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MB0045 Assignment Winter 2011

MB0045 Assignment Winter 2011

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12/16/2012

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Winter / November 2011

Master of Business Administration Semester II MB0045 – Financial Management - 4 Credits (Book ID: B1134) Assignment Set- 1 (60 Marks)
Note: Each Question carries 10 marks. Answer all the questions. Q1. Explain the steps involved in Financial Planning. Q2. A company is considering a capital project with the following information: The cost of the project is Rs.200 million, which consists of Rs. 150 million in plant a machinery and Rs.50 million on net working capital. The entire outlay will be incurred in the beginning. The life of the project is expected to be 5 years. At the end of 5 years, the fixed assets will fetch a net salvage value of Rs. 48 million ad the net working capital will be liquidated at par. The project will increase revenues of the firm by Rs. 250 million per year. The increase in costs will be Rs.100 million per year. The depreciation rate applicable will be 25% as per written down value method. The tax rate is 30%. If the cost of capital is 10% what is the net present value of the project. Q3. Discuss the relevance and factors that influence the determination of stock level. Q4. There was a replacement of its existing machine by a new machine. The new machine will cost Rs 2,00,000 and have a life of five years. The new machine will yield annual cash revenue of Rs 2,50,000 and incur annual cash expenses of Rs 1,30,000. The estimated salvage of the new machine at the end of its economic life is Rs 8,000. The existing machine has a book value of Rs 40,000 and can be sold for Rs 20,000. The existing machine, if used for the next five years is expected to generate annual cash revenue of Rs 2,00,000 and to involve annual cash expenses of Rs 1,40,000. If sold after five years, the salvage value of the existing machine will be negligible. The company pays tax at 40%. It writes off depreciation at 30% on the written down value. The company’s cost of capital is 20% Compute the incremental cash flows of replacement decisions.

The following details have been extracted from the books of Ashraya Ltd Income Statement (Rs.Winter / November 2011 Hint : unit 8 solved problem Q5. What role does cost play in financial decisions? Q6. Explicit cost and Implicit cost are the two dimensions of cost. Loans and Advances Investments 2006 2007 Assets Fixed assets Less depreciation 2006 2007 400 100 300 50 510 120 390 50 1000 300 100 40 60 100 20 120 15 105 30 75 38 37 2007 1300 520 120 45 75 280 40 320 18 302 100 202 100 102 . In millions) Income statement 2006 Sales less returns Gross Profit Selling Expenses Administration Deprecation Operating Profit Non operating income EBIT (Earnings Before Interest & Tax) Interest Profit before tax Tax Profit after tax Dividend Retained earnings Balance sheet Liabilities Shareholders fund Share capital Equity Preference Reserves and surplus Secured loans 120 50 122 100 120 50 224 120 Current assets.

100 million  Investments will increase by Rs.  Depreciation is charged at 25% of fixed assets. if any.19 million  Secured loans in 2008 will be based on its relationship with the sales in the year 2007  Additional funds required.Winter / November 2011 Unsecured loans 50 60 Cash at bank Receivables 10 80 12 128 Current liabilities Trade creditors Provisions Tax Proposed dividend 10 38 700 60 100 984 210 250 Inventories Loans and Advances Miscellaneous expenditure 200 50 10 300 80 24 700 984 Forecast the income statement and balance sheet for the year 2008 based on the following assumptions:  Sales for the year 2008 will increase by 30% over the sales value for 2007.  Fixed assets will increase by Rs.operating income will increase by 10%  There will be no change in the total amount of administration expenses to be spent in the year 2008  There is no change in equity and preference capital in 2008  Interest for 2008 will maintain the same ratio as it has in 2007 with the sales of 2007 . will be met by bank borrowings  Tax rates will be 30 %  Dividends will be 50 % of the profit after tax  Non.  Use percent of sales method to forecast the values for various items of income statement using the percentage for the year 2007.100 million  Current assets and current liabilities are to be decided based on their relationship with the sales in the year 2007  Miscellaneous expenditure will increase by Rs.

2 (60 Marks) Note: Each Question carries 10 marks. 120 lakhs Net profit margin Outstanding preference shares No. Each project requires an initial cash outlay of Rs. 3. Answer all the questions. The following fore cast of cash flows are made by the management. 50 lakhs @ 12% dividend 250000 12% 40% 16% Annual cash Annual cash in flows . Q1. The company’s cost of capital is 12%. Economic Environment Project A Project B 12.4 Credits (Book ID: B1134) Assignment Set. of equity shares Cost of equity shares Retention ratio ROI Hint: Apply the Gordon formula Q3. what is the price of the share as per Gordon’s Model? Net sales Rs. Examine the importance of capital budgeting Q2 Considering the following information.00.5% Rs. Internal capital rationing is uses by firms for exercising financial control” How does a firm achieve this ? Q4.000 and has an effective life of 10 years.Winter / November 2011 Hint: unit 2 worked example Master of Business Administration Semester II MB0045 – Financial Management . A company has two mutually exclusive projects under consideration viz project A & project B.

.000 75.000 75.Winter / November 2011 inflows Pessimistic Expected Optimistic What is the NPV of the project? Which project should the management consider? Given PVIFA = 5.000 25. 40 Rate of return on investments 18% Rate of return required by shareholders 12% Payout ratio being 40%.650 Unit 9 worked example Q5. what will be the price per share using the Walter model. or 60%. Explain various types of bonds. 65. Earnings per share Rs. Given the following information. 50%.000 Q6.000 90.000 1.00.

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