Osmania University (OU) 2010 M.Com Accounting and Finance ,, Financial management - Question Paper

M.com (I-Semester) Examination, June/July 2010
Financial Management

SECTION-A
ans all the ques. in not exceeding 10 lines:-
1.Explain the concept of Wealth Maximization.
2.What is capital Rationing?
3.How do you determine the weighted avg. cost of capital?
4.Distinguish ranging from operating and financial leverage.
5.Explain the concept of operating concept.

SECTION-B
6(a) Briefly discuss and illustrate the concept of 'time value of money'. State its relevance in various areas of financial decision-making/
OR
(b) You can save Rs.2,000 a year for five years and Rs.3,000 a year for 10 years thereafter. What will these savings cumulate to at the end of 15 years, if the rate of interest is 10 percent?

7(a) Make a comparision ranging from NPV and IRR methods. Which 1 of the 2 you obtain to be more rational and why?
OR
(b) A.P.Steels Limited is considering 2 mutually exclusive projects. Both require an initial cash outlay of Rs.2,00,000 every have a life of 5 years. The company's needed rate of return is 10 percent and pays tax at a 50 percent. The projects will be depreciated on a straight line basis. The profit before depreciation expected to be generated by the projects are as follows:
YEAR1 – ProjectI Rs. 80,000 – ProjectII Rs.1,20,000
Year two – ProjectI Rs. 80,000 – ProjectII Rs. 60,000
Year three – ProjectI Rs. 80,000 – ProjectII Rs. 40,000
Year four – ProjectI Rs. 80,000 - ProjectII Rs. 1,00,000
Year five – ProjectI Rs. 80,000 – ProjectII Rs. 98,000
Determine the netpresent value for every project and indicate which project should be accepted and why?

8(a) What is decision tree analysis? discuss the steps involved in decision-tree analysis.
OR
(b) From the subsequent info supplied to you, determine the improper weighted avg. cost of capital, relevant for evaluating long-term investment projects of the company:-
Cost of Equity-12 percent
After tax cost of longterm debt-7 percent
After tax cost of short term loans-4 percent
Source of capital BOOKVALUE- Rs.5,00,000 MARKETVALUE – Rs. 7,50,000
Equity Capital BOOKVALUE – Rs.4,00,000 MARKETVALUE – Rs.3,75,000
Long-term debt BOOKVALUE – Rs.1,00,000 MARKETVALUE – Rs.1,00,000

9(a) Critically evaluate Modigliani and Miller approach to capital structure and evaluation of a firm.
OR
(b) The earnings per share of a company is Rs.8 and the rate of capitalization applicable is 10 percent. The company has before it, an choice of adopting (i) 50, (ii) 75 and (iii) 100 percent dividend payout ratio. calculate the market price of the company's quoted shares as per Walter's Model if it can earn a return of (a) 15, (b) 10 and (c) five percent on its retained earnings.

10(a) elaborate the various approaches to financing of working capital requirements? discuss in detail.
OR
(b) Radiant Garments Limited manufactures readymade garments and sells them on credit basis through a network of dealers. Its current sale is Rs. 60Lakhs perannum with 20 days credit period. The company is contemp;ating an increase in the credit period with a view to increase sales. current variable costs are 70 percent of sales and the total fixed costs Rs.8 per annum. The company expects pre-tax return on investment @ 25 percent. a few other details are provided as under:
Credit Policy I avg. collection period(days)-30 Expected annual sales(Rs.Lakhs) – 65
Credit policyII Avg collection period (days)– 40 Exp annual sales – 70
Credit policyIII Avg collection period(days) – 50 Exp annual sales – 74
Credit policyIV Avg collection period(days) – 60 Exp annual sales – 75
Which credit policy should the company adopt? current your ans with all supporting computations assuming 360-days a year.

Earning:   Approval pending.