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Ani] Surendra Modi School of Commerce / School of Commer

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Academic Year: 2022-23 i,`
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Program: BEA Year: 11 Semester:`RT==--

Subj ect: Financial Management Batch: 2021 -24

Life:igthv/2o23 Time: 12.: 3o pin fo 2-`€o Pin

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M- : 5 0 No. of pages: 3

Find Examination
General Instructions :

1. All questions are compulsory.

2. Basic and scientific calculators are allowed.
3. Make logical assumptions wherever required.
4. Detailed working notes should be part of the answer.

(12 Marks)
Q.1CLO-1,CLO-2;BL-5 Robotics Ltd. has the following capital structure information as on 31 st March
2023.

Equity share capital (4 Lalch shares at { 25 each) 1,00,00,000

12°/oDebenture 65,00,000
10% Preference share capital (€ 100 each) 15,00,000

e company's post-tax Proft for the current year is € 16,92,000. Th tax raterwhich
isaCPPE 40%.ecompany wants to undertake a financial expansion plan fo

ditional capital of € 50 Lakhs is required. The expansion will result in an

crease in ROI by 3% from the existing level of ROI. The management of the
mpany has the following two financial plans for consideration by the Board;

lan 1: Raise 50% capital through Preference shares at a 12% dividend per
armunandequitysharecapitalforthebalance.However,thenowequityshares
•11 be issued at € 50 per sbare.lan2:Raise100%capitalthrough a long-term loan at a 14% interest rate per

anun.equired:

valuate the above plans and decide which plan is better in your opinion to
aximize shareholder' s wealth.

Page 1 of 3
 (10 Marks)
a.2 From the following information prepare the income statement of X, Y, and Z
Ltd. and analyze each company' s perfomance.
CLO.1',CLO-2; `BL4

Company13%Debentures X Y Z
1,20,000 1,60,000 2,40,000

Profit Volume Ratio 33 1/3% 25% 600/o

4:1 4:1 3:1
Operating Leverage
12:1 20:1 7.5:135%
Combine leverage
` Income tax rate 35% 35%

(13 Marks)
Q.3CLO-1,CLO-2;BL-5 AV Ltd. has the following capital structure:EulSharecapital(shareof€10each) 100 crores

13.50/o preference share capital (share of€ 100 each) 50 crores

Retained earnin s 25 crores
12% Non-convertible Debenture (€ 150 each) 30 crores

The curent market price of the equity share is € 20 each. The prevailing risk-
free rate of retun is 5%. The average market return is 10%. The beta of the
company is 1.125.

ThePreferenceSharesareredeemableatpar:5-yearmaturity,4%flotationcost,
sales price € 100.

The debentures are redeemable at par: 10 years maturity, the current market
price of the debenture is € 120 each. The corporate tax rate is 35%.Required:

(1) Evaluate the weighted average cost of capital based on the existing
capital structure by applying book value weights.

(2)Evaluntethemarginalcostofcapitalifitraises€20croresforthenewproject.Thetimplanstohaveanequitycapitalof€8croresofthenewlyraisedcapitalandtheremainingcapitalthroughdebt.Thebeta

of the new project is 1. 457. The debt capital will be raised through term
loans, it will carry 12% interest p.a. on 30% of the anount of the debt
and 15% interest p.a. on the remaining 70% amount of the debt.
 (15 Marks)
SupremeLtd.isevaluntingtheproposalforreplacingtheexistingmachine
with the new machine.
The following data is available for evaluation:

The existing machine was purchased 2 years ago for € 50 crores. The total life
of the existing machine is 8 years. The expected salvage value at the end of its
life is € 10 crores. Today, the existing machine can be sold for € 45 crores.

Thereisaproposaltoreplacetheexistingmachinewiththenewmachinewhich
curently can be bought for { 75 crores and the installation cost is expected to
be€4crores.Theexpectedsalvagevalueattheendofitslifeof6yearswould
be €13 crores. The company charges depreciation using a straight-hoe method
of depreciation for all the machines. This Depreciation win be allowed under
Income Tax Act.

The replacement of the machine would offer an output expansion. As a result

of the replacement of the machine, the sales are expected to increase by € 50
crores p.a. Operating Expenses would decrease by € 11 crores p.a. The
managementalsoestimatesanincreaseinnetworkingcapitalrequirementof€
30 crores as a result of expanded operations with the new machine. It is
estimated that the total working capital will be realized at the end of the life of
theproject.Thecoxporatetaxrateis40%andtheCompany'sCostofCapitalis
12% p.a.

Required:

Evaluntethefeasibilityofrepnacingtheexistingmachinewiththenewmachine
by applying the Incremental Cash flow technique using the Net Present Value
method. dralyze the result and advise the management whether to go for
replacement.

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