ML | Paper Code: BCHCRS20 | Campus: MAIN | | Group/Module (if any): ~ Wt- S&7 y— QP | ‘Name of Paper Setter: SOURAV DAS Please type the Questions in this MS-Word file itself. Please DO NOT rename the file and change the settings of the file such as Page Setup, Margins, Font, Size. GROUP -A Answer ANY THREE questions. [3x5=15] 1. “Profit Maximization” always leads to the Wealth Creation’. Critically examine the statement. 2. Do the profitability index and the NPV criteria of evaluating investment proposals lead to the same acceptance-rejection and ranking decisions? In what situations will they give conflicting results? 3. Simba Limited has in issue 5,00,000 21.00 ordinary shares whose current ex-dividend market price is & 3,00 per share. The company has just paid a dividend of 54 paise per share, and dividends are expected to continue at this level for some time. If the company has no debt capital, what is the weighted average cost of capital? 4, Risk-free return: 15 %; Market return: 25 %; S.D. of market returns: 10 % S.D. of return from Share of Zomato: 15%; Correlation coefficient between return from share X and market returns is 0.50. Calculate the beta factor and expected return of Zomato’s Share. 5. Assume interest rate of interest is 12%. Compute the effective rate if interest is paid (i) Annually ({i) Semi-annually (iii) quarterly. What are the implication of more frequent payment of interest? GROUP-B Answer ANY FIVE questions. [5x7=35] 6. From the following information of Rishi Ltd, you are required to calculate: (iJ Net operating cycle period and, (ii) Number of operating cycles in a year. Raw material inventory consumed during the year % 12,00,000 Average stock of raw material & 1,00,000 Work-in-progress inventory & 10,00,000 Average work-in-progress inventory % 60,000 Finished goods inventory % 16,00,000 Average finished goods stock held & 80,000 Average collection period from debtors & 90 days Average credit period availed 60 days No. of days in a year 360 days 7. The following figures are availabler for Shurveer Industries Ltd. Net sales: £15 crores, EBIT 12% of net sales and combined leverage is 3 Capital Employed: : Equity 35 crores 13% Preference Shares of { 3 crore 15% Debt ¥Bcrores “Applicable Income tax is 40%. Compute (i) Return on equity and, (il) Operating Leverage: % 20,000 except 8. There are two companies Tesla Ltd. and Edison Ltd, having same bib “cost of equity of that Edison Ltd, is a levered company having a debt of % 1,00,000 @ n cess will Tesla Ltd. & Edison Ltd. are 10% and 20% respectively. Find how arbitrage Pro work : 9. Critically examine the Tradftional Approach to the Capital Structure Theories. [Link] rank for mutually exclusive proposals according to two methods are give below. You are required to advise the management on which one to select and why. ANDROID | 10S NPV 18 2nd LIRR 2na 18 11."MM hypothesis discusses how the value of the firm remains same whether the firm pays dividend or not.” Write your answer in this context with proof. 12. A company has a book Value per share of 2137.80. The Return on equity and IRR both are 15% and it follows a policy of retaining 60% of its earnings. Its opportunity cost of capital is 18%. Compute the share Price using Walter's Model and Gordon's Model. Also state what should be the optimum pay-out ratio. GROUP -C Answer ANY TWO questions. [2x15=30] [Link] the following information available from a manufacturing company, prepare a working capital requirement statement for the coming year. Expected annual sales is %1,30,000 units of 10 Per unit. The anticipated ratios of cost to selling price are: Raw material 50% and labour 15%, budgeted overhead is $52,000 per annum. Planned stock will include raw material for €50,000 and 7,500 units of finished goods. Credit allowed to debtors is 4 weeks. Credit expected to be received from suppliers is 3 weeks, For overheads, payment will be made 1 week after ineurring expenses, Materials will stay in process for 2 weeks. Cash in hand to be maintained for contingencies is 10,000. Arrangement of bank overdraft to the extent of 250,000 has been made. Assume mat production is carried out evenly throughout the year and the overheads accrue similarly. 14.(a)A machine purchased six years back for %1,50,000 has been depreciated to a book value of 290,000. It originally had a projected life of 15 years (salvage nil). There is a proposal to replace this machine. Anew machine will cost %2,50,000 and result in reduction of operating cost by 230,000 paa. for next nine years. The existing machine can now be scrapped away for %50,000. The new machine will also be depreciated over 9 year period as per straight line method with salvage of 25,000. Find out whether the existing machine be replaced given that the tax rate applicable is 50% and cost of capital 10% (profit or loss on sale of asset is to be ignored for tax purpose). (b)What is capital rationing? [10+5] [Link] short notes (any three): (a) “Systematic risk” and “Unsystematic risk”. (b) Baumol’s Model of Cash Management. (0) ‘External Yield Criterion’. (d) Financial Break-even Point.ropa INT. St4- T & 1. Theory aes 2. Theory 3. Cost of equity = D/MPs = 9.54 3=0.18 = oo fi /3=0.18 = 18% ; acc = Cost of equity = 18% Cov (RaRn) = Fem. [Link] Dm =0.5: = Beta= 0.007570 192 pa” OSX 0S 0.10 =0,0075 Expected return on Security x = 9 1S + 0.75 i = 0.15 + 0.75(0.25-0.15) =22: 5. (i) Annually = (140.12)-1=17% ; one (ii) Bi-annually = (1+0.12/2)2.4249 36% (iii) Quaterly = (+0.12/4)42 =12.55% Group-B g material /Average Cost of Raw tion per day= 1,00,000/(12,00,000/3 60)=30days Work-in-progress holding period (W) = Average Work-in-progress inventory/ Average Cost of Production per day=60,000/(10,00,000/360)= 22days Finished Goods storage period (F) =Average stock of finish Sold per day=80,000/(16,00,000/ ied goods/Average Cost of Goods 360)= 18days Receivables (Debtors ) collection period (D) = 90 days Credit Period allowe 'd by creditors (C) = 60 days Net Operating Cycle = R + W+ FeD-c =30 +22 +18 + 90 - 60 = 100 days Number of Operating Cycles in a year = No. of days in a year /Operating Cycle period=360days/100days=3.6times 7. EBIT (12% of Net Sales) 1,80,00,000 Less: Interest (15% of Rs.3,00,000 45,00,000EBT EBT | 1,35,00,000 Less: Tax @ 40% 54,00,000 EAT | 81,00,000 Less: Preference Dividend (13% of Rs.1,00,00,000) | 13,00,000 EAESH | 68, (@) ROE = (EAESH/Eq Share Capital) 100 =(68,00,000/5,00,00,000)x100 =13.6% (li) Calculation of Operating Leverage Financial Leverage = EBIT/[EBIT-I-(P/(1-t))] 80,00,000/ 1,80,00,000-45,00,000-(13,00,000/.06} 5882 Operating Leverage = Combined Leverage/Financial Leverage=3/1.5882 =1.89 8. Value of the firm = Tada Waison 20,000 NOI (EBIT) 20,000 1,00,000 Debt (D) rae : = om x a Value of equity capital (S) 2,00,000 (EBIT-Interest )/Ke Total value ofthe firm (V)= | 2,00,000 1,65,000 S+D Arbitrage Process: iFyou have 10% shares of unlevered firm ie. investment of 10% of € 2,00,000 = ¥ 20,000 and Return @ 10% on € 20,000. Investment will be 10% of earnings available for equity i.e. 10% « % 20,000 = € 2,000. Alternative strategy will be: Sell your shares in unlevered firm for % 20,000 and buy 10% shares of levered firm's equity plus debt. 10% equity of levered firm 2 6,500. 10% debt of levered firm % 10,000 Total investment in levered firm % 16,500 Your resources are ¥ 20,000 Surplus cash available = Surplus ~ Investment = & 20,000 - 16,500 = ¥ 3,500 Your return on investment is: 7% on debt of X 10,000 & 700 10% on equity ie. 10% of earnings available for equity holders (10% x % 13,000) % 1,300 Total return & 2,000 In both the cases the return received is € 2,000 and still you have excess cash of 33,500. Hence, you are better off by doing arbitrage i.e. you will start selling unlevered company shares and buy levered company’s shares thereby pushing down the value of shares of unlevered firm and increasing the value of levered firm till equilibrium is reached. 9. Theory 10. Theory/Concept [Link] [Link]=r=15%=0.15 EPS=15% of Rs.137.81 Ke=18%=0.18 Walter Model=27k2@—_827 tas 2067"827)_p. 199 35 Ke 076 £(-b)__20673040__p. 94.97 Gordons Model 0.18~(0.60x0.15) Optimum payout ratio should be 100%alue of old machin gue =2,50,000-50,000e Determination of Adtona Annual 50,000-2,00,009 [Savings in operating cose =e now After Tax (Cla) Less Additional depreciation | 30000 | New Machine [(250000-2 5000)/9] Old machine [9000/9 25000 > | Net Savings before tx (EET) [eh (15000) | Less : Tax @ 50% ; {15000 | 7500 oan EAT Add : Additional depreciation an CAT 22500 | | Terminal Cash Inflow at the end of year 9= Salvage value of new machine=25,000 [Year| CIAT PV factor at 10%] PV 19 22,500 5.759 1,29,578 9 25,000 0.424 10,600 (Terminal Cash Inflow) Total PV| 1,40,178 | Less: PV of Cash Outflow (COs) 2,00,000 INPV(<0) (-) 59,822] ‘The machinery should not be replaced as the proposal has a negative NPV. 14. Working Notes (i) Weekly production=130000/52=2500units (ii)__ Calculation of Cost per unit Raw material(S0%ofRs.10) |_ 5.00 | Labour(15%ofRs.10) 1.50 Overhead(52000/130000) | 0.40 Total Cost) 6.90 Profit 3.10 Sales 0.00 | (iii) Calculation of average cost and profit per week: Raw material (2,500 x 5) | 12,500 | Labour (2,500x¥1.50) | 3,75 Overhead (2,500 x 0.40) | 1,000 Total Cost | 17,250 Profit(2,500x340) 7,750 | iv) Calculation of Time : _ (a) Raw Material in store=(Value of raw materials in store/Weekly cost of raw materials)=50000 /(2500unitsx5)=4 weeks (b) Finished Goods=(No. of units stored/weekly production)=(7500units/2500units)=3weeks(v) Wages and overhead for WIP has been taken as (vi) Profit is assumed to be included in debtors. half of the specified processing period. Particulars Weekly | Time | Raw | Work-n | Finished | Debtors | Creditors] Total Average lag | Mate- | Progress | Goods Cost | (weeks) | rials | lars | x x 7 7 x = | (axa) (a) (b) C) | @ | en 1, Raw Materials: 12500 (i) in Store 4 50000 (il) in WIP a 25000 |i in Finished Goods 3 37500 | (iv) in Debtors | 4 50000 | Gross Block B Less : Credit from (3) 37500 Creditors Net Block 13 125000 2. Labour: 3750 @inwip 1 3750 | Ti)in Finished Goods 3 11250 (ii) in Debtors a 15000 Gross Block/ Net 8 30000 Block 3. Overhead: 1000 @inwiP 1 1000 {ii) in Finished Goods 3 3000 (ii) in Debtors 4 pond Gross 8 i 1 1000 Outstanding overhead Net Block 2 mee 4. Profit 7750 7; 5000 1000 {iin Debtors S000} 28750 | 51750] 100000 | 38500 | 193000 | Add: Contingencies - aioe Gash 203000 Total Working pre of 8203000, €50,000 has been arranged from bank overdraft So Out of Working capital requiremen balance (203000-50000) 153000 has to be arrange [Link] d from different other sources.