PESIT Bangalore South Campus Hosur road, 1km before Electronic City, Bengaluru -100

Transcription

1 INTERNAL ASSESSMENT TEST 3 (KEY) Date : 15/05/2017 Max Marks : 40 Marks Subject & Code : Financial Management (16MBA22) Section : Core Name of faculty : Suresh A S Time: 11:30 1:00 PM Note: Answer all questions 1(a) (b) Briefly explain operating leverage & financial leverage? Operating leverage: Operating leverage may be defined as the tendency of the operating profit to vary disproportionately with sales. It exists when a firm has to pay fixed cost regardless of volume of output or sales. Financial leverage: Financial leverage is defined as the tendency of the residual net income to vary disproportionately with operating profit. It indicates the change that takes place in the taxable income as a result of change in the operating income. What do you mean by dividend? What are the factors that affect the dividend policy of a firm? Dividend refers to the divisible profits of a company distributed or divided among its share holders in proportion to their holdings, as specified in the Memorandum of Association (MOA) and Articles of Association (AOA) Factors affecting dividend policy of the firm (2 Internal factors a) Stability of earning b) Financing policy of the company c) Past dividend rate d) Debt obligation e) Ability to borrow f) Profit rate g) Dividend policy of competitors (6 External factors a) General state of economy

2 b) State of capital market c) Legal restriction d) Tax policy (c) Consider the following two mutually exclusive projects. 2(a) Projects C0 C1 C2 C3 X Y Compute Modified internal rate of return (MIRR) considering the opportunity cost of 10% Also calculate IRR of the project. X Y MIRR 15.24% 18.26% IRR 20% 20% What is capital budgeting and what do you mean by discounting rate? The term capital budgeting refers to long-term planning for proposed capital outlays and their financing. (2 (b) Calculate the DOL, DFL & DTL from the following data under situation I & II & financial plan A & B. Installed capacity 4,000 units. Actual production and sales 75% of the capacity. Selling price Rs. 30 per unit. Variable cost Rs. 15 per unit Fixed cost Under situation I Rs. Under situation II Rs. 20,000 Tax rate 40% Capital structure of the firm is as follows (6 Particulars Equity Debt (rate of interest at 20%) Financial plan A (Rs.) Financial plan B (Rs.) 10,000 10,000 5,000 20,000 20,000 Suggest the better financial plan out of both situations.

3 Situation I Particulars Financial Plan A Financial Plan B Sales (3,000 X Rs.30) Less: Variable Cost (3,000 X 15) Contribution Less: Fixed Cost Less: Interest 2,000 1,000 28,000 29,000 Operating Leverage = Contribution / = 1.5 / = 1.5 Financial Leverage = / 28,000 = 1.07 / 29,000 = 1.03 Combined Leverage = Contribution / 28,000 = / 29,000 = 1.55 Situation II Particulars Financial Plan A Financial Plan B Sales (3,000 X Rs.30) Less: Variable Cost (3,000 X 15) Contribution Less: Fixed Cost 20,000 20,000 Less: Interest 25,000 2,000 25,000 1,000 23,000 24,000 Operating Leverage = Contribution / 25,000 = 1.8 / = 1.8 Financial Leverage = 25,000/ 23,000 = ,000/ 24,000 = Combined Leverage = Contribution / 23,000 = / 24,000 = (c) The expected cash flows (CFBT) of a project are as follows. Year CFBT(Rs.) (1,00,000) 20,000 40,000 50,000

4 The cost of capital is 12%, tax rate is 40% Calculate: PBP, ARR, NPV, PI. Year EAT (-) Dep. (-) Tax EAT (+) Dep. Cash Inflow Cumulative Cash Inflow 1 20,000 20, ,000 20,000 20, ,000 10,000 4,000 6,000 20,000 26,000 46, ,000 20,000 20,000 8,000 12,000 20,000 32,000 78, ,000 20,000 12,000 18,000 20,000 38,000 1,16, ,000 10,000 4,000 6,000 20,000 26,000 1,42,000 PBP = 3.58 years ARR = 16.8% NPV = (Rs. 1,00,264 1,00,000 ) = 264 PI = Case Study ASTRA INDIA Ltd. has currently an ordinary share capital of Rs. 25 lakhs, consisting of 25,000 shares of Rs. 100 each. The management is planning to raise another Rs. 20 lakhs to finance major expansion programme, through one of four possible plans. Entirely through ordinary shares. Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs in 8% long term loan. Rs. 5 lakhs through ordinary shares and Rs. 15 lakhs through 9% long term loan. Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through preference shares with 5% dividend. The companies expected will be Rs. 8 lakhs. Assuming a corporate tax of 50%, determine the EPS in each alternative and comment, which alternative is best & why? Particulars (-) interest (-) tax EAT (-) preference dividend ,000 7,20, ,35,000 6,65, ,000

5 EATESH / no of shares 35,000 3,50,000 35,000 EPS Rank IV II I III