M.Com. DEGREE EXAMINATION, NOVEMBER 2017
Fourth Semester
Commerce
Elective FINANCIAL MANAGEMENT
(CBCS 2014 onwards)
Time 3 Hours Maximum 75 Marks
Part A (10 x 2 20)
Answer all questions.
1. What do you know about time value of money?
2. What are the objectives of financial management?
3. Bring out the meaning of cost of capital.
4. State the meaning of dividend decision.
5. Give the meaning of indifference point.
6. What is financial leverage?
7. State the meaning of NI approach.
8. Is MM approach an extension of NOI.
9. What is operating cycle period?
10. What do you know about inventory management?
Sub. Code
4MCO4E3
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Part B 5 25)
Answer all questions.
11. Discuss the approaches of financial management.
Or
State briefly the significances of financial
management.
12. A firm issues debentures of Rs. 1,00,000 and
realizes Rs. 97,000 after allowing 1.5% commission
to brokers; debentures carry interest rate of 10%.
The debentures are due for maturity at the end of
10th year at par. Calculate cost of debt.
Or
Sakthi Ltd. issued 20,000 debentures of Rs. 100
each 1st April 2009, the cost of issue was Rs. 50,000,
the company's tax is 35%. Determine the cost
debentures (before as well as tax after tax) if they
were issued at par at a premium of 10% and
at a discount of 10%.
13. Josh Ltd. has the following capital structure
Rs. in Lakhs
Equity shares 2 lakh Nos Rs. 10 each 20
Reserves and Surplus 5
11% debentures each of face value Rs. 100 15
40
The company needs Rs. 10 lakh to execute a new
project which will raise its operating profit EBIT
from the current level of Rs. 6 lakh to 8 lakh. It is
considering the following options
Issue of equity shares at a premium of Rs. 10
each for the entire amount.
Issue of 13% debentures for 10 lakh required
additionally.
The company's tax rate is 50%. Evaluate the
two options and advise the company.
Or
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A Ltd is considering two plans to finance a project
costing Rs. 50 lakh. The details are
Plan I (Rs. in lakh) Plan II (Rs. lakh)
Equity share capital
(Rs. 100 per share)
20 25
12% debentures 30 25
50 50
Sales for the first three years of operations are
projected at Rs. 120, 150 and 180 lakhs respectively.
EBIT is expected to be 18% of sales. Corporate
taxation is 30%. Calculate the EPS in each of the
plans for the three years.
14. Belly Ltd has a choice of the following three
financial plans
Plan I Plan II Plan III
Equity share capital 5 lakh 6 lakh 3 lakh
10% debentures 5 lakh 4 lakh 7 lakh
EBIT 2.5 lakh 2.5 lakh 2.5 lakh
You are required to ascertain the financial leverage
in each case and interpret it.
Or
The capital structure of Tom Gilbert Ltd consists of
the following securities
Rs.
45,000 10% preference shares of Rs. 100 each 45,00,000
5,00,000 equity shares of Rs. 10 each 50,00,000
The company's operating profit is Rs. 15,00,000, the
company is in 40% of tax bracket. You are required
to find out the financial leverage if the operating
profit increases to Rs. 20,00,000 and interpret your
results.
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15. Determine the working capital requirements of a
company form the information given below
Operating cycle components
Raw material 45 days; WIP 30 days; finished
goods 10 days; debtors Rs. 30 days; Creditors 60
days.
Annual turnover — Rs. 80 lakh; cost of structure (as
of sale price) is materials labour
overheads 10% and profit 10% of the overheads.
30% constitute depreciation.
Desired cash balance to be held all the times
Rs. 4 lakhs.
Or
From the following information relating to Perara
Ltd., Calculate operating cycle and average working
capital
Annual cash expenses are Rs. 15,000,000
Stock holding
Raw material 2 months
W.I.P 15 days
Finished goods 1 month
Average debt collection period 2 months
Average payment period 45 days.
Part C 10 30)
Answer any three questions.
16. How the goals of wealth maximization a better operative
criterion than profit maximization? Explain.
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17. Wilson Ltd wishes to raise additional finance of Rs. 30
lakh for meeting its investment plans. It has Rs. 6,00,000
in the form of retained earnings available for investment
purposes. The following are the further details
Debt equity mix 40% 60%
Cost of debt upto Rs. 5,00,000 before tax) beyond
Rs. 5,00,000 before tax)
EPS Rs. 5
Dividend payout 60% of earnings
Expected growth rate in dividend
Current market price per share Rs. 50
Tax rate 40%
You are required to determine
the pattern for raising the additional finance
the post tax average cost of additional debt
the cost of retained earnings and cost of equity, and
the overall weighted average after tax cost of
additional finance.
18. Logan Ltd wants to raise Rs. 2,50,000 as additional
capital. It has two mutually exclusive alternative
financial plans. The current EBIT is Rs. 8,50,000 which is
likely to remain unchanged.
The relevant information is
Present capital structure 1,50,000 equity shares of
Rs. 10 each and 10% bonds of Rs. 10,00,000
Tax rate 50%
Current EBIT Rs. 8,50,000
Current EPS Rs. 2.50
Current market price Rs. 25 per share
Financial plan I 10000 equity shares at Rs. 25 per share
Financial plan II 125 debentures of Rs. 2,50,000
Your are require to calculate
EPS
Financial B.E.P
Indifference point between plan I and plan II.
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19. Calculate operating, financial and combined leverages
under situations B and C from the following
particulars
Installed capacity 1200 units
Actual production and sales 800 units
Selling price per unit Rs. 15
Variable cost per unit Rs. 10
Fixed cost situation A Rs. 1,000
Fixed cost situation B Rs. 2,000
Fixed cost situation C Rs. 3,000
Financial Plan
Capital structure I II III
Equity 5,000 7,500 2,500
Debt (cost 5,000 2,500 7,500
20. Guirky Ltd has an annual cash outflow of Rs. 1,00,000
arising uniformly during the year. It plans to meet these
demands for cash by periodically selling marketable
securities from its investments portfolio. The firm's
marketable securities are invested to earn 5%.
Transaction cost of converting investments to cash and
vice-versa is Rs. 100.
Use Baumol model to find out the optimal
transaction size for transfer from marketable
securities to cash
What will be the company's average cash balance?
How many transfers per year will be required?
What is the time interval between two transfers?
What will be the total transaction cost and interest
cost during the year?
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