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) 1st 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 |
Earning: Approval pending. |