DU SOL Question Paper 2018 B.Com (Hons.) Financial Management

This question paper contains 12 pinted pages.
607 Your Roll No.

B.Com. (Hons.) / III
G

PapeT XIX- FINANCIAL MANAGEMENT
(c_304)

, (Admissions of of 2004 and onwards.)

Time: 3 hours Maximum Marks : 75

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Norn:* Answers may be written eithei in English or in
Hindi; but the same medium should be. used
thrcsughout the paper
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Attempt all questions.
Use of simple calculator is allowed.
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1. (a) Explain the concept of time value of money"
Why
' do individuals prefer present droney?
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(h) XYZ Ltd. is considering two mutually exclusive
P. T. O.

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projects. The cash fiows after taxes (CFAT) for
both the projects are as tollows:
Year Proiect A Project B
0 1.00,000 1,00,000
t 40,000 0

2 40,00t) 0

J 40,000 0

4 40,000 0

5 40,000 2,50,000

The required rate of return on these projects is
10%. Fintl out:
(i) NPV for both the Projects
iii) tRR for both the Projccts
(iii) Whi{rh project would you prefer and why?
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0 1,00,000 1,00,000
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4
J 40,000 0
4 40,000 0

) 40,000 2,50.1100

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(a) Why do we focus on cash flows rather than on
accounting profit while evaluating capital
budgeting decisions?

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(b) ABC Ltd. has a machine with a book value of Rs"
5,00,000 and a remaining useful life of 5 years. If
sold today, it would, however, realise only Rs.
1,00,000. The company is planning to replace it
with a new machine which is more efficient and
would lead to a savings in cost amounting to Rs.
10,00,000 p.a. The rate of income tax applicable
to the company is 4AVo and it does not make any
investment if the yield is less than 1.2Vo p.a. The
cost of the new machine is Rs. 25,00,000.

Both the machines are subject to SLM method of
depreciation. The old machine shall have a zercr
scrap value at the end of 5 years from now
whereas the new machine shall have ii $crap value
eif 5,00,000.

Advise whether the companv should replace the
machine or not. trgnore capital gain tax.

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P" T. O.

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12Vo debentures
2. (a) A company issues Rs' 10'00'0OO'
of Rs. L00 each at a premium of lOVo'
The
par after the expiry
debentures are redeernable at
bracket'
of 7 years" The company is in 35Vo tax
Calculate the cost of debt"
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(b) Bronze Ltd" hgs the following capital structure:
Equity share capital (10'000 shares
of Rs" 100
each) 10,00,000
-
9e/o Preference caPital- 3'00'000

L2% D ebentures- 7,00,000
lOVo Term loan- 10,00,000

The equity shares are currently having a market
price of Rs. 200 and the company declared a
dividend of Rs. 20 per share for the next year'
The dividend growth rate is 5Vo p'a' Tax rate
applicable to the com.pany is 50Vo' Calculate
WACC using book value weights'
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or(swrEr)
(a) "Market value weights are superior to book value
weighs while calculating WACC"' Comment,
with suitable reasons.
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(b) Gold Ltd. has assets worth Rs' 40,00,000 that
have been financed by Rs' 20'00'Q00 of equity
shares (of 100 each), retained earninU;"oi.T.

6

10.00,000 and the balance by 8%
debt' For the
year endin g 31-3.?f1'6 the company's EBIT
was
bracket'
Rs. 10,00,000. Gold Ltd" is in SOVo tax
The market value of equity is however Rs'
230'
weights and
Calculate WACC using rnarket value
book value weights'
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11

J. (a) Distinguish between operating leverage and
financial leverage'

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(b) XYZ Ltd. is evaluating two financing plans' A
andB.EBITis25voofinvestment.Corporatetax
be chosen if
is 404o. Which financial plan should
the firm wants to maximise the rate of
return on
bclth the
equity capital? The relevaret data about
plans are:

7 6A7

(i) Determine at what level of EBIT the
company would be indifferent bet\ryeen these
two plans.

(ii) What would be the EPS under both these
plans if the company is expecting an EBIT of
Rs. 10,00,000 and is subject ta 40Va corporate
tax?

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(a) What are the various factCIrs relevant in eieter-
mining the capital structure?

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(b) Calculate the degree of operating degree of
leverage'
and the
degree of financiai leverage
three firms' Also
combined leverage for all the
comment on the result'

5,00,000
tput (units)
,00,000

Variable cost Per unit
ing price Per unlt
Interest cha

75,000 5,00,000

,00,000 75,000

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4.(a) What is an optimum dividend
Walter's model?
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(b) Following are the details for twcl companies. A
and B, which are identical in all respects except
that company B is levered:

CompanyA Company B
I1BIT 3,00,000 3,00.000
Market value of debt @ 12.5% Nil 12,00,000
Rate of return on equity K. ISVo 'l6o/a

Explain using MM approach how an investor
holding 10% equity in company B will be better
off by switching to company A.
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(a,) How does Gordon's model differ from Walter"s
model?
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(t,) POR Ltd. belongs to a risk class for ,"vhich the
appropriate capitalization is ZOo/a.lt curru:ntly has
P" T. O.

60'1 10

50,000 equity shares selling at Rs. 100 each. The
firm is contemplating the declaration erf a
dividend of Rs. 10 per share at the end of the
current financial year. Using MM model find out
the price of the company's share at the end of the
year:

.
(i) when dividend is declared
(ii) when dividend is not declared.
Also find out the number of equity shares to be
issued to meet an investment of 10,00,000
assuming a net income of 5,00,000 and also
assuming that the dividend is paid.

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5. (a) Define safety stock. Discuss its role in
determination of re-order Point'
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(b) Following are the details related to PQR Ltd.:
Sales 30,000 units
Selling price per unit 4A

Variable cost per unit . 25
'Itrtal cost per unit 35
Credit period allowed 1. month

Desired rate of return on investment 25To

The company plans to liberalise its credit policy
by increasing the eredit period from one month to
two months. It is estimated that due to the new
policy the sales would increase by l$Vo. Advise
whether the new policy be implemented or not"

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P" T. O.

12

or (ilTe[ErT)
{a} XYZ. Ltd. requires 20,000 units of a certain itsm
every year. The purchase price per unit is 100.
The carrying cost is 25ola and nrdering cost is Rs.
100 per order" Find out EOQ and total inventory
r;ost at EOQ"

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(b) ABC t td. expects its cost of goods sold for
2AL5-16 to be 6,CI0,000. The expected operating
cycle is 90 days" The campany wants tc have a
minimurn cash balance of 50,00ti at all times.
What is the expected working capital
requirement? Assume a year of 360 days"

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(c) Distinguish between perrnaqent anrl ternporary
working capital"
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