Summer 2011- May drive

Masters of Business Administration- MBA Semester 2 MB0045 Financial Management - 4 Credits

(Book ID: B1134)

Assignment Set- 1 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions.
1. A company has issued a bond with face value of Rs.1000 , with 10% pa coupon rate payable annually and a tenure of 10 years to maturity. At the end of 10 years, the bond will be redeemed at a premium of 10% to face value . a) At what price would you buy the bond if the prevailing interest rate is 12% pa on investments of similar risk? b) What is the YTM of the bond if the prevailing price is same as calculated in a) above. c) What is the current yield of the bond at the given price? d) If the coupon rate is paid semi-annually, at what price would you buy the bond at the 12% pa prevailing interest rate? 2. Given the following details for a company: Net operating income Overall cost of capital Value of the firm Cost of debt Interest Market value of debt Market value of equity 200,000 20% 1000,000 15% 75,000 500,000 500,000

a) Given the assumptions of the net operating income approach, what will be the cost of equity, if the market value of debt is 200,000. b) Given the assumptions of the net income approach, what will be the overall cost of capital with Market value of debt of 200,000. 3. Given the following projects , rank them on the basis of NPV, MIRR and Payback period if the cost of capital is 10% pa. Project A Year 0 1 2 3 4 Cash flow -10000 5000 7000 8000 15000 Project B Year 0 1 2 3 4 Cash flow -10000 5000 8000 6500 11000 Project C Year 0 1 2 3 4 Cash flow -10000 5000 8500 9000 12000

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4. Given the following information, calculate Degree of operating leverage, Degree of Financial leverage, Degree of total leverage. Quantity sold 100,000 units Variable cost per unit 200 Selling price 800 Fixed cost 10,000 Number of equity shares 50,000 Debt 1000,000 @ 15%pa Preference shares 10,000 of Rs.100 each @ 10% Tax rate 30% 5. Explain the following concepts : a) Operating cycle b) Total inventory cost c) Price earnings ratio d) Financial risk 6. Explain the Net operating income approach to capital structure theories.

Summer 2011- May drive

Masters of Business Administration- MBA Semester 2 MB0045 Financial Management - 4 Credits

(Book ID: B1134)

Assignment Set- 2 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions.

1. Given the following information, prepare a cash budget: Month Jan Feb March April May June Sales 100000 120000 150000 160000 175000 200000 Purchases 40000 45000 35000 30000 25000 20000 Wages 10000 15000 18000 20000 22000 24000 Production overheads 6000 6500 7000 7700 8000 8500 Selling overheads 6000 6500 6600 6800 6200 6300

The company has a policy of selling its goods at 50% cash and the balance on credit. On credit sales, 50% is paid in the following month and balance 50% two months from the sale. Purchases are paid one month from the month of purchase. Wages are paid in the following month and overheads are also paid in the following month. The company plans a capital expenditure, in the month of April, for Rs. 25,000. The company has a opening balance of cash of Rs. 40,000 on 1st Jan 2010. Prepare a cash budget for Jan to June.

2. Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement. Raw material 60 Direct labour 22 Overheads 44 Total cost 126 Profit 18 Selling price 140 The following additional information is available: Average raw material in stock one month Average materials in process 15 days Credit allowed by suppliers one month

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Credit allowed to debtors two months Time lag in payment of wages 15 days Time lag in payment of overheads one month Sales on cash basis 20% Cash balance to be maintained 80,000 You are required to prepare a statement showing the working capital required to finance a level of activity of 100,000 units of output. You may assume production is carried out evenly throughout the year and payments occur similarly. Assume 360 days in a year.

3. Given the following information, calculate the weighted average cost of capital. Capital structure in millions Equity capital ( Rs.10 par value) 2 14% preference share capital Rs.100 each 1.5 Retained earnings 2 12% Debentures Rs.100 each 4 8% term loan 0.5 Total 10 The market price per equity share is Rs. 45. The company is expected to declare a dividend per share of Rs.5 and dividends are expected to grow at 15% pa. The preference shares are redeemable at Rs. 115 after 5 years and are currently traded at Rs. 90 in the market. Debentures will be redeemed after 5 years at Rs.110. The corporate tax rate is 30%. Calculate the Weighted average cost of capital.

4. Calculate the present value of the following options: a) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa b) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa payable semi annually c) Rs. 5000 to be received every year for 5 years if the prevailing interest rate is 10% pa d) Rs. 5000 to be received after 5 years and Rs. 10,000 to be received after 10 years

5. Explain each of the following: a) b) c) d) Operating cycle Shareholders wealth maximisation Capital rationing Economic order quantity

Summer 2011- May drive

6. a) Discuss the advantages of ordering Economic order quantity of inventory. b) Discuss the Dividend discount model of measuring cost of equity.