Birla Institute of Technology & Science, Pilani

Work-Integrated Learning Programmes Division

First Semester 2016-2017

Comprehensive Examination
(EC-3 Regular)

Course No. : MM ZG627

Course Title : MANAGERIAL CORPORATE FINANCE
Nature of Exam : Open Book
Weightage : 50% No. of Pages = 3
Duration : 3 Hours No. of Questions = 8
Date of Exam : 05/11/2016 (FN)
Note:
1. Please follow all the Instructions to Candidates given on the cover page of the answer book.
2. All parts of a question should be answered consecutively. Each answer should start from a fresh page.
3. Assumptions made if any, should be stated clearly at the beginning of your answer.

Q.1. Pachaiyappa's Amusement Park, Chennai has collected the following data for operations for the
most recent financial year:
Total revenues: Rs. 1,600,000
Total fixed costs: Rs. 437,500
Total variable costs: Rs. 900,000
Total tickets sold: 100,000

Given the above information, compute the following:

(a) What is the average contribution margin per ticket? [1]

(b) What is the break-even point? [2]
(c) If the owner of Pachaiyappa's Amusement Park has decided that unless the operations can
earn at least Rs. 43,750 in operating profits, he will close it down. How many tickets must
be sold for Pachaiyappa's Amusement Park to make a Rs. 43,750 operating profit for the
year on ticket sales? [3]

Q.2. Given below is an extract of the balance sheet for the most recent six years for Richmond Paper
Cups Limited, a small company that manufactures paper cups based in the suburbs of Chicago,
Illinois, United States of America.

Year 2011 2012 2013 2014 2015 2016

Cash 400.00 404.00 408.04 412.12 416.24 420.40
Inventory 1,580.00 1,627.40 1,676.22 1,726.51 1,778.30 1,831.65
Accounts receivable 1,120.00 1,142.40 1,165.25 1,188.55 1,212.32 1,236.57
Net plant and
equipment 3,500.00 3,640.00 3,785.60 3,937.02 4,094.50 4,258.29
Intangibles 400.00 402.00 404.01 406.03 408.06 410.10
Total assets 7,000.00 7,215.80 7,439.12 7,670.23 7,909.42 8,157.01

Using the data provided above answer the following questions:

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(a) Perform the horizontal analysis for Richmond Paper Cups over the six year period using 2011 as
the base year. [3]
(b) Interpret the horizontal analysis that you have performed in part (a) above. [3]
MM ZG627 (EC-3 Regular) First Semester 2016-2017 Page 2

Q.3. Sri Vel Murugan Agarbathis sells three products namely: Sandalwood, Jasmine, and Divine
fragrance Agarbathis. The table below shows the budget and actual results for the three products
for the most recent financial year:

Budget
Sandalwood Jasmine Divine
Sales (units) 200 100 100
Price (per unit) 20.00 25.00 30.00
Cost (per unit) 17.00 21.00 24.00

Actual
Sandalwood Jasmine Divine
Sales (units) 180 150 170
Price (per unit) 22.00 22.00 26.00
Cost (per unit) 16.00 18.00 25.00

(a) Calculate the Selling Price Variance by product and overall for the company. [2]
(b) Compute the Mix Variance by product and overall for the company. [2]
(c) Compute the Sales Volume Variance by product and overall for the company. [2]

Q.4 (a) You currently have 100 available for investment for a 21 year period. At what annual
interest rate must you invest this amount in order for it to be worth 500 at maturity?
[2]
Q.4 (b) Jantar Mantar Ltd. is expected to pay dividends at t=1 of 40 per share. The companys
dividends will then grow by 8% p.a. in periods 2 and 3 before settling down to a perpetual
growth rate of 3% p.a. Calculate the maximum amount you would be prepared to pay for a
Jantar Mantar Ltd. share assuming a required rate of return of 11% p.a. [3]

Q.5 (a) Explain the difference between non-diversifiable risk and non-market risk. [2]

Q.5 (b) You have been supplied with the following information:
Asset Expected Return (%) Standard Deviation (%)
BHZ Ltd 6 4
ANB Ltd 11 45

You wish to diversify your portfolio by investing 40 per cent in BHZ shares and 60 per cent in ANB
shares.
(i) What will be the expected return of the new portfolio? [2]
(ii) What will be the standard deviation of returns for the new portfolio? [2]

Q.6. Consider the extract of Balance Sheet for Galaxy Ltd. as on 31 May 2013 (Par Values) ($1 million
= 10,00,000)
Issued Capital $ million
7,000,000 Ordinary Shares of $1.00 fully paid 7.00

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 3,000,000 5% Preference Shares of $1.00 fully paid 3.00
Non-Current Liabilities
Debentures 15.00
You also have the following additional information available to you as of today:
MM ZG627 (EC-3 Regular) First Semester 2016-2017 Page 3

1. Debentures have a coupon interest rate of 12% p.a. and could be re-issued at the present time at an
interest rate of 7.5% p.a. The debentures will be redeemed at their face value in three years time.
2. The companys preference shares are currently trading at $2.00 each. The companys ordinary
shares are currently trading at $3.50 each.
3. Galaxy Ltd. has a beta of 1.5, the risk-free rate of return is 4.5% p.a., and the average market
return is 9.5% p.a.
4. Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 36 percent

Required:
(a) Calculate the market value of the various items, the value of the firm and the relative weight of
each item in the firms capital structure. [5]
(b) Calculate the required after-tax rate of return of each item and calculate the WACC. [4]

Q.7 (a) The directors of Tran Ltd have been provided with the following information about two
mutually exclusive projects;
Life NPV
Project A 4 years 5,450
Project B 5 years 6,100
If the required return for Project A is 10% p.a. and for Project B is 11% p.a., which project will
increase shareholders wealth the most and why? [4]

Hint: Calculate the equivalent annual annuity (EAA) for each project to answer this question.

Q.7 (b) Delamo Inc. is a US based company that sells home care cleaning tools such as cleaning
mops. The company sells 50,000 twist mops in a year. The carrying cost of inventory per mop
is 100 per year, and it costs 500 to place, process and receive an order.

i. What ordering quantity minimizes inventory costs? [2]

ii. How many orders will be placed each year if that order quantity is used? [2]

Q.8 (a) Discuss and differentiate Operating lease and Capital lease. [2]
Q.8 (b) What are the four classification criteria discussed in class for operating leases. [2]

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