M.Com. (Semester IV) (CBCS) Examination Mar/Apr-2018
ADVANCED COSTING (Paper III)
Time: 2½ Hours
Max. Marks: 70
Instructions: All questions are compulsory. Figures to the right indicate full marks. Use of calculator is allowed.
Q.1
Choose the alternatives given below.
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The Investment decisions of the firm are commonly known as the decisions.
Revenue expenditure
Revenue and capital expenditure
Capital expenditure
None of these
A tactical investment decision involves
Large amount
Small amount
Medium amount
None of these
The period during which the total cost of the capital investment is recovered, is termed as
Capital expenditure
Revenue expenditure
Accounting rate of returns
Payback period
In financial analysis, the term 'Leverage' is the employment of an asset or funds for which the firm pays cost.
Variable
Fixed and variable
Fixed
None of these
Presence of cost leads to operating leverage.
Variable
Fixed and variable
Fixed
None of these
Presence of debit in the capital structure leads to leverage.
Operating
Financial
Operating and financial
None of these
Forms of stability of dividend are
Constant amount of dividend per share
Constant percentage of net earnings
Dividend as a fixed percentage of market value
All of the above
In India the forms of dividend permitted are
Bond and scrip dividend
Bond and property dividend
Property and cash dividend
Cash and stock dividend
Irrelevance of dividend theorem is developed by
Prof. J. E. Walter
Mr. Myron Gordon
Prof. Miller Modigliani
Mr. John Lintner
10) Spot cost can be considered in financing decision, while normalizes the cost used in decision.
Cash decision
Bond decision
Investment decision
Credit decision
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11) In the case of a company is not legally bound to pay dividend even if a company earns profit.
Equity share holders
Debt holders
Preference share holders
All of the above
12) Cost of capital affects the value of
Equity shares of the company
The debentures
The preference shares
None of the above
13) Price Earning Ratio is computed by dividing the market price of the shares by the
EBIT
EPS
EBT
EAT
14) Operating leverage contribution−−−−−−.
EBIT
EPS
EBT
EAT
Q.2
Write short answer.
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Cost of equity shares
Trading on equity.
Q.3

A company issues 10% irredeemable debentures of Rs. 1,00,000. The company is in 55%.tax bracket. Calculate the cost of debt. If the debentures are issues at
At par
At 10% discount
At 10% premium
07

A project cost Rs. 30,000 and has scrap value of Rs. 6,000.
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Its stream of income before depreciation and taxes during first three years is Rs. 12,000, Rs. 15,000, Rs. 18,000.
Assume 50% tax rate and depreciation on straight line basis.
Calculate the accounting or average rate for the project.
Q.4
Calculate operating leverage and financial leverage under situations B and C and financial 2 and 3 respectively.
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From the following information relating to the operation and capital structure of Z Ltd.
Also find out the combinations of operating and financial leverage which give the highest value and the least value.
Installed capacity (units)
1200
Actual production and sales (units)
800
Selling price per unit
15
Variable cost per unit
10
Fixed costs Situation
1000
Situation
2000
Situation
3000
Capital structure:
Financial plan
1
2
3
Equity
5000
7500
2500
Debt.
5000
2500
7500
Cost of debt (for all plans)
12 percent
OR
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A company has to make a choice between two project namely A and B. The initial capital outlay of the two projects are Rs. 1,35,000 and Rs. 2,40,000 respectively for A and B.
There will be no scrap value at the end of the life of both the project. The opportunity cost of capital of the company is 16%. The annual incomes are as under.
Year
Project
Project
Discounting factor 16%
1

Rs. 60,000
0.862
2
Rs. 30,000
84,000
0.743
3
1,32,000
96,000
0.641
4
84,000
1,02,000
0.552
5
84,000
90,000
0.476
You are required to calculate for each project.
Discount payback period
Profitability index
Net present value
Q.5
A firm sales of Rs. 75,00,000 variable cost Rs. 42,00,000 and fixed cost Rs. 6,00,000. It has borrowed Rs. 45,00,000 at and its equity capital of Rs. 55,00,000.
What is the firm ROI?
Does it have favourable financial leverage?
What are the operating, financial and combined leverage of the firm?
If the sales drop to Rs. 50,00,000 what will be the new EBIT be?
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OR
An investment of Rs. 6,00,000 in a capital project is expected to have cash inflows as under:
1st year Rs. 3,00,000, 2nd year Rs 2,50,000, 3rd year Rs 2,00,000, 4th year Rs 1,50,000, 5th year Rs 1,00,000.
The effective life of the asset is 5years and at the end of the 5th year its scrap value would be Rs. 20,000. The required rate of return is 10%. The P.V. factor 10% is 1st year 0.909, 2nd year 0.826, 3rd 0.751, 4th year 0.683 and 5th year 0.621. Is the investment desirable?
Suppose the above investment was made two year before. The past two years actual cash inflows were Rs. 2,50,000 and Rs. 1,50,000 respectively. On this basis, the cash inflows for the remaining three years are expected to be only Rs. 1,20,000, Rs. 90,000, Rs. 40,000 respectively. However, the investment has a present abandonment value of Rs. 2,40,000. Would you advise the management for abandoning the investment?