| 1. | Comment on any four of the following: | | |
| | (i) | It is not always necessary that inventory is held for smooth manufacturing and sales operations. | | (0) |
| | (ii) | Capital rationing does not always lead to optimum results. | | (0) |
| | (iii) | Corporate taxation creates incentive for advancement to the company by utilising borrowed funds for financing its growth schemes. | | (0) |
| | (iv) | Financial gearing is a double–edged sword. | | (0) |
| | (v) | Financial policy and corporate strategy are most significant concerns of top management. | | (0) |
| | (5 marks each) | | |
| 2. | (a) | Ash Enterprises Ltd. generated the following forecast in real terms for a capital budgeting project : | Year–0
(Rs. in ‘000) | Year–1
(Rs. in ‘000) | Year–2
(Rs. in ‘000) | Capital expenditure
Revenue
Cash expenses
Depreciation | 1,210
–
–
– | –
1,900
950
605 | –
2,000
1,000
605 |
Ash, the President estimates the inflation to be 10% per year over the next two years. In addition, Ash believes that the cash flows of the project should be discounted at the nominal rate of 15.50%.
Required (Apply tax rate of 30%) — | (i) | Workout NPV based on normal cash flow technique. | | (ii) | Workout NPV based on real cash flow technique. |
| | (0) |
| | (10 marks) | | |
| | (b) | Prakash Motors Pvt. Ltd. purchases 9,000 spare parts for its annual requirements ordering one month usage at a time. Each spare part costs Rs. 20. The ordering cost per order is Rs. 15 and the carrying charges are 15% of unit cost. You have been asked to suggest the most economical purchasing policy for the company. What advice would you offer and how much would it save for the company per year ? | | (0) |
|
| | (5 marks) | | |
| | (c) | Following are the details regarding operations of Radiance Enterprises Ltd. during a period of last 12 months : | Rs. | Sales
Selling price (per unit)
variable cost (per unit)
Total cost (per unit) | 12,00,000
10
7
9 |
Credit period allowed to customers is one month.
The company is considering a proposal for a more liberal credit by increasing the average collection period from one month to two months. This relaxation is expected to increase sales by 25%. You are asked to advise the company regarding adoption of new credit policy assuming that the company’s required rate of return on investment is 30%. | | (0) |
| | (5 marks) | | |
| 3. | (a) | The following data relate to Intel Projects (India) Ltd. : | Year ending 31stMarch | Net Earnings Per Share
(Rs.) | Net Dividend Per Share
(Rs.) | 2006
2007
2008
2009
2010 | 32
28
26
26
24 | 17.50
18.50
20.00
21.00
22.00 |
There are 10 lakh equity shares issued and majority of these shares are owned by private investors. There is no debt in the capital structure of the company.
The company has been experiencing difficult trading conditions over the past few years. In the current year, net earnings are likely to be 2.20 crore, which will be just sufficient to pay a maintained dividend of Rs. 22 per share.
You are required to comment on the company’s dividend policy between 2005–06 to 2009–10; and on its possible consequences for earnings. | | (0) |
| | (6 marks) | | |
| | (b) | Hi–Fi Builders Ltd. needs to acquire the use of a crane for its construction business. The crane if purchased outright will cost Rs. 10,00,000. A hire–purchase and leasing company has offered the following two alternatives : Hire–Purchase : Rs. 2,50,000 will be payable on signing of the agreement. Three annual installments of Rs. 4,00,000 will be payable at the end of each year starting from year one. The ownership in the crane will be transferred automatically at the end of the third year. It is assumed that the company will be able to claim depreciation on straight line basis with zero salvage value. Leasing : Rs. 20,000 will be payable towards initial service fee upon signing of the lease agreement. Annual lease rent of Rs. 4,32,000 is payable at the end of each year starting from the first, for a period of three years The company is in 35% tax bracket and its discount rate is 20%. Should it hire–purchase or lease the crane ? | | (0) |
| | (8 marks) | | |
| | (c) | How do firms manage economic risk due to fluctuations in forex market? | | (0) |
| | (6 marks) | | |
| 4. | Distinguish between any four of the following: | | |
| | (i) | ‘Control need of widely–held company’ and ‘control need of closely–held company’ | | (0) |
| | (ii) | ‘Capital structure’ and ‘financial structure.’ | | (0) |
| | (iii) | ‘Finance lease’ and ‘sale–and–lease back’. | | (0) |
| | (iv) | ‘Net income approach to capital structure’ and ‘net operating income approach to capital structure’’. | | (0) |
| | (v) | ‘Financial risk’ and ‘business risk’ | | (0) |
| | (5 marks each) | | |
| 5. | (a) | A Portfolio Manager has three stocks in his portfolio. Following information is available in respect of his portfolio : | Company | Investment
(Rs.) | β | X Ltd.
Y Ltd.
Z Ltd. | 6,00,000
3,00,000
1,00,000 | 1.3
1.4
0.9 |
Expected return on the market portfolio is 15% and the risk free rate of interest is 6%. On the basis of Capital Asset Pricing Model (CAPM), compute the following : | (i) | Expected return of the portfolio; and | | (ii) | Expected β of the portfolio. |
| | (0) |
| | (8 marks) | | |
| | (b) | The following deta is related to X Ltd., Y Ltd. and Z Ltd. for the current financial year: | X Ltd. | Y Ltd. | Z Ltd. | Variable cost as a % of sales
Interest expense (Rs.)
Degree of operating leverage
Degree of financial leverage
Corporate tax rate | 70
20,000
5:1
3:1
30% | 75
30,000
6:1
4:1
30% | 50
1,00,000
2:1
2:1
30% |
You are required to prepare their income statements. | | (0) |
| | (12 marks) | | |
| 6. | Unichem Ltd. sells its products on a gross profit margin of 20% on sales. The following figures and ratios are extracted from its annual accounts for the year ended 31 stMarch, 2010 : Sales for the year (all credit)
Fixed assets turnover (Cost of goods sold basis)
Stock turnover (Cost of goods sold basis)
Liquid ratio
Current ratio
Debtors collection period
Reserves and surplus to share capital
Capital gearing ratio
Fixed assets to net worth | Rs.40,00,000
1.6
8
1 : 1
1.8 : 1
1 Month
0.6 : 1
0.5
1.25 : 1 |
On the basis of above details, you are required to prepare — | (i) | Balance sheet of the company; and | | (ii) | The statement showing working capital requirement, with a provision for contingencies @ 10% of net working capital. |
| | (0) |
| | (20 marks) | | |
| 7. | Write notes on any four of the following: | | |
| | (i) | Forfaiting | | (0) |
| | (ii) | Financial distress | | (0) |
| | (iii) | Cost of retained earnings | | (0) |
| | (iv) | Advantages of commodity trading | | (0) |
| | (v) | Services provided by venture capital fund. | | (0) |
| | (5 marks each) | | |
| | | TABLE 1 : PRESENT VALUE OF RUPEE ONE | | RATE | Year
1 | Year
2 | Year
3 | Year
4 | Year
5 | Year
6 | Year
7 | Year
8 | Year
9 | Year
10 | Year
11 | Year
12 | Year
13 | Year
14 | Year
15 | 5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25% | 0.9524
0.9434
0.9346
0.9259
0.9174
0.9091
0.9009
0.8929
0.8850
0.8772
0.8696
0.8621
0.8547
0.8475
0.8403
0.8333
0.8264
0.8197
0.8130
0.8065
0.8000 | 0.9070
0.8900
0.8734
0.8573
0.8417
0.8264
0.8116
0.7972
0.7831
0.7695
0.7561
0.7432
0.7305
0.7182
0.7062
0.6944
0.6830
0.6719
0.6610
0.6504
0.6400 | 0.8638
0.8396
0.8163
0.7938
0.7722
0.7513
0.7312
0.7118
0.6931
0.6750
0.6575
0.6407
0.6244
0.6086
0.5934
0.5787
0.5645
0.5507
0.5374
0.5245
0.5120 | 0.8227
0.7921
0.7629
0.7350
0.7084
0.6830
0.6587
0.6355
0.6133
0.5921
0.5718
0.5523
0.5337
0.5158
0.4987
0.4823
0.4665
0.4514
0.4369
0.4230
0.4096 | 0.7835
0.7473
0.7130
0.6806
0.6499
0.6209
0.5935
0.5674
0.5428
0.5194
0.4972
0.4761
0.4561
0.4371
0.4190
0.4019
0.3855
0.3700
0.3552
0.3411
0.3277 | 0.7462
0.7050
0.6663
0.6302
0.5963
0.5645
0.5346
0.5066
0.4803
0.4556
0.4323
0.4104
0.3898
0.3704
0.3521
0.3349
0.3186
0.3033
0.2888
0.2751
0.2621 | 0.7107
0.6651
0.6227
0.5835
0.5470
0.5132
0.4817
0.4523
0.4251
0.3996
0.3759
0.3538
0.3332
0.3139
0.2959
0.2791
0.2633
0.2486
0.2348
0.2218
0.2097 | 0.6768
0.6274
0.5820
0.5403
0.5019
0.4665
0.4339
0.4039
0.3762
0.3506
0.3269
0.3050
0.2848
0.2660
0.2487
0.2326
0.2176
0.2038
0.1909
0.1789
0.1678 | 0.6446
0.5919
0.5439
0.5002
0.4604
0.4241
0.3909
0.3606
0.3329
0.3075
0.2843
0.2630
0.2434
0.2255
0.2090
0.1938
0.1799
0.1670
0.1552
0.1443
0.1342 | 0.6139
0.5584
0.5083
0.4632
0.4224
0.3855
0.3522
0.3220
0.2946
0.2697
0.2472
0.2267
0.2080
0.1911
0.1756
0.1615
0.1486
0.1369
0.1262
0.1164
0.1074 | 0.5847
0.5268
0.4751
0.4289
0.3875
0.3505
0.3173
0.2875
0.2607
0.2366
0.2149
0.1954
0.1778
0.1619
0.1476
0.1346
0.1228
0.1122
0.1026
0.0938
0.0859 | 0.5568
0.4970
0.4440
0.3971
0.3555
0.3186
0.2858
0.2567
0.2307
0.2076
0.1869
0.1685
0.1520
0.1372
0.1240
0.1122
0.1015
0.0920
0.0834
0.0757
0.0687 | 0.5303
0.4688
0.4150
0.3677
0.3262
0.2897
0.2575
0.2292
0.2042
0.1821
0.1625
0.1452
0.1299
0.1163
0.1042
0.0935
0.0839
0.0754
0.0678
0.0610
0.0550 | 0.5051
0.4423
0.3878
0.3405
0.2992
0.2633
0.2320
0.2046
0.1807
0.1597
0.1413
0.1252
0.1110
0.0985
0.0876
0.0779
0.0693
0.0618
0.0551
0.0492
0.0440 | 0.4810
0.4173
0.3624
0.3152
0.2745
0.2394
0.2090
0.1827
0.1599
0.1401
0.1229
0.1079
0.0949
0.0835
0.0736
0.0649
0.0573
0.0507
0.0448
0.0397
0.0352 |
| | |
| | | TABLE – 2 : PRESENT VALUE OF AN ANNUITY OF RUPEE ONE | | RATE | Year
1 | Year
2 | Year
3 | Year
4 | Year
5 | Year
6 | Year
7 | Year
8 | Year
9 | Year
10 | Year
11 | Year
12 | Year
13 | Year
14 | Year
15 | 5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25% | 0.9524
0.9434
0.9346
0.9259
0.9174
0.9091
0.9009
0.8929
0.8850
0.8772
0.8696
0.8621
0.8547
0.8475
0.8403
0.8333
0.8264
0.8197
0.8130
0.8065
0.8000 | 1.8594
1.8334
1.8080
1.7833
1.7591
1.7355
1.7125
1.6901
1.6681
1.6467
1.6257
1.6052
1.5852
1.5656
1.5465
1.5278
1.5095
1.4915
1.4740
1.4568
1.4400 | 2.7232
2.6730
2.6243
2.5771
2.5313
2.4869
2.4437
2.4018
2.3612
2.3216
2.2832
2.2459
2.2096
2.1743
2.1399
2.1065
2.0739
2.0422
2.0114
1.9813
1.9520 | 3.5460
3.4651
3.3872
3.3121
3.2397
3.1699
3.1024
3.0373
2.9745
2.9137
2.8550
2.7982
2.7432
2.6901
2.6386
2.5887
2.5404
2.4936
2.4483
2.4043
2.3616 | 4.3295
4.2124
4.1002
3.9927
3.8897
3.7908
3.6959
3.6048
3.5172
3.4331
3.3522
3.2743
3.1993
3.1272
3.0576
2.9906
2.9260
2.8636
2.8035
2.7454
2.6893 | 5.0757
4.9173
4.7665
4.6229
4.4859
4.3553
4.2305
4.1114
3.9975
3.8887
3.7845
3.6847
3.5892
3.4976
3.4098
3.3255
3.2446
3.1669
3.0923
3.0205
2.9514 | 5.7864
5.5824
5.3893
5.2064
5.0330
4.8684
4.7122
4.5638
4.4226
4.2883
4.1604
4.0386
3.9224
3.8115
3.7057
3.6046
3.5079
3.4155
3.3270
3.2423
3.1611 | 6.4632
6.2098
5.9713
5.7466
5.5348
5.3349
5.1461
4.9676
4.7988
4.6389
4.4873
4.3436
4.2072
4.0776
3.9544
3.8372
3.7256
3.6193
3.5179
3.4212
3.3289 | 7.1078
6.8017
6.5152
6.2469
5.9952
5.7590
5.5370
5.3282
5.1317
4.9464
4.7716
4.6065
4.4506
4.3030
4.1633
4.0310
3.9054
3.7863
3.6731
3.5655
3.4631 | 7.7217
7.3601
7.0236
6.7101
6.4177
6.1446
5.8892
5.6502
5.4262
5.2161
5.0188
4.8332
4.6586
4.4941
4.3389
4.1925
4.0541
3.9232
3.7993
3.6819
3.5705 | 8.3064
7.8869
7.4987
7.1390
6.8052
6.4951
6.2065
5.9377
5.6869
5.4527
5.2337
5.0286
4.8364
4.6560
4.4865
4.3271
4.1769
4.0354
3.9018
3.7757
3.6564 | 8.8633
8.3838
7.9427
7.5361
7.1607
6.8137
6.4924
6.1944
5.9176
5.6603
5.4206
5.1971
4.9884
4.7932
4.6105
4.4392
4.2784
4.1274
3.9852
3.8514
3.7251 | 9.3936
8.8527
8.3577
7.9038
7.4869
7.1034
6.7499
6.4235
6.1218
5.8424
5.5831
5.3423
5.1183
4.9095
4.7147
4.5327
4.3624
4.2028
4.0530
3.9124
3.7801 | 9.8986
9.2950
8.7455
8.2442
7.7862
7.3667
6.9819
6.6282
6.3025
6.0021
5.7245
5.4675
5.2293
5.0081
4.8023
4.6106
4.4317
4.2646
4.1082
3.9616
3.8241 | 10.3797
9.7122
9.1079
8.5595
8.0607
7.6061
7.1909
6.8109
6.4624
6.1422
5.8474
5.5755
5.3242
5.0916
4.8759
4.6755
4.4890
4.3152
4.1530
4.0013
3.8593 |
| | |
