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Seat No.: Enrolment
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA SEMESTER 2 • EXAMINATION WINTER 2018
Subject Code: Financial Management Date:26/12/2018
Subject Name: 820003
Time: 02:30 to 05:30 pm Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.1 Explain the structure of financial system under financial management. 07
1. Mr. Rohan has to receive Rs.500at the beginning of each year for 4 years.
Calculate the present value of annuity due assuming 10 per cent rate of interest.
2. ABC company issues Rs. 1000 par value bond at 12 per cent. The bond is
redeemable after 10 years. Determine value of bond assuming required rate of
return is 14 per cent.
07
Q.2 What do you mean by working capital? Explain the policies of working capital
management.
07
Determine the working capital required to finance a level of activity of 180000
units of output for a year. The cost structure is as under:
Cost per unit
Raw material 20
Direct labor 5
Overheads (including depreciation) 15
Total cost 40
Profit 10
Selling price 50
Additional information:
Minimum desired cash balance Rs. 20000
Raw materials are held in stock on an average for 2 months.
Work-in-progress (assume 50 per cent completion stage) will
approximate to half a month production
Finished goods remain in warehouse, on an average for a month.
Suppliers for materials extend a month's credit and debtors are provided
2 months credit. The cash sales are 25 per cent of total sales.
There is a time lag in payment if wages for a month and half-a-month in
the case of overheads.
07
OR
Discuss various factors affecting working capital. 07
Q.3 Define cost of capital. Explain the significance of cost of capital in financial
management.
07
A firm has two investment opportunities each costing Rs. 100000 each and each
having an expected profit as shown below:
Year 1 2 3 4
Project X

50000 40000 30000 10000
Project Y

20000 40000 50000 60000
07
2
After giving due consideration to the risk criteria in each project the management
has decided that project X should be evaluated at 10% cost of capital and project
a risky project with 15% cost of capital.
Compute the NPV and suggest the course of action for the management if:
1. Both the projects are independent
2. Both are mutually exclusive
OR
Q.3 Om Sai enterprises issued 9 per cent irredeemable preference shares four years
ago. The preference share that has a face value of Rs. 100 is currently selling at
Rs. 93. What is the cost of preference share with 8 per cent dividend tax?
07
Compare and contrast NPV with IRR. 07
Q.4 Define leasing. How is it different from hire purchasing? 07
Calculate operating leverage. Interest Rs. 5000; sales Rs. 50000; variable costs
Rs. 25000; fixed costs Rs. 15000.
07
OR
Q.4 Discuss various long term sources of finance 07
Discuss the EBIT-EPS analysis and explain their relationship. 07
Q.5 Discuss the factors which are relevant for determining the dividend payout ratio. 07
The following information is available for a company.
Earnings per share Rs. 4
Rate of return on investments 18%
Rate of return required by shareholders 15%
What will be the price per share as per the Walter Model if the payout ratio is
50% and
07
OR
Q.5 Explain the meaning of leverage and its types with the following example:
EBIT Rs.200
Contribution Rs.400
Interest Rs.100
Calculate and interpret DOL, SFL, and DCL.
07
Describe the traditional view on the optimum capital structure. Compare and
contrast this view with NOI and NI approach.
07