Veer Narmad South Gujarat University 2010-6th Sem B.B.A Advanced Financial Management, T.Y ( ) - Question Paper

RB-1752-N Third Year B. B. A. Examination April/May - 2010 Advanced Financial Management

Time : 3 Hours]

Instructions :

(1)

6silq<3i Puunki(l faaim SuwiA u* <KH=fl. Fillup strictly the details of signs on your answer book.

Name of the Examination :

T. Y. B. B. A.

Name of the Subject:

Advanced Financial Management

-Subject Code No.

1 7 5 2

-Section No. (1,2......): Nil

(2)    Question one is compulsory.

(3)    All questions carry equal marks.

(a) International Food Limited has the following capital structure :

Sources	Book Value (Rs.)	Market Value (Rs.)
Equity shares (25,000 shares of Rs. 10 each) 13% Preference Share (500 shares of Rs. 100 each) Reserves and Surplus 14% Debenture (1500 debenture of Rs. 10 each)	250.000 50,000 150.000 150.000	450.000 45,000 145.000

The expected dividend per share is Rs. 1.40 and the dividend per share is expected to grow at a rate of 8% forever. Preference share is redeemable after 5 years at par whereas debentures are redeemable after 6 years at par. The tax rate for the company is 50%. You are required to compute the WACC for the existing capital structure using market value as weights.

Consider the bonds of the United Pharam, which    4

are selling for Rs. 119, the bonds carry a coupon interest rate of 15% and mature in 10 years with Rs. 100 par value. Although they are selling for Rs. 119,

T.N. Verma, a potential investor, considers them to be worth only Rs. 109. What are the expected rates of return for the bonds and Verma's required rate of return?

What are the different payout methods? How do    7

shareholders react to these methods?

Clay Product Limited is an all equity firm with    7

the market value of its equity at Rs. 20,00,000. Its current cost of equity capital is 15%. The management is planning a capital expenditure of Rs. 15,00,000 that would increase the earning level by 1.5 times.

For the first time in the history of the enterprise, the management is motivated by enthusiastic bankers to avail debt and have been offered very attractive and competitive interest rate slabs as follows :

Plan	I	II	m	IV	V
Amount of debt (Rs.)	3,00,000	6,00,000	9,00,000	12,00,000	15,00,000
Cost of debt (%)	8.00%	8.50%	9.50%	10.00%	11.00%

The finance manager of the firm believes that the cost of equity which is currently at 15% would increase with the increasing amount of debt. His estimate of the equity is as follows :

Plan	I	II	m	IV	V
Cost of Equity (%)	15.50%	15.50%	16.00%	18.00%	21.00%

Examine how much amount of debt Clay Products should have. Assume tax rate at 36%.

OR

2 (a) Explain the following term :    7

(i)    Personal Leverage

(ii)    Optimal Capital Structure

(i)    Exponent Ltd. had 50,000 equity shares of Rs. 10 each outstanding on 1^st April. The shares are being quoted at par in the market. The company intends to pay a dividend of Rs. 2 per share for current financial year. It belongs to a risk class whose appropriate capitalization rate is 15%.

Using M-M model and assuming no taxes, ascertain in price of company's share as it is likely to prevail at the end of the year when (i) dividend is declared; and (ii) when dividend is not declared.

(ii)    A large sized chemical company has been expected to grow at 14% per year for the next four years and then to grow indefinitely at the same rate as the national economy, i.e. 5%. The required rate of return on the equity shares is 12%. Assume that the company paid a dividend of Rs. 2 per share last year (DO=2). Determine the market price of the shares today.

Write a short note on Situational Analysis.    7