Time: 3hours
Max.Marks:60
Answer any Five questions
All questions carry equal Marks
1. Why are capital budgeting decisions important ? Discuss about the time
adjusted methods of capital budgeting.
2. One project of a company is doing poorly and is being considered for
replacement. There mutually exclusive projects A,B and C have been
proposed. The projects are expected to require Rs.2,00,000 each and have an
estimated life of 5years,4years and 3years respectively and have no salvage
value. The company’s required rate of return is 10 %. The anticipated cash
inflows after taxes (CFAT) for the three projects are as follows;
CFAT
| Year | A | B | C |
| 1 | Rs. 50,000 | Rs.80,000 | Rs.1,00,000 |
| 2 | Rs. 50,000 | Rs.80,000 | Rs.1,00,000 |
| 3 | Rs. 50,000 | Rs.80,000 | ----- |
| 4 | Rs. 50,000 | Rs.30,000 | ----- |
| 5 | Rs. 1,90,000 |
(1) w each project applying the methods of payback period,
Average rate of Return Net present value, Internal Rate of return
and Profitability Index.
(2) Recommend the project to be adopted and give reasons.
3. Define financial and operating leverage. How do you measure the degree of
operating and financial leverage? Explain with suitable example
4. From the following data you are required to determine the weighted average
cost of Capital of KCP Ltd using (i) Book value weights and (ii) market
value weights. The KCP Ltd ‘s present book value of capital structure is;
Debentures
Preference shares
Equity shares
Rs.100 per debenture
Rs.100 per share
Rs10 per share
Rs. 8,00,000
Rs. 2,00,000
Rs.10,00,000
----------------
20,00,000
--------------
All these securities are traded in the capital markets. Recent prices are Debentures
@110, Preference shares @Rs.120 and Equity shares @ Rs.22. Anticipated
external financing opportunities are;
1. Rs.100 per debenture redeemable at par 20 year maturity, 8%
coupon rate, 4% flotation costs, sale price Rs.100.
2. Rs 100 preference share redeemable at par 15 year
maturity,10% dividend rate,5%flotation costs, sale priceRs.100
3. Equity shares Rs.2 per share flotation costs, sale price Rs.22
In addition, the dividend expected on the equity shares at the end of the year Rs.2
per share, the anticipated growth rate in dividend is 5% and the company has the
practice of paying all its earnings in the form of dividends. The corporate tax is
50%.
5. Discuss the factors that determine the working capital needs of a firm
6. Priya cements Ltd. Sells its products on a gross profit of 20% on sales. The
following information is extracted from its annual accounts for the year ended
31st December,2009.
Rs.
Sales at 3 months credit 40,00,000
Raw material 12,00,000
Wages paid – average time lag 15 days 9,60,000
Manufacturing expenses paid – one month in arrears 12,00,000
Administrative expenses paid – one month in arrears 4,80,000
Sales promotion expenses – payable half yearly in advance 2,00,000
The company enjoys one month credit from the suppliers of raw materials and maintains a 2 months stock of raw materials and one and half month’s stock of
finished goods. The cash balance is maintained at Rs.1,00,000 as a precautionary
measure. Assuming a 10% margin, find out the working capital requirements of
Priya cements Ltd.
7. Explain briefly the techniques of inventory control used in manufacturing
organizations.
8. State the reasons for cash flow problems and discuss about the methods of improving
liquidity.
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