1
LOYOLA COLLEGE (AUTONOMOUS), CHENNAI 600 034
B.Com.DEGREE EXAMINATION -COMMERCE
SIXTH SEMESTER APRIL 2018
CO 6604- FINANCIAL MANAGEMENT
Date: 10-05-2018 Dept. No. Max. 100 Marks
Time: 01:00-04:00
SECTION-A
ANSWER ALL QUESTIONS: (10X2=20 MARKS)
1. What is meant by Finance function?
2.Mr.X deposits Rs.2,000 at the end of every year for 5 years in his savings account paying 5 per
cent interest compounded annually .He wants to determine how much sum of money he will
have at the end of the 5th yea?.
3. How will a firm go about determining its optimal capital structure?
4. A firm sells its products for Rs.50 per unit, has variable operating costs of Rs.30 per unit and
fixed operating costs of Rs.5,000 per year. Its current level of sales is 300 units. Determine the
degree of operating leverage.
5. Mention the factors affecting cost of capital.
6. The current market price of an equity share of company is Rs.90. The current dividend per
share is Rs.4.50. In case the dividends are expected to grow at the rate of calculate the
cost of equity capital.
7. Explain briefly the meaning of internal rate of return.
8. A Project costs Rs.20 lakhs and yields annually a profit of Rs.3 lakhs after depreciation 12.5
but before tax at 50% Calculate the pay-back period .
9. What is Temporary working capital?
10. Why is an increase in the ratio of current to total assets expected to decrease both profits and
risk as measured by net working capital?
SECTION-B
ANSWER ANY FOUR QUESTIONS: MARKS)
11. Comment on the emerging role of the Finance management in India.
12. Discuss the determinants affecting the need for working capital
13. R Ltd has given the following information and calculate, IIR (internal rate of return)
assuming that the cost of capital is at 10% and the initial investment is Rs 90,000
Year
Cash flow in Rs.
1
10,000
2
2
20,000
3
30,000
4
40,000
5
50,000
14. ABC Ltd has the following capital structures, calculate the overall cost of capital using
Book value. Market value,as base.
Source
Book value
Market value
Tax after cost
Equity Share Capital
45,000
90,000
14%
Retained Earnings
15,000

13%
Preference Share Capital
10,000
9,500
10%
Debentures
30,000
29,000

15. The following projections have been given in respect of companies X and Y
Particulars
Company- X
Company- Y
Sales in units
80,000
1,00,000
Variable Cost per unit Rs
4
3
Fixed Cost Rs
2,40,000
2,50,000
Interest on debt Rs
1,20,000
50,000
Selling price per unit Rs
10
8
On the above information calculate Operating Leverage. Financial Leverage
Combined Leverage. Operating Break even point.
Financial Break-Even point.
16. What factors would you take into consideration in planning the capital structure of a
company?
17. From the following information, prepare an estimate of working capital requirements.
Details
Projected annual sales
52,000 units
Selling price
Rs. 60 per unit
Raw material cost
40% of selling price
Direct labour cost
30% of selling price
Overheads
20% of selling price
3
Raw material remains in stock on an average for 3 weeks. Goods remain in production process for 4 weeks on an average, 5 weeks are allowed to debtors to pay while firm gets 3 weeks credit from suppliers. Finished goods remain in stock for one month .Lag in the payment of wages and overhead expenses is two weeks. 50% of the sales are on cash basis. Assume that goods in process are 100% complete with respect to materials but only 50% in conversion cost
SECTION-C
ANSWER ANY TWO QUESTIONS: MARKS)
18."The finance manager should take account of the time value of money in order to make a
correct and objective financial decision" Elucidate the statement with the help of suitable
illustrations.
19.A company wishes to determine the optimal capital structure .From the following selected
information supplied to you ,Determine the optimal capital structure of the capital .
Situations Debt amount Equity amountAftertax cost of debt ke
1. 4,00,000 1,00,000 9 10%
2. 2,50,000 2,50,000 6 11%
3. 1,00,000 4,00,000 5 14%
20. ABC Ltd is considering an investment proposal to install a new machine. The project will cost
Rs. 50,000 and will have a life of 5 years and no salvage value. The company's tax rate is
50%and no investment allowance is allowed. The firm uses straight line method of
deprecation. The estimated net income before depreciation and tax from the proposed
investment is as follows;
Year
Net income before depreciation tax
PVIF@ 10%
1
10,000
0.909
2
11,000
0.826
3
14,000
0.751
4
15,000
0.683
5
25,000
0.621
Compute Pay- back period. Average Rate of return. Net present value
Profitability Index. € Discounted Pay- back period.
4
21.PQR Ltd has the following capital structure .
Particulars
Rupees in lakhs
Equity Share Capital (Rs 100 each)
20
Retained Earnings
10
Preference Share Capital
12
Debenture
8
Total
50
The company earns 12% on tis capital. The income tax rate is 50%.The company requires a
sum of Rs 25 lakhs to finance its expansion programme for which the following alternatives are
available to it;
To issue of 20,000 equity shares at a premium of rs.25 per share.
To issue of 10% Preference share.
To issue of Debenture.
It is estimated that the P/E ratios in the case of Equity, Preference and Debenture financing would be 21.4, 17, and 15.7 respectively.