IMT 59 Financial Management M4

SECTION - A
Q1: Discuss briefly meaning and purpose of internal financial control.
Q2: Assume that a 10-year savings annuity of Rs. 2,000 per year is beginning at
the end of current year. The payment of retirement annuity is to begin 16 year f
rom now (the first payment is to be received at the end of year 16) and will con
tinue to provide a 20-year payment annuity. If this plan is arranged through a s
aving bank that pays interest @ 7% per year on the deposited funds, what is the
size of the yearly retirement annuity that will result?
Q3: Explain Capital Asset Pricing Model and its assumptions.
Q4: Differentiate between bullet bond and amortizing bond.
Q5: a. An investor has purchased 11% Bond of Rs. 100 repayable after 5 years at
99. Coupon is payable annually. Find out its yield to maturity.
b. An investor has purchased 11% Bond of Rs. 100 repayable 25% at the end of eac
h year beginning from second year at 99. Find out its yield to maturity.

SECTION - B
Q1: Explain revenue based, asset based and capital based profitability ratios.
Q2: What do you mean by Capital Planning and Investment Control? Explain its pha
ses also.
Q3: ABC Ltd. manufactures toys and other gift items. The research and developmen
t department has come up with an item that would make a good promotional gift fo
r office equipment dealers. As a result of efforts by the sales personnel, the f
irm has commitments for this product.

To produce the quantity demanded, ABC Ltd. will need to buy additional machinery
and rent additional space. It appears that about 25,000 sq. feet will be needed
; 12500 sq. feet of presently unused space but leased at the rate of Rs. 3 per s
quare foot per year, is available. There is another 12500 sq. feet available at
the annual rent of Rs. 4 per square foot.

The equipment will be purchased for Rs. 9,00,000. It will require Rs. 30,000 in
modification, Rs. 60,000 for installation and Rs. 90,000 for testing. The equipm
ent will have a salvage value of about Rs. 1,80,000 at the end of the 3rd year.
No additional general overhead costs are expected to be incurred.

The estimated revenues and costs for the product for the 3 years have been devel
oped as follows
IMT SOLUTION
If the company sets a required rate of return of 20% after taxes, should this pr
oject be accepted?

Q4: What do you mean by cost of capital? Explain its significance also.

Q5: A ltd. needs finance of Rs. 10 lakhs for meeting its investment plans. It ha
s Rs. 2,10,000 in the form of retained earnings available for investment purpose
s. The following are the future details.
IMT CDL ANSWERS
Compute over all weighted average after tax cost of additional finance.

SECTION - C
Q1: What are the causes of financial leverage? How is degree of financial levera
ge measured?
Q2: Explain arbitrage theory of capital structure. State two important shortcomi
ngs of the theory.
Q3: Explain the assumptions of Modiglianis dividend irrelevance theory. Criticall
y analyze how far those assumptions are tenable?
Q4: What do you mean by working capital? Explain objectives of working capital m
anagement.
Q5: Explain major sources of short term financing.

CASE STUDY - 1

The selected financial data for A, B, C companies for the year ended Dec. 1999 a
re as follows: -
Prepare income statement of A, B, C.

CASE STUDY - 2

A performa cost sheet of a company provide the following particulars:

The following further particulars are available:
Raw material in stock, on average one month; materials are in process, on averag
e half a month; finished goods in stock, on average one month. Credit allowed by
suppliers is one month; credit allowed to debtors is two months; lag in payment
of wages is 1 weeks; lag in payment of overhead expenses is one month; one four
th of the output is sold against cash; cash in hand and at bank is expected to b
e Rs. 25,000. You are required to prepare a statement showing the working capita
l needed to finance a level of activity of 1,04,000 units of production.
You may assume that production is carried on evenly throughout the year, and wag
es and overheads accrue similarly.
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