Deemed University 2011 B.B.A University: Lingayas University Term: III Title of the : Financial Management-I - Question Paper

 

Roll No. ..

 

Lingayas University

BBA-MBA (Integrated) 1^st Year (Term III)

Examination May 2011

Financial Management-I (BA - 1109)

 

 

 

[Time: 3 Hours] [Max. Marks: 100]

 

Before answering the question, candidate should ensure that they have been supplied the correct and complete question paper. No complaint in this regard, will be entertained after examination.

 

Note: Attempt five questions in all. All questions carry equal marks. Select two questions from Section A and two questions from Section B. Question no. 8 (Section C) is compulsory.

 

Section A

 

Q-1. (a) Discuss the various problems with the profit maximization as the objective of financial management. [10]

(b) What are the importance and significance of financial leverage? [10]

 

Q-2. Calculate the NPV of Project A & B if discounting rate is 18%. PVIF for 1 to 5 years and 18% discount rate are 0.847, 0.718, 0.609, 0.516, and 0.437 respectively. [20]

 

 

Project A
Initial Outlay	-$250
Year 1 inflow	$35
Year 2 inflow	$80
Year 3 inflow	$130
Year 4 inflow	$160
Year 5 inflow	$175

Project B
Initial Outlay	-$50
Year 1 inflow	$18
Year 2 inflow	$22
Year 3 inflow	$25
Year 4 inflow	$30
Year 5 inflow	$32

Q-3. Calculate the degree of operating leverage (DOL), degree of financial leverage (DFL) and the degree of combined leverage (DCL) for the following firms and interpret the results. [20]

 

	Firm A	Firm B	Firm C
1. Output (Units)	60,000	15,000	1,00,000
2. Fixed costs (Rs)	7000	14000	1500
3. Variable cost per unit (Rs)	0.2	1.50	0.02
4. Interest on borrowed funds (Rs)	4000	8000	-
5. Selling price per unit (Rs)	0.60	5.00	0.10

Section B

 

Q-4. Discuss the Net Income Approach of optimal capital structure with example. [20]

 

Q-5. Discuss the IRR technique of capital budgeting in detail. [20]

 

Q-6. Discuss the Proposition 1 of MM approach of optimal capital structure with example. [20]

 

Q-7. ABC Ltd has the following capital structure on 1 July 2011:

Equity share (400000) Rs 8000000

10% preference shares Rs 2000000

14% Debentures Rs 6000000

The share of the company currently sells for Rs 25. It is expected that the company will pay a dividend of Rs 2 per share which will grow at 7 percent forever. Assume a 50 percent tax rate. You are required to calculate weighted average cost of capital of existing capital structure. [20]

 

 

 

Section C

 

Q-8. From the following Probability distribution conduct the risk and return analysis of both the companies and tell your choice of investment. [20]

 

Probability Distribution for Sales.com and Basic Foods
		Rate of return on stocks if this demand occurs (%)
Demand for the Companys Product	Probability of this demand occurring	Sales.Com	Basic Foods
Strong	0.25	90	40
Normal	0.35	15	15
Week	0.4	-65	-12