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ANIL SURENDRA MODI -SCHOOL 0F COMRER¢E,J`' `
AcadeniicYear: 2016-17 *!l,e

Prograpi B.Sc. (Finance) Year: |``Sh*,to§emester: |1

I `, r \ ,J , ``

Subject: Corporate Finance -1- Batch: 2o]6.2o£9 `~,_.nrsgiv, ,,giv„

Date : 22/04/2017. Tine: 10.00am to 12.00rioon

Marks: 60 No. of pages:

FINAL EXAJVIINATI 0N

Note:-
• Question 1 is compulsory. Attempt any 3 out remaining 4'questions
• Each question carries 15 marks. Figures to the right indicate maximum marks
• Working notes should form part of your answers
• Normal & Scientific ca[cu[ators allowed
• Make suitable assumptions wherever necessary
• Timevalue of MoneyTableis annexed

- Q1. Placebo Ltd. is planning to introduce a new product. The company undertook extensive
research & market analysis costing Rs. 15 Iakhs and finally came up with a product with life of 6
years. The machine required for the manufacturing of the product will cost Rs. 56 Iakhs and Working
capital of Rs.15 lakhs will be needed at the beginhing of the second year. At the end of the 6 years,
the equipment will have resale value equivalent to the cost of removal. The 100% capacity of the
plant is of 1.5 lakhs units per annum but the production/sales volume are as under:-

Year % utilisation Fixed Cost (Rs. In lakhs)(excluding depreciation)

1 50 16
2--4 65 20
5--6 85 22

A sale price of Rs.100 per unit with a profit-volume ratio of 60% is likely to be obtained.
Advertisement expenditure will be as under
Year 1 2-3 4--6
Expenditure (in lakhs) p.a 15 10 15

The company is subject to 50% tax, Depreciation rate is 30% and written down value method of
depreciation should be used. Advice whether to launch the product. The expected rate of return is
15%. (15 marks)

Q2 (a) A company whose current sales are of Rs.52 lakhs per annum and average collection period is
30 days wants to pursue a more liberal policy to improve sales. As per the study made by a
consultant, the following data is available:-
Credit Collection period
policy (days) Sales (Rs) Default
A 40 5,260,000 1.50%

8. 50 5,326,000 2.00%
C 60 5,396,000 2.50%
D 75 5,450,000 3.00%
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Page 1 of 3
 total cost per unit is Rs. 3.5
Current bad debts is 1%
Required rate of return is 20%
Assume 360 days a year
Which of the policies would you recommend in comparison with the current policy. (10 marks)

Q2 (b) BIoom Ltd has a variance of daily cash flow of Rs. 180,000. Its transaction cost is Rs.20 per
transaction and interest is 0.01% per day. The minimum cash balance required by the company is Rs.
5000. Find the Upper limit, Return Point, Speed, Spread & Average Cash Balance using Miller Orr
model. `5 man
Number X 1 2 3 4 5 6 7 8 9 10

Cube x3 1 8 27 64 125 216 343 512 729 1000

Q3 a Using the details given below, estimate the working capital requirement (10 marks)
Production (units) 50,000

Selling price per unit Rs. 60

Raw material Per unit 60% of selling price

Direct wages per unit 1/6th of raw materialprice

Overheads per unit twice direct wages

Raw Material Holding period 2 months

Production time 1 month

Finished goods holding period 3 months

Credit period given by suppliers 2 months

Credit allowed to customers 3 months

Cash Balance to be maintained at 20% of net working

capital
Wages and Overheads are paid in the next month
Debtors to be valued on the basis of selling price
-1'

Q3 (b) Ms. Uma who is currently working aspires to start her own business in 8 years. As per her
estimate the cost of.starting the business today would be Rs.15,00,000. She is aware that the cost
would go up due to inflation at 4% p.a. How much should she save in lump sum today to be able to
start her business in 8 years assuming that her savings will receive interest at the rate of 10% p.a?
How much should the savings be if it is done annually? (5 marks)

Page 2 Of 3
 Q4. Balance sheet as on 31-3-2016
Amt. (in Amt. (in Amt. (in Amt. (in
Liabilities Iakhs) lakhs) Assets Iakhs) Iakhs)
Equity Shares (Rs.10each)

20 Fixed Assets 50
Reserves & Surplus 41
I Longterm debt ICurrentLiabilitiesI 12 Current Assets
Inventories 101181
Provisio ns IITradepayablesI 5 Debtors
5 10 Cash & Bank 5 33

- 83 83
IIIIIIIIIIIIIIIIIIIIIIIIiiiiiiiiiiiiiiiiiiiiiiiiii

Sales for 2015-16 amounted to Rs. 80 !akhs. The company's gross profit margin is 50%. All the sales
are on Credit basis.

Forecast for 2016-17

Increase in Sales 10%
E= G.P margin 51%
Selling & Administrative Expenses (on sales) 30%
New Fixed Asset Purchased (Rs. In lakhs) 5
Debtors Turnover (on Average Debtors) 4 times
Inventory Turnover (on Average Inventory & COGS) 4 times
Trade Payable Turnover (on Average Trade Payables) 1.2 months
Year end cash balance same as cash & bank balance
to sales ratio in the last year
Additional Long term debt
0
Additional Fixed Assets (purchased in the beginning)
10
Working capital as a percentage of sales 38.%
Other Income (Rs. In lakhs)
1.96
Depreciation for the next year (Rs. In lakhs)
20

Equity share capital will remain the same

E± There are no Direct Expenses. Ignore interest on long term debt. Current Assets include Debtors,
Inventory & Cash Balance only. Current Liabilities include Trade Payables & Provisions only. Prepare
the Trading and Profit & Loss A/c for the year ended for 2016-17 and the Balance sheet as on 31-3-
2017. (15 marks)

Q5. Write short notes on any 3 of the following (15 marks)

1. Importance of capital budgeting decisions
2. Strategies forworking capital management
3. Commercial paper& itsAdvantages.
4. Wealth Maximization v/s profit Maximization

Page 3 of 3
 TT:T_i
Appendix: Time Value
of Money Tables

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209

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