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Unique Paper Code 7767

Revised 0 of 18

Financial Management2017

B.Com (Hons) · 5 questions

Duration: 2.5 HoursMaximum Marks: 75

From an older CBCS paper

Reworded by Kunji from the printed paper. The original paper belongs to the University of Delhi. See DU's question bank.

Before you start

Numbers and theory. 10 numerical parts and 8 theory parts. Numericals take longer to lay out, so give them your freshest time.
Pace. Two minutes a mark: about 30 minutes for each 15-mark question, with nothing spare in 2.5 hours. Pick your side of each OR before you start writing.
Keep score. Every part opens a worked answer checked against the books. Turn the key when you have revised it; the boxes at the top fill in, on this device.

1.

15 marks
· ~30 min

(a)Traditional methods of evaluating long-term projectsExplain the traditional methods for evaluating long term projects.(4)

(b)Replacement decision: incremental cash flows and NPV at 15%A company plans to replace a machine that is needed for 4 more years. The machine's book value is Rs 1,92,000, and will be fully depreciated at the end of 2 years. The machine will generate revenue of Rs 6,24,000 per…(11)

OR

(b)New product: incremental cash flows and NPV at 15%A company is considering a proposal to produce a new product. It expects to sell 1,00,000 units of it a year, at a selling price of Rs 5 per unit, with a Variable cost of Rs 2 per unit. Whatever the level of production,…(11)

2.

15 marks
· ~30 min

(a)Do retained earnings cost nothing?Retained earnings cost nothing. Do you agree?(4)

(b)WACC at book-value and market-value weightsPQR Ltd.'s capital structure is as below: Last year the company paid a dividend of Rs. 3 per share, and dividends are expected to grow at 5% per annum. The company's applicable tax rate is 30%. All the securities are…(11)

OR

(a)Is profit maximisation a better criterion than wealth maximisation?As a criterion, profit maximisation is better than wealth maximisation. Do you agree? Explain.(4)

(b)Debt or equity for an expansion: EPS comparisonA company earns a profit of Rs. 3,60,000 per annum, after it has met its interest liability of Rs. 1,44,000 on 12% debentures. The rate of tax is 30%. The number of its equity shares of Rs. 10 each is 96,000, and its…(11)

3.

15 marks
· ~30 min

(a)Relevance of the time value of money to financial decisionsExplain how the time value of money is relevant to financial decision making.(4)

(b)MM approach: values of two firms and the arbitrage processTwo companies, X and Y, are in the same risk class. They are alike in everything, except that firm Y has 12.5% debentures of Rs. 14,40,000. The information below about the two firms is available: Compute the value of…(11)

OR

(a)Main decisions in financial managementDiscuss the main decisions taken in financial management.(4)

(b)Income statement, operating and financial leverage, EPS after a rise in EBITHawkins Ltd's capital structure consists of: The company's net sales were Rs 1.92 Crores. EBIT is estimated at 10% of sales. The Corporate tax rate is 40%. The Fixed cost is estimated at Rs 60,00,000. (i) Draw up the…(11)

4.

15 marks
· ~30 min

(b)Choice of credit policyA company's annual sale is Rs. 12 lakhs, and its average collection period is 45 days. It is considering a shift in its credit policy. This information is available: Variable cost is 60% of sales, and Fixed cost is Rs.…(11)

OR

(a)Sources of working capital financeDiscuss the various sources of working capital finance.(4)

(b)Operating cycle and working capital requirementCalculate, from the information below: (i) The operating cycle, in days. Assume a year of 360 days. (ii) The amount of working capital needed.(11)

5.

15 marks
· ~30 min

(a)Gordon's model of the relevance of dividendsExplain the Gordon's Model of the relevance of dividend.(4)

(b)Walter's model: optimal payout and the neutral P/E ratioBradley International began a year ago, with equity capital of Rs 24,00,000. Its other relevant details are below: (i) What is the company's dividend payout ratio? At this payout ratio, what is the share's market price?…(11)

OR

(a)Stock dividend and its rationaleWhat is stock dividend? What is its rationale?(4)

(b)MM approach: price, new shares and value of the firmA company has a capital of Rs. 100 lakhs, in shares of Rs. 100 each, which are now quoted in the market at par. It plans to declare a dividend of Rs. 6 per share at the close of the current financial year, a year which…(11)

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