INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

GHAZIABAD
End-Term Examinations – June 2009
Subject Code : IMT-59 Time Allowed : 3 Hours
Subject Name: Financial Management Max. Marks : 50
Notes: (a) Answer any FOUR questions from SECTION-A and CASE STUDY as given in SECTION-B.
Each Question (SECTION-A) carries 9 MARKS and (SECTION-B) Case Study carries 14 MARKS.
(b) No doubts/clarifications shall be entertained. In case of doubts/clarifications, make reasonable assumptions and proceed.
(c) For students enrolled in January 2008, July 2008 and January 2009 batches, the Question Paper would be treated for
70 marks instead of 50 marks.
SECTION-A MARKS : 36
Q.1 Explain the need for financial analysis. How does the use of ratios help in financial analysis?
Q.2 Discuss any three of the following:
a) Yield to maturity
b) Relevance of MM approach in capital structure
c) Bonus shares
d) Cash conversion cycle
Q.3 (a) A finance company advertises that it will pay a lump sum of Rs44650 at the end of 5 years to investors who deposit
annually Rs 6000 for 5 years. What is the interest rate implicit in this offer?
(b) A company’s bonds have a par value of Rs 100, maturity in seven years, and carry a coupon rate of 12% payable
semi-annually. If the appropriate discount rate is 16%, what price should the bond command in the market place?
Q.4 Differentiate between:
a) Mutually Exclusive and Independent Investment
b) Basic and diluted earning per share
c) Aggressive & matching approach of financing working capital
Q.5 Current market price of share of A Ltd. is Rs 134/- . Company is currently paying the dividened of Rs 3.5 per share ,
dividend is expected to grow at 15 % over the next six years and then at the rate of 8 % perpetually. Calculate the cost of
equity capital.
Q.6 What issue arises when the firm is deciding how to partition profits between dividend and retained earning?
Q.7 Strong Enterprises Ltd. is a manufacturer of high quality running shoes. Ms Dazlling, President, is considering
computerizing the company’s ordering, inventory and billing procedures. She estimates that the annual savings from
computerization include a reduction of ten clerical employees with annual salaries of Rs 15000 each, Rs 8000 from
reduced production delays caused by raw materials inventory problems, Rs 12000 from lost sales due to inventory
stockouts, and Rs 3000 associated with timely billing procedures. The purchase price of system is Rs 2,00,000 and
installation costs are Rs 50000. These outlays will be depreciated on straight line basis to a zero book salvage value
which is also its market value at the end of five years. Operation of the new system requires two computer specialists with
annual salaries of Rs 40000 per person. Also annual maintenance and operating cash expenses of Rs 12000 are
estimated to be required. The company’s tax rate is 40 % and its required rate of return for this project is 12%.
You are required to:
a) Find the projects initial cash outlay
b) Find the projects operating and terminal value cash flows over its 5 year life
c) Evaluate the project using NPV method
d) Evaluate the project using PI method
e) Calculate the projects pay back period

SECTION-B (Case Study) MARKS : 14

Metcalf Engineers is considering a proposal to replace one of its hammers. The following information is available:
a) The existing hammer was bought 2 years ago for Rs 10 lakh. It has been depreciated at the rate 33.33 percent per
annum. It can be presently sold at its book value. It has remaining life of 5 years after which on disposal, it would fetch a
value equal to its the then book value.
b) The new hammer costs Rs 16 lakhs , it will subject to a depreciation rate of 33.33%. After 5 years it is expected to fetch a
value equal to its book value. The replacement of the old hammer would increase revenues by Rs 2 lakhs per year and
reduce operating cost ( excluding depreciation) by Rs 1.5 lakh per year.

Compute the incremental post tax cash flows associated with the replacement proposal, assuming the tax rate of 50%

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