Enrolment No:

___________________

K. P. PATEL SCHOOL OF MANAGEMENT & COMPUTER STUDIES

STRATEGIC FINANCIAL MANAGEMENT (2830201)
DATE: 28/11/2013

TIME: 10:00 AM to 1:00 PM

TOTAL MARKS: 70
INSTRUCTIONS:
1. Attempt all questions
2. Make suitable assumptions wherever required
3. Figures to the right indicate full marks

Q.
1

(a) Explain the following

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i) Sensitivity Analysis in Capital budgeting.

ii) Implications of Corporate Restructuring
(b) Suril Ltd has the beginning of a period 100000 equity shares of Rs 10 each and 12% long
term debt of Rs 10,00,000. The finance department of the company has generated the
following forecast statistics for the period:
ROTA: 25%
Debt Ratio: 0.90
EIR:10%
Current Assets to Fixed Assets: 0.55:1
Tax Tate: 40%

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The assets, Liabilities and equity figures used to compute the above financial statistics are
based on forecast period end Balance. The company has no plan to change its equity capital
and long term debt. You are required to:
1. Prepare forecast Balance sheet
2. Forecast EPS
Q.
2

(a) The Balance sheet of Arav Limited as on 31st March, 2010 is as follows:
Liabilities
Share Capital
Reserves
Long term Debt
Short Term Debt
Payables

Rs. Lakhs
3200
2400
5600
3200
800

Assets
Fixed Assets
Inventories
Receivables
Cash and Bank

Rs. Lakhs
7200
4000
3200
1600

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Provisions
Total

800
16000

Total

16000

The current year sales were 9600 lakh. For the next year ending 31 st
March, 2011 sales and assets are expected to increase by 20%. The net
profit Margin after taxes and dividend payout are expected to be 10% and
50% Respectively.
You are required to determine for the year 2010-11:
(i)
(ii)

The External Fund Requirement

The Mode of raising funds given the following parameters:
Current Ratio Should be 1.5
Ratio of Fixed Assets to long term loans would be 1.5
Long term debt to equity ratio should not exceed 0.9
The fund are to be raised in the order of (i) short term bank
borrowing,(ii)long term loans(iii)equities

(b) Explain the assumption under Walter and Gorden Model.

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OR
(b) The following information pertains to XYZ Ltd.

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Net Profit Rs. 240 lakh

Outstanding 12% preference Shares Rs.800 lakh
No. of outstanding equity shares 24 lakh
Return on Investment 20%
Equity capitalization rate 16%
Required:
i) What should be dividend payout ratio so as to keep the
share price at Rs. 41.25 by using Walter Model?
ii) What is the optimum dividend payout ratio according to
Walter Model?

Q.
3

.
(a) Explain the role of Strategic Financial Management & its functions in business

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(b). Sahara Airways is planning to acquire a light commercial aircraft for flying 07
class clients at an investment of Rs 50,00,000. The expected cash flow
after tax for the next three years is as follows:

(Amount in Rs lakh)

CFAT
16
19
26
40

Year 1
PROBABILITY
0.1
0.2
0.4
0.3

CFAT
18
22
34
45

Year 2
PROBABILITY
0.1
0.3
0.4
0.2

CFAT
20
28
38
48

Year 3
PROBABILITY
0.2
0.5
0.2
0.1

The Company wishes to take into consideration all possible risk factors
relating to an airline operations. The Company wants to know:
(i) The expected NPV of this venture assuming independent probability
distribution with 6 per cent risk free rate of interest.
(ii) The possible deviation in expected value
(iii) How would standard deviation of the present value distribution help
in capital budgeting decisions.

Q.
3

OR
(a) What do you mean by the term Financial Reconstruction? Distinguish Internal and 07
External Reconstruction
(b) The capital structure of the Successive Corporation Ltd consists of an ordinary share capital 07
of Rs20,00, 000 (shares of Rs 100 par value) and Rs 20,00,000 of 10% debentures. The unit
sales increased by 20 per cent from 2,00,000 units to 2,40,000 units, the selling price is Rs
10 per unit, variable costs amount to Rs 6 per unit and fixed expenses amount to Rs
2,00,000. The income tax rate is assumed to be 35 per cent.

You are required to calculate the following:

(i) The percentage increase in earnings per share.
(ii) The degree of financial leverage at 2,00,000 units and 2,40,000 units.
(iii) The degree of operating leverage at 2,00,000 units and 2,40,000 units.
Comment on the behaviour of operating and financial leverage in relation to increase of
production from 2,00,000 to 2,40,000 units

Q.
4

(a) The Modern Chemicals Ltd requires Rs 50,00,000 for a new plant. This plant is expected to 07
yield earnings before interest and taxes of Rs 10,00,000. While deciding about the financial
plan, the company considers the objective of maximizing earnings per share. It has three
alternatives to finance the projectby raising debt of Rs 5,00,000 or Rs 20,00,000 or Rs
30,00,000 and the balance, in each case, by issuing equity shares. The companys share is
currently selling at Rs 300, but is expected to decline to Rs 250 in case the funds are
borrowed in excess of Rs 20,00,000. The funds can be borrowed at the rate of 10 per cent
upto Rs 5,00,000, at 15 per cent over Rs 5,00,000 and upto Rs 20,00,000 and at 20 per cent
over Rs 20,00,000. The tax rate applicable to the company is 50 per cent. Which form of
financing should the company choose?
(b) What is Business Valuation? Explain the methods used for Valuation of Business.

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OR
Q.
4

(a)

The shares of a IT company are selling at Rs 160 per share. The firm had paid 07
dividend @Rs 9.00 per share last year. The estimated growth of the company is
approximately 5% per year.
(i)
Determine the cost of Capital of the Company.
(ii)
Determine the estimated market price if g=8% and g=3
Calculate the value of the share of a company, if its Beta is 1.5, tha previous dividend
was Rs 2 per share and the growth is expected to be 8%. The risk-free return is 10%
and the market portfolio earns a return of 15%.

(b) The Sun star company has a choice of raising an additional sum of Rs 100 lakh either

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by the sale of 10 percent debentures or by issue of additional equity shares of Rs. 100
per share. The current capital structure of the company consists of 20 lakh ordinary
shares.
i) At what level of earnings before interest and tax (EBIT) after the new capital is
required, would earnings per share (EPS) be the same whether new funds are raised by
issuing ordinary shares or by issuing debentures?
ii) Also determine the level of EBIT at which uncommitted earnings per share (UEPS)
would be the same if sinking fund obligations amount to Rs. 5 lakhs per year. Assume
a 35 percent tax rate
Q.
5

(a) Explain the significance of operating and financial leverage analysis for a finance
manager in corporate profit and financial structure planning.

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(b) A company is examining two proposals. The management of the company 07

use certainly- equivalents to evaluate new proposals. From the following
information pertaining to these projects advise the company which
project should be taken up?
Year
0
1
2
3
4

Proposal A
CFAT(Rs)
50000
30000
30000
30000
30000

Proposal B
CFAT(Rs)
50000
18000
36000
24000
32000

CE
1.0
0.8
0.7
0.6
0.5

CE
1.0
0.9
0.8
0.7
0.4

The firms cost of Capital is 14 per cent and risk free borrowing rate is 7
per cent
OR
Q.
5

(a) During union negotiations this year, the Pellon Company Ltd
management realised that it must offer its employees greater retirement
benefi ts. The company is considering offering either one of the following:
Plan A: an increase in the amount of the companys share of the annual
contribution to the funded pension plan now in existence.

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Plan B: elimination of the existing pension plan and its replacement by a

new plan calling for variable payback where the amount of the companys
payment would depend upon the level of profi ts for the year.
The actual cost of the pension plan to Pellon would depend upon many
factors, such as age of employees,number of years they have been with
the company, and employees current earnings. However, the prime
causes of uncertainty for the new retirement offers are that since
employees are given options as to the extent to which they wish to
participate in the pension plan, their individual decisions would determine
the amount of employers contribution under Plan A. This uncertainty
would, however, be resolved in the fi rst year of the new plan. For Plan B,
the level of future profi ts would be the main consideration. However, the
success or failure of a new product line to be introduced in the last part of
the coming year would greatly reduce the uncertainty.
The Management of Pellon Company Ltd wished to make a two-year cost
comparison for the two plans, and has, therefore, made the following cost
and probability estimates:

Plan
A
B

Probability
0.1
0.3
0.6
0.2
0.5
0.3

First year Cost

600000
750000
900000
500000
750000
1000000

In the second year for Plan A, uncertainty is negligible, since all

employees would have selected their participation in the programme. The
Management estimates the second-year cost of Plan A to be Rs 6,00,000
greater than its fi rst-year cost. For Plan B, uncertainty about second-year
profi ts would still exist, so estimates of costs are also still uncertain.
Given First Year Cost
Probability
Second Year Cost

500000
500000
750000
750000
1000000
1000000

0.6
0.4
0.5.
0.5
0.4
0.6

500000
750000
850000
1050000
1100000
1300000

(a) Construct a decision tree for management to use in evaluating the

two plans. Assuming that all costs are
incurred at the end of the year for they apply and that 10 per cent
discount (risk-free) rate is appropriate,
compute the PV of costs for each plan at each branch terminal of tree.
Also, fi nd the expected PV of costs
for each project as a weighted average of these terminal PVs.
(b) Which project is more risky?
(c) Which plan should the firm offer to the union?