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During the current year ended 31st March, a dividend of Rs. 19,500 was paid and the assets of another company were purchased for Rs. 37,500 payable in fully paid-up shares. Such assets purchased were:
Stock — Rs. 16,230; Machinery — Rs. 13,770 and Goodwill — Rs. 7,500
In addition, plant at a cost of Rs. 4,237 was purchased during the year. |
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The following depreciation was written off during the year: on Property — Rs. 3,187 and on Machinery — Rs. 8,070.
Income-tax during the year amounting to Rs. 21,578 was changed to provision for taxation. Net profit for the year before tax was Rs. 57,225.
(a) Prepare statement of changes in financial position on total resources basis, and
(b) Prepare a schedule of changes in the working capital. |
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14. |
(a) |
A company is faced with the problem of choosing between two mutually exclusive projects. Project A requires a cash outlay of Rs. 1,00,000 and cash running expenses of Rs. 35,000 per year. On the other hand, Project B will cost Rs. 1,50,000 and require cash running expenses of Rs. 20,000 per year. Both the machines have a eight-year life. Project A has a salvage value of Rs. 4,000 and Project B has a salvage value of /rs. 14,000. The company's tax rate is 50% and it has a 10% required rate of return. |
6+10=16 |
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Assuming depreciation on straight line basis, ascertain which project should be accepted. Present value of an annuity of Re. 1 for 8 years = 5.335 and present value of Re. 1 at the end of 8 years = 0.467, both at the discount rate of 10%. |
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(b) |
The present capital structure of a company is as follows: |
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| Rs. (million) |
Equity Shares (Face value = Rs. 10) Reservers 11% Preference Shares (Face value = Rs. 10) 12% Debentures 14% Term Loans |
240 360 120 120 360 |
| 1,200 |
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Additionally the following information are available: |
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Company's equity bata — 1.06
Yield on long-term treasury bonds — 10%
Stock market risk premium — 6%
Current ex-dividend equity share price — Rs. 15
Current ex-dividend preference share price — Rs. 12
Current ex-interest debenture market value — Rs. 102.50 per Rs. 100
Corporate tax rate — 40% |
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The debentures are redeemable after 3 years and interest is paid annually. Ignoring flotation costs, calculate the company's weighted average cost of capital (WACC). |
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15. |
(a) |
Discuss the relative merits of Rights issue and New Public issue as sources of equity finance for an established company. |
4+(3x4) |
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(b) |
Write short notes on any three of the following topics:
(i) | Operating and cash cycles; |
(ii) | Trading on equity; |
(iii) | Sensitivity analysis in capital budgeting; |
(iv) | Factoring and its advantages. |
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16. |
(a) |
Enumerate the basic differences between a forward contract and futures contract. |
4 |
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(b) |
Briefly explain the major types of currency exposures. |
4 |
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(c) |
Explain the difference between degree of financial and total leverages. |
4 |
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(d) |
Your bank wants to calculate Rupee. TT selling rate of exchange for DM since a deposit of DM 100,000 in a FNCR A/c has matured, when: |
4 |
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EURO 1 | = | DM 1,95583 (locked in rate) |
EURO 1 | = | US $ 1.02348/43 |
US % 1 | = | Rs. 48.51/53 |
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What is the Rupee TT selling rate for DM currency? |
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17. |
The issued capital of Indiana Ltd.comprises of 100,000 ordinary shares of Rs. 100 each. It has no fixed interest capital. It has paid a dividend of Rs. 30 per share consistently over years and each share has a current market value of Rs. 270 cum dividend. The next dividend is due to be paid shortly. Earnings have been running at about the same level as dividends. |
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The directors are now considering a new investment proposal, requiring an outlay of Rs. 20,00,000, which is expected to yield a net cash inflow of Rs. 4,00,000 p.a. indefinitely. All additional net cash receipts could be used to increase dividend payments. Three sources of finance for the new project are under consideration:
(a) | A reduction in the current dividend. |
(b) | A rights issue of one new share for every ten shares held, at Rs. 200 per share;and |
(c) | A new public issue of ordinary shares. |
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Assume that the broad details of the directors' plan become known in the stock market (but were not known when the share price was Rs. 270).
Estimate the new price per share:
(a) | If the current dividend is reduced; and |
(b) | If the rights issue are made |
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Calculate the price per share required in a new public issue if the entire surplus generated by the new project is to accrue to the existing shareholders. |
6+6+4 |
__________ |