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MBA II SEMESTER

Pre University Examination

MBA 027: Financial Management

Time: 2 hours MM: 80

Note:

1) All questions are compulsory2) The figure given in the right hand side indicates marks

1(A) Choose the correct option. [1x10=10]

1. Shareholders wealth in a firm is represented bya) The number of people employed in the firm

b) The book value of the firms asset less the book value of liabilitiesc) The amount of salary paid to its employeed) The market price per share of the firms common stock

2. WACC stands fora) Weighted average cost of capital

b) Working average cost of capitalc) West Asian cost of capitald)None of the above

3. What do you understand by levered firm?a) Inclusion of equity

b) Inclusion of debtc) Inclusion of preference sharesd)None of the above

4.

In the context of the CAPM, in the above diagram Y= Security Market line, X= Return of

Security of a firm, so what can be inferred about X

a) The security of the firm is overvaluedb) The security of the firm is undervaluedc) The security of the firm is correctly valuedd)None of the above

5. Financial management is concerned with:a) Arrangement of funds

b) All aspects of acquiring & utilizing means of financial resources for firms activitiesc) Efficient management of every businessd)None of the above

Y

X

(Risk)

Returns

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6. CAPM accounts for:a) Systematic risk

b) Unsystematic riskc) Bothd)None of a & b

7. According to NI approach capital structure decision is _____________ to the value of thefirm.

a) Relevanceb) Irrelevancec) Bothd)None of a & b.

8. Market price per share ___________ if more debt is used in NI approach.a) Increases

b) Decreasesc) Remains unchangedd) First increase and then decrease.

9. What is the value of the levered firm L if it has the same EBIT as an Unlevered firm U,(with value of Rs.700/- lakh), has a debt of Rs. 200/- lakh, tax rebate is 35% under MMapproach?

a) Rs.770/- lakhb) Rs. 500/- lakhc) Rs. 630/- lakhd) Rs. 900/- lakh

10.According to traditional approach, what is the effect of increase in the degree of leverage onthe value of the firm?

a) Increasesb) Decreasesc) Remains unaffectedd) Increases first and then decreases

1(B) Write short notes on: [Any 2] [2x5=10]

a) Retained earningsb) CAPM modelc)NI approachd) WACC

2. a) What is Capital structure? What are the factors affecting the Capital structure of a firm?b) A ltd. Co has an equity share capital of Rs.5,00,000/- divided into shares of Rs.100/- each

It wishes to raise the further Rs.3,00,000/- for expansion cum modernization plans. The

company plans the following financing schemes.

a. All common stockb. Rs.1Lakh in common stock and Rs. 2 lakh in 10% debenturesc. All debt at 10% p.a.d. Rs.1 Lakh in common stock and Rs. 2 lakh in preference capital with the rate of

dividend @ 8% p.a.

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The companies expected EBIT are Rs.1,50,000/-. The corporate tax rate is 50%.

You are required to determine the EPS in each plan and comment on the implications of

financial leverage.

[10+10=20]

[OR]

a) Compare the Traditional Approach and MM Approach in capital structure planning.b) With the following Balance Sheet of Hypothetical Company Ltd. and the additional

information given compute the weighted average cost of capital. Assume tax rate 50% andignore short term funds.

Balance Sheet of Hypothetical Co. Ltd.

Liabilities Rs. in lakhs Assets Rs. in lakhs

40,000 equity shares Fixed assets 100

of Rs. 100 each 40 Less :

Reserves and surplus 20 Depreciation 25 75

10,000, 6% cumulative Current assets 75preference shares of

Rs. 100 each 10

20,000, 9.5% cumulative

preference shares of

Rs. 10 each 20

1,000, 7% debentures of

Rs. 1,000 each 10

Current liabilities and provisions 50

150 150

Additional information:

(1) Average market price

(i) per equity share Rs. 125

(ii) per6% cum. pref. share Rs. 65

(iii) per 9.5% cum pref. share Rs. 102

(iv) per 7% debenture Rs. 90

(2) Book value per equity share Rs. 150

(3) Average earnings per equity share Rs. 18

(4) P/E (125/18) 6.94

[10 + 10=20]

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3.

a) What are the differences between NPV and IRR methods?

b) Equipment A has a cost of Rs.75,000/- and net cash flow of Rs.20,000/- p.a. for six years. A

substitute equipment B would cost Rs.50,000/- and generate cash flow of Rs.14,000/- p.a. for

six years. The required rate of return for both the equipments is 11%. Calculate IRR to decide

which equipment should be accepted and why?

[10 + 10=20]

[OR]a) ABC ltd. Want to install machinery whose cost is Rs.2,50,000/-. It has an estimated life of 5

years. Company charges depreciation on straight line basis. Assuming corporate tax is 40%.

The estimated cash flow before depreciation and tax (CFBT) are as below:

Year 1 2 3 4 5

CFBT 60,000 70,000 90,000 1,00,000 1,50,000

Evaluate project with:

i) Accounting rate of returnii) Payback period method

b) In the current stock market scenario, whether you will suggest a well established company togo for shares or debentures. In case the Sensex would have been around 7000 pts, whatwould have been your suggestion? Give reasons for your answer.

[5+5+10=20]

4.

a) Distinguish between long term, medium term and short term source of finance. What is the

importance of long term source of finance; also give its various sources.

b) Discuss the different concepts of working capital and explain the various factors that affect

the need of working capital.

[4+4+2+5+5=20]

[OR]

Investors are indifferent to payment of dividend and retention of profits of a firm.-Discuss

this statement in context of Walters model, Gordon Model and MM model.

What are the various factors affecting the dividend policy of a firm?

[10+10=20]