1

Section A
Objective Type Questions (10*2) 20 Marks
Q1.
(i) A firms return available to shareholders is 15%. The average tax rate of shareholders is 40% and it is
expected that 2% is brokerage cost that shareholder will have to pay while leaving their dividends in
alternative securities. The cost of Retained Earnings will be:
a) 6.67% b) 8.82% c) 7.33% d) 9.33%

(ii) A company is making a proposal. Cash outflows of the proposal in year Zero is Rs.50000 and Cash inflow
per annum for 5 Years is Rs. 15000. If target rate is 10% is used as an evaluation figure, the NPV of the
proposal is:
a) 7200 b) 6800 c) 6850 d) 7800

(iii) The focal point of Financial Management in a firm is:
a) The number and type of products or services produced by the firm
b) The minimization of the amount of taxes paid by the firm.
c) The creation of value for shareholders.
d) The dollar profits earned by the firm.

(iv) Rule of 72 is a short cut method to estimate the:
a) Present value b) Compounding effect c) Both a) & b) d) None of the above

UNIVERSITY OF PETROLEUM & ENERGY STUDIES
Center for Continuing Education (CCE)
End-Semester Examination July,2013 Semester I
Name of the Program: E-MBA (Oil & Gas) Duration: 3 Hours
Course Code: MBOF 912 Course Title: Financial Management Max. Marks: 100
This question paper has 5 pages.

2

(v) Time value of Money is an important concept in Finance because it takes into account:
a) Risk b) Time c) Compound Interest d) All of the above

(vi) Cash budget does not include:
a) Dividend payable b) capital expenditure c) issue of capital d) total sales figure
(vii) For applying NPV, _____________ is considered:
a) Profit After Tax (b) Profit After Tax and Before Depreciation
(c) Profit Before tax and After Depreciation (d) Profits Before Tax
(viii) As per the II method of Tondon committee recommendations the borrower should finance _____ of
current assets out of long term funds and the banks provide the remaining finance:
a) 0.50 b) 0.15 c) 0.25 d) 0.75
(ix) The full form of EVA is:
a) Economic Value Assets b) Economic Value Added
c) Extended Value Added d). Extended Value Assets
(x) For a Lessor, a Lease is a
a) Investment decisions b) Financing decision c) Dividend decision d) None of the above

Section B
Short Questions (Conceptual / Theory) (5*4marks) 20 Marks
(Attempt any Five)
Q2. Differentiate between the Profit Maximization and Wealth Maximization Objective
of Financial Management?

Q3. What do you mean by Mutually exclusive projects? How do they differ from Accept Reject projects?

Q4. Define Cash flows. How is it different from Profit? Explain the superiority of Cash flows in Investment
decision making?

Q5. What do you mean by Optimal Dividend Policy?

3

Q6. Elucidate the relationship between NPV and IRR. When do they differ?

Q7. A firm whose cost of capital is 10% is considering Two Mutually Exclusive projects X and Y, the detail of
which are:
Year Project X Project Y

Cost
Cash
Inflow
0
1
2
3
4
5
Rs. 100000
10000
20000
30000
45000
60000
Rs. 100000
50000
40000
20000
10000
10000
Compute the following:
1. Pay Back Period
2. Discounted Pay Back Period
3. Net Present Value
Section C
Descriptive Type Analytical Questions (5 * 6 Marks) 30 Marks
(Attempt any Five)

Q8. As a Financial Analyst of Power Finance Corp., you are requested to calculate the Weighted Average Cost
of Capital. The following data is available to you:
Debentures (Rs.100 each) 400000
Preference Shares( 100 each) 100000
Equity Shares (10 each) 500000
(a) Rs. 100/Deb. redeemable at Par after 20 Years, Coupon Rate 12%, Flotation cost 4% and
selling price Rs. 100
(b) Rs.100, 10% Pref. Share to be issued at Par and redeemable at Par after 15 Years, floatation
Cost 5%.
(c) Equity Share may be issued at Rs.22 each, floatation cost Rs. 2 per share and
dividend/share is Rs.2, the expected growth rate in dividend is 5%.The company
tax rate may be assumed as 50%.


4

Q9.. The selected financial data for A,B and C companies are as follows:
A B C
Variable expenses as a % of sales
Interest
Degree of Operating Leverage
Degree of Financial Leverage
Income tax rate
66.67
Rs. 200
5
3
30%
75
Rs. 300
6
4
30%
50
Rs.1000
2
2
30%

Prepare Income statement for A, B & C companies.
Q10. A firm whose cost of capitals is 10% is considering two mutually exclusive projects X and Y, the
details of which are:

Year Project X Project Y
Cost
Cash inflows
0 Rs. 1,00,000 Rs. 1,00,000
1 10,000 50,000
2 20,000 40,000
3 30,000 20,000
4 45,000 10,000
5 60,000 10,000
Compute the Net Present Value at 10%, Profitability Index, and Internal Rate of Return for the two
projects.

Q11.. New issue of capital is costlier than the retained earnings. How and what makes these two different?

Q12. The earnings per share of a share of a share of the face value of Rs. 100 of PQR Ltd. Is Rs. 20. It has a rate
of return of 25%.Capitalization rate of its risk class is 12.5%.If Walters model is used:
(a) What should be the optimum payout ratio
(b) What should be the market price per share if the payout ratio is zero ?
(c) Suppose, the company has a payout of 25% of EPS, what would be the price per share ?

Q13. Explain how the scope of finance function has changed over the time.
.


5


Section D
Case Study 30 Marks
Q14. The following figures of ANGC are presented to you:
Rs.
Earnings before interest and tax 23,00,000
Less: Debenture interest @ 8% 80,000
Long term loan interest @ 11% 2,20,000 3,00,000
Earning before Tax 20,00,000
Less: Income tax 10,00,000
Earnings after tax 10,00,000
No. of equity shares of Rs. 10 each 5,00,000
E.P.S. Rs. 2
Market price of share Rs. 20
P/E ratio 10

The company has undistributed reserves and surplus of Rs. 20 lakhs. It is in need of Rs. 30 lakhs
to pay off debentures and modernize its plants. It seeks your advice on the following alternative
modes of raising finance:-
Alternative 1 : Raising entire amount as term loan from banks @ 12%.
Alternative2: Raising part of the funds by issue of 1,00,000 shares of Rs. 20 each and the rest by
term loan @ 12%.
The company expects to improve its rate of return by 2% as a result of modernization, but P/E,
ratio is likely to go down to 8 if the entire amount is raised as term loan.
(i) Advise the company on the financial plan to be selected.
(ii) If it is assumed that there will be no change in the P/E ratio if either of the two alternatives are
adopted, would your advice still hold good?