SVEM’s NMIMS MUKESH PATEL SCHOOL OF TECHNOLOGY MANAGEMENT & ENGINEERING Programme: MBA. Tech (All Streams)’ Year:IV-, Semester: VIII Batch: 015-16 (2016-17 Academic Year: 2016-2017 « financial Management Subject: Date: 11 July 2017 Time: Re-Examination Instructions: Candidates should read carefully the instructions pri on the cover of the Answer Book, which is provided for their use. ed on the question paper and 1) Question No. 1 is compulsory. 2) Out of remaining questions, attempt any 4 questions. 3) In all 5 questions to be attempted. 4) All questions carry equal marks. 5) Answer to each new question to be started on a fresh page. 6) Figures in brackets on the right hand side indicate full marks, 7) Assume Suitable data if necessary. . 1. Answer the following Questions: & Marks= 12 Marks) a, ABC Itd has borrowed Rs. 30,00,000 from Canbank Home finance Itd to finance the purchase of a house for 15 years, The rate of interest on such loans is 24% per annum. Compute the amount of annual installment, b. Determine the cost of equity using the CAPM approach, if required rate of return on risk free security is 8%; required rate return on market portfolio of investment is 13% and firm’s beta is 16. ec. The Goodshape Company has the choice for raising an additional sum of Rs. 50 lakhs either by sale of 10% debenture or by issue of additional equity shares at Rs.50 per share, The current capitalization structure of the company consists of 10 lakh ordinary shares and no debt. At what level of EBIT after the new capital is acquired would EPS be same whether new funds are raised either by issuing ordinary shares or by issuing debentures? Consider tax rate as 50% 4. Venkat Company Ltd. has Capitalization rate of 10%. It’s earnings per share is Rs.20 per share. ‘The company declares Rs.10 as dividend .You are required to calculate share price assuming 20% return on investment using Walter’s Model. Page 1of3Q.2. A rubber manufacturer has under consideration the proposal of production of high quality rubber tubes. The necessary equipment to manufacture the tubes would cost Rs. | lakh and would last 5 years. “The tax relevant rate of depreciation is 20% on written down value. There is iid Other asset in this block. ‘The expected salvage value is Rs. 10,000. The tube can be sold for Rs4 each, Regardless of the level of production, the manufacturer will incur cash cost of Rs.25,000 each year ifthe project is undertaken. The Variable costs are estimated at Rs.2 per tube, The manuficturer estimates it will sell about 75,000 tubes, per year; the tax rate is 35%, Assume 20% cost of capital and additional working capital requirement Rs.50,000 in the beginning of the first year and will be recovered in full at the end of the life of the equipment. Ignore capital gains or losses. Suggest should the proposed equipment be purchased using NPV method of Capital Budgeting? (12 Marks) [Year i 2 3 a 3 PV @20% | 0.833 0.684 0579) 0.482 0.402 Q.3. The following data presents the book value capital structure of a particular company: (12 Marks) Particulars ‘Amount Debenture (Rs. 100 per debenture) 7,00,000 Preference Shares (Rs. 100 per share) 3,00,000 Equity Shares (RS. 10 per share) 70,00,000 All these securities are traded on capital market and their recent market prices are: Debentures Rs.110 per debenture, Preference Share Rs. 120 per share and Equity share Rs.22 per share. Further details are given below: i Face value of a debenture Rs. 100, redeemable after 8 years, 13% interest rate and 4% flotation cost ii, 14% Preference shares redeemable after 5 years, flotation cost of 5% and face value is Rs. 100. iii, Equity share selling price of Rs. 22 per share, Brokerage Rs. 2 per share. In addition, the dividend expected on equity share at the end of the year is Rs.2 per share. The anticipated growth rate in dividends is 6% and the firm has the practice of paying all its earnings in the form of dividends. The corporate tax rate is 35%. You are required to calculate WACC based on book value weights and market value weights. Q.4. The following is the balance sheet of Venson Ltd. as on 31 March 2017. (12 Marks) ~ | Amount | Assets ‘Amount | Equity Share Capital | 1,80,000 | Fixed Assets | 4,50,000 (Rs.10per share) Current Assets | 1,50,000 10% Debentures 2,40,000 Retained Earnings 60,000 Current Liability 1,20,000 6,00,000 600,000 ‘The company’s total assets tumover ratio is 2.5 times. The fixed operating costs are Rs. 2lakhs. Variable operating cost ratio is 40%. Income tax rate is 50%. Calculate Operating Leverage, Financial Leverage and Combined Leverage. Q.5. Answer the following: (2*6"12 Marks) a. Give a brief overview of Financial System in India with its significance in Indian economy. Page 2of 3»- b. Companies X and Y are in same risk class and are identical in every respect except that ‘company X uses debt while company Y does not. The levered firm has debenture of Rs.9,00,000 at 10% interest, Both the firms earn 20% EBIT on their total assets of Rs.15,00,000. Assume that there is perfeot ‘market, rational investor and so on and tax rate is 50% and equity capitalization rate is 15% for all equity company ,Compute value of Firm X and Y using NI Approach. Q.6. A firm belongs to a risk class for that the appropriate capitalization rate is 10%. Ithas 25,000 shares ‘outstanding and selling at Rs.100 each. The firm’s expected earnings available to shareholders are 6,00,000, and its it has an investment proposal costing Rs.8,00,000. The firm is contemplating the declaration of Rs.14 as dividend at the end of current financial year. Assuming MM assumption you are required to compute value of firm when, (12 Marks) a. Dividends are declared and b. Dividends are not declared. Q.7. Write short notes on: (3*412 Marks) a. Principal Agent Conflict b. Cost of Debt ¢. Time value of Money Page 3 of 3