| 1. | Comment on any four of the following: | | |
| | (i) | A treasury manager has a significant role to play in the overall functioning of a firm. | | (0) |
| | (ii) | A firm’s stock price is not related to its mix of debt and equity financing. | | (0) |
| | (iii) | Depreciation is a source of internal finance. | | (1) |
| | (iv) | A stable dividend policy is always preferable to fluctuating dividend policy. | | (0) |
| | (v) | Risk and uncertainty are quite inherent in capital budgeting decisions. | | (0) |
| | (5 marks each) | | |
| 2. | (a) | Indigo Ltd. has the following capital structure: | Rs in Lakhs | Ordinary shares of Rs 1 each
Retained earnings
8% Debentures | 1,000
160
440 | | 1,600 |
In order to undertake a programme of expansion, the company requires to raise additional capital of Rs 400 lakh and three alternative financing schemes are under consideration: | (i) | A rights issue, at nominal value, of an additional 400 lakh Rs 1 ordinary shares: or | | (ii) | Issue, at nominal value, 400 lakh, 10% preference shares of Rs 1: or | | (iii) | Issue an additional Rs 400 lakh of 8% debentures. |
Without the expansion programme, Indigo Ltd‘s estimated annual profit before interest and tax in the foreseeable future is Rs 200 lakh. It the programme proceeds, this will rise to Rs. 280 lakh.
At present, the market values of the company's securities are: Ordinary shares
Debentures | Rs 5.40 (ex–dividend) per share
Rs 110 per Rs 100 nominal |
and the last ordinary dividend was 20 paise per share. If expansion does not take place, ordinary dividends are expected to grow at a constant rate of 2.5% per annum. After some initial fluctuations, the anticipated effect of expansion on dividends and market values is expected to stabilise as follows: | Expansion Financed by | | Rights
Issue | Preference
Shares | Debentures | Market value of an ordinary share
Market value of debentures per Rs 100 nominal
Market value of a preference share
Annual growth rate in ordinary shares | Rs 5.60
Rs 110
NA
3.5% | Rs5.80
Rs 110
Rs 1.14
4.0% | Rs 6.00
Rs 108
NA
5.0% |
The company‘s profit is subject to corporation tax at 35% and this rate is unlikely to change.
You are required to calculate for each alternative financing scheme: | (i) | the gearing ratio | | (ii) | the profit available per ordinary share | | (iii) | Weighted average cost of capital based on market value. |
Calculations may be restricted to two decimal places. | | (0) |
| | (14 marks) | | |
| | (b) | Rani has invested in a share whose dividend is expected to grow at 15% for 5 years and thereafter at 5% till life of the company. Find out value of the share, if current dividend is Rs 4 and investor‘s required rate of return is 6%. | | (0) |
|
| | (6 marks) | | |
| 3. | (a) | Peacock Ltd. has been engaged in manufacturing of textiles. It has a current sales of Rs 30 lakh per annum. The cost of sales is 75% of sales and bad debts are 1% of sales. The cost of sales comprises 80% variable costs and 20% fixed cost, while the company‘s required rate of return is 12%. The company currently allows customers 30 day‘s credit, but is now considering increasing this to 60 days’ credit in order to attract more customers.
It has been estimated that this change in policy will increase sales by 15%, while bad debts will increase from 1% to 4%. It is expected that the policy change will not result in any increase in fixed costs, creditors and stock level.
Should Peacock Ltd. introduce proposed policy? | | (0) |
| | (10 marks) | | |
| | (b) | The following information is related to Evergreen Ltd: Unit cost
Order cost
Inventory carrying cost
Back order cost (stock out cost)
Annual demand | Rs 200
Rs 320
Rs 40
Rs 20
2,000 units |
You are required to compute the following: | (i) | Minimum cost order quantity |
| (iii) | Minimum number of back orders |
| (iv) | Maximum inventory level |
(2 marks each) | 10 | (0) |
| 4. | Distinguish between any four of the following: | | |
| | (i) | ‘Current account’ and ‘capital account ’ in balance of payment. | | (0) |
| | (ii) | ‘Foreign direct investment’ and ‘ portfolio investment.’ | | (0) |
| | (iii) | ‘Ask price’ and ‘ bid price’. | | (0) |
| | (iv) | ‘Horizontal capital structure’ and ‘ Vertical capital structure’. | | (0) |
| | (v) | ‘Investment’ and ‘ speculation’ | | (0) |
| | (5 marks each) | | |
| 5. | (a) | Excel Ltd. is considering investing in a risky project which would be added to an existing portfolio of investment projects, also subject to risk. It envisages six possible states of the economy for which it has estimated probabilities and outcome as follows: State of
Economy | Probability | Return on
Existing Portfolio | Return on
Proposed Projects | 1
2
3
4
5
6 | 0.1
0.2
0.2
0.3
0.1
0.1 | 12%
14%
15%
16%
18%
20% | 8%
10%
12%
10%
14%
6% |
You are required to determine whether the project should be accepted. The risk – free rate of return is 6%. | | (0) |
| | (10 marks) | | |
| | (b) | The following details of Alpha Ltd. for the year ended 2010 are furnished: Financial leverage
Operating leverage
Interest charges per annum
Corporate tax rate
Variable cost as percentage of sales | 2:1
3:1
Rs.20 lakh
40%
60% |
prepare income statement of the company. | | (0) |
| | (6 marks) | | |
| | (c) | Mohan has a portfolio of 6 securities, each with a market value of Rs.10,000. The current beta (β) of the portfolio is 1.30 and β of the riskiest security is 1.80, Mohan wishes to reduce his portfolio β to 1.15 by selling the riskiest security and replacing it with another security with a lower β.What must be the β of the replacement security? | | (0) |
| | (4 marks) | | |
| 6. | Following information is extracted from the books of Perfume Ltd. at the end of financial year 2010 – 11 : Net sales
Debt–assets ratio
Debtors turnover ratio based on net sales
Inventory turnover ratio
Fixed assets turnover ratio
Net profit margin
Gross profit margin
Return on investment | Rs.20,00,000
0.6
2.0
1.25
0.80
5%
25%
2% |
| Balance Sheet as at 31st March, 2011 | | Liabilities | Rs. | Assets | Rs. | Equity
Long–term debts
Short–term debts | ?
?
10,00,000 | Net fixed assets
Inventory
Debtors
Cash | ?
?
?
? | | ? | | ? |
Calculate– | (i) | The working capital available with the company on 31st March, 2011. | | (ii) | Its permissible bank borrowings as per second method recommended by the Tandon Committee. |
| | (0) |
| | (20 marks) | | |
| 7. | Write notes on any four of the following: | | |
| | (i) | Sweat equity shares | | (0) |
| | (ii) | Benefits of depository system. | | (0) |
| | (iii) | Operating cycle | | (0) |
| | (iv) | Risks in forex market | | (0) |
| | (v) | Interest rate parity. | | (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 | 0.6400
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 |
| | |
