Financial Management - CPZ5D
SECTION C — (3 x 10 = 30 marks)
APRIL 2012
Introduction
1. ‘‘The most important cause of business failure in the faulty financial
planning’’ – Discuss. (April 2012)
2. Discuss the approaches to financial management. (April 2013)
3. Explain the objectives of financial management. (April 2014)
4. What is Financial Management? State the approaches of Financial Management. (April
2015)
5. Explain the various functions of finance manager. (April 2016)
Cost of Capital
1. M/s. Jakku corporation has a capital structure of 40% of debt and 60% equity. The
company is presently considering several alternative investment proposals costing less
than Rs. 20 lakhs. The corporation always raises the required funds without distributing is
present debt equity ratio. The cost of raising the debt and equity are as under : (April
2013)
Project cost Cost of debt Cost of equity
Upto Rs. 2 lakhs 10% 12%
Above Rs. 2 lakhs and upto Rs. 5 lakhs 11% 13%
Above Rs. 5 lakhs and upto Rs. 10 lakhs 12% 14%
Above Rs. 10 lakhs and upto Rs. 20 lakhs 13% 14.5%
Assuming the tax rate at 50% calculate
(a) Cost of capital of two projects X and Y whose fund requirements are Rs.
6.5 lakhs and Rs. 14 lakhs respectively.
(b) If a project is expected to give after tax return of 10% determine under what
conditions it would be acceptable?
2. From the following capital structure of a company calculate the overall cost of
capital using (April 2014, 2015)
(a) Book value weights and
(b) Market value weights.
Sources Book Value Market Value Specific cost
Rs. Rs. AfterTax
Equity Sh.Cap
(Rs. 10 each) 45,000 90,000 14%
Retained earnings 15,000 – 13%
Preference share capital 10,000 10,000 10%
Debentures 30,000 30,000 5%
3. From the following particulars relating to the capital structure of Blue
Ltd. Calculate the over all cost of capital, using book value and market
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value weights. (Nov 2015)
Share of funds Book value Market value
Equity share capital Rs. 45,000 90,000
Retained Earnings 15,000 –
Preference share 10,000 10,000
capital
Debentures 30,000 30,000
The after – tax cost of different sources of finance is
Equity share capital 14%
Retained Earnings 13%
Preference share capital 10%
Debentures 8%
4. The following is the capital structure of Moris Ltd. : (Nov 2014)
Source Amount Market value C/C
Rs. Rs.
14% preference capital 2,00,000 2,30,000 14%
Equity capital 5,00,000 7,50,000 17%
16% debt 3,00,000 2,70,000 8%
Total 10,00,000 12,50,000
Calculate the weighted average cost of capital, using book value weights and market
value weights.
5. A company wishes to determine the optimal capital structure. From
the following selected information supplied to you, determine the
optimal capital structure of the company. (April 2016)
Situation Debt Equity After tax cost of Ke
(Rs) (Rs.) debt (%) (%)
1 4,00,000 1,00,000 9 10
2 2,50,000 2,50,000 6 11
3 1,00,000 4,00,000 5 14
6. The estimates of after tax cost of debt and equity capital for varying levels of debt-equity
mix are as follows : (Nov 2013)
Debt as a % of Cost of debt % Cost of equity %
capital employed
0 7.0 15.0
10 7.0 15.0
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20 7.0 16.0
30 8.0 16.0
40 9.0 18.0
50 10.0 21.0
60 11.0 24.0
Calculate the composite cost of capital and determine the optimal debt-equity
mix.
Leverages
1. Calculate the degree of operating leverage, degree of financial leverage and
the degree of combined leverage for the following firms and interpret the
results. (April 2012, 2015, 2016)
P Q R
Rs. Rs. Rs.
Output (Units) 3,00,000 75,000 5,00,000
Fixed cost (Rs.) 3,50,000 7,00,000 75,000
Rs. Rs. Rs.
Unit variable cost (Rs.) 1.00 7.50 0.10
Interest expenses (Rs.) 25,000 40,000 NIL
Unit selling price (Rs.) 3.00 25.00 0.50
2. Calculate final leverage and operating leverage under situations A and B and financial
plans I and II respectively from the following information relating to the operation and
capital structure of ABC Ltd. (April 2013)
Installed capacity 1,000 units.
Actual production and sales 800 units.
Selling price per unit Rs. 20. Variable cost per unit Rs. 15.
Fixed cost : Situation A Rs. 1,000
Situation B Rs. 1,500.
Capital structure :
Financial plans
I II
Rs. Rs.
Equity capital 5,000 7,000
Debt. at 10% 5,000 2,000
3. Calculate financial leverage and operating leverage under situations A and B and
financial plan I and II respectively from the following information relating to the
operation and capital structure of ABC Ltd. (April 2014)
Installed capacity 1000 units
Actual production and sales 800 units
Selling price per unit Rs. 20
Variable cost per unit Rs. 15
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Fixed cost : Situation A- Rs. 800, Situation B - Rs. 1,500
Capital structure Financial plan
I II
Rs. Rs.
Equity capital 5,000 7,000
Debt at 10% 5,000 2,000
4. The following figures relate to two companies. (April 2013)
P Ltd. Q Ltd.
Rs. in lakhs
Sales 500 1,000
Variable cost 200 300
Contribution 300 700
Fixed cost 150 400
150 300
Interest 50 100
Profit before tax 100 200
Calculate :
(a) Operating, financial and composite leverages.
(b) Comment on the risk position.
5. The company’s current balance sheet is as follows :
Liabilities Rs. Assets Rs.
Equity capital 6,00,000 Net fixed 15,00,000
assets
(Rs. 10 per share) Current assets 5,00,000
10% long term loan 8,00,000
Profit and loss a/c 2,00,000
Current liabilities 4,00,000
20,00,000 20,00,000
The company's total assets turnover ratio is 3.0 its fixed operating costs are
Rs. 10,00,000 and variable operating cost 40%. The income tax rate is 50%.
Compute for the company all the three types of leverages. (Nov 2012)
6. The installed capacity of a factory is 600 units. Actual capacity used is 400 units. Selling
price per unit is Rs.10. Variable cost is Rs. 6 per unit.
Calculate the operating leverage in each of the following situations :
(a) When fixed costs are Rs. 400
(b) When fixed costs are Rs. 800
(c) When fixed costs are Rs. 1,000
(d) When fixed costs are Rs. 1,200. (Nov 2013)
7. A company has a choice of the following four financial plans. You are
required to calculate the financial leverage in each case. (Nov 2015)
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Plan Plan Plan Plan
A B C D
Equity capital 3,000 2,000 1,000 500
Debt 1,000 2,000 3,000 3,500
Operating profit (EBIT) 400 400 400 400
Interest @ 10% on debt in all cases.
Capital Structure
1. Explain the factors determining the capital structure. (Nov 2012)
2. Assuming no taxes and given the Earnings Before Interest and Taxes (EBIT)
Interest (I) at 10% and equity capitalisation rate (Ke) below, calculate the
total market value of each firm. (April 2012)
Firms EBIT I Ke
Rs. Rs.
A 2,00,000 20,000 12%
B 3,00,000 60,000 16%
C 5,00,000 2,00,000 15%
D 6,00,000 2,40,000 18%
Also determine the weighted average cost of capital for each firm.
3. Bharathi Ltd. expects an annual EBIT of Rs. 1,00,000. The company has Rs. 4,00,000 in
10% debentures. The capitalisation rate is 12.5%. The company proposes to issue
additional equity shares of Rs. 1,00,000 and use the proceeds for redemption of
debentures of Rs. 1,00,000. Calculate the value of firm V
the overall cost of capital K0 .(Nov 2012)
4. A Ltd has a share capital of Rs. 1,00,000 divided into shares of Rs. 10 each. It has a
major expansion programme requiring an investment of another Rs. 50,000. The
management is considering the following alternatives for raising this amount.
(a) Issuing of 5,000 equity shares of Rs. 10 each.
(b) Issuing of 5,000, 12% preference shares of Rs. 10 each.
(c) Issuing of 10% debentures of Rs. 5,000.
The company’s present earnings before interest and tax are Rs. 40,000 p.a. You
are required to calculate the effect of each of the above modes of financing on the
earning per share presuming : EBIT continues to be the same even after expansion.
(Nov 2013)
5. B Ltd has a share capital of Rs. 1,00,000 divided into shares of Rs.10
each. It has a major expansion programme requiring an investment of
another Rs. 50,000. The management is considering the following
alternatives for raising this amount:
(a) Issue of 5,000 equity shares of Rs. 10 each.
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(b) Issue of 5,000,12 % preference shares of Rs. 10 each.
(c) Issue of 10% debentures of Rs. 50,000.
The company's present earnings before interest and tax are Rs. 40,000
p.a. You are required to calculate the effect of each of the above modes of
financing on the earnings per share presuming EBIT increases by 10%.(Nov
2015)
6. The capital structure of Hindustan Corporation Ltd., consists of equity share capital of
Rs. 10,00,000 (shares of Rs. 100 each) and Rs. 10,00,000 of 10% debentures. Sales have
increased from 1,00,000 units to 1,20,000 units, the selling price is Rs. 10 per unit and
fixed expenses amount to Rs. 2,00,000. The income tax rate is assumed to be 50%. You
are required to calculate the following :
(a) Percentage increase in earnings per share.
(b) Operating leverage at 1,00,000 units and 1,20,000 units
(c) Financial leverage at 1,00,000 units and 1,20,000 units. Comment on the risk
position of the firm. (Nov 2014)
Dividend Policy
1. A company belongs to a risk class of which the appropriate capitalisation rate
is 10%. It has currently 1,00,000 shares at Rs. 100 each. The firm
contemplating the declaration of Rs. 6 as dividend at the end of the current
fiscal year. Calculate : (April 2012)
a. According to M.M. approach, what will be the price of the shares if
(i) dividend is declared (ii) dividend is not declared.
b. Assuming the company pays the dividend has a net income of Rs.
10,00,000 and makes a net investment of Rs. 20,00,000
during the period, how many new shares must be issued?
2. The details regarding three companies are given below : (April 2014, 2015)
X Ltd. Y Ltd. Z Ltd.
r 12% 6% 8%
Ke 8% 8% 8%
E Rs. 10 Rs. 10 Rs. 10
Compute the value of an equity share of each of these companies applying
Walter’s equation when the dividend payout ratio is
(a) 0%
(b) 20%
(c) 60% and
(d) 100%.
3. Following are the details regarding three companies. (April 2016)
‘A’ Ltd. ‘B’ Ltd. ‘C’ Ltd.
r = 15% r = 10% r = 8%
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Ke = 10% Ke = 10% Ke = 10%
E = Rs. 10 E = Rs. 10 E = Rs. 10
Calculate the value of equity shares of each of these companies under Walter’s
approach when dividend pay-out ratio is (a) 20% (b) 50% (c) 0% (d) 100%.
4. Following are the details regarding three companies. (Nov 2012)
‘A’ Ltd ‘B’ Ltd ‘C’ Ltd
r = 15% r = 10% r = 8%
Ke = 10% Ke = 10% Ke = 10%
E = Rs. 10 E = Rs. 10 E = Rs. 10
Calculate the value of equity share of each of these companies under Walters approach
when dividend pay-out ratio is
a. 0%
(b) 50%
(c) 60%
(d) 100%.
5. Following are the details regarding three companies A Ltd., B Ltd., and C Ltd.,
‘A’ Ltd. ‘B’ Ltd. ‘C’ Ltd.
Y 15% 5% 10%
Ke 10% 10% 10%
E Rs. 8 Rs. 8 Rs. 8
Calculate the value of an equity share of each of these companies applying Waiter’s
formula when dividend payment ratio is : (a) 50%, (b) 75%, (c) 25%.(Nov 2013)
6. Calculate the market price of a share of Pollard Ltd. under : (Nov 2014)
(a) Walter’s Formula and (b) Gordon model from the following data :
Earnings per share Rs. 75
Dividend per share Rs. 45
Cost of capital 15%
Rate of return on investment 18%
Retention ratio 40%
7. Following are the details regarding three companies.
A Ltd B Ltd C Ltd
r = 15% r = 10 % r = 8%
Ke = 10% Ke = 10% Ke = 10%
E = Rs. 10 E = Rs. 10 E = Rs. 10
Calculate the value of an equity share of each of these companies applying
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Walter's formula when dividend payment ratio is 40% and 80%.(Nov 2015)
Working Capital
1. Explain the factors to be considered to determine the working capital requirements.
(April 2015, 2016)
2. What are the factors influencing working capital? (Nov 2014)
3. From the following details you are required to make an assessment of the
average amount of marketing capital requirement of Meenakshi Marbles Ltd.
(April 2012)
Average period of credit Estimate for the first
year Rs.
Purchase of material l6 weeks 26,00,000
Wages 1
2
1
weeks 19,50,000
Overheads :
Rent, rate etc. 6 months 1,00,000
Salaries 1 month 8,00,000
Other overheads 2 months 7,50,000
Sales (Cash) – 2,00,000
Credit sales 2 months 6,00,000
Average amount of stock and – 4,00,000
work in progress
Average amount of undrawn – 3,00,000
profit
It is to be assumed that all expenses and income were made at even rate
for the year.
4. From the following information prepare statement showing the working capital
requirement. (April 2013, 2014)
Budgeted sales Rs. 2,60,000 p.a.
Analysis of one rupee sales : Re.
Raw material 0.30
Direct labour 0.40
Overheads 0.20
Total cost = 0.90
Profit 0.10
Sales 1.00
If is estimated that
(a) Raw materials are carried in stock for 3 weeks and finished goods for 2 weeks
(b) Factory processing will take 3 weeks
(c) Suppliers will give 5 weeks credit
(d) Customers will require 8 weeks credit.
5. Prepare an estimate of working capital requirement from the following information.
Projected annual sales 2,00,000 units.
Selling price Rs. 8 per unit.
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Percentage of net profit on sales 25%.
Average credit period allowed to customers 6 weeks.
Average credit period allowed to suppliers 4 weeks.
Average stock holding 10 weeks.
Allow 10% for contingencies. (Nov 2012)
6. From the following balance sheet compute (a) Gross working capital and (b) Net working
capital. (Nov 2013)
Balance sheet as on 31.3.2008.
Liabilities Rs. Assets Rs.
Share capital 6,00,000 Fixed assets :
Reserves 1,00,000 Land and building 3,00,000
Debentures 3,00,000 Plant and machinery 4,00,000
Current liabilities : Current assets :
Bank loan 1,00,000 Cash 60,000
Creditors 60,000 Investments 1,00,000
Bills payable 40,000 Debtors 1,40,000
Inventory 2,00,000
12,00,000 12,00,000
7. From the following information, prepare a statement showing the estimated working
capital requirements : (Nov 2014)
Budgeted sales – Rs. 2,60,000 p.a.
Analysis of cost and profit of each unit :
Rs.
Raw materials 3
Labour 4
Overheads 2
Profit 1
Selling price per unit 10
It is estimated that
(a) Pending use, raw materials are carried in stock for three weeks and finished
goods for two weeks.
(b) Factory processing will take 3 weeks.
(c) Suppliers will give five weeks credit and customers will require eight weeks
credit.
It may be assumed that production and overheads accrue evenly throughout the
year.
8. Anand wishes to commence a new trading business and gives the following
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information. (Nov 2015)
(a) Total estimated sales per annum Rs, 6,00,000.
(b) His fixed expenses are estimated at Rs. 1,000 per month and variable
expenses equal to 5% of his turnover.
(c) He expects of fix a sale price for each product which will be 25% in excess of
his cost of purchase.
(d) He expects to turnover his stock 4 times in a year.
(e) The sales and purchases will be evently spread throughout the year. All sales
will be for cash but he expects one month's credit for purchases.
Calculate his average working capital requirements.
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