PAPER : FINANCIAL MANAGEMENT

TIME ALLOWED : 3 Hours Full Marks: 100

Answer all five Quesions
Q 1(A)TULSIAN Ltd provides you the following information:

Particulars Machine X
No. of Equity Shares ( Rs10 each) 150000
No. of 17% Preference Shares ( Rs100 each) 20000
Retained Earnings Rs 5,00,000
No. of 7.5% Debentures ( Rs 100 each) 30000
10% Long-term Loan Rs 10,00,000
Additional Information:

(a)The Current market price of the company's equity share is Rs 30. Expected Dividend per Equity Share for the last year
is Rs 1.2 which is expected to grow @ 5%. The flotation cost on issue of new equity shares is expected to be Rs 5 per
share.

(b)The Preference shares of the company which are redeemable at par after 5 years are currently selling at Rs 90 per
Preference Share.

(c)The Debentures of the company which are redeemable at 10% premium after 5 years are currently quoted at Rs 90
per debenture.

(d)The corporate tax rate is 20%.

Required: (i) Calculate Weighted Average Cost of Capital using (a) Book Value Weights (b) Market Value Weights

(ii)The company requires Rs 40 lakhs next year and expects to retain Rs 1,20,000 earnings next year. The debt capital
will be raised through term loans only. Rate of Interest on Loan 10 % for the first Rs 6,00,000 and 12% beyond that.
Calculate the Weighted Marginal Cost of Capital Schedule if the company intends to maintain (a) a target Debt-Equity
Ratio of 3:1 (b) the existing optimal capital structure.

Q 1(B) TULSIAN Ltd provides you the following information:

Particulars Machine X
Purchase Price Rs 6,00,000
Working Capital Rs 26,00,000
Useful Life of the machine 5 years
Estimated Salvage Value at the end of useful life Rs 1,00,000
Actual Salvage Value realised at the end of useful life Rs 1,20,000
Method of Depreciation Straight line
Tax Rate 20%
Annual Sales Rs 25,00,000
Variable Cost 60% of Sales
Fixed Cost (other than Depreciation) per annum Rs 4,00,000
Financial Plan 1:

25% Equity Shares of Rs. 10 each: to be issued at 100% premium, Risk Free Rate on 10 years Govt. of India Treasury
Bonds is 4%, Return on Market Portfolio is 9%. Beta of the company is 1.2

12.5% Debentures of Rs. 100 each to be issued at par.

Financial Plan 2:

40% Equity Shares of Rs. 10 each: to be issued at 100% premium,

Dividend Payout Ratio 60%. Rate of Return on Retained Earnings 8.125%. Expected Earning per Equity Share for the
next year is Rs 1.

Rate of Interest on Loan 14.2 % (before tax) for the first Rs 4,00,000 and 16% (before tax) beyond that.

Other Information: Expected Price Earning Ratio 8 if Debt Equity Ratio (Debt divided by debt plus equity) is upto 60%. A
Debt Equity Ratio higher than 60% will cause the Price Earning Ratio to come down by 25%.

Required:

1.Calculate Financial Break-Even Point for each Financial Plan and Indifference Point.

2. If the company is to follow policy of maximising the market value of equity share, which Financial Plan should it choose
?

3.Calculate the percentage drop in Sales to make the EBIT Zero.

4. Calculate the percentage drop in EBIT to make the EPS Zero.

5. Calculate the percentage drop in Sales to make the EPS Zero.

6.At what sales level, the EBIT will be Zero, EBT will be Zero , EPS will be Zero ?

7. Determine the likely level of EBIT if EPS is Rs 3.6 for Financial Plan 1.

8. Does the company have favourable financial leverage?

9.If the firm belongs to an industry whose asset turnover is 300%, does it have favourable asset leverage?

10. Calculate the percentage of change in EBIT and EPS if the Sales drop to Rs 20 lakh.

Q 2(A) AMLA TULSI Ltd provides you the following information:

Particulars Machine X Machine X

Purchase Price Rs 5,00,000 Rs 8,00,000
Installation Expenses Rs 1,00,000 Rs 2,00,000
Working Capital Rs 26,00,000 Rs 22,00,000
Useful Life of the machine 5 years 8 years
Estimated Salvage Value at the end of useful life Rs 1,00,000 Rs 2,00,000
Actual Salvage Value realised at the end of useful life Rs 1,20,000 Rs 60,000
Method of Depreciation Straight line Straight line
Tax Rate 20% 20%
Annual Sales Rs 25,00,000 Rs 30,00,000
Variable Cost 60% of Sales 2/3rd of Sales
Fixed Cost (other than Depreciation) per annum Rs 4,00,000 Rs 4,00,000
Annuity Factor for 5/8 yrs @ 10% 3.791 5.335
PV Factor for 5th/8th year @ 10 % 0.621 0.467
Required: Suggest the Machine to be purchased.
Q 2(B) TULSIAN Ltd provides you the following information:

Particulars Machine X
Purchase Price Rs 6,00,000
Working Capital Rs 4,00,000
Useful Life of the machine 4 years
Estimated Salvage Value at the end of useful life Rs 2,00,000
Actual Salvage Value realised at the end of useful life Rs 1,00,000
Method of Depreciation Straight line
Fixed Cost (other than Depreciation) per annum Rs 1,00,000
Tax Rate 25%
Sales Units: 1st yr 10000 units, 2nd yr 20000 units, 3rd yr 30000
units,4th yr 40000 units
Selling Price per unit Rs 40 , Variable Cost 40% of Sales,Cost of
Capital 10%.

Required: Calculate the Accounting Rate of Return, Payback Period , Discounted Payback Period, Profitability Index,
MIRR and IRR.

Q 3(A) From the following ,Calculate (a) Gross Operating Cycle (in weeks), (b) Net Operating Cycle (in weeks),
and (c) No. of Operating Cycles in a year (d) Working Capital Required.

Particulars Rs
1.Average Stock of Raw Material 5,88,000
2.Raw Material Inventory consumed during the year 101,92,000
3.Average Stock of Work-in-Progress 6,46,800
4.Annual Gross Factory Cost of Goods Produced 1,68,16,000
5.Average Stock of Finished Goods 17,92,000
6.Annual Cost of Goods Produced 232,96,000
7.Average Trade Debtors (at cost) 8,70,000
8.Annual Cost of Credit Sales 180,96,000
9.Average Trade Creditors 5,14,500
10.Annual Cost of Credit Purchases 76,44,000
11. Average Creditors for Wages 2,12,000
12. Annual Wages 55,12,000
13. Average Creditors for Production Overheads 2,19,000
14. Annual Production Overheads 75,92,000
15. Average Creditors for Selling and Distribution Overheads 24,000
16.Annual Production Selling and Distribution Overheads 8,32,000
Q 3(B) GINGER TULSI Ltd provides you the following information:
Raw Material Storage Period 3 weeks
2 weeks
Work-in-progress Conversion Period (% of completion with respect to
Material 75%, Conversion Cost 70%)
Finished goods Storage Period 4 weeks
Credit allowed to debtors 2½ weeks
Credit allowed by creditors 3½ weeks
Time lag in payments of labour 2 weeks
Time lag in payments of Overheads 1½ weeks
Cash Sales and Cash Purchases 25%
At budgeted level of 1,04,000 units, Selling Price Rs 500 per unit, Raw-material 19.6%
of selling price, Wages 10.6% of selling price, Production Overheads (including
depreciation of Rs 15 per unit at budgeted level of activity) 17.6% of selling price,
Selling and Distribution Overheads Rs 8.5 per unit (of which Rs 6.50 per unit is
variable).
The company believes in keeping Rs 3,00,000 available to it including the overdraft
limit of Rs 75,000 not yet utilized by the company.
Provision for contingencies is required @ 4% of working capital requirement including
that provision.
Assume that production is carried on evenly throughout the year (52 weeks) and
wages and overheads accrue similarly.
Required :Calculate the Net Working Capital Requirement on Cash Cost Basis if it is an existing
company.

Q 4(A) Tulsian Ltd. is planning to change its credit terms . At present, Selling Price Rs 300 per unit, Contribution to Sales
Ratio 20% and Average Cost per unit Rs 270 per unit. Following two policies are under consideration:
Debtor Policy A:Proposes to change its credit terms from 1/35, net 60 to 2/10, net 60. As a result the credit sales will
increase from Rs 150 crore to 105%, % of Customers availing Discount will increase from 60% to 80% and Default
Percentage will increase from 0.5% to 1%. Collection Expenses will increase from Rs 35 lakh to Rs 40.5 lakh.
Debtor Policy B: Proposes to change its credit terms from 1/35, net 60 to 3/10, net 110. As a result the credit sales will
increase by 10%, Average collection period will decline by 2/3rd and Default Percentage will increase by 200%. Collection
Expenses will increase to Rs 42.250 lakh.
Required: Which policy should be followed if the required rate of return is 24% (pre tax) and Tax rate is 25%? (Take 360
days in a year)
Q 4(B) From the information given below, prepare a Cash Budget of AMLA TULSI Ltd. for the first half year of 2024,
assuming that cost would remain unchanged:
(a) Sales are both on credit and for cash the latter being one-third of the former;
(b) Realisations from debtors are 25% in the month of sale, 60% in month following that and the balance in the month
after that;
(c) The company adopts uniform pricing policy of the selling price being 25% over cost;
(d) Budgeted sales of each month are purchased and paid for in the preceding month;
(e) The company has outstanding debentures of Rs 2 lakhs on 1st Jan. which carry interest at 15% per annum payable on
the last date of each quarter on calendar years basis. 20% of the debentures are due for redemption on 30th June 2024;
(f) The company has to pay the last instalment of advance tax, for assessment year 2023-2024, amounting to Rs 54,000;
(g) Anticipated office costs for the six month period are; Jan. Rs 25,000 Feb. Rs 20,000 Mar. Rs 40,000 Apr. Rs 35,000
May Rs 30,000 and June Rs 45,000;
(h) The operating cash balance of Rs 10,000 is the minimum cash balance to be maintained Deficits have to be met by
borrowals in multiples of Rs 10,000 on which interest on monthly basis has to be paid on the first date of the subsequent
month at 12% p.a. Interest is payable for a minimum period of a month.
(i) Rent payable is Rs 2,000 per month.
(g) Sales forecast for the different months are: Oct. 2023 Rs 1,60,000, Nov. Rs 1,80,000, Dec. Rs 2,00,000, Jan. 2024
Rs 2,20,000, Feb. Rs 1,40,000 Mar. Rs 1,60,000, Apr. 1,50,000, May Rs 2,00,000, June Rs 1,80,000 and July
Rs 1,20,000.

Q 5 (A) (i) Y Ltd. is an all equity financed company with a market value of Rs 9,00,000 and cost of equity,
ke = 20%. The company wants to buyback equity shares worth Rs 4,00,000 by issuing and raising 10% perpetual debt of
the same amount. Tax Rate 25%. After the capital restructuring and applying MM Model (with taxes), calculate the Value,
ke and ko of Y Ltd.
(ii) Y Ltd. employs 10% Debentures of Rs 4,00,000 with a market value of Rs 10,00,000 and Weighted Average Cost of
Capital of 18%. The company wants to redeem 10% Debentures of Rs 4,00,000 by issuing equity shares of the same
amount. Tax Rate 25%. After the capital restructuring and applying MM Model (with taxes), calculate the Value, ke and
ko of Y Ltd.
(iii) X Ltd and Y Ltd are identical in every respect except that X Ltd does not employ Debt in its capital structure whereas
X Ltd employs 10% Debentures amounting to Rs 4 Lakhs. EBIT is Rs 2,40,000. Equity Capitalization Rate of X Ltd is
20%.Tax Rate 25%. Assuming that all assumptions of M–M model are met. calculate the Value, ke and ko of X Ltd. and
Y Ltd.
Q 5(B) GILOY TULSI Ltd. Ltd. provides you the following information:

Particulars

Equity Share Capital ( Rs 50 each) Rs 100,00,000

12% Preference Share Capital Rs 50,00,000

10% Debentures Rs 50,00,000

Return on Capital Employed 18.75%

Tax Rate 20%

New Investment to be made Rs 28,80,000

Price Earning Ratio 10

Market Price per Share in the beginning Rs 100

Required:
(a) Calculate the theoretical market price of equity share as per (a) Walter’s Formula (b) Gordon’s Formula (a)
MM Model if dividend payout ratio is (a) 0% (b) 60% (c) 100%.
(b) What should be the optimal dividend payout ratio for the company under (i) Walter’s Model (ii) Gordon’s Model? Will your
decision change if the P/E ratio is 4 instead of 10 under (i) Walter’s Model (ii) Gordon’s Model?
(c) What should be the Price Earnings Ratio at which dividend payout ratio will have no effect on the value of the share under
(i) Walter’s Model (ii) Gordon’s Model?
(d) Calculate the Value of the firm under MM’s Model if Dividend Payout Ratio is(i) 0% (ii) 60% (iii) 100%.

Q 5(C)

1. Explain the major determinants of :

(a) Capital Structure
(b) Dividend Policy of a firm
(c) Working Capital
2(a) Explain the Assumptions and Criticisms of M-M Approach as to Capital Structure.
2(b) Compare and contrast NI Approach and NOI Approach as to Capital Structure.
3(a) State the similarities and the differences between NPV and IRR.
3(b) State the difference between the following:
(i) Weighted Average (After Tax) Cost and Marginal Cost of Capital
(ii) Book Value Weights and Market Value Weights
(iii) Systematic Risk and Unsystematic Risk