Question 1a: Should the titles of controller and treasurer be adopted under Indian context? Would ou li!e to modif their functions in "ie# of the compan practice in India? $ustif our opinion?
Ans#er to 1a: Controller & Treasurer are independent & they have their own Perspectives & Drivers as detailed below:
Responsibilities include, Double entry accounting, financial reporting, Fraud measure, detective controls, Financial restatement
Controller wor s & forecasts the events for a long term! "ain focus # income statement $%: Cash involved event Controller loo s from compliance angle &how to record, what '((P provides etc!,) Therefore, from the above it is clear that, controller & treasurer have different roles to play! *owever, ma+ority of the ,ndian companies wor s with Financial Controller who himself ta es care of the treasury department - Portfolio! Therefore, as far as from ,ndian conte%t, it can be concluded that, controller is also responsible for treasury +obs & there is no separate treasurer - treasury department e%ists Question 1b: firm purchases a machinery for Rs! ., //,/// by ma ing a down payment of Rs!0,1/,/// and remainder in e2ual installments of Rs! 0,1/,/// for si% years! 3hat is the rate of interest to the firm4 Ans#er to Q1b: %articulars Cost of "achinery Down Payment made by firm Financed through borrowings Repayment in e2ual instalments every year &ma%imum of si% years) Total interest paid over 7 year period &ef &a) &b) c 5 &a6 b) d57801 /,/// 'ear ( .//,/// 01/,/// 71/,/// 9//,/// 01/,/// 01/,/// 01/,/// 01/,/// 01/,/// 01/,/// 'ear 1 'ear ) 'ear * &s. 'ear + 'ear , 'ear -
e5d6 c
),(/(((
f5e-c
*2.+-3
&ate of interet
g5f-7
per annum
cost - principal repayment: be apportioned in the ratio of no of years repayment 6 i!e! earlier the years more the interest cost & vice versa) 7:1:=:?:
&ratio)
:earwise ,nterest ;utstanding rates: ad+ustment 6 Principal ;utstanding at year end &prinicp al o-s at year beginnin g6 Principal repayme nt) h &71 /// /6 i) &1<0= >96 i) &=./9 1> 6 i)
i5d6h
&?<.1 <0 6 i)
&>7=> .76 i)
&0?./9 1 6 i)
p r i n c i p a l o s a t y e a r b e
g i n n i
n g &h 71////)
Question )a: 5xplain the mechanism of calculating the present "alue of cash flo#s. What is annuit due? :o# can ou calculate the present and future "alues of an annuit due? Illustrate
A n s # e r ) a : ;alculating %resent 8alue of ;ash flo#s: "oney has time value! For e%: Rs!0/// received today is not the same worth after a year &actually it is less) %resent "alue of cash flo#s: ,t indicates the value of e%pected worth at current value! &Discounts the e%pected cash flows at appropriate discount rate &may be 0/@, >/@ etc!,) <iscount rate will generally be e2ual to 5 ,nflation rate A Re2d! rate of return A ris free premium rate <etails re=uired for calculating %resent 8alue of cash flo#s: Cash flows year wise, discount rate! This techni2ue is very useful for decision6ma ing!
Annuit due: Bniform- Constant- $2ual cash flows every year %resent "alue of annuit 3orth of Cump sum consideration today which is going to be received tomorrow Computation: (nnuity 8 Present value annuity factor &PD(F) PD(F is calculated as 5 06E0-&0Ar) to the power nF! ,llustration: "r! ( would li e to receive Rs!0///-6 every year for 0/ years from now! ,t is assumed discount rate 0/@, the present value annuity factor for 0/ years 0/@ is 7!0==! Present value of annuity 5 0/// 8 7!0== 5 Rs!70=1-6
Question )b: >4he increase in the ris!-premium of all stoc!s/ irrespecti"e of their beta is the same #hen ris! a"ersion increases> ;omment #ith practical examples
Ans#er )b: The securityGs beta is a function of the correlation of the securityGs returns with the mar et inde% returns and the variability of the securityGs returns relative to the variability of the inde% returns! ,n simple, beta measures the sensitivity of the stoc with reference to broad based mar et inde%! For instance: a beta of 0!> for a stoc would indicate that this stoc is >/@ ris ier than the inde% & similarly beta of /!9 for a stoc indicates 0/@ less ris ier than the inde%! Finally, a beta of 0!/ means, stoc is as ris y as the stoc mar et inde%! Therefore, the given statement is false! $%pected ris 6premium for stoc is beta times the mar et ris premium! For e%: let us assume beta 5 0!> times, mar et ris premium 5 0/@, then e%pected ris premium 5 0/@ 8 0!> times 5 0>@!
Question *a: :o# le"erage is lin!ed #ith capital structure? 4a!e example of a M7; and anal ?e.
Ans#er to *a: @e"erage: ,t is an advantage gained &it may be anything) Ceverage is lin ed with Capital Htructure, since an organiIation having a optimum capital structure &where 3(CC &weighted average cost of capital) is minimum) is a great leverage- advantage both to the company as well for the investors! ;rganiIations, generally have two types of ris sJ operating ris s # impact of fi%ed costs & variability of $K,T & Financial ris s # impact of interest cost-financial charges & variability of $KT! 5xample: L:M ltd has the following nos: Contribution # Rs!0// lacs, fi%ed cost # Rs!>1 lacs, Financial Charges-debt cost # Rs!=/ lacs!
Contribution Fi%ed cost 5AI4 ,nterest cost 5A4 B'C @td. has following: 6perating le"erage Contribution - $K,T 5 0// - <1 5 0!?? ,t is always preferable to have low operating ris employed &R;C$) N ,nterest cost on debt funds) & high financial ris &sub+ect to Return on capital
3e can conclude that, L:M ltd &"OC) is having a optimum capital structure & manageable ris !
You are required to: (i) Calculate the operating, financial and combined leverages for the two companiesJ and Comment on the relative ris position of them
Ans#er *b:
%articulars Hales Dariable costs ;ontibution Fi%ed cost %AI4 1 5AI4 ,nterest %rofit before 4ax 1 5A4 ;omputation:
Question +a: <efine "arious concepts of cost of capital. 5xplain the procedure of calculating #eighted a"erage cost of capital. Ans#er +a:
;oncepts of ;ost of ;apital: a) (ll source of finance have its own cost! ;ut of long source finance, e2uity mode of sourcing is costlier than debt financing because of e%pectation of shareholders! b) &ISF 8S. ;6S4: $2uity mode of finance will have low ris but costlier as against debt funds which will have high ris but relatively cheaper & have ta% advantage thus reducing the net cost of debt! ;rganiIations have to effectively trade off between ris , cost & control! c) 6ptimum ;apital Structure: 3hen the firm - organiIation has a combination of debt and e2uity, such that the wealth of the firm is ma%imum! (t this point, cost of capital is minimum & mar et price of a share is ma%imum! %rocedure of calculating Weighted A"erage ;ost of ;apital DWA;;E: ,t is computed by reference to proportion of each component of capital &boo value or mar et value as specified) as weights! WA;; 0 Sum Gproportion of each component of capital D#eightsE H indi"idual cost of capitalI 7ote: Ta% rates needs to be ad+usted in respect of debt funds!
Question +b: 4he follo#ing items ha"e been extracted from the liabilities side of the balance sheet of B'C ;ompan as on *1st <ecember )((,.
Paid up capital: =, //,/// e2uity shares of Rs each Loans: 07@ non6convertible debentures 0>@ institutional loans ;ther information about the company as relevant is given below: ?0st dec >//1 =/,//,/// >/,//,/// 7/,//,///
Dividend
$arning
Per share per share per share <!> 0/!1/ 71 :ou are re2uired to calculate the weighted average cost of capital, using boo values as weights and earnings-price ratio as the basis of cost of e2uity! (ssume 9!>@ ta% rate
Ans#er +b:
;omputation of Weighted A"erage ;ost of ;apital DWA;;E:
Oature of Capital
a) $2uity Capital
Question ,a: A compan has issued debentures of &s. ,( @a!hs to be repaid after J ears. :o# much should the compan in"est in a sin!ing fund earning 1)3 in order to be able to repa debentures? Sho# the procedure of loan amorti?ation and capital reco"er through an example. Ans#er ,a:
Debentures to be redeemed after < years $%pected rate of return 6 on sin ing fund investment to be created Discount rateQ0>@, < yrs Present value of e%pected repayment of debentures Q0>@ < yrs 1,///,/// 0>@
therefore, company has to invest Rs!>>,70,<=7 Q 0>@ earning in Hin ing fund to cover the repayment e%pected < years from n
@oan Amorti?ation ( loan amortiIation schedule is a repayment plan that is calculated before repayment of a loan begins!
(mortiIation schedules are used for fi%ed interest long # term loans such as mortgages, e%penses li e R& D e%penses, Purchase of 'oodwill, Doluntary Retirement payment e%pense %rocedure #ith 5x:
"-s!L:M ltd has incurred a Rs!1/, //,/// as lump sum payment towards voluntary retirement separation charges during the a L:M ltd have planned to amortiIe the above e%penses for a period of 0/ years commencing from F:!/960/ Therefore, the schedule of amortiIation for 0/ year period as follows: Rs! 1//,///-6 per years for 0/ years
Question ,b: A ban! has offered to ou an annuit of &s. 1/2(( for 1( ears if ou in"est &s. 1)/((( toda . What is the rate of return ou #ould earn? ! Ans#er ,b:
Return e%pected per annum Fi%ed return-annuity for no of years Total return e%pected ,nvestment re2uired today Oett return e%pected from investment %ercentage of return for 1( ears %ercentage of return per annum
Assignment - ;
The following is the additional information available: (verage raw material in stoc : one monthJ (verage materials in process: half monthJ Credit allowed by suppliers: one monthJ Credit allowed to debtors: two monthsJ Time lag in payment of wages: one and half wee sJ ;verheads: one month! ;ne6fourth of sales are on cash basis! Cash balance e%pected to be Rs! 0>,///! :ou are re2uired to prepare a statement showing the wor ing capital needed o finance a level of activity of </,/// units of output! :ou may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly!
Ans#er 1:
Particular
Raw "aterial Direct Cabour %rime cost ;verheads Total cost Profit Hales
Statement of Wor!ing ;apital for :@@ - J(/((( units production per ear:
%articulars ;urrent Assets: DAE Raw material stoc Process stoc 6 3or in progress &3,P) Debtors 6 customers Cash balance e%pected to maintain 4otal of ;K&&574 ASS54S - DAE
;verheads outstanding 4otal of ;K&&574 @IAAI@I4I5S - DAE 7544 W6&FI7L ;A%I4A@ &5QKI&5<
Question )a: 4hrough =uantitati"e anal sis pro"e that %I is a better techni=ue than 7%8 in ;apital Audgeting. Ans#er )a:
P, # Profitability ,nde% & OPD # Oet Present Dalue both are capital budgeting techni2ues! %rofitabilit Index D%IE %I 5 Present value of inflows - Present value of outflows ,deal 5 should be N 0 Quantitati"e anal sis: Present value of inflows 5 Rs! >//,/// Present value of outflows 5 Rs! 0//,/// P, 5 > OPD techni2ue is better than P, techni2ue for capital budgeting decisions! OPD shows wealth at the end in absolute amount, which will be helpful to ma e decisions clearly, whereas the same advantage is not available with P, techni2ue! *owever, P, shows # return over investment in times, which will be very useful for immediate decision ma ing! 'enerally, over the years, organiIations prefer OPD techni2ue for capital budgeting decisions than P, techni2ue!
( K C D ,! according to each of the following methods: &0!) Paybac , &>!) (RR, &?!) ,RR, &=!) OPD assuming discount rates of 0/ and ?/ percent! ,,! (ssuming the pro+ect is independent, which one should be accepted4 ,f the pro+ects are mutually e%clusive, which pro+ect is the best4
Ans#er )b:
IE Methods &0) Paybac Q0/@ discount rate Q?/@ discount rate &>) (ccounting rate of return &(RR) &?) OPD Q0/@ discount rate Q?/@ discount rate &=) ,RR Independent proMect: Pro+ect with higher OPD needs to be selected, which shows wealth in absolute value at the end of the pro+ect 4herefore/ %roMect ; needs to be accepted. IIE In case proMects are mutuall exclusi"e: First disparity between pro+ects needs to be resolved! OPD selects Pro+ect C whereas ,RR selects Pro+ect D, therefore, disparity e%ists! Hince cash outflows &Rs!0/, ///-6) are same for both the pro+ects, the disparity arisen is called as Cash flow disparity! ,t can be resolved by using Incremental cash flo# techni=ue! (fter resolving, the right pro+ect can be accepted! Wor!ings are as follo#s: %&6$5;4 A: The following has been calculated assuming discount rates of 0/@ & ?/@ separately: 1E %a bac! period: time period to reco"er initial in"estment aE <iscounted N1(3
:ears
Cash flows
&0)
&>)
&0/,///)
0 0/,/// 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year Paybac period 5 Kase year A E&unrecovered disocunted cash flow of base year -
%a bac! period exceed 1 ear/ since unreco"ered cash flo#s turns positi"e onl from IInd r on#ards where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period Q 0/@ & ?/@ discount rate 5 0 A years 01O ears
)E Accounting rate of return: rate of return on initial in"estment made: given as: investmen Hince no consider
&0)
&>)
/ 0 7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
&0/,/// ) 0/,///
*E I&& DInternal rate of returnE: #hich is the rate of return at #hich 7%8 0 ( ,n pro+ect ( , ,RR is G/G@ at which OPD 5/ &i!e! there is no return from the pro+ect)
%&6$5;4 A: The following has been calculated assuming discount rates of 0/@ & ?/@ separately: 1E %a bac! period: time period to reco"er initial in"estment aE <iscounted N1(3
:ears
Cash flows
&0)
&>)
/ 0 > 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
Paybac period 5 Kase year A E&unrecovered disocunted cash flow of base year disocunted cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period Q 0/@ discount rate5 0 A E&?0.>-?/0<)80>F 01.1* ears Paybac period Q ?/@ discount rate5 0 A E&=>?0->/<)80>F 01.), ears
)E Accounting rate of return: rate of return on initial in"estment made: given as: (verage profit after depriciation & Ta% - ,nitial investment Hince no information on profits, depreciation & ta%es, it is treated cash inflows considered as profits after depreciation & ta%es therefor e5 &01,/// &inflow) - 0/,/// &investment)) 8 0//
:ears
&0)
/ 0 >
7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
*E I&& DInternal rate of returnE: #hich is the rate of return at #hich 7%8 0 ( For pro+ect K , ,RR is calculated as below: I&& 0 @1 O G7%8@1 1 D7%8@1 - 7%8@)EI H D@) - @1E where C0 5 guess rate &depend on OPD, disocunted at given re2uired rate of return) rate C> 5 one more guess
bE <iscounted N*(3
:ears
&elationship bet#een discount rate and 7%8: in"erse relationship: Discount rate goes up Discount rate comes down OPD falls OPD goes up
Cet us assume @1 0 *(3 &why, because as could be seen at ?/@ Q discount rate OPD is Ave by applying the relationship, increased disocunt rate) Cet us calculate C> 5 ?>@ <iscounted N*)3 Dassumed rateE :ears
&0)
/ 0 >
7%8 therefore, ,RR for Pro+ect K 5 ?/@ A E>/< -& >/<A0=)F8?>@ 6 ?/@ *(3 O I&& 1.2J* *1.2J3
%&6$5;4 ;: The following has been calculated assuming discount rates of 0/@ & ?/@ separately: 1E %a bac! period: time period to reco"er initial in"estment aE <iscounted N1(3
:ears
Cash flows
&0)
&>)
/ 0 > ? 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
Paybac period 5 Kase year A E&unrecovered disocunted cash flow of base year - disocunted
cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period Q 0/@ discount rate5 > A E&=.<7-=0=/)80>F 0).1+ ears Paybac period Q ?/@ discount rate5 e%ceeds ? years 0*O ears
)E Accounting rate of return: rate of return on initial in"estment made: given as: (verage profit after depriciation & Ta% - ,nitial investment Hince no information on profits, depreciation & ta%es, it is treated cash inflows considered as profits after depreciation & ta%es therefor e5 &0.,/// &inflow) - 0/,/// &investment)) 8 0//
&0)
/ 0 > ? 7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
*E I&& DInternal rate of returnE: #hich is the rate of return at #hich 7%8 0 ( For pro+ect C , ,RR is calculated as below: I&& 0 @1 O G7%8@1 1 D7%8@1 - 7%8@)EI H D@) - @1E where C0 5 guess rate &depend on OPD, disocunted at given re2uired rate of return) rate C> 5 one more guess
&elationship bet#een discount rate and 7%8: in"erse relationship: Discount rate goes up Discount rate comes down OPD falls OPD goes up
Cet us assume @1 0 *(3 &why, because as could be seen at ?/@ Q discount rate OPD is 6ve by applying the relationship, reduced disocunt rate) Cet us calculate C> 5 >7@ <iscounted N)-3 Dassumed rateE
:ears
&0)
/ 0 > ? 7%8 therefore, ,RR for Pro+ect K 5 ?/@ A E67?? -& 67??6 0/7)F8>7@ 6 ?/@ *(3 I&& %&6$5;4 <: The following has been calculated assuming discount rates of 0/@ & ?/@ separately: *.+* )-.,J
:ears
Cash flows
&0)
&>)
/ 0 > ? 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
Paybac period 5 Kase year A E&unrecovered disocunted cash flow of base year disocunted cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period Q 0/@ discount rate5 0 A E&9/9-01</)80>F 01.J ears Paybac period Q ?/@ discount rate5 > A E&1??-.??)80>F 0 ).2 ears
)E Accounting rate of return: rate of return on initial in"estment made: given as: (verage profit after depriciation & Ta% - ,nitial investment Hince no information on profits, depreciation & ta%es, it is treated cash inflows considered as profits after depreciation & ta%es therefor e5 &07,/// &inflow) - 0/,/// &investment)) 8 0//
:ears :ears
&0)
/ 0 > ? 7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
*E I&& DInternal rate of returnE: #hich is the rate of return at #hich 7%8 0 ( For pro+ect C , ,RR is calculated as below: I&& 0 @1 O G7%8@1 1 D7%8@1 - 7%8@)EI H D@) - @1E where C0 5 guess rate &depend on OPD, disocunted at given re2uired rate of return) rate C> 5 one more guess
&elationship bet#een discount rate and 7%8: in"erse relationship: Discount rate goes up Discount rate comes down OPD falls OPD up goes
Cet us assume @1 0 *(3 &why, because as could be seen at ?/@ Q discount rate OPD isAve by applying the relationship, increased disocunt rate) Cet us calculate C> 5 ?.@
:ears
&0)
/ 0 > ? 7%8 therefore, ,RR for Pro+ect K 5 ?/@ A E.?? -& .??A?<)F8?.@ 6 ?/@ *(3 O I&& J.-*J.--3
1E 7%8 Dnet present "alueE: for increments cash flo#s aE <iscounted N1(3 bE <iscounted N*(3
:ears :ears
&0)
/ 0 > ? 7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year
*E I&& DInternal rate of returnE: #hich is the rate of return at #hich 7%8 0 ( For pro+ect C , ,RR is calculated as below: I&& 0 @1 O G7%8@1 1 D7%8@1 - 7%8@)EI H D@) - @1E where C0 5 guess rate &depend on OPD, disocunted at given re2uired rate of return) rate C> 5 one more guess
&elationship bet#een discount rate and 7%8: in"erse relationship: Discount rate goes up Discount rate comes down OPD falls OPD goes up
Cet us assume @1 0 1(3 &why, because as could be seen at ?/@ Q discount rate OPD isAve by applying the relationship, increased disocunt rate) Cet us calculate C> 5 0?@ <iscounted N1*3 Dassumed rateE
:ears
&0)
/ 0 > ? 7%8 therefore, ,RR for Pro+ect K 5 0/@ A E?07 -& ?07A19)F80?@ 6 0/@ 1(3 O I&& )., 1).,(3 Target return 5 0/@ ,RR for incremental cash flows 5 0>!1@
since I&& for incremental cash flo#s P 4arget return/ select 1 accept %roMect ;
Question *a: >Firm should follo# a polic of "er high di"idend pa -outQ 4a!ing example of t#o organi?ation comment on this statement> Ans#er *a:
The statement not necessarily be true! Cet us ta e > companiesJ :igh di"idend pa out compan R 1((3 pa out a) Cess retained earnings b) Hlower - lower growth rate c) Cower mar et price d) Cost of e2uity &Re) N ,RR &r 5 rate of return earned by company on its investment! e) ,ndicates that company is declining!
,t must be noted that, dividend is a trade off between retaining money for capital e%penditure and issuing new shares!
Question *b: An in"estor gains nothing from bonus share >;riticall anal se the statement through some real life situation of recent past. Ans#er *b:
The statement is false! (n investor gains bonus shares at Iero cost, *owever, the mar et price of the stoc will come down & over the long period, the investor definitely ma%imiIes his wealth due to bonus shares! From company angle, bonus issue is only an accounting entry & it doesnSt change the wealth-value of the firm! Recently, Kharti (irtel have issued bonus share >:0, due to which, the investors have gained Konus shares at Iero cost & the mar et have come down to the e%tent of bonus issue & immediately went up & investors have cashed the bonus shares thus ma%imiIed their wealth! *owever, currently it is trading down due to varied reasons!
;AS5 S4K<'
Ques 1: 'ou are re=uired to ma!e these calculations and in the light thereof/ ad"ise the finance manager about the suitabilit / or other#ise/ of machine A or machine A. Solution:
Ad"ise to finance manager of Aro#n metals ltd/ to select the appropriate machine: %articulars 0) OPD >) Profitability inde% ?) Pay Kac period =) Discounted pay bac period It is ad"ised to go in for Machine A #ith enhanced capacit / #hich #ill add more "alue to the firm. 7%8 is higher in respect of Machine A as compared to Machine A S therefore machine #ith higher 7%8 needs to be in"ested. Wor!ings are as follo#s: DaE to bu machine A #hich is similar to the existing machine: :ears
&0)
/ 0 > ? = 1 7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year 0) Oet Present value 5 Present value of inflows 6 Present value of outflows 5 1) &as computed above) >) Profitability ,nde% 5 Present value of inflows - present value of outflows which should be N0 ?< - >1 1.+2 ?) Paybac period 5 Kase year A E&unrecovered cash flow of base year - cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period 5 > A E&>/-/)80>F 0 ) ears
&>1 1 >/ 0= 0=
=) Discounted Paybac period 5 Kase year A E&unrecovered disocunted cash flow of base year - disocunted cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period 5 ? A E&7-=)80>F 0*.12 ears
DbE to go in for machine A #hich is more expensi"e S has much greater capacit : :ears
&0)
/ 0 > ? = 1 7%8 8 disocunt rate computed using formule 5 0 - &0Ar) to the power nJ where r 5 disocunt rate & n 5 year 0) Oet Present value 5 Present value of inflows 6 Present value of outflows 5 1+ &as computed above) >) Profitability ,nde% 5 Present value of inflows - present value of outflows which should be N0 1= - =/ 1.*,
&=/ 0/ 0= 07 0< 01
?) Paybac period 5 Kase year A E&unrecovered cash flow of base year - cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period 5 ? A E&07-/)80>F 0 * ears
=) Discounted Paybac period 5 Kase year A E&unrecovered disocunted cash flow of base year - disocunted cash flows of ne%t year) 80>F where base year 5 year in which unrecovered cash flows turns / or Ave Paybac period 5 ? A E&<-=)80>F 0*.)1 ears
Assignment - ;
1. 4he main function of a finance manager is &a) capital budgeting &b) capital structuring &c) management of wor ing capital &d) &a),&b)and&c) Ans#er R DdE ). 5arning per share &a) refers to earning of e2uity and preference shareholders! &b) refers to mar et value per share of the company! &c) reflects the value of the firm! &d) refers to earnings of e2uity shareholders after all other obligations of the company have been met! Ans#er R DdE *. If the cut off rate of a proMect is greater than I&&/ #e ma &a) accept the proposal! &b) re+ect the proposal! &c) be neutral about it! &d) wait for the ,RR to increase and match the cut off rate! Ans#er R DbE +. ;ost of e=uit share capital is &a) e2ual to last dividend paid to e2uity shareholders! &b) e2ual to rate of discount at which e%pected dividends are discounted to determine their PD! &c) less than the cost of debt capital! &d) e2ual to dividend e%pectations of e2uity shareholders for coming year! Ans#er R DbE ,. <egree of the total le"erage D<4@E can be calculated b the follo#ing formula E'iven degree of operating leverage &D;C) and degree of financial leverage &DFC)F &a) D;C A DFC &b) D;C -DFC &c) DFC6D;C &d) D;C % DFC Ans#er R DdE -. &is!- &eturn trade off implies &a) increasing the profits of the firm through increased production &b) not ta ing any loans which increase the ris of the firm &c) ta ing decisions in a way which optimiIes the balance between ris and return &d) not granting credit to ris y customers Ans#er R DcE J. 4he goal of a firm should be &a) ma%imiIation of profit &b) ma%imiIation of earning per share &c) ma%imiIation of value of the firm &d) ma%imiIation of return on e2uity Ans#er R DcE
2. ;urrent Assets minus current liabilities is e=ual to &a) 'ross wor ing capital &b) Capital employed &c) Oet worth &d) Oet wor ing capital! Ans#er R DdE 9. &a) &b) &c) 4he indifference le"el of 5AI4 is one at #hich $PH increases $PH remains the same $PH decreases
&d) $K,T5$PH! Ans#er R DdE 1(. Mone has time "alue since &a) The value of money gets compounded as time goes by &b) The value of money gets discounted as time goes by &c) "oney in hand today is more certain than money in future &d) &b) and &c) Ans#er R DbE 11. 7et #or!ing capital is &a) e%cess of gross current assets over current liabilities &b) same as net worth &c) same as capital employed &d) same as total assets employed Ans#er R DaE 1). 4he internal rate of return of a proMect is the discount rate at #hich 7%8 is &a) positive &b) negative &c) Iero &d) negative minus positive Ans#er R DcE 1*. ;ompounding techni=ue is &a) same as discounting techni2ue &b) slightly different from discounting techni2ue &c) e%actly opposite of discounting techni2ue &d) one where interest is compounded more than once in a year! Ans#er R DcE 1+. For determining the "alue of a share on the basis of %15 ratio/ information is re=uired regarding: &a) earning per share &b) normal rate of return &c) capital employed in the business &d) contingent liabilities Ans#er R DaE 1,. 4andon committee suggested in"entor and recei"able norms for &a) 01 ma+or industries &b) >/ minor industries &c) >1 ma+or and minor industries &d) ?/ ma+or and minor industries Ans#er R DcE 1-. ;apital structure of AA; @td. consists of e=uit share capital of &s. 1/((/((( D1(/((( share of &s. 1( eachE and 23 debentures of &s. ,(/((( S earning before interest and tax is &s. )(/(((. 4he degree of financial le"erage is
&d) >!// Ans#er R DbE 0<! The following data is given for a company! Bnit HP 5 Rs! >, Dariable cost-unit 5 Re! /!</, Total fi%ed cost6 Rs! 0,//,/// ,nterest Charges Rs! ?,77., ;utput60,//,/// units! The degree of operating leverage is
(a) 4.00
&b) =!?? &c) =!<1 &d) 1!?? Ans#er R DbE 0.! "ar et price of e2uity share of a company is Rs! >1 and the dividend e%pected a year hence is Rs! 0/!
The e%pected rate of dividend growth is 1@! The cost of e2ual capital to company will be &a) =/@ &b) =1@ &c) ?1@ &d) 1/@ Ans#er R DbE 19. 4he dilemma of >li=uidit 8s profitabilit > arise in case of &a) Potentially sic unit &b) (ny business organiIation &c) ;nly public sector unites &d) Purely trading companies Ans#er R DbE )(. 4he present "alue of &s. 1,((( recei"able in J ears at a discount rate of 1,3 is
(a)
&b) &c) &d) Ans#er R DaE )1. A bond of &s. 1((( bearing coupon rate of 1)3 is redeemable at par in 1( rs. If the re=uired rate of return is 1(3 the "alue of bond is &a) &b)
(c)
Ans#er R DaE &d)
)). 4he 5%S of AA; @td. is &s. 1( S cost of capital is 1(3.4he mar!et price of share at return rate of 1,3 and di"idend pa out ratio of +(3 is &a) &b) &c) &d)
Ans#er R DaE
)*. 4he credit term offered b a supplier is *11( net -(.4he annuali?ed interest cost of not a"ailing the cash discount is &a) >>!1.@ &b) ><!=1@ &c) ?<!<1@ &d) ?.!1/@ Ans#er R DaE )+. 4he costliest of long term sources of finance is &a) Preference share capital &b) Retained earnings &c) $2uity share capital &d) Debentures Ans#er R DcE ),. Which of the follo#ing approaches ad"ocates that the cost of e=uit capital S debit capital remains the degree of le"erages "aries &a) Oet income approach &b) Oet operating income approach &c) Traditional approach &d) "odigliani6"iller approach Ans#er R DbE S DdE )-. &a) &b) &c) Which of the follo#ing is not a feature of an optimal capital structure. Profitability Hafety Fle%ibility
&d) Control Ans#er R DbE )J. While calculating #eighted a"erage cost of capital &a) Retained earnings are e%cluded &b) Kan borrowings for wor ing capital are included &c) Cost of issues are included &d) 3eights are based on mar et value or on boo value Ans#er R DaE )2. Which of the follo#ing factors influence the capital structure of a business entit ? &a) Kargaining power with suppliers &b) Demand for product of company &c) $%pected income &d) Technology adopted Ans#er R DcE )9. According to the Walters model/ a firm should ha"e 1((3 di"idend pa -out ratio #hen. &a) r 5 e &b) r T e &c) r N e &d) g N e Ans#er R DaE *(. 6perating c cle can be dela ed b &a) ,ncrease in 3,P period &b) Decrease in raw material storage period &c) Decrease in credit payment period &d) Koth a & c above Ans#er R DdE *1. If net #or!ing capital is negati"e/ it signifies that &a) The li2uidity position is not comfortable &b) The current ratio is less then 0 &c) Cong term uses are met out of short6 term sources &d) (ll of a, b and c above Ans#er R DdE *). Which of the follo#ing models on di"idend polic stresses on in"estors preference for the current di"idend &a) Traditional model &b) 3alters model &c) 'ordon model &d) "" model Ans#er R DdE **. Which of the follo#ing is a techni=ue for monitoring the status of recei"ables &a) ageing schedule &b) outstanding creditors &c) selection matri% &d) credit evaluation Ans#er R DaE *+. A"erage collection period is e=ual to &a) ?7/- Receivables Turnover Ratio &b) (verage Creditors - Hales per day &c) Hales - Debtors &d) Purchases - Debtors Ans#er R DaE *,. &a) &b) &c) &d) In I&&/ the cash flo#s are assumed to be rein"ested in the proMect at ,nternal rate of return cost of capital "arginal cost of capital ris free rate
Ans#er R DdE *-. In a capital budgeting decision/ incremental cash flo# mean &a) cash flows which are increasing! &b) cash flows occurring over a period of time &c) cash flows directly related to the pro+ect &d) difference between cash inflows and outflows for each and every e%penditure! Ans#er R DdE *J. 4he simple 56Q model #ill not hold good under #hich of the follo#ing conditions &a) Htochastic demand &b) constant unit price &c) Mero lead time &d) Fi%ed ordering costs Ans#er R DaE *2. 4he opportunit cost of capital refers to the &a) net present value of the investment! &b) return that is foregone by investing in a pro+ect! &c) re2uired investment in a pro+ect! &d) future value of the investments cash flows! Ans#er R DbE *9. Which of the follo#ing factors does not influence the composition of Wor!ing ;apital re=uirements &a) Oature of the business &b) seasonality of operations &c) availability of raw materials &d) amount of fi%ed assets Ans#er R DdE +(. 4he capital structure ratio measure the &a) Financial Ris &b) Kusiness Ris &c) "ar et Ris &d) operating ris s Ans#er R DaE