‘SVEM’s NMIMS MUKESH PATEL SCHOOL OF TECHNOLOGY MANAGEMENT & ENC Programme: MBA Tech (All Streams) ~ Year: IV « Semed Batch: 2015-16 | Academic Year: 2016-17 Subject: Financial Management L we Marks: 60 Time: 2.00 pm - 4.00 pm - Date: 17 April 2017 Durations: 2 Hrs No. of pages_2 Jastruction: Candidates should read carefully the instructions printed on the question paper and on the cover ofthe Answer Book, which is provided for their use. NB: 1) Question No. | is compulsory. 2) Out of remaining questions, attempt any 4 questions 3) Inall S questions to be attempted 4) All questions carry equal marks. 5) Answer to each new question to be started on afresh page. 6) Figures in brackets on the right hand side indicate full marks 7) Assume Suitable data if necessary Qu. (2) a. Determine the cost of equity using the CAPM approach if the required rate of return on risk free security is 12%, required rate of retum on market portfolio of investment is 15 % and the firm's beta is 2 b. ‘The key information pertaining to the proposed Sources of Funds ns is given below ___|Finaneing Plan Determine the Financial Break-even point for each plan, Aqua Company which ears Rs 10 per share, is capitalised at 10% and has a return on investment of 12%. Using Walter's dividend policy determine the optimum dividend payout and the price at this payout 4. A limited company borrows from a commercial bank Rs 10,00,000 at 14% rate of interest to be paid in equal annual end of year instalments for'S years. What would be the size of the instalment? @ (12) The XL industries Ltd needs Rs 5,00,000 for construction of a new plant. The following three financial plans are feasible: ‘The@ompany may issue 50,000 equity shares of Rs 10 per share ii, ‘The Company may issue 25,000 equity shares of Rs 10 pet share and 2,500 deb denomination bearing 8% interest iii, The Company may issue 25,000 equity shares of Rs 10 per share and 2,500 preference share of Rs 100 per share bearing 10% dividend nture of Rs 100 Ifthe company’s earnings before interest and taxes are (a) Rs 40,000 and (b) Rs 1,20,000, what is the EPS Under each of the three financing plans? Ifthe company follows a policy of maximising the market value of its shares, which form of financing should be employed for it under the two levels of EBIT? Assume a corporate tix of 35% and P/E ratio of 10 times in Equity plan, 9 times in Equity + Preference plan and 8 times in Equity + Debt Plan. At what level of EBIT after the new capital is acquired, would EPS be the same among i& ii and i8¢ iii? fyQ. (12) | Timberland Ltd wants to replace its old machine with @ new automatic machine. Two models X and Y are available at the same cost of Rs 5 lakhs each, Salvage value of the old machine is Rs 1 lakh. The utilities of the existing machine can be used if the company purchases X. Additional cost of ulties to be purchased in that ease are Rs 1 lakh. Ifthe company purchases Y then all the exiting utilities will have to be replaced with new utilities costing Rs 2 lakhs. The salvage value of the old utilities will be Rs 0.20 lakhs. The earnings after taxationand before depreciation are expected to be: Year X(Rs) [¥Rs)_[P-V Factor @15 % T 1,00,000 | 2,00,000 | 0.87, : (ome 1,50,000 | 2,10,000 [0.76 | [3 1,80,000 | 1,80,000 | 0.66 4 2,00,000 | 1,70,000 | 0.57 [5 1,70,000 | 40,000 [0.50 [ Salvage Value at the end of year 5 | 50,000 | 60,000 a The targeted return on capital is 15 %. You are required to compute for the two machines separately net present values, discounted payback period and desirability factor. Advice which of the machines is to be selected? 98 GY (12 Arial Ltd wishes to raise additional finance of Rs 10 lakh for ‘meeting its investment plans. It has Rs. 2,10,000 in the form of retained earnings available for investment purposes. The following are the further details: i ii, Cost of Debt a. UptoRs 1,80,000 - 10% Before tax b. Beyond Rs 1,80,000 - 16% Before tax iii. Earnings per share Rs 4 iv, Dividend Payout 50% of. ‘earnings v. Expected growth rate in dividend 10% _vi.Current Market Price per share Rs 44 vii, Tax Rate 35% You are required to: 2) Determine the pattern of rais existing debt — equity mix. b) Determine the post- tax cost of additional debt ©) Determine the Cost of Retained Earnings and Cost of Equity 4) The overall Marginal cost of additional finance. 1g the additional finance, assuming the firm intend to maintain the 6A. S 6) A Textile company belongs to a risk class for which the appropriate P/E ratio is 10. It currently has 50,000 outstanding shares selling at Rs 100 each. The firm is contemplating the declaration of Rs 8 dividend at the end of the current fiscal year which has started, Given the assumption of Modigliani and Miller questions a. What will be the price of the share at the end of the year i. if dividend is not declared ii. If dividend is declared? b. Assuming that the firm pays the dividend, has net income of Rs 5,00,000 and makes new investments of Rs 10,00,000 during the period how many new shares must be issued? ¢. What will be the value of the firm i. if dividend is declared? ii, If dividend is not declared? 06.8. (oe ee What are the assumptions and arguments used by Modigilani and Miller in support of the irrelevance of Dividends? Q7. Write Short Motes on: (12) a, Net Income Theory of Capital Structure b.CAPM —_¢, Accounting rate of return 2a