Financial Management — DU Bachelor of Management Studies Previous Year Question Papers

Attempt parts of a question together. Show your workings clearly as a part of the solution. Reference to Present Value Tables may be allowed. Rupee if not specified. 12% Preference capital (in shares of Rs 100 each: Rs 1 Retained earnings: Rs 20 11.5% Debentures (of Rs 100 each): Rs10 11% Term loans: Rs 12.5 The next expected dividend on equity shares per share is Rs 3.60; the dividend per share is expected to grow at the rate of 7 per cent. The market price per share is Rs 40. Preference stock, redeemable after ten years, is currently selling at Rs 75 per share. Debentures, redeemable after six years, are selling at Rs 80 per debenture. The Income- tax rate for the company is 40 per cent. (i) Required: Calculate the weighted average cost of capital using: (a) Book value proportions; and (b) Market value proportions. (12 marks) (II). How is profit maximization different from wealth maximization as the objective of a firm? Being the equity investor in a large firm, what is important for you? (6 marks) Q3.(I). In the light of the data given below for a firm with two capital structures A and B, find Value of the Firm, Value of Equity and Cost of Equity. Verify the propositions of NOI Approach with the help of the above. (12 marks) Structure 10% Debt Equity Assume EBIT to be 72,00,000 and Overall cost of capital to be 12.5%. II). Explain the propositions under the Net Operating Income Approach to Capital Structure. (6 marks) Q 4(I). A company is considering two financing options to raise 720,00,000. Assuming tax rate of 35%, find the EBIT level at which EPS is the same under both options. Comment on the capital structure mix that will be appropriate before and beyond the Indifference Point. (12 marks) Option A Option B Equity (of Rs. 10 each) Rs. 20,00,000 Rs. 12,00,000 10% Debt Nil Rs. 8,00,000 (II). Explain briefly Gordon's Dividend Theory. With the information provided below, calculate the market price per share using Gordon's Model and recommend an appropriate dividend policy. (6 marks) Earnings per share (E) = 712 Dividend payout ratio = 40% Cost of equity (Ke) = 15% Rate of return (r) = 18% QS.I. Gamma Industries Ltd. has an installed capacity of 60,000 units per annum. It is currently operating at 60% capacity. The company earns a profit of 20% on total cost. The cost sheet per unit is as follows: (12 marks) Expenses Per Unit Raw material Direct wages 40F Manufacturing overheads 607 (including depreciation 207) Administrative overheads 207 Selling and distribution overheads 107 (all cash) Working-capital policy (assume applies at all levels of activity): Raw materials in stock: 1 month. Production process: half a month. In work-in-progress, materials are 100% complete, and wages plus cash manufacturing overheads are 50% complete. Finished goods inventory: 1 month at production cost (excluding depreciation). Customers are allowed 1.5 months' credit (on sales value). Suppliers allow 1 month's credit for raw materials.