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# FM12

Financial Management
Assignment No.I

## Assignment Code: 2011FM12A1 Last Date of Submission: 31st March 2011

Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

Section-A
Ques.1 A firm’s sales, variable costs and fixed cost mount to Rs.70,00,000, Rs.42,00,000 and
Rs.6,00,000 respectively. It has borrowed Rs.45,00,000 at 9 percent and its equity
capital totals Rs.55,00,000.

## a)What is the firm’s ROI?

b)Does it have favourable financial leverage?
c)If the firm belongs to an industry whose average asset turnover is 3, does it have a
high or low asset leverage?
d)What are the operating, financial and combined leverages of the firm?
e)If the sales drop to Rs.50,00,000, what will the new EBIT be?
f)At what level will the EBT of the firm equal to zero?

## Ques.2 (a) Explain Certainty-Equivalent Approach in evaluating the riskiness of a project.

(b) A project costs Rs.6,000 and it has cash flows of Rs.4,000, Rs.3,000, Rs.2,000 and
Rs.1,000 in years 1 through 4. Assume that the associated αt factors are estimated
to be: a0 = 1.00 a1 = 0.90, a2 = 0.70, a3 = 0.50 and a4 = 0.30, and the risk-free
discount rate is 10 percent.
Will you advice the project to be selected.

Ques.3 (a)Should the company restructure its business? What are the important financial and
non-financial considerations?

(b)Which financial alternative do you suggest for the company and why?

## (c).Analyze the option of issuing the rights issue in detail.

Ques.4 Briefly explain the following:

## 1.Capital Asset Pricing Model (CAPM).

2..Weighted Average Cost of Capital (WACC).
3.Operating, Financial and Combined leverage.

Section-B

## Ventura Home Appliances Ltd. has the following capital Structure:

(Rs. In
Lakhs)
Equity Capital (10 lakhs shares at par value) 100
12% Preference Share (10,000 shares at par value) 10
Retained Earnings 120

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14% Non convertible Debentures 70
(70,000 debenture at par value)
14% term loan from APSFC 100
TOTAL 400

The market Price per Equity Share is Rs. 25. The next expected dividend per share (DPS) is Rs. 2.00 and
the DPS is expected to grow at a constant rate of 8%. The preference shares are redeemable after 7 years at par
and are currently quoted at Rs. 75 per share in the stock exchange. The debentures of face value of rs 100/- each
are redeemable after 6 years at par and their current market quotation is Rs. 90 each. The tax rate applicable to
the firm is 50%.

## Calculate the weighted average cost of capital.

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FM12
Financial Management
Assignment No.II

## Assignment Code: 2011FM12A2 Last Date of Submission: 15th May 2011

Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

Section-A
Ques.1 The annual demand for an item is 3,200 units. The unit cost is Rs. 6 and inventory-
carrying cost is 25% per annum. Cost of procurement is Rs. 150 per order.

Determine:
(a)Economic Order Quantity,
(b)Number of orders per year,
(c)Time between two consecutive orders.

## b)What are different approaches of financing the working capital?

Ques.3 Describe the main elements of the issue procedure for debt instruments.
Ques.4 Outline the assumptions which underlie Gordon’s Model of dividend affect. Does
dividend policy affect the value of the firm under Gordon’s Model?

Section-B

Agrawal Refrigerators Ltd. manufactures quality refrigerators of different specifications. This requires an
input of material ‘ZED’. The following particulars are collected for the year 2008-09.

## (i) Monthly demand of ZED 7,500 units

(ii) cost of placing an order Rs. 500
(iii) Re-order period 5 to 8 weeks
(iv) Cost per unit Rs. 60
(v) Carrying cost % p.a. 10%
(vi) Normal usage 500 units per weeks
(vii) Minimum usage 250 units per week
(vii) Maximum usage 750 units per week.
Required:
(i) Re-order quantity (EOQ)
(ii) Re-order level
(iii) Minimum stock level
(iv) Maximum stock level
(v) Average stock level

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