Theory Questions: 1 NPV decision rule does not hold true in the situation of capital rationing, Explain. 2.

What is the significance of cost of capital in capital budgeting? What effect does this have on specific cost of capital? 3. Briefly explain the techniques of incorporating risk in the capital budgeting analysis with suitable examples. 4. Write short notes on Wealth maximization and Profit maximization. 5. Why is dividend policy important for a company? Discuss the various determinants of dividend policy. 6. Write short note on decision tree analysis. 7. Financial Management is concerned with solution of three major decisions a firm must make. What are these three decisions and how are they interrelated? 8. Explain long term and short term sources of raising finance of a company. 9. Briefly explain techniques of incorporating risk in the capital budgeting analysis with suitable examples. 10. Short note on Cash Management of a company. 11. Receivables Management.

Cases:
(1) The following information is related to Sunrise Ltd: Sales Rs. 4,00,000 Less: variable expenses 35% 1,40,000 ----------------Contribution 2,60,000 Less: fixed expenses 1,80,000 -----------------EBIT 80,000 Less: Interest 10,000 ------------------Taxable Income 70,000 -------------------You are required to submit the following to the management of the company; (i) What percentage taxable income will increase , if the sales increase by 6%? (use combined leverage), (ii) What percentage EBIT will increase , if the sales increase by 10%? (use operating leverage),

(iii)

What percentage taxable income will increase, if EBIT increase by 6%? (use financial leverage)

2 A firm is considering the introduction of a new product which will have a life of five years. Two alternatives of promoting the product have been identified : Alternative 1 : This will involve employing a number of agents. An immediate expenditure of Rs. 5,00,000 will be required to advertise the product. This will produce net annual cash inflows of Rs. 3,00,000 at the end of the each of the subsequent five years. However, the agents will have to be paid Rs. 50,000 each year. On termination of the contract, the agents will have to be paid a lump sum of Rs. 1,00,000 at the end of the fifth year. Alternative 2 : Under this alternative, the firm will not employ agents but will sell directly to the consumers. The initial expenditure on advertising will by Rs. 2,50,000. This will bring in cash at the end of each year of Rs, 1,50,000. However, this alternative will involve out-of-pocket costs for sales administration to the extent of Rs. 50,000. The firm also proposes to allocate fixed costs worth Rs. 20,000 per year to this product. Answer the following : (a) Advise the management as to the method of promotion to be adopted. You may assume that the firms cost of capital is 20%. (b) Calculate the Internal Rate of Return for Alternative 2. 3 ABC Ltd. has three financial plans, Plan I, Plan II and Plan III. Calculate operating and financial leverage for the firm and also, find out the highest and lowest value of combined leverage: Production 800 Units Selling Price per unit Rs. 15 Variable cost per unit Rs. 10 Fixed cost : Situation A Rs. 1,000 Situation B Rs 2,000 Situation C Rs 3,000

Capital Structure Equity Capital 12 % Debt

Plan I Rs. 5,000 5,000

Plan II Rs. 7,500 2,000

Plan III Rs. 2,500 7,500

4 ABC Limited has the following capital structure: Particulars Book value(Rs.) Market value(Rs.) Equity Capital 2,50,000 4,50,000 (25000 shares of Rs. 10) 13% Preference Capital 50,000 45,000 (5000 shares of Rs. 10) Reserves & Surplus 1,50,000 ------14% Debentures 1,50,000 1,45,000 (15000 Debentures of Rs. 10) Dividend per share is Rs. 2.40 and it is expected to grow at a rate of 15% forever. Preference shares and debentures are redeemable at par after 5 years and 6 years respectively. Tax rate is 30%. Compute the weighted average cost of capital taking market value as weights. 5 ABC Limited has the following capital structure: Particulars Book value(Rs.) Market value(Rs.) Equity Capital 2,50,000 4,50,000 (25000 shares of Rs. 10) 13% Preference Capital 50,000 45,000 (5000 shares of Rs. 10) Reserves & Surplus 1,50,000 ------14% Debentures 1,50,000 1,45,000 (15000 Debentures of Rs. 10) Dividend per share is Rs. 2.40 and it is expected to grow at a rate of 15% forever. Preference shares and debentures are redeemable at par after 5 years and 6 years respectively. Tax rate is 30%. Compute the weighted average cost of capital taking market value as weights. 6 ABC Ltd. Requires 2,000 units of an item annually. The cost of the item per unit is Rs. 20 and ordering cost is Rs. 50 per order. If the carrying cost is 25% of the cost of item, find the optimum lot size. If the company purchases in lots of 1,000 or more units of the item, it gets a rebate of 3%. Should the company accept the offer?

7. ABC Ltd. has a capital of Rs. 10,00,000 in equity shares of Rs. 10 each. The stock is currently quoted at par. The company proposes to declare a dividend of Rs.1 per share at the end of the current financial year. The capitalization rate for the risk class to which the company belongs is 12 %. What will be the market price of the shares at the end of current year, if i) A dividend is not declared? ii) A dividend is declared? iii) Assuming that the company pays the dividend and has net profits of Rs. 5,00,000 and makes new investments of Rs. 10,00,000 during the period, how many new shares should be issued ? Use the MM model. 8. ABC Ltd. sells goods on a gross profit of 25%. Depreciation is considered as a part of the cost of production. The following annual figures are given: Sales (2 months credit) Rs. 18,00,000 Materials consumed (1 month credit) 4,50,000 Wages paid ( 1 month lag in payment 3,60,000 Cash manufacturing expenses (1 month lag in payment) 4,80,000 Administrative expenses (1 month lag in payment) 1,20,000 Sales promotion expenses (paid quarterly in advance) 60,000 The company keeps one months stock each of raw materials and finished goods. It also keeps Rs. 1,00,000 in cash. You are required to estimate the working capital requirement of the company on cash cost basis, assuming 15% safety margin. 9. Determine the market price of equity shares of the company from the following information as per Walters Model: Earnings of the company Rs. 5,00,000 Dividend paid 3,00,000 Number of shares outstanding 1,00,000 Price earning ratio 8 Rate of return on investment 15% Are you satisfied with the current dividend policy of the firm? If not, what should be the optimal dividend payout ratio? 10. Mr. Kulkarni borrows from PNB Bank an amount of Rs. 10,00,000 @12% on 1-4-2012. As per agreement, repayment including interest is to be

made in five equal instalments with first instalment falling due after three years i.e. on 31-3-2015. What would be the amount of each instalment? 11. A company is considering one of the two mutually exclusive projects it should undertake. The Financial Director thinks the project with a higher NPV should be chosen whereas the Managing Director thinks that the one with higher IRR should be undertaken. The company anticipates a cost of capital of 12% and the net after tax cash flows of the projects are given below: Year Project A Project B 0 Rs.(55,00,000) Rs. (58,00,000) 1 (38,00,000) (40,00,000) 2 18,00,000 33,00,000 3 19,00,000 44,00,000 4 11,00,000 50,00,000 5 75,00,000 1,00,000 Compute the NPV and IRR of each project and state with reasons which project would you recommend. 12. A Company is considering alternative proposals to finance its expansion plan of Rs. 4,00,000. Two proposals are given below: (i) Issue of 15% loans of Rs. 2,00,000 and issue of 2000 shares of 100 each, and (ii) Issue of 4000 shares of 100 each. Given the tax rate of 50% and assuming EBIT of Rs. 70,000 and Rs. 80,000 which alternative is better and also compute the indifference level of EBIT of both the proposals.