University of Delhi 2010-1st Year M.Com Commerce FINANCIAL MANAGEMENT AND POLICY UNIVERSITY - Question Paper
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Your Roll No.....
6457
M.ComjT J
Course 417FINANCIAL MANAGEMENT AND POLICY (Admissions of 2008 and before)
Time . 3 Hours Maximum Marks 75
Note The maximum marks printed on the question paper are applicable for the candidates registered with the School of Open Learning These marks will, however, be scaled down proportionately in respect of the students of regular colleges, at the time of posting of awards for compilation of result
(Write your Roll No on the top immediately on receipt of this question paper)
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Note Answers may be written either in English or in Hindi, but the same medium should be used throughout the paper.
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Attempt All questions All questions carry equal marks.
Answers should be short and specific.
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1 (a) Explain the emeigmgrole of finance manager in a company in the wake of global financial crisis and recent corporate scams
Or
Financial management is nothing but managerial decision-making on as set-mix, capital-mix and profit allocation Explain 7Vi
(6) Maximisation of wealth of shareholders is equivalent to maximisation of EPS Do you agree 7 Explain
Or
A Ltd is considering a proposal to acquire T Ltd so as to avail the synergistic advantage and capture a larger market share Various parameters of the companies are given below :
No of Equity Shares 2,00,000 1,50,000
Earnings after taxes (Rs ) 6,00,000 3,00,000 Market price per share (Rs.) 20 15
(i) If merger is expected to bring a gain of Rs. 10,00,000, what is the total value of combined entity 9
(u) How many shares are required to be issued by A Ltd if merger takes place by exchange of equity shares and exchange ratio is based on EPS ?
(in) Calculate the post merger EPS of the combined entity. 1XA
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2. (a) Wnte short notes on :
(i) Scenario Analysis;
(w) Risk adjusted discount rate method.
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A company is considering two mutually exclusive projects X and Y Project X costs Rs. 30,000 and
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project Y Rs 36,000 The net present value $
probability distribution for each proj'ect is given as follows
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(i) Compute the expected NPV of Projects X and Y
(ii) If standard deviation of Projects X and Y are Rs. 3,800 and Rs. 3,600 respectively, which project do you think is more nsky and why ? IVi
(b) A company is considering two mutually exclusive projects P and Q. Project P requires an initial investment outlay of Rs 1,00,000 and will generate cash inflows after taxes (CFAT) of Rs 25,000 per year for 10 years which is the expected economic life of the project
Project Q requires an initial investment of Rs. 1,50,000 and will generate CFAT of Rs 34,500 per year for first 5 years and Rs. 50,000 per year for the next 3 years The total life of the project is 8 years
Which project should be undertaken by the firm and why ? Assume that the cost of capital is 14%
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3 (a) Explain trade-off theory on the relationship between financial leverage and cost of capital How is it inconsistent with the pecking order theory of capital structure ?
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Firm U and L belong to the same risk class and have same EBIT But U is an all equity firm while L has employed 15% debt also of Rs 10,00,000 Find out by what amount, value of firm L will be different from that of U m the following situations :
(0 Corporate tax rate (tc) - 35%, tax rate on dividend income (t) = 10% and tax rate on interest income (t) = 30%
GO tc = 35%, tpe = tpd = nil
(m) tc = - 35% and t - nil IVi
(b) Sakshi Ltd needs Rs 9, lakh to finance an expansion project which is expected to provide EBIT of Rs 1,35,000 The company is considering three alternative financial plans as given below
Plan I : 60% equity and 40% debt
Plan II . 50% equity and 50% debt
Plan III 60% debt and 40% equity
Shares can be sold at a net price of Rs 20 per share Funds can be borrowed as follows .
Interest Rate
Upto and including Rs. 1,80,000 14%
Rs 1,80,0014,50,000 15%
Over Rs 4,50,000 17%
If the objective of the firm is to maximise EPS, which alternative would you recommend Assume that tax rate is 35%.
Or
Explain how traditional approach to capital structure provides a midway between NI and NOI approach of capital structure 7V&
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4 (a) .In spite of higher taxability of dividend income as compared to capital gains, firms pay dividends * ' Do you agree 9 If yes, give the reasons why do companies pay dividends 7
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The following information is relating to Sbaran Ltd
Earnings of the firm Rs 2 lakh
Dividends paid Rs 15 lakh
P/E Ratio 12 5
The company was started a year ago with an equity capital of Rs 20 lakh divided into 20,000 equity shares of Rs 100 each The company is expected to maintain its current rate of earnings on investment
Ascertain whether the firms D/P ratio is optimal as per Walters model If not, what should be the optimal D/P ratio 7 Also find out the PE ratio at which the dividend payout ratio will have no effect on the value of the share VA
(b) Explain the following briefly
(i) Spontaneous sources of current assets financing,
(u) Playing the float as a technique of cash t
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Katna Ltd is considering relaxing its collection
effort policy At present its sales are Rs 150 lakh,
average collection penod 35 days,, variable cost
to sales ratio 0 80, cost of capital 14%, bad debts ratio 0 04 and tax rate applicable is 35% The relaxation in collection efforts is expected to push sales to the level of Rs 180 lakh, increase average collection period to 45 days and raise the bad debt ratio to 0 05 Advise the company as to whether it should relax collection efforts or not ? 7Vfc
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5 Ram Lai and Associates (RLA) was organised as a partnership firm m 1979, with its main office in Delhi Since that time, the firm diversified into various product lines, both in manufacturing and trading, and also expanded us market Sales of
RLA increased from Rs 70 lakh m 1979 to the estimated figure of Rs 20 crore for the accounting year ending on March 31, 200 At present, RLA has three works offices engaged in processing of basic industrial chemicals, production of hardware goods and leather products In addition to this, RLA also owns one cold storage-cum-warehouse For the last two years, RLA is experiencing the problem of low profits Mr Ramlal has asked each unit supervisor to submit his suggestions to improve the long-run profitability of the company While going through
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various suggestions, Mr Ramlal found two proposals
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worth considering He estimated that the use of 12 percent after-tax required rate of return would be appropriate in evaluating the proposals RLAs tax rate is estimated at 35 percent
The first proposal Mr Ramlal selected was
I New Investment Proposal
The chemicals processing works office head has suggested that RLA should invest in a plant which can produce a new chemical He expects that the new product would be widely accepted and used by the manufacturers of plastic bags The works manager of that unit submitted the following information on the basis of market survey and sales forecasts made by him
Estimated Investment Rs. 40 lakh
Estimated life 10 years
Estimated EBDT (Earnings before Depreciation and Taxes) over the Rs 10 lakh
life of plant per annum
He has estimated that the salvage value of the machine at the end of its expected life is likely to be 50 percent of its book value Further, he mentions m his proposal that RLA would be entitled for depreciation at the rate of 25 percent using diminishing balance method
Find out is it wise for Ramlal to invest in this proposal ?
The second proposal was Cost Saving Proposal *
The hardware unit supervisor submitted the cost reduction techniques proposal This proposal required
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a machine which can be bought for Rs 46.35 lakh paid in cash
However, the company supplying the machine also
provides the facility of purchasing the machine on
instalment basis In that case the amount has to be paid in eight equal annual instalments and the rate of interest compounded annually by the company would be 18 percent
You are required to find out the amount of instalment which the company would be required to pay each year
Given that the life of this machine is 15 years, how much after tax cost savings should accrue to RLA to recover the investment made on the machine 9 15
Or
Explain the following
() Radical position on dividends,
() Different approaches to current assets financing
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