Set B

Unique Paper Code : 61011406

Name of Paper : Financial Management
Name of Course : Bachelor of Management Studies (BMS) 2020 (CBCS)
Semester : IV
Duration : 2 hours
Maximum Marks : 75

Instructions to Candidates:
Answer any four questions. All questions carry equal marks. Show your workings clearly as
a part of solution. Use of Simple Calculator is allowed.
1. XYZ is having a proposal to buy an asset costing Rs. 2,00,000. The life of the asset will
be six years and estimated operating profit before depreciation and tax (PBDT) will be Rs.
80,000. The asset being considered for purchase will be the only asset in the block it
belongs to and applicable depreciation rate to this block is 25% on written down value.
The asset will require an additional investment of Rs. 40,000 in working capital from the
beginning. This will be realised at the end of useful life. The desired rate of investment
for the company is 15% p.a. and tax rate is 25%. The scrap value of the machinery at the
end of the 6th year is expected to be Rs. 40,000. Should the proposal be accepted by the
company based on the NPV method of capital budgeting?
PV factors at 15%
Year 1 2 3 4 5 6
Factor 0.870 0.756 0.658 0.572 0.497 0.432

2. Danone food supplier’s capital structure is as follows:

Particulars Market value (Rs.) Book value (Rs.)
Equity capital (25,000 shares of Rs. 10 each) 4,50,000 2,50,000
Pref. shares (500 shares of Rs. 100 each
Carrying 15% dividend) 45,000 50,000
Reserves and surplus ----- 1,50,000
Debentures (1,500 debentures of Rs.
100 each carrying 12% interest) 1,45,000 1,50,000
The expected dividend per share is Rs. 1.40 and it is expected to grow at a rate of 9% forever.
Preference shares are redeemable after five years at par, whereas debentures are redeemable
after 6 years at par. The tax rate is 30 %.
Calculate weighted average cost of capital using market value weights and book value
weights.
3. Prepare cash budget for SPV Ltd. for the quarter ending 31st December, 2019 based on the
following details (amount in Rs.).
Month Sales Material. Wages. Overheads
August 50,000 20,400 7,600 3,800
September 42,000 20,000 7,600 4,200
October 46,000 19,600 8,000 4,600
November 50,000 20,000 8,400 4,800
December 70,000 21,600 9,000 5,000
Additional information is as follows:
  Sales – 10% are on cash basis, 50% of the credit sales are collected next month and
the balance in the following month.
 Creditors - materials 2 months, wages 1/5 month, overheads ½ month.
 Cash balance on 1st October, 2019 is expected to be Rs. 10,000.
 A machinery will be installed in August, 2019 at a cost of Rs 1,00,000. The monthly
instalment of Rs. 5,000 is payable from October onwards.
 Depreciation will be of Rs, 5,000 for three months ending 31st December 2019.
 Dividend at 10% on preference shares will be paid on 1st December, 2019 (Face value
of Preference share capital is Rs. 3,00,000 and Market value is Rs 4,00,000).
 Advance for sale of vehicle Rs. 20,000 to be received in December 2019.
 Income tax (advance) to be paid in December, 2019 Rs. 5,000.
 Interest will be paid in the month of December, 2019 Rs. 3,000.

4. The behavioural model developed by Modigliani and Miller Theory (MM theory of
Capital structure) supports the Net Operating Income approach (NOI). Explain the NOI
approach giving reference to MM Theory. Also explain how under Modigliani and Miller
theory, an investor holding 10% of shares in company X will be better off in switching his
holdings to Company Y as per the details given below.
The company X and Company Y belongs to the same class and are identical in every
respect except that company X is levered and company Y is unlevered. All profits after
debenture interest is distributed as dividend.
X Y
No. of ordinary shares of Rs 10 each 9,000 15,000
Market Price per share 12 10
6% Debenture (Rs) 60,000 ----
Profit before interest (Rs) 18,000 18,000
5. Briefly explain the concept of relevance and irrelevance of dividends. Show under MM
assumptions, the payment of dividend does not affect the value of the company that
belongs to a risk class for which the appropriate capitalisation rate is 10%. It currently has
outstanding 25,000 shares selling at Rs. 100 each. It is contemplating to declare the
dividend of Rs. 6 per share at the end of financial years. It expects to have a net income of
Rs. 2,50,000 and has a proposal for making an investment of Rs. 7,50,000.

6. Current sales of Super Sales Co. as per its existing credit policy are Rs. 20 lakhs per
annum and the average collection period is 20 days. It wants to pursue a more liberal credit
policy to improve sales. Present collection cost is Rs. 8,000 and bad debts are Rs. 18,000.
The selling price per unit is Rs 5 per unit. Average cost per unit is Rs. 4 and variable cost
is Rs. 2.75. The required rate of return on additional investment is 20%.

A study by consultant firm reveals the following information about the various credit
policies:
Credit policy Increase in Increase in sales Increase in Increase in bad
 collection period (Rs) over collection cost debts(Rs) over
(days) over existing policy (Rs) over existing policy
existing policy existing policy
A 10 60000 10000 20,000
B 20 90,000 15,000 21,000
C 30 1,50,000 20,000 22,000
D 40 1,80,000 24,000 24,000
E 50 2,00,000 30,000 26,000

Which of the credit policies you would recommend? (Assume 360 days in a year.)
 Set A
Unique Paper Code : 61011406
Name of Paper : Financial Management
Name of Course : Bachelor of Management Studies (BMS) 2020 (CBCS)
Semester : IV
Duration : 2 hours
Maximum Marks : 75

Instructions to Candidates:
Answer any four questions. All questions carry equal marks. Show your workings clearly as
a part of solution. Use of Simple Calculator is allowed.
 1. Sangam Industries Ltd. is considering expanding its operations. Consequently it is
considering replacing one of its plant (Original cost Rs. 8,00,000 life 6 years, depreciation @
25% WDV) which has a remaining life of 4 years. This machine has a salvage value of Rs.
1,00,000 at present. However, it will have a salvage value of only Rs. 50,000 at the end of its
useful life.
The new machine being considered for replacement will cost Rs. 11,00,000. It would take
Rs. 2,00,000 to install the mew machine. It will have a salvage value Rs. 1,00,000 at the end
of its useful life of 4 years. The machine will require an additional working capital of Rs.
2,00,000 and will be subject to the same rate of depreciation.
Other important Incremental figures pertaining to replacing new machine with the old one
are as follows:
Annual revenue Rs. 9,00,000
Fixed cost Rs. 1,00,000
(excluding depreciation)
Variable cost Rs. 2,00,000
Evaluate the replacement decision according to NPV technique and recommend to the
management whether the existing machine should be replaced or not if the required rate of
return is 15%, Rate of tax is 30% and there are no other assets in the same block. (Round off
your calculations to nearest rupee.)
Year 1 2 3 4
PV Factor at 15% 0.870 0.756 0.658 0.572

2. The following is the capital structure of XYZ Ltd.

Source Amount (Rs.) Specific C/C

Equity Share Capital 20,00,000 11%
(2,00,000 shares of Rs. 10 each)
Preference Share Capital 5,00,000 8%
(50,000 shares of Rs. 10 each)
Retained earnings 10,00,000 11%
7.5% Debentures of Rs. 1,000 each 15,00,000 4.5%

Presently, the debentures are being traded at 96%, preference shares at par and equity shares
at Rs. 14 per share. Find out the WACC based on book value weights and market value
weights. (Round off your calculations to nearest rupee.)

3. A company has provided you with the following particulars and you are required to
estimate working capital required for the company (Round off your calculations to nearest
rupee.)
 Material cost 30%
Direct Labour cost 20%
Manufacturing Overheads 15%
Administrative Overheads 15%
Selling and Distribution Overheads 10%
The following additional information is also available:
 It is proposed to maintain a level of activity of 24,000 units p.a.
 Selling price is Rs 20 per unit.
 Raw materials are expected to remain in stores for an average period of one month.
 Material in process are expected to remain in stock on an average half a month
(requiring full materials but only 50% of other conversion costs).
 Finished goods are required to be in stock on an average period of one month.
 All sales are expected to be credit sales.
 Credit allowed to debtors is two months.
 Credit allowed by suppliers is one and a half months.
 Lag in payment of wages is one month.
 Minimum cash balance desired is Rs. 20000.
 Add 10% of your estimated figure for unforeseen contingencies.

4. ABC Ltd. expects an operating income of Rs.1,00,000. The company has 12% debt of Rs.
3,00,000. The company’s overall cost of capital is 13%. Calculate the total value of the firm
and the equity capitalization rate (Ke) based on Net Operating Income approach. Comment
whether the value of the firm and equity capitalization rate so obtained will change or not for
different level of debt composition in the capital structure as per NOI approach and support
your argument with the help of a diagram.

5. “Receivables management is one of the important aspects of financial management.” In the

light of the above statement, explain briefly how various components of costs, namely,
collection cost, capital cost, default cost and delinquency cost are relevant in financial
management.
One of the executives of the company has proposed to the management to tighten its current
credit policy. The management is skeptical about the proposed change and it has requested
you as the finance manager to demonstrate the effect of tightening the credit policy to the
management and recommend whether the proposal should be accepted or not in the light of
following information:
Current Annual sales Rs. 50,00,000. Expected sales after new credit policy is implemented
Rs. 46,00,000. The present average age of receivables is 60 days which is expected to reduce
to 20 days if the proposal is accepted. The sale price of the product is Rs. 50 and its variable
 cost is Rs. 25 on the volume of 1,00,000 units. The average cost of the product is Rs. 40.
Assume one year to be 360 days. The firm’s required rate of return is 20%.

6. You are contemplating raising finance of Rs. 10,00,000 for a new project and have two
proposals under consideration:
 Plan A: Raising the required amount through the issue of equity shares of Rs. 10 each.
 Plan B: Raising Rs. 5,00,000 through Equity shares of Rs. 10 each; Rs. 2,00,000 through
13% Preference shares of Rs. 100 each; and Rs. 3,00,000 through 15% Debentures.
Assuming the corporate tax rate of 50%, determine the level of EBIT corresponding to the
indifference point and show the verification. Which plan would you choose for levels of
EBIT less than and more than the indifference point and why?