AN-979

M.B.A. Second Semester Examination

FINANCIAL MANAGEMENT
Paper—MBA/204

Time : Three Hours] [Maximum Marks : 70

Note (1) Attempt ALL questions.

(2) Figures to the right indicate marks.
(3) Annuity Table showing Future value,
Present value and scientific calculator is
permitted.

SECTION—A
1. (a) "Maximization of Profit is regarded as proper
objective of Investment decision. But it is not exclusive
of maximizing shareholders wealth" — Comment.
14

OR
(b) What are the different methods used for the analysis
and interpretation of Financial Statements ? Also
explain the different control techniques of Financial
Analysis, 14

UYQ-2416 1 (Contd.)
 End of Year 3 10,000 18,000
SECTION--B
End of Year 4 NIL 25,000
2. (a) Between Equity Shares and Debentures which is
profitable for raising additional long term capital for End of Year 5 12,000 8,000
manufacturing Company and why ? 7 End of Year 6 6,000 4,000
(b) XYZ Limited has recently made an issue of non- 7
convertible debentures for Rs. 400 lakh. The terms
of the issue are as follows : each debenture has a
Face Value of Rs. 100 and carries a Rate of Interest
of 14%. The interest is payable annually and the
debenture is redeemable at a premium of 5% after
10 years.
If XYZ Limited realizes Rs. 97 per debenture
and the Corporate Tax Rate is 50%, what is the
cost of debenture to the company ? 7
OR
(c) Why is a Preference Share called a Hybrid
Security '? Also explain its most important features.
7

(d) From the following capital structure of a company

calculate the overall cost of capital using :
(i) Book Value Weights
(ii) Market Value Weights.

UYQ--2416 7 525
UYQ-2416 2 (Contd.)
 (iv) Equity capitalization rate for company is 10%. Source Book Value Market Value
Determine the values of both the firms. 7 (Rs.)
(Rs.)
SECTION—C Equity Share Capital 45,000 90,000
5. A choice is to be made between two competing proposals Preference Share
which require an equal investment of Rs. 50,000 and are
Capital 10,000 10,000
expected to generate net cash flows as under :
Debentures 30,000 30,000
The Cost of Capital of the company is 10%. The
following are the present value factors at 10% p.a. Retained earnings 15,000

Year 1 2 3 4 5 6
P.V. Factor The after-tax cost of different sources of finance is
as follows :
10% 0.909 0.826 0.751 0.683 0.621 0.564
Equity Share Capital
Which project proposals should be chosen and
why ? Preference Share Capital

Evaluate the project proposals under : Debentures

(a) Pay-back Period and Profitability Index. 7 Retained Earnings 7

(b) Discounted cash flow method i.e. on the basis of 3. (a) Explain the factors which determine the working capital
NPV needs of the organisation. 7

Project Alpha Project Beta (b) The earnings per Share of ARP Ltd. is Rs. 8. The
rate of Capitalization is 10%. The productivity of
(Rs.) (Rs) retained earnings is 15%
End of Year 1 25,000 10,000

End of Year 2 15,000 12,000

UYQ-2416 6 (Contd.) UYQ —2416 3 (Contd.)

 Compute the operating cycle for the firm;
Compute the market price per share if the payout
assuming that the information given above is for a full one
is 0%, 25%. What inference can be drawn from the
year period and consider one year as 360 days. 7
above ? Use Walter's Model. 7
OR
How do the considerations of control and size affect
(c) What factor determines the dividend policy of a the capital structure decisions of the firm '? 7
company ? Also, what are the different forms of
7 If Anand Company expects cash inflows from its
dividend ?
investment proposals it has undertaken; Rs. 2 lakh;
(d) Following information has been extracted from the Rs. 3 lakh for the first two years respectively and
Financial Statements of a manufacturing firm : expects cash inflow of Rs. 1 lakh each year for the
Figures in Rs. crore unless stated Otherwise next eight years, what would be the present value of
cash inflows, assuming a 10% Rate of Interest ?
(In days)
7
(i) Average Credit Period
OR
allowed by suppliers 60
(c) Generally individuals show a time preference for
(ii) Average debtors outstanding 06 money. Give reasons for such a preference. 7
(iii) Raw material Consumed 60
(d) A firm X and Y are identical in all respects, except
(iv) Cost of Production 145 that film 'X' is unlevered while Y is levered. Company
`Y' has Rs. 20,00,000 of 8% Debentures Outstanding.
(v) Cost of goods sold 157.5
200 Assume that :
(vi) Sales
(i) All Assumptions MM are made
(vii) Inventory of Raw Material 5.75
6.75 (ii) Tax rate is 50%
(viii) Work In-Porgress
4.80 (iii) EBIT - Rs. 6,00,000/-
(ix) Finished goods

UYQ-2416 5 (Contd.)
4 (Contd.)
UYQ-2416