FINANCIAL MANAGEMENT-2016

3 hours
a l l o r v e d :

Maximum marks: 75
Tint
Attempt All questions. All
questions carry equal marks.
Use of simple calculator is allowed.
1. La "Wealth
(a) "Weal maximisation is a better criterion than profit maxi-
misafion,"
Do you agree? Explain. 6
(
Ltd.
S. L
has a machine having an additional life of 5 years which costs
and has a book value of T4,00,000. A new machine costing 20,00,000
ti0hle Though its capacity is the same as that of the old machine, it will
s a v a i l a b l e .

Saving in variable costs to theextent of 7,00,000 per annum. The life

he machine will be 5 years at the end of which it will have a scrap value
of
2 00.000. The rate of income tax is 40% and S. Ltd's policy is not to make
vestment if the yield is less than 12% per annum. The old machine if sold
ndav, will realise K1,0,000; it will have no salvage value if sold at the end of
h vear. Advice S. Ltd. whether or not the old machine should be replaced.
Capital gain is tax free. ignore income tax saving on additional depreciation
well as on loss due to sale of existing machine.
aS
Will it make any difference, if the additional depreciation (on new machine)
also subject to tax at the rate of 30%, and
and gain on sale of old machine is
the scrap value of the
new machine is 73,00,000.
Page 8
Ans. (a) See Q. 15, Chapter 1
[Page 86
(b) See Q. 16, Unit II.
Or
decisions that business
(c What major types of financial management
are the
6
firms make? Describe briefly each one
of them.
two mutually exclusive projects.
Both
Jeevan Steels Ltd., is considering each and have a life of five years.
F10,000
require an initial cash outlay of return is 10% and pays tax at a 50%% rate.
The company's required rate of
a straight line basis.
The profit before
The projects will be depreciated on follows: 9
the projects are as
depreciation expected to be generated by
Year 2 4,000
4,000 4,000 4,000
Project1( 4,000 2,000 5,000 5,000
Project 2( ) | _6,000 3,000
You to calculate:
required
are
for each project
and Profitability Index
() The Net Present Value
for each project.
,

The
(ti) Interal Rate of Return
and why?
Which project should be accepted Page 7
1.
Ans. (c) See Q. 11, Chapter [Page 103
4) See Q. 34, Unit II. for IRR and NPV
methods
of capital budgeting
Q.2. (a) When is it possibleof investment proposals?
to result in different ranking structure: 9
BLimited company
has the following capital
40,00,000
(2,00,000 shares)
Equity Share Capital 10,00,000
6% Preference Share Capital
30,00,000
8% Debentures share is 20. It is expected that the
The market
of the company's price
of 2 per share. It will grow at 7% forever.
company
will pay current dividend to compute the following:
at 50%. You are required
The tax may be presumed P-1
P-2 Shiv Das DELHIUNIV'ERSITY SERIES
FINANCIAL MANAGEMENT-2016P-3
()A weighteri average cost of capital based on
existing capital structure. Credit Policy Increase in Collection Period
Increase in Sales
(17) The weightod average cost of capital it the conpany raises an additional
new A 5 days
0,00.0N) debt by issuing 10% delvnturrs. This would esult in B 60 000
increasing the 30 days
enprtai dividend to ?i and leave the C ,000
gnwth rate unchanged but the price of 0 days 1.80.000
share will tall to Ri5 per shar.
90 days
2.00 000
Ans. (a) Se Q. 12. Chapter
2 IV'age 23 The selling priceper unit is ?5. Average cost per unit is 4 and
(b) Sce Q. 22. Unit !l1: 1. variable cost
Page 128 per unit is 2.75 per unit. The required rate of return on additional
investments
Or is 20 per cent. Assume 360 days in a year and also assume that there are no
() Explain the behaviour of cost of debt, cost of equity and overall cost bad debts. Which of the above policies would you recommend for adoption? 9
of
capital under the traditional approach to capital structure. Ans. (a) See Q. 0, Chapter 5.
TThe following details of RS Ltd. for the year ended 31.3.2014 are furnished: (b) See Q. 24, Unit V, I'age 202
P'repare income st.atement of the connpany. 9 Or
Operating leverage :1 Financial leverage 2:1 () Discuss brietly various factors that determine the cash needs of a firm. 6
lnterest charges pr annunn 20 lakhs; Cororate tas rate () SS Ltd. has appointed you as its finance manager. The company wants
Variable oost as penentage of sales o0% 50
to implement a project for which 30 lakh is required to be raised from the
Ans. (c) Sce Q. 26, Chapter 3.
P'age 40 market as a
means financing the project. The following financing plans and
of
() Sce Q. 9, Unit l : 2. IPage 135 options are at hand: (number in thousands)
Q.3. (a) Explain Gordon's Model of dividend decision. What
Is the value of the firm aftected
are its assumptions? Particular PlanA Plan B Plar C
by its dividend policy as per this model? Option 1: Equity shares
T h e XYZ Ltd., currently has outstanding ,00,000 shares selling at <i00 Option 2: Equity shares
each. The firm is considering to declare a dividend of R5 12% Preference shares
per share at the end of
the current fiscal year. The firm's
opportunity cost of capital is 10%. What will 10%Non-convertble debentures
be the price of the share at the end of the Assuming corporate tax to be 35 per cent and the face value of ali the shares
year if (i) a dividend is not declared, and debentures to be 100 each, calculate the indifference points and earmings
(ti) a dividend is declared?
per share (EPS) for each of the financing plans. Which plan should be accepted
dssuming that the firm pays the dividend, has net profits of 10,00,000,
and makes new investments of *20,00,000 by the company?
during the period. How nany new Ans. (c) See Q. 5, Chapter 5. age 5
shares must be issued? Also show that the total market value of the shares at
() Sce Q. 19, Unit lil: 2 age 145
the end of the accounting
distributed
year will remain the
not distributed. Use MM model to
or
same whether dividends are either
answer these 9 Q. 5. Differentiate between business risk and financing risk of a firm.
(a)
questions.
Ans. (a) Sce Q. 8, Chapter 4. Page 49 How they measured by leverage?
are
of a component from
() See Q. 27, Unit IN. Page 180 (b) A manufacturing company purchases 24,000 pieces
Or a sub-contractor at 500 per piece and uses them in assembly department, at
it up is *2500. The
is credit policy? Explain a
steady rate. The cost of placing an order and1"ofollowing
cWhat the role of credit poliey terms in a credit
estimated stock-holding cost is of the value ot
approvimately stockk average
polisy,
ATDetermine the market value of equity shares of the company from the held. The company is placing orders which at present vary between an order
orders p.a.) to one order per annum. Which
foffowing information: placed every two months (i.e., six
Earmings of the company 5,00,000:; Dividend paid
policy would you recomnmend?
3.00.000 Ans. () See Q. S, Chapter 1. Page 4
Number oft shares outstanding 1.00.000: Price-Earning ratio (b) See Q. 33, Unit V.
P'age 210
Rate of Return on Investment 15% Or
value of money.
Are you satisfied with the current dividend policy of the firm? If not, what (c) Explain the concept of present
short notes on the following: 10
should be the optimum dividend payout ratio? Use Walter's Model. () Write
(ii) ABC Analysis of Inventory control.
Ans. (c) See Q. 17, Chapter 5. Page (i) Home-made leverage;
a g e 168
Ans. () Present value of money. Sr Q lo. Chapter 1 Page
) See Q. 10, Unit IV. S t O lo. Chapter 3. age 34
Q. 4. (a) Discuss the assumptions underlying basic ()) Home-made leverage.
EOQ Model. (i)ABC Analysis Inventory contol. See Q 24, Chapter 5.
of
|Page 62
(b) A trader whose current sales are 15 lakh per annum and average

period is 30 days wants to pursue a more liberal credit policy to

collection improve
sales. A study made by a consuitant firm reveals the following information
 FINANCIAL MANAGEMENT-2017(NOV.-DEC.) « P-5

2017 (NOV-DEC) Q. 3. There are two companies L Ltd.' and 'U Ld.' which are identical in
all respects excepts in terms of their capital structure. Following information is
Fundamentals of Financial Management
Name of the Paper CBCS
availablee
Name of the Course : B.Com. (Prog.) U Ltd.
Maximu1 nmarks: 75 LLtd.
Tme: 3 ours EBIT (7) 1,00.000 1,00.000
Attempt Al the Questions. 12% Debentures (7) Ni
5,00.000
Questions carry equal marks.
All Equity Capitalisation Rate 20% 16%
the objective of shareholders Calculate the values of two firms and illustrate using MM approach how an
Q. 1. What do you understand by
is it considered superior to objective of profit investor holding 10%o shares of L Ltd. will be benefited by swiing over his
wealth maximization? Why
15 investment from L Ltd. to U Ltd. 15
maximization?
Ans. See Q. 15, Chapter 1 [Page 8 Sol. See Q. 39, Unit Il: 2. [Page 161
Or Or
(a)Explain the concept of systematic and unsystematic risk. 8 The capital structure of XYZ Ltd. is as under:
Tb) The cost of a new mobile phone is 10,000. If the interest rate is 5%, how 9% Debentures (?100) 2.75.U
much would you have to set aside now to provide this sum in five years? 7
Ans. (a) See Q. 7, Chapter 1. [Page 4
11% Preference shares (100) 2.25,00
Equity shares (face value 10 per share) 5,00.000
(b) See Q. 6(ii), Unit I. Page 66
Additional information:
Q.2. (a) What are the main techniques of capital budgeting?
() Debentures are redeemable at par after 10 years and have 20°
The Management of a company has two alternative proposals under floatation cost. The market price per debenture is 105.
consideration. Project A requires a capital outlay of 712,00,000 and Project B
requires R18,00,000. Both are estimated to generate cash flows for five years: (ii) Preference shares are redeemable at par after 10 years and have 30%
floatation cost. The market price per preference share is *06.
Project A 74,00,000 per year and Project B 75,80,000 per year. The cost of capital
e of 24.
is 10%. Determine which of the two projects should be selected on the basis of:
(iin) Equity share has 4 floatation cost and market price per -

The next year expected dividend is 2 per share with annual growth
(i) net present value method, and (ii) profitability index method. of 5%. The firm has a practice of paying all earnings in the form of
In case of conflict which criteria should be followed and why? 8
Page 14 dividends.
Ans. (a) See Q.5, Chapter 2.
(iv) Corporate income tax rate is 35%.
(b) See Q. 30, Unit lI. [Page 99
Calculate weighted average cost of capital using (a) book value weights
Or
(b) market value weight.
ABCLtd. has a machine which has been in operation for 3 years. Its remaining
Sol. See Q. 19, Unit Il:1. [Page 125
useful life is 8 years with no salvage value. Its current market value is
The company is considering a proposal to purchase a new model of machine to
2,00,000. Q.4. (a) Explain Gordon's dividend model. What are its shortcomings? 7

replace the existing machine. The relevant information is given below: (6) The earning per share of a company is R20. The face value of the share
is 100. The rate return for the company
of is 25
0 and capitalization rate of
risk
Existing Machine New Machine
class is 12.5%. If Walter's model is used:
Cost of machine 3,30,000 10,00,000 ( What should be the optimum payout ratio
Estimated life 11 years 8 years
Salvage value 40,000 ( What should be the market price per share at optimum payout ratio?
Annual output 30,000 units 75,000 units (ii) If company has a D/P ratio of 259%, what would be the price perPage
share?
49
Selling price per unit 15 15 Ans. (a) See Q S, Chapter 4.
Annual operating hours 3,000 3,000 () See Q.3, Unit IV. Page 163
Material cost per unt 4 4 Or
Labour cost per hour 740 70
(a) What is a stable dividend policy? Why should it be foliowed?
Indirect cash cost peT annum 50,000 65,000
(b) A company has a total investment of t5,00,00
in assets and 50,000

The company follows the straight-line method of depreciation. The shares of t10 each. It earns a rate of 15e on its investment
outstanding ordinary
corporatetax rateis 30o. ABC Ltd. does not make any investment if it yields less and has a policy of retaining 50e of the earnings. If the appropriate discount
than 12. Advise ABC Ltd. whether the
existing machine should be replace firm is 10%, determine the price ot îts share using Gordon's modelLs
rate of the
not. Ignore capital gain tax. 15
IPage 8o
Ans. (2) Sr Q. 1.Chapter 4. Page4
Sol. See Q. 19, Unit II. () See Q. 17, U'nit N Page 173
P4
P-6Shiv Das DELHI UNIVERSITY SERIES 2018 (NOV-DEC)
information is given to you:
Q.5(a) The following Name of the Paper Fundamentals of Financial
Period covered
360 days Name of the Course: B.Com. (Prog.) CBCS Management
30 days
Average period allowed by suppliers
debtors 45 days
Time: 3 hours
Maximum Marks: 75
Average credit period allowed to
Raw material consumed 76,00,000 Attempt All the Questions
AllQuestions carry equal marks.
material 750,000
Average stock of r a w Q1.(a) "The profit maximization is not an operationally feasible criterion."
Annual work in progress inventory 5,00,000
30,000 Do you agree? Give reasons.
Average work in progress inventory (b) Mr. Vijay is borrowing 10 lakhs from a bank for renovation of his house.
Annual finished goods inventory 78,00,000
40,000 Bank is giving him two options. Option one is to return this
Average finished goods stock held money in six equal
annual instalments at rate of 7% p.a. Option two is to return this money in equai
Total cost of sales 78,40,000
Compute half yearlyinstalments over a of six years at annual rate of
period
6.3% p.a. Which option should he select and why?
interest
of
( Net operating cycle period
(i) The number of operating cycles in a year Ans. (a) See Q. 13, Chapter 1.
(ii The amount of working capital. 8 (6) See. 11, Unit I.
[Page
[Page 65
(b)What do you mean by 'economic order quantity'? What are its limitations? Or
(a) How is cash flow different from accounting proft? Which one is better
Sel. (a) SeeQ6, Unit V. [Page 188 for capital budgeting decisions? Why?
) See Q.25, Chapter 5. [Page 63 (b) Mr. Anil is due to receive 8,000 each year for eight consecutive years.
Or
(a) The following are the details regarding the operation of a firm during
However thereceipts would start third year from now. Find the present vaiue of
the sum received, if the required rate of return is 12%.
a period of 12 months: Ans. (2) See Q. 4, Chapter 2. Page 13
Sales 712 Lakhs (b) See Q.7, Unit I. [Page 67
Selling price per unit 10 Q.2 (a) Explain the Discount Cash Flow Techniques to evaluate Capital
Variabie cost per unit 7 Budgeting Proposals.
Total Cost per unit 79 (b) Vikas Ltd. is considering the purchase of a new machine. Two alternative
Credit period allowed to customers one month machine X&YY have been suggested, each having initial cost of 10,00000 and
s considering a proposal for a more liberal extension of credit requiring 50,000 as additional working capital at he end of int yea. Net cash
The
which
firm
flows are expected to be as follows:
increasing the average collection period from one month its
will result to
wo months. The relaxation is expected to increase the sales by from 25 Cash Inflows
existing level. Advise the firm regarding adoption of new credit policy assuming Year Machine X Mackine Y
fim's required rate of return on investment is 251. 10 3.00,000
b)Differentiate between permanent workingcapital and temporar 3.0000 000C
00 000
wgrking capital.
SoLaSeeQ 19, Unit Page 199 600.00 00
) See Q 10, Chapter 5 0000
Paze The company has target return on capital of 1 0 and on the basis you are
required to compare the profitability of machines and state which altermative
you consider to be financially preferable.
Ans. (2 See Q5.Chapter
Fa
Sharda Ltd is considering two mutualiy euiusive maxhines Both rquired
an initial outiay of 2,00,200 each and have a ife af ive vezrn Te company's

equired rate of return is 10a and pays tar

t the rate ot Sa. The projects will
 P-SShiv Das DELHI UNIVERSITY SERIES

be depreciated line basis. The profit before

on a
straight depreciation expectaa FINANCIAL MANAGEMENT-2018(NOV-DEC) P-9
to be generated by d
the projects are as follows: Number of Shares
Year 4
Price Earning Ratio Outstanding 2,00,000
Mackine 1 () SO,000 80,000 80,000 80,000 Rate of Return on
Investment 8
Mackine 2() 1.20,000 60,000 40,000 1,00,000 80,000 Are you satisfied with
the current 15/
You are required to calculate: 1,00,000 should be the optimum dividend dividend policy of the firm? If not,
what
() The Net Present Value and Profitability Index for each Ans. (a) See Q.2, payout ratio? Use Walters mode.
(ti) The Internal Rate of Return for each machine. machine.
(b) See Q. 6, Unit IV. Chapter
4. 8
[Page 45
Which machine should be
accepted and why? Or
Page 165
Sol. See Q 35, Unit II. 15 (a)
[Page 104 Explain Gordon's Model of Dividend Decision.
Q.3. (a) Explain and illustrate "Arbitrage Process" of MM
theory of capital (b) Heena Ltd. has a
capital of 10,00,000 in Explain its assumptions. 7
structure.
(b)The following figures are taken from the 8
shares are
currently quoted at par. The companyequity shares
of 10 per share at the end
of ?100 each. The
current balance sheet of a
proposes declare a dividend
of the current financial
to
Equity Share Capital company: for the risk class to which the year. The capitalisation rate
40,00,000
price of the share at the end ofcompany belongs
12% Preference Shares is 12%. What will be the
4,00,000 the year, if: market
10 %Debentures
The equity shares of 76,00,000 () dividend is not declared, (ii) a dividend is deciared.
a
company are quoted at R110 and the (ii) Assuming that the company
expected to declare a dividend of R15 per share. Rate of growth of company is
pays the dividend and has net profits of
80e which is expected to be maintained. Assuming tax rate 40%. dividend is 10,00,000 and makes new investmentof ?20,00,000
how many new shares must be issued? Use the MMduring
the period,
() Calculate Weighted Average Cost of
Capital (WACC). Ans. (a) See Q.8, model.
(i) The company wants to raise additional term loan of
T5,00,000 at 10% Chapter 4.
b) See Q. 20, Unit IV. [Page49
Calculate the revised WACC
gone down to R105.
assuming the market price of equity share has Q5. Compute the working requirements from [Page 174
the following details:
7
Ans. (a) See Q. 30,
Chapter 3. Page 41
Budgeted Sales
Raw Material Cost per unit 40,000 units per annum
(b) See Q. 8, Unit III:1.
Page 114 Direct Labour per unit
Or Overhead per unit
(aA company has an EBIT of R3,00,000 and overall cost of Total Cost per unit
company has debt of 5,00,000 borrowed 8%. Find the capital 12.5%. The Profit per unit 19
value of the company
using NOI approach. Also show how change in debt Selling price per unit
on the cost of by 73,00,000 have impact Additional Infomations:
20
equity of t company. 8
(b)The following particulars are related to Seema Ltd. and Leena Ltd: Debtors allowed 7 weeks credit.
are

Particulars Seema Ltd. R) Leena Ltd. ) in Suppliers provide 4 weeks credit.

Otput and Sales (Units) 80,000
(iin Raw material will be carried in stock for 4 weeks and finished goods
Seling Price Per Unit (7) 1,00,000 for 2 weeks.
Vanable cost per unt (R) 10
Fixed Cost (7) 4 3 (iv) Factoy processing willtake on an average 4 weeks.
Assume labour and overhead expenses to accrue evenly throughout the
interestBurden on Debt (3) 2,40,000 2,50,000 production cycle. 15
On the basis of data 1,20,000 50,000 Sol. See Q. 13 Unit V. [Page 14
given above, compute: 7
( Operating leverage, (i) Financial leverage and
Or
(iii Combined leverage. What short notes on the following: 5x3 15
Sol. (a) See Q. 26, Unit III: 2. (a) Cash Budget (b) Re-order Point for Inventory
Page 151
(b) See Q. 2, Unit II1: 2. (c) Credit Policy
|Page 129
Q4. (a) Explain Ans. (a) Cash Budget. See Q. 13(¢), Chapter5 Page So
briefly the main determinants of the dividend policy of (b) Re-order point for inventory. See Q. 24, Chapter 5.
firm. the7 Page 62
(b) Determine the Market value () Credit policy. See Q. 17, Chapter 5. Page 59

following information: of equity shares of the company tro

Earnings of the
Comnpany 10,00,000
Dividend Paid
76,00,000
 2019 (NOV-DEC)
FINANCIALMANAGEMENT-2019(NOV-DEC) P-11
rinancial Management
ent (When do NPV and IRR
Fundamerntalsor give conflicting rankings in capital
Name of the Paper
Course:
B.Com:
DSE-2 Explain with examples. budgeting 7
Nameof the Sol. (a) See Q. 25, UnitIl
Maximum Marks: 75 (b) See Q. 12, Chapter 2.
Page 95
T: urs Page 23
All Questions carry equal marke
Attempt All
the Questions.
tavles wll be provided to th.
Q.3. (a) Calculate Weighted Average Cost ofCapital (WACC) both by book
The tume value value and market value
is of siyle
calculator is allored. weigths from the following information: 8
criterion than profit maximize
maximization is a superior
dHa)"Wealth 8% Term Loan
Give r e a s o n s . 12,00,000
Do you agree? to deposit a sum of R35,.000. 9%% Cumulative Preference share capital
A finance company
makes an offer be 3 nd then Equity share capital (10,00,000 shares)
3,00,000
) perpetually. Should the offer 10,.00,000
receive a return of 13,960 p.a. retirthe Retained earnings
decision change if the rate of 15,00,000
rate of return in
12% p.a? Will the 11% Total 40,00.000
p.a.? 7 The market value of equity shares is 730 per share. The
company pays a
Ans.(a) See Q. 15, Chapter
1
[Page8 constant dividend of 3 per share every year. Assume tax rate 35%.
(b) See Q. 4, Unit I. Page 6 (b) Define Leverage. What are the different types of leverage? Explain them
Or with example. 7
financial decisions taken by finance managers? Sol. () See Q. 16, Unit II.
(a) What are the major the rent of R3,923 per month. Entire
Page 122
Ramesh rented a house for 7 months at (6) See Q. 12, Chapter 3 Page 31
(b)
him. He plans to invest this money 9% p.a. to get
money is lying with now
65,000. For how many years is the deposit made to realise the desired amount?
Or
(a) The following are the data regarding two companies P and Q belonging to
7 the same equivalent risk class:
Ans. (a) See Q. 10, Chapter 1. Page 6 Particulars Company (P) Company (Q)
(b) See Q. 12, Unit I. Page 68 Number of ordinary shares 90 OC0 150.000
Q.2. ABCLimited has a machine with an additional life of 5 years whichcosts Market price per share (7) 120 1.00
10.00,000 and has a book value of T4,00,000. A new machine costing 20,00,000 6% Debentures (?) 60.000
Profit before interest() 18.000 13.000
is available. Though its capacity is same as that of the old machine, it will lead
to a saving in variable cost to the extent of R7,00,000 per annum. The life of All profits after debenture interest are distributed as dividend.
will be 5 years at the end of which it will have a scrap value of You are required to explain how under Modigliani and Miller Approach, an
the machine
3,00,000. The income tax rate is 40% and as policy the firm does not make an investor holding 10% shares in Company P will be better off by switching his
holding to Company Q.
investment if the yield is less than 12% p.a. The old machine, if sold today, Will 15
realize 1,00,000; it will have no Sol. See Q. 34, Unit Ill: 2. Page 157
salvage value if sold at the end of 5 years. The Q.4. (a) Calculate the price per share as per Walter's model:
company uses straight line method of depreciation. Capital gain on
sale of ola
machine is also subject to the tax rate of 40%. Advise ABC Limited whether o Earnings of the Company 15,00,000
not the old machine should be 15 Dividends Paid 9,00,000
Ans. See Q. 13
replaced.
(Case 1), Unit I. Page82 Number of ordinary shares outstanding 3,00,000
Or Price Earning Ratio 8.33
(a) R Limited is Rate of Return on Investment 15%
considering to install a new project costing *7,50,000
of 6 years and no
salvage value. The tax rate of the company is
e Are you satisfied with the current dividend policy of the firm? If not, what
straight line method of depreciation. The estimated 40/0deprea
profits before anic ation
should be the optimum dividend pay-out ratio in this case?
and tax (PBDT) are as
follows: (b) What are the various determinants of dividend policy of a firm? 7
Year 3 5 Ans. (a) See Q. S, Unit IV. Page 166
4
) 1,50,000 2,00,000 2,25,000| 2,50,000 3,00,00040
4,00,00 () See Q. 2, Chapter 4 Page 45
You are
required to calculate: Or
i) Payback Period on investment is 12%o and
(ii) (a Assuming cost of equity is 11%, rate of return 'Gordon
Profitability index at 129% discount rate. earnings per share are15, calculate price per share by Model' if dividend
pay-out ratio is 10% and 30%.
P-10
 2020 (NOv-DEC)
P-12Shiv Das DELHI UNIVERSITY SERIES Name of the Paper
Fundamentals of
Name of the Course: B.Com Financial Management
(b) What is meant by stable dividend policy? Explain the methoda : DSE--2
of Time: 3 hours
maintaining stability in the payment of dividend.
Sol. (a) See Q. 16, Unit IV.
[Page 172 General Instructions: Maximun Marks: 75
(b) See Q.1, Chapter 4. 1. It is an open book
Page 44 examination.
Q.5. ABC Ltd. is planing to sell 1,80,000 units next year. The expected of 2. Attempt any four
Questions. All
goods is as follows: 3. Though the duration of examinationQuestions
is three
carry equal marks.
Raw Material 20 given for downloading the question paper, hours, the yet one additional hour will be
Direct Labour 5 the answer sheet to the scanning answer sheet, and uploading
Overheads (including depreciation of 5 per unit)
15 portal.
4. Use of simple calculator is
Total Cost 740 allowed.
Profit
10 Q.1. "Financial management is concerned
with the solution of three
Selling price 50 decisions a firm must make." What are these three decisions and how
major
The following is the additional information: interrelated? are they
Raw material in stock Average 2 months Ans. See Q. 11, Chapter 1.
Work in progress Average h month Q.2. Is it possible for NPV and IRR methods to result in [Page 7
Finished goods in stock Average 1 month investment proposals? Why? different rankings of
Credit allowed by suppliers Average 1 month
Credit allowed to debtors Average 2 months
Management of ABC Ltd. has the
B. Machine A has a cost of
option to buy either Machine A or Machine
Lag in payment of wages
90,000. Its expected life is 6 years with no salvage
Average 1 month value at the end. It would
Lag in payment of overheads Average h month on the other hand would
generate net cash flows of 25,000 per year. Machine B
cost 760,000. Its expected life is 6
value at the end. It would years with no salvagee
75% ofgoods are sold on credit basis. Cash in hand is expected to be 720,00. generate net cash flow of 718,000 per year. Assuming8
From the above information, you are required to prepare a statement showingthat the cost of capital of ABC Ltd. is 10%, you are required to calculate:
working capital requirements of the firms. (i Net Present Value for each machine.
Sol. See Q. 8, Unit V. [Page 190 (i) Internal rate of return for each machine.
Or (ii) Which machine should be recommended and why?
Write short notes on the following: (any three) 15 Ans. See Q. 12, Chapter 2. [Page 23
(a) Cash Budget () Computation of Net Present Value:
(b) Reorder Point for Inventory Machine A: NPV PV of Cash Inflorw Cash Outflow
= -

(c) Credit Policy 25,000x PVAF10x.6 790,000

= -

() Operating Cycle 25,000x 4.355-790,000 71,08,875 -790,000 =*18,875

-

Ans. (a) Cash Budget. See Q. 13(c), Chapter 5. [Page 56

(b) Reorder Point for Inventory. See Q. 24, Chapter 5. Machine B: NPV 18,000x 4.355 -760,000 78,390 - R60,000 18,390
[Page 62
(c) Credit Policy. See Q. 17, Chapter 5. [Page 59 (i) Computation of Internal Rate of Return:
(d) Operating Cycle. See Q. 16, Chapter 5. Page 58 Initial Cash Outflows
As we know, Pay-back Period Annual Cash Infious
For Machine A: IRR 25.000 3.6; 60,000=3.33
ForMachine B: IRR 18,00 3.33
Based on Pay-back period, the possible rates for interpolation are 16% and
17% for Machine A.
At 16%, PV of Cash Flows = ?25,000 x 3.685(PVAF16%.) - 790,000

- 792,125 - 790,000 = {2,125

25,000 3.589(PVAF17%, 90,000

At 17%, PV of Cash Flows = x

789,725-790,000 = 7(275)
P-13
 P-14Shiv Das DELHI UNIVERSITY SERIES
Based on ay-back period, the possible rates for interpolation are 19%
FUNDAMENTALS OF FINANCIALL MANAGEMENT-2020
MANAO (NOV-DAC) 3 P-15
20% for Machine B.
Particulars
At 19, rV of Cash Flows = 18,000 x 3.410(PVAF19%,)- R60,000 EBIT Existing Plan () Proposed Plan R)
= R61,380 - R60,000 = 1,380
Less: Interest on Debentures 9.00.000 9.00.000
At 20%. PV of Cash Flows = R18,000 x 3.326(PVAF20°%,6)- ~60,000
EBT (3,20.000) 480.000)
Overall Capitalisation Rate (K) 5,80,000 4,20,000
= 759,868 - 760,000 = 7(132) (EBT) 10%
Positive NPV Value of the Firm, V= EBIT
V)
10%
IRR Lower Discount Rate + 90,00,000 90,00,000
Positive
=
NPV Negative NPV
-

Market Value of Debentures

() 40.00,000
x
(Difference
in Discount Rates) Market Value of Equity
(E=V-D)
60.00.000
2,125 2125 50,00,000 30,00,000
Machine A: IRR = 16+ 2,125-(-275) 16 2400
16.89% Equity Capitalisation Rate, K, = x100 11.6%
14
1,380 1,380 Decision. If the debenture debt is increased
Machine B: IRR =

19 + 1380-(-132) *1 =19 +
1,512 19.91% remains unattected but the
equity
760 lakhs, value of the firm
to

(i) Decision. Machine A should be preferred. The firm should rely Q.4. "Market value weights arecapitalisation rate increases from 11.6% to 14o.

the NPV Method

on
The following is the superior to book value weights." Comment.
ranking given by as the underlying assumption of Capital Structure of XYZ Ltd.
reinvestment rate is quite realisable and ranking given by this method is Sources
consistent with the objective of maximisation of shareholders wealth. Amt.
Equity Share Capital (5,00,000 equity shares of ?10 each) ()Specific Cost of Capital
Q.3. "The 'Modigliani-Miller model is the behavioural justification of the
Preference Share Capital (1,50,000 shares of 10 each) 50,00.000 10%
NOI approach to the Capital Structure theory." Explain. 10% Debentures of 1,000 each 15.00.000
A company has annual net operating income of 79 lakhs. It has 40 lakhs 896 20.00.000 5
debentures. The overall capitalization rate is 10%. You are Retained Earnings 25,00,000 10%
required to calculate the Presently, the debentures are being traded at 90%,
value of the firm and the equity capitalization rate preference shares at par
according to Net Operating and the equity shares at 15
per share. Find out the WACC based on book
Income Approach. What will be the effect on the value of the firm and
the value weights and market value
equity capitalization rate if the debenture debt is inc Ised to 60 lakhs? weights.
Ans. See Q. 6, Chapter 3.
Ans. Modigliani-Miller Model (MM) was Page 29
between the leverage, cost of
presented in 1958 on the relationship Weighted Average Cost of Capital (Book Value)
capital and the value of the firm. They have Source of Capital
maintained that under the given set of Amount
Weight Cost of CapitalWerghted Cos
assumptions- the capital structure and
its compositions have no effect on the value of the (W (K) (K W)
firm. They have shown that
the financial leverage does not matter and the Equity Share Capital 50,00,000 0.455 0.1 0.0455
cost of capital and value of firm
(5,00,000 Share of 10 each)
are
independent the capital structure. There is nothing which may be called
of
the optimal capital structure. Preference Share Capital 15.00.000 136 0.08 0.0109
They have, in fact, restated the NOI Approach and (1.50,000 shares@10 each)
have added to it the behavioural
The MM Model is based on the
justification for their model. 10%Debentures (2.0001,000 each) 20,00.000 0.182 0.05 0.0091
following assumptions.
i) The capital market is perfect and complete information is available to all the Retained Earnings 25.00.000 0227 0.1 0 0227
investors free of cost. The Total 1,10,00,000 0.0882
implication of this assumption is that investors
can borrow and lend funds at the
same rate and can move WACC = 0.0882 x 100 8.82%
quickly from
one
security to another without incurringany transaction cost. Weighted Average Cost of Capital (Market Value)
(ii) The securities are infinitely divisible. Source ef Capital Amount Weight Cost of Capital Weighted Cost
(i) Investors are rational and well-informed about the risk-return of all the
(K) (Kx W)
securities. Equity Share Capital 75,00.000 0.694 1 0.0694
(iv) All the investors have same probability distribution about the (5,00,000shares15 each)
future earnings.
expecteu
Preference Share Capital 15.00,000 0139 0 08 0.0111
(v) There is no corporate income tax. (However, this was relaxeu 50,000 shares@ *10 each)
assumption
later). 10%Debentures (2,000R900 each) 18.00,000 01167 005 0.0084
(vi) The personal leverage and the corporate leverage 1,08,00,000 1 0.0889
Also, See Q. 29 and 31, Chapter 3.
are perfect Pages
sbstir 41-42 Total
. WACC = 0.0889 x 100 8.89%
P-16ShivDas DELHI UNIVERSITY SERIES FUNDAMENTALS OF FINANCIAL MANAGEMENT-2020 (NOv-DEC)P1
Ltd. currently has 120 lakh equity outstanding. Curens shares 6.6. "Excess as well as
shortage of inventory is not desirable for a business-
Q5. PQR er share is 12. The net income for the current year is 2 CTore firm." Explain.
market price
and investment budget is also of 2 crore. Cost of equity is 10%. The pany Assuming monthly sales level of 3,000 units, estimate the gross working
is planning to declare dividend @t1 per share. Assuming MM Approach: captal requirements of XYZ Ltd., if the desired cash balance is 59% of
gross
if dividend is declared and if is not declared working capital requirement and work-in-progress is 25% complete with
( Calculate market price per share
shares are to be issued under both options? respect to manufacturing expenses. The expected cost of goods is as follows:
(in How many new equity
shares remains unaffected by the
(iinShow that the total market value of (per unit)
dividend decision. Raw material 120

Also, explain the relevance of Stable dividend policy. Manufacturing expenses (including depreciation 5 per
per unit)
unit) 35
735
Ans. Given: Po =
12, D, 1 and k, 0.10
= =
Selling administration and financial expenses 15

() Market Price when dividend is declared: Selling price 220

P = Future market price of share The duration at various stages of operating cycle is expected to be as follows:
.where D, = Dividend paid after a year Raw material stage 2 months
P.= k = Cost of Equity
Work-in-progress stage 1 month
Finished goods stage 1/2 month
P Po(1 +k)- D, =12(1+0.10)-1 1 2 2 0 Debtors stage 1 month
Market Price when dividend is not declared:
Ans. Excess as well shortage of inventory is not desirable because of sufficient
stock and over-stock. The stock maintained should be suficient to meet
1+ke the production requirements so that uninterrupted production flow can be
P=Po(1+k) D, - =
12(1+0.10) -0=13.20 maintained. Insufficient stock not only pauses the production but also causes a
(i Number of Shares to be issued loss of revenue and goodwill. On the other hand, inventory requires some funds

-EtnD
I=Investment for purchase, storage, maintenance of materials with a risk of obsolescence
m= ...where E = Net Income
pilferage etc. The main objective of inventory control is to maintain a trade-off
P n Existing No. of Shares between stock-out and over-stocking. The management may employ various
When Dividend is declared:
methods of inventory control to have a balance.
2,00,00,000-2,00,00,000+R1(1,20,00,000) Disadvantages of holding excess inventory
12.2 Risk of inventory becoming obsolete. The value and quality of your product
1,20,00,000-c
12.2
9,83,607 (approx.) decreases the longer you keep it on stock. Entities have to make it a priority to
sell their inventory while they're new to the market. If you are selling perishable
When Dividend is not declared: nearer it to its
goods, you would have to sell them at a much lower price the if it gets
m = 2,00,00,000-72.00.00.000+0 = 0
expiration date. You would potentially lose money on
the item must be sold
13.2
below cost in order to clear it out, for example, milk or similar items.
of any
Issue equity shares is not
fresh
earnings are sufficient.
required because available retained Risk of item not selling. If entities are keeping excess inventory on hand, it's
what will not sell,
iii) possible that you have not judged accurately what will and of items on hand
Particulars Declared () Not Declared () and in doing so, you could end up with enormous quantity
that people do not wish to buy. Now again, you might have to sell your
excess
Net Income 2,00,00,000 2,00,00,000
of your
Less: Dividend Paid (1,20,00,000x 71) goods at a steepdiscount, or sell below cost to move the inventory out
1.20,00,000 warehouse.
Retained Eamings 80,00,000 2.00.00.00
Excess inventory means extra space needed for storage
costs.
Investment needed
(2.00.00,000) (2.00,00,000) Higher storage extra costs, and since you have
Shorlage of Funds and maintenance. Extra space also means
(A) 1,20,00,000 end up losing to rivalry
Price of Share to include those extra costs in your price, you might
(B) 12.2 13.2 is too high. Even if you have your own
No. of Shares Issued with other sellers because your price
(A/B) 9.83,607 extra costs of maintenance, and you also
Existing Shares warehouse, you would still be having
1.20,00,000 1,20,00,000 for new items.
Total No. of shares risk not having enough space
(C) 1,20,00,00 stock is always at a risk of being
Price of Shares
1,29,83,607 Risk of natural disasters. Any type of
D) 12.2 13.2 floods, earthquake or other natural disasters.
fires,
Market Value of Shars destroyed or damaged by
(CMD) 15,84,00,000 (approx.) 15,84,00,000(pprol would incur smaller losses.
Having less of it, however,
 2021 (NOV-DEC)
P-18Shiv Das DELH UNIVERSITY SERIES
The more inventory you keep
and the longer v Name of the Paper Fundamentals of Financial Management
Higher insurance premiums. on it.
Name of the Course : B.Com: (Prog.) CBCSs
insurance you pay
keep it, the more

inventory Semester V
Disadvantages Shortages
of of
of shortages of inventory, entities might not b
Time: 3 iours Maximum Marks: 75
Delay in response. in case in the markot
customer wants
as per their requirement
able to deliver what their the entities. Customers might Attempt any four the Questions. Al Questions carry equal marks.
within due course or pre-decided
time frame by night
Use of simple calculator is allowed.
lose interest for such products. will not be able to
of shortage of inventory, you Maximization should be the objective of Financial Management,"
Risk of shortages. In case will be able to deliver a particular
that you
Q.1."Profit
customers at any point, Do you agree? Give reasons.
guarantee your
customers. You might be losing your regular customers ro Mr. Xfinanced his house by taking a loan of 71,00,000 @10% p.a.and has paid
item, even to your regular
within stipulated time.
by not delivering products 15,00,000 as down payment. The loan is to be repaid in 10 equal instalments
Goodwill loss. In case of shortage of inventory, you
might be losing your regular starting at the end_of the first year. Calculate the amount of equal annuai
turn damages your goodwill
in the market. The
which in
and daily customers,
and also recommend similar products instalment and total interest paid uponrepayment of loan.
existing unsatisfied customers might buy
Pages 7-8
Ans. First Part: See Q.12, 13 and 14, Chapter 1.
by competitors or other manufacturers to manufacture, excess labour cost
Second Part:
Idle labour. If there are not sufficient goods Loan amount 756 lakhs
Opening Balance of First year
= =

have any work to do and the business

has to be incurred because labour does not
will enhance the cost of the product. Interest Instaiments Closirg Baiance
entity has to pay wages to them which Payment No. Opening Balance (C) D (A + B-C)
Statement of Estimated Gross Working Capital Requirment (A) (B) Ax 10%
56,00,000.00 5,60,000.00 9,11,310 52.48,690.00
Current Assets Amount ) 52,48,690.00 5.24,869.00 9.11.310 48.62.249.00
Raw material
(3,000 x 2 x 7120) 7,20,000
48,62,249.00 4,86.224.90 9,11,310 44,37,163.90
Work-in-Progress (3,00x 1 x120) 3,60,000 44,37,163.90 4,43,716.39 9,11.310 39.69.570.29
Raw material
3,82,500 3,96,957.03 9,11.310 34,55.217.32
Manufacturing Expenses
(3,000x 1 x 730) x 25%
22,500 39,69,570.29
Finished Goods (3,000x0.5x 150) 2,25,000 34,55,217.32 3,45,521.73 9,11,310 28.89 429.05
Debtors (3,000x 1 x 165)
4,95,000 28,89,429.05 2,88,942.91 9,11.310 22.67.061.96
Gross Working Capital 18,22,500 22,67,061.96 2.26,706.20 9,11.310 15,82.458.15
Cash Balance (R18.22.500 5) 95,921 15,82,458.15 1,58,245.82 9.11.310 8.29 393.97
19,18,421 8,29,393.97 82,939.40 9,11,310 1.023.36
Working Capital Requirement 10
35,14,123.38
. Total interest paid = 735,14,123.38

Working Note:
PV= Annuity x PVAF(10%, 10years)
Annuity = PV/PVAFa03,10)
Annuity = R56,00,000/6.145
A n n u i t y = 79,11,310

T Q.2. A project requires an initial investment of 6,00,000. It is estimated to

have a life of 6 years. The estimated net cash flows are as under:

Year 2 6

Net Cash Flow ()| 1,60,000 1,80,000 1,00,000 1,10,000 1,20,000 1,90,000

Hurdle rate is 10%. Calculate:

(a) Payback period (b) Net Present Value () IRR of the project.

P-19
P-20 Shiv Das DELHI UNIVERSITY SERIES
Assume that the standard payback period is 4 years. Should the project be
accepted as per each of the above measures? In case of conflict in decision which FUNDAMENTALS OF FINANCIAL MANAGEMENT-2021 (NOV-DEC) P-21
method should be preferred and why? In case of conflict, NPV method should be
Calculation of NPV maximisation of the shareholders. preferred as it leads to wealth
Sol.
Year Cashflow() PVF (10%) Present value( C.F Q. 3. How do book value
measurement of cost of capital?
weights differ from market value weights in
(6.00,000) (6.00,000)
1,45,440 The following is the capital structure of
160.000 0.909 1,60,000 PQR Ltd.:
1,80,000 0.826 1,48,680 3,40.000 Particulars Amount ()
1,00,000 0.751 100 4,40,000 Equity Share Capital (Face Value ?10 per share) 20,00.000
10% Preference Share Capital (Face Value 100
A 1,10,000 0.683 130 5,50,000 per share) 4,00,000
1,20,000 0.621 74,520 6,70,000 12% Debentures (Face Value R100 per debenture) 16,00,000
6 1,90,000 0.564 1,07,160 8,60,000 Total 40,00,000
All these securities are traded in the
NPV 26,030 capital market. Recent prices are:
Debentures {108 per debenture, Preference share 125 per share,
shares R50 per share. The company expects to pay a dividend of 75
Equity
Balance investment
(a) Payback Period = Completed years+ per share
Cash inflows at the end of the year which is expected to grow at 8% p.a. The company pay»
income tax 35%. Calculate the company's cost of capital using book value
4+
6,00,000-5,50,000 4+0.4167 4.4167 years weights and market value weights.
1,20,000
(b) Net Present Value - 26,030 (from table) Ans. See Q.6, Chapter 3. Page 29
11% +0.5175 11.52% (approx) Cost of debt, ka Interest (1-Tax)
Market Price of Debentures . Interest 100 12% ?12
= -

c)Now, check the values nearest to 44167

[calculated in point (a)] in PVAF
table in 6 year rows. Project lies at 9% but since cash inflows are smaller than the = 12(1-0.35) 0.0722 or 7.22%
cash
average we inflow in the beginning years IRR will be much smaller than 9% 108 108
Interest
Here get 9%, but at this rate we are not able to reach at required IRR. Cost of Prefrence share, *,
Therefore, we assume the possible rate for interpolation to be 11% and 12%. Market price of pref. share
Computation of IRR . : Interest 1 0 0 x 10% = 710
Year Cash Inflows Discount Rate (PVF) PVF Cash
x
Inflows ) 0.08 or 8%
11% 12% 11% 12% 125
1,60,000 0.901 0.893 1,44,160 42,880
1,80,0 0.812 0.797 1,46,160 1,43,460 Secondpart: Given. Income tax, t =
35%; growth rate g -S%
1,00,000 0.731 0.712 3,100 ,200 Cost of Equity, k, "*S8 D , - Dividend at the end of year 1 ie, ?5
4 1,10,000 0.659 0.636 72,490 69,960
1,20,000 0.593 0.567 71,160 58,,040 0.08-0.10+0.08 = 0.18 or 18%
1,90,000 0.535 0.507 1,016 96,330 50
Present Value of all Cash Infows 5,91,870
6,08,720
Less. Present Value of Cash Outhows (6,00,000) (6,00,000)
Calculation of WACCbased on Book Value
Net Present Value of Cash Flows 8,130 Book Value Cost of Capital Weights Weighted cost
8,720
Positive NPV (K ) W (K W
IRR lower discount Positive NPV - Negative NPy X (DiJ. in discount rate)
Equity Share Capital 20.00,000 18% 0.5 09

11% 8720-(-8130)
8720
x(12%-11%) =11%+ 11% +0.5175 20,00,000 50
10 01
10% Preference Share Capital 4,00,000
11.52% (approx) (TA,00,0007125
Decision. In case of Payback period, as the standard
Reject the project.
payback period is 4 years, 100
16,00,000 722% 04 0 0289
In cae of NPV, as NPV is 12% debentures
positive, so, Accept the project.
In case of IRR, as IRR> 10%, so, should 16,00,O00» t108
the accept project. 100

Total 40,00,000 0.1269

-0.1269 100 12.69%

(Weighted Average Cost of Capital)
x
WACC
 FUNDAMENTALS OF FINANCIAL MANAGEMENT-2021 (NOV-DEC) P-23

DELHI UNIVERSITYSERIES What should be the dividend payout ratio so as to keep the share price at ?48
P-22ShivDas Market Value
based on byusing Walter Model? Also, determine the optimum dividend payout ratio
Calculation of WACC
Book Value Cost of Capital
Weights Weighted cost and'the market price of share at the optimum dividend payout ratio. What will
the maximum and minimum share price be under this model?
(W (K x W)
(K) (%)
Ans. Stable Dividend Policy. See Q. 1, Chapter 4 Page 44
18% 0.817795 0.1472031
1.00,00,000
0.04089 0.0032712
Equity Share Capital
10% Preference Share Capital
5,.00,000 8%
0.141315
0.0102029
DK(E-D) ...where| DD
P =
Price per share
= Dividend per share
7.22% Po K e t u r n on investment = 22.5%

12% debentures
17,28,000 0.1606772 K = Capitalisation rate = 15%

1,22,28,000
Total 0u,UU0 6
0.1606772 100 16.06772%=
x =
Earning per ? share 1,50,000
Cost of Capital)
WACC (Weighted Average Net Operating Income
'Net Income and 45.
A4. Explain
and compare the
and firm valuation using
numerical example. Part I: Calculation ofDividend payout Ratio when market price of the share is
structure
approaches to capital
information,
calculate Operating Leverage,
Financial D+0,225 (6- D)
From the following 48
Combined Leverage: 0.15
Leverage and )
Particulars
9,00,000 4 8 (0.15) = D +1.5 (6- D)
Sales 2,40,000
EBIT 1,25,000
EBT 35% 7.2 D+9-1.5D
Tax Rate
60%of sales 0.5D =1.8
ariable Cost [Page 38 D (Dividend per share) 3.60
Ans. NI and NOI Approach. See Q. 23, Chapter 3. .

Problem Now, E x
D/P Ratio =
D
()Amount
ParticularS 9,00,000 6 x D/P Ratio 3.6
Sales
(5,40,000) 60%
Less: Variabie cost (60%)
3,60,000 DP Ratio =
Dividend Payout Ratio should be zero.
Contribution
Less: Fixed cost (Balancing figure)
(1,20,000) PartI1:Since K, Optimum
r>

2,40,000
EBIT (Given) =0+
Less: Interest (Balancing figure) (1,15,000) D Market price of share, Po
1,25,000
EBT (Given)
Less: Tax @ 35%
43,750 Pa 15x =760
81,250 at Optimum Payout Ratio is
60
EAT (Earning After Tax) Hence, Market price of share kept
of 760 will occur when all earnings
are
Part 1 : Minimum share price
Now, Operating levera ge
Contribution
EBIT 3,60,000=1.5
2,40,0001.5 and no dividend has been

Part IV: Miximum share

distributed i.e., D/P Ratio is zero.
calculated when
price can only by
EBIT 2,40,000
Financial leverage EBT
1,25,000 1 . 9 2 D/P ratio is 100% 100% =
76
Dividend per share
=
76 x
.
Combined leverage= OL FL =
1.5 x
1.92 2.88 225
6+(6 -6)
Q.5. How can stability policy
of dividend be maintained?
Market price of share, P'o 1515
The following information is collected from the current annual report o
XYZ Ltd: = 40
79,00,000 15
Earnings of firm
1,50,000 ?40
Number of equity shares Share Price
=

22.5% Maximum
Return on Equity
Cost of Equity
15%
Q.6. What do you mean by operating cyele?
zeoe/ ovso vsi -ôis euu9j gofsi6xSLL9ZX02"(s6d ovz) na gwes doa seepANs.