Program 2C00455 paper 44804 QP 75414 TYBAF SEM V FINANCIAL MANAGEMENT II 22/11/2019

Q.1 A Corporate level 2.Payback 3. Interest rate at which NPV is zero 4.Industry Norms
5. Both a & b 6. Re-investing profits 7.Equity shares & Debentures 8.Price Movement
9.All of the above 10Stipulated maturity period
Q.1 B TRUE: 2,4,6,7,8,9,10 FALSE:1,3,5
Q. 2a] Pay Back Period:

Year Net Cash Flow(rs) Cum. Net Cash Flow(rs)

1. 42,000 42,000
2. 42,000 84,000
3 42,000 1,26,000
4. 42,000 1,68,000
5. 42,000 2,10,000
6. 48,000 2,58,000
7. 60,000 3,18,000
8. 90,000 4,08,000
9. 60,000 4,68,000
10. 24,000 4,92,000
Initial outlay =Rs. 2,40,000, cash flows for 5 years =Rs.2,10,000
Balance outlay = Rs.2,40,000 –Rs. 2,10,000 = Rs.30,000
cash flow for 6years = Rs 48,000
Therefore, Payback period = 5years +30,000/48,000 =5.62 years 5mks
Year Net Cash Flow(rs) PV(10%) PV(Rs)
1 42,000 0.909 38,178
2 42,000 0.826 34,692
3 42,000 0.751 31,542
4 42,000 0.683 28,686
5 42,000 0.621 26,082
6 48,000 0.564 27,072
7 60,000 0.513 30,780
8 90,000 0.467 42,030
9 60,000 0.424 25,440
10 24,000 0.386 9264
Total Inflows 293766
(-) Initial outlay (2,40,000)
NPV 53,766 5mk
PI = 2,93,766/2,40,000 = 1.22 5mk
Payback period =5.62 years
NPV = Rs. 53,76I PI = 1.22

OR

Q.2b]5mk for calculation of NPV

Particulars Amount Amount

P.V of savings
Year1 (1,20,000*0.9259) 1,11,108
Year 2 (1,40,000*0.8573) 1,20,022
2,31,130
Less:
P.V of Running cost
Year1 (40,000*0.9259) 37,036
Year 2 (50,000*0.8573) 42,864 (79,900)
Net savings 1,51,230
(-) Purchase Cost of Plant (1,40,000)
N.P.V 11,230
1. Sensitivity for plant cost: If the purchase cost of plant increase by Rs. 11,230. The N.P.V of the project will be
zero. The sensitivity for plant cost is: 11,230/1,40,000*100 = 8.02% 1mk
2. Sensitivity for Running cost: If the present value of running cost increase by Rs. 11,230. The N.P.V of the
project will be zero. The sensitivity for Running cost is: 11,230/79,900*100 =14.06% 1mk
3. Sensitivity for savings: If the saving decreases by Rs.11, 230. The N.P.V of the project will be zero. The
sensitivity of savings is: 11,230/2,31,130*100 = 4.86% 1mk
Sensitivity for Plant Cost is = 8.02% Sensitivity for Running cost is =14.06%
Sensitivity of Savings = 4.86% Analysis: Savings is most sensitive
Q2c]
Proposal Outlay (Rs).1 NPV(RS) .2 INFLOW P.I(1+2)/1 I.R.R.
(1+2)
A 28,00,000 12,00,000 40,00,000 1.428 (4) 20% (1)
B 10,00,000 6,40,000 16,40,000 1.640 (2) 17.0% (5)
C 20,00,000 8,00,000 28,00,000 1.400 (5) 19.0% (2)
D 8,00,000 4,00,000 12,00,000 1.500 (3) 17.5% (4)
E 22,00,000 18,00,000 40,00,000 1.818 (1) 18.0% (3)
F 30,00,000 -10,00,000 20,00,000 0.687 (0) 12.0% (0)
It may be noted the above techniques given different proposals. The proposal F has not been assigned any ranking
because it is having negative NPV and its PI is less than 1. Now the firm has to select out these 5 proposals so that
the total capital outlay is within the budget constraint of Rs. 20, 00,000.PI calculation 4 mks and ranking 1 mk.
NPV ranking 1 mk. Comment 1mk

Q.3c]

Particulars Present Proposed

EBIT 1600000 1600000
WACC 10% 10%
Market value of the Co. (V) 16000000 16000000
V=EBIT/Ko [ 3 marks]
Less: Market value of Debt (D) 4000000 4800000
Market value of Equity (S) 12000000 11200000
S= V-D [ 3 marks] 1280000 1216000
Earning for Equity Shareholders( =EBIT-INTEREST) [ 2 marks]
Equity Capitalization Rate (Ke) 10.67% 10.86%
Ke= Earning available to Equity shareholders/S x100 [ 2 marks]

Conclusion: As Net operating income Approach is a Capital structure irrelevant theory. So any
change in combination of debt and equity does not affect the market value of the company i.e.
WACC remains same. [ 2 marks]
VERIFICATION: [ 3 marks ]
WACC PRESENT = [ Cost of debt x D/V] + [ Cost of Equity x S/V]
= [ 0.08 x 4000000/16000000] + [ 0.1067 x 12000000/16000000]
= 0.02 + 0.08
= 0.1 i.e. 10%
WACC PROPOSED = [ 0.08 x 4800000/16000000] + [0.1086 x 11200000/16000000]
= 0.02 + 0.08 = 0.1 i.e. 10%

OR

Q. 3b]Reliance Co.Ltd. D0 = Dividend of Last year D1 = Dividend of First year

 D2 = Dividend of Second year D3 = Dividend of Third year g = Growth Rate
Ke = Cost of Equity i.e. Investors Desired Rate of Return i.e. 12% [3 marks]
D1 = D0 ( 1+ g) = 2 (1+ 0.25)= 2.50 D2 = D1 ( 1+ g)= 2.50( 1+ 0.25)= 3.125
D3 = D2 ( 1+ g) = 3.125( 1+ 0.05) = 3.28 Therefore, Market Price for Second Year: [3 marks]
P2 = D3/Ke-g= 3.28/0.12-0.05
P2 = Rs. 46.86
- Calculation of Present Value @12% PV FACTOR: [ 2 marks]
First year Dividend [ 2.50 x 0.893] = Rs. 2.23
Second year Dividend [ 3.125 x 0.797] = Rs. 2.49
Market Price per share for Second year [ 46.86 x 0.797] = 37.35.

Q3c]4mks for calculation

Investments in No. of Units Market price per Investment Value

unit(Rs.) ( No. of units x Market
price per unit)
X Ltd. 10000 18.50 185000
Y Ltd. 35000 384.40 13454000
Z Ltd. 10000 263.60 2636000
P Ltd. 75000 575.60 43170000
Q Ltd. 20000 27.65 553000
Total 59998000

NAV = Investment Value/ No.of Outstanding units 1mk

NAV = 59998000 / 500000 1mk
NAV = 119.996 p.u. 1mk

Q.4a]

Particulars Present Plan I Plan II Plan II

Policy
Sales 15 16 18 21

- Variable Cost 10.5 11.2 12.6 14.7

Contribution 4.5 4.8 5.4 6.3

- Fixed Cost
3 3 4 4
Profit
1.5 1.8 1.4 2.3
Total Cost
13.5 14.2 16.6 18.7
Average investment in receivables
0.75 1.58 3.23 5.19
Cost of investment in receivables
0.15 0.32 0.65 1.04
Bad Debts
0.04 0.08 0.18 0.53
Total Cost
0.19 0.4 0.83 1.57
Net Benefit
1.31 1.4 0.57 0.73
Incremental Net Benefit
- 0.09 (0.74) (0.58)

Plan I should be adopted since the incremental net benefit is highest i.e 0.09.
Q.4b] YTM
Bond X = 15.23% 3mks each
Bond Y = 19.44% 3mks each
Bond Y should be selected 2mk

Q.4c]
4
Year Coupon PV@15% PV PV/Sum *100 1*years
1 14 0.8696 12.174 :1 0.126
2 14 0.7561 10.585 0.126 0.219
3 14 0.6575 9.205 0.1095 0.2856
4 14 0.5718 8.005 0.0952 0.3312
5 114 0.4972 56.681 0.0828 2.9325
Sum 96.65 3mks 0.5865 3.8943 4mk Dura
1.00 tion =
3.89
years
Q5 a Determinants of capital structure : growth, stability ,risk, trading on equity, degree of control, flexibility ,market
condition , cost of financing
b.Parameters for evaluation of portfolio performance : quality of investment, returns, risk, identity of factors which has
generated returns.
Q5 Short notes:
1.Capacity, Capital,condition,collateral, character
2.YTM: Meaning ,formula, one example
3.Open ended and closed ended : period, example
4. Internal rate of return: meaning, formula
5.Methods of assessing :
Students can be given full marks when they have covered points .