IMT-59

FINANCIAL MANAGEMENT
Notes:
a. Write answers in your own words as far as possible and refrain from copying from the text books/handouts.

b. Answers of Ist Set (Part-A), II nd Set (Part-B), IIIrd Set (Part C) and Set-IVth (Case Study) must be sent together.
c. Submit the assignments in IMT CDL H.O. along with the assignments Question Papers for evaluation .
d. Only hand written assignments shall be accepted.
A. First Set of Assignments
B. Second Set of Assignments
C. Third Set of Assignments
D. Forth Set of Assignments

5 Questions, each
5 Questions, each
5 Questions, each
to 200 Words.
Two Case Studies

question carries 1.5 marks.

question carries 1.5 marks.
question carries 1.5 marks. Confine your answers to 150
: 7.5 Marks. Each case study carries 3.75 marks.

SECTION - A
Q. 1.

Discuss briefly meaning and purpose of internal financial control.

Q. 2.

Assume that a 10-year savings annuity of Rs. 2,000 per year is beginning at the end of current year. The
payment of retirement annuity is to begin 16 year from now (the first payment is to be received at the end of
year 16) and will continue to provide a 20-year payment annuity. If this plan is arranged through a saving bank
that pays interest @ 7% per year on the deposited funds, what is the size of the yearly retirement annuity that
will result?

Q. 3.

Explain Capital Asset Pricing Model and its assumptions.

Q. 4.

Differentiate between bullet bond and amortizing bond.

Q. 5.

a.

An investor has purchased 11% Bond of Rs. 100 repayable after 5 years at 99. Coupon is payable
annually. Find out its yield to maturity.

b.

An investor has purchased 11% Bond of Rs. 100 repayable 25% at the end of each year beginning
from second year at 99. Find out its yield to maturity.

SECTION - B
Q. 1.

Explain revenue based, asset based and capital based profitability ratios.

Q. 2.

What do you mean by Capital Planning and Investment Control? Explain its phases also.

Q. 3.

ABC Ltd. manufactures toys and other gift items. The research and development department has come up
with an item that would make a good promotional gift for office equipment dealers. As a result of efforts by the
sales personnel, the firm has commitments for this product.
To produce the quantity demanded, ABC Ltd. will need to buy additional machinery and rent additional space.
It appears that about 25,000 sq. feet will be needed; 12500 sq. feet of presently unused space but leased at
the rate of Rs. 3 per square foot per year, is available. There is another 12500 sq. feet available at the annual
rent of Rs. 4 per square foot.
The equipment will be purchased for Rs. 9,00,000. It will require Rs. 30,000 in modification, Rs. 60,000 for
installation and Rs. 90,000 for testing. The equipment will have a salvage value of about Rs. 1,80,000 at the
end of the 3rd year. No additional general overhead costs are expected to be incurred.
The estimated revenues and costs for the product for the 3 years have been developed as follows

Year 1

Year 2

Year 3

10,00,000

20,00,000

8,00,000

(-) Material labour & Overhead

4,00,000

7,50,000

3,50,000

(-) Overhead allocated

40,000

75,000

35,000

(-) Rent

50,000

50,000

50,000

(-) Depreciation

3,00,000

3,00,000

3,00,000

EBT

2,10,000

8,25,000

65,000

(-) Taxes

1,05,000

4,12,500

32,500

EAT

1,05,000

4,12,500

32,500

Sales

If the company sets a required rate of return of 20% after taxes, should this project be accepted?
Q. 4.

What do you mean by cost of capital? Explain its significance also.

Q. 5.

A ltd. needs finance of Rs. 10 lakhs for meeting its investment plans. It has Rs. 2,10,000 in the form of
retained earnings available for investment purposes. The following are the future details.
(i) Debt/ equity Mix
(ii) Cost of debt upto

30%
1,80,000

10% (before tax)

beyond 1,80,000

16% (before tax)

(iii) Earning per share

4 Rs.

(iv) Dividend payout

50% of earnings

(v) Exp ected growth rate of dividend

10%

(vi) Current market price per share

44

(vii) Tax rate

50%

Compute over all weighted average after tax cost of additional finance.

SECTION - C
Q. 1.

What are the causes of financial leverage? How is degree of financial leverage measured?

Q. 2.

Explain arbitrage theory of capital structure. State two important shortcomings of the theory.

Q. 3.

Explain the assumptions of Modiglianis dividend irrelevance theory. Critically analyze how far those
assumptions are tenable?

Q. 4.

What do you mean by working capital? Explain objectives of working capital management.

Q. 5.

Explain major sources of short term financing.

CASE STUDY - 1
The selected financial data for A, B, C companies for the year ended Dec. 1999 are as follows: A

Variable exp. as a % of sales

66.67

75

50

Interest

200

300

1000

Degree of operating leverage

5 1

Degree of financial leverage

3 1

4 1

2 1

Income tax Rate

50%

50%

50%

6 1

Prepare income statement of A, B, C.

2 1

CASE STUDY - 2
A performa cost sheet of a company provide the following particulars:
Elements of cost

Amount per unit (Rs)

Raw materials

80

Direct labour

30

Overheads

60

Total cost

170

Profit

30

Selling price

200

The following further particulars are available:

Raw material in stock, on average one month; materials are in process, on average half a month; finished goods in
stock, on average one month. Credit allowed by suppliers is one month; credit allowed to debtors is two months; lag in
payment of wages is 1 weeks; lag in payment of overhead expenses is one month; one fourth of the output is sold
against cash; cash in
hand and at bank is expected to be Rs. 25,000. You are required to prepare a statement
showing the working capital needed to finance a level of activity of 1,04,000 units of production.
You may assume that production is carried on evenly throughout the year, and wages and overheads accrue similarly.