B.

Com 2019-22
Semester – IV
End Semester Examination, 2021

FIN203-02: Business Finance

Duration: 3 Hrs. Maximum Marks: 100

Weightage: 50%

Instructions to Candidates

1. The exam is open book.

2. Follow the Instructions given at the beginning of the section.

3. The maximum marks for each question are shown in brackets

Please turn over

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 Section A
Answer the following in detail (10x 10= 100)

1. A project requires an initial outlay of Rs 20000. It will generate year ending profits of
Rs12000, Rs 6000, Rs 4000, Rs 10000 and Rs 10000 from the end of the first year to
the end of 5th year and is depreciated on straight line basis. Assume the above year
ending profits are before depreciation and tax. You are required to compute:
a. Payback period
b. Average rate of return
c. Net present value

2. As a financial analyst, you are required to determine the WACC of the company using
a. book weights and
b. Market value weights. The following information is available for your perusal.

The company’s present book value structure is:

Debenture(Rs 100 per debenture) 800000

Preference shares(Rs 100 per share) 200000

Equity shares(Rs 10share) 1000000

Total 2000000

All these securities are traded in capital markets. Recent prices are:

i. Debentures, Rs 110 per debenture

ii. Preference shares Rs 120 per share
iii. Equity shares at Rs 22 per share.

Anticipated external financing opportunities are:

a. Rs 100 debentures redeemable at par, 10 year maturity, 11%coupon rate, 4percent

flotation cost, sale price Rs 100
b. Rs 100 preference shares redeemable at par, 10 year maturity, 12% dividend rate, 5%
flotation cost, sale price Rs 100
c. Equity shares, Rs 2 per share flotation cost, sale price =Rs22
ii. In addition the dividend expected on the equity share at the end of the year is
Rs 2 per share. The anticipated growth rate is 7%. The corporate tax rate is
35%.

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 3. A company is considering between two mutually exclusive projects P and Q. Project
P requires 30000 and Project Q required 36000. You have been given below the net
present value probability distribution for each project.

Project P Project Q
NPV estimate Probability NPV estimate Probability
3000 0.1 3000 0.2
6000 0.4 6000 0.3
12000 0.4 12000 0.3
15000 0.1 15000 0.2
a. Compute the expected NPV for both the projects
b. Compute the risk attached to each project that is, standard deviation of each project.

4. Why must the financial manager keep in mind the degree of financial leverage in
evaluating various financing plans? When does financial leverage become
favourable?

5. Hyper ltd is interested in raising Rs 18lakhs of new equity capital through right issue.
Its current capital consists of 900000 shares. It would set the subscription price at Rs
50 and anticipates that the shares would sell for Rs 58 with rights.
Required:
a. Number of shares HL should sell to raise the desired amount of funds.
b. Number of rights needed to purchase one share at the subscription price.
c. Additional shares an investor holding 96000 shares can purchase on exercising his
rights.
d. Value of one right
e. Comment on what happens to an investor’s stake if he (a) exercises his rights, (b)
sells his right and (c.) doesn’t exercise his right.

6. The motivation for getting the MBA degree has many aspects—the prestige, greater
opportunity for promotion, change of occupation, and an increase in pay. To focus
just on this last motivation, suppose that you are interested in getting an MBA and are
studying the various programs in the United States. You want to balance the costs of
getting the degree against the future benefits in increase of pay. You have information
on the cost of two MBA programs, which includes the costs of tuition, living
expenses, and forgone pre-MBA salary for the two years you are in the MBA
program. School A has an average cost of $100,000, and school B, a far more
prestigious school at which you think your grades would qualify you to be a
successful applicant, has a cost of $250,000. Required Assume that you have a 5-year
planning horizon, that the difference in pay for a job after both schools would remain
the same for all 5 years, and the relevant cost of borrowing is 6%. Based on increase
in pay only, how great would the increase for a job after leaving school B have to be

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 relative to school A for you to be indifferent between the two schools? Answer in
detail.

7. The following table depicts the information regarding two Company’s X and Y
belonging to the same risk class.

Particulars X Y
No of ordinary shares 90000 150000
Market price of shares 1.2 1
6% debentures 60000 -
EBIT 18000 18000
All profits after interest are distributed as dividend. Explain how under Modigliani & Miller
Approach an investor holding 10% of shares in Company X will be better off in switching his
holding to Company Y.

8. A company is considering method of financing its establishment. Initially Rs 200000

will be needed. The company is considering two proposals for the purpose: i. issue of
15% debentures of Rs 100000 and issue of 1000 equity shares of Rs 100 each. Or ii.
Issue 2000 equity shares of Rs 100 each. The corporate tax rate is 35%.
a. Compute the indifference point of the above proposed financial plans.
b. Show that the indifference point calculated above is correct.
c. Compute the EPS under both the plans if EBIT is Rs 30000 and Rs 40000. How
do you explain the difference in your results?

9. Answer the following:

a. In Walter’s approach the dividend policy of a firm depends on availability of
investment opportunity and the relationship between the firm’s internal rate of
return and cost of capital. Discuss what the shortcomings of this view are?
b. Also give the arguments to support the view that dividends are relevant.

10. Answer the following:

a. ‘The equity capital is cost free’. Do you agree? Give reasons.
b. Give a critical appraisal of the Net Income Theory.

********** End of Question Paper **********

All the Best

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