ANURAG GROUP OF INSTITUTIONS Venkatapur (V), Ghatkesar (M), R.R. Dist

School of Business Management (2014-16)

FINANCIAL MANAGEMENT COURSE FILE (A92003) TEACHING PLAN (2015-16)

Name of the Faculty: Ch. SivaPriya

S.NO TOPIC NO. OF

CLASSES

REFERENCES

UNIT-1 THE FINANCE FUNCTION

IM PANDEY,

“FINANCIAL

MANAGMENT”

&

M. Y KHAN,

PK JAIN

“FINANCIAL

MANGEMENT”

1. Definition, Nature & Scope, Goals of Finance Function 1

2. Evolution of Finance Function, Role in the Contemporary

Scenario

1

3. Maximizing Vs. Satisfying, Profit Vs Wealth Vs Welfare 1

4. The Agency Relationship and costs 1

5. Risk-Return Trade off, Concept of Time Value of Money 1

6. Future Value and Present Value 2

7. Basic Valuation Model 1

Total 8

UNIT -2 THE INVESTMENT DECISION

8 Investment Decision Process 1

9 Developing Cash Flow, Data for New Projects 1

10 Capital Budgeting Techniques – Traditional & DCF Methods 4

11 The NPV Vs IRR Debate, Approaches for Reconciliation 1

12 Capital Budgeting Decision and Risk & Uncertainty 1

13 Cost of Capital, Concept & Measurement of Cost of Capital 2

14 Debt Vs Equity, Cost if Equity, Preference shares 2

15 Cost of Retained Earnings, Weighted Average Cost of

Capital

2

16 Marginal Cost of Capital 2

17 Importance of Cost of Capital in Capital Budgeting Decisions 1

Total 17

UNIT-3 CAPITAL STRUCTURE DECISIONS

18 Capital Structure Vs Financial Structure 1

19 Financial Leverage, Operating Leverage, Composite

Leverage

3

20 EBIT-EPS Analysis 2

21 Indifference Point/ Break Even Analysis of Financial

Leverage

2

22 Capital Structure Theories –The Modigliani Miller Theory 1

23 NI Approach, NOI Approach, Traditional Theory – A

Critical Appraisal

2

Total 11

UNIT-4 DIVIDEND DECISIONS

24 Dividends and Value of the firm – Relevance of Dividends 1

CH.Siva Priya

25 Factors determining Dividend Policy – Dividend and

Valuation of the firm – The Basic Models

2

PRASANNA

CHANDRA

“FINANCIAL

MANAGEMENT

THORY AND

PRACTICE”

26 Declaration and Payment of Dividends 2

27 Bonus Shares, Right Issues, Share Splits, Major forms of

Dividends

28 Major theories of Dividends, MM Model, Gordon Model,

Walter Model and Litner Model

2

29 Dividend Policies of Indian Companies 1

Total 8

UNIT-5 A) WORKING CAPITAL MANAGEMENT

30 Definition, Net Working Capital, Gross Working Capital 1

31 Components of Working Capital, Importance, Determinants 1

32 Operating Cycle, Planning of Working Capital 2

33 Finance of Working Capital through Bank Finance and Trade

Credit

2

Total 6

UNIT – 5 B) MANAGEMENT OF CURRENT ASSETS

34 Management of Cash, Basic Strategies for Cash Management 1

35 Cash Budget, Cash Management Techniques/ Processes 1

34 Marketable Securities Analysis: Characteristics, Selection 2

35 Marketable Securities Alternatives; Management of

Receivable and Management of Inventory

2

Total 6

Total No. of Classes 56

UNIT – I

THE FINANCE FUNCION

SHORT ANSWER QUESTIONS

1. Define Finance Function

2. Time Value of Money

3. Agency Relationship Costs

4. Risk Return Trade off

5. Basic Valuation Model

LONG ANSWER QUESTIONS

1. Define Finance Function. Explain Nature & Scope of Finance Function

2. Explain the Evolution of Finance Function

3. Explain the new role of Finance Function in the contemporary Scenario

4. Explain the concept of Time Value of Money with Future and Present Value with suitable

Example

5. Distinguish between

a) Maximizing vs Satisfying

b) Profit Vs Wealth Vs Welfare

Unit – I

Case: The AnandNagar Electricity Copmany

The Anandnagar Electricity Board( AEB) has been operating under the ownership and control of the state

of Anandnagar since the creation of the state in 1961. The state government privatized AEB in 2000 by

selling it to a local business house that has interests in Pharmaceutical, financial service and energy. AEB

came to be known as the Anandnagar Electricity Company (AEC). Privatization was intended to pave

way to the company to improve the performance and raise much needed finances from the capital market.

The demand for electricity has always exceeded the supply, as the state government did not have enough

funds to spend on capital expenditure to create the required power generation capacities. AEC would be

now required to make sufficient investments to increase power generation capacity in order to meet ever

increasing demand for electricity. AEC management stated that being a private sector company, it shall

maximize shareholders return. At the time of its privatization, a large private sector financial institution

valued the company at Rs4000 million. The issue of ordinary shares raised the money. The merchant bank

division of the financial institution helped the public issue of ordinary shares, par values Rs 10 each, sold

at a premium of 100 per cent for Rs20 each. The issue was oversubscribed and on the very first day of

trading, the market price of share reached a value of Rs35.

AEC has been in operation for three years as a private sector company. The Table below provides select

financial and operation data of the company‟s operations for the period 2001-2004. The financial data for

2001 are for the last year of the government ownership of the company. As a private sector company,

AEC has paid dividend in accordance with the policy stated in the prospectus.

The Central Electricity Board regulates the prices and oversees the activities of the privatized electricity

companies. The demand for electricity in Anandnagar has grown at the rate if 4 percent per annum.

The Anandnagar Electicity Company: Key Financial and Operating Data for the year ending 31

March

2001 2002 2003 2004

Pub. Sector Pvt. Sector Pvt. Sector Pvt. Sector

Revenues 13,500 14,250 17,500 19,500

Operating Profit 810 1100 1790 2730

Taxes 160 200 300 400

Profit before depreciation & tax 900 960 1030 1190

Profit after Tax 650 900 1490 2330

Dividends 200 320 600 900

Wages and Salaries 3000 3000 2700 2600

Total Assets 3000 3600 4500 5750

Capital Expenditure 500 900 1750 2250

Debtors 6000 3200 3000 3600

Creditors 4500 2400 2300 2400

Director‟s commission 30 70 80 100

Employees (number) 32000 31400 30500 30100

P/E Ratio -- 10.5 12.0 11.5

Consumer Price Index 100 102.7 105.8 107.

Discussion Questions:

1. What changes, if any, do you expect in the objectives of the company after privatization and

why?

2. Who are the company‟s stakeholders? Has the company been able to fulfill their objectives? State

the additional information that you may need to answer this question.

UNIT- II

INVESTMENT DECISION

SHORT ANSWERQUESTIONS

1. What do you mean by investment?

2. What are the different types of capital budgeting decisions?

3. What is probability index

4. Distinguish between even cash flow and uneven cash flows

5. What is specific cost

6. Explain the concept of retained earnings.

7. Explain how to calculate cash flows.

8. A project requires a cash outlay of Rs.20, 000 and generates cash inflow of Rs.

8000,4000,7000 & 5000; during the next 4 years. What is the project paybackperiod?

LONG ANSWERQUESTIONS

1. Explain the need and importance of investment decisions.

2. Explain the importance and techniques of capital budgeting decisions.

3. One of the projects of a company is doing poorly and is being considered for

replacement. The projects ( A, B & C) are expected to require Rs 200,000 each, have an

estimated life of 5 years, 4 years & 3 years respectively and have no salvage value. The

required rate of return is 10%. The anticipated cash flows after taxes for the three projects is

as follows:-

Year CFAT’s(Rs)

A B C

1 50,000 80,000 100,000

2 50,000 80,000 100,000

3 50,000 80,000 10,000

4 50,000 30,000 -

5 190,000 - -

A. Rank each project applying the methods of pay back, ARR, NPV, IRR & PI.

B. Explain why the 5 capital budgeting systems yield conflicting answers.

C. Recommend the projects to be accepted and give reason

4. i) A company‟s debenture of the face value of Rs.100 bears an 8%coupon

rate.Debentures of this type currently yield 10%.

ii) What is the market price of debentures of the company?

iii) What would be the market price of the debentures if interest rises to 16% and drops to

12%.

iv) What would be the market price of the debentures in situation- if it is assumed that

debentures were originally having a 15 year maturity period in 4 years away from now?

v) Would you pay Rs.90 to purchase debentures specified in situation. Explain.

5. What makes risk important in the selection of projects? Explain briefly the various

methods of evaluating risky projects?

6. A firms after tax cost of capital of the specific sources is as follows:

Cost of debt-8%: cost of preference shares (including dividend tax) - 14%:

Cost of equity funds- 17%.

The following is the capital structure:-

Source Amount

Debt 300,000

Preference capital 200,000

Equity capital 500,000

10,00,000

Calculate the weighted average cost of capital using book value weights.

Unit – 2

Case: G.S. Petro pull company (GSPC)

GSPC is a fast growing profitable company. The company is situated in Western India. Its sales are

expected to grow about three times from Rs360 million in 2003-04 to Rs1100 million in 2001-05. The

company is considering of commissioning a 35km pipeline between two areas to carry gas to a state

electricity board. The project will cost Rs250 million. The pipeline will have a capacity of 205 MMSCM.

The company will enter into a contract with the state electricity board (SEB) to supply gas. The revenue

from the sale to SEB is expected to be Rs 120 million per annum. The pipe line will also be used for

transportation of LNG to other users in the area. This is expected to bring additional revenue of Rs 80

million per annum. The company management considers the useful life of the pipeline to be 20 years. The

financial manager estimates cash profit to sales ratio of 20 per cent annum for the first 12 yars of the

projects operations and 17 per cent per annum for the remaining life of the project. The project has no

salvage value. The project being in a backward area is exempt from paying any taxes. The company

requires a rate of return of 15 percent from the project.

Discussion Questions:

1. What is the projects payback and return on investment (ROI)

2. Compute project‟s NPV and IRR

3. Should the project be accepted? Why?

UNIT - III

CAPITAL STRUCTURE DECISIONS

SHORT ANSWER QUESTIONS

1. What is meant by the term leverage?

2. What are the different types of leverage?

3. Explain combined leverage.

4. What do you understand by NI approach?

5. List out the capital structure theories.

6. List out atleast two assumptions of Modigliani miller theory.

7. What is break even analysis?

8. What is indifference point?

LONG ANSWER QUESTIONS

1. Calculate the Operating Leverage, Financial Leverage and Combined Leverage from the

following data under situation I & II and Financial plans A & B.

Installed capacity - 4000 units.

Actual production and sales - 75% of the capacity.

Selling price Rs 30 per unit.

Variable cost Rs 15 per unit.

Fixed Cost situation i- 15,000

Situation ii- 20,000.

Capital structure:-

Particulars Financial plan A Financial plan B

Equity 10,000 15,000

Debt(0.2 interest) 10,000 5,000

20,000 20,000

[pg no 14.22 MY Khan]

2. Explain the importance and significance of operating and financial leverage analysis for a

financial executive in a corporate profit and financial structure planning.

3. The following figure relate to two companies:

Particulars P ltd Q ltd

Sales 500 1000

Variable costs 200 300

contribution 300 700

Fixed cost 150 400

EBIT 150 300

Interest 50 100

Profit before tax 100 200

You are required to calculate i) operating, combined & financial leverage for the two

companies. ii) Comment on the relative risk position of the firms.

4. What is meant by the concept financial risk? What is the relationship between leverage

and the cost of capital? Explain.

5. Explain briefly the view of traditional writers on the relationship between capital

structure and the value of a firm.

6. “The total value of a firm remains unchanged regardless of variations in its financing

mix” discusses the statement and point out the role of arbitraging and homemade

leverage.

7. Explain Modigliani-Miller approach.

Unit – 3

Case: Samrudh Company Limited

Samrudh Company Limited (SCL) is a public limited company, whose shares are listed on the

Ahmedabad Stock Exchange. The company produces and markets a wide range of well-known home use

products and high competition from small and medium size firms the sales of the company have grown

moderately. The company finances its activities employing both debt and equity. It follows an implicit

policy of not allowing its debt level to exceed the industry average. The company‟s current debt ratio is

not high in comparison with the industry average. However, the company is constrained by the terms and

conditions of debt.

At the end of March 2004, the management is worried as it is near violating the terms and conditions of

debt that it had borrowed from the Industrial Development Bank of India(IDBI) in 1998 were high. It had

raised the loan amount at 14 percent from IDBI to buy plant and machinery for expanding its business.

The loan is repayable in equal installments at par during 2008-08. There are three covenants attaching to

the loan from IDBI. These covenants are:

1. The company‟s book value debt-equity ratio should not exceed 1:1

2. The current ratio, defined as sum of stock, debtors and cash divided by the sum of creditors,

provisions and bank credit, shall be at least 1

3. The interest coverage ratio should be at least 3 times.

The current interest rates are very low. Banks and financial institutions have a lot of liquidity and log-

term loans are available at about 9.0 per cent rate of interest. The finance director argues the SCL should

take advantage of low interest rates. The company should refinance its existing debt by borrowing funds

at 9 percent from the banks. IDBI may not agree to the company‟s proposal of pre-payment unless it is

given some incentives. It will ask for redemption of principal at a premium of 11 per cent. The finance

director proposed to pay this premium by drawing down the company‟s surplus cash and negotiate more

flexible debt covenants with the new lender. He argues that since the interest rate comes down by five

percentage points, the 11% redemption premium will be recovered in a little over two years. He also

claims that the improved share is currently selling for Rs35.25. The average P/E ratio of the companies in

the same industry is 8.5

Assume that for income tax purposes, SCL will be able to charge the premium paid as expense in equal

annual installments from 2003-04 to 2007-08

Estimated Summarized Balance Sheet for Samrudh for Year Ending 31st March2004

(Rs in crore)

Assets and Liabilities Rs Rs Rs

Fixed Assets (Net):

Land 167.39

Buildings 186.91

Machinery & Equipments 468.26

822.56

Current Assets:

Stocks 83.70

Debtors 83.91

Cash 66.74

234.35

Current Liabilities:

Creditors 133.91

Provisions 100.44

234.35

Net Current Assets 0.0000

Net Assets 822.56

Financed by:

Ordinary Shares (Rs10 Par value) 217.00

Reserves 185.56

Share holder‟s funds 402.56

Borrowings:

14% IDBI Loan 420.00

822.56

Estimated Profit And Loss Account for the Year Ended 31st March 2004

Rs. Crore

Sales 771.75

Less: Variable Cost 355.96

Less: Fixed Cost 170.60

Profit before interest and tax 235.19

Less: Interest 58.80

Profit before tax 176.39

Less: Tax@35% 61.74

Profit after tax 114.65

Discussion Questions:

1. How close is SCL to violating the loan covenants?

2. If SCL wants to refinance, which loan covenants will it have to renegotiate with the new lender?

Would the new lender agree

3. Should SCL refinance its existing debt

4. Assuming that the market was not expecting a refinancing, estimate the impact on SCL‟s share

price if it decides to refinance

UNIT IV

DIVIDEND DECISION

SHORT ANSWER QUESTIONS

1. Name the twoTheories of Dividend.

2. Enlist the factors that influence the dividend policy of a firm.

3. What is the significance of scrip dividend?

4. What is dividend pay-out ratio?

5. Bonus issues vs. Stock Split.

6. Write a short note on dividend policy in practice

7. What do you mean by rights issue

8. Write a short note on buy back of shares.

LONG ANSWER QUESTIONS

1. How far do you agree that Dividends are Irrelevant?

2. Explain the MM hypothesis theory and Walter's approach to dividends.

3. Explain the factors which influence the dividend decision of a firm.

4. The asbestos company belongs to a risk class of which the appropriate capitalization rate

is 10%. It currently has 100,000 shares selling at Rs. 100 each. The firm is contemplating

the declaration of a Rs. 6/- dividend at the end of the current fiscal year, which has just

began. Answer the following questions based on the MM model and the assumption of no

taxes:

What will be the price of the shares at the end of the year if dividends are not declared and

if dividends are declared?

5. Explain the various forms of dividends

Unit – 4

Case: A.C. Company Ltd

A.C. Company Ltd. has improved its profitability in 2003-04, and is on a growth path after poor

performance in the preceding two years. The following is the summary of the company‟s operations

during preceding three years:

The company‟s focus in 2003-04 was on cost reduction and funds management rather than growth in

sales. Operating and interest costs fell by 3.3 per cent and 60 per cent respectively. According to the

company‟s managing director, „the turnover in 2003-04 dipped because of a drop in volumes. However,

the sales are not strictly comparable because in the previous year, there was a large order worth Rs 15

crore from a public sector oil company. On the other hand, the net profit growth was higher borrowings

and lowered the financial charges. “The company was able to bring down its inventory holding period to

46 days from 81 days and debtors holding period to 95 days from 119 days. The company is changing its

debt policy to a conservative policy. The debt-equity ratio of 1:8:1 in 2001-02 has been brought down to

0.5:1 in 2003-04.

A.C. COMPANY LTD: OPERATING PERFORMANCE

(Rs in Crore)

2001-02 2002-03 2003-04

Sales 53.4 75.6 69.5

Gross Profit 3.4 4.5 12.3

Net Profit 1.3 1.8 5.9

EPS (Rs) 1.8 1.8 8.1

The prospectus of the Company for increased business in 2004-05 is estimated to be good. According to

the managing director, “the general industrial activity as such has picked up which should result in a

better demand for the company‟s products from sectors such as automobiles, mining and chemicals.

“Experts think that compressor industry will grow at 10 per cent in 2004-05. The company is anticipating

sales growth of 15-20 percent in 2004-05. The company‟s strategy of cost reduction and improving

marketing efficiency will continue.

The company operates in the compressor industry and drilling and mining equipment industry. It is

number two in the compressor industry after Inger Soll Rand. The product profile of the company in the

years has shifted in favor of the compressor sector.

In 2003-04 the company‟s gross block increased to Rs22 crore from Rs 20 Crore. The company has

planned for an investment of Rs 5 crore in its Poona factory. The company‟s share enjoys good liquidity

and its P/E ratio is 32. In the expectation of good performance, the company‟s share price started since

January 2004, and sharply increases to Rs285 just before the budget from Rs190 in January. The current

price (after technical correction) is around Rs 225-35.

In the last two years, the company paid a dividend of 10 percent. The company was wondering paid a

dividend of 10 per cent. The company was wondering if it should declare a higher dividend in 200-04

Discussion Questions:

1. Evaluate the company‟s financial condition.

2. Recommend the dividends to be paid by A.C. Company Ltd. Justify your advise

UNIT –V

WORKING CAPITAL MANAEMENT & MANAGEMENT OF CURRNET ASSETS

SHORT ANSWER QUESTIONS

1. Working capital concept

2. Operating Cycle

3. List out atleast five sources of Working Capital Financing.

4. List out the methods of estimating Working Capital Requirement.

5. What are the motives of Holding Cash in Hand?

6. Factors considered for making an Investment in Marketable Securities.

7. Inventory.

8. Miller and or model.

9. EOQ concept

10. VED analysis.

LONG ANSWER QUESTIONS

1. Explain Cash Management Models.

2. Explain the tools and techniques of inventory management.

3. Define the term working capital. What factors you take into consideration in estimating

the working capital needs of a concern

4. Explain the need and determinants of Working Capital in Business.

5. What do you understand by cash management? How can it be undertaken?

6. Explain the various methods of investing the surplus cash. What criteria should a firm use

in investing in Marketable Securities

7. From the following forecast of income and expenditure Prepare a cash budget for the

months of Jan to April.

Months/expenses Sales

(credit)

Purchases

(credit)

wages Mfg

expenses

Admin

expenses

Selling

Expenses

November 30,000 15,000 3000 1150 1060 500

December 35,000 20,000 3200 1225 1040 550

January 25,000 15,000 2500 990 1100 600

February 30,000 20,000 3000 1050 1150 620

March 35,000 22,500 2400 1100 1220 570

April 40,000 25,000 2600 1200 1180 710

Unit – 5

Case: Bright Paints Limited

Bright paints Limited, situated in Punjab, is a large whole – seller of industrial paints. The company sells

paints mostly to small retailers in cities and towns of Northern states. About 10 percent of sales are made

directly to the public on cash basis. For meeting its working capital requirement, the company has a cash

credit limited form State Bank of India. However, it has been recently facing a liquidity problem. In its

cash credit account, the company has an overdraft balance of Rs 24 lakh at the end of March 2004. The

managing director of the company is quite concerned about its adverse cash position. He discussed the

matter with his finance manager, and asked him to make an assessment of the company‟s cash situation

for the next six months. The finance manager‟s staff made the following estimates of revenues and

expenditures for the next six months.

The company has a plan to buy two delivery vans in June for Rs 8 lakh. It will pay taxes in June and

September. The corporate tax rate is 35 per cent. The company sells to retailers on two months‟ credit

terms. Debtors at the end of March are Rs 500 lakh. The company makes more purchases in the months of

April, May and June for high demands in the next three months. Suppliers extend one month‟s credit to

the company. At the beginning of March, creditors were Rs 630 lakh.

(Rs in lakh)

April May June July Aug. Sep.

Expected sales 1000 1400 1750 2180 2400 2700

Purchases 1250 1700 2000 1800 1700 1700

Advertising 170 190 220 250 350 380

Rent 50 50 50 50 50 50

Depreciation 12 12 12 12 12 12

Wages 180 180 180 180 190 190

Sundry Exp 260 260 260 270 280 280

Discussion Questions:

1. Prepare a cash flow forecast for Bright Paints Limited for the six months. What are the benefits of

preparing a cash flow forecast to the company?

2. What do you think are the problems for the company during the next six months? What remedies

do you suggest?

Code: 07MB202

MBA – II Semester Supplementary Examinations, March/April 2012 FINANCIAL MANAGEMENT (For

students admitted in 2008 only) Time: 3 hours Max Marks: 60 Answer any FIVE questions

All questions carry equal marks

***** 1 Define the scope of Financial Management. What role should the Finance Manager

play in a modern enterprise?

2 XYZ Ltd is looking to take up the project. It has the following information:

Income statement(Rs.in thousands)

C1 C2 C3

Cash revenue 16 14 12

Cash expenses 8 7 6

Gross profit 8 7 6

Depreciation 4 4 4

Net profit 4 3 2 The initial investment of the project is estimated as Rs. 12,000.

(a) Calculate the project’s accounting rate of return. (b) Of it is found that the initial investment will be Rs. 9,000 and cash expenses will be

more by Rs. 1,000 each year, what will be the project’s accounting rate of return.

Also calculate the project’s NPV if the cost of capital is 9%.

3 What is cost of capital? And what are the components of cost of capital?

4 What is capital structure? What are the determinants of capital structure?

5 Explain Walter’s model of dividend policy.

6 What is working capital? What are the determinants of working capital?

7 Explain the three principal motives for holding cash.

8 What are ordering and carrying costs? What is their role in inventory control?

FINANCIAL MANAGEMENT

MODEL QUESTION PAPER

YEAR 2015

SHORT NOTES

1. What do you mean by investment?

2. What are the different types of capital budgeting decisions?

3. Distinguish between even cash flow and uneven cash flows

4. A project requires a cash outlay of Rs.20, 000 and generates cash inflow of Rs. 8000,

4000, 7000 & 5000; during the next 4 years. What is the project payback period.

5. What is break even analysis?

6. What is indifference point?

7. What is the significance of scrip dividend?

8. What is dividend pay-out ratio?

9. Working capital concept

10. Operating cycle

ESSAY QUESTIONS:-

11. a. Explain the functions of financial manager.

(OR)

b. Explain the nature and scope of financial management.

12. a. Explain the importance and techniques of capital budgeting decisions.

(OR)

b. One of the projects of a company is doing poorly and is being considered for replacement.

The projects (A, B & C) are expected to require Rs 200,000 each, have an estimated life of 5

years, 4 years & 3 years respectively and have no salvage value. The required rate of return is

10%. The anticipated cash flows after taxes for the three projects is as follows:-

Year CFAT’s(Rs)

A B C

1 50,000 80,000 100,000

2 50,000 80,000 100,000

3 50,000 80,000 10,000

4 50,000 30,000 -

5 190,000 - -

a. Rank each project applying the methods of pay back, ARR, NPV, IRR & PI.

b. Explain why the 5 capital budgeting systems yield conflicting answers.

c. Recommend the projects to be accepted and give reasons.

13. a. Calculate the operating leverage, financial leverage and combined leverage from the

following data under situation i&ii and financial plans A & B.

Installed capacity - 4000 units.

Actual production and sales - 75% of the capacity.

Selling price Rs 30 per unit.

Variable cost Rs 15 per unit.

Fixed Cost situation i- 15,000

Situation ii- 20,000.

Capital structure:-

Particulars Financial plan A Financial plan B

Equity 10,000 15,000

Debt(0.2 interest) 10,000 5,000

20,000 20,000

(OR)

b. Explain the importance and significance of operating and financial leverage analysis for a

financial executive in a corporate profit and financial structure planning.

14. a. Explain the MM hypothesis theory and Walter's approach to dividends.

(OR)

b.The asbestos company belongs to a risk class of which the appropriate capitalization

rate is 10%. It currently has 100,000 shares selling at Rs. 100 each. The firm is

contemplating the declaration of a Rs. 6/- dividend at the end of the current fiscal year,

which has just began. Answer the following questions based on the MM model and the

assumption of no taxes:

a. what will be the price of the shares at the end of the year if dividends are not declared

and if dividends are declared.

15. a. From the following forecast of income and expenditure prepare a cash budget for the

months of Jan to April.

Months/expenses Sales

(credit)

Purchases

(credit)

wages Mfg

expenses

Admin

expenses

Selling

Expenses

November 30,000 15,000 3000 1150 1060 500

December 35,000 20,000 3200 1225 1040 550

January 25,000 15,000 2500 990 1100 600

February 30,000 20,000 3000 1050 1150 620

March 35,000 22,500 2400 1100 1220 570

April 40,000 25,000 2600 1200 1180 710

(OR)

b. Explain Cash Management Models.