Reg. No.

ARPIL 2022 U/2636/2045412

FINANCIAL MANAGEMENT – II

Time : Three hours Maximum : 100 marks

SECTION A — (10  2 = 20 marks)

Answer ALL the questions.

1. Demonstrate patterns of Capital structure.

2. K Ltd. is expecting an annual EBIT of 2,00,000. The company

has 7, 00000 in 10% debentures. The cost of equity capital or
capitalization rate is 12.5%. You are required to calculate the
total value of the firm. Also ascertain the overall cost of capital.

3. Define capital budgeting.

4. A project costs 2,50,000 and yields an annual cash inflow of

50,000 for 7 years. Calculate its Pay Back Period.

5. Illustrate operating cycle of manufacturing firm.

6. A company has a 360 working days in a year and includes 120

operating cycle – with this information – ascertain number of
operating cycle in a year.

7. Outline the meaning of cash management.

8. List out the concept of credit analysis.

9. Infer the term ‘stock dividend’.

10. The following information is available in respect of G Ltd.

EPS – 15, Cost of capital – 10%. Find out the market price of
the share applying Walter model under rate of return of 8% for
payout ratio of 0%.
 SECTION B — (5  7 = 35 marks)

Answer ALL the questions.

11. (a) From the following data relating to V ltd. calculate the
market value of the company and overall cost of capital :
Net Operating income – 1,20,000
Total Investment – 6,00,000
Equity Capitalization rate :
(i) If the company uses no debt = 10%
(ii) If the company uses a debt of 2,40,000 = 11%
(iii) If the company uses a debt of 3,60,000 =12%
The debt of 2,40,000 can be raised at 5% rate of interest
while the debt of 3,60,000 can be raised at 7%.
Or
(b) M Ltd. has EBIT of 30,00,000 and a 40% tax rate. Its
required rate of return on equity in the absence of
borrowing is 18%. In the absence of personal taxes, what is
the value of the company in MM world
(i) with no leverage
(ii) with 40,00,000 in debt
(iii) with 70,00,000 in debt.
12. (a) P Ltd. is producing articles mostly by hand labour and is
considering to replace it by a new machine. There are two
alternatives models : A and B. Prepare a statement of
profitability showing the payback period from the following
information.

Particulars Machine A Machine B

Estimated life of machine 4 years 5 years

Cost of machine ( ) 9,000 18,000

Estimated savings in scrap ( ) 500 800
Estimated savings in direct wages ( ) 6,000 8,000
Additional cost of maintenance ( ) 800 1,000
Additional cost of supervision ( ) 1,200 1,800
Ignore taxation.
Or

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 (b) An investment of 10,000 (having scrap value of 500)
yields the following returns :

Year CFAT PV factors

1 4000 0.909

2 4000 0.826

3 3000 0.751

4 3000 0.683

5 2000 0.620

The cost of capital is 10%. Is the investment desirable?

Discuss it according to NPV method.

13. (a) A company provided the following data :

Cost per unit

Raw materials 52

Direct labour 19.50

Overheads 39

Total 110.50

Profit 19.50

Selling price 130

The following additional information is available

Average materials in process – half a month

Average raw materials in stock – one month

Average finished goods in stock – one month

Credit allowed by suppliers – one month

Credit allowed to debtors – two months

Time lag in payment of wages – 1.5 weeks

Overheads – one month

One – fourth of sales are on cash basis

Cash balance is expected to be 1,20,000

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 You are required to prepare a statement showing the
working capital needed to finance a level of activity of
70,000 units of annual output. The population is carried
throughout the year on even basis and wages and
overheads accrue similarly. Weeks – 52, days in a
month –30.

Or

(b) Explain the determinants of Working Capital.

14. (a) From the following information relates to Gordan Ltd.

calculate :

(i) The firm’s cash cycle

(ii) Cash turnover assuming 360 days in year

(iii) Minimum cash balance to be maintained to meet

payments

(iv) Savings by reducing the average age of inventory to

45 days.

(1) Average age of accounts payable – 45 days

(2) Average age of accounts receivable – 75 days

(3) Average age of inventory – 90 days

(4) Total annual operating outlay – 15,00,000

(5) Rate of return on investment – 12%.

Or

(b) Categorize the ABC analysis, JIT and its procedures.

15. (a) Inspect the factors determining dividend policy.

Or

(b) V Ltd. earns 5 per share. The capitalization rate is 10%

and the return on investment is 12%, under the Walter’s
model? determine

(i) The optimum payout

(ii) The market price of the share at this payout

(iii) The market price of the share if payout is 20%

(iv) The market price of the share if the payout is 40%.

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 SECTION C — (3  15 = 45 marks)

Answer ALL the question.

(Question No. 16 is compulsory)

16. G Ltd. has currently an ordinary share capital of 25 lakh,

consisting of 25000 shares of 100 each. The management is
planning to raise another 20 lakhs to finance a major
programme of expansion through one of four possible financing
plans. The options are as under :

(a) Entirely through ordinary shares

(b) 10 lakhs through ordinary shares and 10 lakhs

through long term borrowings at 15% interest per annum.

(c) 5 lakhs through ordinary shares and 15 lakhs through

long term borrowings at 16% interest per annum

(d) 10 lakhs through ordinary shares and 10 lakhs through

preference shares with 14% dividend.

The company’s expected EBIT will be 8 lakhs, Assuming a

corporate tax rate of 50% determine the EPS in each alternative
and suggest the best alternative.

17. (a) A company has to choose one of the following two mutually
exclusive projects investment required for each project is
1,50,000. Both the projects have to be depreciated on
straight line basis. The tax rate is 50%.

Year Profit before depreciation

Project X Project Y

1 42,000 42,000

2 48,000 45,000

3 70,000 40,000

4 70,000 50,000

5 20,000 1,00,000

Calculate Payback period.

Or
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 (b) Determine the working capital requirements of a company
from the following information given below :
Operating cycle components :
Raw materials – 60 days
WIP – 45 days
Finished goods – 15 days
Debtors – 30 days
Creditors – 60 days
Annual turnover – 73 lakhs; cost structure (as % of sale
price) is materials 50%, labour 30%, overheads 10% and
profit =10%. Of the overheads, 30% constitute depreciation
Desired cash balance to be held at all times : Rs. 3 lakhs.

18. (a) Explain the aspects of management of receivables.

Or
(b) Details regarding three companies are given below :

Particulars N Ltd. M Ltd. G Ltd.

r 18% 20% 8%

K 15% 20% 10%

E 30 40 20
By using Walters model – you are required to
Calculate the value of an equity share of each of these
companies when dividend payout is
(i) 30%
(ii) 60%
(iii) 100%.
_____________

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