(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.
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