T.

Y BAF CE – II (ASSIGNMENT)
FINANCIAL MANAGEMENT
Question 1. PQR Company Ltd. Is considering to select a machine out of two mutually
exclusive machines. The company’s cost of capital is 12 percent and corporate tax rate is 30
percent. Other information relating to both machines is as follows:

Particulars Machine I Machine II

Cost of machine Rs.15,00,000 Rs.20,00,000
Expected life 5 Yrs 5 Yrs
Annual income (before Tax and depreciation) Rs.6,25,000 Rs.8,75,000

Depreciation is to be charged on straight line basis:

You are required to calculate:
1. Discounted Payback Period.
2. Net Present Value.
3. Profitability Index.

Year 1 2 3 4 5
PV factor @ 12% 0.893 0.797 0.712 0.636 0.567

Question 2 The management of P Ltd. Is considering to select a machine out of two mutually
exclusive machines. The company’s cost of capital is 12 % and corporate tax rate is 30 %.
Details of the machines are as follows:

Machine Machine I Machine II

Cost of machine Rs.10,00,000 Rs.15,00,000
Expected life 5 Yrs 6 Yrs
Annual income before tax and depreciation Rs.3,45,000 Rs.4,55,000

Depreciation is to be charged on straight line basis:

You are required to calculate:
1. Calculate the discounted pay-back period, net present value and internal rate of return
for each machine.

2. Advise the management of P Ltd. As to which machine they should take up.
The present value factor of Re.1 are as follows:
 Year 1 2 3 4 5 6
At 12% 0.893 0.797 0.712 0.636 0.567 0.507
At 13% 0.885 0.783 0.693 0.613 0.543 0.480
At 14% 0.877 0.769 0.675 0.592 0.519 0.456
At 15% 0.870 0.756 0.658 0.572 0.497 0.432
At 16% 0.862 0.743 0.641 0.552 0.476 0.410

Question 3 Question1–ALtd.isconsideringanewprojectwhichrequiresacapitalinvestment of
Rs.150 lakhs. The required funds can be raised either through the sale of equity shares or
borrowed from a financial institution. Interest on term loan is 15% and tax rate is 35%. If the
debt equity ratio insisted by the financial agencies is 2:1, calculate the indifference point for
the project.

Question 4 The following data relate to A Ltd. and B Ltd. of the same risk class.
A Ltd. B Ltd.
Expected net operating profit 4,80,000 4,80,000
10 % Debentures 14,40,000 -
Equity capitalisation rate 20% 15%

Decide total value of the company and the WACC of each company.

Question 5 Shalini & Co. earns Rs.6 per share having capitalization rate of 10% and has a
return on investment @20%. According to Walter’s Model, what should be the price per
share at 30%dividend payout ratio? Is this the optimum payment ratio as per Walter?

Question 6 – Following are the details regarding 3 companies A Ltd., B Ltd. and C Ltd.
A Ltd. B Ltd. C Ltd.
Internal Rate of Return 15% 5% 10%
Cost of Equity Capital 10% 10% 10%
Earning per share Rs.8/- Rs.8/- Rs.8/-
Calxulate value of an equity share of each of these companies as per Walter’s Model when
the dividend payout ratio is:
a) 50%
b) 75% and
c) 25%
Question 7 Market value of investment of ABC Mutual Fund income scheme is Rs.25,72,825
as on 31st March 2018, as against this, it had external liabilities of Rs.5,17,250. Compute Net
Asset value of the units assuming that there are in all 1,00,000 units held under the scheme.

Question 8 From the following information extracted from the records of ABC M.F,
calculate NAV.
Particular Amount in rupees
(crores)
Investment 5,514
Liabilities 780
Debtors 442
Other current assets 1,286
Outstanding expenses 174
No. of outstanding units 300 crores

Question 9 Bonds of SFC has par value is Rs.100 each and bears a coupon rate of 12% with
a maturity period of 4 years. The required rate of return on the bond is 10%. What is the
value of this bond ?

Question 10 A bond of Rs.100 face value carries an interest rate of 13% is redeemable after 5
years at a premium of 2%. If the required rate of return is 15%, what is the present value of
the bond?

Question 11 A company currently has an annual turnover of Rs. 50 lakhs and an average
collection period of 30 days. The company wants to experiment with a more liberal credit
policy on the ground that increase in collection period will generate additional sales.
From the following information, kindly indicate which policy the company should adopt:
Credit Policy Average Collection Period Annual Sales (Rs. lakhs)
A 45 days 56
B 60 days 60
C 75 days 62
D 90 days 63
Costs: Variable Cost is 80% of sales
 Fixed Cost is Rs. 6 lakhs per annum.
Required (pre-tax) return on investment: 20%
A year may be taken to comprise of 360 days.

Question 12 - JK 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 customers are given one month
time to settle the dues. It has a contribution of 40% on sales. It can raise funds at a cost of
20% p.a. The marketing manager of the company has given the following options along with
estimates for considerations:
Particulars Current I Option II option III Option
position
Sales in (Rs. in lakhs) 200 210 220 250
Credit Period (in months) 1 1.5 2 3
Bad debts (% of sales) 2 2.5 3 5
Cost of credit administration (Rs. 1.2 1.3 1.5 3
lakhs)
Investment in Debtors is to be taken at sales value. You are required to advise the company
for the best option.

Question 13 - In a capital rationing situation (Investment limit Rs.25 lakhs), suggest the most
desirable, feasible combination on the basis of the following data (indicate justification):
Project Initial outlay NPV
A 15 6
B 10 4.5
C 7.5 3.6
D 6 3
Project B and C are mutually exclusive.

Question 14 – A Ltd. has an investment budget of Rs.25 lakhs for next year. It has under
consideration, three projects A, B and C (B and C are mutually exclusive) and all of them can
be completed within a year. Further details are given below:
Project Investment required Net present value
A 14 5.6
B 12 7.2
C 10 5.0
Recommend the best policy to utilize the investment budget, supported by proper reasoning.