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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI 600 034
M.Com.DEGREE EXAMINATION COMMERCE
SECONDSEMESTER APRIL 2018
17/16PCO2MC03- STRATEGIC FINANCIAL MANAGEMENT
Date: 21-04-2018 Dept. No. Max. 100 Marks
Time: 01:00-04:00
SECTION A Answer ALL questions (10 x 2 20)
1. What is Financial Management all about?
2. Write note on Net Operating Income to Capital structure.
3. What the factors affecting Cost of Capital in Financial Management?
4. Why is Capital Budgeting considered to be very important?
5. Mention the different types of Lease.
6. Why does Financial Leverage exist in a financial statement?
7. A person deposits Rs.2,000 at 10% interest per annum. What will be the amount at end of 5 years?
8. Suppose your father gave you Rs.100 on your 18th birthday. You deposited this amount in a bank at 10% rate of interest for one year. How much future sum would receive after one year?
9. Indicate the ways of raising the temporary working capital for Textile Company
10. What are the different motives of Cash Management?
SECTION B Answer any FOUR questions x 10 40)
11. Discuss in detail the various factors affecting requirement of Working Capital.
12. How does Profit maximization differ from Wealth maximization?
13. Balance Sheet of X ltd..
Liabilities
Rs.
Assets
Rs.
Equity Share Capital
10% Debentures
Reserves
Creditors
60,000
80,000
20,000
40,000
Fixed Asset
Current Asset
1,50,000
50,000
2,00,000
2,00,000
The Company's total Asset turnover ratio is 3. ii) Fixed operating expenses is Rs.1,00,000. iii) Variable cost ratio Tax rate= 35%.
Calculate all leverages. Calculate EBIT if EPS is Rs 3.
14. Jerry Ltd has purchased on asset for Rs 2,500 having 5 years life and the salvage value of Rs 500 at the end of 5th year. The firm provides depreciation on straight line method. The firm is expected to increase the revenue by 1,500 p.a. and its operating expenses will increase by Rs 700 p.a excluding depreciation and interest tax rate is 50% and the COC is 10%.Alternatively the asset can be leased for an annual rent of Rs
2
650 p.a the incremental balance revenue will be Rs 1,500 p.a the operating expenses Rs 600 p.a. Evaluate the proposal.
15.a) Discuss the various steps in finalising the Capital Budgeting.
A Project requires investment of Rs. 1,00,000. It is expected to yield the following cash inflows:
Year Cash Inflows (Rs.
1 30,000
2 40,000
3 60,000
Assume discount rate at 10% and 15%. Calculate IRR.
16a) Discuss the various factors affecting payment of Dividend.
Calculate the value of an equity shares of company X Ltd. and Y Ltd. from the
Ratio) is 50% and
X Ltd. Y Ltd.
r 12% 15%
Ke 10% 10%
E Rs.15 Rs.12
17a)M Ltd is considering releasing its collection efforts. Existing sales are 50, 00, 000; average collection period is 25 days pv ratio 25% cost of capital 15% and bad debts 4%. The relaxation of the collection effort will increase sales by Rs.6, 00, 000, increase average collection period to 40 days and increase bad debts to .The company can save collection expenses up to Rs.10, 000. Advise the Company.
From the following data calculate the Operating Cycle in days:
Rs.
Average Debtors 80,000
Raw Materials Consumed 44, 00,000
Total Production Cost 00, 00, 000
Total Cost of Sales 05, 00, 000
Sales 60, 00,000
Average stock of RM 20,000
Average Stock of WIP 50,000
Average Stock of Finished Goods 60,000
Creditors Payment Period 16 days.
SECTION C Answer any TWO questions x 20 40)
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18. AB ltd gives you the following figures
Particulars
Rs
EBIT
Less: 12 Debenture Interst
Less: Income tax 50%
EAT
3,00,000
60,000
2,40,000
1,20,000
1,20,000
No. of Equity shares 40,000
1,20,000
EPS Rs 3 per share. Market price per share Rs.30
40,000
Market Price Per share 30
Price Earnings Ratio 10
EPS 3
The company has undistributed reserves of Rs.6,00,000 It requires Rs.2,00,000 for expansion. This amount will earn the same rate of return on funds employed as it is earned now.
You are informed that the Debt-Equity ratio (Debt/ Debt Equity) higher than 35% will reduce the PE ratio to 8 and raise the interest rate on additional funds burrowed to 14%.
The company would prefer to raise the entire funds required through equity or through debt. Which would you recommend?
19.R ltd has the following capital structure.
Equity capital Rs. 20 each) 40 Lakhs
prefcapital(Rs. 100 each) 10 lakhs
debentures 30 lakhs
Market price of equity is Rs. 20
The current dividend is Rs. 2 per share which is expected to grow at per annum. The tax rate is 50%.Calculate.
i. Weighted average COC based on book value.
ii. The new weighted average COC if the company an additional Rs. 20 lakhs as 10% debentures to finance for expansion. This would result in increasing expected dividend per share to Rs. 3 and increase growth rate of dividend to 10% but the market price of equity share will fall to Rs. 15.
20. A highly profitable company plans to put up a windmill to generate electricity. The details of which are as follows
1. The cost of windmill Rs. 3,00,00,000 with 10 years life and no residual value.
2. The cost of land Rs. 15,00,000 which will appreciate to 60 lakhs at the end of 10 years.
3. Subsidy to Government Rs. 15,00,000 will be received at the end of one year.
4. Electricity will be sold at 2.25 per unit in year1, increasing by .25 paise per year up to
7th year and thereafter by .50 paise till the 10th year.
5. The COC is 15% and tax rate id 50%. Ignore tax on capital profit.
6. Maintenance cost is Rs. 4,00,000 in the 1st year and will increase by Rs. 2,00,000 per year thereafter.
7. Windmill is subject to 100% depreciation in year1 at the Income tax Act.
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8. Electricity generated will be 25,00,000 units per annum, of which will be given free to the state Electricity Board. Ascertain the viability of the project.
21. The cost sheet of PQR Ltd provides the following data.
Raw material Rs. 50 per unit
Labour 20 per unit
OHS (including depreciation Rs. 10) 40 per unit
Profit Rs. 20 per unit
Selling price Rs.130 per unit
1. Raw material is in stock 1 month.
2. WIP for ½ month.
3. Finished goods for 1 months
4. Credit allowed by suppliers 1 month.
5. Credit allowed to customers 1 month.
6. Average time lay in payment of wages 10 days and payment of OHS 30 days
7. 25% of the sales are for cash. The cash balance of Rs. 00,000 is to be maintained.
Ascertain the requirement of working capital needed to finance level of activity of 54,000 units based on Cash Cost Method and Total Cost Method. Production is carried on evenly throughout the year and wages and OHS accrue evenly throughout the year.