DU SOL M.Com Question Paper 1st Year 2018 Sem 2 Financial Management And Policy

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llt.Com. : Semester - ll (NC) G

Paper No. - .1201

(Financial N4anagenrent and I'}olicy)

Time : 3 llours lvluximum ll.larks : 100

(ll'rite your lloll ]tio. an the lolt rnmetliatetj on racetp! o.f this tlue-ttiort puper.)

Atternpt l/l questions.

zll/ questions carry equal marks.

Ansrvers should be specific and precise.

t. (a) Write a detailed note on the nature and scope of financial

rnanagement as it has evolved over the vears. l0

(h) "The l'ime Value of Nloney does not exist in case the

interest rates are negligible." Do you agree ? .lustifo your

ansrver. 5

P.l'.o.

() M2

(c) Why is Modificd lnternal Ratc of Return (MIRR) considered

superior to lnternal Rate of Return ? When can a project

be accepted using IVIRR ?

()r
.
(ril "The Finance firnction in an organization is concerned

only rvith financing aspccts of the business." Do you

agrec ? Explain. l0

(e) Explain rvealth nraximization as the operationally f'easible

criterion fcrr flnancial decisiorts. ls rnaximization of

sales same as nraxinrization o1' shareholders' wealth 'i

Whv ? l0

) (a) What is Fisher's Rate of lntersection ? Explain its

significance in capital budgeting. )

(hi Worldwide Tour Ltd. is evaluating a project which

requires an investrnent outlay of Rs. 1,00.000 and is

expected io produce cash irrflows tbr tlvo years as given

belorv :

4W

Ycar I Year 2

CI'AT (Rs.) CFAT (Rs.) Prob.

7-5.m0 0.i0 75.000 0.20

65.000 0.40 70.000 0.60

40,m0 0.30 90,000 0.20

Assunte that the cash t'lorvs are independent and fbllorv

nornral distribution.
'the risk free rate is l0% and cost

ol' capital is l40,o. Calculate :

(0 NPV and risk i.e. o(NPV) as well as Coefllcient of

variation of the prqiect.

(ii) The probability that NPV rvill be rnore than 0.

(iit) Based on y'our calculations, should the pro.iect be
accepted ? 15

CI'

(c) Wlrat is capital rationing ? Which method is used to

evaluate the capital budgeting proposals in such
situation 'l 5

P.1'.O.

(4 4W2

@ How does inflation affect evaluation of capital projects ?

Pepper Clock Ltd. is considering purchase of a new machine

which will cost Rs. 8,00,000 and have an economic life

of 8 years with no salvage value. The expected Earnings

before depreciation and Taxes (EBDT) is Rs. 1,60,000 p.a.

which is subject to inflation of 10o/o p.a. Assume the

tax rate is 30o/o and depreciation is charged on Straight

line Basis. Calculate :

(l) nominal CFATs of the machine

(1, real CFATs of the machine

(iii) If real cost of capital is l5%o, should the machine

be purchased ? l5

(a) Explain the following :

(,) Net Operating Income QrlOl) Approach lts. Traditional

approach of capital structure.

(tD MM Hypothesis with Corporare Taxes. IO

4ry2

(b) MCPizza Ltd. PresentlY has Rs, 10,00,000 l0%

debentures and 3,00'000 equitY shares outstanding
of

Rs. l0 per share, selling at Rs. 15 per share' In order

to finance a new project, the company needs Rs' 30

lakh of additional funds which can be raised either by

the ISSUC of 2 lakh equity shares at Rs' 15 per share

OR issue of l0% debentures. for Rs. 30 lakh at par'

After undertaking new project' the expected EBIT of the

company will be Rs. 8 Lakh p'a' normally distributed

with a standard deviation of Rs' 5 Lakh' Assume that

the corporate tax rate is 35%. Calculate :

(,) The expected EPS under each financial plan'

(lr) lndifferenec level of EBIT between the two options

of fund raising.

(iil) Which financial plan would you advise ? Why ? l0

P.T.O.

(61 "1|)c)l

Or

(c, Whatistheetfccto|corporaletaxesancllletscrrtltltare.s

on leverage benefrts ? Explain using Merton Miller argunlent

5
on Clapital strtlcttlre.

(rt) The capital strttctttre of Evcrdrivc Ltd. comprises I l-akh

c'cluity shares o1' Rs. l0 each selling at a Price of

Rs. 12 each and Rs. l0 Lakh llgi' debenttrres. What

is the present value of lnterest tax shield tbr the contPan,r

under the fbllowing cases ;

(4 When there is no corporate tax or personal tax

rates.

(li) When corporate tax rate is 25% but personal tax

rates are Nil.

(ili) When corporate tax rate is 25')b' personal tlrx rale

rate on interest inconte is 10016 and personal tax

rate on dividend iltcorrre 109'i''

W2

(rr) When corPorate tax l'ate ls 2504, personal tax rate
tax rate
on interest income is 25o/o and personal

on dividend income Nil'

having l'00'000
\c) Unidell Ltd' is an all equity company

shares outstanding. lts cost of equity
is l0%' Lovadell

to the same
Ltd. is sitnilar to Unidell Ltd' and belongs
debentures amounting
risk class except that it also has l0%

The EBIT of both
Rs. 10.00,000 in its capital structure'
that the corporate
the companies is Rs' 1,40'000' Assume

tax rate is '109'o.

as per
(i) Calculate the value of both the companies

MM hypothesis with corporate taxes'

(ii ) If the actual rrrarket value of Lovadell Ltd' is
Rs. 13.00,000, speci$ whether the company
is

Also explain
overvalued or undervalued in the market'

will be
the process through which the equilibrium
l0
set ?

P.T.O.

4W2

4. {a) Explain Miller-Orr Model of Cash Management. How is

it diffbrent from Baumol,s Model ? What is the significance

of Return Point in that Moclel ? Explain with the help

of an example. l0

(b) Xylo Ltd. has 8 lakh shares outstanding at the beginning

of the year. The current market price of the share is
Rs. 120. The Board of Directors of the company is

contemplating Rs. 6 per share dividend. The rate of

capitalization appropriate to the risk class to which the

company belongs is 9%. Based on MM approach calculate

the market price of the company when :

(i) Dividend is declared.

(ii) Dividend is nor declared.

(iii) How many new shares are to be issued by the
company if the company desires to fund an investment

budget of Rs. 3 Crores by the end of the year

assuming that the net income for the year will

be Rs. 1.6 Crores. l0

4ry2

Or

(c) Why is MM hypothesis on irrelevance of dividend
criticized ? Explain in brief Signaling theory on
dividend. 10

@ The present cash discount terms of Giani Ltd. is
"l/10 net 20 days". The company has present sales of
Rs. 60 lakhs. lts average collection period is l5 days.

The proportion of sales on which customers currently

avail cash discount is 0.70. To stimulate demand, the

company is planning to give credit terms of "2110 net

30 days". In such a case, sales are expected to increase

by 25%. After the Change, the average collection period

is expected to be 35 days. However the proportion of

sales on which customers avail cash discount goes up

to 0.80. The variable cost to sales ratio is 0.80 and the

company's before tax required rate of return on investment

in receivables is 20oh. Corporate tax rate is 30%.

Should the company change its,credit terms ? Show all

necessary calculations. Assume a 360-days year. 10

P.T.O.

t0 4W2

(a) What are the approaches of current assets financing ?

Explain in detail. Which approach is more suitable in

highly uncertain financial environment ? Explain. l0

(b) Target Ltd. is being acquired by Acquirer Ltd. on a share

exchange basis. The relevant financial data for the two

companies is given below :

Pa rticu la rs Acquirer Ltd. Target Ltd.

Earning after Tax 150 n

(Rs. Lakh)

No. of Shares t5

(Lakh)

P/E Ratio

Determine :

(,) Pre merger markel price per share for both the

companies.

402
( lr )

Ltd' should ot'l'er rvitlrout
(,,) The cxchange ratio Acquirer
the dilution ol' its F'PS

Ltd' slrould oft-er if
(iii) -the cxchange ratio Acquirer
of its tnarkct price
it does not rvant the tlilution
l0
Per slrirre'

(h'

the tbllorving :
Write short notes on

(i) Demerger

(lr) l.everagctl BuYout

(iri) OPcrating C-vclc

(i') CollectionMatrix'

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