:
EPS for 2021 at the expected EBIT of Rs 5,50,000 for the three financing options. Which
alternative would you recommend & why?

Part C (Compulsory Case Study / Comprehensive Problem) (15 marks)


Instructions for students: The following question is compulsory:
Q9. A firm in the business of manufacture of automobile components is considering two
mutually exclusive technologies for manufacture of hydraulic brakes. These two technologies
are designated as Option A & Option B with project cost of Rs 1,600 lakhs & Rs. 1,850
lakhs, respectively. Depending upon various features of the product obtainable from the two
technologies the firm has developed a forecast of cash flows for 5 years i.e., the life of each
project. These cash flows are as follows:
Rs in Lakhs
Year Option A Option B
1 350 675
2 475 575
3 625 725
4 575 350

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5 350 400
Option A is a familiar technology and therefore the firm feels that the current cost of capital
of 13% is the appropriate discount rate. However, Option B is considered riskier than Option
A and therefore the firm would like to use a discount rate of 15%, somewhat higher than its
current cost of capital.
You are required to determine:
a. Pay Back (PB) period of both option A & B. Which Option would you select if the
standard PB period is 3 years?
b. Net Present Value (NPV) of both option A & B. Which Option would you select
based on NPV rule?
c. Internal rate of Return (IRR) of both option A & B. Which Option would you select
based on IRR rule?
*************

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