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LOYOLA COLLEGE (AUTONOMOUS), CHENNAI 600 034
M.Com.DEGREE EXAMINATION COMMERCE
SECONDSEMESTER APRIL 2018
CO 2817- 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 do you mean by Profit Maximisation in Financial Management?
2. Write a note on Traditional approach for Capital Structure.
3. Illustrate the term ARR in Capital Budgeting
4. Mention the various costs of maintaining debtor in bills receivable management.
5. Why is Wealth maximization gaining more importance in Financial Management?
6. Classify the different types of Working Capital.
7. Discuss the external factors affecting the payment of Dividend Policy.
8. Calculate the value of money after 5 years, if a person deposits Rs.1,000 in a Bank, at the rate of 12% per annum?
9. Suppose your father gave you Rs.1000 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?
10. The percentage of variable cost is 40 on of Sales Rs. 00,000 and the fixed cost is Rs.20, 000, Calculate Operating Leverage and interprets the results.
SECTION B Answer any FIVE questions x 10 40)
11. Discuss the different types of Leasing in detail and state its advantages.
12. Explain the various factors affecting Working Capital requirement of a company.
13. A Project requires investment of Rs. 1,00,000. It is expected to yield the following cash inflows:
Year Cash Inflows
1 30,000
2 40,000
3 60,000
Assume discount rate at 10% and 15%. Calculate IRR.
14. VYA ltd is considering the purchase of a computer. It can either be leased or purchased outright by borrowing at 12% interest payable at the end of each year. The principal amount is to be repaid at the end of 10 years. Other data:-
Purchase of computer:
Cost 40, 00,000
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Annual maintenance Rs 50,000 is to be paid in advance for every year.
The life of the computer 10 years, depreciation 15% p.a on WDV, salvage value Rs 00,000
Leasing of computer:
Initial lease payment Rs
Lease rent Rs 00,000 p.a. payable in advance each year for 10 years.
Cost of capital is 12%. Assuming there is no tax.
Should the company buy in lease the computer?
15. A Ltd. has an Equity capital consisting of 5,000 Equity shares of Rs.100 each.
It plans to raise Rs.3,00,000 for the finance expression programme and as identify. Four options for raising funds
Issued Equity shares of Rs.100 each
Issued 1,000 Equity shares of Rs.100 each and 2,000, Preference shares of Rs.100 each.
Borrow of Rs.3,00,000 at 10% interest p.a.
Issued 1,000 Equity shares of Rs.100 each and Rs.2,00,000, 10% Debentures.
The company has EBIT of Rs.1,50,000 of its expansion. Tax ratio is 50%.
Suggest the source in which funds should be raised.
16. Calculate the value of an equity shares of company X Ltd. and Y Ltd. from the following particulars by applying Walters formula when dividend payment ratio (dividend payout ratio) are and 25%.
X Ltd. Y Ltd. Z Ltd.
r 15% 12% 10%
Ke 10% 10% 10%
E Rs.10 Rs.12 Rs. 8
17. From the following details calculate leverages and interpret the results.
Particulars
A
B
C
Output(units)
60,000
15,000
1,00,000
Selling price per unit(Rs)
1
3
.50
Fixed cost(Rs)
7,000
14,000
15,000
Variable cost per unit(Rs)
.20
1.50
.02
Interest(Rs)
4,000
8,000
10,000
Preference dividend


5,000
Tax rate
50%
50%
50%
SECTION C Answer any TWO questions x 20 40)
18. A company has machine which has been in operating for 2 years, remaining estimated life is 10 years with no salvage value. Its current market value is Rs. 1,00,000. The management is considering a proposed to replace its machine with a new machine. The relevant particulars are as follows:
Particulars Existing machine New machine
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Purchase price 2,40,000 4,00,000
Estimated life 12 years 10 years
Annual operating hours 2000 2000
Selling price per unit 10 10
Output per hour 15 units 30 units
Material per unit Rs. 2 2
Labour per hour Rs. 20 40
Other expenses p.a. 11,000 11,000
Working capital 25,000 40,000
Tax rate is and COC is@15%. Loss on sale of assets is tax deductible. Should the machine be replaced?
19. A Ltd. wishes to raise an additional finance of Rs.10 lakhs to meet its investment plans.
It has Rs.2,10,000 in the form of retained earnings available for investment.
The following are the further details:-
Debt Equity Ratio 3:7
Cost of debt
Upto Rs.1,80,000 10%
Over Rs.1,80,000 16%
EPs =Rs.4
Dividend payout Ratio 50%
Expected growth rate of dividend 10%
Current market price per share= Rs.44
Tax rate 35%
You are required to determine the pattern for raising additional finance assuming the company intends to maintain its existing debt equity ratio.
Determine the cost of additional debt.
Determine the cost of equity capital and retained earnings.
Compute the W.A Cost for additional finance using book value as weights.
20. X ltd has to make a choice between debt issue and equity issue for its expansion programme and its current position is as follows,
The capital structure consist of Debentures Rs. 20,000: Equity Share Capital (Rs.10) Rs. 50,000 and Reserves Rs. 30,000. Its income statement is as follows
Sales 3,00,000
Less:- Total Cost 2,69,000
EBIT 31,000
Less: Interest 1,000
EBT 30,000
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Less: Tax 10,500
EAT 19,500
The Expansion programme is expected to cost Rs. 50,000. This is financed through debt the rate of Interest will be and the PE ratio will be 6. If the expansion is financed through Equity the new shares are sold Rs.25 each and the PE ratio will be 7.
The expansion will increase the sales by 50% with the return of 10% on the new sales before interest and Taxes. Advice the company.
21. A ltd sells its product at a gross profit of 20%on sales. The following data relates to the year ended 31.3.98:
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Sales at (3months credit) 40,00,000
Raw Material 1 month credit 12,00,000
Wages Paid 15 days arrears 9,60,000
Manufacturing expenses I month arrear 1200000
Administration expenses paid I month arrear 4,80,000
Sales promotion expenses paid half yearly in advance 200,000
The company maintains 2 months stock of Raw materials, 1.5 months stock of finished goods, and a cash balance of Rs. 1,00,000. Assuming a 10% margin is required calculate the level of working capital.