Download GTU (Gujarat Technological University) MBA (Master of Business Administration) 2016 Winter 3rd Sem 2830201 Strategic Financial Management Sfm Previous Question Paper
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 3? ? EXAMINATION ? WINTER 2016
Subject Code: 2830201 Date: 03/01/2017
Subject Name: Strategic Financial Management (SFM)
Time: 02:30 pm to 05:30 pm Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.1
(a)
6
1.
The contractor takes complete responsibility to construct, erect, commission and supply
the plant and keep it ready to operate by owner in :
A. LROT contract B. BOT Contract
C. BOO Contract D. EPC Contract
2.
SGR cannot be achieved in one of the following ways, without increase in further equity:
A. Increase in profit Margin
B. Increase in net worth of the firm
C. Decrease in proportion of
assets to sales
D Increase in debt component proportionate to
equity
3.
The price of a company?s Share has risen from Rs. 10 to Rs. 400. Small Investors are
complaining that this is affecting their ability to buy shares in the company. Which one of
the following might overcome the problem?
A. A Share Buy back B. A Share Split
C. Issuing new Stock option D. A Share Consolidation
4.
A Dividend policy of the firm and his market price of share is determined by :
A. Earnings Per Share B. Dividend yield
C. Price Earnings Ratio D. Book value
5.
Ruby ltd. is to pay dividend of Rs. 2.15 at the end of the year and is expected to grow at
11.2% per year forever. If the required rate of return on the company?s stock is 15.2%
p.a., its intrinsic value will be:
A. Rs. 59.77 B. Rs. 53.75
C. Rs. 52.50 D. Rs. 50.50
6.
If greater the risk associated with receiving of future economic benefit, the
______________ discount rate is adopted.
A. Lower B. Normal
C. Higher D. Positive
Q.1 (b) Define the following terms
(a) LOB (Line of Balance)
(b) LLP
(c) SGR (Sustainable Growth Rate)
(d) P/ E ratio and Earning yield
04
Q.1 (c) Explain: Gordan Model of Dividend Theory. 04
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Page 1 of 5
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 3? ? EXAMINATION ? WINTER 2016
Subject Code: 2830201 Date: 03/01/2017
Subject Name: Strategic Financial Management (SFM)
Time: 02:30 pm to 05:30 pm Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.1
(a)
6
1.
The contractor takes complete responsibility to construct, erect, commission and supply
the plant and keep it ready to operate by owner in :
A. LROT contract B. BOT Contract
C. BOO Contract D. EPC Contract
2.
SGR cannot be achieved in one of the following ways, without increase in further equity:
A. Increase in profit Margin
B. Increase in net worth of the firm
C. Decrease in proportion of
assets to sales
D Increase in debt component proportionate to
equity
3.
The price of a company?s Share has risen from Rs. 10 to Rs. 400. Small Investors are
complaining that this is affecting their ability to buy shares in the company. Which one of
the following might overcome the problem?
A. A Share Buy back B. A Share Split
C. Issuing new Stock option D. A Share Consolidation
4.
A Dividend policy of the firm and his market price of share is determined by :
A. Earnings Per Share B. Dividend yield
C. Price Earnings Ratio D. Book value
5.
Ruby ltd. is to pay dividend of Rs. 2.15 at the end of the year and is expected to grow at
11.2% per year forever. If the required rate of return on the company?s stock is 15.2%
p.a., its intrinsic value will be:
A. Rs. 59.77 B. Rs. 53.75
C. Rs. 52.50 D. Rs. 50.50
6.
If greater the risk associated with receiving of future economic benefit, the
______________ discount rate is adopted.
A. Lower B. Normal
C. Higher D. Positive
Q.1 (b) Define the following terms
(a) LOB (Line of Balance)
(b) LLP
(c) SGR (Sustainable Growth Rate)
(d) P/ E ratio and Earning yield
04
Q.1 (c) Explain: Gordan Model of Dividend Theory. 04
Page 2 of 5
Q.2 (a) The Balance sheet of Hindustan Ltd. As on March 31, 2010 is as follows:
Liabilities Rs. Lakhs assets Rs lakhs
Share capital 200 Fixed assets 500
Reserves 140 Inventories 300
Long term loans 360 Receivables 240
Short term loans 200 Cash and bank 60
Payables 120
Provisions 80
Total 1100 total 1100
Sales for the year were Rs. 600 lakhs. For the year ending on 31 March 2011 sales
are expected to increase by 20%. The profit margin and dividend payout ratio are
expected to be 4% & 50% respectively. You are required to :
(I) Quantify the amount of external fund required.
(II) Determine the mode of raising fund given the following parameters:
(a) Current ratio should at-least be 1.33
(b) Ratio of fixed assets to Long term loans should be 1.5
(c) Long term debt to equity ratio should not exceed 1.05
Note: Assume assets will increase pari pasu with sales.
07
(b) One of the MNC of Germany wants to establish the Project in Gujarat state. Guide
them about various steps involved in setting up of a Project and discuss any five
steps in detail.
07
OR
(b) What do you mean by Strategic Financial Management? Discuss the steps
involved in Financial Planning Process.
07
Q.3 (a) The XYZ Ltd. has to make a choice between debt issue and equity issue for its
expansion programme. It current position is as under:
Equity Capital (Rs. 10 per share) 50000
Long term Debenture @ 5% 20000
Reserve and Surpluses 30000
Total Capitalisation 100000
Sales 300000
Total Costs 269000
Income before interest and taxes 31000
Interest 1000
Earnings before taxes 30000
Income Tax 10500
Income after taxes 19500
The expansion programme is estimated to cost Rs. 50000. If this is financed
through debt, the rate of interest on new debt will be 7% and the price earnings
ratio will be 6. If the expansion programme is financed through equity, new shares
can be sold netting Rs. 25 per share; and the price earnings ratio will be 7. The
expansion will generate additional sales of Rs. 1,50,000 with return of 10% on
sales before interest and taxes. If the company is to follow a policy of maximizing
07
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Page 1 of 5
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 3? ? EXAMINATION ? WINTER 2016
Subject Code: 2830201 Date: 03/01/2017
Subject Name: Strategic Financial Management (SFM)
Time: 02:30 pm to 05:30 pm Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.1
(a)
6
1.
The contractor takes complete responsibility to construct, erect, commission and supply
the plant and keep it ready to operate by owner in :
A. LROT contract B. BOT Contract
C. BOO Contract D. EPC Contract
2.
SGR cannot be achieved in one of the following ways, without increase in further equity:
A. Increase in profit Margin
B. Increase in net worth of the firm
C. Decrease in proportion of
assets to sales
D Increase in debt component proportionate to
equity
3.
The price of a company?s Share has risen from Rs. 10 to Rs. 400. Small Investors are
complaining that this is affecting their ability to buy shares in the company. Which one of
the following might overcome the problem?
A. A Share Buy back B. A Share Split
C. Issuing new Stock option D. A Share Consolidation
4.
A Dividend policy of the firm and his market price of share is determined by :
A. Earnings Per Share B. Dividend yield
C. Price Earnings Ratio D. Book value
5.
Ruby ltd. is to pay dividend of Rs. 2.15 at the end of the year and is expected to grow at
11.2% per year forever. If the required rate of return on the company?s stock is 15.2%
p.a., its intrinsic value will be:
A. Rs. 59.77 B. Rs. 53.75
C. Rs. 52.50 D. Rs. 50.50
6.
If greater the risk associated with receiving of future economic benefit, the
______________ discount rate is adopted.
A. Lower B. Normal
C. Higher D. Positive
Q.1 (b) Define the following terms
(a) LOB (Line of Balance)
(b) LLP
(c) SGR (Sustainable Growth Rate)
(d) P/ E ratio and Earning yield
04
Q.1 (c) Explain: Gordan Model of Dividend Theory. 04
Page 2 of 5
Q.2 (a) The Balance sheet of Hindustan Ltd. As on March 31, 2010 is as follows:
Liabilities Rs. Lakhs assets Rs lakhs
Share capital 200 Fixed assets 500
Reserves 140 Inventories 300
Long term loans 360 Receivables 240
Short term loans 200 Cash and bank 60
Payables 120
Provisions 80
Total 1100 total 1100
Sales for the year were Rs. 600 lakhs. For the year ending on 31 March 2011 sales
are expected to increase by 20%. The profit margin and dividend payout ratio are
expected to be 4% & 50% respectively. You are required to :
(I) Quantify the amount of external fund required.
(II) Determine the mode of raising fund given the following parameters:
(a) Current ratio should at-least be 1.33
(b) Ratio of fixed assets to Long term loans should be 1.5
(c) Long term debt to equity ratio should not exceed 1.05
Note: Assume assets will increase pari pasu with sales.
07
(b) One of the MNC of Germany wants to establish the Project in Gujarat state. Guide
them about various steps involved in setting up of a Project and discuss any five
steps in detail.
07
OR
(b) What do you mean by Strategic Financial Management? Discuss the steps
involved in Financial Planning Process.
07
Q.3 (a) The XYZ Ltd. has to make a choice between debt issue and equity issue for its
expansion programme. It current position is as under:
Equity Capital (Rs. 10 per share) 50000
Long term Debenture @ 5% 20000
Reserve and Surpluses 30000
Total Capitalisation 100000
Sales 300000
Total Costs 269000
Income before interest and taxes 31000
Interest 1000
Earnings before taxes 30000
Income Tax 10500
Income after taxes 19500
The expansion programme is estimated to cost Rs. 50000. If this is financed
through debt, the rate of interest on new debt will be 7% and the price earnings
ratio will be 6. If the expansion programme is financed through equity, new shares
can be sold netting Rs. 25 per share; and the price earnings ratio will be 7. The
expansion will generate additional sales of Rs. 1,50,000 with return of 10% on
sales before interest and taxes. If the company is to follow a policy of maximizing
07
Page 3 of 5
the market value of its shares, which form of financing it choose?
(b) What is meant by leverage analysis? What are different type of leverage
associated with business and how it effect to business? Why must the finance
manager keep in mind the degree of Financial leverage in evaluating various
financing plans?
07
OR
Q.3 (a) India Ltd. has 50000 equity shares of Rs. 10 each outstanding on 1
st
January. The
shares are currently quoted at par in the market. The Company now intends to pay
dividend of Rs. 2 per share for the current calendar year. It belongs to a risk class
whose appropriate capitalization rate is 15 %. Using Modigliani- Miller Model
and assuming no taxes, ascertain the price of the company?s share at it is likely to
prevail at the end of the year (a) when dividend is declared and (b) when dividend
is not declared. (c) Also find out the number of new equity shares that the
company must issue to meet its investment needs of Rs. 2,00,000, assuming net
income of Rs. 1,10,000 and also assume that dividend is paid.
07
(b) The following information is supplied to you about a company.
Earning of the company Rs. 15,00,000
Dividend paid Rs. 5,00,000
Number of issued shares 1,00,000
Price earnings ratio 10
Rate of Return on investment (%) 15
(i)Determine the theoretical market price of the share.
(II) Are you satisfied with the current dividend policy of the firm? If not what
should be the optimal dividend payment ratio in this case? Prove your answer.
07
Q.4 (a) Apple Ltd. Is having an issued and subscribed capital of 5,00,000 equity shares of
Rs. 10 Each fully paid up. The Company?s after tax profit for the year 2010
amounting to Rs. 28 Lakhs. The Average present stock exchange price of the
company?s share is Rs. 19. The P/E ratio of the four Listed Companies to be as
under, their type of business seems to be similar to permanent magnets Ltd. Are:
Company 20013 2014 2015
Alfa Ltd. 5.7 6.3 7.1
Beta Ltd. 6.5 5.9 6.8
Theta Ltd. 7.4 6.8 7.0
Gama Ltd. 5.0 5.9 6.1
Determine the valuation of the business and value per share based on average P/E
ratio of the Industry.
07
(b) (i) Explain the reasons for the Project Failure
(ii) NOI Approach of capital structure theory is superior to NI Approach of capital
Structure theory. Justify.
07
OR
Q.4 (a) The Gujarat Textile Manufacturing Company Ltd. Is Considering one of the two
mutually exclusive proposals, Project M and Project N, which requires cash outlay
of Rs 8,50,000 and 8,25,000 respectively. The Certainty equivalent approach is
used in incorporating risk in capital budgeting decisions. The current yield on
government bond is 6% and this is used as risk free rate. The expected net cash
07
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Page 1 of 5
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 3? ? EXAMINATION ? WINTER 2016
Subject Code: 2830201 Date: 03/01/2017
Subject Name: Strategic Financial Management (SFM)
Time: 02:30 pm to 05:30 pm Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.1
(a)
6
1.
The contractor takes complete responsibility to construct, erect, commission and supply
the plant and keep it ready to operate by owner in :
A. LROT contract B. BOT Contract
C. BOO Contract D. EPC Contract
2.
SGR cannot be achieved in one of the following ways, without increase in further equity:
A. Increase in profit Margin
B. Increase in net worth of the firm
C. Decrease in proportion of
assets to sales
D Increase in debt component proportionate to
equity
3.
The price of a company?s Share has risen from Rs. 10 to Rs. 400. Small Investors are
complaining that this is affecting their ability to buy shares in the company. Which one of
the following might overcome the problem?
A. A Share Buy back B. A Share Split
C. Issuing new Stock option D. A Share Consolidation
4.
A Dividend policy of the firm and his market price of share is determined by :
A. Earnings Per Share B. Dividend yield
C. Price Earnings Ratio D. Book value
5.
Ruby ltd. is to pay dividend of Rs. 2.15 at the end of the year and is expected to grow at
11.2% per year forever. If the required rate of return on the company?s stock is 15.2%
p.a., its intrinsic value will be:
A. Rs. 59.77 B. Rs. 53.75
C. Rs. 52.50 D. Rs. 50.50
6.
If greater the risk associated with receiving of future economic benefit, the
______________ discount rate is adopted.
A. Lower B. Normal
C. Higher D. Positive
Q.1 (b) Define the following terms
(a) LOB (Line of Balance)
(b) LLP
(c) SGR (Sustainable Growth Rate)
(d) P/ E ratio and Earning yield
04
Q.1 (c) Explain: Gordan Model of Dividend Theory. 04
Page 2 of 5
Q.2 (a) The Balance sheet of Hindustan Ltd. As on March 31, 2010 is as follows:
Liabilities Rs. Lakhs assets Rs lakhs
Share capital 200 Fixed assets 500
Reserves 140 Inventories 300
Long term loans 360 Receivables 240
Short term loans 200 Cash and bank 60
Payables 120
Provisions 80
Total 1100 total 1100
Sales for the year were Rs. 600 lakhs. For the year ending on 31 March 2011 sales
are expected to increase by 20%. The profit margin and dividend payout ratio are
expected to be 4% & 50% respectively. You are required to :
(I) Quantify the amount of external fund required.
(II) Determine the mode of raising fund given the following parameters:
(a) Current ratio should at-least be 1.33
(b) Ratio of fixed assets to Long term loans should be 1.5
(c) Long term debt to equity ratio should not exceed 1.05
Note: Assume assets will increase pari pasu with sales.
07
(b) One of the MNC of Germany wants to establish the Project in Gujarat state. Guide
them about various steps involved in setting up of a Project and discuss any five
steps in detail.
07
OR
(b) What do you mean by Strategic Financial Management? Discuss the steps
involved in Financial Planning Process.
07
Q.3 (a) The XYZ Ltd. has to make a choice between debt issue and equity issue for its
expansion programme. It current position is as under:
Equity Capital (Rs. 10 per share) 50000
Long term Debenture @ 5% 20000
Reserve and Surpluses 30000
Total Capitalisation 100000
Sales 300000
Total Costs 269000
Income before interest and taxes 31000
Interest 1000
Earnings before taxes 30000
Income Tax 10500
Income after taxes 19500
The expansion programme is estimated to cost Rs. 50000. If this is financed
through debt, the rate of interest on new debt will be 7% and the price earnings
ratio will be 6. If the expansion programme is financed through equity, new shares
can be sold netting Rs. 25 per share; and the price earnings ratio will be 7. The
expansion will generate additional sales of Rs. 1,50,000 with return of 10% on
sales before interest and taxes. If the company is to follow a policy of maximizing
07
Page 3 of 5
the market value of its shares, which form of financing it choose?
(b) What is meant by leverage analysis? What are different type of leverage
associated with business and how it effect to business? Why must the finance
manager keep in mind the degree of Financial leverage in evaluating various
financing plans?
07
OR
Q.3 (a) India Ltd. has 50000 equity shares of Rs. 10 each outstanding on 1
st
January. The
shares are currently quoted at par in the market. The Company now intends to pay
dividend of Rs. 2 per share for the current calendar year. It belongs to a risk class
whose appropriate capitalization rate is 15 %. Using Modigliani- Miller Model
and assuming no taxes, ascertain the price of the company?s share at it is likely to
prevail at the end of the year (a) when dividend is declared and (b) when dividend
is not declared. (c) Also find out the number of new equity shares that the
company must issue to meet its investment needs of Rs. 2,00,000, assuming net
income of Rs. 1,10,000 and also assume that dividend is paid.
07
(b) The following information is supplied to you about a company.
Earning of the company Rs. 15,00,000
Dividend paid Rs. 5,00,000
Number of issued shares 1,00,000
Price earnings ratio 10
Rate of Return on investment (%) 15
(i)Determine the theoretical market price of the share.
(II) Are you satisfied with the current dividend policy of the firm? If not what
should be the optimal dividend payment ratio in this case? Prove your answer.
07
Q.4 (a) Apple Ltd. Is having an issued and subscribed capital of 5,00,000 equity shares of
Rs. 10 Each fully paid up. The Company?s after tax profit for the year 2010
amounting to Rs. 28 Lakhs. The Average present stock exchange price of the
company?s share is Rs. 19. The P/E ratio of the four Listed Companies to be as
under, their type of business seems to be similar to permanent magnets Ltd. Are:
Company 20013 2014 2015
Alfa Ltd. 5.7 6.3 7.1
Beta Ltd. 6.5 5.9 6.8
Theta Ltd. 7.4 6.8 7.0
Gama Ltd. 5.0 5.9 6.1
Determine the valuation of the business and value per share based on average P/E
ratio of the Industry.
07
(b) (i) Explain the reasons for the Project Failure
(ii) NOI Approach of capital structure theory is superior to NI Approach of capital
Structure theory. Justify.
07
OR
Q.4 (a) The Gujarat Textile Manufacturing Company Ltd. Is Considering one of the two
mutually exclusive proposals, Project M and Project N, which requires cash outlay
of Rs 8,50,000 and 8,25,000 respectively. The Certainty equivalent approach is
used in incorporating risk in capital budgeting decisions. The current yield on
government bond is 6% and this is used as risk free rate. The expected net cash
07
Page 4 of 5
flow and their certainty equivalents are as follows.
Year
ended
Project M Project M Project N Project
N
Cash flows (Rs. ) C. E Cash flows (Rs. ) C. E
1 4,50,000 0.8 4,50,000 0.96
2 5,00,000 0.7 4,50,000 0.8
3 5,00,000 0.5 5,00,000 0.7
Recommend company:
(i) Which project should be accepted?
(ii) If the adjusted discounted rate method is used. Which project would
be appraised with a higher rate and why?
(b) The ABC Ltd. has declared dividend during the past five years as follows :
Year 2010 2011 2012 2013 2014
Rate of
Dividend (%)
12 14 18 21 24
The average rate of return prevailing in the same industry is 15%. Determine the
value per share of Rs. 10 of ABC Ltd. based on Dividend Yield Method.
07
Q.5 Star Industries Ltd. Is considering the replacement of one of the its moulding
machines. The existing machine is in good operating condition, but is smaller than
required if the firm is to expand its operations. It is 4 years old, has a current
salvage value of Rs. 200000 and remaining life of 6 years. The machine was
initially purchased for Rs. 10 lakh and is being depreciated at 20 % on the basis of
written down value method.
The new machine will cost Rs. 15 lakh and will be subject to same method as well
as same rate of depreciation. It is expected to have a useful life of 6 years, salvage
value of Rs. 150000 at the sixth year end. The management anticipates that with
the expanded operation, there will be need of an additional net working capital of
Rs. 1 lakh. The new machine will allow the firm to expand current operations and
thereby increase annual revenue by 500000; variable cost to volume ratio is 30%.
Fixed costs (excluding depreciation) are likely to remain unchanged. The
corporate tax rate is 35% its cost of capital is 10% .The company has several
machines in the block of 20% depreciation.
Give Your recommendation to the company: Should the company replace
existing machine? Yes/ No. Justify. Recommend the company.
14
OR
Q.5 A Omega Manufacturing company is planning to expand its assets by 50%. All
Financing for this expansion will come from external sources. The expansion will
generate additional sale of the Rs. 3 Lakhs with return of 25% on sales before
interest and taxes. The finance department of the company has submitted
following plans for the consideration of the board.
Plan 1: Issue of 10% debentures
Plan 2: Issue of 10% debenture for the half the required amount and balance in
equity shares to be issued at 25% premium.
Plan 3: Issue of Equity at 25 % Premium
14
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Page 1 of 5
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 3? ? EXAMINATION ? WINTER 2016
Subject Code: 2830201 Date: 03/01/2017
Subject Name: Strategic Financial Management (SFM)
Time: 02:30 pm to 05:30 pm Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q.1
(a)
6
1.
The contractor takes complete responsibility to construct, erect, commission and supply
the plant and keep it ready to operate by owner in :
A. LROT contract B. BOT Contract
C. BOO Contract D. EPC Contract
2.
SGR cannot be achieved in one of the following ways, without increase in further equity:
A. Increase in profit Margin
B. Increase in net worth of the firm
C. Decrease in proportion of
assets to sales
D Increase in debt component proportionate to
equity
3.
The price of a company?s Share has risen from Rs. 10 to Rs. 400. Small Investors are
complaining that this is affecting their ability to buy shares in the company. Which one of
the following might overcome the problem?
A. A Share Buy back B. A Share Split
C. Issuing new Stock option D. A Share Consolidation
4.
A Dividend policy of the firm and his market price of share is determined by :
A. Earnings Per Share B. Dividend yield
C. Price Earnings Ratio D. Book value
5.
Ruby ltd. is to pay dividend of Rs. 2.15 at the end of the year and is expected to grow at
11.2% per year forever. If the required rate of return on the company?s stock is 15.2%
p.a., its intrinsic value will be:
A. Rs. 59.77 B. Rs. 53.75
C. Rs. 52.50 D. Rs. 50.50
6.
If greater the risk associated with receiving of future economic benefit, the
______________ discount rate is adopted.
A. Lower B. Normal
C. Higher D. Positive
Q.1 (b) Define the following terms
(a) LOB (Line of Balance)
(b) LLP
(c) SGR (Sustainable Growth Rate)
(d) P/ E ratio and Earning yield
04
Q.1 (c) Explain: Gordan Model of Dividend Theory. 04
Page 2 of 5
Q.2 (a) The Balance sheet of Hindustan Ltd. As on March 31, 2010 is as follows:
Liabilities Rs. Lakhs assets Rs lakhs
Share capital 200 Fixed assets 500
Reserves 140 Inventories 300
Long term loans 360 Receivables 240
Short term loans 200 Cash and bank 60
Payables 120
Provisions 80
Total 1100 total 1100
Sales for the year were Rs. 600 lakhs. For the year ending on 31 March 2011 sales
are expected to increase by 20%. The profit margin and dividend payout ratio are
expected to be 4% & 50% respectively. You are required to :
(I) Quantify the amount of external fund required.
(II) Determine the mode of raising fund given the following parameters:
(a) Current ratio should at-least be 1.33
(b) Ratio of fixed assets to Long term loans should be 1.5
(c) Long term debt to equity ratio should not exceed 1.05
Note: Assume assets will increase pari pasu with sales.
07
(b) One of the MNC of Germany wants to establish the Project in Gujarat state. Guide
them about various steps involved in setting up of a Project and discuss any five
steps in detail.
07
OR
(b) What do you mean by Strategic Financial Management? Discuss the steps
involved in Financial Planning Process.
07
Q.3 (a) The XYZ Ltd. has to make a choice between debt issue and equity issue for its
expansion programme. It current position is as under:
Equity Capital (Rs. 10 per share) 50000
Long term Debenture @ 5% 20000
Reserve and Surpluses 30000
Total Capitalisation 100000
Sales 300000
Total Costs 269000
Income before interest and taxes 31000
Interest 1000
Earnings before taxes 30000
Income Tax 10500
Income after taxes 19500
The expansion programme is estimated to cost Rs. 50000. If this is financed
through debt, the rate of interest on new debt will be 7% and the price earnings
ratio will be 6. If the expansion programme is financed through equity, new shares
can be sold netting Rs. 25 per share; and the price earnings ratio will be 7. The
expansion will generate additional sales of Rs. 1,50,000 with return of 10% on
sales before interest and taxes. If the company is to follow a policy of maximizing
07
Page 3 of 5
the market value of its shares, which form of financing it choose?
(b) What is meant by leverage analysis? What are different type of leverage
associated with business and how it effect to business? Why must the finance
manager keep in mind the degree of Financial leverage in evaluating various
financing plans?
07
OR
Q.3 (a) India Ltd. has 50000 equity shares of Rs. 10 each outstanding on 1
st
January. The
shares are currently quoted at par in the market. The Company now intends to pay
dividend of Rs. 2 per share for the current calendar year. It belongs to a risk class
whose appropriate capitalization rate is 15 %. Using Modigliani- Miller Model
and assuming no taxes, ascertain the price of the company?s share at it is likely to
prevail at the end of the year (a) when dividend is declared and (b) when dividend
is not declared. (c) Also find out the number of new equity shares that the
company must issue to meet its investment needs of Rs. 2,00,000, assuming net
income of Rs. 1,10,000 and also assume that dividend is paid.
07
(b) The following information is supplied to you about a company.
Earning of the company Rs. 15,00,000
Dividend paid Rs. 5,00,000
Number of issued shares 1,00,000
Price earnings ratio 10
Rate of Return on investment (%) 15
(i)Determine the theoretical market price of the share.
(II) Are you satisfied with the current dividend policy of the firm? If not what
should be the optimal dividend payment ratio in this case? Prove your answer.
07
Q.4 (a) Apple Ltd. Is having an issued and subscribed capital of 5,00,000 equity shares of
Rs. 10 Each fully paid up. The Company?s after tax profit for the year 2010
amounting to Rs. 28 Lakhs. The Average present stock exchange price of the
company?s share is Rs. 19. The P/E ratio of the four Listed Companies to be as
under, their type of business seems to be similar to permanent magnets Ltd. Are:
Company 20013 2014 2015
Alfa Ltd. 5.7 6.3 7.1
Beta Ltd. 6.5 5.9 6.8
Theta Ltd. 7.4 6.8 7.0
Gama Ltd. 5.0 5.9 6.1
Determine the valuation of the business and value per share based on average P/E
ratio of the Industry.
07
(b) (i) Explain the reasons for the Project Failure
(ii) NOI Approach of capital structure theory is superior to NI Approach of capital
Structure theory. Justify.
07
OR
Q.4 (a) The Gujarat Textile Manufacturing Company Ltd. Is Considering one of the two
mutually exclusive proposals, Project M and Project N, which requires cash outlay
of Rs 8,50,000 and 8,25,000 respectively. The Certainty equivalent approach is
used in incorporating risk in capital budgeting decisions. The current yield on
government bond is 6% and this is used as risk free rate. The expected net cash
07
Page 4 of 5
flow and their certainty equivalents are as follows.
Year
ended
Project M Project M Project N Project
N
Cash flows (Rs. ) C. E Cash flows (Rs. ) C. E
1 4,50,000 0.8 4,50,000 0.96
2 5,00,000 0.7 4,50,000 0.8
3 5,00,000 0.5 5,00,000 0.7
Recommend company:
(i) Which project should be accepted?
(ii) If the adjusted discounted rate method is used. Which project would
be appraised with a higher rate and why?
(b) The ABC Ltd. has declared dividend during the past five years as follows :
Year 2010 2011 2012 2013 2014
Rate of
Dividend (%)
12 14 18 21 24
The average rate of return prevailing in the same industry is 15%. Determine the
value per share of Rs. 10 of ABC Ltd. based on Dividend Yield Method.
07
Q.5 Star Industries Ltd. Is considering the replacement of one of the its moulding
machines. The existing machine is in good operating condition, but is smaller than
required if the firm is to expand its operations. It is 4 years old, has a current
salvage value of Rs. 200000 and remaining life of 6 years. The machine was
initially purchased for Rs. 10 lakh and is being depreciated at 20 % on the basis of
written down value method.
The new machine will cost Rs. 15 lakh and will be subject to same method as well
as same rate of depreciation. It is expected to have a useful life of 6 years, salvage
value of Rs. 150000 at the sixth year end. The management anticipates that with
the expanded operation, there will be need of an additional net working capital of
Rs. 1 lakh. The new machine will allow the firm to expand current operations and
thereby increase annual revenue by 500000; variable cost to volume ratio is 30%.
Fixed costs (excluding depreciation) are likely to remain unchanged. The
corporate tax rate is 35% its cost of capital is 10% .The company has several
machines in the block of 20% depreciation.
Give Your recommendation to the company: Should the company replace
existing machine? Yes/ No. Justify. Recommend the company.
14
OR
Q.5 A Omega Manufacturing company is planning to expand its assets by 50%. All
Financing for this expansion will come from external sources. The expansion will
generate additional sale of the Rs. 3 Lakhs with return of 25% on sales before
interest and taxes. The finance department of the company has submitted
following plans for the consideration of the board.
Plan 1: Issue of 10% debentures
Plan 2: Issue of 10% debenture for the half the required amount and balance in
equity shares to be issued at 25% premium.
Plan 3: Issue of Equity at 25 % Premium
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Page 5 of 5
Balance sheet of the Company as on 31
st
March
Liabilities Amount
(Rs.)
Assets Amount
(Rs.)
Equity Capital (Rs. 10
per share)
4,00,000 Total
Assets
12,00,000
8% Debentures 3,00,000
Retained Earnings 2,00,000
Current Liabilities 3,00,000
12,00,000 12,00,000
Income statement for the year ending March 31
Sales 19,00,000
Operating Costs 16,00,000
EBIT 3,00,000
Interest 24,000
Earning After Interest 2,76,000
Taxes 96,600
EAT 1,79,400
EPS 4.48
(I) You are required to determine the number of equity shares that will be
issues if financial plan 3 is adopted.
(II) Determine the indifference point between (a) Plan 1 and Plan 2 (b) Plan 1
and Plan 3 (Plan 2 and Plan 3
(III) Assume that the price earnings ratio is expected to remain unchanged at 8
if plan 3 is adopted, but is likely to drop to 6 if either plan 1 or plan 2 is
used to finance the expansion. Determine the expected market price of the
share in each of the situations.
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This post was last modified on 19 February 2020