Lecture No.

1 Concept of Finance 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Working Capital Management Capitalization Capital Budgeting

Institute of Science, Poonas INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH Wakad, Pune-411 057 Subject: (202) Financial Management M.B.A. Sem-II Topic Sub Topic Concept of Finance, Corporate Finance Finance Functions and other functions. Structures of the Financial System Meaning and Objectives, As of Financial Management Scope and Functions of Financial Management, Financial Planning and Forecasting. Under and Over Capitalization, Capital Structures Computation of cost of capital, Trading on Equity, Leverages, Type and Significance Nature and Significance, Time value of money Discounting and Compounding, Methods of evaluating Capital Expenditure proposals Financial statements of Corporate organizations, Introduction to Schedule- VI, Provisions of Companies Act 1956 Analysis and interpretation of Financial Statements using the techniques of Ratio Analysis Analysis and interpretation of Financial Statements using the techniques of Ratio Analysis Analysis and interpretation of Financial Statements using the techniques of Fund Flow analysis Analysis and interpretation of Financial Statements using the techniques of Fund Flow analysis Nature of Working Capital Management, Need for working capital operating cycle, estimation of working capital requirement Management of Cash and Receivables, Cash Budget. Dividend Policy, Procedural and Legal formalities involved in the payment of dividend Bonus Shares

Financial Management

Financial statements of Corporate organizations Analysis and interpretation of Financial Statements

Management of Profits

Institute of Science, Poonas INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH

Wakad, Pune-411 057

ASSIGNMENT ON Financial Management M.B.A. SEM-II (Jan-2012) U.C. No. 202 -------------------------------------------------------------------------------------------------------* There are 5 sections in this assignment. * Students are required to solve any one question from each section. * This assignment is also required for written internal examination. Hence, please do not write anything on the question bank as students are supposed to bring it at the time of examination. * Please submit the assignment in FILE. * Generally, each question below carries weight age of 14 marks. -----------------------------------------------------------------------------------------------------SECTION I Q.1

Write in detail the scope of decision making in the financial management. Explain the role of finance executive. Define Financial Planning, State its objectives. Explain various factors which are required to be considered while preparing financial plan. What is working capital management? Explain the concept of Operating Cycle and factors affecting the working capital management of the organization. Explain the factors which affect the capital structure planning of the organization. What is overcapitalization? Why overcapitalizations arise? Explain the corrective remedies for the overcapitalization. Define Capital Budgeting. Explain the following techniques of capital budgeting with their respective merits and demerits. a) Pay Back Period, b) Net Present Value. c) Average Rate of Return.

Q.2 Q.3

Q.4

Q.5

SECTION II

The cost sheet of POR Ltd. provides the following data: Cost per unit Rs. Raw materials 50 Direct Labor 20 Overheads (including depreciation of Rs. 10) 40 Total cost 110 Profits 20 Selling price 130 Average raw material in stock is for one month. Average materials in work-in-progress is for half month. Credit allowed by suppliers; one month; credit allowed to debtors; one month. Average time lag in payment of wages; 10 days; average time lag in payment of overheads 30 days. 25% of the sales are on cash basis. Cash balance expected to be Rs. 1, 00,000. Finished goods lie in the warehouse for one month. You are required to prepare a statement of the working capital needed to finance a level of the activity of 54,000 units of output. Production is carried on evenly throughout the year and wages and overheads accrue similarly. State your assumptions, if any, clearly.
Q.1

Q.2 A Company requires Rs. 15 Lakhs for the installation of a new unit, which would yield an annual EBIT of Rs. 2, 50,000. The Companys objective is to maximize EPS. It is considering the possibility of Issuing Equity Shares plus raising a debt of Rs. 3,00,000, Rs. 6,00,000 and Rs. 9,00,000. The current Market Price per Share is Rs. 50 which is expected to drop to Rs. 40 per share if the market borrowings were to exceed Rs. 7, 00,000., The cost of borrowing are indicated as follows : Level of Borrowing up to Rs. 2,00,000,Rs. 2,00,000 to Rs. 6,00,000 ,Rs. 6,00,000 to Rs. 9,00,000, Cost of Borrowing 12% p.a., 15% p.a., 17% p.a. Assuming a tax rate of 50%, work out the EPS and the scheme, which you would recommended to the Company. Q.3 a. Y Ltd issued Rs. 2, 00,000, 9% debentures at a premium of 10%. The costs of floatation are 2%. The tax rate is 50%. Compute the after tax cost of debt.

b. A company issued Rs. 1, 00,000, 10% redeemable debentures at a discount of 5%. The cost of floatation amount to Rs. 3,000. The debentures are redeemable after 5 years. Compute before tax and after tax cost of debt. The tax rate is 50%. c. A company issued 10,000, 10% preference share of Rs. 10 each, Cost of issue is Rs. 2 per share. Calculate cost of capital if these shares are issued (i) at par, (ii) at 10% premium, and (iii) at 5% discount.

Q.4 Zenith Industrial Ltd. is thinking of investing in a project costing Rs. 20 lakhs. The life of the project is five years and the estimated salvage value of the project is zero. Straight line method of charging depreciation is followed. The tax rate is 50%. The Expected cash flows before tax are as follows: Year Estimated Cash flow before depreciation and tax (Rs. lakhs) You are required to determine the: (i) Payback Period for the investment, (ii) Average Rate of Return on the investment, (iii) Net Present Value at 10% Cost of Capital, (iv) Benefit-Cost Ratio. Q.5 A company is considering which of two mutually exclusive projects is should undertake. The Finance Director thinks that the project with the higher NPV should be chosen whereas the Managing Director thinks that the one with the higher IRR should be undertaken especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after-tax cash flows of the projects are as follows: Year 0 1 Cash Flows : Project X (200) 35 Project Y (200) 21 8 2 8 0 1 0 3 9 0 1 0 4 7 5 4 5 20 3 1 4 2 6 3 8 4 8 5 10

Required: (a) Calculate the NPV and IRR of each project. (b) Sate, with reasons, which project you would recommend. (c) Explain the inconsistency in the ranking of the two projects. The discount factors are as follows: Year 0 1 Discount Factors: (10%) 1 0.9 1 (20%) 1 0.8 3 2 0.8 3 0.6 9 3 0.7 5 0.5 8 4 0.6 8 0.4 8 5 0.62 0.41

SECTION-III Q.1 Discuss the disclosure requirements of the following items in schedule VI format:

a) Debtors. b) Equity share capital. c) Secured loans. d) Investments.

Q.2

Following is the Profit and Loss Account and Balance Sheet of Jai Hind Ltd. Redraft them for the purpose of analysis and calculate the following ratios: 1) Gross Profit Ratio 6) Finished goods Turnover Ratio 2) Overall Profitability Ratio 7) Liquidity ratio 3) Current Ratio 4) Debt-Equity Ratio 5) Stock-Turnover Ratio
Profit and Loss A/C

Dr.

Cr.

Opening stock of finished goods Opening stock of raw material Purchase of raw material Direct wages Manufacturing Exp Administration Exp Selling & distribution Exp Loss on sale of Plant Interest on debentures Net Profit

1,00,000 50,000 3,00,000 2,00,000 1,00,000 50,000 50,000 55,000 10,000 3,85,000

Sales Closing stock of raw material Closing stock of finished goods Profit on sale of shares

10,00,000 1,50,000 1,00,000 50,000

13,00,00 0 Balance Sheet Liabilities Equity share capital Preference share capital Reserves Debentures Sundry Creditors. Bills Payable Rs 1,00,000 1,00,000 1,00,000 2,00,000 1,00,000 50,000 Assets Fixed assets Stock of raw material Stock of finished goods Bank balance Debtors

13,00,000

Rs 2,50,000 1,50,000 1,00,000 50,000 1,00,000

6,50,000 Q.3 Q.4

6,50,000

What is ratio analysis? Explain its significance. Explain the liquidity ratios A company has maintained the following relationships in recent years : Gross profit to net sales 40% Net profit to net sales 10% Selling expenses to net sales 20% Book debts turnover 8 per annum Inventory turnover 6 per annum Quick ratio 2 Current ratio 3 Assets turnover (sales basis) 2 per annum Total assets to intangible assets 20 Accumulated depreciation to cost of fixed assets 1/3 Book dets to sundry creditors (for goods) 1.5 Shareholders funds to working capital 1.6 Total debt to shareholders funds 0.5

Quick assets comprise 25% cash, 15% marketable securities and 60% book debts. During 2008-2009, the company earned Rs. 1,20,000 or Rs.4.68 per equity share; the market value of one equity share was Rs. 78. The capital consisted of equity shares issued at a premium of 10% and 12% preference shares of Rs. 100 each. Interest was earned 17 times in 2008-2009. Many years ago the company had issued 10% debentures due for redemption in 2010. During 2008-2009 there was no change in the level of inventory, book debts, debentures and shareholders funds. All purchases and sales were on account. Preference dividend paid in 2008-2009, in full, was Rs. 3,000. You are required to prepare the balance sheet and the profit and loss account relating to 2008-2009. Ignore taxation including corporate dividend tax. Q.5 Calculate the degree of operating leverage (DOL), degree of financial leverage (DFL) and the degree of combined leverage (DCL) for the following firms and interpret the results. Firm K Firm L Firm M 1. Output (Units) 60,000 15,000 1,00,000

2. Fixed costs (Rs.) 3. Variable cost per unit (Rs.) 4. Interest on borrowed funds (Rs.) 5. Selling price per unit (Rs.)

7,000 0.20 4,000 0.60

14,000 1.50 8,000 5.00

1,500 0.02 0.10

SECTION IV Q.1 A firm has sales of Rs. 10,00,000, variable cost of Rs. 7,00,000 and fixed costs of Rs. 2,00,000 and debt of Rs. 5,00,000 at 10% rate of interest. What are the operating, financial and combined leverages? It the firm wants to double its Earnings before interest and tax (EBIT), how much of a rise in sales would be needed on a percentage basis? Q.2 Hi-tech Ltd. plans to sell 30,000 units next year. The expected cost of goods sold is as follows: Rs. (Per Unit) Raw material 100 Manufacturing expenses 30 Selling, administration and financial expenses 20 Selling price 200 The duration at various stages of the operating cycle is expected to be as follows : Raw material stage 2 months Work-in-progress stage 1 month Finished stage 1/2 month Debtors stage 1 month Assuming the monthly sales level of 2,500 units, estimate the gross working capital requirement. Desired cash balance is 5% of the gross working capital requirement, and work in- progress in 25% complete with respect to manufacturing expenses. Q.3 Company earns a profit of Rs. 3, 00,000 per annum after meeting its interest liability of Rs. 1, 20,000 on its 12% debentures. The tax rate is 50%. The numbers of Equity Shares of Rs. 10 each are 80,000 and the retained earnings amount to Rs. 12, 00,000. The Company proposes to take up an expansion scheme for which a sum of Rs. 4, 00,000 is required. It is anticipated that after expansion, the Company will be able to achieve the same return on investment as at present. The funds required for expansion can be raised either through debt at the rate of 12% or through the issue of Equity shares at par. Required: 1. Compute the EPS if additional funds were raised by way of (a) Debt;

(b) Equity Shares. 2. Advise the Company as to which source of finance is preferable. Q.4: Discuss in detail the procedural and legal formalities involved in the payment of dividend The relevant information for two alternative systems of internal transportation Are given below : System 1 6 1 6 years 2 (Rs. Millions) System 2 4 0.9 4 years 1.5

Q.5

Particulars Initial investment Annual operating costs Life Salvage value at the end

Which system would you prefer if the cost of capital is 6%? Justify your recommendation with appropriate analysis. [Present value of annuity at 6% for 6 years = 4.917 and for 4 years = 3.465. Present value of Rs. 1.00 at 6% at the end of 6the year 0.705 and that at the end of 4th year 0.792]. SECTION V Write short notes on (any 2) a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) Advantages of Joint Stock Company. Turnover Ratios. Financial Leverage Optimum capital structure Financial Leverage. Operating Cycle. Cost of debt capital Time value of money Undercapitalization Discounting & Compounding Bonus Shares Fund Flow Statement Financial Statements Finance decision Current liabilities & provisions Credit policy Solvency ratios

r) s)

Cost of retained earnings Leverages