CM AA 60555 560 ‘ 1 Semester M.Com. Degree Examination, February 2019 (CBCS Scheme) ‘Commerce Paper - 1.5 : ADVANCED FINANCIAL MANAGEMENT Time : 3 Hours Max, Marks : 70 Instruction : Answer all Sections. SECTION -A 1, Answer any seven questions. Each question carries 2 marks. a) What is arbitrage from the view point of capital structure theory ? 0) How profitability index is superior to not present value method ? ©) What is sensitivity analysis ? 6) Distinguish tetween merger and acquisition. €) What is a commodity derivative ? ‘) What is meant by Pecking order theory of capital structure ? 9) Give the situations suitable for the use of modified IRR. h) What is meant by risk from the view point of capital budgeting ? i) ABC Corporation stock is currently trading at Rs. 500 per share and its ‘earnings per share for the year is Rs. 50. Calculate ABC's P/E ratio. How do you express the results 7 }) Distinguish between futures and forwards. SECTION -B ‘Answer any four questions. Each question carries § marks. 2. “There are various motives behind corporate mergers and acquisitions", Elucidate 3. Examine the Validity of the assumptions of MM Hypothesis in capital structure. 4. Briefly explain the types of options with suitable examples. 6. A Trader buys a Canadian dollar futures contract at a price of INR 40. The contract size is CAD 1 million. ithe spot rate for the CAD at the date of settlement is CAD/INR 41, what is the gain or loss on this contract to the trader ? P10.60555 2 (00 6. Green Way Ltd. employs certainty-equivalent approach in the 2valuation of risky investments. The finance department of the company has developed the following information regarding a new project : Year Expected CFAT (Rs.) epnn se 2 (200,000) 10 7 7,60,000 08 2 740,000 07 3 7,30,000 06 4 1,20,000 04 5 80,000 03 The firm's cost of equity capital is 18 per cent; its cost of debt is 9 per cent and the riskless rate of interest inthe market on the treasury bonds ss 6 per cent. Should the project be accepted ? 7. Determine NPV of the project with the following information : Initial Outlay of project : Rs, 80,000 Annual revenues (Without Inflation) : is. 60,000 Annual costs excluding depreciation (Without inflation) : Rs. 20,000 Useful life 4 years Salvage value: Nil Tax Rate : 50% Cost of Capital (Including Inflation premium of 10%) : 12% SECTION -C Answer any three questions. Each question carries 12 marks. (8x12=36 8. From the following particulars, ascertain which project is more risky on the basis, of standard deviation Project X Project ¥ Cash Inflow | _ Probability | Cash infiow(@| Probability 2,500 02 2,800 oa 4,800 03 4,500 04 7,000 03 6,300 04 8,200 02 8,400 = O41ne A . 8 60555 9. Shiva Limited is planning its capital investment programme for next year. It has five projects all of which give a positive NPV at the company cut-off rate of 15 percent, the investment outflows and present values being as follows : : Investment NPV at 15% Project Rs. 000 Rs. 000 A (50) 15.4 8 (40) 18.7 c (25) 10.4 D (30) 112 E (35) 19.3 The company is limited to a capital spending of Rs. 1,20,000. ‘You are required to optimise the returns from a package of projects within the capital spending limit. The projects are independent of each other and are divisible (i. part-project is possible). 10. Pigeon Ltd. reported a profit of Rs. 77 lakhs after 30% tax for the financial year 2011 — 12. An analysis of the accounts revealed that the income included extraordinary items of Rs. 8 lakhs and an extraordinary loss of Rs. 10 lakhs. The existing operations, except for the extraordinary items, are expected to continue in the future. In addition, the results of the launch of a new product are expected to be as follows : Rs. in lakhs Sales 70 Material costs 20 Labour costs 12 Fixed costs 10 You are required to : |) Calculate the value of the business, given that the capitalization rate is 14%, li) Determine the market price per equity share, with Pigeon Ltd.'s share capital being comprised of 1,00,000 13% preference shares of Fis. 100 ‘each and 50,00,000 equity shares of Rs. 10 each and the P/F ratio being 10 times.60555 + (NO EE 11. Gems Ltd. has just installed Machine — X at a cost of Rs. 2,00,000. The machine has a five year life with no residual value. The annual volume of production is estimated at 1,50,000 units, which can be sold at Rs. 6 per unit. Annual operating costs are estimated at Rs. 2,00,000 (excluding depreciation) at this output level. Fixed ccsts are estimated at Rs. 3 per unit for the same level of production, Gems Ltd. has just come across another model called Machine ~ ¥ capable of giving the same output at an annual operating cost of Rs. 1,80,000 (exclusive of depreciation). There will be no change in fixed costs. Capital cost of this machine is Rs. 2,50,000 and the estimated life is for five years will nil residual value. ‘The company has ar offer for sale of Machine ~ X at Rs. 1,00,000. But, the cost of dismantling and removal will amount to Rs. 30,000. As the company has not yet commenced operations, it wants to sell Machine ~ X and purchase Machine - Y. Gems Ltd, will be a zero-tax company for seven yeare in view of several incentives and allowances available. The cost of capital may be assumed at 15%, You are required ’) Advise whether the company should opt for the replacement, il) Will there be any change in your view, if Machine — R has’not been installed but the company is in the process of selecting one or the other machine ? Support your view with necessary workings. 12. Write a note on i) Hedging with exemple ii) Scenario analysis lil) Decision Tree analysis.‘M01 EA PG-738 | Semester M.Com. Degree Examination, January/February 2018 (CBCS Scheme) ‘COMMERCE Paper ~ 1.5 : Advanced Financial Management Time : 3 Hours Max. Marks : 70 ‘SECTION-A 1. Answer any seven sub-questions. Each sub-question carries 2marks: (7x2=14) a) Define Finance Function. ) What is Modified Internal Rate of Return (MIRA) ? ©) What are Non-Conventional Investments ? d) Whatis meant by Post-Payback Profitability ? ©) Distinguish between Net income and Net Operating Income Approach. {), What are the important elements of Capital Structure ? 9) What do you mean by Back to Back Loan? h) Define Derivatives. 1). Whatdo you mean by Sequential Analysis ? |), What do you mean by Real Rate and Nominal Rate of Return ? SECTION-B ‘Answer any four questions. Each question carries § marks, (4x5=20) 2. Explain how a firm will go about determining its ‘Optimal Capital Structure’ ? 3. The investment data of XYZ Company Lid., with 12 percent Cost of Capital, is as follows : Particulars: ‘Amount (Rs.) Investment '50,00,000 CashFlowBeforeTax Rs. 1 :30,00,000 2 :30,00,000 3 20,00,000 4 10,00,000 5 +5,00,000 ‘Assuming an inflation rate of 3.5 percent, determine NPV of the project by using real rate of discount. Pro.PG-738 2 ‘i 4, Certainly Equivalent Approach is theoretically superior to Risk Adjusted Discount Rate. Do you agree ? Comment. 5. ‘Conglomerate firm shares tend to have a higher market value due to lower cost of capital. Elucidate. 6. No Dividends, No Carrying Cost. Compute the theoretical forward price of the following securities for 1 month, 3 months and 6 months Securities ALtd, Bld. CLtd. SpotPrice (So) Rs. 160 Rs.380 Rs. 80 ‘You may assume a isk free interest rate of 6% per annum, 7. A company is considering two mutually exclusive projects X and Y. Project X ‘costs Rs. 3,00,000 and Project Y Rs. 3,60,000. You have been given bélow the net present value, probability distribution for each project. Project X Project Y NPV Estimate (Rs.) Probability NPV Estimate(Rs.) Probability 30,000 O41 30,000 02 60,000 0.4 60,000 03 * 4,20,000 oa 1,20,000 03 150,000. 01 1,50,000 02 1) Compute the risk attached to each project ie., Standard Deviation of ‘each probability cistrbution. II) Which project do you consider more risky and why ? ‘SECTION-C ‘Answer any three questions. Each question carries 12 marks (8x12=36) 8. ALimited has Rs. 10,00,000 available for investment opportunities under Capital Rationing and they are as follows: Proposal Cost of the Project PBP (Years) ARR(%) Pl(Times) IRR (%) Rs, A 4,00,000 43 10 13 8 B 4,60,000 4 2 14 9 c 4,00,000 5 5 09 10 D 4,00,000 6 6 10 13 E 2,40,000 3 8 13 4 F 150,000 34 10 20 1610. 1" ia 0 + PG-738 G 1,20,000 4 2 10 10 H 1,40,000 39 “4 17 6 ' +4,60,000 3 10 19 7 J 4,00,000 35 8 20 8 ‘The firms cost of capital is 15%. Select the best proposals among 10 proposals, based on PBP, ARR, Pl and IRR techniques. 1. Write a note on a) Homemade Leverage b) Company Arbitrage and Personal Arbitrage c) MMs thesis with Corporate Taxes. d) Reverse Leverage. ‘The following is the data regarding two Company's. X and Y belonging to the same risk class Particulars: x Y No. of Ordinary Shares 90,000 1,50,000 Market Price/ Share (Rs.) 12 10 6% Debentures 60,000 - Profit Before taxes (Rs.) 18,000 18,000 All profits after interest are distributed as dividend. Explain how under Modigliani and Miller Approach assuming an investor holding 15% of shares in Company X ‘willbe better off in switching his holding to Company Y. Paramount Products Ltd., wants to raise Rs. 100 lakh for diversification project. ‘current estimate of EBIT from the new projectis Rs. 22 lakh p.a. + Cost of debt will be 15% for amounts up to and including Ris. 40 lakh, 16% for additional amounts up to and including Rs. 5Olakh and 18% for adcitional amounts above Rs. 50 lakh. The equity shares (face value of Rs. 10) of he company have fa current market value of Fs. 40. This is expected to fall to Rs. 32 if debts ‘exceeding Rs. 50 lakh are raised. The following options are under consideration of the company. Option Debt Equity 1 50% 50% We 40% = 60% MW 60% = 40% Determine EPS for each option and state which option should the company adopt. ‘Tax rate is 30%.PG-738 + 12, Company P wishes to takeover Company Q. the details are as follows : Particulars ‘Company X (Rs) Equity shares (Rs. 100 per share) 22,00,000 Share premium account 20,000 Profitand Loss account 28,000 Preference shares 25,000 {8% Debentures 10,000 Fixed assets 11,52,000 Not current assets 4,01,000 PAT for share holders 66,000 Market Price/Equiy shares 2 Price Eamings Ratio 6 Company ¥ (Rs.) 5,00,000 30,000 14,000 415,000 10,000 3,35,000 46,000 26,000 23 10 ‘What offer do you think company P could make to Company Q in terms of Exchange Ratio, based on following methods a) Netasset value b) Eamings per share and ) Market price per share. Which method would you preter from P's point of view ?PG-569 | Semester M.Com. Examination, January 2017 (cBcs) COMMERCE Paper ~ 1.5 : Advanced Financial Management Time : 3 Hours Max. Marks : 70 SECTION-A 1. Answerany seven questions out often. Each question carries two marks. (7x2=14) a) Discuss Arbitrage process. ») Explain value of the firm, ©) Define opportunity cost of capital. 4) Explain decision tree. €) Define ‘time value of money’ 4) Explain utility theory. {9) Discuss the significance of PIE ratio, +h) What is Leveraged buyout ? i) Define a ‘futures’ contract. |) Explain the difference between futures and options, SECTION-B ‘Answerany four questions out of six. Each question carriesfive marks. _(4xS=20) 2. Define strategic financial management. State three examples of strategic financial decisions, 3. Discuss the use of sensitive analysis in risk evaluation. 4. Critically examine NPV and IR. Do they give identical results ? 5. Companies U and are identical in every respect except that the former does ‘not use debt in its capital structure, while the latter employs Rs. 6 lakh 10% deb. ‘Assuming that (i) all the M-M assumptions are met, (i the corporate tax rate is 35%, (i) the EBIT is Rs. 1,20,000, and (iv) the equity capitalization of the unleveled ‘company is 0.20. What will be the value of the firms U and L.? P10.PG-569 2 | EAA 6. Acompany is faced with the problem of choosing between two mutually exclusive projects. Project X requires a cash outlay of Rs. 1,00,000 and cash running ‘expenses of Rs. 30,000 per year. On the other hand project Y requires a cash outlay of Ris. 150,000 and running expenses of Fs. 20,000 per year. Both the projects have a eight year life. Project X has a salvage value of Rs. 4,000 and project Y has Rs. 14,000. The company's required rate of returns 10%. Assume the corporate tax rate is 50% and the depreciation of the project is on straight line basis. On a differential basis which project should be accepted ? 7. Aparticular putis the option to sell stock at Rs. 40. It expires after 3 months and currently sells for Rs. 2 when the price of the stock is Rs. 42. i) tan investor buys this put, what will the profit be after three months if the price of the stock is Rs. 45, Rs. 40 and Rs. 35 ? ii) What will the profit be from selling this put after three months ifthe price of the stock is Rs. 45, Rs. 40 and Rs. 35? SECTION-C ‘Answer any three out offive, Each question carries twelve marks, (312236) 8, Explain the different Hedging instruments and their features. ‘9. What is optimal capital structure and discuss the cost of capital behavior in ‘Traditional approach ? 10. Afirm has Ris. 6,00,000 available for investment. The investment opportunities available are as follows : Proposal Cost of the Project IRR% 1 2,00,000 7 2 12,30,000 8 3 2,00,000 9 4 2,00,000 23 5 4,20,000 19 : 6 1,50,000 7 7 90,000 16 8 3,00,000, 13 9 3,60,000, 12 10 500,000 1" ‘The firms cost of capital is 10%. Select the best proposals among 10 proposals based on Internal Rate of Return.‘1 * PG-569 11. Acompany is considering two mutually exclusive projects X and Y. Project X ost Rs. 30,000 and Project Y Rs. 36,000. You have been given below the net present value and probability distribution for each project. Project X Project Y NPVEstimate Probability NPVEstimate Probability Rs, Rs. 3,000 on 3,000 02 6,000 04 6,000 03 12,000 o4 12,000 03 416,000 oa 15,000 02 a) Compute the expected net present value of projects X and Y. 'b) Compute the risk attached to each project that is, standard deviation of each probability distribution, (©) Which project do you consider more risky and why ? 12, Reliance Ltd. wishes to acquire Raja Ld., a small company with food growth prospects. The relevant information both the companies is as follows : Company Equity shares Shareprice Earni outstanding (Rs) taxes Reliance Ltd. 10,00,000 B £20,00,000 Raja Lc. 1,00,000 10 2,00,000 2 Reliance Ltd. is considering 3 different acquisition plans. a) Pay Rs. 12.5 per share for each target share. ) Exchange Rs. 25 cash and one share of Reliance Lid, for every four shares, of Raja Ltd. 6) Exchange 1 share for every two shares of Raja Ltd. ’) What will Reliance EPS be under each of the three plans ? {i) What will the share prices of Reliance be under each of the three plans, ifits current P/E ratio remains unchanged ?‘NE PG - 882 | Semester M.Com. Examination, January 2016 (cBcs) COMMERCE Paper ~ 1.5 : Advanced Financial Management Time :3 Hours Max. Marks : 70 SECTION-A 1. Answerany seven sub questions. Eachsub question carries 2marks. (7x2=14) a) Define Finance. b) What are European Options ? c) What do you mean by Synergy ? d) What are the essentials of Sound Capital Mix ? ) What do you mean by Investment Timing ? ) Whatiis Bailout Takeover ? ‘9) What do you mean by Back to Back loan in Swaps ? hh) What is Decision Tree Analysis ? i) What is hostile takeover ? j) What is Implicit Reinvestment Rate ? SECTION-B ‘Answerany four questions; each question carries § marks. (4%5=20) 2. The investment data of A Company Limited launching a new product and with 10 percent cost of capital, is as follows Particulars ‘Amount (®) Investment & 7,00,000 ‘Cech Flow After Tax z is 1 —_|- 8.00;000 2 4,00,000 _| 3 2,00,000 4 4,00,000 5 4,00,000 ‘Assuming an inflation rate of 6 percent, determine NPV of the project by using both the nominal rate of discount and the real rate of discount, Pro.PG - 882 3. Briefly explain the participants of Derivatives Market in India. 4. ‘Conglomerate firm shares tend to have a higher market value due to lower cost of capital’. Elucidate the statement. 5. What are the critical factors to be observed while making capital budgeting decisions under capital rationing ? 6. Paramount Products Ltd, wants to raise Rs. 100 lakh for diversification project. Current estimates of EBIT from the new project are Rs. 22 lakh p.a. Cost of debt will be 15% for amounts up to and including Rs, 40 lakh, 16% for ‘additional amounts up to and including Rs. 50 lakh and 18% for additional amounts ‘above Rs. 50 lakh, The equity shares (face value of Rs, 10) of the company have current market value of Rs. 40. This is expected to fall to Rs. 32 if debts exceeding Rs. 50 lakh are raised. The following options are under consideration of the company. Option | Debt | Equity o [50% | 50% w [40% | com w [ex [sox Determine EPS for each option and state which option should be Company Adopt. Tax rate is 50%, 7. ‘There are two firms ‘A’ and ‘8! which are exactly identical except that A does not Use any debt in its financing, while B has Rs. 2,50,000, 6% debentures in its financing, Both the fims have eamings before interest and tax of Rs. 75,000 and the equity capitalization rate Is 10%, Assuming the corporation tax is 50%, calculate the value ofthe firm. SECTION-C ‘Answer any three questions; each question carries 12marks. (3x12=96) 8. Write a critical note on Capital Structure Theories 9. What are Derivatives ? How Future and Options Contracts are priced ?(ne PG - 882 10. Accompany with a 12 percent of cost of funds and limited investment funds of Fs, 4,00,000 is evaluating the desirability of several investment proposals. Project | initial investment (® | Lie (in years) | Year-end Gash inflow @® A 3,00,000, 2 187,600, a 2,00,000, 5 165,000 é 2,00,000 2 100,000 D 100,000 ° 20,000 E 3,00,000 10 166,000 i) Rank the projects according to the profitability index, and NPV methods, li) Determine the optimal investment package. lil) Which projects should be selected, if the company has Rs, 5,00,000 as the size of its capital budget ? iv) Determine the optimal investment package in the above situations, assuming that the projects are divisible. 411. Mr. Agni is considering an investment proposal of Rs. 80,000. The expected returns during the life of the investment are as under Year! Event | Cash inflow (®) Probabiity | 0 32,000 03 w 48,000 03 40,000 oa Year il Cash inflows in year 1 are: ; z 32,000 48,000 40,000 Event ‘ 5 ash Inflows Cash Inflows Cash Inflows Prob. Prob. Prob. (Rs) @s) @s) (| e000 [02 | 80,00 | o3a| 10,000 | oa @_| 80.000 | a6 | 1.20000 | 034 | 16,000 | 08 Ui) |1,00,000 [02 | 1,60,000 [02a | 24000 | 025 Using 10% as the cost of capital, advice about the acceptability of the proposal.PG - 882 + NE 12. AB Limited wishes to acquire CD Ltd. on the basis of an exchange.ratio of 0.8. * Other relevant financial data is as follows : Partoulare ‘AB Lid 0D Lid. Eaminge After Tax (©) 3,00,000 20,000 Equity Shares Outstanding 150,000 20,000 Earnings Por Share @®) 2 4 Market Price Per Share (®) 20 8 1) Determine the number of shares required to be issued by AB Ltd. for acquistion of CD Ltd, Il) What would be the exchange ratio fit is based on the market prices of shares: of AB Ltd. and CD Ltd, ? iil) What are the Current Price-Earnings of the two companies ? iv) Assuming the eatnings of each firm remains the same, what's the EPS after the aoquisition ? v) What is the equivalent EPS per share of CD Ltd. ? vi) Ascertain the gain to shareholders of both the companis (a) at 0.8 exchange ratio and (b) an exchange ratio based on market price.PG —755 1 Semester M.Com. Examination, January 2015 (CBs) COMMERCE Paper ~ 1.5 : Advanced Financial Management Time: 3 Hours Max, Marks : 70 SECTION—A Answer any seven sub questions. Each sub question carries 2marks. _ (7x2=14) 4. a) What do you mean by Capital Budgeting ? ) What do you mean by Sequential Investment Decision ? ©) Whats Absorption ? 4) Define Derivatives. €) Give the meaning of Utlity Theory. 4) Whatis MIRR ? 9) What is Sensitivity Analysis ? 1h) Whatis hedging ? i) How are future contracts priced ? j) What is meant by risk-return tradeott ? Pro.PG - 755 2 ‘wea SECTION-B ‘Answer any four questions; each question caries 5 marks (x5: + 2 Isthe MIM thesis realistic with respect o capital stucture and the value of the firm ? I not, what are its main weakness 2 8. Do you agree that an option is always more risky than the associated share ‘witht? How does the risk ofan option change when the share price changes ? 4 ‘The Balance Sheet of Alpha Numeric companys given below : Liabilities Amount Assets Amount Equity capital of Ris 10 per share 90,000. Net Fixed Assets 2,25,000 10% Long term debt 1,20,000 Current Assets 75,000 Retained Eamings 80,000 Curent abilities 60,000 Total 3,00,000 Total 300,000 ‘The company’s total assets turnover ratio is 9, its fixed operating cost is Fs. 1,50,000 and its variable operating cost ratio is 60%, The income tax ate 1s 50%, You are required to 1 Caleulate the diferent ypesofeverages forthe company il) Determine the likely level of EBIT I the EPS ig a) Ro,1 b) Rs.2 ©) Rs.0+ PG ~ 755 5. XYZ expects a net operating income of Rs. 2,00,000. It has 8,00,000, 6% debentures, The overall capitalization rate is 10%. Calculate the value of the firm and the equity capitalization rate (Cost of Equity) according to the net ‘operating income approach. I the debentures debtis increased to As. 10,00,000. ‘What will be the effect on volume of the firm and the equity capitalization rate ? 6. A.company has under review a project involving the outlay of is. 55,000 and expected to yield the following cash flows in current terms. 5 4 ar 1 2 Gash Fiows in(Rs,) | 10,000 | 20,000 | 30,000 | 6,000 ‘The company’s cost of capital, incorporating a requirement for growth in dividends to keep peace with cost inflation is 20% and this is used for the purpose of investment appraisal. On the above basis, the divisional manager involved as recommended rejection of the proposal. Having regard to your own forecast that the rate of inflation is likely to be 15% in year 1 and 10% in each of the following years, you are required to comment on his recommendation. (Discount factors @ 20% are, 0.833, 0.694, 0.579 and 0.482 respectively.) 7. Explain the difference between operating leverage and financial leverage.PG ~ 755 + “AN 5 Mr Kumarin considering an investment proposal °F RS, 40,000. The expected Totums during the let of the investment are as under Year-1 Event Cashinflow Probability i 16,000 os i 24,000 0s iy 20,000 02 Year~1 Cash intlows in year 1 are :PG ~ 755 8. “Changes in capitalization may be sought as a means of easing tension and 10. iving corporation a better opportunity to pursue its purpose.” In the light ofthis statement, discuss various reasons for changes in capitalization, ‘Acompany is considering which of two mutually exclusive projects is should Undertake. The finance director thinks that the project which had higher NPV should be chosen; where as the MD thinks that the one with the higher IRR should be undertaken especially for both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after tax cash flows of the projects are as follows : Year 5 36,000 0,000 90,000 75,000 20,000 Project X Project ¥ 2,18,000 10,000 10,000 4,000 3,000 a) Calculate NPV and IRR of each project. b) State with reasons, which project you would recommend, ‘¢) Explain the inconsistency in the ranking of the two projects.PG ~ 755 6 ‘A a "1 EreelentLimitea,aequting company, is inerestedin the acqustion of Pathetic Limited, Target company. The management of Excelent Limited wants youto compute the maximum price it should be wiling to pay to acquire Pathetic "Limited's peradustedpresentvaue ‘approach. Forthe purpose you have been Provided withthe folowing data: 1) AS 2 result of acquisition, itis expected thatthe FOFF of Excellent Limited are likely o increase as follows for 6 years Year Amount (Rs. in lakh) 1 120 2 150 3 200 4 200 5 140 6 100 il) The FOF of Pathetic Limited is expected tobe contact after 6 years, lil) Unlevered cost of equity is 15 percent, 'v) 10% Debt (to the extent of Fis. 120 lakh) wil nance part of acquisition cost, Debt willbe reduced to Rs. 70 lakh at the end of year 6 by repaying Rs. 10 lakh atthe end ofeach year, commencing from year 1. Debt lovelis expected to remain at that level thereafter,“TR * PG - 755 V) Corporate tax rate is 35 percent, vi) Advantage from debt isto be valued at cost of debt. vill) Bankruptey costs are assumed to be zero, 12. Explain the following derivative instruments in brief: > 1) Forward Contract ii) Futures Contract ii) Options iv) Swaps,