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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI 600 034
B.B.A. DEGREE EXAMINATION BUSINESS ADMINISTRATION
FIFTH SEMESTER NOVEMBER 2017
BU 5509 FINANCIAL MANAGEMENT
Date: 08-11-2017 Dept. No. Max. 100 Marks
Time: 09:00-12:00
Section A (10 X 2 =20 marks)
Answer the following questions.
Define financial management.
What do you understand by time value of money?
Give the formula for determining the degree of operating leverage.
Write a short on indifference point.
What are the components of cost of capital?
A company's share is quoted in the market at Rs.20 currently. The company pays a dividend of Re. 1
per share and the investors expect a growth rate of per year. Compute the company's Cost of
equity capital.
What is Internal Rate of Return?
A project has an initial investment of Rs.2,00,000. It will produce cash inflows after tax of Rs.50,
000 per annum for six years. Compute the payback period for the project.
Define working capital.
10) Abishek Ltd. expects its cost of goods for the next year to be Rs.600000. The expected operating
cycle is 60 days. The company's policy is to carry a minimum cash balance of Rs.200000. Estimate
the working capital requirement.
Section B X10 40 marks)
Answer any FOUR Questions.
11) Explain the objectives of financial management.
12) Explain the need for capital budgeting.
13) Calculate the operating leverage, financial leverage and the combined leverage for the following
firms and interpret the results:
P Q R
Outputs units) 3,00,000 75,000 5,00,000
Fixed cost 3,50,000 7,00,000 75,000
Variable cost per
unit(Rs)
1 7.50 0.10
Interest expenses 25,000 40,000
Unit selling price 3 25 0.50
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14) Excel Industrial Ltd. has assets of Rs.1,60,000 which has been financed with Rs.52,000 of debt and
Rs.90,000 of equity and a general reserve of Rs.18,000. The firm's total profits after interest and taxes
for the year ended 31st March 2007 were Rs.13,500. It pays interest on borrowed funds and is in the
50% tax bracket. It has 900 equity shares of Rs.100 each selling at a market price of Rs.120 per share.
Calculate weighted average cost of capital.
15) A firm issues debentures of Rs.1,00,000 and realizes Rs.98,000 after allowing 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.
16) From the following information relating to Perara Ltd., calculate Operating cycle Number of
operating cycles in a year assuming a 360 day year, and average working capital required, if annual
cash operating expenses are Rs.150 lakh.
Stock holding: Raw materials 2 months
WIP 15 days
Finished goods 1 month
Average debt collection period 2 months
Average payment period 45 days
17) Discuss the objectives of cash management.
Section C X 20 40 marks)
Answer any TWO questions
18) From the following capital structure of a company, compute the overall cost of capital using
Book value weights and ii) Market value weights
Book value
Rs.
Market value
Rs.
Equity share capital
(Rs. 10 per share)
45,000 90,000
Retained earnings 15,000
Preference share capital 10,000 10,000
Debentures 30,000 30,000
The after tax cost of different sources of finance is as follows:
Equity share capital 14%
Retained earnings 13%
Preference share capital 10%
Debentures
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19) Cost sheet of a company provides the following particulars:
Elements of cost: Raw materials Labour 10%
Overheads 30%
The following particulars are also available:
Raw materials remain in stock for 6 weeks
ii) Processing time 4 weeks
iii) Finished goods are in stock for 5 weeks
iv) Period of credit allowed to debtors 10 weeks
Lag in payment of wages 2 weeks
vi) Period of credit allowed by creditors 4 weeks
vii) Selling price Rs.50 per unit
viii) Production in units: 13,000 p.a.
Prepare an estimate of working capital requirement.
20. Anbu Co. Ltd., is considering the purchase of a new machine. Two alternative machines and have
been suggested each costing Rs.4,00,000. Earnings after taxation are expected to be as follows:
Year Cash inflow
Machine X
Rs.
Machine Y
Rs.
1 40,000 1,20,000
2 1,20,000 1,60,000
3 1,60,000 2,00,000
4 2,00,000 1,20,000
5 1,60,000 80,000
The company has a target rate of return on capital of 10% and on this basis, you are
required to compare the profitability of the machines and state which alternative is
preferable. The present value of Re. 1 (to be received at the end of each year).
Year 1 2 3 4 5
PV 0.909 0.826 0.751 0.683 0.621
21) Explain the factors determining capital structure of a firm.