Advanced Financial Management -2010Con. 5922-10. (FURTHER REVISED COURSE ) MR-5892

(3 HOURS) Total Marks : 60

Instruction to Students : 1) Answer any five questions. All questions carry equal marks2) Presentation should be neat and clean. Marks will be deducted for poor presentation3) All the sub-questions of the main question should be attempted together4) If students attempt more than five questions, only first five will be considered5) Every new question should start on a new page

1. Explain the important function of either Credit Rating Information Services of India Ltd (CRISIL) or Information & Credit Rating Services Ltd (ICRA)

2. a) Discuss the P/E ratio approach to stock valuationb) Describe and evaluate the adjusted book value approach to corporate valuation.

3. A firm has total sales of Rs.15lacs with 40% variable cost and total cost of Rs.900,000 it also has debt of Rs.800,000 at 10% rate of interest. If the tax rate is 45%, calculate:

a) Operating Leverageb) Financial Leveragec)Combined Leverage

4. A Ltd. Paid a dividend of Rs.5 per share for 2009-2010. the company follows a fixed dividend payout ratio of 30% and earns a return on 18% on its investments. Cost of capital is 12%. What is the price of the shares of A Ltd. As per Walter’s model?

5. Explain in brief any three of the following : a) Revival programme for a sick industrial unitb) Procedure pertaining to IPO’sc) Regulation of financial markets in Indiad) Rationale of disinvestment in public Sector Enterprisee) Important sources of financing long term projects in Indiaf) Financial interest rate Swaps

6. The following is the data regarding two Companies “X” and “Y” belonging to the same equivalent risk class:

Company X Company YNumber of ordinary shares 90,000 150,000

Market price per share Rs.1.20 Rs.1.00

6% Debentures 60,000 -------

Profit before interest Rs.18,000 Rs.18,000

All profit after debentures interest are distributed as dividends. Explain how under Modigliani & Miller approach, an investor holding 10% of shares in Company ‘X’ will be better off in switching his holding to Company ‘Y’

7. The balance sheet of Deepak Ltd. On December 31,2009 us shown below:

Particulars Rs. Particulars Rs.Share Capital 150 Fixed Assets 400Retained Earnings 180 Inventories 200

Term Loans 80 Receivables 150Short Term Bank Borrowings 200 Cash 50Accounts Payable 140Provisions 50

800 800

The sales of the firm for the year ending on December 31,2009 were 1,000. its profit margin on sales was 6% and its dividend payout ratio wad 50%. The tax rate was 60%Deepak Ltd. Expects its sales to increase by 30% in the year 2010. the ratio of assets to sales and spontaneous current liabilities to sales would remain unchanged. Linkwise the profit margin ratio, the tax rate and the dividend payout ratio would remain unchanged.

Required: a) Estimate the external funds requirement for the year 2010b) Prepare “Projected balance sheet” and Projected Profit & Loss Account” assuming that the external funds requirement would be raised equally from term loans and short term bank borrowings.

8. Acme Ltd is considering a capital project for which the following information is available

Investment Outlay 1,000 Debt equity ratio 1:1Project life 10 Yrs Depreciation (for tax purpose) SLMSalvage value 0 Tax rate 40%Annual Revenues 2,000 Annual cost 1,400Cost of equity 18% (excluding depreciation ,- Cost of debt (post tax) 10% Interest and taxes) --

a) Calculate the EVA of the project over its life:b) Compute the NPV of the project

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Advanced Financial Management -2009Con. 5190-09 (FURTHER REVISED COURSE ) DS-5735

(3 HOURS) Total Marks : 60

Instruction to Students :

Answer any five questions. All questions carry equal marksPresentation should be neat and clean. Marks will be deducted for poor presentationAll the sub-questions of the main question should be attempted togetherIf students attempt more than five questions, only first five will be consideredEvery new question should start on a new page

1. There are two main regulators to regulate the Indian Financial system –RBI and SEBI. Explain the role of SEBI in detail . do you think that these two agencies can be merged to create a super regulatory body for an effective regulation of the financial system?

2. a) Explain the different ways is which a venture capitalist can finance an investment proposal.b) What do you understand by financial derivatives? Explain in detail.

3. Write short notes any Three of the following : -a) Credit ration methodology for a financial instrumentb) Book building process for IPO

c) Revival programme for a sick industrial unitd) functions of investment banke) Rationale of disinvestment in Public Sector Enterprisef) Sources of foreign currency finance for a company

4. Following information is available form the books of XYZ Ltd.(Rs.In lakh )

Sales 500Cost of Raw Materials 200Labour cost for manufacturing 100Interest on borrowings 60

The capitalization rate for debt is 10% and the capitalization rate for the entire firm is 12.5%. assuming that the firm does not retain any earning and there is no tax, as per net operating income approach -

a) What is the total market value of the firm?b) What is the market value of the debt of the firm?c) What is the market value of the equity of the firm?d) What is the equity capitalization rate?

5. A firm has sales of Rs.10,00,000. variable cost is 70%, total cost is Rs.9,00,000 and Debt of Rs.5,00,000 at 10% rte of interest. If tax rate is 40% calculate : a) Operation Leverageb) Financial leveragec) Combined leveraged) If the firm wants to double up its earning before interest and tax (EBIT), how much of a raise in sales would be needed on a percentage basis?

6. a) ABC company Ltd. Is expecting 10% return on total assets of Rs.50lakh. the company has outstanding shares 20,000. the directors of the company have decided to pay 40% of earning as dividends. The rate of return required by shareholders is 12.5% Rate of return expected on investment is 15%. You are required to determine the price of the shares using Walter’s model.

b) The current market price of the shares of X ltd. Is rs.120 per share. The company is considering Rs.6.40 per share as dividend. The company belongs to a risk class for which the capitalization rate is 9.60%. Based on M and M approach calculate the market price of the share of the company when the dividend is declared and not declared. What is your learning out of it?

7. The income statement of Modern Electronics Limited for years I and II is given below (All figures are in Rs.Lakh) :-

Income Statement Year I (Rs.) Year II (Rs)Net Sales 2,400 2,670Gross Profit 1,830 2,040Cost of goods sold 570 630Selling expenses 180 195General and administration expenses 180 156Depreciation 150 192Operating Profit 60 87Non-operating surplus/ deficit 24 30Earnings before interest and tax 84 117Interest 30 33Earnings before tax 54 84Tax 21 30Earnings after tax 33 54Dividends 18 21Retained earnings 15 33

The balance sheet of Modern Electronics Ltd. as of the end of years I and II is given below: -

a) Using the per cent of sales method (except, assume that dividends are raised to 24, depreciation ot 180 and interest to 36) prepare the pro forma income statement for year III. Assume that the sales will be Rs.3,060 in year III.

b) Assume that all items on the assets side, except investment and miscellaneous expenditures and losses, will grow proportionally to sales. Likewise, trade credit will be proportional to sales. Finally estimate the amount of external financing needed for year III.

c) The tax rate expected is 35%. This will be the only provision in year III.

8. The following is the balance sheet of a corporate firm as on March 31, current year :-____________________________________________________________________________Liabilities Amount (Rs) Assets Amount (Rs.)____________________________________________________________________________

Share capital (Rs.100 Fully paid up) 200 Land & Buildings 80Reserves and surplus 80 Plant and machinery 160Sundry creditors & OtherLiabilities 60 Marketable securities 20

Stock 40Debtors 30Cash and bank balance 10

______________________________________________________________________340 340

_____________________________________________________________________

Profit before tax for current year end amount to Rs.128 lakh, including Rs.8 lakh as extraordinary incomeOf Rs,2 lakh in the current year form investments in marketable securities . it is not usual for the firm to have excess cash and invest in marketable securities. However, an additional amount of Rs.10 lakh per annum, in terms of advertisement and other expenses, will be required to be spent for the smooth running of the business in the years to come. Market values of land and buildings, and plant and machinery are

Balance Sheet Year I (rs) Year II (Rs)Assets :Fixed assets (net) 900 1,140Investments 60 60Current assets, loans and advances Cash and bank 36 42 Receivables 540 600 Inventories 519 576 Prepaid expenses 123 135Miscellaneous expenditures and losses 45 42

2,223 2,595LiabilitiesShare capital Equity 450 450Reserves and surplus 354 387Secured loans Term loans 432 525 Bank borrowings 489 597Current liabilities Trade creditors 378 501 Provisions 120 135

2,223 2,595

estimated at Rs.180 lakh and Rs.200 lakh respectively. In order to match the revalued figures of these fixed assets, additional respectively in order to match the revalued figures of these fixed assets additional depreciation of Rs.12 lakh is required to be taken into consideration. Effective corporate tax rate may be taken at 30 percent. The capitalization rate applicable to businesses of such risks is 15 percent.

a) From the above information. Compute the value of business, value of equity and price per equity share, based on the capitalization method

b) Assuming everything to be the same as given above calculate the expected market price of the share given the P/E multiple of ---(i) 8 times and (ii) 5 times

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Advanced Financial Management -2008Con. 5321-08 (FURTHER REVISED COURSE ) BB-8528

(3 HOURS) Total Marks : 60

Instruction to Students: 1) The question paper has two section : A and B. students must attempt questions form only One of these two sections.2) Total 5 questions are to be attempted. All Five questions must be either from section A or from Section B3) On the Top of the answer sheet the students must mention which section they have chosen4) Correct and to the point answers to theoretical questions will be assessed like practical problems. Thus, students attempting more theoretical questions will not be at a disadvantage5) it students attempt more than five questions, only first five will be considered6) All questions carry equal marks.

SECTION – A

1. Ellite India Ltd. A four year young company, is growing rapidly presently it has 80,000 equity shares of Rs.50 each and 10% debentures of Rs.20,00,000.The summary of income statement for last year is given below:-

SalesLess : V Expenses F Expenses EBIT Interest EBTTax (35%) PAT EPS

25,00,000 9,00,000

50,00,000

34,00,000

16,00,000 2,00,00014,00,000 4,90,000 9,10,000 11.38

The company further wants to expand its activities for which it is planning to make an additional investment of Rs.20,00,000There are two financing options: either 40,000 equity shares of Rs.50 each, or debt funds of Rs.,20,00,000 at 12% interestThe company wants to assess its position for two levels of sales projection for next year viz. Rs.70,00,000 and Rs.1,20,00,000The ratio of variable expenses to sales will remain the same next year and fixed expenses will be Rs.13,00,000 at Rs.70,00,000 sales and Rs.26,00,000 at Rs.1,20,00,000 sales.

For both the levels of sales projections the P/E ration is expected to be 2:5 in case of debto option and 3 in case of equity option.If the objective of the company is to maximize the market price of its shares then which financing option should it go for if the sales are Rs.70,00,000 and if the sales are Rs.1,20,00,000? 12 Marks

2. A company wants to assess the feasibility of a new project. It is not able to estimate the sales revenue and expenses and is not clear about sensitivity analysis. Using hypothetical figures explain to the company how it can do feasibility analysis of the project for three different levels viz. Pessimistic, expected and optimistic. 12 Marks

3 Explain with examples any two method of corporate valuation which can be used to calculate the value of a company. 12 Marks

4. Explain the various financing options in respect of infrastructure projects 12 Marks

5. What are the benefits to investors because of the existence of financial intermediaries ?Which are the important financial intermediaries in the Indian financial system? Explain. 12 Marks

6. a) Explain the important function of an investment banker and his role in primary issues management b) Explain in brief the process and methodology followed by a rating agency to rate a financial instrument

12 Marks

7. What are the possible causes of an industrial unit becoming a sick unit? What according to you, can be a typical revival programme to revive a sick unit? 12 Marks

8. Answer any two of the following :-a) Explain the role of SEBI, in brief as the regulator of financial marketsb) Explain in simple worlds ‘Financial interest Rate Swaps’c) Explain offshore/onshore instruments and multiple option bonds 12 Marks

9. Explain in brief, any Three of the following 12 Marksa) Due diligenceb) FIPB and joint venture formulationc) Loan syndicationd) Process of bond valuatione) Procedure of IPOf) Any five factors which determine the capital structure of a company

SECTION -- B

1. The balance sheet of International Trade Ltd. As on 31st March,2008 is as under :- 12 MarksAll figures are in lacs)

Liabilities Rs. Assets Rs.Equity Captial(Rs.10 Per share)10% Long Term debtRetained Earnings Current liabilities

90

1203060

BuildingMachineryStockDebtorsCash

1507550205

300 300

The total assets turnover ratio of the company is 3, its fixed operating cost is 1/6 of sales and variable operating cost is 50% of sales. The corporate tax rate is 35% You are required to :

i) Calculate the operating financial and combined leverageii) Calculate the market price of the share if the P/E multiple is 2.5

iii) Calculate the level of EBIT if the EPS is (a) Rs.15 (b) Rs.25

2. The exiting capital structure of Textile India Ltd. is as under :-

The company wants to raise Rs.25,00,000 for its expansion project for which it is considering the following options :-a) Issues of 20000 equity shares at a premium of Rs.25 per share

ORb) Issue of 10% preference shares

ORc) Issue of 9% debentures.

Company’s return on capital employed is 12% (on exiting as well as new funds) and corporate tax rate is 35%It is expected that the P/E multiples in case of the above three options would be 16, 13 and 12 respectively. Suggest the company, which alternative it should select and why?

3. a) ABC Co. Ltd has net present value of net assets Rs.100 lac which includes cash balance of Rs.10lac. it has to make the decision about declaring dividend. At the same time it is also exploring the possibility of investing in a new project. The company has three options : -

i) Do not declare any dividend and invest the available cash of Rs.10 lac in the new projects. The present value of the future cash flows generated by this projects is Rs.20 lac

ORii) Pay Rs.10 per share as dividend. This will take away the entire cah balance of Rs.10lac

ORiii) Pay dividend as suggested in the second option and also invest in a new project through a fresh equity issue of 1 lac shares of Rs.10 each. This investment will have the same effect of the company as in the first option, i. e. Rs.20 lac NPV from the project

Give your recommendation to the company as to which is the best option if the company wants to maximize the shareholder value.

b) The following information is available in respect of a company: Capitalization rate (Ke) = 0.12EPS = Rs.15Rate of return on investment (r) : (i) 0.15 (ii) 0.10

The company wants to know the effect on the market price of its shares under the two possibilities of (i.e. 0.15 and 0.10 ) under the two options (i) if it does not declare any dividend and (ii) if it declares Rs.15 as dividend.Using Walter’s model explain the results obtained by you.

4. The income statement and balance sheet of Five Star Ltd. is given below:-

Income Statement

Equity shares of Rs.100 eachRetained Earnings9% Preference shares7% Debentures

40,00,00010,00,00025,00,00025,00,000

Balance Sheet

Liabilities Rs. Assets RsEquity Capital(Rs.10 share)Retained earningsLong term loanCreditorsProvisions

50

40601513

BuildingMachineryStockDebtorsBank

807010126

178 178

The cost of equity and cost of debt is 10% and 12% respectively. The company pays 30% corporate tax.From the information given you are required to calculate the EVA. Also calculate MVA on the basis of Market value of equity capital

5. Describe the important sources of financing long term projects which can be used by the Indian companies. If they approach the financial institutions for long term finances, what important norms and policies financial institutions would apply to provide such finances? 12 Marks

6. The Balance sheet for the current year of a company is given below (all the figures are in Rs.lacs) :-

Liabilities Rs. Assets Rs.Equity CapitalRetained EarningsTerm LoanShort Term BorrowingsCreditorsProvisions

10012016012010040

Land & BuildingMachineryFurnitureBills ReceivablesDebtorsStockBank

20030301006018040

640 640Other information : Sales Rs.800

V. Expenses Rs.560F.Expenses Rs.160

The following are the projections for the next year :-

Rs. (in lacs)SalesInterest on investmentProfit on sale of old assets Total incomeLess: Manufacturing cost Admn. Cost Selling and distribution cost Depreciation Loss on sale of an old M/C EBITLess : Interest EBTLess : Tax (30%) PAT EPS 119 lac/5lac P/E ratio

500102

515

325

1806050305

1902017051

119Rs/23.82

1) The sales are expected to be Rs.1,0002) F. expenses will increase by 25%3) No Change in the ratio of variable expenses to sales4) Interest expenses will be Rs.205) No change in fixed assets. Ignore depreciation.6) Bank balance and other current assets will increase in proportion to sales7) Tax to be provided at 35%. This will be the only provision next year.8) Creditors will increase in proportion to sales.

You are requires to prepared the projected income statement and balance sheet of the company for the next year.If the company is required to raise funds (i.e. if liability side is less) they will be raised in the order of short term borrowings, term loan and if required equity capital. It is a policy of the company to maintain current ratio of minimum 1.25 : 1 and ensure that that long term loans do not exceed 40% of total long term funds.If the asset side is less then the difference will be considered as cash balance available

7. Explain the important functions of either Credit Rating Information Services of India Ltd. (CRISIL) or information and Credit Rating Services Ltd. (ICRA) 12 Marks

8. Which are the important financial intermediaries in the Indian financial system? How are they beneficial to the investors? Explain

9. Explain in brief, any three of the following 12 Marksa) important financial derivativesb) MOU between government and a PSUc) Venture capital funding in Indiad) Revival of a sick unit and viability studye) Regulation of financial markets in Indiaf) Procedure pertaining to IPOs

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