BANASTHALI VIDYAPITH

FACULTY OF MANAGEMENT STUDIES

TAKE-HOME ASSIGNMENT IN LIEU OF II PERIODICAL TEST 2020
AND
II CONTINUOUS ASSIGNMENT 2020
MBA II Semester: Financial Management, Teacher: Dr. Megha Aggarwal
Note: Assignment could be submitted after you come back to campus/on my email address
(meghaaggarwal@banasthali.in) by 07 April, 2020. Please also include a 1 page ‘duly signed
self-declaration’ towards the beginning of the assignment mentioning the key sources of
preparing this assignment, whether you have done it absolutely yourself/taking help of others and
the key learning. No marks would be deducted based on the contents of ‘duly signed self-
declaration’. In case assignment is submitted via email it should bear the subject line:
Assignment by <Name of Student and Roll number>. For example assignment by Aakansha
Raghav, 1944991
For students with roll numbers 1944991 to 1945030
Case 1
Arun is a successful businessman in the paper industry. During his recent visit to his friend’s
place in Mysore, he was fascinated by the exclusive variety of incense sticks available there. His
friend tells him that Mysore region in known as a pioneer in the activity of Agarbathi
manufacturing because it has a natural reserve of forest products especially Sandalwood to
provide for the base material used in production. Moreover, the suppliers of other types of raw
material needed for production follow a liberal credit policy and the time required to
manufacture incense sticks is relatively less. Considering the various factors, Arun decides to
venture into this line of business by setting up a manufacturing unit in Mysore. In context of the
above case:
1. Identify of the above case with regard of investment decision.
2. Identify the three factors mentioned in the paragraph which are likely to affect the capital
requirements of his business.

Question 1
Calculate the Trend Analysis from the following information of Tamilnadu Mercantile Bank
Ltd., taking 1999 as a base year and interpret them (in thousands).
Year Deposits Advances Profit
1999 2,05,59,498 97,14,728 3,50,311
2000 2,66,45,251 1,25,50,440 4,06,287
2001 3,19,80,696 1,58,83,495 5,04,020
2002 3,72,99,877 1,77,26,607 5,53,525
2003 4,08,45,783 1,95,99,764 6,37,634
2004 4,40,42,730 2,11,39,869 8,06,755
For students with roll numbers 1945031 to 1945060
Case 2
Adwitiya’ is a company enjoying market leadership in the food brands segment. It’s portfolio
includes three categories in the Foods business namely Snack Foods, Juices and Confectionery.
Keeping in the with the growing demand for packaged food it now plans to introduce ready-To-
Eat Foods. Therefore, the company has planned to undertake investments of nearly Rs. 450
crores for its new line of business. As per the current financial report, the interest coverage ratio
of the company and return on investment is higher. Moreover, the corporate tax rate is high. In
context of the above case:
1. As a financial manager of the company, which source of finance will you opt for debt or
equity, to raise the required amount of capital? Explain by giving any two suitable reasons in
support of your answer.
2. Why are the shareholders of the company like to gain from the issue of debt by the company?

Question 2
ABC Ltd., needs Rs. 30,00,000 for the installation of a new factory. The new factory expects to
yield annual earnings before interest and tax (EBIT) of Rs.5,00,000. In choosing a financial plan,
ABC Ltd., has an objective of maximizing earnings per share (EPS). The company proposes to
issuing ordinary shares and raising debit of Rs. 3,00,000 and Rs. 10,00,000 of Rs. 15,00,000. The
current market price per share is Rs. 250 and is expected to drop to Rs. 200 if the funds are
borrowed in excess of Rs. 12,00,000. Funds can be raised at the following rates.
–up to Rs. 3,00,000 at 8%
–over Rs. 3,00,000 to Rs. 15,000,00 at 10%
–over Rs. 15,00,000 at 15%
Assuming a tax rate of 50%, advise the company.

For students with roll numbers 1945061 to 1945090

Case 3
Computer Tech Ltd., is one of the leading information technology outsourcing services providers
in India. The company provides business consultancy and outsourcing services to its clients.
Over the past five years the company has been paying dividends at high rate to its shareholders.
However, this year, although the earnings of the company are high, its liquidity position is not so
good. Moreover, the company plans to undertake new ventures in order to expand its business. In
context of the above case:
1. Give any three reasons because of which you think Computer Tech Ltd. has been paying
dividends at high rate to its shareholders over the past five years.
2. Comment upon the retention policy of the company this years by stating any two reasons in
support of your answer.

Question 3
Compute the market value of the firm, value of shares and the average cost of capital from the
following information.
Net operating income Rs. 1,00,000
Total investment Rs. 5,00,000
Equity capitalization Rate:
(a) If the firm uses no debt 10%
(b) If the firm uses Rs. 25,000 debentures 11%
(c) If the firm uses Rs. 4,00,000 debentures 13%
Assume that Rs. 5,00,000 debentures can be raised at 6% rate of interest whereas Rs. 4,00,000
debentures can be raised at 7% rate of interest.

For students with roll numbers 1945090 to 1945120

Case 4
Madhur Milan’ is a popular online matrimonial portal. It seeks to provide personalized match
making service. The company has 80 offices in India, and is now planning to open offices in
Singapore, Dubai and Canada to cater to its customers beyond the country. The company has
decided to opt for the sources of equity capital to raise the required amount of capital. In context
of the above case:
1. Identify and explain the type of risk which increases with the higher use of debt.
2. Explain briefly any four factors because of which you think the company has decided to opt
for equity capital.
Question 4
(a) A Company expects a net income of Rs. 1,00,000. It has Rs. 2,50,000, 8% debentures. The
equality capitalization rate of the company is 10%. Calculate the value of the firm and overall
capitalization rate according to the net income approach (ignoring income tax).
(b) If the debenture debts are increased to Rs. 4,00,000. What shall be the value of the firm and
the overall capitalization rate?

For students with roll numbers 1945121 to 1945150

Case 5
Wooden Peripheral Pvt. Ltd. is counted among the top furniture companies in Delhi. It is known
for offering innovative designs and high quality furniture at affordable prices. The company
deals in a wide product range of home and office furniture through its eight showrooms in Delhi.
The company is now planning to open five new showrooms each in Mumbai and Bangalore. In
Bangalore it intends to take the space for the showrooms on lease whereas for opening
showrooms in Mumbai, it has collaborated with a popular home furnishing brand, ‘Creations.’
1. Identify the factors mentioned in the paragraph which are likely to affect the fixed capital
requirements (Capital Budgeting Decision) of the business for opening new showrooms both in
Bangalore and Mumbai separately.
2. “With an increase in the investment in fixed assets, there is a commensurate increase in the
working capital requirement.” Explain the statement with reference to the case above.
Question 5
XYZ expects a net operating income of Rs. 2,00,000. It has 8,00,000, 6% debentures. The
overall capitalization rate is 10%. Calculate the value of the firm and the equity capitalization
rate (Cost of Equity) according to the net operating income approach. If the debentures debt is
increased to Rs. 10,00,000. What will be the effect on volume of the firm and the equity
capitalization rate?

For students with roll numbers 1945151 to 1945180

Case 6
Krishna Ltd. is manufacturing steel at its plant at Noida. Due to economic growth, the demand
for steel is also growing. The company is planning to set up a new steel plant at Gurgaon. It
needs Rs. 800 crore to start the new plant. It decides to raise Rs. 300 crore through debentures,
Rs. 200 crore through long-term loan from banks and Rs. 200 crore by issue of equity share to
the public. It decided to finance the remaining amount by utilizing its
reserves and surplus.
1. State the importance of financial planning for this company.
2. What is the capital structure of this company? Explain.
3. Identify the financial decision involved when the company decides to raise Rs. 800 crore from
different sources of funds.
4. How will the payment of dividend in Krishna Ltd. be affected? Explain.
Question 6
Abinaya company Ltd. expresses a net operating income of Rs. 2,00,000. It has Rs. 8,00,000 to
7% debentures. The overall capitalization rate is 10%.
(a) Calculate the value of the firm and the equity capitalization rate (or) cost of equity according
to the net operating income approach.
(b) If the debenture debt is increased to Rs. 12,00,000. What will be the effect on the value of the
firm, the equity capitalization rate?

For students with roll numbers 1945181 to 1945210

Case 7
Amar is doing his transport business in Delhi. His buses are generally used for the tourists going
to Jaipur and Agra.
Identify the long run capital requirement of Amar giving reason in support of your answer.
Further Amar wants to expand and diversify his Transport business for Dehradun and Shimla.
Enumerate any four factors that will affect his long run capital requirements.
Question 7
There are two firms ‘A’ and ‘B’ which are exactly identical except that A does not use any debt
in its financing, while B has Rs. 2,50,000 , 6% Debentures in its financing. Both the firms have
earnings before interest and tax of Rs. 75,000 and the equity capitalization rate is 10%.
Assuming the corporation tax is 50%, calculate the value of the firm.

For students with roll numbers 1945210 to 1945240

Case 8
The directors of a manufacturing company are thinking of issuing Rs. 20 crores worth additional
debentures for expansion of their production capacity. This will lead to an increase in debt equity
ratio from 2 : 1 to 3 : 1. What are the risks involved in it? What factors other than risk do you
think the directors should keep in view before taking the decision? Discuss any four factors.
Question 8
Gentry Motors Ltd., a producer of turbine generators, is in this situation; EBIT = Rs. 40 lac. rate
=35%, dept. outstanding = D = Rs. 20 lac., rate of Interest =10%, Ke = 15%, shares of stock
outstanding = No. = Rs. 6,00,000 and book value per share = Rs. 10. Since Gentry’s product
market is stable and the Company expects no growth, all earnings are paid out as dividends. The
debt consists of perpetual bonds. What are the Gentry’s EBS and its price per share, Po?
For students with roll numbers 1945241 to 1945270
Case 9
Shalini, after acquiring a degree in Hotel Management and Business administration took over her
family food processing company of manufacturing pickles, jams and squashes. The business was
established by her great grandmother and was doing reasonably well. However the fixed
operating costs of the business were high and the cash flow position was week. She wanted to
undertake modernization of the existing business to introduce the latest manufacturing processes
and diversify into the market of chocolates and candies. She was very enthusiastic and
approached a finance consultant, who told her that approximately Rs. 50 lakh would be required
for undertaking the modernization and expansion programme. He also informed her that her
stock market was going through a bullish phase.
1. Keeping the above considerations in mind, name the source of finance Shalini should not
choose for financing the modernization and expansion of her food processing business. Give one
reason in support of your answer.
2. Explain any two other factors, apart from those stated in the above situation, which Shalini
should keep in mind while taking this decision.
Question 9
(a) A Ltd. issues Rs. 10,00,000, 8% debentures at par. The tax rate applicable to the company is
50%. Compute the cost of debt capital.
(b) B Ltd. issues Rs. 1,00,000, 8% debentures at a premium of 10%. The tax rate applicable to
the company is 60%. Compute the cost of debt capital.
(c) A Ltd. issues Rs. 1,00,000, 8% debentures at a discount of 5%. The tax rate is 60%, compute
the cost of debt capital.
(d) B Ltd. issues Rs. 10,00,000, 9% debentures at a premium of 10%. The costs of floatation are
2%. The tax rate applicable is 50%. Compute the cost of debt-capital.

For students with roll numbers 1945271 to 1945300

Case 10
Shubh Ltd. is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its
products as economic growth is about 7%-8% and the demand for steel is growing. The company
has decided to set up a new steel plant to cash on the increased demand. It is estimated that it will
require about Rs. 2000 crore to set up and about Rs. 500 crore of working capital to start the new
plant.
1. State the objective of financial management for this company.
2. Identify and state the decision taken by the finance manager in the above case.
3. State any four factors affecting the fixed capital requirements of Shubh Ltd.
Question 10
Your company share is quoted in the market at Rs. 40 currently. The company pays a dividend of
Rs. 5 per share and the investors market expects a growth rate of 7.5% per year:
(i) Compute the company’s equity cost of capital.
(ii) If the anticipated growth rate is 10% p.a. Calculate the indicated market price per share.
(iii) If the company’s cost of capital is 15% and the anticipated growth rate is 10% p.a. Calculate
the indicated market price if the dividend of Rs. 5 per share is to be maintained.
For students with roll numbers 1945301 to 1945330
Case 11
A company’s earnings before interest and tax is Rs. 7 lac. It pays 10% interest on its debt. Total
investment of company is rs. 50 lac.
1. Advise company whenever it should include debt or equity to raise its capital with
identification of the concept.
2. Will be company’s decision to raise funds from debt or equity will change if company’s EBIT
becomes 3 lac.
Question 11
A project costs Rs. 16,000 and is expected to generate cash inflows of Rs. 4,000 each 5 years.
Calculate the Interest Rate of Return.

For students with roll numbers 1945331 to 1945360

Case 12
Visions Ltd. is a renowned multiplex operator in India. Presently, it owns 234 screens in 45
properties at 20 locations in the country. Considering the fact that the there is a growing trend
among the people to spend more of their disposable income on entertainment, two years back the
company had decided to add more screens to its existing set up and increase facilities to enhance
leisure, food chains etc. it had then floated an initial public offer of equity shares in order to raise
the desired capital. The issue was fully subscribed and paid. Over the year, the sales and profits
of the company have increased tremendously and it has been declaring higher dividend and the
market price of its shares has increased manifolds.
In context of the above case:
1. Name the different kinds of financial decisions taken by the company by quoting lines from
the paragraph.
2. Do you think the financial management team of the company has been able to achieve its
prime objective? Why or why not? Give a reason in support of your answer.
Question 12
From the following information, prepare the Balance Sheet of ABB Ltd. Showing the details of
working:
Paid up capital Rs. 50,000
Plant and Machinery Rs. 1,25,000 Inventory Turnover 4
Total Sales (p.a.) Rs. 5,00,000 Gross Profit 25%
Annual Credit Sales 80% of net sales Current Ratio 2
Fixed Assets Turnover 2 Sales Returns 20% of sales
Average collection period 73 days Bank Credit to trade credit 2
Cash to Inventory 1 : 15 Total debt to current Liabilities 3

For students with roll numbers 1945361 to 1945386

Case 13
Manoj is a renowned businessman involved in export business of leather goods. As a responsible
citizen, he chooses to use jute bags for packaging instead of plastic bags. Moreover, on the
advice of his friends, he decides to use jute for manufacturing aesthetic handicrafts, keeping in
view the growing demand for natural goods. In order to implement his plan, after conducting a
feasibility study, he decides to set up a separate manufacturing unit for producing varied jute
products. In context of the above case:
1. Identify the type of investment decision taken by Manoj by deciding to set up a separate
manufacturing unit for producing jute products.
2. State any four factors that he is likely to consider while taking this decision.
Question 13
The following information is available about
Dnieper Company.
Number of shares = 100,000 Income tax rate = 30%
EBIT = $200,000 Price per share = $4.20
Long-term debt = $1 million Coupon rate on bonds = 8%

Find its (A) P/E ratio, (B) Interest coverage ratio, and (C) Debt ratio