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JUNE 2011 EXAMINATION
FM 12
FINANCIAL MANAGEMENT

Time: Three HoursMaximum Marks: 100

Note:
1.The paper is divided into three sections: Section A, Section B and Section C. 2.There are seven questions in Section A of 10 marks each. Attempt any four. 3.Section B has 5 questions of 15 marks each. Attempt any three. 4.All the questions of Section C (Case Study) are compulsory. This section is of 15 marks.

Marks will be awarded for the right procedure also in numerical questions.

Section – A

1. Time value of money means that the value of money changes over a period of time. That is a sum of money received today is worth more than if the same is received after sometime. Elaborate.(10)

2. Capital budgeting decisions are very important, but they pose difficulties, which shoot from three principal sources: measurement problem, uncertainty and temporal spread. Explain.(10)

3. Write a note on EBIT-EPS analysis giving suitable examples.(10)

4. Compare the advantages and disadvantages of different types of sources of long-term financing of working capital.(10)

5. “Ratios are indicators – sometimes pointers but not in themselves powerful tool of management decision making”. Explain.(10)

6. “Working capital deals with the decision regarding the appropriate mix and level of current assets and current liabilities”. Elucidate the statement.(10)

7. What is hedging approach of current asset financing? Discuss the basic premise of the hedging approach to finance funds requirements. What are the effects of this approach on the profitability and risk? (10)

Section B

1. A project costs Rs. 5,00,000 and has a scrap value of Rs. 1,00,000. Its stream of income before depreciation and taxes during first year through five years is Rs. 1,00,000, Rs. 1,20,000, Rs. 1,40,000, Rs. 1,60,000 and Rs. 2,00,000. Assume a 50 percent tax rate and depreciation on straight line basis. Calculate the accounting rate for the project. Also state whether you recommend the project for investment when management expects a rate of return of 10 percent.(15)

2. PSGC has provided the following information and requested you to calculate (a) WACC using book value weights and (b) weighted marginal cost of capital (assuming that specified cost do not change).

Source of FinanceAmount (Rs.)Weights %After tax cost %
Equity capital
Preference capital
Debentures14,00,000
8,00,000
9,00,0000.452
0.258
0.2909
12
16

PSGC wishes to raise an additional capital of Rs. 12, 00,000 for the expansion of the project. The details are as follows.

Equity capitalRs. 3, 00,000
Preference capitalRs. 3, 00,000
DebenturesRs. 6, 00,000(15)

3. Following is the balance sheet and income statement of Green fields Ltd. for the year ended 31st march 2011.

Income statement for the year ended 31st March 2011.
Particulars(Rs. ‘000)
Sales
Less: Cost of goods sold
Gross Margin
Less: Selling and distribution expenses
EBIT
Less: Interest expenses
Earnings before tax
Less: Tax
Net Profit1,600
1,310
290
40
250
45
205
82
123
Balance sheet as on 31st March 2011
Particulars(Rs. ‘000)
LIABILITIES:
Paid-up capital (40,000 equity shares of Rs 10 each, fully paid up) Retained earnings
Debentures
Creditors
Bills payable
Other current liabilities
Total

400
120
700
180
20
80
1,500
ASSETS:
Net fixed assets
Inventory
Debtors
Marketable securities
Cash
Total
800
400
175
75
50
1,500

Price per share: Rs. 15

Industry’s average Ratios are:
Current ratio
Quick ratio
Sales to inventory
Average collection period
Debt to asset2.4
1.5
8 times
36 days
40%Debt equity ratio
Times interest earned
Net profit margin
PE ratio
Return to total assets2:01
6
7%
15
11%

From the above facts and figures, you are required to;...
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