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DRIVE

SUMMER 2015

PROGRAM

MBA/ MBADS/ MBAFLEX/ MBAHCSN3/ PGDBAN2

SEMESTER

SUBJECT CODE & NAME

MB0045

FINANCIAL MANAGEMENT

Qus:1 Critically analyze the four broad areas of strategic financing decision.

· Four broad areas of strategic financing decision

Answer:

Strategic financing decision:

An important decision which finance manager has to take is deciding source of finance. A company can raise finance from various sources such as by issue of shares, debentures or by taking loan

Qus:2 What is FVIFA ? Is it different from Sinking fund factor ?

A finance company offers to pay Rs. 44,650 after five years to investors who deposit annually Rs. 6,000 for five years. Calculate the rate of interest implicit in this offer.

· What is FVIFA ? Differentiate FVIFA and Sinking Fund factor

· Solve the case

Answer:

FVIFA:

The expression is called the Future Value Interest Factor for Annuity (FVIFA). This represents the accumulation of Re.1 invested at the end of every year for n number of years at “i” rate

Qus:3 A firm owns a machine furnishes the following information :

The firm follows straight line method of depreciation (permitted by the Income-tax authorities).

The management of the company is now considering selling of the machine. If it does so, the total operating costs to perform the work, now done by the machine, will increase by Rs. 40,000 p.a.

Advise the management.

Solve the case.

Solution:

Cash Inflows(if machine is sold)

Selling price of the old machine Rs. 80,000

Add Tax service (0.35xRs 30,000, short-term capital loss) 10500

-------------------

90,500

Present value of cash outflows saved if machine is not sold(PV of keeping machine)

Particulars

Amount before tax

Amount after tax

Qus:4 How will you compute the cost of equity capital using CAPM ?

The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a long-run level of future earnings of Rs. 7 per share. The current market price of Xavier’s share is Rs. 55.45. Floatation costs for the sale of new equity shares would average about 10 % of the price of the shares. What is the cost of new equity capital to Xavier Corporation ?

· How will you compute the cost of equity capital using CAPM ?

· Solve the case

Answer:

The cost of equity capital using CAPM:

This model establishes a relationship between the required rate of return of a security and its systematic risks expressed as “β”. According to this

Qus:5 Jharkhand Mining ltd. has to select one of the two alternative projects whose particulars are furnished below :

The company can arrange necessary funds @ 8 %. Compute the NPV and IRR of each project and comment on the results.

Is there any contradiction in the results ? If so, state the reason for such contradictions. How would you propose to resolve the contradictions ?

Solve the case

Solution:

The PV of Re. 1, to be received at the end of each year, at different cost of capital, is the following:

YEAR	8%	10%	12%	14%
1	0.926	0.909	0.893	0.877

Qus:6 Premier Steel Ltd. has a present annual sales turnover of Rs. 40,00,000. The unit sale price is Rs. 20. The variable costs are Rs. 12 per unit and fixed costs amount to Rs. 5,00,000 per annum. The present credit period of 1 month is proposed to be extended to either 2 or 3 months whichever is profitable. The following additional information is available :