Financial Management 1

MODEL PAPER-ISRI BALAJI SOCIETY

PGDM - SECOND SEMESTER EXAMINATIONBATCH: 2011 – 2013

FINANCIAL MANAGEMENT - 1 Time :

3Hrs Marks: 100

Instructions

1. Attempt any 3 questions from Q1 to Q5 [ 22 Marks each]2. Q6 is compulsory and carries 24 Marks[ 4 *6]3. Use of calculator is allowed4. If a question has A and B part, both need to be attempted.

Q1- Given below are the financial statements of SAFAL limited for the year 2006-07, Total number of shares outstanding for the firm is 2.69 crores. In view of the growth opportunities in the near future the firm has been maintaining a policy of 45 % payout

Summarized P and L Account of SAFAL enterprises for the year ended 31st March

Particulars 2006 [ Crores] 2007 [ crores]Sales 132.00 144.00Other income 12.00 15.00Cost of Sales 102.96 110.02

Gross profit 29.04 33.98Operating expenses:Administration 12.44 14.36Selling and distribution 4.42 5.36

PBIT 24.18 29.26Interest 3.00 4.01

Profit before tax - PBT 21.18 25.26Provision for taxes 7.94 9.47

Profit after Tax - PAT 13.24 15.79

Balance sheet of SAFAL enterprises for the year ended 31st March

31/03/06 [ Crores] 31/03/07 [ crores]Assets

Net Fixed assets 31.25 37.50Current assets :

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Inventory 14.56 16.64Accounts receivable 13.20 15.43Cash 1.50 1.75Less : Current Liabilities 8.55 11.25

Net Current Assets 20.71 22.57Total assets 51.96 60.07

LiabilitiesShare capital 27.00 27.00Reserves and surplus 4.96 6.36Debt – Long term 20.00 26.71

Total Liabilities 51.96 60.07

As a financial analyst you are required to analyze and comment on the profitability and the liquidity position of the business by comparing the ratios calculated for 2006 against the ratios

calculated for 2007.

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Q2- While preparing a project report on behalf of a client you have collected the following facts. Estimate the net working capital required for the project . Add 10 % for contingencies

Particulars Amount per unitEstimated cost per unit of production :Raw material Rs 80Direct labour Rs 30Overheads [ Exclusive of depreciation , Rs 10 per unit)

Rs 60

Total Cost 170Additional Information

Selling price – Rs 200 per unit

Level of activity – 1, 04,000 Units of production per annum

Raw materials in stock, average 4 weeks

Work in progress [assume 50 % completion in case of conversions costs and 100 % completion in case of materials] – average 2 weeks

Finished goods in stock – average 4 weeks

Credit allowed by suppliers – average 4 weeks

Credit allowed to debtors – average 8 weeks

Lag in payment of wages – average 1.5 weeks

2

Cash at bank – Rs 25000

A year has 52 weeks. All sales are on credit basis only

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Q3. The following particulars pertain to C ltd:

Profit and Loss Account for the year ended 31st March 1998

Sales revenue 32,00,000Less : Cost of Goods sold 20,00,000

12,00,000Add: Government compensation for loss in riots

50,000

12,50,000Less: Operating expenses 7,90,000Less: Interest on Debentures 15,000Less: Depreciation 2,10,000Less: Cost of issue of debentures written off 1,000Profit before tax 2,34,000Less – Tax – provision 92,000Profit after Tax 1,42,000

Other InformationAs on 31/03/1997 As on 31/03/1998

Inventories 1.80,000 2,20,000Debtors 40,000 38,000Bills receivable 30,000 55,000Cash at bank 1,02,000 2,48,000Creditors 78,000 95,000Bills payable 20,000 15,000Outstanding expenses 31,000 44,000

You are also informed that the following important transactions have taken place during the year ended 31.03.1998:

1. Fully paid equity shares of the face value of Rs 2,00,000 were issued at a premium of 20 %

2. 10 % debentures for Rs 3,00,000 were redeemed at a premium of 2 %3. Land was purchased for Rs 1,50,000 and the consideration was discharged by the

allotment to the vendor of zero percent convertible debentures for the amount 4. Dividend for the year ended 31.03 .1997 amounting to Rs 1,00,000 was paid 5. Tax paid during the year totaled Rs 95000.

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You are required to prepare cash flow statement for the year ended 31.03.1998 [Preferably as per AS-3 Format]

Q4-Pay early limited is planning a major investment to expand its current manufacturing capacity. The cash outflow for the same is expected to be Rs 350 Lakhs. The finance department of the company has projected following cash flows over the next 7 years which is considered to be the life of the project

Year 1- 100 Lakhs, Year 2- 150 lakhs, Year 3 – 400 Lakhs, Year 4- 450 Lakhs, Year 5- 300 Lakhs, Year 6- 250 Lakhs, year 7 – 50 Lakhs

1. What is the payback period of the project?2. What is the discounted payback period of the project assuming that the cost of capital is

15 %3. What is the NPV and PI of the project assuming that the cost of capital is 13 %

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Q5A- What is operating leverage and financial leverage .Explain in detail the impact of leverages on the earning per share of a company?

Q5B- Describe and elaborate on the relationship of finance with other functions of business. Provide suitable examples to illustrate your point.

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Q6- Short Notes [Any 4] – 4 * 6=24

1. Turnover ratios and their significance2. Operating cycle 3. Importance of the capital budgeting decision 4. Factors affecting dividend policy 5. Payback period method and its limitations

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MODEL PAPER-IISRI BALAJI SOCIETY

PGDM - SECOND SEMESTER EXAMINATIONBATCH: 2011 – 2013

FINANCIAL MANAGEMENT - 1 Time :

3Hrs Marks: 100

Instructions

5. Attempt any 3 questions from Q1 to Q5 [ 22 Marks each]

6. Q6 is compulsory and carries 24 marks [ 4*6]

7. Use of calculator is allowed

8. If a question has A and B parts. Both need to be attempted.

Q1- You are presented with the following figures prepared from the balance sheet of Fair dealings limited.

Particulars Year 1 Year 2 Year 3

Assets

Debtors 30,000 50,000 60,000

Stock 50,000 50,000 70,000

Plant 12,000 15,000 20,000

Building 10,000 10,000 10,000

1,02,000 1,25,000 1,60,000

Liabilities

Bank 11,000 26,000 39,000

Trade creditors 25,000 30,000 50,000

Profit and loss account 10,000 13,000 15,000

Paid up capital [ Rs 10 per share , Rs 7.50 paid up]

56,000 56,000 56,000

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1,02,000 1,25,000 1,60,000

Sales 1,00,000 1,50,000 1,50,000

Gross profit 25,000 30,000 25,000

Net Profit 5,000 7,000 5,000

Dividend paid 4,000 4,000 3,000

The opening stock at the beginning of year 1 was Rs 4,000. You are required to calculate in respect of each of the year, the ratios and comment on the changes in the profitability, liquidity and financial position of the company.

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Q2- Beta Limited and Theta Limited operate in the same line of business of manufacture of rubber components. However their cost structure and financial structures differ substantially, an analysis of their financial performance has revealed the following data:

Rs [ Lakh] Beta Limited Theta Limited

Sales 750 1100

Variable cost 300 500

Fixed cost 250 200

Interest 75 80

1. Find out the operating leverage and the financial leverage for both

2. What is your interpretation of the same?

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Q3-A company is planning to invest in a new project. The cost of the project is Rs 70,000 and the life of the project is 5 years with a salvage value of Rs 5000 at the end of the life of the project. .The tax rate is 25 % and the firm uses SLM method of depreciation. The estimated Profit before tax [PBT] from the new project is as follows

Year 1- Rs 15,000 Year 2- Rs 20,000 , Year 3- Rs 5000, Year 4- Rs 10,000 and Year 5- Rs 15000

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You are required to calculate the Net Present value and the Profitability Index at 10 % discounting rate and advise the company whether the project should be accepted or not.

Q4- The balance sheet of A company ltd as on 31.3 .1989 is as under:-

Liabilities Rs Assets RsEquity share capital 1,00,000 Fixed Assets 2,50,000

Less – Dep 80,000 1,70,000

14 % Preference share capital

50,000 Stock in trade 30,000

General reserve 20,000 Sundry debtors 40,00012 % Debentures 30,000 Bank 10,000Current Liabilities 50,000

2,50,000 2,50,000

The company wishes to forecast the balance sheet as on 31.3. 1990.

The following additional particulars are given below

1. Fixed assets costing Rs 50,000 have been installed on 1.4.1989, but the payment will be made on 31.3.1990

2. The fixed assets turnover ratio on the basis of the gross value of the fixed assets would be 1.53. The stock turnover ratio would be 14.4 [ Calculated on the basis of the average stock]4. Debtors would be 1/9 of sales5. Creditors would be 1/5 of the material consumed 6. In March 1990 , a dividend of 10 % on equity capital would be paid 7. Rs 25000 , 12 % debentures have been issued on 01.04.19898. The breakup of the cost profit would be as follows :-

Materials – 40 %Labour – 25 %

Manufacturing expense- 10 %Office and selling expense- 10 %

Depreciation- 5 %Profit – 10 %

Prepare the forecasted balance sheet as on 31.3.1990 and show the following resultant ratios1. Current Ratio2. Fixed assets/ Net worth ratio3. Debt – equity ratio

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Q5A- What are the factors affecting the dividend policy of the company? Also explain the legal and procedural requirements to be fulfilled by the company at the time of payment of dividend.

Q5B- Explain the various form of Business organization in brief.

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Q6- Short Notes [Any 4] – 4 * 6=24

1. The capital structure decision

2. Credit rating

3. Long term solvency ratios

4. Difference between cash flow and funds flow statement

5. Sources of working capital

8

MODEL PAPER-IIISRI BALAJI SOCIETY

PGDM-SECOND SEMESTER EXAMINATIONBATCH: 2011-2013

FINANCIAL MANAGEMENT - I

Time: 3Hrs Marks:100

Instructions: 1. Question no. seven is compulsory.2. Attempt any five out of the remaining.

Q1 . A company is considering the possibility of manufacturing a particular component which at is being bougt from outside .The manufacture of the component would call for an investment of Rs 750000 in a new machine besides an additional investment of Rs 50000 in working capital . The life of the machine would be 10 years with a salvage, value of Rs 50000. The estimated saving(before tax) would be Rs 180000 p.a. The income tax rate is 50%. The company ‘s required rate of return is 10%. Department is considered on straight line system.

Q2. Raju Brother Pvt. Ltd sells googs on a gross profit of 25%. Depreciation is cost of the production. The following are the annual figures give to you. Rs Sales (two months credit) 18,00,000 Material consumed (one months credit) 4,50,000 Wages paid (one month lag in payment) 3,60,000 Administration expenses 1,20,000 (one month lag in payment) Sales promotion expenses 60,000 (paid quarterly in advance) Income tax payable in 4 equal instalment of one falls in the next year Cash manufacturing expenses 4,80,000(one month lag in payment) The payment keeps one month’s stock each of raw materials and finished goods. It also keeps Rs.100000 in cash. You are required to estimate the working capital requirement of the company on cash basis assuming 15% safety margin

Q 3Using the following information, complete the balance sheet of XYZ Ltd.Long –term Debit to net worth 0.5 to 1

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Total Assets turnover 2.5 Times Averages collection period ½ monthInventory turnover 9 monthsGross Profit margin 10%Acid test ratio 1;1

Liabilities Rs. Assets Rs

Equity share CapitalRetained EarningsLong- term debtCreditors

1,00,000

1,00,000

-

1,00,000

Fixed assets

Inventory

Debtors

-

-

-

-

Q 4 A company’s capital structure consists of the following:

Equity share of Rs. 100 eachRetained earnings9% Preference shares7 % debentures

20 lakh 10 lakh12 lakh 8 lakh

Total 50 lakh

The company earns 12% on its capital .the income tax rate is 50%. The company requires a sum of Rs 25 lakh to finance its expansion programe for which following alternatives to it.

i. Issue of 20,000 equity shares at a premium of Rs.25 per share.ii. Issue of 10% preference shares.

iii. Issue of 8%. Debentures.It is estimated that the P/E ratios in the cases of equity, preference and debentures financing would be 21.4,17 and 15.7 respectively .

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Q 5.From the following, prepare Income statement of company

A, B and C. Briefly on each company’s performance.

Particulars A B C

1. Financial leverage2. Interest (Rs.)

3. Operating leverage

4. Variable cost as % to sales

5. Tax rate

3-1

200

5-1

66 2/3%

45%

4-1

300

6-1

75%

45%

2-1

1,000

2-1

50%

45%

Q6 .

A company capital structure consists of the following

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Rs.

Equity shares of Rs. 100 each

Retained earnings

9% Preference share

7 % debenture

20 lakhs

10 lakhs

12 lakhs

8 lakhs

Total 50 lakhs

The company earns 12% on capital. The income tax is 50% . the company requires sum of Rs. 25 lakhs to finance expansion programme for whoch following alternatives are available to it:

i. Issue of 20,000 equity shares at a premium of Rs. 25 per share.ii. Issue of 10% preference share .

iii. Issue of 8 % debentures.It is estimated tht the P/E ratio in then case of equity preference and debenture financing would be 21.4, 17 and 15.7 respectively . which of the three financing alternative would you recommend and why?

Q .7 Write Short notes on / Explain the following: ( any four)

a) Liquidity ratios b) Profitability ratios c) Solving ratiosd) Return on capital employed e) capital gearing ratio

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12


Q1 . ‘ X’ Ltd , is considering the purchase of new machine .Two alternatives are available having a cost price Rs. 200000 (two lakhs) each. The following inflows are expected during the five years. Life of both the machines are 5 years.

Year machine A Machine B1 20,000 60,0002 60,000 80,0003 80,000 1,00,0004 1,20,000 60,0005 80,000 40,000The company is expecting 10% returns on its capital . the net present value of Rs.1 @10 % are given as follows:

1st Year 0.9092nd Year 0.8263rd Year 0.7514th Year 0.6835th Year 0.620You are required to appreciate the proposal on the basis of :

a. Pay –back period method b. Average rate of return method c. Net present value method

Q 2. X Ltd., sells goods at a gross profit of 25%, not counting depreciation as part of the cost of goods sold. The annual figures are as follows ; Rs Domestic sales (1 month credit) 12,00,000Export sales (3 months credit with salesprice 10% below domestic price) 5,40,000Materials used (2 months credit) 4,50,000Depreciation on fixed assets 60,000

Wages paid ½ month in arrears 3,60,000Office expenses paid 1 month in arrears 1,20,000Sales expenses payable quarterly in advance 60,000Income tax payable in four installments of 1,50,000Which one Falls due in the next financial year

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The company normally keeps one month’s stock of raw materialand finished goods and beliving in not utilizing Rs.1,00,000 available to it, including overdraft imit of Rs.50,000

Q 3. With the help of the following ratios draw the Balance sheet of the company for the year 1998.Current ratio 2.5Liquidity ratio 1.5Net working, capital Rs. 3,00,000Stock turnover ratio(Cost of sales/Closing stock) 6 timesGross profit ratio 20%Fixed assets turnover ratio(on cost of sales) 2 timesDebit Collection Period 2 monthsFixed assets to shareholders net worth ` 0.80Reserve and Surplus to capital 0.50

Q 4.

Aries limited wishes to raise additional finance of Rs . 10 lakhs for meeting its investment plans . it has Rs. 2,10,000 in the form of retained earnings available for investment purpose. The following are the details :

1. Debt /Equity mix 30%/70%2. Cost of debt 10%(before tax) up to Rs. 1,80,000

3. Beyond Rs.1,80,000 16%( before tax )4. Dividend payout 50% of earnings5. Expected growth rate in dividend 10%6. Current market price per share Rs.447. Tax rate 50%

You are required :

a) To determine the pattern for raising the additional financeb) To determine the post-tax average cost of additional debtc) To determine the post-tax average cost of retained earnings and cost of equity

and d) Complete the over all weighted averages after tax cost of additional finance.

Q5.

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Calculate the operating leverage , financial leverage and combined leverage from the following data under situation I and II and Financial plan A and 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

Under situation I Rs. 15,000

Under situation II Rs. 20,000

Capital structure

Q

6.The following are the Balance sheets as of Unique ltd.

Liabilities 1.1.96 31.12.96 Assets 1.1.96 31.13.96

Creditors

Outstanding Exps.

5% debenture

(Rs.100 each)

Depreciation fund

1,63000

13,000

90,000

40,000.

1,46,000

22,000

70,000

44,000

Cash@ bank

Stock

Debtors

Prepaid Exps.

50,000

2,02,000

77,000

1,000

40,000

1,90,000

73,000

2,000

15

Financial plan

A (Rs.) B (Rs.)

Equity

Debt (Rate of interest at 200%)

10,000

10,000

15,000

5,000

20,000 20,000

Capital Reserves

Profit & loss a/c

Equity share capital

6,000

10,000

1,80,000

7,800

15,200

1,80,000

Land /Bldg.

Machinery

1,00,000

72,000

1,00,000

80,000

5,02,000 4,85,000 5,02,000 4,85,000

The following additional information is also available:

a) 10% dividend on equity share capital was paid in cash .b) Old Machinery costing Rs.12,000 was sold for Rs.4,000 and accumulated depreciation on

that was Rs.6,000.c) 5% debenture of Rs.20,000 were redeemed by purchase from open market at Rs.96 per

debenture , profit on this redemption was transferred to capital reserves.

Prepare fund flow statement

Q 7. Write Short notes on / Explain the following: ( Any four)

(a) Trading on equity

(b) Financial and operational leverage

(c) Weighted average cost of capital

(d) Optimum capital structure

(e) Components of working capital

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16

.Q1. After conducting a survey that cost Rs.300000 , X Ltd .., decided to undertake a project for putting a new product in the market . The Comoany’s cut off rate is 12% . It was estimated that the project would have a life of 5 years . The project would cost Rs .60,00,000 in plant and machinery in addition to working capital of Rs. 15,00,000. The machine was no scrap value at the end of 5 years. After providing depreciation on straight line basis, profits after tax were estimated as follows

Years Rs 1 6,00,000 2 10,00,000 3 26,00,000 4 10,00,000 5 8,00,000 The present value factor @ 12% per annum are given below:1st year 0.87292nd year 0.79723rd year 0.71184th year 0.63555th year 0.5674

Q2. A proforma cost sheet of a company provides the following particurals ; Element of cost Amount per unit Raw material 80 Direct labour 30 Overheads 60 Total cost 170 Profit 30 Selling price 200The following further particulars are available;Raw materials are in stock on average one month. Materials are in process on an average half month. Finished goods are in stock on an average one month.Credit allowed by suppliers is one month. Credit allowed to debtors is two months. Lag in payment of wages is 1.5 weeks. Lag in payment of overhead expenses is one month. One fourth of the output is sold against cash. Cash on hand and bank is expected to be Rs.25,000.You are required to prepare a statement showing the working capital needed to finance a level of activity of 1,04,000 units of production.You may be assume that production is carried on evenly throughout the year, wages and overheads accure similarly and a time period of 4 weeks is equivalent to a month.

Q3. From the following information, you are required to prepare Balance sheet of A ltd. as on 30th September 1995.

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Current ratio 1.8;1 Working capital Rs.40,000

Liquid ratio 1.5:1Fixed asset to shareholders equity 90%

Gross profit % 25%Net Profit to share capital 10%

Share capital Rs.4,00,000Stock turnover ratio (on cost of goods sold) 10 timesAverages rate of outstanding for the year 54 year On 30th .september 1995, current assets including stock /debtors and bank balance , Liabilities include share capital and current liabilities and Assets include Fixed assets current assets and development expenditure (not written off so far).

Q4.

XYZ & Co. has the following capital structure as on 31st December :

Rs.

11% debentures10% preference shares4,000 equity shares of Rs.100 each

5,00,000

1,00,000

4,00,000

10,00,000

Equity shares are quoted at Rs.102, and it is expected that the company will declare a dividend of Rs. 10 per share at the of the current year. The dividend is expected to grow at Rs.10% for the next 5 years. The company’s tax rate is 50%.

a. Calculate the cost of equity capital and weighted averages cost of capital.b. Assuming the company can raise additional debentures for Rs. 3 lakhs at 12%.

Calculate the revised weighted averages codt of capital if the resultant charges:

i. Increase in dividend rate from 10 to 12%ii. Reduction in growth rate from 10 to 8%

iii. Fall in market price of shares from Rs.108 to 92.

Q5.

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Goodshape company has currently , an ordinary share capital of Rs. 25 lakhs, consisting of 25,000 share of Rs.100 each. The management is planning to raise another Rs.20 lakhs to finance major programme of expansion through one of four possible financing plans . the plans are:

i. Entirely through ordinary shares.ii. Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through long-term borrowing at 8

percent interest per annum.iii. Rs. 5 lakhs through ordinary shares and Rs.15 lakhs through long-term borrowing at 9%

interest per annum.iv. Rs . 10 lakhs through ordinary shares and Rs.15 lakhs through preference shares with 5

percent dividend .The company’s expected earnings before interest and taxes (EBIT) will be Rs.8 lakhs .Assuming a corporate tax rate of 50%. Determine the earnings per share (EPS) in each alternative and comment on the implication of financial leverage.

Q6.

Balance sheets of X and Y Co, on 1.1.1987 and 31.12.1987 were as follows:

During the year , a machine costing Rs.10,000 (Accumulated depreciation Rs.3,000) was sold for Rs.5,000.

The provision for depreciation against machinery as on 1.1.87 was Rs.25,000 and on 31.12.87 it was Rs.40,000. Net profit for the year 1987 amounted to Rs.45,000. You are required to prepare Cash Flow statement.

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Liabilities 1.1.87

Rs .

31.12.87

Rs.

Creditors

Mrs. X’s loan

Loan from bank

Capital

40,000

25,000

40,000

1,25,000

44,000

-

50,000

1,53,000

2,30,000 2,470,000

Assets 1.1.87

Rs .

31.12.87

Rs .

Cash

Debtors

Stock

Machinery

Land

Building

10,000

30,000

35,000

80,000

40,000

35,000

7,000

50,000

25,000

55,000

50,000

60,000

2,30,000 2,47,000

Q 7.Write Short notes on / Explain the following: any four

a) Importance of working capital b) Net present valuec) Pay book period d) Working capital cyclee) Profitability Index

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Q 1.X ltd.., has machine having an additional life of years which cost Rs.1,00,000 and which has a book value of Rs. 40,000. A new machine costing Rs. 2,00,000 is available. Though its capacity is the same as that of the old machine , it will mean a saving in variable costs to the extent of Rs. 70,000 per annum. The life of the machine will be 5 years at the end of which it will have a scrap value of Rs.20,000. The rate of income tax is 35% and X Ltd.., does not make an investment, if it yields less than 12%. The old machine, if sold, will fetch Rs.10,000.

Q 2. The board of directors of Nanak Engineering Company private ltd.., request you to prepare statement showing the working capital requirements for a level of activity at 1,56,000 units of production.

The following information is available for your calculation. Cost per unit (Rs)A) Raw material 90 Direct labour 40 Overheads 75 Total 205 Profit 60 Selling price per unit 265

i. B) Raw material are in stock, on average,for one month.ii. Materials are in process, (50% complete) on average for 4 weeks.

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iii. Finished goods are stock, on average ,for one month.iv. Credit allowed by suppliers is one monthv. Time lag in payment from debtors is 2 months.

vi. Average lag in payment of wages is 1 ½ weeks. vii. Average lag in payment of overheads is one month.

20% of the output is sold against cash. Cash in hand and bank is expected to be Rs.60,000. It is to be assumed that production is carried on evenly throughout the year, wages and overheads accure similarly, and period of 4 weeks is equivalent to a month.

Q3. From the following information, you are required to prepare Balance sheet of A ltd. as on 30th September 1995.

Current ratio 1.8;1Working capital Rs.40,000Liquid ratio 1.5:1Fixed asset to shareholders equity 90%Gross profit % 25%Net Profit to share capital 10%Share capital Rs.4,00,000Stock turnover ratio (on cost of goods sold) 10 timesAverages rate of outstanding for the year 54 year On 30th .september 1995, current assets including stock /debtors and bank balance , Liabilities include share capital and current liabilities and Assets include Fixed assets current assets and development expenditure (not written off so far).

Q 4. From the information given below calculate the weighted cost of capital(before tax)

Rs. in lakhs

1. shareholders funds

Share capital equity

Preference

Retained earnings

2. loan funds

Secured loan

Unsecured loan

(including inter corporate deposits)

500

100

300

800

700

-

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a) Normal return on equity shareholder funds articipated at:15%b) Dividend rate on preference share : 12%c) Tax rate for Z Ltd.: 60%d) Interest on secured loans :16.25%e) Interest on unsecured loans : 20%

Q5. The capital structure of the progress corporation consists of an ordinary share capital of Rs.10,00,000(share of Rs.100 per value) and Rs.10,00,000 of 10 % debenture, sales increased by 20% from 1,00,000 units to 1,20,000 units , the selling price is Rs.10 per units , variable costs amount to Rs.6 per unit and fixed expenses amount to Rs.2,00,000. The income-tax rate is assumed to be 50%.

a) You are required to calculate the following :

i. The percentage increase in earnings per share .ii. The degree of financial leverage at 1,00,000 units and 1,20,00 units

iii. The degree of operating leverage at 1,00,000 units and 1,20,000 unitiv. b) Comment on the behaviour of operating and financial leverages in relation to

increase in production from 1,00,000 units and 1,20,000 units.

Q6. PCB Corporation has plans for expansion which calls for 50% increase in assets. The alternative before the corporation are issue of equity shares or debt at 14%, the balance sheet and profit and loss account are as given below:

Balance sheet as at 31st December ,1999

Liabilities Rs . Assets Rs .

12% debenture

Ordinary shares 10 lakhs shares of Rs 10 each

General Reserve

25

100

75

Total assets 200

200 200

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Profit and loss A/c for the year ending 31st December ,1989

Rs. in lakhs

Sales

Total cost excluding interest

E.B.I.T.

Interest on debentures

EBT

Taxes

EAT

Earnings per share (EPS)

P /E Ratio

Market price

36,00,000

750

675

75

3

72

36

36

= Rs.3.60

= 5 times

= Rs.18.00

10,00,000

If the corporation finances the expansion with debt: the incremental financing charges will be at 14 % and P/E Ratio is expected to be at 4 times. If the expansion is through equity the P/E ratio will remain at 5 times. The company expected that its new issue will be subscribed to at premium of 25%. With the information determine the following :

i. If the EBIT is 10% of sales, calculate EPS at sales levels of Rs. 4 crores . 8 crores and Rs. 10 crores .

ii. After expansion determine at what level of EBIT would remain the same , whether new funds are raised by equity/ debts.

iii. Using P/E ratio’s calculate the market value per share at each sales level for both debt and equity financing.

Q 7.Write Short notes on / Explain the following:

a) Time value of moneyb) Average rate of return

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c) Cash from operationsd) Price earnings ratioe) Interest coverage ratio

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Q1.. M/s. lalvani & Co. has Rs.2,00,000 to invest. The following proposals are under consideration . the cost of capital for the company is estimated to be 15percent.

Project Initial Rs .

Annual cash Rs.

)

ABCDE

1,00,00070,00030,00050,00050,000

25,00020,0006,000

15,00012,000

820101020

Rank the above project on the basis of i. Pay-back method.

ii. Net Present (NPV) method.iii. Profitability Index method.

Present value of annuity of Rs.1 received in steadly stream discounted as at the rate of 15%. 8 years = 4.6586 10 years= 5.1790 20 years= 6.3345

Q2.Standard Electrical ltd. furnish you with the following information for the year 1997. Rs.Sales (one months credit) 2,40,000Raw materials (two months credit) 1,20,000Wages (1/2 month time lag) 30,000Manufacturing Exps 24,000

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(one month time lag) Company always keeps one month’s stock of raw materials and finished goods. Production cycle take ½ months time and it is even throughout the year. During the year 1998, the company expects that

i. Price of raw materials will go up by 10%.ii. Due to agreement with labour union, the company will have to pay overall 5%

increase to labour.iii. To cover increase in cost of production the selling price will have to be increase

by 20%.iv. Inspite of increase in prices sales will go up by 25%.

You are required to prepare estimate of working capital requirement for 1998.

Q3. Prepare a balance sheet on the basis of the information given below:

i. Debtors turnover ratio 4ii. Creditors turnover ratio 6

iii. Capital turnover ratio 2iv. Stock turnover ratio 8v. Fixed assets turnover ratio 8

vi. Gross profit ratio 25%vii. Gross profit during the year Rs.1,00,000

viii. Reserves and surplus Rs.35,000ix. Closing stock is more by Rs.20,000 than the opening stock.x. There were no long –term liabilities .

Q4.

In considering the most desirable capital for a company the following statements of the cost of debt and equity capital (after tax ) have been made at various levels of debt-equity mix.

Debt as % of total capital employed

Cost ofdebt %

Cost ofEquity %

0 10 20 30 40 50 60

7.07.07.07.58.08.59.5

1515

15.516171920

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You are required to determine the optimal debt-equity mix for the company by calculating composite cost of capital.

Q 5.

(i) Find the operating leverage from the following data:

Sales Rs. 50,000

Variable cost Rs. 60%

Fixed cost Rs. 12000

(ii) Find the financial leverage from the following data:

Net worth Rs. 25,00,000

Debt /Equity 3/1

Interest rate 12%

Operating profit Rs.20,00,000

Q6.

Bogus auto ltd., has procured you the following Balance sheets as on 31.3.1997 and 31.3.1998:

Liabilities 1997 . 1998

Equity capital

Share premium

General Reserves

Profit & loss a/c

Debentures

Secured loans

Provision for taxation

Creditors

Bank overdraft

2,50,000

50,000

40,000

60,000

1,50,000

2,00,000

17,500

30,0000

25,000

3,50,000

60,000

62,500

50,000

2,00,000

1,50,000

20,000

40,000

22,500

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8,22,500 9,55,000

Assets 1997 1998

Buildings

Machinery

Furniture

Long-term investment

Stock

Debtors

Bills receivable

Cash in hand

3,00,000

1,50,000

45,000

25,000

1,50,000

1,00,000

50,000

2,500

3,50,000

2,00,000

40,500

-

1,75,000

1,25,000

40,000

24,500

8,22,500 9,55,000

You are required to prepare ‘Funds Flow Statement’ after considering the following information :

a) Taxes paid during the year Rs.15,000b) Building was depreciated @5% and machinery and furniture were depreciated by 10%c) A machine having book value Rs.40,000 was sold at a loss of 10%.

Long term investments were sold at 30% profit which was directly transferred to the General reserves account

Q 7.Write Short notes on / Explain the following:

a) Debt service coverage ratiob) Net worthc) Importance of fund flow Statement d) Gross and Net working capital e) Credit rating

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MODEL PAPER-VIIISRI BALAJI SOCIETY




Instructions:

28

1. Question no. seven is compulsory.2. Attempt any five out of the remaining.

Q1. After conducting a survey that cost Rs. 2,00,000. Z ltd., decided to undertake a project for putting a new product in the market. The company’s cut off rate is12%. It was estimated that the project would have a life of 5 years. The project would cost Rs.40,00,000 in plant machinery in addition to working capital of Rs. 10,00,000 .the scrap value of plant and machinery at the end of 5 years was estimated at Rs.5,00,000. After providing depreciation on straight line basis , profits after tax were estimated as follows;

Years Profit after tax (Rs) Present value of Rs.1 at 12% 1 3,00,000 0.8929 2 8,00,000 0.7972 3 13,00,000 0.7118 4 5,00,000 0.6355 5 4,00,000 0.5674

As certain the net value of the project .

Q2. Grow more ltd. is presently at 60% level producing 36000 units per annum. In view of favourable market conditions it has been decided that from 1st January 1994 the company would operate at 90% capacity. The following

information are available.i. Existing cost-price structure per unit is given below,

Raw material Rs.4.00Wages Rs.2.00Overhead (variable) Rs.2.00Overhead(fixed) Rs.1.00Profit Rs.1.00

ii. It is expected that the cost of raw material, wage rate, and sales per unit will remain

unchanged in 1994.iii. Raw materials remains in store for 2 months before they issued to production

department, raw materials remains in production process for one month.iv. Finished goods remain is production process for one month.v. Credit allowed to debtors is 2 months.credit allowed by creditors is 3 months.

vi. Lag in wages and overhead payment is 1 month. It may be assumed that wages and overhead accure evenly throughout the production cycle. You are required to

a) Prepare profit statement at 90% capacity level andb) Calculate the working capital requirement on an estimated basis to sustain the

increased production level.Assumption made if any, should be clearly statisfied

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Q3. From the following figures and ratios, draw out balance sheet and trading and profit and loss a/c . Share capital Rs.1,80,000 Working capital 63,000

Bank overdraft 10,000There is no ficitious assets. In current assets there is no assets other than stock, debtors and cash. closing stock is 20%higher than the opening stock.Current ratio 2.5Proprietary ratio 0.7Stock velocity 4Net profit ratio 10% (to average capital employed)Quick ratio 1.5Gross profit ratio 20% of sales Debtors velocity 36.5 days.

Q4. Given below is the summary of the balance sheet of a company as at 31st December ,1998

Balance sheetLiabilities Rs. Assets Rs.

Equity share capital:20,000 shares of Rs.10 each

Reserves &Surplus8% debenture (redeemable at

par in 2003)Current liabilities:

Short term loanTrade creditors

2,00,000

1300001,70000

1,00,00050,000

Fixed assetsInvestment

Current assets

4,00,00050000

2,00,000

6,50,000 6,50,000

You are required to calculate the company’s weighted average cost of capital using balance sheet valuations. The following additional information is also available:

i. 8% debentures were issued as par.ii. All interest payment are up-to-date and equity dividend is currently 12%

iii. Short –term loan carries interest at 18% p.a.iv. The share and debenture of the company are all quoted on the stock exchange and current

market price are as follows:

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Equity share8% debentures

Rs. 14 eachRs.98 each

Q5.

Calculate the degree of operating leverage, financial leverage, and Combined leverage for the following firms and interpret the results.

P Q R

Output (units)

Fixed cost (Rs.)

Variable cost per unit (Rs)

Interest exps.(Rs.)

Unit selling price (Rs.)

3,00,000

3,50,000

1-00

25,000

3-00

75,000

7,00,000

7-50

40,000

25-00

5,00,000

75,000

0-10

Nil

0.50

Q6.

The summarized balance sheets of XYZ Ltd., as at 31.12.79 and 1980 given below:

Liabilities1979 1980

Assets 1979 1980

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Share Capital 4,50,000 4,50,000 Fixed assets 4,00,000 3,00,000

General Reserve

Profit & loss A/c

Creditors

Provision for taxation

Mortgage loan

3,00,000

56,000

1,68,000

75,000

3,10,000

68,000

1,34,000

10,000

2,70,000

Investment

Stock

Debtors

Bank

50,000

2,40,000

2,10,000

1,49,000

60,000

2,10,000

4,55,000

1,97,000

10,49,000 12,42,000 10,49,000 12,42,000

Additional information :

a) Investments costing Rs.8000 were sold during the year for Rs.8,500.b) Provision for taxation made during the year was rs.9,000/-c) During the year part of the fixed assets costing Rs.10,000 was sold for Rs.12,000 and the

profit was included in profit &loss A/c andd) Dividend paid during the year amounted to Rs.40,000.

You are required to prepare fund flow statement.

Q 7. Write Short notes on / Explain the following:

a) Return on capital employed b) Trading on equity c) Optimum capital structure

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d) Components of working capital e) Profitability Index

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Documents

Financial Management 1