Set C

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. “It has traditionally been argued that the objective of a company is to earn
profit, hence the objective of Financial Management is also profit
maximization.” Comment.

2. Ariel Ltd. is considering an investment proposal to install a new antenna machine.

The project will cost Rs. 1, 50,000. Expected life is 5 years and no salvage value.
The firm uses straight-line method of depreciation. The estimated cash flows
before tax (CFBT) from the proposal as follows.

Year 1 2 3 4 5
CFBT 30,000 37,500 37,500 45,000 75,000
(Rs.)

You are required to compute the following when company’s minimum required rate
of return is 10%:
a) Net Present Value
b) Profitability Index
c) Internal Rate of return

Also suggest whether Ariel Limited should accept this investment proposal or
not.
[Discount factors at 10% are 0.909, 0.826, 0.751, 0.683, 0.621, 0.564 for 1 to 6 years.]

3. As per Modigliani Miller there is no optimum capital structure. Comment and

illustrate to show how homemade leverage by an individual investor can replicate
same risk and return as provided by the levered firm.

4. ABC Ltd. plans to sell 50,000 units next year. The expected cost of goods is as
follows:
Cost Per Unit Rs.
Raw Material 5
Wages 4
Overheads 6
Selling Price 20

The duration of various stages of operating cycle is expected to be as follows:

Raw Material Stage 2 weeks
Work in Progress Stage 1 week
Finished Goods stage 3 weeks
Debtors Stage 4 weeks
Creditors allow credit for 6 weeks

25% of the sales are on cash basis and 20% margin is kept for contingencies.
Estimate the working capital requirements assuming 52 weeks in a year.

5. “The key argument of Walter’s model is that a firm would have an optimum
dividend policy.” Comment and compare the same with MM’s hypothesis of
dividend irrelevance.

6. You have been recently appointed as the finance manager of XYZ Ltd. The CEO
has asked you to calculate the Weighted Average cost of capital:
a. Based on market value weights
b. Based on book value weights

The following details have been shared with you:

Specific Cost of
Sources of Finance Amount (Rs.)
Capital
Equity Share Capital
(5,00,000 equity shares of Rs. 10 50,00,000 15%
each)
Preference Share Capital
10,00,000 9%
(1,00,000 shares of Rs. 10 each)
10% Debentures of Rs. 1,000
30,00,000 5%
each
Retained Earnings 20,00,000 15%

Presently, the debentures are being traded at 92%, Preference Shares at par and
the equity shares at Rs. 14 per share.