Financial Decision Assignment for A & B division

What is Finance? Define financial management? What is wealth maximization? What is profit maximization? Wealth maximization objective of financial management is said to be superior to the profit maximization objective. It is aimed at removing the drawbacks of profit maximization concept. Comment. 6. Financial Management is many ways an integral part of the jobs of managers Comments. 7. Comment on the emerging role of the finance manger in India. 8. Without adequate finance no business can survive and without efficient financial management no business can prosper and grow Comment on this statement outlining the role and scope of financial functions? 9. Structural changes in the economy, such as the increasing number of financial institutions and the ever increasing influence of government in financial matters will increase the pressure on financial manager for preciseness in his decision Elucidate and describe the organization of the finance function in a large corporation. 10. The concept of finance function has changed and keeps changing along with the evaluation of the contents of finance as a management activity. Critically examine this statement. 11. What do you mean by the term Capitalisation? 12. What is the difference between Capitalisation & Capital 13. Define Fair Capitalisation, Over Capitalisation & Under Capitalisation 14. Difference between Over Capitalisation & Under Capitalisation 15. What is watered Capital? What are the causes of watered capital? 16. State the difference between Watered Capital & Over Capitalisation 17. How do you make use of real value & Book value to determine whether a company is over capitalized or under capitalized? 18. What is real value of share and book value of share? 19. Explain in brief the theories of capitalization? 20. Explain the consequences if over capitalization & Under Capitalisation? 21. Explain the difference patterns of capital structure? 22. What are the essentials of a sound capital mix? 23. What is point of indifference? Explain with the example? 24. What is Arbitrage Process? 25. What is capital gearing? What are its significances? 26. Changes in Capitalisation may be sought as a means of easing tension and giving corporation a better opportunity to pursue its purpose. In the lights of this statement, discuss various reasons for changes in Capitalization. 27. What is term financing? Explain the major sources of Term finance in India. 28. What do you understand by short term finance? Examine the Short-term sources of supply of funds in India? 29. Describe the main Types of Securities which are considered useful meeting the longterm financial requirements of Industries? 30. Debt is usually considered the cheapest source of financing available to the firm. Comment. 31. The equity share capital is cost free Do you agree? Explain 32. What is a Preference share? Explain the different types of preference shares. 33. What is debt? Explain the different types of debt? 34. What is factoring? Explain the different types of factoring? 1. 2. 3. 4. 5.

35. Write short notes in detail a. Venture Capital b. Commercial Paper c. Factoring and its process d. Bills discounting and its process e. Letter of credit and its process f. Deferred stocks g. Ploughing back of profit h. Bridge finance i. Seed finance j. Loan syndication k. Zero Interest bond l. Deep discount bond 36. What is cost of capital? 37. What is an explicit cost? 38. Specific cost Vs. composite cost? 39. What is floatation cost? 40. Name the various methods of computing cost of equity capital? 41. What is an implicit cost? 42. What is historical cost? 43. What is future cost? 44. What is opportunity cost? 45. What is composite cost of capital? 46. What is weighted Average cost of capital? 47. How do you find out cost of preference capital? 48. What is marginal cost of capital? 49. What is CAPM approach to cost of equity capital? 50. What do you mean by market value weights? 51. Explain in brief, advantages and disadvantages of weighted average cost of capital? 52. What do you mean by composite cost of capital? 53. What do you mean by the term Capitalisation? 54. What is the difference between Capitalisation & Capital 55. Define Fair Capitalisation, Over Capitalisation & Under Capitalisation 56. Difference between Over Capitalisation & Under Capitalisation 57. What is watered Capital? What are the causes of watered capital? 58. State the difference between Watered Capital & Over Capitalisation 59. How do you make use of real value & Book value to determine whether a company is over capitalized or undercapitalized? 60. What is real value of share and book value of share? 61. Explain in brief the theories of capitalization? 62. Explain the consequences if over capitalization & Under Capitalisation? 63. Explain the difference patterns of capital structure? 64. What are the essentials of a sound capital mix? 65. What is point of indifference? Explain with the example? 66. What is Arbitrage Process? 67. What is capital gearing? What is its significances? 68. Changes in Capitalisation may be sought as a means of easing tension and giving corporation a better opportunity to pursue its purpose. In the lights of this statement, discuss various reasons for changes in Capitalisation. 69. What is risk free security? What is risk premium? 70. What factors influence the beta of a share? Give Example. 71. Define capital structure? What is a appropriate capital structure?

72. 73. 74. 75. 76.

What is the optimal capital structure of the company? What is networth? Give example. What is indifference point? Why is it so called? Why does cost of capital decrease when the firm pays taxes? Can term loans be raised in the following circumstances? a. The debt equity ratio of the company is 8:1. b. The financial institution finds that the demand for product manufactured by the applicant borrower does not hold promise in the future and adequate capacity already exists. 77. Distinguish between cost drivers and activity drivers? 78. How can the effect of probability on designing an appropriate capital structure be analyzed? IIIustrate your answer with the help of EBIT-EPS analysis. 79. State the substance of the CAPM model? 80. State any two important parameters to be used for identifying the optimum capital structure. 81. Cost of capital is the base for financial decision. Discuss. 82. What is bankruptcy cost? 83. Define marginal cost of capital? 84. What is trading on equity? Explain with example 85. Write a note on Activity base costing system? 86. State any two sources of financing for the expansion programme. 87. How do you estimate the capital required by a manufacturing organisation? Explain with example. 88. Discuss the guidelines and considerations relevant for planning the capital structure of a new company? 89. What do you mean by risk return trade off? 90. Explain elaborately the functions and structure of Indian Financial system? 91. Explain in detail with example the EBIT-EPS approach for determining capital structure of a company. 92. What is Business risk and financial risk? 93. What is book building? Give one example for 100% book building and one example for 75% book building. 94. What is the meaning of leverage? Explain the different types of leverage? 95. Distinguish between operating leverage and financial with appropriate illustrations. 96. Write short note on Structural leverage? 97. Write short note on Income gearing? 98. Write short note on Arbitrage process? 99. What is Home made or personal leverage? 100. Apple ltd has a share capital of Rs. 1, 00,000 divided into shares of Rs. 10 each. It has major expansion programme requiring an investment of another Rs. 50,000. The top management is considering the following alternatives for raising this amount. i) ii) iii) Issue of 5,000 equity shares of Rs. 10 each Issue of 5,000, 12% Preference shares of Rs. 10 Issue of 10% debenture of Rs. 50,000

The companys present earnings before interest and tax (EBIT) are Rs. 40,000 p.a. You are required to calculate the effect of each of the above modes on financing of the earnings per share (EPS) presuming. (a) EBIT continues to be the same after expansion. (b)EBIT increase by Rs. 10,000

101. Goodshape India ltd Company has currently an ordinary share capital of Rs. 25 lakhs, consisting of 25,000 shares of Rs. 100 each. The top management is planning to raise another Rs. 20 lakhs to finance a major progarmme of expansion through one of four possible financing plans. The options are: i) ii) iii) iv) Entirely equity shares. Rs. 10 lakhs through equity shares and Rs. 10 lakhs through long-term borrowings at 8% interest per annum. Rs. 5 lakhs through equity shares and Rs. 15 lakhs through long-term borrowings at 9% interest per annum. Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through preference shares with 5% dividend.

The companys expected earnings before interest and taxes (EBIT) will be Rs. 8 lakhs. Assuming a tax rate of 50%, determine the EPS in each alternative and comment on the implication of financial leverage. 102. Star ltd has appointed you as its finance manger. The company 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 hand: Plan A Plan B Plan C (No in thousands)

Option I
Equity shares 30 30 30

Option II
Equity shares 12% Preference shares 10% Non convertible debt 15 15 20 10 10 10 10

Assuming tax to be 35% and the face value of all the shares and debenture to be Rs.100 each A. Calculates the indifference point and earnings per share for each of the financing plans. With plan should be accepted by the company. B. If the EBIT of the company is 20 lakhs, what is impact on EPS on all the financing plans? Give your comments 103. A company wishes to determine the optimum capital structure from the following selected information supplied to you, determine the optional capital structure of the capital. Situation s 1 2 3 Debt amount 4,00,000 2,50,000 1,00,000 Equity Cost of debt amount in % 1,00,000 9 2,50,000 6 4,00,000 5 Ke in % 10 11 14

104. Alpha ltd a widely held company, is considering a major expansion of its production facilities and the following alternatives are available. (Rs. In Lakhs)

Particulars Share capital 14% Debenture Loan from a Financial Institutions @ 18% p. a rate of interest

Alternatives A B C 50 20 10 20 15 10 25

Expected rate of return before tax is 25% of Share capital. The rate of dividend of the company is not less than 20%. The company at present has low debt. Corporate taxation 50%. Which alternative you would choose? And also calculate indifference point for A & B and B & C. 105. Fitwell Company is now capitalized with Rs. 50 Lakhs consisting of 10,000 shares of Rs. 500 each. Additional finance of Rs. 50 Lakhs is required for a major expansion programme launched by the company. Four possible financing plans are under consideration. These are: i) ii) iii) iv) Entirely through additional share capital, issuing 10,000 ordinary shares of Rs. 500 each. Rs.25 lakhs through ordinary shares capital and Rs. 25 lakhs through borrowing from term lending institutions at 12 per cent interest. Entirely through borrowings from the term lending institutions at 13 per cent interest. Rs. 25 lakhs through ordinary shares capital and Rs.25 lakhs through 10 per preference shares, by issuing 5,000 preference shares of Rs. 500 each.

The companys existing earnings before interest and tax (EBIT) amounted to Rs. 6 lakhs. By virtue of the increase in capitalization the earnings before interest and tax are expected to double the present level. Examine the impact of financial leverage of theses four plans and calculate the earnings per share (EPS) for the shareholders, in each case Assume 35 per cent tax rate. And also calculate the indifference point for a. b. c. d. e. I & II III & IV II & IV I & III I & IV

106. LG Company is now capitalized with Rs. 50 Lakhs consisting of 10,000 shares of Rs. 500 each. Additional finance of Rs. 70 Lakhs is required for a major expansion programme launched by the company in Belgaum. Four possible financing plans are under consideration. These are: d. Entirely through additional share capital, issuing 14,000 ordinary shares of Rs. 500 each. e. Rs.35 lakhs through ordinary shares capital and Rs. 35 lakhs through borrowing from term lending institutions at 12 per cent interest. f. Entirely through borrowings from the term lending institutions at 13 per cent interest. g. Rs. 35 lakhs through ordinary shares capital and Rs.35 lakhs through 10 per preference shares, by issuing 7,000 preference shares of Rs. 500 each.

The companys existing earnings before interest and tax (EBIT) amounted to Rs. 6 lakhs. By virtue of the increase in capitalization the earnings before interest and tax are expected to 2.5 times the present level. Examine the impact of financial leverage of theses four plans and calculate the earnings per share (EPS) for the shareholders, in each case Assume 50 per cent tax rate. 107. XYZ Company is considering three different plans to finance its total project cost of Rs. 100 lakhs: A, B & C. Equity ( Rs. 100 per share ) 10% debt A 50 50 B 34 66 C 25 75

Sales for the first 6 years of operations are estimated at Rs. 100 lakhs, Rs. 125 lakhs, Rs. 150 lakhs, Rs. 175 lakhs, 200 lakhs and 250 lakhs respectively and EBIT is 10% of sales forecast. And tax rate is 50%. Calculate EPS for each year under different financial plan. 108. Beta ltd a widely held company is considering a major expansion of its production facilities and the following alternatives are available. (Rs. In Lakhs) Alternatives Particulars A B C D Share capital 100 40 20 25 % 14 Debenture 40 30 25 Loan from a Financial Institutions @ 15% p. a 20 50 25 rate of interest 12% Preference share capital 25 Expected rate of return before tax is 25% of Share capital. The rate of dividend of the company is not less than 20%. The company at present has low debt. Corporate taxation 35%. Which alternative you would choose? And also calculate indifference point for A & B, A & C, A & D , B & C, B & D and C & D. 109. Belgaum ltd wishes to raise Rs. 40, 00,000 to finance the acquisition of new assets. It is considering three alternatives ways of financing assets, A. To issue only equity shares at Rs. 20 per shares B. To borrow Rs. 20, 00,000 at 14% debenture and balance in equity shares. C. To borrow Rs. 30, 00,000 at 14% debenture and balance in equity shares. The following are the estimates of the earnings from the assets with their probabilities distributions: EBIT 3,20,000 4,80,000 6,40,000 8,00,000 12,80,000 You are required to calculate a. EPS Probabilities .1 .2 .4 .2 .1

b. c. d. e. f. g. 110.

Compute indifference point Determine the financial risk for each of the three alternatives. Expected EBIT for entire plan Expected EPS for all plans SD & CV for EBIT and EPS for all the plans Comment on the same.

Assuming 35% is tax rate. From the following information EBIT (Rs. In lakhs) 75 100 125 150 160 180 Probabilities .05 .05 .30 .50 .05 .05

Required to Calculate. a. Expected EBIT, SD & CV for EBIT. 111. ABC international is considering expansion of its plant capacity to meet the growing demand. The company would finance the expansion with a. 15% debenture b. Issue of equity shares of 1,00,000 at price of 16 per share The total funds requirement is 16, 00,000. expansion is as follows. Sales Less cost EBIT Less Interest PBT Less tax 51.75% PAT Outstanding shares EPS The companys income statement before (Rs. In Lakhs) 1,500 1,050 450 50 400 207 193 50 3.86

The companies expected EBIT with associated probabilities after expansion is as follows. EBIT ( Rs in Lakhs ) 250 450 540 600 Probabilities .10 .30 .50 .10

Required to Calculate (a) Expected EBIT and EPS & SD & CV for EBIT and EPS for all plans. 112. Calculate Operating leverage and financial leverage under Situation I, II & II for financial plan A and B respectively from the following information relating to the

operations and capital structure of the company. What are the combinations of operating and financial leverage which gives highest and least value? Installed Capacity Annul production and also Variable cost per unit Selling price per unit Fixed cost Situation I Situation II Situation III Capital Structure Financial Plan A Debt (10%) 4000 units 80% of installed capacity Rs. 10 Rs. 20 Rs.3, 000 Rs.4, 000 Rs.4, 500 Equity 5,000 15,000 Debt 15,000 5,000

113. From the following information calculate Operating and financial leverage and also calculate highest and least values Installed Capacity Selling price per unit Variable cost Fixed costs: 2,000 units Rs. 25 Rs.10 Situation 1 : 4000 Situation 2 : 5000 Capital Structure: Financial Plan Plan A Plan B 10,000 30,000 40,000 20,000 50,000 50,000

Equity Debt (10%) Total

Note: 1) Date of submission on or before 22nd October 2011 before 11.15 am 2) Assignment submitted after the deadline will not be accepted. 3) Please write your assignments in 200 pages KING SIZE BOOK only. 4) Please write the answer to the point and it should cover all the points in the concepts.

Prof. Rahul K Kavishwar Faculty IMSR Hubli.