Financial Management — DU B.Com. (Hons.) Previous Year Question Papers

1. (a) Modern finance functions are aimed at maximizing the net worth of shareholders and not the profits of the business. Elucidate. (b) Bestie takes a loan of $10,00,000 repayable in 5 equal instalments at the end of each year. The rate of interest is 10%. Compute the amount of each instalment. (c) Firms X and Y are identical in every aspect except for their leverage levels. Firm X has 9% debentures totalling 720,00,000, an operating profit of 76,00,000, and a tax rate of 30%. Firm Y's overall cost of capital is 10%. Calculate the value of each firm using the Modigliani-Miller (MM) approach. Additionally, determine the equity capitalization rate and the overall cost of (3+3+3) capital for Firm x. (a) If you start in vesting a sum of $10,000 in mutual funds starting today expecting that you will earn a return of 12% p.a., how much will you (3) accumulate in 10 years? (b) You plan to go abroad for higher studies after working for the next five years and understand that an amount of $20,00,000 will be needed for this purpose at that time. You have decided to accumulate this amount by in vesting a fixed amount at the end of each year in a safe scheme offering a rate of interest at 10%. What amount should you invest every year to achieve the target (3) (c) The Honorable Vice-Chancellor of University of Delhi wants to start a scholarship that pays 725, 000 p.a. to the student for an outstanding performance at the Center of IKS Studies. The amount of scholarship is expected to grow at 5% p.a to commensurate with the inflation. He wants to know how much money he can invest at 12.5% p.a. to pay the scholarship till perpetuity! (3) (d) A firm has 10,000 equity shares, an EBIT of 73,00,000, Interest liability of 740,000 and Preference Dividend of 720,000 and the tax rate is 40%. Compute Earnings Per Share (EPS) and Degree of Financial Leverage (DFL) What will be the EPS if operating profit increases by 30% (2+2+2) (e) The following data pertains to Jonas Ltd. Operating Expenses Interest on borrowing $20,000 2. (a) Van Gogh Ventures is considering the installation of a machine that costs 22,00,000, with additional installation charges of 740,000. The machine has a lifespan of 5 years and is expected to have a scrap value of 720,000 at the end of its useful life. For the first two years, the machine is projected to produce 2,000 units annually. From year three to year five, production is expected to increase to 3,000 units per year. The selling price of the product is anticipated to be 730 per unit during the first three years and 736 per unit during the last two years. The operating costs are estimated to be 710,000 per year for the first three years and $16,000 per year for the last two years. The company follows the straight-line method of depreciation, and the applicable tax rate is 40%. To determine whether the machine should be installed, we need to calculate the cash flows and evaluate the investment using the Net Present Value