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Special Study in Finance April – 2002 60 Marks Note:
(1) Section I, Question No. 1 and 2 are compulsory. (2) Attempt any three questions from Section II.
Section — I (1) Concept Testing:
(15)
(a) (b) (c) (d)
What is Buy-Back of Shares? Explain the provisions of MAT. Explain primary and collateral security with examples. Explain why internal Accruals are considered as the cheapest source of finance. (e) Explain role of a lead Manager. (2) The following data is available in respect of Jay Textiles Ltd.: 1) The company was incorporated in 1982 with the Promoters having an experience of more than 35 years in the textile field and is a brand leader in micro yarn.
(15)
2) The company proposes to borrow the term loan under TUFs (Technology Upgradation Fund Scheme). 3) The present installed capacity is 10 machines or 6000 TPA of polyester texturised yarn. 4) The additional investment will increase the installed capacity by 3600 TPA. 5) The present and proposed set up is at Silvassa backward area and enjoys Income tax holiday for 5 years. Tax Rate is 40%. 6) GIIC, GSFC and SBI financed the present unit. All the accounts are regular. 7) The project will lead to economies of scale, reduced cost of productions higher production due to yarn speed being faster due to latest generation machine, best quality due to the modernized machine. 8) The expected ROl of the project is 18%. 9) Depreciation for Project is Rs. 400 Lacs every year. 10) The cost of proposed project and the means of finance are as follows:
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2002 60 Marks Proposed Project Cost of Project Land and Site Development Factory Building Plant and Machinery Electrical Installation Misc. Fixed Assets Pre-operative Expense Contingencies Margin Money for Working Capital TOTAL
Rs. In Lacs 27 155 1604 24 10 20 67 93 2000 Rs. In Lacs
Means of Finance Promoter’s Fund Additional Equity Share Capital Internal Cash Accrual Term Loan
300 500 1200 2000
TOTAL
11) The Term lending institution has Interest rate of 13% for similar risk project and the loan is repayable in 5 years with installment and interest repayable at the end of each year.
General Manager of the Term Lending Institution has requestedyou to (a) (b) (c)
Prepare Flash Report from the point of view of the Term lending institution. Evaluate the project for Profitability in the next 5 years. Calculate the Debt Service Coverage ratio for the Term Loan.
Section — II (3) Company A wishes to takeover Company B. The financial details of the two companies are given as under: Particulars
Company A (Rs.)
Equity Shares (Rs.10 per share) Share Premium Account Profit and Loss Account 10% Preference Shares 10% Debentures Total Fixed Assets Net Current Assets Total Maintainable Annual Profits (after tax) Market Price per Equity share (Rs.) Price Earnings Ratio
TY BMS – Sem VI
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(10)
Company B (Rs.)
1,00,000 Nil 38,000 20,000 15,000
50,000 2,000 4,000 Nil 5,000
1,73,000
61,000
1,22,000 51,000
35,000 26,000
1,73,000 26,000 24 10
61,000 15,000 27 9
Special Study in Finance
Special Study in Finance April – 2002 60 Marks In order to determine the terms of exchange ratio, the company has approached you for valuation of shares based on: (i) Net Asset Value (ii) Earning per share (iii) Market price per share (4) M/s Onward Technology has short listed two projects A and B for final consideration. It wants to take up only one project of the two and not both. The investment required for project A is Rs.190 Lakhs while that for project B is Rs.400 Lakhs. The other details related to Project A and B are given below: PROJECT A Year I II III
Depreciation 24 20 16
Profit Before Tax 78 82 100
Profit After Tax 56 60 74
PROJECT B Year I II III
Depreciation 78 64 54
Profit Before Tax 104 118 260
Profit After Tax 82 92 186
(10)
The cost of capital of company is 14% and the present value of Re.1 at the end of first, second and third year @ 14% rate is 0.8772, 0.7695 and 0.6750 respectively. Using Net Present Value Method, which project would you recommend. What will be your answer under Pay Back Period Method? (5) Discuss “Companies prefer to issue bonus shares to payment of dividend but investor prefer dividend to bonus shares”.
(10)
(6) Describe the impact of corporate taxation on corporate financing. Elucidate your answer with suitable examples.
(10)
(7) Discuss briefly the contents of a prospectus for issue of shares.
TY BMS – Sem VI
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Special Study in Finance
(10)
Special Study in Finance April – 2003 60 Marks Note:
(1) Section I, Question No. 1 and 2 are compulsory. (2) Attempt any three questions from Section II.
Section — I (1) Concept Testing: (a) (b) (c) (d) (e)
(15)
Pari Passu Charge. Authorized and Subscribed Capital. Internal Rate of Return. Statement in Lieu of Prospectus. ROI Composition.
(2) You are approached by a Financial Institution to appraise the following project:
(15)
Name of the Borrower: Blue Lines Chemicals Private Limited Proposed loan is taken to set up a chemical unit for processing industrial waste into a marketable product XYZ. The product has a demand for 50,000 Litres. The processing costs include variable cost Rs. 5 per Litre and fixed cost (excluding depreciation) Rs.30,000 per year. Advertising expenses are also expected to be Rs. 20,000 per year. XYZ can be sold at Rs.10 per Litres. Raw Material (Industrial Waste) is available at Re. 1 per Litre. The Capital Cost of Chemical Unit is Rs. 7,50,000. The company has applied for a loan of Rs. 6,00,000 for a term of 10 years that is over the life of the asset. The promoters of this company are young, dynamic and highly qualified people but are doing the venture for the first time. The Promoters are unable to provide any collateral security for the loan except Personal Guarantee of their parents. They have thought of this project after market research. The said research has stated in the risk factors about invasion of South Korea in Chemical Market and drastic reduction in Selling Price of similar products. The above unit is a SSI unit and its average tax rate is 20%. Interest Rate is 12% p.a. Loan is repayable equally in 10 annual installments along with interest at the end of each year. You are required to: Questions: 1) Give the Cashflow generated by the above project for the first 3 years only. 2) Calculate the Debt Service Coverage ratio for the above 3 years. 3) Prepare Flash Report presenting the above information to the Financial Institution.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2003 60 Marks
Section — II (3) The following is the abridged financial statement of Auto Company. Liabilities Equity Shares (Rs.100 each) Retained Earnings Loans Current Liabilities Total
Rs. 15,00,000 5,00,000 3,00,000 2,00,000 25,00,000
Assets Bank Balance Fixed Assets Investments Other Assets Total
(10)
Rs. 4,00,000 14,00,000 1,00,000 6,00,000 25,00,000
The Management of the company proposes the following: (1) Payment of Cash Dividend @ 10%. (2) Issue Bonus Share to existing shareholders in the ratio of 1 share for every 10 shares held. Calculate: (a) Value of Shares before the above proposals. (b) Value of Shares after Cash Dividend but before Bonus. (c) Value of Shares after Cash Dividend and after Bonus. (d) Retained Earnings after the above proposals. (e) Value of Assets and Liabilities after the above proposals. (4) The total available budget for the company is Rs. 20 Lacs. The Projects have been ranked in the order of Profitability. Project
Cost (Rs. In Lacs)
Profitability Index
M N O P Q R
6 5 7 2 5 13
1.50 1.25 1.20 1.15 1.10 1.40
(a) Calculate (i) Cash Inflow for each of them projects. (ii) Net Present Value for each of the projects.
(5)
(b) Which projects should be undertaken by the company in order to maximize the Net Present Value under Capital Rationing assuming that the each Project is indivisible?
(5)
(a) Explain the provisions of MAT and its implications of Corporate Financing (b) Explain whether Dividend declared to shareholders reduces the tax liability
(5)
(5)
under MAT.
TY BMS – Sem VI
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(5)
Special Study in Finance
Special Study in Finance April – 2003 60 Marks (6) (a) Discuss the role of Merchant banker in the following:
(6)
(i) Portfolio Management. (ii) Mergers and Acquisition.
(4) (b) Explain briefly four qualities of good Merchant banker. (7) Discuss the various theories of explaining Dividend Policy of the company.
TY BMS – Sem VI
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Special Study in Finance
(10)
Special Study in Finance April – 2004 60 Marks Note:
(1) Answer all the questions in Section I. (2) Answer any three questions from Section II. Each question in this Section carries 10 marks.
Section — I (1) Attempt the following: (a) (b) (c) (d) (e)
(15)
What is authorized share capital? What is margin money? What is stock split? What is DCF technique in capital budgeting? What is statement in lieu of prospectus?
(2) The Directors of the following two Indian Companies have approached you with their concern for the current scenario and future prospects
(15)
(1) Madhur Products Limited is an established company in the field of dairy products, chocolates and ice creams. It has a decent track record of Dividend, which averages @ 40 % p.a. The Company has also a good record of Bonus issue. The last Bonus Issue ‘was made in September, 2000. The Company feels that due to the conspiracy hatched by its competitors with the help of widespread network of distributors, the Company’s products were shown to have been contaminated and it was also widely shown on the media that under the wrappers of many of their chocolates and ice creams, there was a layer of fungus and decayed dry fruits. The snaps and live interview of the consumers complaining about the inferior quality and “totally unsafe for human consumption” shouts, drastically brought down the sale in the last quarter of the Financial Year 2003—04. The Directors immediately undertook damage controlling steps and through wide scale advertisement campaign tried to restore the public confidence. However the current years performance is very much lower than the earlier years and any prudent financial consultant would not recommend dividend more than 20% this year. The Directors are of the opinion that the sale would again pick up from the second quarter of the next year and there will be a complete normally thereafter.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2004 60 Marks (2)
HU-MA-NE Software Ltd. is a well established company in the field of software development, e—service provider and man power consultancy service. Its clients is mainly in the banking, airways and transport sector. Almost 60% of the revenue comes from overseas clients. It has shown a steady growth and progress for last five years and has paid dividend of 15%, 15%, 17%, 20% and 25% and still a large amount of profits were ploughed back every year. Till December, 2003 everything was going smoothly, but all of a sudden the overseas countries having maximum business associates, saw the rise of antioutsourcing agitations. The problem got further aggravated by rupee becoming stronger day by day against the US dollar. The Company some how managed to complete the ongoing contract but is not so sure of the future prospects. The Company is also in the process of finalizing new business ventures with “nonaffected countries” and also taking steps to expand its operations more in India. The Company is hopeful of getting the better results for all its efforts. Give your guidance in each of the case, with special reference to the issues related to Dividend/Bonus policy and future share price behavior on the stock exchange.
Section — II (3) Monica Engineering Ltd. gives you the following information of their income for the year ended 31.3.2003: (Amt. in Rs.) 238,23,200 188,20,100 50,03,100 4,50,000 20,12,460 14,80,670 8,29,910 3,80,000 5,00,000 1,80,000 70,060
(10)
Sales Cost of sales Gross Profit Add: Transfer from Contingency Reserve Less: Office Overheads Selling and distribution Depreciation Provision for Income tax Transfer to General Reserve Proposed Dividend Net profit carried to Balance sheet Additional information (1) The Carried Forward business loss from last year is Rs. 4,05,600. (2) Depreciation allowable as per Income Tax Act is Rs. 9,20,300. (3) Corporate Tax rate is 35% + Surcharge @ 5% and MAT u/s 115 JB is @ 7.50% + Surcharge @ 5%. You are required to calculate the amount of tax payable by the Company for the year ended 31.3.2003 after taking into account the provisions of MAT u/s 115JB of LT. Act, 1961.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2004 60 Marks (4) What are the key steps involved in obtaining term loans?
(10) (10)
(5) Discuss in brief method of valuation of Equity Shares. (6) The existing manufacturing units has yearly fixed overheads of Rs.1,00,000. It wished to expand the production by purchasing one of the two types of machinery
(10)
Model A and Model B, each costing Rs.5,00,000 and having the estimated life of 5 years. The estimated annual Sales and Cost under both of these models are given as under: Model A (Rs.) Model B (Rs.) Sales
20,00,000
24,50,000
Materials
9,20,000
11,12,200
Labour
4,12,450
5,67,800
Variable Overheads
3,80,900
4,95,670
Compute the comparative profitability of each model of machinery under the payback period and also calculate payback profitability. Ignore depreciation and taxation. (7) Write Short Notes on:
(10)
(a) International Sources of Finance (b) Underwriting of shares
Page 3 of 3 Special Study in
Finance
Special Study in Finance April – 2005 Note:
60 Marks
(1) Answer all the questions in Section I. (2) Answer any three questions from Section II. Each question in this Section carries 10 marks.
Section — I (1) Attempt the following:
(15)
(a) What is the principle underlying Discounted Cash Flow Techniques in Capital Investment Decisions? (b) What is a Shelf Prospectus? (c) What are the matters covered in a Marketing Appraisal of a Term Loan Appraisal? (d) What do you understand by the term stock-split and consolidation of shares? What is their impact on the Balance sheet of a company? (e) State the main functions of Securities and Exchange Board of India.
(2)
Royal Industries has for many years enjoyed a moderate stable growth in sales and earnings. In recent years it is facing stiff competition in a plastic product line and consequently its sales have been declining. Apprehending further decline in its sales, its management is planning to move eventually out of plastic business altogether and develop a new diversified product line in growth oriented industries. To execute the proposed investment plan of this year a capital outlay of Rs. 12 crores is necessary to purchase new facilities to start manufacturing a new product. The estimated rate of return on fresh investment is 20 percent per annum. The company has been paying a dividend of Rs. 1.50 per share on 4 crore outstanding shares. The dividend policy has been to maintain a stable dividend of Re. 1 raising it only when it appears that earnings have reached a new permanently higher level. The directors may change such a policy if there are compelling reasons to do so. Total earning of the current year are Rs. 10 crores. The current market price of the equity share is Rs. 15 and the firm’s Debt/Assets ratio is 40%. Current costs of various forms of financing are: Debentures 13%, New equity shares sold at Rs. 15, Required rate of return is 10 percent. (i) (ii)
What would be an appropriate policy for the company? What assumptions, if any, do you make in your investors’ preference for dividends versus capital gains?
(4) (3)
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2005 60 Marks (3) ABC Ltd. has made a rights offer (to its existing shareholders) of one share for every 3 shares held @ Rs. 25 per share. The current market price per share of the company is Rs. 40. A presently holds 1000 equity shares of the company. Before deciding on the acceptance of the rights offer, he would like to know answers to the following questions: (i)
What is expected to be the market price of the share after the rights issue?
(ii) (iii)
What is the value of the right to the shareholder per shares held by him? If he renounces his shares in favor of his friend for a price which is the value of the right, what would be the change in his wealth?
(iv)
What would be the change in his wealth if he remains dormant and let go the right offer? Advise him.
(2) (2) (2) (2) (2) (2)
Section — II (4) Discuss the financial ratios used for appraisal of Term Loan Proposals. (5) What are Mutual Funds? What is meant by NAV of a Mutual Fund Scheme? What
(10)
(2) (2) (5) (1)
are the different types of Mutual Fund Schemes? Which is the regulatory body of Mutual Fund Schemes? (6) What is Capitalization of Reserves? What are the guidelines issued by SEBI with in
(10)
this regard? How does it affect the Balance sheet of a company? (7) Following are the data on a capital project evaluated by the management of EFG Ltd. Annual Cost Saving Useful Life IRR Profitability Index NPV Cost of Capital Cost of Project Payback Salvage Value
(10)
Rs. 40,000 4 years 15% 1.064 ? ? ? ? 0
Find the missing value considering the following table of thediscount factors only: Discount Factor 1st Year 2nd Year 3rd Year 4th Year Total
TY BMS – Sem VI
15% 0.869 0.756 0.658 0.572 2.855
14% 0.877 0.769 0.675 0.592 2.913
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13% 0.885 0.783 0.693 0.613 2.974
12% 0.893 0.797 0.712 0.636 3.038
Special Study in Finance
Special Study in Finance April – 2005 60 Marks
(8) The Balance sheet of Ganesh Ltd. as on 31-3-2005 was as under: Liabilities
Rs.
2,000 Equity Shares of
Assets
2,00,000
Land & Building
(10) Rs. 1,25,000
Rs.100 each General Reserve
50,000
Machinery
75,000
Profit & Loss A/c
25,000
Investment at Cost
45,000
(Market Value Rs. 37,5000) Creditors
45,000
Debtors 50,000
Provision for Taxation
20,000 37,500
Stock
Provident Fund
17,500 25,000
Cash & Bank
Total
3,57,500
Total 3,57,500
Additional Information: (i) Land & Building and Machinery are valued at Rs. 1,37,500 and Rs. 55,000 respectively. (ii) Of the total debts Rs. 2,500 are bad. (iii) Goodwill is to be valued at Rs. 25,500 (iv) The normal dividend declared and paid by such type of companies is 15% on the paid-up capital (v) The average rate of dividend, declared and paid by the company is 18% on its paid-up capital. Calculate the fair value of an equity share of the company.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2006 Note:
60 Marks
(1) Section I is compulsory (2) Answer any three questions from Section II (3)Use of simple calculators is permitted (4)Figures to the right indicate marks (5)Make suitable assumptions wherever required. (6) Working notes, if any, shall form part of your answers.
Section — I (1) Answer the following: (a) (b) (c) (d) (e)
(15)
What are the types of share capital? What is MAT? What is IRR? What is social wealth? What is Capital Rationing?
(2) (a)
Mr. Anil Sane, a fresh MBA, wishes to start a Manufacturing Unit from his (10) ancestral factory premises. He has Rs.1,05,200 in his bank account. His parents have promised to gift him Rs.3,50,000. He has estimated the project cost at Rs.18,00,000 of which machinery will be Rs.15,25,000 and the remaining amount will be for furniture and fittings. The bank finance is available to the extent of 80% of the project cost. He expects first year’s sales at Rs.40,00,000 with annual increase of 20% every year over previous year. The cost of sales will be 80% of sales. The rate of interest on loan will be 10% on reducing balance method. The loan is repayable @ Rs.3,00,000 at the end of every year. He charges depreciation @ 20% on his fixed assets under straight line and his other overheads for three years are Rs.2,00,000, Rs.3,00,000 and Rs.3,60,000 per year respectively. You are required to prepare the Projected Profit & Loss account and Projected Balance Sheet for the first three years of operations to be presented to the bankers, assuming that the first year is also a full year of 12 months activities and rate of income tax is flat @ 30%
(b)
Also find out any five plus points of the above loan proposal from Banker’s
(5)
Point of view.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2006 60 Marks
Section — II (3) Evaluate the merits of Internal Funding and External Funding.
(10)
(4) Discuss recent controversies related to IPOs and multiple Demat Accounts.
(10)
(5) Explain the impact of inflation on corporate financing, covering al the aspects in
(10)
detail. (6) M/s Maha Sweet would like to setup a food-processing unit. The technology for the (10) processing is always on improvement and hence the propose unit would become obsolete within four years of operation and would be scrapped. The company estimates to achieve sales of Rs.50 lakh in the first year of operation. This will be double every year. Net profit margin is 50%. Initial Outlay is Rs.5 crores. Company will also pump-in initial working capital of Rs.1 crore. Scrap value of the unit is Rs.1 crore. Depreciation on SLM basis. Present Value table of Re.1 is as follows: Years
1
17% 18%
2
3
4
0.855 0.731
0.624
0.534
0.847 0.718
0.609
0.516
Calculate: (a) Payback Period (b) Payback Profitability (c) NPV at 17% discounting rate (d) NPV at 18% discounting rate (e) IRR
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2006 60 Marks (7) Gems Ltd. Gives you the following information as on 31.3.2006
(10)
1
Tangible Fixed Assets
Rs.15 lacs
2
Patents
Rs.5 lacs
3
Investments
Rs.1 lacs
4
Current Assets
Rs.10 lacs
5
Long Term Loan
Rs.5 lacs
6
Current Liabilities
Rs.3 lacs
7
Share Capital:
8
20,000 – 10% Pref. Shares of Rs.10 each
Rs.2 lacs
50,000 – Equity Shares of Rs.10 each
Rs.5 lacs
Average Profit after tax, but before dividend
Rs.4 lacs
on Pref. Shares 9
Normal Rate of return for industry
19%
The patents are worthless while 50% of the fixed assets are appreciated by 20% From the above you are required to calculate value of an equity share of the company under: (1) Net Worth Basis (2) Yield Basis (3) Fair Value Basis
**********
TY BMS – Sem VI
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Special Study in Finance
Question Bank from Management Paradise
All the Important Questions already get covered in the past board papers. For more questions, refer to http://www.managementparadise.com/forums/t1690-question-bank-sem-62006-.html
(1) Section I, Question No. 1 and 2 are compulsory. (2) Attempt any three questions from Section II.
Section — I (1) Concept Testing:
(15)
(a) (b) (c) (d)
What is Buy-Back of Shares? Explain the provisions of MAT. Explain primary and collateral security with examples. Explain why internal Accruals are considered as the cheapest source of finance. (e) Explain role of a lead Manager. (2) The following data is available in respect of Jay Textiles Ltd.: 1) The company was incorporated in 1982 with the Promoters having an experience of more than 35 years in the textile field and is a brand leader in micro yarn.
(15)
2) The company proposes to borrow the term loan under TUFs (Technology Upgradation Fund Scheme). 3) The present installed capacity is 10 machines or 6000 TPA of polyester texturised yarn. 4) The additional investment will increase the installed capacity by 3600 TPA. 5) The present and proposed set up is at Silvassa backward area and enjoys Income tax holiday for 5 years. Tax Rate is 40%. 6) GIIC, GSFC and SBI financed the present unit. All the accounts are regular. 7) The project will lead to economies of scale, reduced cost of productions higher production due to yarn speed being faster due to latest generation machine, best quality due to the modernized machine. 8) The expected ROl of the project is 18%. 9) Depreciation for Project is Rs. 400 Lacs every year. 10) The cost of proposed project and the means of finance are as follows:
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2002 60 Marks Proposed Project Cost of Project Land and Site Development Factory Building Plant and Machinery Electrical Installation Misc. Fixed Assets Pre-operative Expense Contingencies Margin Money for Working Capital TOTAL
Rs. In Lacs 27 155 1604 24 10 20 67 93 2000 Rs. In Lacs
Means of Finance Promoter’s Fund Additional Equity Share Capital Internal Cash Accrual Term Loan
300 500 1200 2000
TOTAL
11) The Term lending institution has Interest rate of 13% for similar risk project and the loan is repayable in 5 years with installment and interest repayable at the end of each year.
General Manager of the Term Lending Institution has requestedyou to (a) (b) (c)
Prepare Flash Report from the point of view of the Term lending institution. Evaluate the project for Profitability in the next 5 years. Calculate the Debt Service Coverage ratio for the Term Loan.
Section — II (3) Company A wishes to takeover Company B. The financial details of the two companies are given as under: Particulars
Company A (Rs.)
Equity Shares (Rs.10 per share) Share Premium Account Profit and Loss Account 10% Preference Shares 10% Debentures Total Fixed Assets Net Current Assets Total Maintainable Annual Profits (after tax) Market Price per Equity share (Rs.) Price Earnings Ratio
TY BMS – Sem VI
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(10)
Company B (Rs.)
1,00,000 Nil 38,000 20,000 15,000
50,000 2,000 4,000 Nil 5,000
1,73,000
61,000
1,22,000 51,000
35,000 26,000
1,73,000 26,000 24 10
61,000 15,000 27 9
Special Study in Finance
Special Study in Finance April – 2002 60 Marks In order to determine the terms of exchange ratio, the company has approached you for valuation of shares based on: (i) Net Asset Value (ii) Earning per share (iii) Market price per share (4) M/s Onward Technology has short listed two projects A and B for final consideration. It wants to take up only one project of the two and not both. The investment required for project A is Rs.190 Lakhs while that for project B is Rs.400 Lakhs. The other details related to Project A and B are given below: PROJECT A Year I II III
Depreciation 24 20 16
Profit Before Tax 78 82 100
Profit After Tax 56 60 74
PROJECT B Year I II III
Depreciation 78 64 54
Profit Before Tax 104 118 260
Profit After Tax 82 92 186
(10)
The cost of capital of company is 14% and the present value of Re.1 at the end of first, second and third year @ 14% rate is 0.8772, 0.7695 and 0.6750 respectively. Using Net Present Value Method, which project would you recommend. What will be your answer under Pay Back Period Method? (5) Discuss “Companies prefer to issue bonus shares to payment of dividend but investor prefer dividend to bonus shares”.
(10)
(6) Describe the impact of corporate taxation on corporate financing. Elucidate your answer with suitable examples.
(10)
(7) Discuss briefly the contents of a prospectus for issue of shares.
TY BMS – Sem VI
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Special Study in Finance
(10)
Special Study in Finance April – 2003 60 Marks Note:
(1) Section I, Question No. 1 and 2 are compulsory. (2) Attempt any three questions from Section II.
Section — I (1) Concept Testing: (a) (b) (c) (d) (e)
(15)
Pari Passu Charge. Authorized and Subscribed Capital. Internal Rate of Return. Statement in Lieu of Prospectus. ROI Composition.
(2) You are approached by a Financial Institution to appraise the following project:
(15)
Name of the Borrower: Blue Lines Chemicals Private Limited Proposed loan is taken to set up a chemical unit for processing industrial waste into a marketable product XYZ. The product has a demand for 50,000 Litres. The processing costs include variable cost Rs. 5 per Litre and fixed cost (excluding depreciation) Rs.30,000 per year. Advertising expenses are also expected to be Rs. 20,000 per year. XYZ can be sold at Rs.10 per Litres. Raw Material (Industrial Waste) is available at Re. 1 per Litre. The Capital Cost of Chemical Unit is Rs. 7,50,000. The company has applied for a loan of Rs. 6,00,000 for a term of 10 years that is over the life of the asset. The promoters of this company are young, dynamic and highly qualified people but are doing the venture for the first time. The Promoters are unable to provide any collateral security for the loan except Personal Guarantee of their parents. They have thought of this project after market research. The said research has stated in the risk factors about invasion of South Korea in Chemical Market and drastic reduction in Selling Price of similar products. The above unit is a SSI unit and its average tax rate is 20%. Interest Rate is 12% p.a. Loan is repayable equally in 10 annual installments along with interest at the end of each year. You are required to: Questions: 1) Give the Cashflow generated by the above project for the first 3 years only. 2) Calculate the Debt Service Coverage ratio for the above 3 years. 3) Prepare Flash Report presenting the above information to the Financial Institution.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2003 60 Marks
Section — II (3) The following is the abridged financial statement of Auto Company. Liabilities Equity Shares (Rs.100 each) Retained Earnings Loans Current Liabilities Total
Rs. 15,00,000 5,00,000 3,00,000 2,00,000 25,00,000
Assets Bank Balance Fixed Assets Investments Other Assets Total
(10)
Rs. 4,00,000 14,00,000 1,00,000 6,00,000 25,00,000
The Management of the company proposes the following: (1) Payment of Cash Dividend @ 10%. (2) Issue Bonus Share to existing shareholders in the ratio of 1 share for every 10 shares held. Calculate: (a) Value of Shares before the above proposals. (b) Value of Shares after Cash Dividend but before Bonus. (c) Value of Shares after Cash Dividend and after Bonus. (d) Retained Earnings after the above proposals. (e) Value of Assets and Liabilities after the above proposals. (4) The total available budget for the company is Rs. 20 Lacs. The Projects have been ranked in the order of Profitability. Project
Cost (Rs. In Lacs)
Profitability Index
M N O P Q R
6 5 7 2 5 13
1.50 1.25 1.20 1.15 1.10 1.40
(a) Calculate (i) Cash Inflow for each of them projects. (ii) Net Present Value for each of the projects.
(5)
(b) Which projects should be undertaken by the company in order to maximize the Net Present Value under Capital Rationing assuming that the each Project is indivisible?
(5)
(a) Explain the provisions of MAT and its implications of Corporate Financing (b) Explain whether Dividend declared to shareholders reduces the tax liability
(5)
(5)
under MAT.
TY BMS – Sem VI
Page 2 of 3
(5)
Special Study in Finance
Special Study in Finance April – 2003 60 Marks (6) (a) Discuss the role of Merchant banker in the following:
(6)
(i) Portfolio Management. (ii) Mergers and Acquisition.
(4) (b) Explain briefly four qualities of good Merchant banker. (7) Discuss the various theories of explaining Dividend Policy of the company.
TY BMS – Sem VI
Page 3 of 3
Special Study in Finance
(10)
Special Study in Finance April – 2004 60 Marks Note:
(1) Answer all the questions in Section I. (2) Answer any three questions from Section II. Each question in this Section carries 10 marks.
Section — I (1) Attempt the following: (a) (b) (c) (d) (e)
(15)
What is authorized share capital? What is margin money? What is stock split? What is DCF technique in capital budgeting? What is statement in lieu of prospectus?
(2) The Directors of the following two Indian Companies have approached you with their concern for the current scenario and future prospects
(15)
(1) Madhur Products Limited is an established company in the field of dairy products, chocolates and ice creams. It has a decent track record of Dividend, which averages @ 40 % p.a. The Company has also a good record of Bonus issue. The last Bonus Issue ‘was made in September, 2000. The Company feels that due to the conspiracy hatched by its competitors with the help of widespread network of distributors, the Company’s products were shown to have been contaminated and it was also widely shown on the media that under the wrappers of many of their chocolates and ice creams, there was a layer of fungus and decayed dry fruits. The snaps and live interview of the consumers complaining about the inferior quality and “totally unsafe for human consumption” shouts, drastically brought down the sale in the last quarter of the Financial Year 2003—04. The Directors immediately undertook damage controlling steps and through wide scale advertisement campaign tried to restore the public confidence. However the current years performance is very much lower than the earlier years and any prudent financial consultant would not recommend dividend more than 20% this year. The Directors are of the opinion that the sale would again pick up from the second quarter of the next year and there will be a complete normally thereafter.
TY BMS – Sem VI
Page 1 of 3
Special Study in Finance
Special Study in Finance April – 2004 60 Marks (2)
HU-MA-NE Software Ltd. is a well established company in the field of software development, e—service provider and man power consultancy service. Its clients is mainly in the banking, airways and transport sector. Almost 60% of the revenue comes from overseas clients. It has shown a steady growth and progress for last five years and has paid dividend of 15%, 15%, 17%, 20% and 25% and still a large amount of profits were ploughed back every year. Till December, 2003 everything was going smoothly, but all of a sudden the overseas countries having maximum business associates, saw the rise of antioutsourcing agitations. The problem got further aggravated by rupee becoming stronger day by day against the US dollar. The Company some how managed to complete the ongoing contract but is not so sure of the future prospects. The Company is also in the process of finalizing new business ventures with “nonaffected countries” and also taking steps to expand its operations more in India. The Company is hopeful of getting the better results for all its efforts. Give your guidance in each of the case, with special reference to the issues related to Dividend/Bonus policy and future share price behavior on the stock exchange.
Section — II (3) Monica Engineering Ltd. gives you the following information of their income for the year ended 31.3.2003: (Amt. in Rs.) 238,23,200 188,20,100 50,03,100 4,50,000 20,12,460 14,80,670 8,29,910 3,80,000 5,00,000 1,80,000 70,060
(10)
Sales Cost of sales Gross Profit Add: Transfer from Contingency Reserve Less: Office Overheads Selling and distribution Depreciation Provision for Income tax Transfer to General Reserve Proposed Dividend Net profit carried to Balance sheet Additional information (1) The Carried Forward business loss from last year is Rs. 4,05,600. (2) Depreciation allowable as per Income Tax Act is Rs. 9,20,300. (3) Corporate Tax rate is 35% + Surcharge @ 5% and MAT u/s 115 JB is @ 7.50% + Surcharge @ 5%. You are required to calculate the amount of tax payable by the Company for the year ended 31.3.2003 after taking into account the provisions of MAT u/s 115JB of LT. Act, 1961.
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2004 60 Marks (4) What are the key steps involved in obtaining term loans?
(10) (10)
(5) Discuss in brief method of valuation of Equity Shares. (6) The existing manufacturing units has yearly fixed overheads of Rs.1,00,000. It wished to expand the production by purchasing one of the two types of machinery
(10)
Model A and Model B, each costing Rs.5,00,000 and having the estimated life of 5 years. The estimated annual Sales and Cost under both of these models are given as under: Model A (Rs.) Model B (Rs.) Sales
20,00,000
24,50,000
Materials
9,20,000
11,12,200
Labour
4,12,450
5,67,800
Variable Overheads
3,80,900
4,95,670
Compute the comparative profitability of each model of machinery under the payback period and also calculate payback profitability. Ignore depreciation and taxation. (7) Write Short Notes on:
(10)
(a) International Sources of Finance (b) Underwriting of shares
Page 3 of 3 Special Study in
Finance
Special Study in Finance April – 2005 Note:
60 Marks
(1) Answer all the questions in Section I. (2) Answer any three questions from Section II. Each question in this Section carries 10 marks.
Section — I (1) Attempt the following:
(15)
(a) What is the principle underlying Discounted Cash Flow Techniques in Capital Investment Decisions? (b) What is a Shelf Prospectus? (c) What are the matters covered in a Marketing Appraisal of a Term Loan Appraisal? (d) What do you understand by the term stock-split and consolidation of shares? What is their impact on the Balance sheet of a company? (e) State the main functions of Securities and Exchange Board of India.
(2)
Royal Industries has for many years enjoyed a moderate stable growth in sales and earnings. In recent years it is facing stiff competition in a plastic product line and consequently its sales have been declining. Apprehending further decline in its sales, its management is planning to move eventually out of plastic business altogether and develop a new diversified product line in growth oriented industries. To execute the proposed investment plan of this year a capital outlay of Rs. 12 crores is necessary to purchase new facilities to start manufacturing a new product. The estimated rate of return on fresh investment is 20 percent per annum. The company has been paying a dividend of Rs. 1.50 per share on 4 crore outstanding shares. The dividend policy has been to maintain a stable dividend of Re. 1 raising it only when it appears that earnings have reached a new permanently higher level. The directors may change such a policy if there are compelling reasons to do so. Total earning of the current year are Rs. 10 crores. The current market price of the equity share is Rs. 15 and the firm’s Debt/Assets ratio is 40%. Current costs of various forms of financing are: Debentures 13%, New equity shares sold at Rs. 15, Required rate of return is 10 percent. (i) (ii)
What would be an appropriate policy for the company? What assumptions, if any, do you make in your investors’ preference for dividends versus capital gains?
(4) (3)
TY BMS – Sem VI
Page 1 of 3
Special Study in Finance
Special Study in Finance April – 2005 60 Marks (3) ABC Ltd. has made a rights offer (to its existing shareholders) of one share for every 3 shares held @ Rs. 25 per share. The current market price per share of the company is Rs. 40. A presently holds 1000 equity shares of the company. Before deciding on the acceptance of the rights offer, he would like to know answers to the following questions: (i)
What is expected to be the market price of the share after the rights issue?
(ii) (iii)
What is the value of the right to the shareholder per shares held by him? If he renounces his shares in favor of his friend for a price which is the value of the right, what would be the change in his wealth?
(iv)
What would be the change in his wealth if he remains dormant and let go the right offer? Advise him.
(2) (2) (2) (2) (2) (2)
Section — II (4) Discuss the financial ratios used for appraisal of Term Loan Proposals. (5) What are Mutual Funds? What is meant by NAV of a Mutual Fund Scheme? What
(10)
(2) (2) (5) (1)
are the different types of Mutual Fund Schemes? Which is the regulatory body of Mutual Fund Schemes? (6) What is Capitalization of Reserves? What are the guidelines issued by SEBI with in
(10)
this regard? How does it affect the Balance sheet of a company? (7) Following are the data on a capital project evaluated by the management of EFG Ltd. Annual Cost Saving Useful Life IRR Profitability Index NPV Cost of Capital Cost of Project Payback Salvage Value
(10)
Rs. 40,000 4 years 15% 1.064 ? ? ? ? 0
Find the missing value considering the following table of thediscount factors only: Discount Factor 1st Year 2nd Year 3rd Year 4th Year Total
TY BMS – Sem VI
15% 0.869 0.756 0.658 0.572 2.855
14% 0.877 0.769 0.675 0.592 2.913
Page 2 of 3
13% 0.885 0.783 0.693 0.613 2.974
12% 0.893 0.797 0.712 0.636 3.038
Special Study in Finance
Special Study in Finance April – 2005 60 Marks
(8) The Balance sheet of Ganesh Ltd. as on 31-3-2005 was as under: Liabilities
Rs.
2,000 Equity Shares of
Assets
2,00,000
Land & Building
(10) Rs. 1,25,000
Rs.100 each General Reserve
50,000
Machinery
75,000
Profit & Loss A/c
25,000
Investment at Cost
45,000
(Market Value Rs. 37,5000) Creditors
45,000
Debtors 50,000
Provision for Taxation
20,000 37,500
Stock
Provident Fund
17,500 25,000
Cash & Bank
Total
3,57,500
Total 3,57,500
Additional Information: (i) Land & Building and Machinery are valued at Rs. 1,37,500 and Rs. 55,000 respectively. (ii) Of the total debts Rs. 2,500 are bad. (iii) Goodwill is to be valued at Rs. 25,500 (iv) The normal dividend declared and paid by such type of companies is 15% on the paid-up capital (v) The average rate of dividend, declared and paid by the company is 18% on its paid-up capital. Calculate the fair value of an equity share of the company.
TY BMS – Sem VI
Page 3 of 3
Special Study in Finance
Special Study in Finance April – 2006 Note:
60 Marks
(1) Section I is compulsory (2) Answer any three questions from Section II (3)Use of simple calculators is permitted (4)Figures to the right indicate marks (5)Make suitable assumptions wherever required. (6) Working notes, if any, shall form part of your answers.
Section — I (1) Answer the following: (a) (b) (c) (d) (e)
(15)
What are the types of share capital? What is MAT? What is IRR? What is social wealth? What is Capital Rationing?
(2) (a)
Mr. Anil Sane, a fresh MBA, wishes to start a Manufacturing Unit from his (10) ancestral factory premises. He has Rs.1,05,200 in his bank account. His parents have promised to gift him Rs.3,50,000. He has estimated the project cost at Rs.18,00,000 of which machinery will be Rs.15,25,000 and the remaining amount will be for furniture and fittings. The bank finance is available to the extent of 80% of the project cost. He expects first year’s sales at Rs.40,00,000 with annual increase of 20% every year over previous year. The cost of sales will be 80% of sales. The rate of interest on loan will be 10% on reducing balance method. The loan is repayable @ Rs.3,00,000 at the end of every year. He charges depreciation @ 20% on his fixed assets under straight line and his other overheads for three years are Rs.2,00,000, Rs.3,00,000 and Rs.3,60,000 per year respectively. You are required to prepare the Projected Profit & Loss account and Projected Balance Sheet for the first three years of operations to be presented to the bankers, assuming that the first year is also a full year of 12 months activities and rate of income tax is flat @ 30%
(b)
Also find out any five plus points of the above loan proposal from Banker’s
(5)
Point of view.
TY BMS – Sem VI
Page 1 of 3
Special Study in Finance
Special Study in Finance April – 2006 60 Marks
Section — II (3) Evaluate the merits of Internal Funding and External Funding.
(10)
(4) Discuss recent controversies related to IPOs and multiple Demat Accounts.
(10)
(5) Explain the impact of inflation on corporate financing, covering al the aspects in
(10)
detail. (6) M/s Maha Sweet would like to setup a food-processing unit. The technology for the (10) processing is always on improvement and hence the propose unit would become obsolete within four years of operation and would be scrapped. The company estimates to achieve sales of Rs.50 lakh in the first year of operation. This will be double every year. Net profit margin is 50%. Initial Outlay is Rs.5 crores. Company will also pump-in initial working capital of Rs.1 crore. Scrap value of the unit is Rs.1 crore. Depreciation on SLM basis. Present Value table of Re.1 is as follows: Years
1
17% 18%
2
3
4
0.855 0.731
0.624
0.534
0.847 0.718
0.609
0.516
Calculate: (a) Payback Period (b) Payback Profitability (c) NPV at 17% discounting rate (d) NPV at 18% discounting rate (e) IRR
TY BMS – Sem VI
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Special Study in Finance
Special Study in Finance April – 2006 60 Marks (7) Gems Ltd. Gives you the following information as on 31.3.2006
(10)
1
Tangible Fixed Assets
Rs.15 lacs
2
Patents
Rs.5 lacs
3
Investments
Rs.1 lacs
4
Current Assets
Rs.10 lacs
5
Long Term Loan
Rs.5 lacs
6
Current Liabilities
Rs.3 lacs
7
Share Capital:
8
20,000 – 10% Pref. Shares of Rs.10 each
Rs.2 lacs
50,000 – Equity Shares of Rs.10 each
Rs.5 lacs
Average Profit after tax, but before dividend
Rs.4 lacs
on Pref. Shares 9
Normal Rate of return for industry
19%
The patents are worthless while 50% of the fixed assets are appreciated by 20% From the above you are required to calculate value of an equity share of the company under: (1) Net Worth Basis (2) Yield Basis (3) Fair Value Basis
**********
TY BMS – Sem VI
Page 3 of 3
Special Study in Finance
Question Bank from Management Paradise
All the Important Questions already get covered in the past board papers. For more questions, refer to http://www.managementparadise.com/forums/t1690-question-bank-sem-62006-.html
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