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University of Kashmir Srinagar, Kashmir Batch 2006

Examination: M. Com 2nd Sem. Course No: Com - 204 Maximum Marks: 80 Paper: Corporate Finance Time Allowed: Two & half hours Minimum Pass Marks: 32

Section A
(Note: Attempt all questions in about 10 20 words. Each question carries 2 marks) Q. No. 1 i. ii. iii. iv. v. vi. vii. viii.

Name the management systems that are needed to put in place to control agency relationship conflict between shareowners & management. Define Economic Value Added. Why Debt capital is considered less costly than other sources of capital? How Annuity Due is different from Ordinary Annuity? Why there is a need to be selective in controlling inventories? Name the different inventory costs & generally which cost is not considered in the determination of EOQ. What does Playing the Float means? What does aging schedule of receivables reveals?

Section B
(Note: Attempt all theoretical questions in about 200 250 words. Each question carries 8 Marks) Q.No.2. Answer the questions raised in part (A) & part (B) of this question. A) A Rs. 100 par value bond bears a coupon rate of 14 per cent and matures after 5 years. Interest is payable semi-annually. Compute the fair value of the bond if the required rate of return is 16 percent. B) A company retains 60% of its earnings, which are currently Rs 5 per share. Its investment opportunities promise a return of 15%. Calculate the rate at which company will grow. What is the fair value of the share if the required rate of return is 13%? Should the share be purchased at the current market price of Rs 65?

Q. No. 3: Compute the after-tax cost of capital for Rahim Ltd. Under the following cases & assume that the company is subject to a 50% corporate tax rate: i. ii. iii. A perpetual 10% Rs 100 face value preference shares sold for Rs 90. The issue involves floatation costs to the extent of 5% of face value of the bond. A 10-year, 12%, Rs 1000 bonds sold at par. An ordinary share of the company is currently selling for Rs 75. The EPS are Rs 12 of which 50% is paid in dividends. The company reinvests retained earnings @ 15%. Assume that the company engages no external financing.

Q.No. 4

Q. No 5:

A company has Rs. 4 per year carrying cost on each unit of inventory, an annualusage of 50,000 units, each unit costing Rs 125 and an ordering cost of Rs. 100 per order.Calculatethe Economic Order Quantity. What shall be the total annual cost of EOQ? If a quantity discount of Re. 0.25 per unitis offered to the company when it purchases in lots of 1,000 units, should the discount be availed? Explain the methods that are used in accelerating cash inflow by a large sized business firm.

Section C
(Note: Attempt all theoretical questions in about 400500 words. Each question carries 16marks) Q.No 6 What agency relationship conflict is all about? Discuss the reasons for conflict between shareowners & management. Also discuss the mechanisms that need to be put in place to control this conflict.

Q.No 7 The Nokia India Ltd. has the following capital structure as on 30 June, 2006:
Ordinary shares (200,000 shares) Rs.40,00,000 10% Preference shares Rs10,00,000 14% debentures Rs30,00,000 Rs80,00,000 The shares of the company sells for Rs. 20. It is expected that company will pay next year a dividend of Rs. 2 per share which will grow at 7 percent for ever. Assume a 50 percent tax rate. You are required to:
a) Compute a weighted average cost of capital based on existing capital structure. b) Compute the new weighted average cost of capital if the company raises an additional Rs. 20,00,000 debt by issuing 15 percent debenture. This would result in increasing the expected dividend to Rs. 3 and leave the growth rate unchanged, but the price of share will fall to Rs. 15 per share.

Q.No 8 A proforma cost sheet of Jamkash Ltd. provides the following particulars:
Amount per unit

Raw material Direct labour Overheads Total cost Profit Selling price

Rs. 90 20 50 160 30 190

The following further particulars are available: Raw material in stock on an average for one month; materials in process on an average for half a month; finished goods in stock on an average for one month. Credit allowed by suppliers is one month; credit allowed to debtors is two months; lag in payment of wages is two weeks; lag in payment of overhead expenses is one month; one-fourth of the output is sold against cash; cash in hand and at bank is expected to be Rs. 175,000. You are required to prepare a statement showing working capital needed to finance a level of activity of 1,00,000 units of production. You may assume that production is carried on evenly throughout the year, and wages and overheads accrue similarly. Q.No.9 Explain the procedure adopted in taking credit granted decision by a large scale business firm?