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

1. (a) Explain how wealth Maximisation emphasises sustainable value creation for shareholder. Suppose Mr Ashvik deposits a four-year annuity of 73,000 per year in a bank account that pays 7% interest compounded yearly. What will be the future value of this annuity? (9) (b) Differentiate between Operating risk and Financial risk of a firm. How are these risks measured through leverage analysis? (9) (a) Explain the goal of Financial Management. How does the application of the Time Value of Money enable managers and analysts to make informed, ethical, and long-term decisions that ensure continuous wealth creation for shareholders (9) and society alike? (b) Consider the given information for ABC Limited Sales (70% of Variable cost) 8000 Tax rate 20% Calculate different type of leverages. Calculate percentage change in earning per share. If sales increases by 7%. (9) 2. (a) Explain any three discounting techniques of capital budgeting. (9) (b) A machine is purchased six years back for 71,50,000 has been depreciated to a book value of 790,000. It originally had a projected life 15 years (salvage nil). There is a proposal to replace this machine. A new machine will cost 72,50,000 and result in reduction of operating cost by 730,000 per annum for next nine years. The existing machine can now be replaced away for 270,000. The new machine will also be depreciated over nine years period as per straight line Method with salvage value $25,000. Find out whether the existing machine be replaced or not given that tax rate applicable is 30% and cost of capital is 12%. (Profit or loss on sale of asset is to be ignored for tax purposes.) (9) (a) Pulmona Limited is considering an investment proposal requiring initial investment of $50,000. The estimated life of the project is five years and no scrap value. The company uses straight line method of depreciation and the same is allowed for tax purpose. The corporate tax rate is 30%. The estimated profit before depreciation and tax from the investment proposal are as follows. PBDT (Profit before Dep Calculate the following - (i) Payback Period (ii) Net Present Value at 10% discount rate. (9) (b) Explain IRR method of capital budgeting decision. Why NPV and IRR techniques lead to conflict in project ranking? (9) 3. (a) Companies U & L are identical in every respect, except that the former does not use debt in its capital structure, while the later employees 710,00,000 of 8% debt. Assuming that all the assumptions of Modigliani Miller approach are met, corporate tax rate is 30%, EBIT is 74,00,000, equity capitalization rate of unlevered firm is 20%. What will be the value of the firms, U & L? Also determine weighted average cost of capital of both the firms? (9) (b) The expected annual net operating income of a company is 75,00,000. The company has $30,00,000 10% debentures. The overall, cost of capital is 12.5%. Calculate the value of the firm and cost of equity according to NOI approach.