FINANCIAL MANAGEMENT – Nov/Dec 2011 Anna University Previous year Model Question Paper

M.B.A. DEGREE EXAMINATION, NOVEMBER/DECEMBER 2011.
Second Semester
571211 — FINANCIAL MANAGEMENT
(Regulation 2010)             
Time : Three hours Maximum : 100 marks
Answer ALL questions.
PART A — (10 ´ 2 = 20 marks)
1. Briefly explain any two set backs of Profit maximization
2. What is “Agency problem”? Indicate any two remedial measures of agency
problem.             
3. Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT Rs. 1,00,000 Rs. 20,000 Rs. 30,000 Rs. 40,000 Rs. 50,000 Rs. 60,000
4. Define “Explicit Cost”             
5. Explain “Degree of Operating Leverage”.
6. List out the various assumptions of capital structure theories
7. What is permanent working capital?
8. Briefly explain any two motives of holding cash.
9. What is meant by subscribed share capital?
10. What is operating leasing?
PART B — (5 ´ 16 = 80 marks)
11. (a) Explain the various setbacks of Profit maximization and how that can be
overcome through Wealth maximization.
Or              
(b) (i) Palace heights ltd ., engaged in real estate Business , has taken Rs. 5,00,000 from a bank at a compound interest rate of 14% . This loan  has to be amortised in 4 equal installments , which include both
principal and interest . The interest is calculated on the balance  outstanding. Calculate the principal and interest components for  each of these 4 years. Verify your result. (8)
(ii) The most recent year annual dividend paid by the premier  investments Ltd (PIL) is Rs. 3 per share . An annual increase of l0  percent growth rate is expected over three years. At end of the three  year the dividend is expected to slow down 5%. Assuming 15 %  required rate of return. Compute the value of shares (8)

12. (a) Engine valves company is considering building an assembly plant .The
decision has been narrowed down to two possibilities . The company
desires to choose the best plant at a level of operation of 10,000 gadgets a
month. Both plants have an expected life of 10 years and are expected to
have any salvage value at the time of their retirements .The cost of
capital is 10 percent. Assuming a zero income tax rate , suggest what
would be the desirable choice?
Cost of the monthly output of 10,000 valves
Large Plant Rs Small plant Rs
Initial cost 30,00,000 22,93,500
Direct labour: First shift 15,00,000 per year 7,80,000 per year
Second shift –––––––––––– 9,00,000 per year
Overheads 2,40,000 per year 2,10,000 per year
The present value of an ordinary annuity of Re 1 for 10 years at 10%, is
6.1446.
Or             
(b) A company has on its books the following amounts and specific costs of
each type of capital :
Type of capital Book value Market value Specific cost (%)
Rs. Rs.
Debt 4,00,000 3,80,000 5
Preference 1,00,000 1,10,000 8
Equity 6,00,000 15
Retained earnings 2,00,000 12,00,000 13
Determine the weighted average cost of capital using (i) Book value weights
and (ii) Market value weights. How are they different? Can you think of a
situation where the weighted average cost of capital would be the same using
either of the weights?
13. (a) A firm has a capital structure exclusively comprising of ordinary shares
amounting to Rs. 10,00,000. The firm now wishes to raise additional
capital of Rs. 10,00,000 for expansion. The firm has four alternative
financial plans
(i) It can raise the entire amount in the form of equity capital
(ii) It can raise 50 per cent as equity capital and 50 per cent 5%
debentures
(iii) It can raise the entire amount as 6% debentures
(iv) It can raise 50 percent as equity capital and 50 percent as 5%
preference share capital
Further assume that the existing EBIT are Rs. 1,20,000, the tax
rate is 35 percent. outstanding ordinary shares 10,000 and the
market price per share is Rs 100 under all the four alternatives
Which financing plan should the firm select?
Or             
(b) As a finance manager of the firm , what are all the factors to be
considered for devising a dividend policy of the firm.
14. (a) X& Y Ltd is desirous to purchase a business and has consulted you and
one point on which you are asked to advise them , is the average amount
of working capital which will be required in the first year’s working.
You are given the following estimates and are instructed to add l0
percent to your compound.
Particulars Amount for the year
Stocks of finished product Rs. 5,000
Stocks of stores and material 6,000
Average credit given
Inland sales 6 weeks credit 3,12,000
Export sales 1.5 weeks credit 78,000
Average time lag in payment of wages and other outgoings
Wages 1.5 weeks
2,50,000
Stocks and materials 1.5 months 48,000
Rend and royalties 6 months 10,000
Clerical staff. 5 month 62,400
Manager .5 month 4.800
Miscellaneous expenses 1 .5 month 48,000
Payment in advance Sundry expenses
(paid quarterly in advance)
8,000
Undrawn profits on an average through out the year 11,000
Or              
(b) (i) From the following data, compute the duration of the operating
cycle for each of the two years and comment on the
increase/decrease
Particulars Year 1 Year 2
Raw materials Rs. 20,000 Rs. 27,000
Work in progress 14,000 18,000
Finished goods 21,000 24,000
Purchase of raw materials 96,000 1,35,000
Cost of materials consumed 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000
Assume 360 days per year for computations purposes.
(ii) Elucidate the various determinants of working capital.
15. (a) Explain the various kinds of Equity shares and Preference shares in
raising the financial resources of the firm.
Or             
(b) What is leasing? Explain the different kinds of leasing. Discuss “Is
leasing as either investment or financing decision of the firm.

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