Unique Paper Code : C-118

Name of Paper : Financial Management

Name of Course : B. Com (P) Part-III
Semester/ Annual : Annual
Duration : 2 hours
Maximum Marks : 75
Instructions to Candidates:
1. Attempt any four questions. All questions carry equal marks.
2. Use of simple calculator is allowed

1. “The prominent areas of financial decision making today are considerably different from what
they were few decades ago.” Explain.

2. A project requires an initial investment of Rs.5, 00,000. It is estimated to have a life of 6 years.
The estimated net cash flows are as under:
Year Net Cash Flow (Rs.)
1 60,000
2 80,000
3 1, 10,000
4 1, 20,000
5 1, 30,000
6 1, 00,000
Cost of capital is 10%. Calculate:
a. Payback Period
b. Net Present Value
c. IRR of the project.
Assume that the standard payback period is 4 years. Should the project be accepted as per each of
the above measures? Why?
[Discount factors at 10% are 0.909, 0.826, 0.751, 0.683, 0.621, 0.564 for 1 to 6 years.]
3. There are two firms which are identical in all respects except in terms of their capital structure
as can be observed from the details given below:
R Ltd. S Ltd.
Levered Unlevered
EBIT (Rs.) 2,00,000 2,00,000
Debt (Rs.) 6,00,000 0
Rate of Debt 15% __
Ke 20% 15%

Calculate the values of two firms and illustrate using MM approach how an investor holding 10%
shares of R Ltd. will be benefitted by switching over his investment from R Ltd. to S Ltd. Why?

4. “There are different approaches to the computation of cost of equity capital and there is no
explicit cost of retained earnings” Critically comment.

5. Is the Walter’s model relevant to the dividend policy? Calculate the market price of the firm’s
share as per Walter Model if dividend payout ratio is (i) 25%, (ii) 50% or (iii) 100% from the
following information:
Earnings per share Rs. 10
Cost of equity 15%.
Rate of return on investment 10%.
What conclusion will you draw from these prices?

6. Compute Working Capital Requirements from the following details:

Budgeted Sales: 30,000 units per annum
Rs.
Raw material cost per unit 10
Direct labour per unit 8
Overhead per unit 2

Total cost per unit 20

Profit per unit 2

Selling price per unit 22

Additional Information:
 i. Raw material will be carried in stock for 4 weeks and finished goods for 2 weeks.
ii. Factory processing will take on an average 3 weeks
iii. Suppliers provide 6 weeks credit; and
iv. Debtors are allowed 8 weeks credit.
Assume labor and overhead expenses to accrue evenly throughout the production cycle.
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