FMS – Parul University

Semester. II
Financial Management
Total Marks: 50

This is an individual basis hand written assignment. Please submit it by 30th March 2020.

Instructions:
All questions are compulsory
Each question carries 10 Marks

1. What are the discounted and non-discounted techniques used in capital budgeting decision
process? Explain the NPV ratio technique with an example.
2. Explain Modigliani & Miller position of capital structure theory – in which investment and
dividend decisions are related. Also state the assumptions of this Position.
3. The expected cash flows of a project are as follows:

Year 0 1 2 3 4 5
Cash Flow -100,000 20,000 30,000 40,000 50,000 30,000
The cost of capital is 12 percent. Calculate the NPV, IRR, Pay-back period and Discounted Pay-
Back Period.
4. Adinath ltd. has the following capital structure on 31-3-2019

Sources Amount (‘000)

Ordinary Shares 6000
15% Preference Share 1500
18% Debentures 4500
The share of the company is currently selling for Rs 30, per share. It is expected that company
will pay a dividend of Rs. 3, next year; this will grow at 10% for perpetual time period. Assume
50% tax rate. You are required to calculate WACC on the basis of existing capital structure.

5. The capital structure of the P. Ltd. consists of an ordinary share capital of Rs.10,00,000 (shares of
Rs. 100 per value) and Rs. 10,00,000 of 10% debentures. The unit sales increased by 20 per cent
from 1,00,000 units to 1,20,000 units, the selling price is Rs. 10 per unit, variable costs amount to
Rs.6 per unit and fixed expenses amount to Rs. 2,00,000. The income-tax rate is assumed to be 35
per cent.

1) You are required to calculate the following:

a) The percentage increase in earnings per share.

b) The degree of financial leverage at 1,00,000 units and 1,20,000 units.
c) The degree of operating leverage at 1,00,000 units and 1,20,000 units.

2) Comment on the behaviour of operating and financial leverage in relation to increase of

production from 1,00,000 to 1,20,000 units.