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Advanced Financial Management -2010 (FURTHER REVISED COURSE )
MR-5892 Total Marks : 60
Instruction to Students : 1) Answer any five questions. All questions carry equal marks 2) Presentation should be neat and clean. Marks will be deducted for poor presentation 3) All the sub-questions of the main question should be attempted together 4) If students attempt more than five questions, only first five will be considered 5) Every new question should start on a new page 1. Explain the important function of either Credit Rating Information Services of India Ltd (CRISIL) or Information & Credit Rating Services Ltd (ICRA) a) Discuss the P/E ratio approach to stock valuation b) Describe and evaluate the adjusted book value approach to corporate valuation. A firm has total sales of Rs.15lacs with 40% variable cost and total cost of Rs.900,000 it also has debt of Rs.800,000 at 10% rate of interest. If the tax rate is 45%, calculate: a) Operating Leverage b) Financial Leverage c)Combined Leverage A Ltd. Paid a dividend of Rs.5 per share for 2009-2010. the company follows a fixed dividend payout ratio of 30% and earns a return on 18% on its investments. Cost of capital is 12%. What is the price of the shares of A Ltd. As per Walter’s model? Explain in brief any three of the following : a) Revival programme for a sick industrial unit b) Procedure pertaining to IPO’s c) Regulation of financial markets in India d) Rationale of disinvestment in public Sector Enterprise e) Important sources of financing long term projects in India f) Financial interest rate Swaps The following is the data regarding two Companies “X” and “Y” belonging to the same equivalent risk class: Number of ordinary shares Market price per share 6% Debentures Profit before interest Company X 90,000 Rs.1.20 60,000 Rs.18,000 Company Y 150,000 Rs.1.00 ------Rs.18,000
All profit after debentures interest are distributed as dividends. Explain how under Modigliani & Miller approach, an investor holding 10% of shares in Company ‘X’ will be better off in switching his holding to Company ‘Y’ 7. The balance sheet of Deepak Ltd. On December 31,2009 us shown below: Particulars Share Capital Retained Earnings Term Loans Rs. 150 180 80 Particulars Fixed Assets Inventories Receivables Rs. 400 200 150
8. Linkwise the profit margin ratio. Write short notes any Three of the following : a) Credit ration methodology for a financial instrument b) Book building process for IPO 2. do you think that these two agencies can be merged to create a super regulatory body for an effective regulation of the financial system? a) Explain the different ways is which a venture capitalist can finance an investment proposal. b) What do you understand by financial derivatives? Explain in detail. Marks will be deducted for poor presentation All the sub-questions of the main question should be attempted together If students attempt more than five questions.000 18% 10% Debt equity ratio Depreciation (for tax purpose) Tax rate Annual cost (excluding depreciation . the ratio of assets to sales and spontaneous current liabilities to sales would remain unchanged. Explain the role of SEBI in detail . its profit margin on sales was 6% and its dividend payout ratio wad 50%.Short Term Bank Borrowings Accounts Payable Provisions 200 140 50 800 Cash 50 800 The sales of the firm for the year ending on December 31. 3. All questions carry equal marks Presentation should be neat and clean. the tax rate and the dividend payout ratio would remain unchanged. .000. The tax rate was 60%Deepak Ltd.400 -- a) Calculate the EVA of the project over its life: b) Compute the NPV of the project **************************************** Con. only first five will be considered Every new question should start on a new page 1. There are two main regulators to regulate the Indian Financial system –RBI and SEBI.2009 were 1. 5190-09 (3 HOURS) Instruction to Students : Advanced Financial Management -2009 (FURTHER REVISED COURSE ) DS-5735 Total Marks : 60 Answer any five questions. Expects its sales to increase by 30% in the year 2010.000 10 Yrs 0 2. Acme Ltd is considering a capital project for which the following information is available Investment Outlay Project life Salvage value Annual Revenues Cost of equity Cost of debt (post tax) 1.Interest and taxes) 1:1 SLM 40% 1. Required: a) Estimate the external funds requirement for the year 2010 b) Prepare “Projected balance sheet” and Projected Profit & Loss Account” assuming that the external funds requirement would be raised equally from term loans and short term bank borrowings.
10. how much of a raise in sales would be needed on a percentage basis? a) ABC company Ltd.60%.830 2.670 Gross Profit 1.000 and Debt of Rs.Lakh) :Income Statement Year I (Rs.6. The rate of return required by shareholders is 12. Following information is available form the books of XYZ Ltd.040 Cost of goods sold 570 630 Selling expenses 180 195 General and administration expenses 180 156 Depreciation 150 192 Operating Profit 60 87 Non-operating surplus/ deficit 24 30 Earnings before interest and tax 84 117 Interest 30 33 Earnings before tax 54 84 Tax 21 30 Earnings after tax 33 54 Dividends 18 21 Retained earnings 15 33 The balance sheet of Modern Electronics Ltd.40 per share as dividend. total cost is Rs.50lakh.000 at 10% rte of interest.120 per share.5% Rate of return expected on investment is 15%. the directors of the company have decided to pay 40% of earning as dividends. b) The current market price of the shares of X ltd.5%. The company is considering Rs. as per net operating income approach a) What is the total market value of the firm? b) What is the market value of the debt of the firm? c) What is the market value of the equity of the firm? d) What is the equity capitalization rate? 5. assuming that the firm does not retain any earning and there is no tax. What is your learning out of it? 7. Is rs.000.000.00. Is expecting 10% return on total assets of Rs.00.c) Revival programme for a sick industrial unit d) functions of investment bank e) Rationale of disinvestment in Public Sector Enterprise f) Sources of foreign currency finance for a company 4.00. You are required to determine the price of the shares using Walter’s model. The company belongs to a risk class for which the capitalization rate is 9.5. Based on M and M approach calculate the market price of the share of the company when the dividend is declared and not declared. If tax rate is 40% calculate : a) Operation Leverage b) Financial leverage c) Combined leverage d) If the firm wants to double up its earning before interest and tax (EBIT). variable cost is 70%. as of the end of years I and II is given below: - 6. the company has outstanding shares 20.) Year II (Rs) Net Sales 2. (Rs. A firm has sales of Rs. . The income statement of Modern Electronics Limited for years I and II is given below (All figures are in Rs.400 2.In lakh ) Sales 500 Cost of Raw Materials 200 Labour cost for manufacturing 100 Interest on borrowings 60 The capitalization rate for debt is 10% and the capitalization rate for the entire firm is 12.9.
Balance Sheet Assets : Fixed assets (net) Investments Current assets. b) Assume that all items on the assets side. trade credit will be proportional to sales.595 450 354 432 489 378 120 2.223 Year II (Rs) 1. will grow proportionally to sales. Likewise.140 60 42 600 576 135 42 2. assume that dividends are raised to 24. Finally estimate the amount of external financing needed for year III.3.223 450 387 525 597 501 135 2. loans and advances Cash and bank Receivables Inventories Prepaid expenses Miscellaneous expenditures and losses Liabilities Share capital Equity Reserves and surplus Secured loans Term loans Bank borrowings Current liabilities Trade creditors Provisions Year I (rs) 900 60 36 540 519 123 45 2. except investment and miscellaneous expenditures and losses. .595 a) Using the per cent of sales method (except. Assume that the sales will be Rs. depreciation ot 180 and interest to 36) prepare the pro forma income statement for year III.060 in year III.
students attempting more theoretical questions will not be at a disadvantage 5) it students attempt more than five questions.) ____________________________________________________________________________ Share capital (Rs.10 lakh per annum. Market values of land and buildings. Thus. students must attempt questions form only One of these two sections. SECTION – A 1.20. in terms of advertisement and other expenses. including Rs. a) From the above information. . an additional amount of Rs.200 lakh respectively.000 equity shares of Rs. Effective corporate tax rate may be taken at 30 percent. 2) Total 5 questions are to be attempted.00.8 lakh as extraordinary income Of Rs.50 each and 10% debentures of Rs. The capitalization rate applicable to businesses of such risks is 15 percent. The following is the balance sheet of a corporate firm as on March 31.12 lakh is required to be taken into consideration. A four year young company.128 lakh.100 Fully paid up) 200 Reserves and surplus 80 Sundry creditors & Other Liabilities 60 Land & Buildings Plant and machinery 80 160 Marketable securities 20 Stock 40 Debtors 30 Cash and bank balance 10 ______________________________________________________________________ 340 340 _____________________________________________________________________ Profit before tax for current year end amount to Rs. 8.000. only first five will be considered 6) All questions carry equal marks. current year :____________________________________________________________________________ Liabilities Amount (Rs) Assets Amount (Rs. value of equity and price per equity share.c) The tax rate expected is 35%. In order to match the revalued figures of these fixed assets. This will be the only provision in year III. based on the capitalization method b) Assuming everything to be the same as given above calculate the expected market price of the share given the P/E multiple of ---(i) 8 times and (ii) 5 times ****************************** Con. All Five questions must be either from section A or from Section B 3) On the Top of the answer sheet the students must mention which section they have chosen 4) Correct and to the point answers to theoretical questions will be assessed like practical problems. Ellite India Ltd.2 lakh in the current year form investments in marketable securities . additional respectively in order to match the revalued figures of these fixed assets additional depreciation of Rs. it is not usual for the firm to have excess cash and invest in marketable securities. is growing rapidly presently it has 80.180 lakh and Rs. Compute the value of business. will be required to be spent for the smooth running of the business in the years to come. However. and plant and machinery are estimated at Rs. 5321-08 (3 HOURS) Advanced Financial Management -2008 (FURTHER REVISED COURSE ) BB-8528 Total Marks : 60 Instruction to Students: 1) The question paper has two section : A and B.
00.The summary of income statement for last year is given below:Sales Less : V Expenses F Expenses EBIT Interest EBT Tax (35%) PAT EPS 50.000? 12 Marks 2.20.000 and if the sales are Rs.20.00.20. It is not able to estimate the sales revenue and expenses and is not clear about sensitivity analysis. 8.. Using hypothetical figures explain to the company how it can do feasibility analysis of the project for three different levels viz.000 at Rs.26.000 25.000 equity shares of Rs.000 9. 12 Marks a) Explain the important function of an investment banker and his role in primary issues management b) Explain in brief the process and methodology followed by a rating agency to rate a financial instrument 12 Marks What are the possible causes of an industrial unit becoming a sick unit? What according to you. 12 Marks 12 Marks 9.1. 12 Marks Explain with examples any two method of corporate valuation which can be used to calculate the value of a company.000 11.000 2. For both the levels of sales projections the P/E ration is expected to be 2:5 in case of debto option and 3 in case of equity option.00.10.000 sales. expected and optimistic.1.90.20.00.000 9.70.000 4.70.20. 6.00.00.000 16.000 at Rs.13.00.000 14. 5.00. What are the benefits to investors because of the existence of financial intermediaries ? Which are the important financial intermediaries in the Indian financial system? Explain.70.000 and Rs. Pessimistic.000 34.00.00. in brief as the regulator of financial markets b) Explain in simple worlds ‘Financial interest Rate Swaps’ c) Explain offshore/onshore instruments and multiple option bonds Explain in brief.000 There are two financing options: either 40. If the objective of the company is to maximize the market price of its shares then which financing option should it go for if the sales are Rs.00. Rs. A company wants to assess the feasibility of a new project.00.00.00. . 12 Marks Explain the various financing options in respect of infrastructure projects 12 Marks 3 4.38 The company further wants to expand its activities for which it is planning to make an additional investment of Rs. can be a typical revival programme to revive a sick unit? 12 Marks Answer any two of the following :a) Explain the role of SEBI.00.00.000 sales and Rs.1. or debt funds of Rs. any Three of the following a) Due diligence b) FIPB and joint venture formulation c) Loan syndication d) Process of bond valuation 7.00.000 The ratio of variable expenses to sales will remain the same next year and fixed expenses will be Rs.50 each.000 at 12% interest The company wants to assess its position for two levels of sales projection for next year viz.
000 for its expansion project for which it is considering the following options :a) Issues of 20000 equity shares at a premium of Rs.000 10.10 Per share) 10% Long Term debt Retained Earnings Current liabilities Rs. Company’s return on capital employed is 12% (on exiting as well as new funds) and corporate tax rate is 35% It is expected that the P/E multiples in case of the above three options would be 16. The balance sheet of International Trade Ltd.5 iii) Calculate the level of EBIT if the EPS is (a) Rs. it has to make the decision about declaring dividend.000 25. The corporate tax rate is 35% You are required to : i) Calculate the operating financial and combined leverage ii) Calculate the market price of the share if the P/E multiple is 2.00.100 lac which includes cash balance of Rs. 13 and 12 respectively. which alternative it should select and why? 3.00.25 2.25 per share OR b) Issue of 10% preference shares OR c) Issue of 9% debentures.2008 is as under :All figures are in lacs) Liabilities Equity Captial (Rs.000 25.e) Procedure of IPO f) Any five factors which determine the capital structure of a company SECTION -.B 1.00.100 each Retained Earnings 9% Preference shares 7% Debentures 40.00.15 (b) Rs.000 The company wants to raise Rs. 90 120 30 60 300 Assets Building Machinery Stock Debtors Cash Rs. a) ABC Co.00. At the same time it is also exploring the possibility of investing in a new project. 150 75 50 20 5 300 12 Marks The total assets turnover ratio of the company is 3. is as under :Equity shares of Rs. As on 31st March. Suggest the company. its fixed operating cost is 1/6 of sales and variable operating cost is 50% of sales. The company has three options : - . Ltd has net present value of net assets Rs.10lac. The exiting capital structure of Textile India Ltd.25.
10 per share as dividend.10lac OR iii) Pay dividend as suggested in the second option and also invest in a new project through a fresh equity issue of 1 lac shares of Rs. Cost Selling and distribution cost Depreciation Loss on sale of an old M/C EBIT Less : Interest EBT Less : Tax (30%) PAT EPS 119 lac/5lac P/E ratio 500 10 2 180 60 50 30 5 515 325 190 20 170 51 119 Rs/23. e.e.15 and 0. This investment will have the same effect of the company as in the first option.10 ) under the two options (i) if it does not declare any dividend and (ii) if it declares Rs. The present Rs. 4.10 each. (in lacs) Sales Interest on investment Profit on sale of old assets Total income Less: Manufacturing cost Admn. The income statement and balance sheet of Five Star Ltd. is given below:Income Statement .8 2 value of the future cash flows generated by this projects is Rs.20 lac NPV from the project Give your recommendation to the company as to which is the best option if the company wants to maximize the shareholder value.i) Do not declare any dividend and invest the available cash of Rs.10 The company wants to know the effect on the market price of its shares under the two possibilities of (i.12 EPS = Rs. i. Using Walter’s model explain the results obtained by you. Rs.15 Rate of return on investment (r) : (i) 0. 0.20 lac OR ii) Pay Rs.10 lac in the new projects.15 as dividend.15 (ii) 0. b) The following information is available in respect of a company: Capitalization rate (Ke) = 0. This will take away the entire cah balance of Rs.
Expenses Rs.800 V. Also calculate MVA on the basis of Market value of equity capital 5.1.lacs) :Liabilities Equity Capital Retained Earnings Term Loan Short Term Borrowings Creditors Provisions Rs. what important norms and policies financial institutions would apply to provide such finances? 12 Marks The Balance sheet for the current year of a company is given below (all the figures are in Rs. From the information given you are required to calculate the EVA. Expenses Rs.Balance Sheet Liabilities Equity Capital (Rs. Describe the important sources of financing long term projects which can be used by the Indian companies. expenses will increase by 25% 3) No Change in the ratio of variable expenses to sales 4) Interest expenses will be Rs.20 5) No change in fixed assets. The company pays 30% corporate tax. You are requires to prepared the projected income statement and balance sheet of the company for the next year. Ignore depreciation.160 The following are the projections for the next year :1) The sales are expected to be Rs. Other information : Sales Rs. This will be the only provision next year.10 share) Retained earnings Long term loan Creditors Provisions Rs. If they approach the financial institutions for long term finances. 200 30 30 100 60 180 40 640 6. .000 2) F. 100 120 160 120 100 40 640 Assets Land & Building Machinery Furniture Bills Receivables Debtors Stock Bank Rs.560 F. 8) Creditors will increase in proportion to sales. 50 40 60 15 13 Assets Building Machinery Stock Debtors Bank Rs 80 70 10 12 6 178 178 The cost of equity and cost of debt is 10% and 12% respectively. 6) Bank balance and other current assets will increase in proportion to sales 7) Tax to be provided at 35%.
if liability side is less) they will be raised in the order of short term borrowings.e. 9.If the company is required to raise funds (i. It is a policy of the company to maintain current ratio of minimum 1. If the asset side is less then the difference will be considered as cash balance available 7. Explain the important functions of either Credit Rating Information Services of India Ltd. (ICRA) 12 Marks Which are the important financial intermediaries in the Indian financial system? How are they beneficial to the investors? Explain Explain in brief. any three of the following a) important financial derivatives b) MOU between government and a PSU c) Venture capital funding in India d) Revival of a sick unit and viability study e) Regulation of financial markets in India f) Procedure pertaining to IPOs ********************************* 12 Marks . term loan and if required equity capital.25 : 1 and ensure that that long term loans do not exceed 40% of total long term funds. (CRISIL) or information and Credit Rating Services Ltd. 8.
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