1) | A) Answer the following in two to three lines 1) Modigiliani & Miller approach 2) Capital Structure 3) Cost of Capital 4) Capital Budgeting 5) Merger & Acquisition | ||||||||
B) Solve Any Two i. Consider the information of Gaurav International Ltd- EBIT 1,120 Rs. in lakh; PBT 320 Rs. in lakh; Fixed Cost 700 Rs. in lakh Calculate the percentage of change in earnings per share, if sales increased by 10 per cent ii. Cost of capital A firm’s after – tax cost capital of the specific sources is as follows: Cost of Debt - 4.77% ; Cost of Preference share-10.53% ; Cost of Equity share-14.59%; Cost of retained Earnings-14.00% The following is the capital structure: (Assuming external yield criterion)
Calculate the weighted average cost of capital using book value weights. iii. Cost structure : Pritham ltd requires 50 lacs for a new plant. This plant is expected to yield EBIT of 20% on investment. While deciding about financial plan, the company considers the objective of maximizing EPS. It has three alternatives to finance the project- by raising debt of Rs.5 lakhs or Rs.20 lacs or Rs.30 lacs and the balance in each case by issuing equity shares. The company share is currently selling at Rs.150, but is expected to decline to Rs.125 in case the funds are borrowed in excess of Rs.20 lakhs. The funds can be borrowed at the rate of 10% upto Rs.5 laks, at 15% over Rs.5 lakhs and upto Rs. 20 lakhs and at 20% over Rs.20 lakhs. The tax rate applicable to the company is 40%. Equity shares are issued at market price. Which form of financing should the company choose? | |||||||||
2) | A. Capital Budgeting: From the following information calculate the net present value of the two projects and suggest which of the two projects should be accepted assuming a discount rate of 10%. Project X Project Y Initial investment Rs.20,000 Rs.30,000 Estimated life 5 Years 5 Years Scrap value Rs. 1,000 Rs. 2,000 The profits before depreciation and after taxes (cash flows) are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 /Rs Project X 5000 10000 10000 3000 2000 Project Y 20000 10000 5000 3000 2000 B. You are provided with the following information in respect of XYZ Ltd. For the ensuing year: Production for the year 69,000 units ; Finished goods in store 3 months ; Raw material in store 2 months ; Production process 1 month ; Credit allowed by creditors 2 months; Credit given to debtors 3 months ; Selling price per unit Rs. 50 ; Raw material 50% of selling price; Direct wages 10% of selling price ; Overheads 20% of selling price ; There is a regular production and sales cycle and wages and overheads accrue evenly. Wages are paid in the next month of accrual. Material is introduced in the beginning of production cycle. You are required to find out: (1) Its working capital requirement (2) Its permissible bank borrowings | ||||||||
3) | Cash Budget: Prepare Cash Budget of Jasmin Ltd. For 3 months commencing from April with the help of following information. (i) Cash Sales are 25% of total sales against which 1% discount is given. (ii) 0.5% of sales are returned and on the good receivables there 60% of credit sales are collected in the same month and balance 40% in the following month. (iii) Refer the chart below:-
(iv) Payment for purchases is made 40% in the same and 60% in the following month. If paid in the same month entitled for 1% discount. (v) Interest @ 6% on debentures of Rs. 2,00,000 is paid in the month of June. (vi) Rent of Rs. 8,000 paid per month. (vi) Dividend received in May Rs. 22,000 (vii) Cash Balance as on 31st March is Rs 2,00,000. (viii) As the marketing manager was going for business promotion tour to Delhi during May first week, was given Rs.1,00,000/- on account.. (ix) Minimum balance to be maintained by the company standards is of Rs.2,00,000/- and the amount of shortage to be brought in by friendly loan from directors. | ||||||||
4) | 1) The following are the details regarding the operation of Annapurna Ltd during a period of 12 months: Sales Rs.1200000 Selling Price per unit Rs.10 Variable Cost Price per unit Rs.6 Total Cost per unit Rs.9 Credit period allowed to customers 1 month The Enterprise is considering a proposal for a more liberal extension of credit by increasing the average collection period from 1 month to 2 months. This relaxation is expected to increase the sales by 25%. You are required to advise the Enterprise regarding adopting the new credit policy, presuming that the Enterprise’s required return on investment is 25%. 2) From the following data of a trading company compute the realisation period (operating cycle) Rs. in lakhs Average inventories 13.0 Average Debtors 22.5 Average Creditors 14.0 Purchases 240.0 Cost of goods sold 260.0 Sales 300.0 | ||||||||
5) | Business Restructuring: Sitha Ltd is intending to acquire Githa Ltd. (by merger) and the following information is available in respect of the companies.
Required: (i) What is the present EPS of both the companies? (ii) What is the present Price Earning Ratio. (P/E Ratio) of both the companies? (iii) If the proposed merger takes place, what would be the new EPS for Sitha Ltd. (assuming that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price.) (iv) What should be the exchange ratio if, Githa Ltd. wants to ensure the same EPS to members as before the merger takes place? | ||||||||
6) | Write short notes on any two of following: a) Traditional role vs. modern role of finance manager b) What do leverage ratios indicate c) NPV vs. IRR d) Modern instruments of financing |
a) | Answer the following in two to three lines 1) Leverage 2) Optimal level of receivable 3) Discounted Cash Flow 4) Securitization of Debt 5) Retained earnings | ||||||||||||
b) | B) Solve Any Two i. Ambika enterprises has sales of Rs.150 lakhs, variable cost of Rs.84 lakhs and fixed cost of Rs.12 lakhs. It has a debt of Rs.100 lakhs @ 9% and equity of Rs.100 lakhs. a) What is firm’s ROI? b) Does it have favorable financial leverage? c) If the firm belongs to an industry whose asset turnover is 2, does it have a high or low asset leverage? d) What is operating, financial and combined leverage of firm? e) If the sales drop to Rs.125 lakhs, what will be the EBIT? f) At what level the EBT of the firm will be equal to zero? ii. The following is the capital structure of a Company: Source of capital Book value Rs. Market valueRs Equity shares @ Rs. 100 each 80,00,000 1,60,00,000 9 per cent cumulative preference shares @ Rs. 100 each 70,00,000 24,00,000 11 per cent debentures 60,00,000 66,00,000 Retained earnings 40,00,000 Nil 2,50,00,000 2,50,00,000 The current market price of the company’s equity share is Rs. 200. For the last year the company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent every year. The corporate tax rate is 30 per cent and shareholders personal income tax rate is 20 per cent. You are required to calculate: (i) Cost of capital for each source of capital. (ii) Weighted average cost of capital on the basis of book value weights. (iii) Weighted average cost of capital on the basis of market value weights. iii. Cost structure: Sha Ltd. a widely held company is considering a major expansion of its production facilities and the following alternatives are available: Alternatives (Rs. in lakhs) A B C Share Capital 50 20 10 16% Debentures - 20 15 Loan from a Financial Institution @ 16% p.a. Rate of Interest. - 10 25 Expected rate of return before tax is 25%. The rate of dividend of the company is not less than 20%. The company at present has low debt. Corporate taxation 50% Which of the alternatives you would choose? | ||||||||||||
c) | A newly formed company has applied to the Commercial Bank for the first time for financing its working capital requirements. The following information is available about the projections for the current year: Per unit Elements of cost: (Rs.) Raw material 40 Direct labour 20 Overhead 30 Total cost 90 Profit 10 Sales 100 Other information: a. Raw material in stock : average 4 weeks consumption, Work – in progress (completion stage, 50 per cent), on an average half a month. Finished goods in stock : on an average, one month. b. Credit allowed by suppliers is one month and Credit allowed to debtors is two months. c. Average time lag in payment of wages is 1½ weeks and 4 weeks in overhead expenses. d. Cash in hand and at bank is desired to be maintained at Rs. 50,000. e. 20% sales are cash sales and rest on credit basis. Required: (i) Prepare statement showing estimate of working capital needed to finance an activity level of 96,000 units of production. Assume that production is carried on evenly throughout the year, and wages and overhead accrue similarly. For the calculation purpose 4 weeks may be taken as equivalent to a month and 52 weeks in a year. (ii) From the above information calculate the maximum permissible bank finance by all the three methods for working capital as per Tondon Committee norms; assume the core current assets constitute 25% of the current assets. | ||||||||||||
d) | 2) Prepare a Cash Budget for the Quarter beginning from 1st July 2012, from the following information:- Month Sales Purchases Wages Overheads Other expenses June 12 120000 62000 24000 8000 6000 July 130000 67000 27000 7000 8000 August 124000 60000 25000 7000 7000 September 132000 65000 26000 9000 8000 Other Information: a) 25% of the sales are for cash with a discount of 1% and the balance are on one month’s credit. But most of the time only 50% is collected after one month and the rest realizes only in the next month. b) The purchases are on 1 month credit c) Advance income tax of Rs.1,00,000 in Aug, out of which Rs.50,000 were paid immediately as advance to the supplier for machinery. e) The Cash in hand on 1-7-12 was at Rs.42,300 and the company has an overdraft facility to tide over temporary cash deficit and at the same time the bankers are instructed to transfer any balance in excess of Rs.35,000 to Short Term Deposit with them. | ||||||||||||
e) | Receivable Management: Suman Ltd. is considering the revision of its credit policy with a view to increasing its sales and profit. Currently all its sales are on credit and the customers are given one month’s time to settle the dues. It has a contribution of 40% on sales and it can raise additional funds at a cost of 20% per annum. The marketing manager of the company has given the following options along with estimates for considerations: Particulars Current Position I Option II Option III Option Sales (Rs. in lakhs) 200 210 220 250 Credit period (in months) 1 1½ 2 3 Bad debts (% of sales) 2 2½ 3 5 Cost of Credit administration (Rs. in lakhs) 1.20 1.30 1.50 3.00 You are required to advise the company for the best option. | ||||||||||||
f) | Sunil Ltd and Benny Ltd had been carrying on business independently. They agreed to amalgamate and from a new company SunBen Ltd., with an authorized share capital of 2,00,000 divided into 40,000 equity shares of Rs. 5 each. On 31st December, 2011 the respective Balance Sheets were as follows: Fixed Assets 3,17,500 1,82,500 Current Assets 1,63,500 83,875 4,81,000 2,66,375 Less: Current Liabilities 2,98,500 90,125 Representing Capital 1,82,500 1,76,250 Additional Information: (a) Revalued figures of Fixed and Current Assets were as follows:
(b) The purchase consideration is satisfied by issue of following shares and debentures: (i) 30,000 equity shares of Sunben Ltd., to S and B in proportion to the profitability of their respective business based on the average net profit during the last three years which were as follows:
(ii) 15% debentures in Sunben Ltd. at par to provide an income equivalent to 8% return on capital employed in their respective business as on 31st December, 2011 after revaluation of assets. You are requested to: Compute the amount of debentures and shares to be issued to S and B. A Balance Sheet of Sunben Ltd., showing the position immediately after amalgamation. | ||||||||||||
g) | Write short notes on any two of following: a. Determinants & Components of cost of capital b. Investment proposal appraisal techniques c. Types of business restructuring |
I. | Answer the following in two to three lines 1) Aging schedule 2) Motives of holding cash 3) Optimal Capital Structure 4) De-merger 5) Profit maximization objective |
II. | B) Solve Any Two i. The selected data for A, B and C companies in the year ended 31st march 2002 were as follows: P Q R Variable cost as percentage of sales 66% 75% 50% Interest expenses Rs 250 500 1,000 Degree of operating leverage 5 6 2 Degree of financial leverage 3 4 2 Income tax rate % 40 40 40 You are required to prepare income statement for the three comapnies ii. M/s. Maneesh enterprises believes in net operating income approach. Its capital structure has following parameters: Overall cost of capital 16% Cost of Debt 14% Market value of debts Rs.300 lacs Value of Equity Rs.260 Lacs : Calculate 1. Cost of equity in current level 2. If cost of debt is reduced by 3% what will be cost of equity if the overall cost remains unchanged 3. If bonus shares are issued in the ratio of 1:1 and overall costs gets reduced to 14% 4. If debt-equity ratio is adjusted ti 1.8 in current situation , then what will be cost of equity? iii. Cost structure: Rajani Ltd, has a capital structure exclusively of ordinary share of Rs.10 each amounting to Rs.5,00,000. The company desires to raise additional funds of Rs.10 lakhs for financing its extension programme. The company can raise 50% as equity at par and balance in 5% debentures. The existing EBIT is Rs.60,000 which will raise by 75% on expansion. The market price per share is Rs.100 and tax rate is 30%. Calculate EPS after expansion |
III. | Maneesha Ltd. is commencing a new project for manufacture of electric toys. The following cost information has been ascertained for annual production of 60,000 units at full capacity: Item / Amount per unit Rs. Is given: Raw materials - 20 ; Direct labour -15 ; Manufacturing overheads: Variable Rs. 15 ; Fixed Rs.10 ; Total Rs.25/-; Selling and Distribution Variable is Rs. 3 and Fixed is Rs.1 and total Rs. 4/- ; Total cost is Rs.64 and Profit is Rs.17/- and Selling price is Rs. 81/- ; In the first year of operations expected production and sales are 40,000 units and 35,000 units respectively. To assess the need of working capital, the following additional information is available: (i) Stock of Raw materials…………………………………...3 months consumption. (ii) Credit allowable for debtors…………………………..…1½ months. (iii) Credit allowable by creditors……………………………4 months. (iv) Lag in payment of wages………………………………..1 month. (v) Lag in payment of overheads…………………………..½ month. (vi) Cash in hand and Bank is expected to be Rs. 60,000. (vii) Provision for contingencies is required @ 10% of working capital requirement including that provision. You are required to prepare a projected statement of working capital requirement for the first year of operations. Note: Valuation to be done following convention of conservatism. |
IV. | 1) Prepare the Monthly forecast of Cash of Sundar Ltd. For the Quarter ended 31 December, 2012 from the following information: a. Opening Balance as on 1st Oct., 2012 is Rs. 50, 000 b. The Budgeted and Actual sales were Rs. 1, 00, 000 each for august and September, October Rs. 1, 20, 000, November Rs. 1, 35, 000 and December Rs. 1, 40, 000. 30 % of the sales were for Cash, with a discount of 1%, and out of the balance 50 % in the subsequent month of the sale and remaining 50 % in the second month subsequent of the sale. c. Dividend on the Investments is being declared on the 20th December, amounting to Rs. 1200 d. Machinery Sale in the month of December is Rs. 15, 000 e) Materials worth Rs. 40, 000 each is being purchased in August and September, 50 % of which is payable on 1st October and proposed purchases for the quarter October to December evenly spread out to Rs. 1, 50, 000. Vendors offer 5 % discount for the cash payments. It is decided to maintain the cash balance at Rs. 10, 000 each month and the balance to be utilized for payment to vendors. f) Wages are expected to be Rs. 12, 000 per month payable a month in arrear g) Manufacturing expenses payable in the month incurred Rs. 15, 000 per month. h) General Selling expenses are expected to be Rs. 5, 000 per month i) Machine costing Rs. 55, 000 is proposed to be purchased for cash in December. j. Sales Commission of 2% on sales payable two month after sales |
V. | 3) Haripriya Ltd. has a present annual sales of 10,000 units at Rs. 300 per unit. The variable cost is Rs. 200 per unit and the fixed costs amount to Rs. 3,00,000 per annum. The present credit period allowed by the company is 1 month. The company is considering a proposal to increase the credit period to 2 months and 3 months and has made the following estimates: Existing Proposed Credit Policy 1 month 2 months 3 months Increase in sales - 15% 30% Sales return - 1% 2% Collection costs 1 Lac 10% increase 20% increase % of Bad Debts 1% 3% 5% There will be increase in fixed cost by Rs. 30,000 on account of increase of sales beyond 20% of present level. The company plans on a pre-tax return of 20% on investment in receivables. You are required to calculate the most paying credit policy for the company. |
VI. | Business Restructuring: Company X is contemplating to purchase Company Y. Company X has 5,00,000 shares having a market price of Rs. 30 per share while company Y has 2,50,000 shares selling at Rs. 20 per share. The EPS are Rs. 4 and Rs. 2.25 for X and Y respectively. Management of both the companies are discussing proposal for exchange of share in proportion to the relative earning per share of two companies. Calculate EPS after merger if implemented. |
VII. | Write short notes on any two of following: a. Factors determining working capital b. FL Vs. OL c. Various Sources of capital d. Importance of Business restructuring an risks involved |
A. | Answer the following in two to three lines 1) Trading on Equity 2) Return on Investment 3) Capital Gearing 4) Point of Indifference 5) WACC |
B. | B) Solve Any Two i. Calculate operating leverage and financial leverage under situation A, B and C and financial plans I.II and III respectively from the following information relating to the operations and capital structure of Ravi Limited. Also find out the combinations of operating and financial leverages, which gives the highest value and the least value. How are these calculations useful to finance manager? Installed capacity ( No of units) 1000 Actual production and sales (No of units) 800 Selling price per unit Rs 15 Variable cost per unit Rs 9 Fixed cost Situation A Rs.1000 Situation B Rs.2000 Situation C Rs.3000 Financial Plans I II III Equity (Rs) 5,000 7,500 2.500 12% debt(Rs) 5,000 2,500 7,500 ii. Binu Ltd wishes to raise additional finance of Rs.20 Lakhs for meeting its investment plans. It has Rs.5,10,000 in the form of retained earnings available for investment purposes. The following are the further details:- Debt equity mix 40% /60% Cost of Debt Upto Rs.4,00,000 10% before tax Cost of Debt Beyond Rs.4,00,000 16% before tax Earnings per share Rs.4/- Dividend pay out 50% of earnings Expected growth rate in dividend 10% Current market price per share Rs.44 Tax rate 40% You are required 2) To determine the pattern of raising the additional finance 3) To determine the post tax average cost of additional debt 4) To determine the cost of retained earnings and cost of equity 5) Compute the overall weighted average after tax cost of additional finance. iii. Cost structure: Shankaranaryanan Ltd. currently has an equity share capital of Rs. 10,00,000 consisting of 1,00,000 Equity share of Rs. 10 each. The company is going through a major expansion plan requiring to raise funds to the tune of Rs. 6,00,000. To finance the expansion the management has following plans: · Plan-I : Issue 60,000 Equity shares of Rs. 10 each. · Plan-II : Issue 40,000 Equity shares of Rs. 10 each and the balance through long-term borrowing at 12% interest p.a. · Plan-III : Issue 30,000 Equity shares of Rs.10 each and 3,000 Rs.100, 9% Debentures. · Plan-IV : Issue 30,000 Equity shares of Rs. 10 each and the balance through 6% preference shares. The EBIT of the company is expected to be Rs. 5,00,000 p.a. assume corporate tax rate of 40%. Required: (i) Calculate EPS in each of the above plans. (ii) Ascertain the degree of financial leverage in each plan. |
C. | 3) From the following information prepare an estimate of working capital required to finance a level of activity of 3,12,000 units p.a. (52 weeks) and how will you finance the working capital. Particulars Per unit (Rs.) Raw Materials 100 Wages 30 Manufacturing OH 20 Administrative OH 50 Selling 10 210 Profit 15 Selling Price 225 Other Information: a. Raw materials are held in stock for a period of 4 weeks. b.Materials remain in process for 2 weeks requiring 50% wages and 40% overheads. c.Finished goods remain in stock for a period of 4 weeks. d. Credit allowed to customers is 8 weeks but 20% of the invoice price is collected immediately.f. Time lag in payment of wages is 1.5 weeks and in overheads is 4 weeks. G. Credit available from suppliers is 4 weeks but 20% of the creditors are paid 4 weeks in advance.h. Bank balance is to be maintained at Rs. 60,000. |
D. | 2) From the following prepare Cash Budget for the period from 1st March to 31st August when the opening Cash Balance was Rs. 50,000. 3) (a) Period of credit allowed by suppliers and to customers 1.5 month and 20% of sales are on cash basis so as to obtain discount of 4% and balance in the subsequent months. 4) (b) Lag in payment of: Wages :1 month ; Factory Expenses : 1 month ; Administration Expenses: 1.5 month ; Selling Expenses : 1 month (c) Machinery purchased for Rs. 1,00,000 in March Payable on delivery in April. (d) Building purchased in April Rs. 3,00,000 payable in two equal instalments in May and July with interest @ 12% on diminishing balance base. (e) Commission of 3% on sales payable two month after sales. |
E. | Receivable Management: Yamuna ltd. specializes in manufacture of computer component. The component is currently sold for Rs. 1,000/- and its variable cost is 80%. Fixed cost is 10% of the sales at current level. For the year-ended the company sold on an average 500 components per month. At present the company grants one-month credit to its customers. The company is thinking of extending the same to two months on accounts of which the following is expected: Increase in Sales 25 %; Expect Expected sales return 1% ; Expect Advance of 20% against sales quotation; Expected Bad debts : 2% ; Expected collection costs Rs.50,000/-. You are required: To advise the company on whether or not extended the credit terms. The Company expects a minimum return of 40% on the investment. |
F. | Business Restructuring: XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd’s. Shares are currently traded at Rs. 25. It has 2,50,000 shares outstanding and its EAT amount to Rs. 4,00,000. ABC Ltd. has 1,50,000 shares outstanding; its current MPS is Rs. 12.50 and its EAT are Rs. 1,00,000. The merger will be effected by means of a Stock Swap (exchange). ABC Ltd. has agreed to a plan under which XYZ Ltd. will offer the current Market Value of ABC Ltd’s Shares: (i) What is the pre-merger EPS and P/E ratios of both the companies? (ii) If ABC Ltd’s P/E Ratio is 10, What is its current MPS? What is the exchange ratio? What will XYZ Ltd’s. Post-merger EPS be? (iii) What must be the exchange ratio for XYZ Ltd’s so that the pre and post-merger EPS to be the same? |
G. | Write short notes on any two of following: a. Profit maximization vs. wealth maximization b. Shares vs. debentures c. Merits and demerits of discounted cash flow techniques of capital budgeting d. Traditional and modern finance instruments |
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