B.Com-COMMERCE 6th Sem CORPORATE FINANCIAL POLICY(Bangalore University, Bangalore-2008)

VI SEMESTER B.COM. EXAMINATION, JUNE 2008
( Semester Scheme)
COMMERCE (ELECTIVE PAPER – 3(b)
Corporate Financial Policy

Time : 3 Hours Max. Marks : 90

Instructions : Answer should be completely either in English or in Kannada.

SECTION – A [10x2=20]

Answer any ten of the following in not exceeding four lines for each sub-question. Each sub-question carries two marks :

1.a) What is meant by Mission?

b) What is meant by Exchange Rate?

c) Give any four advantages of Equity Shares.

d) What is meant by financial policy?

e) State any two functions of finance manager.

f) What is Dividend-Pay-Out ratio?

g) Give the meaning of NOI approach.

h) State the meaning of zero coupon bond.

i) Give any two example for mergers in India.

j) What is meant by convertible debentures?

k) What is EPS? How is it calculated?

l) Mr. Anand has an irredeemable preference share of Rs. 100. He receives an annual dividend of Rs. 8. What will be its value if the required rate of return is 10%.

SECTION – B [5x5=25]

Answer any five of the following. Each question carries five marks.

2.What is meant by profit maximization? What are its limitations?

3. Explain any two types of merger.

4. Explain the 3 financial decisions.

5.What are intangible assets? How they are valued?

6.Mr. X is considering the purchase of a 7% preference share of Rs. 1000, redeemable after 5 years at par. What should he be willing to pay now to purchase the share assuming that the required rate of return is 8%?

7.A Co. Issue 10% debentures for Rs. 2,00,000. Rate of tax is 55%, calculate the cost of debt
(after tax) if the debenture is issued
a)at par b) at a discount of 10%

8.Following information is available in respect of ABC Ltd. And XYZ Ltd.:

ABC Ltd. XYZ Ltd.
Present earnings (Rs.) 2,00,00,000 40,00,000
No. of shares (No.) 10,00,000 1,00,000
Price earning ratio (Times) 18 10

In case, ABC Ltd. And XYZ Ltd. Were to merge and the exchange ratio is 1:1, what would be the initial impact on EPS of the two Co.’s? What is the market value based exchange ratio?

9.A company expects a net income of Rs. 1,00,000. It has Rs. 2,00,000, 8% debentures. The equity capitalization rate of the Co. is 10%. Calculate the value of the firm and overall capitalization rate. According t o the Net Income Approach, (ignore income tax).

SECTION – C

Answer any three of the following. Each question carries Fifteen marks. [3x15=45]

10.You are provided with the following financial data of two Companies :
T Ltd. A Ltd.
Earning after taxes (Rs.) 7,00,000 10,00,000
Equity shares outstanding (No.) 2,00,000 4,00,000
Earning per share (Rs.) 3.50 2.50
P/E Ratio ( Times ) 10 14
Market Price Per share (Rs.) 35 35

A Ltd. Is acquiring the Co. T Ltd., exchanging its shares on a one-to-one basis for T’s shares. The exchange ratio is based on the market prices of the shares of the two Co.’s.
a) What will be the EPS subsequent to merger?
b) What is the change in EPS for the shareholders of Co.’s A and T?
c) Determine the market value of the post-merger firm.

11. Distinguish between Equity shares and debentures.

12. Explain the various forms of financing merger.

13. Determine the earning per share of a company which has an operating profit (EBIT) of
Rs. 2,00,000. Its capital structure consists of the following securities :
10% Debentures Rs. 6,00,000
12% Preference share Rs. 2,00,000
Equity Shares of Rs. 100 each Rs. 5,00,000
The Co. is in the 50% tax-bracket. Determine the percentage change in EPS associated with 25% increase and 25$ decrease in operating profit.

14. From the particulars presented below, calculate the total market value of each of the following firms and ascertain their weighted average cost of capital, assuming that there is no corporate tax.
Firms Earning before Interest & Taxes Interest @ 10% Cost of capital Ke
(EBIT) Rs. equity
Rs.

A 50,000 5,000 12%
B 75,000 15,000 16%
C 1,25,000 50,000 15%