Question Paper Code: M.B.

A DEGREE EXAMINATION, NOV/DEC 2011 Elective 571080-CORPORATE FINANCE (Regulation 2010) Time: Three hours Answer ALL the Questions PART A (10X2=20 MARKS) 1. What do you mean by sick unit? 2. Describe the functions of SEBI. 3. What is commercial paper? 4. What is inter-corporate investment? 5. What is DCF? 6. List out the different risk adjusted investment evaluation methods. 7. What is an agency cost? 8. What do you mean by dividend decision? 9. List out the six core values that are desirable for code of ethics. 10. What is Clarkson principle of stakeholder management? PART-B (5X16=80 marks) 11. a) Equity shares (Rs. 10 par) 7% preference share (Rs. 100 par) Share premium account Profit & loss account 9% Debentures (Rs. In Lakhs) 200 100 110 655 800 Maximum : 100 Marks

Total 1,865 Additional information The current price of equity shares is Rs. 75 ex-dividend. The projected EPS and DPS for the current year are Rs. 16 and Rs. 10 respectively. Dividend indicated on preference shares is 11%. The current price of preference shares is Rs. 78. The Debenture interest has also been paid recently and Debentures are currently trading at Rs. 80 per Rs. 100 nominal. Corporation Tax: 35 per cent; Dividend Tax: 10 per cent.

Calculate the companys weighted average cost of capital (WACC) using the respective market values as weighing factors. Or (b) i) Describe the role of EXIM bank and commercial banks in the promotion of international trade. ii) Describe some of peculiar features of Indian capital market. (10+6) 12.(a) From the following information prepare a statement showing working capital requirement Sales for the year 12000 units Cost Raw materials Rs. 10 per unit Labour Rs.6 per unit Overhead Rs.4 per unit Total Rs. 20 per init Additional information: a) Raw materials are in stock on an average for one month. b) Materials are in process on an average for 2 months c) Finished goods are in stock on an average for 3 months d) Credit allowed to customer four months e) Credit allowed by suppliers two months It may be assumed that production and overhead accrue throughout the year Or (b) i) ABC company limited is attempting to evaluate two mutually exclusive projects A and B. Each project requires a net investment of Rs.10,000 and the annual cash flows from each of the projects is estimated at Rs. 2,000 p.a in the next 15 years. The companys cost of capital may be taken as 10%. The management has made the following optimistic, most likely and pessimistic estimates of the annual cash inflows associated with each of these projects. Project A Project B Initial Investment Rs.10,000 Rs.10,000 Estimated cash inflows Pessimistic 1,500 Most Likely 2,000 2,000 Optimistic 2,500 4,000 You are required to give your opinion to the management in arriving at a decision ii) Explain the steps involved in decision tree approach in investment decision. (10+6)

13. A) X. Ltd is considering a project with the following cash flows. Year Purchase of Plant Rs. Running Costs Rs. Savings Rs. 0 (7000) 1 2,000 6,000 2 2,500 7,000 The cost of capital is 8%. Measure the sensitivity of the project to changes in the levels of plant value, running costs and savings (considering each factor at a time) such that net present value becomes zero. Which factor is most sensitive to affect the acceptability of the project? The present value factors at 8% are as follows. Year Factor 0 1.00 1 0.93 2 0.86 Or (b) XYZ Company is considering to make investment in a proposal which requires an outlay of Rs. 50,000 the project has a life of three years over which the following cash inflows are likely to be generated: Year 1 Cash flow Rs. Probability 10,000 0.10 20,000 0.20 30,000 0.30 40,000 0.40 Year 2 Cash flow Rs. Probability 10,000 0.20 20,000 0.30 30,000 0.40 40,000 0.10 Year3 Cash flow Rs. Probability 10,000 0.30 20,000 0.40 30,000 0.20 40,000 0.10

If the discount rate is 4% and the cash flows of the three years are independent determine the expected NPV of the investment proposal and standard deviation. 14. (a) i) Describe the factor influencing option valuation. ii) Describe factors influencing cash insolvency. Or (b Describe the relationship between investment, financing and dividend decisions. 15. (a) i) Write a brief note on the matters that shall be mandatorily reviewed by the audit committee. ii) Describe the provisions on risk management under the listing agreement. (10+6) Or (b) i) Examine the role of the Board of Directors in internal control. ii) Describe the steps suggested to conduct an ethics audit. (10+6) 3