PES School Of Engineeringpesitsouth.pes.edu/pdf/2017/mba/16MBA22 Financial Management.pdfTo explain...
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PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS Dept. of MBA Lesson Plan Semester – II Subject Code : 16MBA22 Total no of Lectures: 56 Subject Title : Financial Management IA Marks: 20 Type : Core Credits: 4 Faculty Name : Dr. R. Duraipandian Exam Hours: 03 No of Lecture Hours / Week : 03 Exam Marks: 80 Practical Component Hour : 02 Ratio of theory to problems: 60 : 40 Pre-Requisite: Course Delivery As the subject is of practical utility and significance, the course would be conducted in an interactive manner. To stimulate the thought process the participants are requested to read any financial newspaper daily and present/seek views on the subject/article of their interest. Conceptual framework of the subject shall be covered adequately through lectures/power point presentations. Course Objectives: 1. To familiarize the students with basic concepts of financial management. 2. To understand time value of money and cost of capital. 3. To analyze capital structure, capital budgeting and dividend decision. 4. To understand the short term and long term financing and working capital management. Course Outcomes: At the end of the course students will be able to: Understand the basic financial concepts, Apply time value of money, Evaluate the investment decisions, Analyze the capital structure and dividend decisions, Estimate working capital requirements.
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Transcript of PES School Of Engineeringpesitsouth.pes.edu/pdf/2017/mba/16MBA22 Financial Management.pdfTo explain...
PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS
Dept. of MBA
Lesson Plan
Semester – II
Subject Code : 16MBA22 Total no of Lectures: 56
Subject Title : Financial Management IA Marks: 20
Type : Core Credits: 4
Faculty Name : Dr. R. Duraipandian Exam Hours: 03
No of Lecture Hours / Week : 03 Exam Marks: 80 Practical Component Hour : 02 Ratio of theory to problems: 60 : 40
Pre-Requisite: Course Delivery As the subject is of practical utility and significance, the course would be conducted in an interactive manner. To stimulate the thought process the participants are requested to read any financial newspaper daily and present/seek views on the subject/article of their interest. Conceptual framework of the subject shall be covered adequately through lectures/power point presentations.
Course Objectives: 1. To familiarize the students with basic concepts of financial management. 2. To understand time value of money and cost of capital. 3. To analyze capital structure, capital budgeting and dividend decision. 4. To understand the short term and long term financing and working capital management.
Course Outcomes: At the end of the course students will be able to: Understand the basic financial concepts, Apply time value of
money, Evaluate the investment decisions, Analyze the capital structure and dividend decisions, Estimate working capital requirements.
Table - 1
Session Plan
Mo
du
le
No
Se
ssio
n N
o.
Contents
Pedagogical
Tools
Presentation
Assignments
/ addit ional
work
Stu
de
nt
Le
arn
ing
Ev
alu
ati
on
Te
ch
niq
ue
Cu
mu
lati
ve
Co
ve
rag
e
I 1 Course Outline:
Introduction to Financial
Management, objectives of financial management
Course Objective:
To explain meaning and objectives
of financial management
Course Outcome:
students should be able to
understand the meaning of financial
management
DLP
&
Chalk Board
Refer the
Table 2
Refer the
Table 3
# Class Discussion
# Test I
# Case Presentation
07%
18%
2 Course Outline:
Profit maximization & Wealth
maximization Course Objective:
To understand the goal of the firm
Course Outcome:
students should be able to
understand the how financial goals
related to the firms mission and
objectives
”
”
”
”
3 Course Outline:
Changing role of finance managers
” ” ” ”
Course Objective:
To review the changing role of
finance manager and his position in
the management hierarchy
Course Outcome:
students should be able to analyze
the changing role of finance
managers 4 Course Outline:
Interface of Financial management with other functional areas.
Course Objective:
To explain the nature of finance and
its interaction with other
management functions
Course Outcome:
students should be able to
understand organization of financial
function
”
”
”
”
5 Course Outline:
Sources of financing: Shares,
debentures, Term loans, Hybrid financing Course Objective:
To know how to raise the funds
Course Outcome:
students should be able to
understand why and how do firms
raise funds
”
”
”
”
6 Course Outline:
Venture capital, angel investing and
”
”
”
”
private equity Course Objective:
To know how to raise the funds
Course Outcome:
students should be able to
understand why and how do firms
raise funds
7 Course Outline:
Warrants & Convertibles
Course Objective:
To know how to raise the funds
Course Outcome:
students should be able to
understand why and how do firms
raise funds
”
”
”
”
8 Course Outline:
Emerging Issues: Risk management, Behavioral finance and Financial
engineering. Course Objective:
To understand how to manage the
financial risk and its emerging issues
Course Outcome:
students should be able to
understand what are the elements of
company’s financial risk
management strategy and modern
concepts
”
”
”
”
II 9 Course Outline:
Time Value of Money: Future value of
single cash flow Course Objective:
To explain time value of money and
the various valuation concepts
Course Outcome:
students should be able to
understand the different valuation
models concerned with different
securities
”
”
”
”
10 Course Outline:
Future value of single cash flow &
annuity Course Objective:
To explain time value of money and
the various valuation concepts
Course Outcome:
students should be able to
understand the different valuation
models concerned with different
securities
” ” ” ”
11 Course Outline:
Present value of single cash flow Course Objective:
To explain time value of money and
the various valuation concepts
Course Outcome:
students should be able to
understand the different valuation
models concerned with different
” ” ” ”
securities 12 Course Outline:
Present value of single cash flow and annuity
Course Objective:
To explain time value of money and
the various valuation concepts
Course Outcome:
students should be able to
understand the different valuation
models concerned with different
securities
” ” ” ”
13 Course Outline:
Present value of single cash flow,
annuity & perpetuity Course Objective:
To explain time value of money and
the various valuation concepts
Course Outcome:
students should be able to
understand the different valuation
models concerned with different
securities
” ” ” ”
14 Course Outline:
Problems on time value of money Course Objective:
To calculate time value of money
and the various valuation concepts
Course Outcome:
Students should be able to compute
” ” ” ”
the various values based on different
valuation concepts 15 Course Outline:
Problems on time value of money Course Objective:
To calculate time value of money
and the various valuation concepts
Course Outcome:
Students should be able to compute
the various values based on different
valuation concepts
” ” ” ”
16 Course Outline:
Problems on Simple interest
Course Objective:
To calculate time value of money
and the various valuation concepts
Course Outcome:
students should be able to compute
the various values based on different
valuation concepts
” ” ” ”
17 Course Outline:
Problems on Compound interest Course Objective:
To calculate time value of money
and the various valuation concepts
Course Outcome:
students should be able to compute
the various values based on different
valuation concepts.
” ” ” ”
18 Course Outline:
Capital recovery & Loan amortization ” ” ” ”
36%
Course Objective:
To know the concept of Capital recovery & Loan amortization
Course Outcome:
Students should be able to
understand the concept of Capital recovery & Loan amortization
III 19 Course Outline:
Cost of capital : Cost of capital – basic concepts
Course Objective:
To explain the general concept of
the opportunity cost of capital
Course Outcome:
students should be able to
understand the why the cost of
capital important
” ” ” ”
20 Course Outline:
Cost of debenture capital
Course Objective:
To determine the cost of debenture
capital
Course Outcome:
Students should be able to
understand how the cost of
debenture capital calculated
” ” ” ”
21 Course Outline:
Cost of preference capital Course Objective:
” ” ” ”
To calculate cost of preference capital
Course Outcome:
Students should be able to
understand how the cost of
preference capital calculated
50% 22 Course Outline:
Cost of term loans, Cost of equity capital Course Objective:
To compute the cost of term loans &
equity
Course Outcome:
Students should be able to
understand how the cost of debt and
equity calculated
” ” ” ”
23 Course Outline:
Dividend Discounting & CAPM model Course Objective:
To understand the concept of
Dividend Discounting & CAPM Model
Course Outcome:
Students should be able to
understand how the cost of equity
calculated using CAPM and its logic
” ” ” ”
24 Course Outline:
Cost of retained earnings Course Objective:
To calculate the cost of retained
earnings
” ” ” ”
Course Outcome:
Students should be able to
understand the opportunities are
available to creditors with regard to
investment and its return 25 - 26 Students related activity
Students are asked to collect the financial statement of various
companies (groups will be made among students) and will be asked to
calculate the various cost of funds for each sources of capital used by the companies
Students
participation
Laptop and
DLP
Compute cost
of various
sources of
funds and can
also
concentrate on
computing cost
for assets also.
Activity
Grades will be given
based on innovation
techniques.
27 Course Outline:
Determination of Weighted average
cost of capital(WACC) Course Objective:
To learn the component of cost of
capital and the WACC
Course Outcome:
Students should be able to
understand how to determine the weighted average cost of capital
1 hr. problem
solving
Refer – case
study
Group – C
Refer – Table 3 Class Discussion
Case presentation
Assignments
28 Course Outline:
Determination of Marginal Cost of Capital
Course Objective:
To learn about marginal cost of
capital
1 hr. problem
solving
Refer – case
study
Group – C
Refer – Table 3 Class Discussion
Case presentation
Assignments
Course Outcome:
students should be able to
understand how to determine the marginal cost of capital
IV 29 Course Outline:
Investment Decisions: Investment evaluation techniques – Net Present Value
Course Objective:
To understand the nature and
importance of investment decisions
Course Outcome:
Students should be able to
understand how to determine the
NPV
.5 hr lecture
.5 hr solving problem
Refer – case
study
Refer the
Table 3
Class Discussion
Case presentation
Assignments
68%
30 Course Outline:
Internal Rate of Returns (IRR)
Course Objective:
To explain the methods of
calculating IRR
Course Outcome:
students should be able to
understand the implications of NPV
& IRR
DLP &
Chalk Board
Refer the
Table 2
Refer the
Table 3
# Class Discussion
# Test II
# Case Presentation
31 Course Outline:
Internal Rate of Returns (IRR), Modified Internal Rate of Return
(MIRR) Course Objective:
To explain the methods of
”
”
”
”
calculating MIRR
Course Outcome:
Students should be able to
understand the implications of NPV
& MIRR 32 Course Outline:
Profitability index (PI)
Course Objective:
To explain the methods of
calculating PI
Course Outcome:
Students should be able to
understand the implications of NPV,
MIRR & PI
”
”
”
”
33 Course Outline:
Problems on IRR Course Objective:
To compute IRR and its implications
Course Outcome:
Students should be able to compare
and contrast NPV & IRR and
emphasize the superiority of NPV.
”
”
”
”
34 Course Outline:
Problems on MIRR & PI Course Objective:
To describe the MIRR and PI
Course Outcome:
Students should be able to
understand how is MIRR calculated
for even and uneven cash flows.
”
”
”
”
35 Course Outline:
Pay Back Period (PBP)
Course Objective:
To describe the non-DCF criteria:
PBP
Course Outcome:
Students should be able to
understand what is payback and
how is it calculated.
DLP &
Chalk Board
Refer the
Table 2
Refer the
Table 3
# Class Discussion
# Test III
16# Case
Presentation
36 Course Outline:
Discounted Pay Back Period (DPBP) Course Objective:
To describe the DCF criteria: DPBP
Course Outcome:
Students should be able to
understand how discounted payback
calculated? Is it an improvement
over simple payback?
”
”
”
”
37 Course Outline:
Problems on PBP & DPBP
Course Objective:
To describe the PBP & DPBP
Course Outcome:
Students should be able to
understand how is PBP & DPBP
calculated for even and uneven cash
flows.
”
”
”
”
38 Course Outline:
Accounting Rate of Return (ARR)
”
”
”
”
Course Objective:
To describe the ARR
Course Outcome:
Students should be able to
understand how is ARR calculated
for even and uneven cash flows.
39 Course Outline:
Problems on ARR Course Objective:
To describe the ARR
Course Outcome:
Students should be able to
understand how is ARR calculated
for even and uneven cash flows.
”
”
”
”
40 Students related activity
Here based on the above techniques students are asked to select any new projects undertaken by any companies
and will be asked to justify their answers
Laptop & DLP
More Weightage
will be given for
international projects
Students will select newer
projects of thecompanies and will use
various techniques to
determine the feasibility of the newer
project.
Refer – Table 3
Activity
Grades will be given based on innovation
techniques.
V 41 Course Outline:
Working capital management : Factors
influencing working capital requirements
Course Objective:
To explain the factors that should be
”
”
”
”
considered while estimating working
capital
Course Outcome:
Students should be able to
understand the meaning, definition,
concepts and kinds of working
capital and its factors.
78%
42 Course Outline:
Current asset policy & current assets finance policy Course Objective:
To analyze the current asset policy &
current assets finance policy
Course Outcome:
Students should be able to
understand the concept of Current asset policy & current assets finance
policy
”
”
”
”
43 Course Outline:
Determination of operating cycle and
cash cycle Course Objective:
To explain the operation cycle and
cash cycle
Course Outcome:
Students should be able to
understand the determination of operating cycle and cash cycle
”
”
”
”
44 Course Outline:
Estimation of working capital
requirements of a firm
”
”
”
”
Course Objective:
To determine the working capital
required
Course Outcome:
Students should be able to
understand how to estimate the working capital requirements of a firm
45 - 47 Course Outline:
Problems on Working capital management
Course Objective:
To estimate the requirement of WC
Course Outcome:
Students should be able to
understand how is WC calculated
and based on its requirement
”
”
”
”
48 Students related activity
Students are asked to collect the final accounts of various companies and are
asked to find out the working capital statement of the companies, students
are open to come out with newer ideas about working capital management which can be used as an alternative
mode for working capital.
Laptop and DLP
1 hr.
presentation
Refer – Table 3
Activity Grades will be
given based on innovation
techniques.
VI 49 Course Outline:
Capital Structure: Planning the capital
structure (No capital structure theories to be covered)
Course Objective:
To know the relationship between
capital structure and value of the
firm
Course Outcome:
Students should be able to
understand the relationship between
capital structure and value of the
firm and its planning
92%
50 Course Outline:
Leverages – Determination of
operating leverage, financial leverage & total leverage Course Objective:
To describe the computation of
operating and financial leverage
Course Outcome:
Students should be able to
understand the practical
considerations in determining the
firm’s capital structure
51 Students related activity
Method to be adopted will be decided
during the class progress and students knowledge in the above topic
Students are open to
come out with newer
concepts of planning capital
structure away form
traditional
Collection of capital
structure of companies
and analyzing whether the capital
structure adopted by
the companies
Activity Grades will be
given based on innovation
techniques.
techniques.
Also can concentrate
on dividend payment strategies of
various companies.
is feasible.
52 Course Outline:
Dividend Policy – factors affecting the
dividend policy. Stable dividend, stable payout (No dividend theories to
be covered) Course Objective:
To explain the meaning of dividend
policy of management of prof its and
its factors
Course Outcome:
Students should be able to
understand the meaning of dividend
policy of management of profits and
understand the factors that influence
a firm’s dividend payment
1 hr lecture Refer case study
Refer –Table 3
Class Discussion Case presentation
Assignments
53 Course Outline:
Problems on Capital structure Course Objective:
Course Outcome:
1 hr. problem
solving
54 Course Outline:
Problems on Capital structure Course Objective:
To estimate the capital structure
Course Outcome:
Students should be able to
understand how to determine the
optimum capital structure for the
firm
1 hr.
problem solving
Refer – Table
3
Class Discussions
Assignments
55 Case study discussion. 1hr Lab 56 Course Outline:
Problems on Capital structure Course Objective:
To estimate the capital structure
Course Outcome:
Students should be able to
understand how to determine the
optimum capital structure for the
firm
1 hr.
problem solving
Lab Sessions
Every fifth hour will be handled lab sessions which will focus the practical
aspect of the syllabus content. A complete revision through the
presentation by the students based on the presentation topics will be
covered during this slot.
Table – 2
Presentation Topics
S.No. Mod. No. Presentation Topics
1-30 I to VII Case study and assignment topics will be considered as
presentation topics, Presentation only after T3 during
review period.
Table – 3
Assignments & Additional Work
Table – 4
Case Study Topics
S.No. Mod. No. Assignment Topic
1 to 30 I to VII Each students will be given one question each from Question
Bank from the following manner ( 1 - 3 marks question,
1- 7 marks question and 1- 10 marks question)
Question Bank contents will be divided as an assignment topics to the students
S.No. Mod. No. Particulars
1 – 30 I – VII Case study will be given to the students for presentation based
on previous year question papers problems and case let
from text books
1 ” Question Paper, VTU, June-July 2011, 12. 13 & 14
2 ” Question Paper, VTU, June-July 2009 & 10
3 ” Question Paper, VTU, December 2008
4 ” Question Paper, VTU, July 2008
5 ” Question Paper, VTU, December 2006 / January 2007
6 ” Question Paper, VTU, July 2006
7 ” Question Paper, VTU, December 2005 / January 2006
8 ” Question Paper, VTU, January / February 2005
9 ” Question Paper, VTU, June / July 2004
Table – 5
References & Additional Readings
10 ” Question Paper, VTU, January / February 2004
11 ” Question Paper, VTU, June / July 2003
12 ” Question Paper, VTU, January / February 2003
13 ” Question Paper, VTU, July / August 2002
S.No. Mod. No. Particulars
1 I – VII Financial Management – Prasanna Chandra, 8/e, TMH, 2011
2 ”
Financial Management, Shashi K Gupta and R.K. Sharma, 8th Revised Edition,
Kalyani Publishers, 2014
3 ” Financial Management, M.Y. Khan, & P.K. Jain, 6/e,TMH, 2011
4 ” Financial Management, Rajiv Srivastava and Anil Misra, Second Edition,
Oxford University Press, 2011
5 ” Financial Management – I.M. Pandey, 10th Edition, Vikas Publishing House,
2014
Table – 6
IA Pattern Test Marks Presentations Assignments
10 5 5
For Internal Evaluation T1 marks and the best out of remaining two will be considered.
1st Test is mandatory.
Question Bank 16MBA22: FINANCIAL MANAGEMENT
2 Marks Questions:
1. Define financial management. 2. What is operating leverage?
3. What are the objectives of financial management? 4. What is combined leverage?
6 ” Financial Management & Policy, – Vanhorns & James C, 12/e, Pearson, 2002
7 ” Financial Management – V.K. Bhalla
8 ” Fundamentals of Financial Management – Brigham & Houston
9 ” Corporate Finance – Damodaran
10 ” Financial Management – Shah
11 ” Fundamentals of Financial Management – Sheeba Kapil, Pearson, 2013
12 ” Financial Management, Sumit Gulati & Y.P. Singh
5. What are financing decisions? 6. What do you mean by dividend policy?
7. Give four important financial decisions? 8. What is bond or scrap dividend?
9. What is Financial System? 10. What is property dividend? 11. What are Financial Institutions?
12. Define Stock Dividend? 13. What is profit maximization?
14. State the different practices of dividend? 15. State the importance of a financial manager? 16. Define ESOP?
17. What is the time value of money? 18. What do you mean by a share?
19. Define Cost of capital. 20. What do you mean by Equity Shares? 21. Define a debenture?
22. What are deferred share? 23. What is redeemable debenture?
24. What are preference share? 25. What is irredeemable debenture? 26. Mention the types of preference share.
27. What are preference shares? 28. What are cumulative preference shares?
29. What are equity shares? 30. What are non-cumulative preference shares? 31. What is Bond?
32. What are participating preference shares? 33. What are term loans?
34. What are non-participating preference shares? 35. What are redeemable preference shares? 36. What is CAPM?
37. What is retained earnings?
38. What are irredeemable preference shares? 39. What is weighted average cost of capital (WACC)?
40. What are convertible preference shares? 41. What non-convertible preference shares?
42. AB Ltd. issues Rs.1, 00,000 9% debentures at a premium of 10%. The cost of floatation is Rs.2500. The tax rate applicable is 50%. Compute cost of debt-capital.
43. The market price of the equity of a Ltd. Co. is Rs.160. The dividend expected after a year is Rs.12 per share. The
dividend is expected to grow at a constant rate of 4 percent per annum. Find the rate of return required by shareholders. 44. What do you understand by debentures?
45. What is the net benefit cost ratio when benefit cost ratio is 1.40:1?
46. What are guaranteed preference shares?
47. The market price of a share is Rs.255. A company anticipated earnings of Rs.3,00,000 to be distributed among 30,000 share holders. The tax rate is 30%. Find out the cost of internally generated retained earnings.
48. What are registered debentures?
49. What do you mean by bearer / unregistered debenture?
50. The shares of a leather company are selling at 60% shares. The firm has paid dividend at the rate of Rs.3 per share. The growth rate is 9%. Compute cost of equity capital of the company.
51. 20 yrs 20% Debentures of a firm are sold at a rate of Rs.180. The face value of the debenture is 200/-, 50% tax is assumed. Find the cost of debt.
52. What do your understand by unsecured debentures?
53. A company has the following capital structure find out weighted average cost of capital
Securities Book values After tax
Equity 1000000 12%
Retained earnings 400000 8%
Preference capital 400000 14%
Debentures 800000 5%
2600000
54. What are mortgage debentures?
55. What is Redeemable Debenture? 56. What do you mean by investment decision? 57. What is capital budgeting?
58. What are irredeemable debentures?
6 Marks Questions:
1. What are the functions of a finance manager?
2. State and explain in brief the different goals of financial management? 3. Explain the functions of financial management.
4. Describe the activities of financial management? 5. State the advantages of Wealth Maximization. 6. Explain the Constituents of Financial System?
7. How will you compute the cost of equity capital? 8. Write a note on cost of retained earnings?
9. How will you compute marginal cost of capital? 10. Distinguish between Internal and External Equity. How can these equities be estimated? 11. Explain what is CAPM and its assumptions
12. Explain what is WACC? 13. Mr.Kiran is considering to purchase 20% Rs.2, 000 preference share redeemable after 6 years at par. What should be
willing to pay now to purchase the share assuming that the required rate of return is 14%? 14. What are the Advantages and disadvantages of Net Present Value (NPV) method? 15. Explain payback period method for evaluating investment proposals.
16. Mention advantages and disadvantages of pay back period? 17. What are the advantages and disadvantages of rate of return method?
18. Explain the Internal Rate of Return method (IRR). 19. Differentiate NPV and IRR methods. 20. Explain average rate of return.
21. What is discounted payback period and why is it better than payback period method? 22. Explain the different principles of working capital?
23. Explain the process of estimating cash flow for the new project. 24. What is capital rationing?
25. What are the different motives of holding cash? Explain Cash Management? 26. From the following information compute the Working Capital requirement for a company
a. annual sales 2,00,000 units b. selling price Rs.8 per unit c. percentage net profit on sales 25%
d. average credit period allowed to customers – 8weeks e. average credit period allowed to suppliers – 4weeks
f. average stock holding in terms of sales requirement – 12weeks g. allow 10% for contingencies
27. Calculate the working capital requirement from the following information. You are given the following estimates and are instructed to add 20% as contingencies.
Particulars amt 1) Amount blocked up in stock Stock of finished goods 12000
Stock of stores, materials 12000 2) Average credit sales
Inland sales 8 weeks credit 600000 Export sales 2 weeks credit 160000 3) lagging payment of wages and outgoings
Wages 2 weeks 500000 Stock of materials 2 months 100000
Rent, royalties 6 months 20000 Clerical staffs 1 month 10000 Miscellaneous expenses 2 months 100000
4) payment advances Sundry expenses paid quarterly 20000
28. As a financial consultant prepare cash budget for the firm whom advice on the amount of overdraft they will require during with August, September details.
A. 50% of the credit sales are realized in the months following the sales and remaining sales 2nd month. Creditors are paid in the month following purchase.
Cash in Bank OD August is 50,000
Month Sales Purchase Wages
June 3, 60,000 2, 24,000 24,000 July 2, 84,000 2, 88,000 28,000
August 2, 16,000 4, 86,000 22,000 September 3, 48,000 4, 92,000 20,000
29. What is the difference between capital structure and financial structure?
8 Marks Questions:
1. Explain the scope of financial management? 2. What are the objectives of financial management?
3. Evaluate wealth maximization and profit maximization as primary objectives of a concept? Or Profit maximizatio n approach is not operationally feasible. Substantiate the statement.
4. Explain the constituents of the financial system and the role of importance of financial system?
5. Discuss about the emerging trends in the Indian financial system. 6. Explain the different types of Costs?
7. Explain the methods of valuation of shares? 8. Explain different methods for evaluating investment proposals? 9. Explain the inter-relationship between the three financial functions. 10. Explain the Capital Budgeting Process.
11. What are the factors influencing capital expenditure decision?
12. You are a financial analyst for XYZ Co. Ltd. The director of capital budgeting has asked to analyze two proposed capital investment. Project P and Q. Each project has a cost of Rs.10, 00,000 are the cost of capital for each project is 12%. The
projects expected net cash flows are as follows:
Year
Expected Net Cash Flows
Project ‘P’ Project ‘Q’
0 (10,00,000) (10,00,000)
1 6,50,000 3,50,000
2 3,00,000 3,50,000
3 3,00,000 3,50,000
4 1,00,000 3,50,000
Required:
a) Calculate each projects payback period. NPV and IRR.
b) Which project or project should be accepted, if they are independent?
c) Which project should be accepted if they are mutually exclusive?
d) How might a change in the cost of capital (k) produce a conflict between the NPV and IRR rankings of these two projects?
Would this conflict exist if ‘K’ were 5%?
13. An enterprise can make either of two investments at the beginning of 2004. Assuming that the required rate of return is 10% p.a. evaluates the investment proposals as under.
a) Pay back method b) Return on investment c) Profitability index
Particulars Project A Project B
Cost of investment R.40,000 Rs.56,000
Life 4 years 5 years
Scrap value Nil Nil
Net income (After Depreciation and Tax)
End of 2004 1,000 -
End of 2005 4,000 6,800
End of 2006 7,000 6,800
End of 2007 5,000 6,800
End of 2008 - 6,800
It is estimated that each of the alternative projects will require an additional working capital of Rs.4, 000 which will be
received back in full after the expiry of project life. Depreciation is charge under straight line method.
The present value of Re.1 to be received at the end of each at 10% p.a. is given below:
Year 1 2 3 4 5
P.V. .909 .826 .751 .683 .621
14. Keerthi ltd is considering the purchase of machinery. Two machinery S and T each costing Rs 200000 are available. Cash inflows are expected to be as under. Calculate
a) Pay back period
b) Post pay back period method.
Year machine S machine T
1 60000 20000
2 80000 60000
3 100000 80000
4 60000 120000
5 40000 80000
15. From the following information calculate the NPV of the two projects and suggest which of the two projects should be accepted assuming discount rate at 10%.
Particulars project x project y Initial investment 40,000 60,000
Estimated life 5 yrs 5 yrs Scrap value 2000 4000
The profits before depreciation and after taxes are as follows Year project x project y
1 10,000 40,000 2 20,000 20,000
3 20,000 10,000 4 6,000 6,000 5 4,000 4,000
16. Explain the factors influencing the working capital?
17. Briefly explain the necessity of investment in working capital and the factors affecting the level of such investments? 18. Explain the different sources of finance for funding working capital or short-term finance requirements.
19. What are the factors that influence credit policy of the firm?
20. A proforma a cost sheet of a company provides the following particulars.
Elements of cost Amount per Unit Materials 50% Direct labour 15%
Overheads 15%
The following further particulars are available:
a) It is proposed to maintain a level of activity of 6,00,000 units
b) Selling price is 20 per unit
c) Raw materials are expected to be in stores for an average of 2 months d) Materials will be in process, an average of one month
e) Finished goods are required to be in stock an average of 2 months f) Credit allowed to debtors is three months
g) Credit allowed to supplier is two months.
21. A cost sheet of a company provides you the following information.
Elements of cost Amount per Unit Materials 80
Direct labor 30 Overheads 60 Total cost 170
Profit 30 Selling price 200
The following further particulars are available.
Raw materials are in stock for one month (avg)
Raw materials are in process on an average for half a month.
Finished goods are in stock on an average for one month.
Credit allowed by supplier one month.
Lag in payment of overheads is one month
1/4th output is sold against cash.
Cash in hand and at bank is expected to be Rs.1, 25,000.
Credit allowed to customers 2 months.
You are required to prepare a statement showing the working capital needed to finance level of activity of 2,08,000 units of production.
22. Explain the factors determining capital structure?
23. Foods Ltd., is presently operating 60% level producing 36,000 packets of snack Foods and proposes to increase the capacity utilization in the coming year by 33 1/3% over the existing
level of production. The following data has been supplied. i. Unit cost structure of the product at current level:
Raw material 40 Wages 20
Variable overheads 20 Fixed overheads 10
Profit 30 Selling price 120
ii. Raw materials will remain in stores for one month before being issued for production. Material will remain in process for further
one month. Suppliers grant 3 months credit to the company. iii. Finished goods remain in godown for one month iv. Debtors are allowed credit for 2 months.
v. Lag in wages and overhead payment is one month Prepare a projected profitability statement and the working capital requirement at the new level, assuming that a
minimum cash balance of Rs.19, 500 has to be maintained.
24. What is a bonus issue or stock dividend? What are its advantages and disadvantages? 25. What is bonus issue or stock dividend? What are its advantages and disadvantages? 26. Determine the earnings per share of a company which has operating profit of Rs.4,80,000. Its capital structure consists of the
following securities. Securities Amount
10% debentures 15,00,000
12% preference shares 3,00,000
Equity shares of Rs.100 each 12,00,000
The company is in the 55% tax bracket.
1. Determine the company’s EPS.
2. Determine the percentage change in EPS; associated with 30% increase and 30% decrease in EBIT.
3. Determine the degree of financial leverage.
27. A company needs Rs 1000000 for construction of a new plant, the following 3 financial plan are feasible. a) the company may issue 1 lakh ordinary shares @ rs 10 per share
b) the company may issue 50000 ordinary share @ rs 10 per share and 5000 debentures @ rs 100 denomination bearing 8% rate of interest
c) the company may issue 50000 ordinary shares @ rs 10 per share and 5000 preference shares @ rs 100 per share bearing a 8% rate of dividend
If the companies EBIT are rs 20000, 40000, 80000, 120000 and 200000
What are the EPS under each of the 3 financial plans? Which alternatives would be recommended and why? Assume corporate tax @ 50%
28. Following information of business concern is available who chose book of A/c deemed 31/ of ever year.
Calculate EPS and return on equity capital A. 10,000 Equity shares Rs.10 earn and Rs.8 paid up of Rs.80, 000.
B. 10% 12,000 preference cash of Rs.10 and Rs.1, 20,000. C. Profit before tax Rs.80, 000. D. Rate of Tax applicable 50%.
29. The balance sheet of ABC Company Ltd as on 31-12-2007 gives the following details.
Balance Sheet
Liabilities Assets
Equity capital 30,00,000 Fixed Assets 40,00,000
Preference capital (5%) 6,00,000 Current Assets 10,00,000
10% Debentures 4,00,000
Reserve and Surplus
Profit and Loss a/c
4,00,000
General reserve 2,00,000
Current liabilities 4,00,000
Total 50,00,000 50,00,000
The net profit before interest and tax amount to Rs.2, 50,000 firm has the tax liability of 50%. Calculate return on
capital employed and return on net worth ratio
