NJR/KS/18/6753

Master of Business Administration (M.B.A.) Semester—III (C.B.C.S.) Examination

CORPORATE FINANCIAL MANAGEMENT
Group-B : Financial Management
Optional Paper—1
(Elective/Specialization Courses — Core)
Time : Three Hours] [Maximum Marks : 80
N.B. :— (1) ALL questions are compulsory.
(2) All questions carry equal marks (16 marks each).

1. (A) Royal industries is considering the replacement of one its moulding machines. The existing
machine is in good operating condition, but is smaller than required if the firm is to expand
its operations. The old machine is 5 years old, has a current salvage value of Rs. 30,000
and a remaining depreciable life of 10 years. The machine was originally purchased for
Rs. 75,000 and is being depreciated at Rs. 5,000 per year for tax purpose. The new machine
will cost Rs. 1,50,000 and will be depreciated on straight line basis over 10 years, with no
salvage value. The management anticipates that the expanded operation will need additional
net working capital of Rs. 30,000. The new machine will enable to increase revenue by
Rs. 50,000 p.a. but variable operating expenses shall increase by Rs. 10,000 p.a. The tax
rate applicable to the company is 50% and its cost of capital is 10% p.a. Should the
company replace its existing machine, given that capital gain is taxable at the same rate of
tax ? PVAF @ 10% for 10 years is 6.145.

OR

(B) A project under consideration is likely to cost Rs. 50 lacs by way of fixed assets and needs
another Rs. 20 lacs for current assets. It is expected to have a life of 10 years, during which
the returns are likely to be uniform and at the end of which, it is likely to have scrap value
of Rs. 5 lacs. Various estimates of the gross income before depreciation and tax have been
made. These are as follows :

Annual Amount (Rs. in lacs) Probability

5 0.1

10 0.2

20 0.5

30 0.1

40 0.1

The rate of income tax is 50%. The required rate of return is 12%. Would you recommend
acceptance of the project ?

RQA—32391 1 (Contd.)
2. (A) ABC Ltd. is considering to buy a machine that costs Rs. 1,10,000 payable Rs. 10,000 down
payment and balance payable in 10 annual equal installments inclusive of interest chargeable
at 15% p.a. Another option before the company is to acquire the assets on a lease rental
of Rs. 15,000 p.a. for 10 years. As a financial manager, decide between these two options;
that :
(i) Scrap value of Rs. 2,000/- is realisable if the asset is sold at the end of 10th year.
(ii) The firm provides 10% depreciation on straight line basis on the original cost.
(iii) The tax rate is 50% and after tax cost of capital is 15% p.a. The PVAF @ 15% for
10 years = 5.019.
P.V. at 15% p.a.
Year P.V. Factor @ 15%
0 1.000
1 0.870
2 0.756
3 0.658
4 0.572
5 0.497
6 0.432
7 0.376
8 0.327
9 0.284
10 0.247
OR
(B) Explain in detail about venture capital. Also elaborate financing methods at different stages
of enterprise life.
3. (A) A Ltd. has a capital of Rs. 10,00,000 in equity shares of Rs. 100 each. The shares are
currently quoted at par. The company proposes to declare a dividend of Rs. 10 per share
at the end of current year. The capitalisation rate for the risk class to which the company
belongs is 12%.
What will be the market price of the share at the end of the year if :
(a) Dividend is not declared
(b) Dividend is declared
(c) Assuming that the company pays dividend or not and has net profits of Rs. 5,00,000
and makes new investment of Rs. 10,00,000 during the period, how many new shares
must be issued ? Use the MM dividend model.
(d) Also evaluate value of firm and show it would be same.
OR

RQA—32391 2 NJR/KS/18/6753
 (B) Following information is available with respect to a Ltd. company :
Earnings Per Share (EPS) Rs. 5
Dividend Per Share (DPS) Rs. 3
Cost of Capital 16%
Internal Rate of Return on Investment 20%
Retention Ratio 40%
Determine :
(i) What is the market value of share if Walter model is used ?
(ii) Is the current dividend policy satisfactory if Walter model is considered ? If not what
should be the market value of share, had the optimum dividend policy been
adopted ?
(iii) Determine the market value of share using dividend growth model.
4. (A) A Ltd. wants to acquire T Ltd. by exchanging 0.5 of its share for each share of T Ltd.
Relevant information are as follows :
Particulars A Ltd. T Ltd.
Earnings After Tax (EAT) Rs. 18,00,000 Rs. 3,60,000
Equity Shares Outstanding 6,00,000 1,80,000
Price Earnings Ratio 10 times 7 times
You are required to calculate :
(i) The number of equity shares required to be issued by A Ltd. for acquisition of T Ltd.
(ii) What would be post acquisition EPS of A Ltd. ?
(iii) Determine equivalent EPS of T Ltd.
(iv) If price earnings ratio is assumed to remain unchanged then what would be the market
value of an equity share post acquisition ?
(v) Gain/loss to the shareholders of both companies consequent to acquisition.
OR
(B) Explain in detail about Balanced Score Card. How it can be used in a business organisation
for performance analysis ?
5. Write short notes on :
(A) Sensitivity Analysis in Capital Budgeting
(B) Operating and Financial Lease
(C) Discounted Cash Flow method of Business Valuation.
(D) IPO.

RQA—32391 3 NJR/KS/18/6753