Masters of Commerce 2nd Semester
Financial Management and Policy
(Same for USOL Candidates)
Time : Three Hours Maximum Marks :80
Note. Attempt five questions at least one question from each Unit Each question carries 16 marks.
Unit-I
1. The U.S. Bureau of the Census publishes employment statistics and demand forecasts for various
occupations :
Employment (1000)
Occupation 2005 2006
Bill collectors 311 420
Computer engineers 299 622
Physicians assistants 66 98
Respiratory therapists 86 123
System analysts 617 1.194
Using a spreadsheet or hand-held calculator, calculate the ten-year growth rate forecast using the
compounding for each occupation.
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constant growth model with annual compounding, and the constant growth model with continuous
2.
.r c
Environmental Designs, Inc., produces and installs energy efficient window systems in
commercial buildings. During the past ten years, sales revenue has increased from $25
million to $65 million.
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(a)
o
Calculate the company's growth rate in sales using the constant growth model with annual
a .r c
compounding.
(b)
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Derive a five-year and a ten-year sale forecast.
3.
b e
Calculate the change in the key balance sheet accounts between 2004 and 2005 and classify each as
p
a source (S), a use (U), or neither (N), and indicate which type of cash flow it is: an operating cash
a
flow(o) and investment cash flow (I) or a financing cash flow (F).
p
Account 2004
($)
2005
($) b r
Changes and Classification of Key Accounts between 2004 and 2005
change classification type
Long-term debt 960 800
Accounts 640 500
receivable
Common stock 200 200
Cash 640 500
Retained earnings 960 800
Accruals 50 200
Inventory 840 600
Accounts payable 1.150 1.000
Net fixed assets 1.800 2.000
Unit-II
4. A company has a machine which has been in operation for 2 years. Its remaining estimated useful
life is 10 years, with no salvage value at the end. Its current market value is Rs. 1,00,000. The
Management is considering a proposal to purchase an improved model of a machine, which gives
increased production. The relevant particulars are as follows:
Existing New
Machine Machine
Purchase price 2,40,000 4,00,000
Estimated life 12years 10years
Salvage value - -
Annual operating hours 2,000 2,000
Selling price per unit Rs,10 Rs10
Output per hour 15 Units 30units
Material cost per unit Rs.2 Rs2
Labour cost per unit Rs.20 Rs40
Consumable stores per year Rs.2,000 Rs5,000
Repairs and maintenance p.a. Rs9,000 Rs6000
Working Capital Rs25,000 Rs40,000
The company follows the straight line method of depreciation and is subject to 50% tax. Should
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the existing machinery be replaced by the new one? Assume that the company's required rate of
return is 15% and the loss on sale of machinery is tax deductible.
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5. Hindustan Chemicals Ltd. has paid, up equity capital of Rs. 60,00,000 divided into 6,00,000
equity shares of Rs. 10 each. The current market price of the share is Rs. 24. During the current
e
year, the company has paid a dividend of Rs. 6 per share. The company has also previously issued
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14% preference shares of Rs. 10 each aggregating Rs. 30 lakhe and 13% 50,000 Debentures of Rs.
p o
100 each. The company's corporate tax rate is 40%, growth in dividends equity shares is expected
a .r c
at 5% In case of preference shares the company has received only 95% of the face value of shares
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after deducting issue expenses. Calculate the Weighted Average Cost of Capital on the basis of
6. b
book value weights and market value weights.
e
Explain and distinguish between Internal Rate of Return Method and Net Present Value
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Method of evaluating investment proposals. Which one would you prefer and why? Why
a
is Profitability Index prepared for evaluating projects ? Discuss.
p
7. (a)
(b) b r Unit-III
Describe the factors that determine the capital structure of a company.
Describe in detail EBIT-EPS Analysis.
8. (a) What do you mean by the term “Trading on equity?" How it can be used by an organization ?
(b) Explain operating and financial leverages with the help of hypothetical example.
Unit-IV
9. “Stability in the payment of dividends has a marked bearing on the market price of the
shares of a corporate firm.” Explain this statement. What other factors are taken into
consideration while deciding the dividend payment ? Explain.
10. Discuss various dividend models. Which one is best and why?
