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Birla Institute of 1echnology & Science, Pilani

LCON C48J / MG1S C382 / IIN C342 Iinancial Management
Comprehensive Lxam - 08 Dec 2008 Weight-age 3S (3S marks) 1ime 3 hours
Closed Book 3S Marks
J/ 1wo of the important principles of Iinancial Management are:
a, 1he trade-o between risk and return
b, 1he Agency problem ,conlict between shareholders and the Agents,
Lxplain the rationale behind these two principles and how they impact the arious dimensions o
linancial Management decision making. MarksS
2/ Gien below is the summary table or calculation o operating cycle or ABC Limited. ,An year is
assumed to hae 360 days,.
Rs. In Iakhs
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a Raw Mat eri al s, St ores and Spares et c 3,454.84
b Work-i n-Process 56.15
c Fi ni shed Goods 637.92
d Account s Recei vabl e 756.45
e Account s Payabl e 2,504.18
2
a Raw Mat eri al s, St ores and Spares et c 4,095.41
b Work-i n-Process 72.50
c Fi ni shed Goods 1,032.74
d Account s Recei vabl e 1,166.32
e Account s Payabl e 3,087.47
3 Purchase of Raw Mat eri al s, St ores and Spares et c 10,676.10
4 Manuf act uri ng Expenses 1,146.76
5 Depreci at i on 247.72
6 Cust oms and Exci se Dut y 35,025.56
7 Sel l i ng, Admi ni st rat or and Fi nanci al Expenses 4,557.48
8 Sal es 54,210.65
Openi ng Bal ance of
Data for the previous year
Cl osi ng Bal ance of
Calculate: Lstimate the working capital requirements based on operating cycle. \ou may
require other details such as the irm sells 1,50,00,000 units eery year at the price o Rs 361.4.
Monthly sales equal 12,50,000 units. Assuming 50 o manuacturing expenses incurred in \-I-P.
|Marks J0
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3/ Lewis Lnterprises is considering relaxing its credit standards to increase its currently sagging sales.
As a result o the proposed relaxation, sales are expected to increase by 10 rom 10,000 to 11,000
units during the coming years, the aerage collection period is expected to increase rom 45 to 60
days, and bad debts are expected to increase rom 1 to 3 o sales. 1he sale price per unit is Rs 40
and the ariable cost per unit is Rs 31. 1he cost o capital is 25. Laluate the proposed relaxation
and make a recommendation to the irm. ,One year has 360 days, |Marks S
4/ Camp Manuacturing turns oer its inentory 8 times each year, has an aerage payment period o
35 days, and has an aerage collection period o 60 days. 1he irm`s total annual outlays or operating
cycle inestments are Rs 3,50,00,000. Assume a 360-day year:
a, Calculate the irm`s operating and cash conersion cycles.
b, Calculate the irm`s daily cash operating expenditure. low much in resources must be inested to
support its cash conersion cycle
c, I the irm pays 14 or these resources, by how much would it increase its annual proits by
aorably changing its current cash conersion cycle by 20 days Marks S
S/ Lotus Corporation is contemplating replacement o its existing milling machine with an improed
ersion that would increase the production rom 12,000 components per month to 18,000. Due to
improed design the new component would also etch a better price o Rs 85 as against existing price
o Rs 90 per piece. New machine costs Rs 12 lacs with additional amount on installation and training
o Rs 1.50 lacs to be spent. I purchased, the existing milling machine would be sold or Rs 3.5 lacs
that has a book alue o Rs 4 lacs. 1he remaining lie o the existing machine is 5 years and the irm
ollows a policy o SLM or depreciation o ixed assets. 1he lie o the new machine too is 5 years.
Installation o new machine would entail some extra recurring cost. 1he operator salary would be
increased rom Rs 50,000 to Rs 0,000 per month. loweer it would sae the cost on maintenance
and power. \hile the production would increase by 50 the rise in maintenance cost would be 20
rom existing Rs 10,000 per month. Similarly the power consumption would increase by 25 only
rom existing Rs 6,000 per month. 1here would be no change in any other cost. Increase in working
capital may be ignored.
Assuming 40 taxes and cost o capital at 10 examine whether Lotus Corporation should buy the
new milling machine or not. Marks S
6/ 1he ollowing data relates to a large company operating in the electronics industry.
J994 J99S J996 J997 J998
Ater tax earnings ,_ million, 130 195 255 295 42
Diidend per share ,pence, 95 110 125 140 155
Number o ordinary shares ,million, 508 600 650 695 930
Aerage share price ,pence, 40 85 690 820 1012
Net capital inestment ,_ million, 210 20 340 410 520
Annual increase in inlation ,, 4 4 3 3 3
A major institutional shareholder has criticized the leel o diidend payment o the company
suggesting that it should be substantially increased.
Required:
,a, Briely discuss the actors that are likely to inluence the company`s diidend policy 2 marks
,b, Discuss whether or not the institutional shareholder`s criticism is likely to be alid. 3 marks