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Question sheet

From the information given below, suggest the management as to which project is preferable
based on pay-back period. Two projects A and B, each project needs an investment of Rs. 30,000.
The standard cut off period for the company is 5 years.

Year

(Net profit before depreciation and after tax)


1
2
3

Project A (Rs)

10000

10000

4000

6000

8000

Project B (Rs)

8000

8000

12000

6000

7000

The initial investment required for Project A is Rs. 32400. It is expected to generate cash inflows
of Rs. 16000, Rs. 14000 and Rs. 12000 through its three years life period. Compute the Internal
Rate of Return of the Project A.
According to Walters Model the optimum Payout Ratio can be either Zero or 100%.. Explain
the circumstances when it is true.

Three firms A, B and C has EPS to be Rs. 100. The Capitalization rate or cost of equity is given to
be 10%. The Rate of Return (r) for Firm A, B and C are 17%, 10, and 7% respectively. Show the
affect of dividend policy on the market price of shares, using Gordons model when dividend
payout ratio is 0%, 40%, 80% and 100% .

In the income Statement of Income of Aura Cycles the sales are 10, 50,000, Variable Cost of 7,
67,000 and Fixed Cost of 75000. EBIT is given to be 2, 08,000. The amount of Interest is 1,
10,000 and the Tax rate applicable is 30%. Calculate the:
(A) Operating Leverage (B) Financial Leverage (C) Combined Leverage
Itemize the relationship between debt and value of the firm apropos of a related form of Leverage.

Calculate Average Rate of Return from the following information:


An investment with expenditure of Rs. 10, 00,000 is expected to produce the following profits (after deducting
depreciation)
Year
1
2
3
4
Profits (after deducting depreciation)

80000

160000

180000

60000

An investment project costs Rs. 25000 and it creates cash inflows through a period of five years. The cash flows are
Rs. 9000, Rs. 8000, Rs. 7000, Rs. 6000 and Rs. 5000 from first year to fifth year. The required rate of return is
assumed to be 10 Percent. Find out the
(A) Net Present Value
(B) Profitability Index

In the income Statement of Income of Aura Cycles the sales are 20, 50,000, Variable Cost of 17, 67,000 and Fixed
Cost of 55000. EBIT is given to be 1, 80,000. The amount of Interest is 1, 20,000 and the Tax rate applicable is 40%.
Calculate the:
(A) Operating Leverage (B) Financial Leverage (C) Combined Leverage
The contention that dividends have an impact on the share price has been characterized as the Bird in hand
argument. Elucidate the essentials of this argument. Why this argument is considered Fallacious?

Three firms A, B and C has EPS to be Rs. 100. The Capitalization rate or cost of equity is given to be 10%. The Rate
of Return (r) for Firm A, B and C are 17%, 10, and 7% respectively. Show the affect of dividend policy on the
market price of shares, using Walters model when dividend payout ratio is 0%, 40%, 80% and 100% .

The existence of Financial and Operating Leverage is always complementary. Do you agree? Vindicate your
views with suitable examples.

Rita, who is 30 years old is planning for her government investment. She invested in government scheme
which promise to pay interest @ 9% pa compounded annually on the payment of yearly installment of Rs.
10000. Calculate the amount payable by government at the end of 10 years.
Write a short note

A. Factoring

B. Lease financing

An asset has following possible returns with associated possibilities. Calculate a) variance b) Standard variation
YEAR

RETURN

PROBABILITY

2008

30

0.10

2009

20

0.20

2010

10

0.40

2011

0.20

2012

-10

0.10

You have Rs.80,000 available today for investment. You want to invest it for 5 years. Bank of India is offering
Interest @7.25%p.a compounded annually. Axis Bank is offering Interest @7%p.a compounded semi-annually.
Punjab National Bank is offering interest @8% pa compounded annually. Which bank you will choose to invest
in and Why?
The following table gives dividend and share price data for Hind Manufacturing Company.
Calculate his A.)Annual rate of return B.) Average rate of return
Year

Dividend per year Closing share price

1994
2.50
12.25
1995
2.50
14.20
1996
2.50
17.50
1997
3.00
16.75
1998
3.00
18.45
1999
3.25
22.25
2000
3.50
23.50
Mr. Sharma is appointed as a financial manager of JCT Ltd Being CEO of the company you have to advice Mr.
Sharma regarding what financial decisions he has to take for the company.

Explain the Net Income Approach ( Relevance Theory ) of cost of capital?


Enumerate the various methods to calculate cost of equity. Also mention its formulas
A company has an expansion proposal and wishes to raise 15,00,000 for it . The company
decided to raise 8,00,000 through debt , 1,00,000 through preference share and balance
through reserves . The cost of preference is 14% debenture is 8% and reserve is 14% .
Find out weighted average cost of capital?
What is the cost of debenture whose face value is Rs.100 and is redeemed at par after 10
years .The coupon rate is 6% ,Floatation cost is 4 %
Find out the cost of equity whose expected dividend is Rs.3.5 and which is likely to grow
at 7% and market price is Rs.140
ABC Ltd is selling 8% debenture at 10% discount on face value (Rs.100) and 12%
preference share is sold at par (Rs.100) . ABC Ltd is growing at 15% p.a and had paid
dividend of Rs.3 per share in the previous year and the equity share has face value of Rs.
20 and is now traded at Rs. 80. Find the overall cost of capital?
Source

Amount

Debenture

3,00,000

Preference

1,50,000

Equity

3,50,000

Question 1.The initial investment in a project is Rs. 200,000. The project has an
expected life of 5 years and zero salvage value. The company uses straight line
method for depreciation. Tax rate is 40%. The estimated earnings before
depreciation and before tax from the project are as below. Calculate NPV .

year

Earnings
before Dep.
And Tax

70000

80000

120000

90000

60000

Discount
Rate=10%

Question 2.A Co. has an investment opportunity costing Rs. 40000 with the
following expected net cash flows after taxes and before depreciation.

Year

Net Cash
Flow

7000

7000

7000

7000

7000

8000

10000

15000

10000

10

4000

Calculate:

Pay back period

NPV at 10% discount factor

Profitability Index at 10%

IRR with the help of 10% and 15% discount factor

A firm is considering two mutually exclusive projects X and Y, the details are as:
Project X
Project Y
Investment
43,500
36,000
Cash flows in years
1
10,000
15,000
2
12,000
13,000
3
13,000
12,000
4
14,000
10,000
5
16,000
10,000
Compute for both the projects and give decision which project is beneficial:
1. Payback period.
2. NPV at 10% discount rate.
3. Profitability Index at 10% discount rate.

Find the ARR for a project having a life of 5 years will cost Rs.4,00,000. Its stream of income before
depreciation (straight line method)is expected to be Rs.1,00,000; Rs.1,20,000; Rs.1,60,000;
Rs.1,70,000;Rs.2,00,000 during the life of the project and applicable tax rate is 40%.

Find the market value of the firm and average cost of capital from the following information
NOI
Rs.3.5 lacs
Total investment

Rs.15 lacs

Equity capitalization rate is 10% and firm not uses any debts.
What is dividend? Explain the Walters Model based on dividend.
What is optimum capital structure? Why is it important for any firm?

A company is considering an investment proposal to purchase a machine costing Rs.50,000 with a life
of 5 years and no salvage value. Applicable tax rate is 35% and straight line method is used for
providing depreciation. The estimated cash flows before depreciation and tax from the machine are as
follows:
Year
1
2
3
4
5
CFBT 10,000
10,692
12,769
13,462
20,385
Compute and comment about the decision of the proposal:
1. Average rate of return
2. NPV at 10% discount rate

A companys EBIT is Rs.1.5 lacs and having 8% debentures of Rs.8 lacs. Overall capitalization rate is
12%. Find value of the firm and Equity capitalisation rate.

X Ltd. Has 20% debt and 80% equity in its capital structure. The cost of debt is 10% and cost of
equity is 15%. Find overall cost of capital of the firm.
How does Gordons Model differ from Walters Model in valuation of the firm based on Dividend?

The following information is available of Avanti Corporation


Earnings per share- Rs.4
Rate of return --

18 %

Cost of Capital-

15%

What will be price per share as per Walter model if dividend payout ratio is 40%? 50%? 60%.

The Indage products limited capital structure consists of 12000 equity share of 10 each and 160000 debentures of 10% with sales of 120
Its fixed cost is 200000 and variable cost ratio to sales is 40%.The income tax rate is 50%.Calculate all three leverage.
.A company is considering purchasing a machine .Three machines are available X, Y AND Z.The details are:

Cost

50000

60000

70000

Estimated scrap

5000

7500

10000

Life in years

12

10

13

Average profit
before tax and
depreciation

10000

14000

18000

Tax is 50%.Find ARR Rate and which machine to be procured


An investment of 10000(having a scrap value of 500) yields the following return:
Year

Cash flow

1st

4000

2nd

4000

3rd

3000

4th

3000

5th

2000

Is the investment desirable? Discuss according to NPV assuming PV factor for first-five year are.909,.826,.751,.683,.621 respectively.
Critically Analyse Walter and Gordon Model of Dividend Theories?
Write a short note on
(A)Financial Leverage v/s operating Leverage (B)Net v/s Gross Working Capital

Explain the importance of working capital management for a manufacturing company.


Consider the following information about Sagar Cements:
EBIT
Rs 1000 lakhs
PBT
Rs 400 lakhs
Fixed cost
Rs 300 lakhs
Find out the operating leverage and financial leverage of the firm ?
Find out the percentage change in earning per share for Sagar Cements , if sales increased by 6 percent ?
A company is considering two mutually exclusive investments, Project X and Project Y. The expected cash flows of these projects
are as follows :

Year

Project X

Project Y

-3000

-4000

1000

1500

1200

2500

2000

5000

4000

6000

What is the NPV of each project if the cost of capital is 10 percent? Which project would you choose in this case?
Find out the payback period for each of the above mentioned projects?
ABC Ltd. has been earning Rs 10 per share. The firm is in the business where it can use these earnings in projects that provide a
return of 15%. The firms cost of capital is 10%.What is the price of the share of ABC Ltd under Walters model if it
follows payout of (a) 0% (b) 40% ?

Define Financial Management. What are the various areas of application


under the scope of Financial Management?
How is profit maximization different from shareholders wealth maximization?
Explain which goal should be adopted by modern business entities and why?
Explain the rationale of Finance in the success of the organization. Enumerate
the various role to be performed by Finance Manger.
Explain various sources of Finance, which could be used by an organization to
raise funds for its projects with a duration ranging from short run to long run.
Mr. Gautam is recently appointed as Finance manager of ABC Ltd. Being CEO
of the company advice Mr. Gautam what financial decisions he has to take for
the company.
Mr. Sameer has joined a firm dealing into Seasonal products as Chief Financial
Manager. The firm is having a small market share. Enlist various financial
challenges which Mr. Sameer may confront along with the major decisions to
be taken by him.

Explain the concept of Time value of money? Why the value of the money
changes over the period of time?
Explain in detail, the various factors that affect the value of the money in due
course of time.
Define the concept of Risk and Return. In the case of Single Asset, how is it
measured?
Explain the role of Compounding in the estimation of time value of money
with a suitable example.
Explain the role of Discounting in the estimation of time value of money with
a suitable example.

Modigliani- Miller Hypothesis is an old wine in new bottle. Enumerate the


statement apropos of Net Operating Income Approach.
The achievement of Optimal Capital Structure is a day dreaming as it is just
a baseless claim and alien phenomenon. Explain the statement in the light
of a capital structure theory that justifies it.
What do you understand by Cost of Capital? How the cost of different sources
of Finance could be measured?
Explain the concept of Weighted Average Cost of Capital along with its
measurement.
What is the significance of the Cost of Capital? Enumerate the various factors
affecting cost of capital of Firm?

Q1. Explain the significance of NPV


Q2. What is the difference between discounted and non discounted methods which is
better and why?
Q3. Explain the difference between financial risk and operating risk.
Q4. Explain the degree of operating leverage and its significance.
Q5. Explain the Walters model of dividend theory.
Q6. Critically evaluate the MM hypothesis of dividend irrelevance..

Q1. Explain the significance of IRR


Q2. In what circumstances NPV and IRR give conflicting results, which method should
be preferred at that time and why?
Q3. Explain the relation between EPS and Financial leverage.
Q4. Explain the degree of combined leverage.
Q5. Explain the Gordons model of dividend policy.

Q6. The assumption of MM hypothesis is unrealistic. Do you agree? Justify your


answer.

Illustrate the effect of Dividend policy of a firm on Market price of its shares using Walter model
taking hypothetical example.
Volga is a large manufacturing and marketing company in the private sector. In 2014, the company
had a gross sales of Rs. 982.2 crores. Other financial data if the company is given below:
Net Worth- Rs. 152.31 crores
Borrowing- Rs.165.47 crores
EBIT- Rs. 43.17 crores
Interest- Rs. 34.39 crores
Fixed cost (excluding interest) Rs. 118.23 crores
Calculate: a) Operating leverage, b)Financial leverage, Combined leverage and interpret the results
Explain the meaning of Working capital and also explain the determinants of working capital.
A machine will cost Rs.5,00,000 and will provide annual cash inflow of Rs. 1,50,000 for a period of 6
years. Calculate:
a) Payback Period
b) Accounting rate of return
Should company invest in this machine? Justify your answer.
A project will cost Rs.5,00,000. Its stream of earnings before depreciation, interest and taxes during
the first year through 5 years is expected to be Rs.1,90,000, Rs.1,70,000, Rs.1,60,000, Rs. 1,20,000
and Rs.2,00,000 respectively. Assume 40% tax rate and depreciation on straight line basis. Calculate:
a) Net Present Value
b) Profitability Index