M.Com-M.Com Accounting and Finance 1st Sem (Osmania University (OU)-2010)

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

SECTION-B
6(a) Briefly explain and illustrate the concept of 'time value of money'. State its relevance in different areas of financial decision-making/
OR
(b) You can save Rs.2,000 a year for 5 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 between NPV and IRR methods. Which one of the two you find to be more rational and why?
OR
(b) A.P.Steels Limited is considering two mutually exclusive projects. Both require an initial cash outlay of Rs.2,00,000 each have a life of five years. The company's required 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 2 – ProjectI Rs. 80,000 – ProjectII Rs. 60,000
Year 3 – ProjectI Rs. 80,000 – ProjectII Rs. 40,000
Year 4 – ProjectI Rs. 80,000 - ProjectII Rs. 1,00,000
Year 5 – ProjectI Rs. 80,000 – ProjectII Rs. 98,000
Determine the netpresent value for each project and indicate which project should be accepted and why?

8(a) What is decision tree analysis? Explain the steps involved in decision-tree analysis.
OR
(b) From the following information supplied to you, determine the appropriate weighted average 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 valuation 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 option of adopting (i) 50, (ii) 75 and (iii) 100 percent dividend payout ratio. Compute 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) 5 percent on its retained earnings.

10(a) What are the different approaches to financing of working capital requirements? Explain in detail.
OR
(b) Radiant Garments Limited manufactures readymade garments and sells them on credit basis through a network of dealers. Its present 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. Present 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. Some other details are given as under:
Credit Policy I Average 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? Present your answer with all supporting calculations assuming 360-days a year.

Earning:  ₹ 0.00/-