FINANCIAL MANAGEMENT-KANNUR UNIVERSITY

            II  Semester M.B.A. Degree (Regular) Examination, July 2015
                                                     (2014 Admn.)
                          MBA - 2C08 : FINANCIAL MANAGEMENT

                                               SECTION-A
Answer two questions in this Sections. Each questions carries 13 marks.

 1.  Describe the scope of financial management in the light of changing financial

    environment.

                                              OR

   The following information is available in respect of a firm :

    Capitalisation rate 11 percent

     EPS Rs.20

    Assumed rate of return on investment (!)12 percent (!!) 11 percent(!!!) 10 percent.

     Dividend pay-out ratio: 0 percent 20 percent 40 percent 60 percent 80 percent

    100 percent.

    Show the effect of dividend  policy on the market price of shares, using Gordon's

     modal.

2.  Assume there are two firms L and U, which are identical in all respect except

     that firm L has 10 percent Rs.5,00,000 debentures. The earnings before interest

     and taxes of both the firms are equal that is Rs. 1,00,000. The equity capitalisation

     of firm L is slightly higher (16 percent) than that of firm U (12.5 percent). Compute

     the cost of capital and value of the firms. According Modigliani and miller  do

    they represent equilibrium values ? If not, explain the process of by which the

   value of the both firms will be equal. Assume that an investor holds 10 percent

   of the  outstanding shares in firm L to explain the arbitrage process.

                                             OR

Describe different capital budgeting techniques.

                                                  SECTION-B

Answer six questions in this Section. Each question carries 9 marks. (1 mark for

Part(a), 3 marks for Part (b) and 5 marks for Part (c).

3.  a) What is combined leverage ?

     b) What are the implications of financial, operating and combined leverage ?

     c) Two firms A and B have the following information :

    Firm                                                   A                                   B

Sales (Rs. in Lakh)                              1,800                              1,500

Variable Cost  (Rs.in Lakh)                  450                                   750

Fixed Cost (Rs in Lakh)                       900                                   375 

 You are required to calculate the degree of operating leverage and comment on

 the position of the firms. If sales increase by 20 percent what shall be the impact

 on the profitability of the two firms ?

4. a) What is cost of capital ?

    b) How to compute overall cost of capital.

   c) Explain the significance of cost of capital.

5. a) What is gross working capital ?

    b) Explain permanent working capital.

    c) Explain the determinants of working capital.

6. a) What is net present value ?

    b) Explain capital rationing.

    c) Consider the following two project.Calculate their NPV at 9 percent and 

       IRR. Do you find a difference in project ranking as per these two criteria ?

      Which project will you choose ? Why ?

      Cash Flows                                        Project P                           Project Q

        C0                                                     -840                                 -840

        C1                                                     700                                     70

        C2                                                     350                                    420

       C3                                                       70                                     760 

7. a) What is economic order quantity ?

    b) Explain the ABC analysis.

    c) A manufacturing company has an expected usage of 50000 units of certain

       product during the next year. The cost of processing an order is Rs.20 and

       the carrying cost per unit is Rs.0.50 for one year. Lead time on an order is

       five days and the company will keep a reserve supply of two days usage.

     You are required to calculate economic order point.

      (Assume 250 days year)

8.  a) What is cash planning ?

     b) Explain cash budget.

    c) Explain the four facets of cash management.

9.  a) What is credit policy ?

     b) Why do companies in India grant credit ?

    c) X Company is desirous to purchase a business and has consulted you and

       one point on which you are asked to advise them is the average amount of 

       working capital which will be required in the year's working.

       You are given the following estimates and are instructed to add 15 percent to

       your computed figure to allow for contingencies.

     Details                                                                  Amount for the year(Rs.)

    a)Average amount backed up for stocks

       Stock of finished product                                               5,000

       Stock of stores, material, etc.                                         8,000

   b) Average Credit given :

      Inland sales   6 weeks credit                                          3,12,000

      Export sales   11/2 weeks credit                                        78,000 

  c) Average time lag in payment of wages and other outgoing :

      Wages                                      11/2 weeks                                   2,60,000

     Stocks, materials,etc.                 11/2 months                                    48,000

     Rent,royalties,etc.                       6 months                                        10,000

     Clerical staff                               1/2 month                                      62,400

     Manager                                    1/2 month                                        4,800

    Miscellaneous Expenses               11/2 month                                   48,000

d) Payment in advance :

    Sundry expenses (paid quarterly in advance )                                     8,000

   undrawn profits on the average throughout the year                            11,000

  Prepare statement to determine the net working capital for the firm.