DISTANCE EDUCATION
M.B.A. DEGREE EXAMINATION, MAY 2017.
Third Semester
FINANCIAL MANAGEMENT
(2012-2013 Academic Year and 2013 Calendar Year only)
(English Medium Only)
Time Three hours Maximum 100 marks
SECTION A — 8 40 marks)
Answer any FIVE questions.
All questions carry equal marks.
1. What do mean by Financial Management? Explain its
basic aspects.
2. What are the objectives of Financial Management?
3. Explain the features, advantages and disadvantages of
debentures as a source of long-term finance.
4. What are the approaches concerned with the working
capital management?
5. What is leverage? Briefly explain the leverages used in
financial management.
6. Dividend-Payers Ltd. has a stable income and stable
dividend policy. The average annual dividend payout is
Rs. 27 per share(face value Rs. 100). You are required
to find out cost of equity capital, if market price in
year 1 is Rs. 150. expected market price in year 2. if
cost of equity is expected to rise to 20% dividend
Sub. Code
31
DE-896
2
SP 5
payout required in year 2. if the company were to have an
expected market price of Rs. 160 per share, at the
existing cost of equity.
7. A company has an annual sales of Rs. 1 lakh with 60%
contribution margin. The fixed operating costs are
Rs. 30,000 and the interest on long-term debt is
Rs. 10,000. Compute the combined leverage, and find its
impact on residual income if sales increases by 5%.
8. Due to a considerable risk inherent in a project costing an
initial cash outflow of Rs. 20,000 a firm decides to use
certainty equivalents to evaluate the project. The
certainty equivalents have been estimated to be 0.8, 0.7,
0.6, 0.4 in a period of 5 years. The risk free rate of
interest is 10%. The expected values of cash inflows are
given below:
Years Cash Inflows
1 Rs. 5,000
2 8,000
3 8,000
4 6,000
5 12,000
You are required to advise the firm whether its
management should accept the project.
SECTION B — × 15 60 marks)
Answer any FOUR questions.
All questions carry equal marks.
9. What factors are to be taken into account while
determining working capital requirements?
10. What do you understand by Dividend Policy? What are
the main determinants of dividend policy in a corporate
enterprise?
DE-896
3
SP 5
11. What do you understand by Simple Capital Structure and
Complex Capital Structure? Explain the Net Operating
Income Theory of Capital Structure planning.
12. The capital structure of a company as on 31st March is as
follows:
Equity capital: 6,00,000 equity shares
of Rs. 100 each Rs. 6.00 crores
Reserves and surplus Rs. 1.20 crores
12% Debentures of Rs. 100 each Rs. 1.80 crores
For the year ended 31st March, the company has paid
equity dividend at 24%. Dividend is likely to grow by
every year. Market Price of Equity Share is Rs. 600 per
share. Income tax rate applicable to the company is 30%.
You required to compute the current weighted average
cost of capital(WACC), the company has a plan to
raise a further Rs. 3 crores by way of long-term loan at
18% interest. If the loan is raised, the Market Price of
Equity Share is expected to fall to Rs. 500 per share.
What will be the new WACC of the company?
13. Company X and Company Y are in the same risk class,
and are identical in every fashion except that company X
uses Debt while company Y does not. The levered firm
has Rs. 9,00,000 debentures, carrying 10% rate of
interest. Both the firms earn 20% before interest and
taxes on their total assets of Rs. 15 lakhs. Assume perfect
capital market, rational investors, and so on: a tax rate of
15% for an all equity company.
compute the value of firm X and Y using the Net
Income(NI) approach,
also compute the value of each firms using the net
operating income approach.
DE-896
4
SP 5
14. A choice is to be made between two competing proposals
which require an equal investment of Rs. 50,000 and are
expected to generate net cash flows as under:
Project I Project II
End of year 25,000 10,000
End of year 15,000 12,000
End of year 10,000 18,000
End of year Nil 25,000
End of year 12,000 8,000
End of year 6,000 4,000
The cost of capital of the company is 10%. The following
are the present value factors at 10% per annum.
Years 1 2 3 4 5 6
PV of Re. 1 at 10% p.a. 0.909 0.826 0.751 0.683 0.621 0.564
Which project will you choose?
15. Calculate the degree of operating leverage degree of
financial leverage and the degree of combined leverage
for the following firms and interpret the results.
Particulars P Q R
Output(units) 3,00,000 75,000 5,00,000
Fixed cost(Rs.) 3,50,000 7,00,000 75,000
Unit variable cost(Rs.) 1.00 7.50 0.10
Interest expenses(Rs.) 25,000 40,000 Nil
Unit selling price(Rs.) 3.00 25.00 0.50