VI Semester B.

COM Examination July/August 2024

(NEP)

Commerce

COM 6.1: Advanced Financial Management

Time:2 .30Hours Max. Marks: 60

KEY ANSWERS

Prepared by

MR. PARVEEZ ULLA

Dept of commerce

Christ Academy Institute for Advance Studies.

Hulhalli,Begur-Koppa Road,Bangalore-87

PRASHANTH KUMAR H MAHENDRA S.G

Dept of commerce &Administration Dept of commerce

Swamy Vivekananda Rural First Grade College Dharmasagara First Grade College
Chandapura-99 Dommasandra-125

SANTHOSH HR CHANDRASHEKAR K

Dept of commerce& Administration Dept of commerce& Administration

SVVN Degree College,Neralur-107 SVVN Degree College,Neralur-107

 1. a) The Zero Growth Dividend Discount Model assumes dividends will continue at a fixed rate
indefinitely into the future. It is useful for very mature companies in slow growth or no growth
environments.
b) Net Income Approach (NI) and Traditional Approach
c) Investment decision refers to the decisions that involve the investment of various resources of the
firm to gain the highest possible return on investment for their investors. An investment decision is
categorized as a long-term and short-term investment decision.
d) Difficulty in finding risk premium and risk –adjusted discount rate , Complexity in quantifying risk
factors, potential subjectivity in risk assessment., Complexity in determining appropriate adjustments
for uncertain future cash flows.
e) Growth firm r>k, The firm is able to earn more than what the shareholders could by re-investing ,if
the earning are paid to them
The growth firm optimum payout be Zero
Normal Firm r=k, The divined will not affect the market value of shares
There is no optimum dividend pay-out
f) An interim dividend is a payment made by a company to its shareholders before the annual financial
statements are finalized.
g) Horizontal diversification, concentric diversification, Conglomerate diversification, Vertical
diversification.
h) Integrated report it is report which communicates how an organization strategy ,governance
performance and decision lead to creation of value for the business. The purpose of the integrated
report is to create preserve and maintain value of the business for long period of time

2. a) Cash Dividend: This is a common type of dividend that companies distribute to their shareholders in
the form of cash payments
b) Stock Dividend: Stock dividends are a type of dividend payment in which a company distributes
additional shares of its own stock to existing shareholders instead of cash
c) Property dividends : Property dividends are a type of dividend payment in which a company
distributes assets or property to its shareholders instead of cash or additional shares
d) Scrip dividends : Scrip dividends are quite similar to stock dividends. In this, instead of additional
shares, the shareholder will be getting scrips or vouchers that can be redeemed with shares on the
market.
e) Liquidating Dividend: Liquidating dividends are given by a company when it is in the process of
liquidating its assets and winding up its operations and therefore, cannot pay in the form of other
dividends.

3. a) Risk management, b) Transparency , c) Accountability , d) Fairness e) Responsibility f)

compliance
 4.

i).In case of New Equity shares

Ke=

Ke= =2.066+8=10.06%

Expected dividend= Last year Dividend + Growth = 20+1.6(20X5/100)=21.6

NP= FV-Flotation Cost= 1100-55 (1100X5/100)=1045

G=8%
Or

Ke= =2.066+8=10.06%

D= 10000X20=200000+16000=2,16,000
NP= FV-Flotation Cost= 1,10,00,000(10,000X1100) -5,50,000 (1,10,00,000X5/100)=1,04,50,000

ii) Foe existing Shareholders assuming market price of the share is Rs 2,250 per shares

Ke=

Ke= = 8.96%

Expected dividend= Last year Dividend + Growth = 20+1.6(20X5/100)=21.6

MP= 2,250
G=8%

Or

Ke= = 8.96%

D= 10000X20=200000+16000=2,16,000
MP= 10,000 X 2,250= 2, 25, 00,000
G=8%

5. Co-efficient of variation =

Proposal A= =23. 68%

Proposal B = =26. 95%

6. Exchange ratio Under EPS=

= 0.833

No of shares to be issued to target company = 10,000X0.833=8,330 shares

 Exchange ratio Under EPS=

=0.666

No of shares to be issued to target company = 10,000X0.666=6,666 shares

7.

Book Value
Source ₹ Proportion % Cost After tax Total
Product
Equity Shares 6,00,000 40.00 0.0532 2.13
Preference Shares 4,00,000 26.67 0.0752 2.01
Debentures 5,00,000 33.33 0.0627 2.09
Total 15,00,000 100 WACC 6.23

Market Value
Source Rs Proportion Cost After tax Total
Product
Equity Shares 7,00,000 43.75 0.0532 2.33
Preference Shares 4,00,000 25 0.0752 1.88
Debentures 5,00,000 31.25 0.0627 1.96
Total 16,00,000 100 WACC 6.166
or
Book Value
Source Rs Proportion % Cost After tax % Total Product
Equity Shares 6,00,000 40.00 5.32 212.8
Preference Shares 4,00,000 26.67 7.52 200.56
Debentures 5,00,000 33.33 6.27 208.99
Total 15,00,000 ∑ 100 ∑ =

∑ ∑
WACC= ∑ ∑
= 6.22

Market Value
Source Rs Proportion(W) Cost After tax Total Product (WX)
%(X)
Equity Shares 7,00,000 43.75 5.32 228.81
Preference Shares 4,00,000 25 7.52 181.25
Debentures 5,00,000 31.25 6.27 195.94
Total 16,00,000 ∑ 100 ∑ 606
∑ ∑
WACC= ∑ ∑
= 6.06

Working Note

1. Calculation of Cost of Equity

Ke=

= = 5.319 or 5.32%
D= 5 per shares

NP/MP= Selling Price – Cost = 100-6= 94

2. Calculation of Cost of Preference shares

Kp=

= 7.518 or 7.52%

D= 10 (100X10/100)

NP= Issued price-Underwriting commission = 140-7= 133

3. Calculation of Cost of Redeemable Debentures after tax

Kd=

=
=
10.456 = 6.27%

I= 10 (100X10/100)

P= 100

NP= FV- Underwriting commission = 100-3(100X3/100)=97

N= 10 Years, t= 40% or 0.40

8. Project R

Year Cash Probability(f) fx d=(X- d2 Fd2

Flow(X) mean=34,000)
1 30,000 0.1 3,000 -4,000 1,60,00,000 16,00,000
2 50,000 0.2 10,000 16,000 25,60,00,000 5,12,00,000
3 25,000 0.4 10,000 -9,000 8,10,00,000 3,24,00,000
4 20,000 0.2 4,000 -14,000 19,60,00,000 3,92,00,000
5 70,000 0.1 7,000 36,000 129,60,00,000 12,96,00,000
∑ =
1 ∑ = 34,000 25,40,00,000

∑
Mean= = =34,000
 ∑
S.D= √ =√ =√ = 15937.37

Co-efficient of variation = = == =46.87%

. Project S

Year Cash Probability(f) fx d=(X- d2 Fd2

Flow(X) mean=28,000)
1 25,000 0.1 2,500 -3000 90,00,000 9,00,000
2 45,000 0.15 6,750 17000 28,90,00,000 4,33,50,000
3 20,000 0.5 10,000 -8000 6,40,00,000 3,20,00,000
4 15,000 0.15 2,250 -13000 16,90,00,000 2,53,50,000
5 65,000 0.1 6,500 37000 136,90,00,000 13,69,00,000
∑ =
1 ∑ = 28000 23,85,00,000

∑
Mean= = =28,000

∑
S.D= √ =√ =√ = 15,443.44

Co-efficient of variation = = == =55.15%

9.Market Price Under Gordon’s Model

Payout =35% Payout 25% Payout 20%

Retention(b) =65% Retention(b) =75% Retention(b) =80%
r=10% or 0.10 r=10% or 0.10 r=10% or 0.10
K=8% or 0.08 K=8% or 0.08 K=8% or 0.08
P= P= P=

D= Earning X Payout ratio D= Earning X Payout ratio D= Earning X Payout ratio

15X35/100=5.25 15X25/100=3.75 15X20/100=3

g=bXr g=bXr g=bXr

=0.65X0.10=0.065 0.75X0.10=0.075 0.80X0.10=0.08

P=
P= P=

= = 350 per = = 750 per share = = 0 per share

share
10. Merger negotiations are the process of reaching an agreement between two or more parties that want to
combine their business into one entity.

1. Conduct a thorough due diligence on the target company

2. Develop a clear strategy and rationale for the merger
3. Determine the appropriate valuation range and structure for the merger
4. Prepare a detailed term sheet that key terms and conditions
5. Negotiate with the target company in a collaborative and respectful manner
6. Involve the relevant stakeholders in negotiation process
7. Review and finalize the merger agreement
8. Obtain the necessary approvals and consents
9. Implement the integration plan for the merged entity

11. Agency theory is a principle that is used to explain and resolve issues in the relationship between business
principals and their agents

1. Parties Involved a) Principal, b) Agent 2.Fiduciary Duty 3.Authority and Delegation a) Actual Authority

b)Implied authority c)Apparent authority, 4. Duty and Responsibilities a)Duty loyalty b)Duty of care,
5.Termination of agency a)Revocation b)Renunciation , 6.Ratification ,7.Undisclosed Principal ,8.Scope of
Authority , 9.Power of attorney .10.Business Context