INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

GHAZIABAD

End-Term Examinations December 2009

Subject Code : IMT-59 Subject Name: Financial Management
Time Allowed : 3 Hours Max. Marks : 70

Notes: (a) Answer any FOUR questions from SECTION-A and CASE STUDY as given in SECTION-B. Each Question (SECTION-A) carries 14 MARKS and (SECTION-B) Case Study carries 14 MARKS. (b) For students enrolled before January 2008, the Question Paper would be treated for 50 marks instead of 70 marks. (c) No doubts/clarifications shall be entertained. In case of doubts/clarifications, make reasonable assumptions and proceed.

SECTION-A Q.1

MARKS : 56

Band Box is considering the purchase of a new wash & dry equipment in order to expand its operations. Two types of options are available; A low speed system (LSS) with a Rs. 20000 initial cost and a high speed system (HSS) with an initial cost of Rs. 30000. Each system has a 15 year life and no salvage value. The net cash flows after taxes (CFAT) associated with each investment proposal are ; Low Speed System (LSS) CFAT for Years 1 through 15 Rs. 4000 High Speed System (HSS) Rs. 6000

Which Speed System should be chosen by Band Box, assuming 14% cost of capital? Q.2 Q.3 What is CAPM? What are the components of CAPM equation? Explain the meaning of each component. What does it tell us about the required return on a risky investment? a) XYZ Ltd has borrowed Rs. 5,00,000 to be repaid in five equal annual payments (interest and principle both). The rate of interest is 16%. Compute the amount of each payment. b) A company is considering raising Rs. 100 Lakh by one of the two alternative methods, viz. 14% institutional term loan and 13% non convertible debentures. The term loan option would attract no major incidental cost. The debentures would have to be issued at a discount of 2.5% and would involve Rs. one lakh as cost of issue. Advice the company as to the better option based on effective cost of capital in each case. Assume a tax rate of 35%. Q.4 The bonds of Alert Ltd currently sell at Rs. 115.They have 11% coupon rate of interest and Rs. 100 par value. The interest is paid annually and the bonds have 18 years to maturity. Compute the yield to maturity of bond. Compare the computed yield to maturity with the coupon interest rate. How do you explain the difference between the current price and the par value of the bond? What is the basic premise of the hedging approach for meeting fund requirements? What are the effects of this approach on the profitability & risk? Write short notes on any three: a) b) c) d) Q.7 Leverage ratio The MM Hypothesis under corporate taxes Share Split Commercial Papers

Q.5 Q.6

Differentiate between: a) Basic & Diluted Earning per share b) Mutually Exclusive & Independent Investment c) Perpetual Bonds & Pure Discount Bonds

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SECTION-B

(Case Study)

MARKS : 14

Anand, a chemical engineer with 15 years of experience and Prakash a pharmacy graduate with 18 years of experience are evaluating a pharmaceutical formulation. The total outlay on the project is as follows: Plant & Machinery Working Capital Rs 36 lakhs Rs 24 lakhs

The proposed scheme of financing: Equity Capital Term Loan Trade Credit Working Capital Finance Rs 16 lakhs Rs 26 lakh Rs 8 lakh Rs 10 lakh

Project has an expected life of 10 years. Depreciation is charged @ 10% on WDV. Expected annual sales Rs 80 lakhs and cost of sales (incl. depreciation but excluding interest) is expected to be Rs 50 lakhs per annum. Term loan to carry 14% interest and repayable in 5 equal installments beginning from the end of first year. Working capital advance has interest rate of 17 % and has an indefinite maturity.

Questions 1) 2) Calculate cash flows for three years if at the end of 3 years the plant & machinery will fetch a value equal to the book value and working capital investment will be fully liquidated. Is the project viable for Anand, if he judges the viability by applying pay back method and NPV method (cost of capital is 12%) ? How different is the answer by the two methods?

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