Seat No.: Enrolment
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA SEMESTER EXAMINATION WINTER 2018
Subject Code: 3529203 Date: 26/12/2018
Subject Name: FINANCIAL MANAGEMENT
Time: 2.30 PM to 5:30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.
No.
Marks
Q.1 Explain following Concepts:
Floatation Cost
Yield to Call
Private Equity
Green-Shoe Option
Risk Premium
Letter of Credit
Operating Cycle
14
Q.2 "Financial Management is in many ways an integral part of the jobs
of managers" Explain.
07
An Investor deposits Rs. 50000 at the end of each year for 5 years
at the rate of 8 percent p.a. interest, compounded half-yearly. Find
out the future value of the annuity.
ii) You have borrowed a 3 year loan of Rs. 10000 at 9 percent p.a.
from your employer to buy a motorcycle. If your employer requires
you to pay in three equal end-of-year repayments what will be an
installment amount? Prepare loan amortization schedule.
07
OR
The market price of a Rs. 1000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs. 1050. What is
the yield to maturity on this bond? What will be the realized
yield to maturity if the re-investment rate is 12 percent p.a.?
07
Q.3 Explain the Modigliani Miller's Proposition I and Proposition II.
Illustrate how the arbitrage mechanism works in MM hypothesis
with help of an example.
07
The installed capacity of an organisation is 30000 units. The actual
exploited capacity is 25000 units. Selling price per unit is Rs. 10
each and variable cost is Rs. 6 per unit. Compute the Operating
Leverage in each of the following situation.
07
When Fixed cost is 25000
When Fixed cost is 55000
When Fixed cost is 75000
OR
Q.3 You are the CFO of XYZ Ltd. Your company is planning to design
the dividend policy. You have been asked to explain the factors
influencing the dividend policy for your company.
07
A company has a total investment of Rs. 500,000 in assets and
500,000 outstanding ordinary shares at Rs. 10 per share (par value).
It earns a rate of 15 percent on its investment, and has a policy of
retaining 50 percent of its earnings. If the appropriate discount rate
of the firm is 10 percent, determine the price of its share using
Gordon's model when Earning Per Share is Rs.1.50.
What shall happen to the price of the share if the company has a
Dividend payout ratio of 80 percent or 20 percent?
07
Q.4 Discuss various major sources of long term finance of an
organisation.
07
The present credit terms of Satvika Ltd are 1/10 net 30. Its sales are
Rs.25 million, its average collection period is 24 days and its
variable cost to sales ratio is 0.80 and its cost of funds is 15%. The
proportion of sales in which customers currently take discount is
0.3. The company is considering relaxing its discount terms to 2/10
net 30. Such relaxation is expected to increase the sales by Rs. 2.5
million, reduce the average collection period to 16 days and
increase the proportion of discount sales to 0.7. What will be the
effect of relaxing the discount policy on residual income? The tax
rate of the firm is 50 percent.
07
OR
Q.4 Explain the factors which determine the amount of working capital
in a business.
07
Sujoy Limited is evaluating an expansion project that is expected to
cost Rs. 10 Million and generate an annual after tax cash flow of
Rs. 2 Million for the next 10 years. The tax rate for the company is
35 percent. Sujoy Limited has debt equity ratio of 1:1. Its cost of
equity is 16.9 percent whereas its pre-tax cost of debt is 14 percent.
The floatation cost of equity is 12 percent whereas the floatation
cost of debt is 2 percent. Calculate the Net Present Value of
the project after taking into account the floatation cost.
07
Q.5 Khatari Ltd. is in Equipment manufacturing business since 2001. It
supplies to the equipment manufacturer as well as the replacement
market. Recently company has received two projects and
and company will consider either of these projects in the beginning
of the year. Depreciation is provided under straight line method in
the firm. Following are the details of the two projects and
Project X Project Y
Cost of the Investment Rs. 25000 Rs. 30000
Life 5 Years 6 Years
Net Income (After depreciation and
tax)
2011 600 3800
2012 1000 4500
2013 2500 5000
2014 3000 4500
2015 3500 5500
2016 6000
Calculate Net Present Value of Project X and assuming
the rate of return of 10 percent per annum.
07
Calculate Average Rate of Return of Project X and Y. 07
OR
Calculate Profitability Index of the Project X and assuming the
rate of return of 10 percent per annum.
07
Calculate Payback Period of the Project X and Y. 07