Questions:
Question 1. Critically evaluate various approaches to the financial management.
Question 2. What are the differences between fund flow and cash flow?
Question 3. (a) Critically examine the advantages and disadvantages of equity shares.
(b) Evaluate the overall view of debentures.
Question 4. (a) What is optimum capital structure?
(b) Compute the market value of the firm, value of shares and the average cost of capital from the following information.
Net operating income Rs. 2, 00,000
Total investment Rs. 5, 00,000
Equity capitalization Rate:
(a) If the firm uses no debt 10%
(b) If the firm uses Rs. 25,000 debentures 11%
(c) If the firm uses Rs. 4, 00,000 debentures 13%
Assume that Rs. 5, 00,000 debentures can be raised at 6% rate of interest whereas
Rs. 4, 00,000 debentures can be raised at 7% rate of interest.
Question 5. A company has on its books the following amounts and specific costs of each type of capital.
|
Type of Capital
|
Book Value Rs.
|
Market Value Rs.
|
Specific Costs (%)
|
|
Debt
|
4,00,000
|
3,80,000
|
5
|
|
Preference
|
1,00,00
|
1,10,00
|
6
|
|
Equity
|
6,00,00
|
9,00,000
|
15
|
|
Retained Earning
|
2,00,00
|
3,00,000
|
13
|
|
|
|
|
|
|
|
13,00,000
|
16,90,00
|
|
Determine the weighted average cost of capital using:
(a) Book value weights, and
(b) Market value weights.
Question 6. Distinguish the operating leverage from financial leverage.
Question 7. Explain the factors affecting the dividend policy.
Question 8. (a) A project costs Rs. 20, 00,000 and yields annually a profit of Rs. 3, 00,000 after depreciation @ 12½% but before tax at 50%. Calculate the pay-back period.
Profit after depreciation 3, 00,000
Tax 50% 1, 50,000
1, 50,000
Add depreciation:
20, 00,000 12.5 % 2, 50,000
(b) From the following information, calculate the net present value of the two projects and suggest which of the two projects should be accepted a discount rate of the two.
|
|
Project X
|
Project Y
|
|
Initial Investment
|
Rs. 20,000
|
Rs. 30,000
|
|
Estimated Life
|
5 years
|
5 years
|
|
Scrap Value
|
Rs. 1,000
|
Rs. 2,000
|
The profits before depreciation and after taxation (cash flows) are as follows:
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
|
Rs.
|
Rs.
|
Rs.
|
Rs.
|
Rs.
|
|
Project X
|
5000
|
10,000
|
10,000
|
3000
|
2000
|
|
Project Y
|
20000
|
10,000
|
5000
|
3000
|
2000
|
Note: The following are the present value factors @ 10% p.a.
|
Year
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Factor
|
0.909
|
0.826
|
0.751
|
0.683
|
0.621
|
0.564
|
Question 9. (a)An annuity is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the entire series does contain an annuity. Is this statement true or false? And Why?
(b) Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds?