[This question paper contains 4 printed pages.] Your Roll Ni Sr.No. of Question Paper : 5709 Unique Paper code : 61011406 Name of the Paper Financial Management Name of the Course Bachelor of Management Studies (BMS), 2022 LOCF Semester : ow Duration : 3 Hours Maximum Marks B98 Instructions for Candidates 1. Write your Roll No. on the top immediately on receipt of this question paper, Attempt any five questions. Alll questions carry equal marks. Attempt parts of a question together. Show your workings clearly as a part of the solution. awep Use of Simple calculator is allowed. 1. A2Z Lid. is considering the replacement of one of its machine. The firm wants to expand its and hence requires bigger machine. The existing machine is in good operating condition, but is smaller. It is 3 years old, has @ current salvage value of Rs, 4,00,000 and a remaining life of 5 years. The machine was initially purchased for Rs. 20 lacs and is being depreciated at 20% on the WDV basis. It’s salvage value at the end of its useful life is estimated to be negligible. ‘The new machine will cost Rs. 40 lacs and will be subject to the same method as well as the same rate of depreciation. It is expected to have the useful life of 5 years. The management anticipates that with the expanded operations there will be a need of an additional net working capital of Rs. 1,00,000 at the beginning. The new machine will allow the firm to expand the current operations and thereby increase its cash annual revenue by Rs. 25,00,000. Variable cost will be 50 percent of sale. Annual fixed cash costs are likely to increase by Rs. 1,00,000 in the first three years of its operation and Rs. 1,50,000 thereafter. it is estimated that new machine can be sold for Rs. 6,00,000 at end of its useful life, The corporate tax rate is 30%. Firm’s cost of capital is 10%. The company has several machines in the block of 20% depreciation. Using NPV technique, comment whether the company should replace the existing machine. (Round off your calculations to nearest rupee). PIF at 10% cost of capital are given below for your ready reference: Year 1 2 3 4 z PVIF at 10% 0.909 0.826 0.751 0.683 (0.621 (15 marks) PT.O5709 2 2. The capital structure of XYZ Lid. is as under: Rs. Equity shares (face value Rs. 10 per share) 10,00,000 11% Preference shares 5,00,000 9% Debentures 5,00,000 ~20,00,000 Additional Information: (0 Rs. 100 per debenture redeemable at par, has 2% flotation cost and 10 years of maturity ‘The market price per debenture is Rs. 98. (ii) Rs. 100 per preference share redeemable at par, has 3% flotation cost and 10 years of maturity. The market price per preference share is Rs. 90. (i Equity share has Rs. 4 flotation cost and market price per share of Rs. 25. The expected dividend is Rs. 2 per share with annual growth of 6%. (i) Corporate income tax rate is 30% Caleulate weighted average cost of capital (WAC) using book value and market value weights. (15 marks) 3. (@) Explain the objectives of holding cash for a business enterprise. (5 marks) (b) Company X is making sales of Rs. 45,00,000 and it extends eredit of 90 days to its Customers. However, it is considering tightening its credit policy. The proposed terms of credit and expected sales are given below: Policy Term Sales I 75 days Rs. 41,00,000 u 60 days Rs. 39,00,000 mm 45 days Rs. 38,50,000 ‘The firm has a variable cost of 80% and fixed cost of Rs. 1,00,000. ‘The cost of capital is 15%, Evaluate different proposed policies and indicate which policy should be adopted. (Assume 360 days ina year and round off your calculations to nearest rupee). (10 marks) 4. (2) Briefly explain the permanent and temporary working capital requirement. (5 marks) (®) The management of MN Ltd. has called for a statement showing the working capital needs to finance a level of activity of 1,80,000 units of output for the year. The cost structure for the company’s product for the above mentioned activity level is detailed below: Cost/unit (Rs) Raw materials 20 Direct labour 3 Overheads (including depreciation of Rs $ unit) 15 Total cost 405709 3 Profit 10 Selling price 30 Additional information: i. Minimum desired cash balance is Rs. 40,000 Rew materials arc held in stock on an average for 3 months. ‘Work-in-progress (assume 50% completion stage) will approximate to half-a-month's Production. Complete raw material is introduced in the beginning of the production cycle. iv. Finished goods remain in warehouse on an average for two months, ¥. Suppliers of material extend a month’s eredit and debtors are provided two months credit: Cash sales are 20% of total sales. vi, There is a time-lag in payment of wages of a month and half-a-month in case of overheads. From the above facts, you are required to prepare a statement showing working capital needs of the firm, (10 marks) 5. (@) Explain the concept of time value of money and its relevance in computing the present value of a rupee and an annuity. (5 marks) (b)From the following forecast of income and expenditure prepare cash budget for the three ‘months ending on June 2020. Month Sales (Rs.) Purchases(Rs) Wages(Rs) Misc.(Rs) Feb 1,20,000 84,000 10,000 7,000 March 1,30,000 — 1,00,000 12,000 8,000 April 80,000 —1,04,000 8,000 6,000 May — 1,16,000 —1,06,000 10,000 12,000 June 88,000 80,000 8,000 6,000 Additional information: (i) Sales: 25% realized in the month of sales, discount allowed 2% in cash on the sales realized in the month of sale; balance realized equally in two subsequent months. Purchases: These are paid in the month following the month of supply. ‘Wages: 30% paid in the arrears following month. Misc. Expenses: Paid a month in arrears, Rent: Rs1,000 per month paid quarterly in advance, due in Apzil. Income tax: First installment of advance tax Rs. 25,000 due on of before 15 June to be paid within the month, (vii) Income from investment; Rs. 5,000 received quarterly in April, July ete. (viii) Cash in hand Rs, 25,000 on April 1. (ix) Depreciation: Rs 5000 for the month of April. (x) Sale of old machinery at Rs. $0,000 in June, (10 marks) PT.O5709 6. Attempt any fio of the following: “The total value of a firm remains unchanged regardless of variations in its financing mix.” Discuss the statement and point out the role of homemade leverage and arbitrage. ABC Co. Ltd. belongs to a risk class of which the appropriate capitalization rate is 10%. It currently has 1,00,000 shares selling at Rs. 100 each. The firm is contemplating the declaration of a Rs. 6 dividend at the end of the current fiscal year that has just begun. ‘What will be the price of shares at the end of the year as per MM model and assumption of no taxes if dividend is declared? Also compute the number of new shares that must be issued assuming that the firm pays the dividend, has a net income of Rs. 10,00,000 and makes new investments of Rs. 20,00,000 during the period. SS Ltd. wants to implement a project for which Rs 30 lakhs is required to be raised from the market as a means of financing the project. The following financing plans and options are at hand: (Number in thousands) Particulars Plan A. Plan B Plan C Option I: Equity shares 30 30 30 Option 2. Equity shares 1s 20 10 12% Preference shares Nil 10 10 10% Non-convertible debentures 15 Nil 10 Assuming corporate tax to be 30 per cent and the face value of all the shares and debentures to be Rs 100 each, calculate the indifference points and earnings per share (EPS) for cach of the financing plans. Which plan should be accepted by the company? (7.5*2=15 marks) 7. Attempt any fwo of the following: iii, The finance department of a corporation provides the following information: (a) Annual Carrying costs per unit of inventory are Rs. 10 (b) The fixed ordering cost per order is Rs. 20. (©) The number of units required is 30,000 per year. Determine Economic Order Quantity, total number of orders in a year and the time gap between two orders assuming 365 working days per year. Explain the Net Operating Income approach of Capital Structure with the help ofa diagram. Describe risk-return trade off in investment, financing and dividend decisions under financial management. (7.5*2=15 marks) (800)