B

APJ ABDUL KALAM TECHNOLOGICAL UNIVERSITY

THIRD TRIMESTER MBA DEGREE EXAMINATION, JUNE 2016

MBA 32 Financial Management II

Max. Marks: 60 Duration: 3 Hours

PART A
Write short answers to all questions
(Each question carries two marks)
1. What is a warrant? What are its characteristic features?
2. What is a bonus issue or stock dividend? What are its advantages and disadvantages
3. Distinguish between the weighted average cost of capital and the marginal cost of capital.
4. What is multi-period compounding? How does it affect the annual rate of interest? Give an
example.
5. What is meant by the term time value of money? Which capital budgeting methods take into
consideration this concept?

(5 x 2 marks = 10 marks)

PART B
Answer any three questions
(Each question carries ten marks)
6. What is a warrant? What are its characteristic features? Why are warrants issued?
7. Define venture capital. Explain its characteristics. What are the steps involved in a venture
capital investment process? Explain them briefly.
8. A firm is thinking of raising fund by the issue of equity capital. The current market price of
the firm’s share is Rs 150. The firm is expected to pay a dividend of Rs 3.55 next year. The
firm has paid dividend in the past years as follows:
Year Dividend per share (Rs)
2010 2.00
2011 2.20
2012 2.42
2013 2.66
2014 2.93
2015 3.22
The firm can sell shares for Rs 140 each only. In addition, the floatation cost is Rs 10.
Calculate the cost of new issue.
9. Calculate the discounted pay-back period from the information given below:
i) Interest factor : 10 per cent
ii) Cost of the project : Rs. 300000
iii) Life of the project (in years) :5
iv) Annual cash flow : Rs. 100000
Present value factor at 10 per cent are:
Year I II III IV V
PVF 0.909 0.826 0.751 0.683 0.621

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10. The following data relates to a firm:
Earnings per share Rs 10
Capitalization rate 10 per cent
Retention ratio 40 per cent

Determine the price per share under Walter’s Model and Gordon’s Model if the internal rate
of return is 15 per cent, 10 per cent and 5 per cent.

(3 x 10 marks = 30 marks)

PART C
Compulsory Question
(The question carries twenty marks)

11. Modern Enterprise Ltd. is considering the purchase of new computer system for its Research
and Development Division which would cost Rs 35 lakh. The operation and maintenance cost
(excluding depreciation) are expected to be Rs 7 lakh per annum. It is estimated that the
useful life of the system would be six years at the end of which disposal value is expected to
be Rs one lakh.
The tangible benefit expected of the system in the form of reduction in design and
draftmanship cost would be Rs 12 lakh per annum. Besides, the disposal of used drawing
office equipment and furniture initially anticipated to net Rs 9 lakh.
Capital expenditure in research and development would attract 100 % write-off for tax
purpose. The gain arising from the disposal of used asset would be considered tax free. The
company’s effective tax rate is 50 per cent.
The average cost of capital to the company is 12 per cent and PVF at this rate are
Year I II III IV V
PVF 0.892 0.797 0.711 0.635 0.506

Advise the company of the financial viability of the proposal.

(20 marks)

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