SVKM’s NMIMS

Anil Surendra Modi School of Commerce

Programme: BBA Batch: 2019 - 2022 Semester: V Academic Year: 2021 – 2022
Subject: Advanced Financial Management Marks: 50
Date: _________ Time:-________ Duration: - 2 Hrs (120 Min)
Final Examination/ Re-Examination

Instructions
1) All questions are compulsory
2) Question no.1 carries 20 marks
3) Question no.2 carries 10 marks.
4) Question no.3 carries 8 marks.
5) Question no.4 carries 7 marks.
6) Question no.5 carries 5 marks.
7) Each question has been given in separate worksheet. Solution to each question has to be provided in the same work sheet .
8) Working notes have to be prepared in detail for every question or subquestion in the same work sheet.
9) Solution has to be outlined with thick borders.
10) All types of calculators (Financial, Scientific and Ordinary) are allowed
11) Make suitable assumptions wherever necessary
Question 1 ……………………………………………………………………………………………………………………………...(20 Marks)
Yield Fertilizers Limited is a leading company having world-class R & D team of experts engaged in the manufacturing of varieties
of improved fertilizer products is tageting to acquire its major customer Field Agriculture Limited,
involved in marketing and trading of varities of agri products with wide network of customers across India.
Yield Fertilzers Limited makes a cash offer to Field Agriculture's shareholders at Rs. 5,100/- per share.
Number of outstanding shares in Field Agriculture Ltd is 50,00,000 and the shareholders have accepted the offer.
The financial analyst of Yield Fertilizers determined that a two stage FCFF model is appropriate for valuation of the target company
and provided with the following financial data of Field Agriculture Ltd.

(Rupees in lakh)
Current year
2021
Revenues 18,000
Cost of Goods Sold 10,800
Gross Profit 7,200
Selling, general and administrative Expenses 2,000
Depreciation 400
Earnings before interest and taxes (EBIT) 4,800
Net interest expense 510
Earnings before taxes (EBT) 4,290
Income tax @ 40% 1,716
Net income 2,574

Following is the pojection for high growth period, estimated by analyst of Field Agriculture Ltd. (Amount in lakhs )
Particulars 2021-22 2022-23 2023-24 2024-25 2025-26
Revenue growth 22% 26% 20% 28% 25%
Cost of Goods sold (% of sales) 62% 64% 59% 57% 52%
Total Interest expense 490 465 430 390 355
(including existing debt)
Depreciation expenses 464 461 459 544 352
Capital expenditures 650 710 820 905 1010
 Increase in Working capital 410 520 564 615 705

Selling, general and administrative Expenses will remain fixed irrespective of changes in production or sales.
The analyst estimates 4% constant annual growth in company's free cash flows after five years.
Cost of Capital for the target company is 9.5%.
In addition to above, the merger will be benefited by synergies that will arise over a period of next five years.
There will not be any synergy after five years and discounting rate applicable will be 9.5%.
The following benefits in the form of synergy have been projected by the analyst.
Year 2021-22 2022-23 2023-24 2024-25 2025-26
Benefits (Rs in Lakh) 190 240 180 160 120
You are required to-
1) Determine the value of Field Agriculture Limited as estimated by the analyst using discounted cash flow approach. (15 marks)
2) Calculate the value of Synergy using discounted cash flow approach. (3 marks)
3) Calculate the gain to the shareholders of Target company i.e. Field Agriculture Limited. (2 marks)

Solution to Question 1
Question 2 …….……………………………………………………………………………………………………………….. (10 Marks)
TUTU Motors is the leading manufacturer of electrical vehicles in India.
Currently the company is dependent upon the foreign supplier for import of semi conductor chips from China.
TUTU Motors is considering investment of Rs.4,55,00,000 in a new machine for manufacturing of semi conductor chips in India.
The expected life of machine is five years and has no scrap value.
It is expected that 3,000 units will be produced and sold each year at a selling price of Rs.20,000 per unit.
It is expected that the variable costs to be Rs.14,000 per unit and fixed costs to be Rs.6,00,000 per year.
The cost of capital of TUTU Motors Ltd. is 14% (Ignore tax and depreciation)
Calculate expected net present value of the project.
You are required to measure the sensitivity of the project’s net present value to a change in the following project variables:
(i) sale price; and (ii) sales volume

Solution to Question 2
Question 3 ……...…………………………………………………………………………………………………………..(8 Marks)
Fast Foods Ltd. is presently operating at 60% level producing 36,000 packets of snack foods and proposes to increase capacity
utilisation in the coming year to 80% of the installed capacity.
The following data has been supplied:
(i) Unit cost structure of the product at current level:
Rs.
Raw Material 4
Wages (Variable) 2
Overheads (Variable) 2
Fixed Overhead 1
Profit 3
Selling Price 12

(ii) Raw materials will remain in stores for 1 month before being issued for production.
(iii) Material will remain in process for further 1 month. Wages and overheads will be in process for half a month in average.
(iv) Suppliers grant 3 months credit to the company.
(v) Finished goods remain in godown for 1 month.
(vi) Debtors are allowed credit for 2 months.
(vii) Lag in wages and overhead payments is 1 month and these expenses accrue evenly throughout the production cycle.
No increase either in cost of inputs or selling price is envisaged.
Prepare a projected working capital requirement at the new level,
assuming that a minimum cash balance of Rs. 19,500 has to be maintained.

Solution to Question 3
Question 4 ….………………………………………………………………………………………………………………. ( 7 Marks)

Few information regarding TKP Ltd is given as below:

Current Annual Sales 2,000,000
Operating Expenses (% of Sales) 75%
Collection Expenses (% of Sales) 1.50%
Bad Debt Losses (% of Sales) 2%
Cost of Capital 12%
Current Credit Policy 30 Days
TKP Ltd is considering a revision in its credit policy to increase its market pressence.
The new credit policy is to increase the days sales outstanding by 15 days more than existing level.
The proposed policy is expected to increase sales by 10%, decrease collection expenses to 1% of sales
and the resulting bad debt losses will be 3% of sales.
You are required to analyse the two proposals and suggest which policy should be adopted and Why?
Your justification should be based on analysis of the facts. Consider 360 days for the year.

Solution to Question 4
Question 5 ...………………………………………………………………………………………………. ( 5 Marks)
Explain the factors affecting dividend policy of the firm.

Solution to Question 5
…………………. ( 5 Marks)