Programme: Subject: Date: INSTRUCTIONS: Candidate should read carefully the instructions printed on the question paper and on cover of Answer book, which is provided for their use 27/04/2012 NOTE: Ql iii iv. ae vi Under MM approach, all of the following are assumed except a. that there are no corporate or personal income taxes b. ©. the operating earnings of a firm grow at a decreasing rate d. IRR method will not be good for considering the project a. When the project being considered is independent b. c. When the project is being financed by own funds and borrowings d If the interest on long term debt is 18% p.a and the tax rate of the firm is 35%, SVKM’s NMIMS Mukesh Patel School Of Technology Management & E: MBA(Tech)-ALL STREAMS Year: IV Trimester: Academic Year : 2011-2012 Financial Management Marks: ‘Time: Duration: Final - Examination (1) Total No. of questions - 7 (2) Part A3 questions compulsory, Part B - answer 2 out of 4, (3) Total Questions to be answered 5 (4) Working will form part of answer PART A — Compulsory Questions (Mark each total 5 Marks) the dividend payout ratio is 100% there are no bankruptcy cost When the cash flows are conventional In all the above situations the effective cost of debt will be a b. c a 10.70% 11.70% 12.85% 12.70% Risk free discount rate means a. b. ¢. Discount rate used as base rate for adjustment of project related risk 4 Cost of capital applicable to the project Weighted average cost of capital None of the above Commercial paper pe se Is a transferable instrument Not a transferable instrument Can be transferred with the consent of the issuer Can be transferred with the approval of RBI Page 1 of 3 2.00 pm To 4.00 pmQ2 Firm X has following base data Number of shares 10,00,000 Price per share Rs. 20 Market value of shares Rs. 2,00,00,000 Operating income Rs. 40,00,000 i. Mr. S CEO of the firm believes that the shareholders of the firm will be benefited in case the firm has debt equity ratio of 1:1 ii, Therefore Mr. S proposes to issue 15% non convertible debenture of Rs.1,00,00,000 and use the proceeds to repurchase 5,00,000 shares and reduce the share capital to 1,00,00,000 iii, Mr. S would like to check the results at operating income levels of Rs.20,00,000 and Rs.60,00,000 also iv. The finance manager of the firm differs from Mr. $ and opines that a When share holders have the option to borrow on their ‘own account why the firm need borrow b. If investor put his own money of Rs.20, borrows Rs.20 himself and invests Rs.40 in 2 shares of unlevered firm x” ©. The retum on his own investment will be same as that of what he will get from his investment in 1 share of levered firm vy. calculate the following for all 3 levels of operating income equity earning of unlevered firm X earning per share of unlevered firm X retum on equity of unlevered firm X prepare base data for levered firm X at operating income evel of 40,00,000 equity earning of levered firm X earning per share of levered firm X return on equity of levered firm X what are your conclusions with reasons? Do you agree with CEO prepare eaming per share and return on equity for the investor, who resorts to personal leverage, for all 3 levels of operating income j. what are your conclusions with reasons? Do you agree with Finance manager ae oP re me (15 Marks) Page 2 of 3a 3 -Mis A Lid bas provide flowing information Net operating income Rs. 40 million ii ntereston debt Rs. 10 million iii, Cost of equity 18% iv. Cost of debt 12% y. Work out a Market value of debt b. Market value of equity ©. Average cost of capital vi, Assume further that A Lid. a. Takes additional debt of Rs. 100 million b. Uses the additional debt to finance a project which ears additional operating income of Rs, 20 million ©. There are no taxes vii, work out following by using Net Operating Income (NOI) approach taking into account additional details of point (vi) also a Equity earnings b. Market value of debt ©. Market value of equity d. Average cost of capital (10 Marks) PART B— Answer Any Two questions out of Four (All questions 10 marks each) Q.4 Why firms pay dividends? What is the importance of payout ratio, stability and retained earings in the payment of dividends? Explain difference between dividend payment and share buyback method. Q.5 Discuss time value of money, Present value and Future Value concepts. Explain with examples, 2.6 What are the assumptions and limitations of MM appfoach?-How arbitrage {method works in proposition I of MM approach? Give example also. a 7 Short Notes (Attempt any 4 short notes) Pecking order theory Gorden’s Growth model of dividend policy’ Signaling theory with scenarios Trade-off theory Traditional approach in Capital structure weene —* sw ee Page 3 of 3