Assignment – Financial Management
( Due date of Submission : On or before 27th October, 2025 )
( Attempt any five questions)
Q1Comment on the following statements:
a) “The modern role of finance manager is wider than traditional role of the financial manager”.
b) “Wealth maximization is superior criterion than profit maximization.”
c) “ As there is no explicit cost of retained earnings , these funds are free of cost”. Critically comment.
Q 2a) Discuss the situations under which NPV and IRR method of capital budgeting gives similar and dissimilar results.
Which one is preferable out of the two ? Give reasons.
b) Wisec Ltd. has a machine with an additional life of 5 years which costs Rs 12 lakhs .Its present book value is Rs 4 lakhs. A
new machine costing Rs 20 lakhs is available. Though its capacity is the same as that of old machine, it will mean a saving
in variable costs to the extent of Rs 800000 per annum. The life of the machine will 5 years at the end of which it will have
a scrap value of Rs 2 lakhs. The rate of income tax is 40% and as a policy firm does not make an investment if the yield is
less than 12% per annum. The old machine if sold today will realize Rs 100,000. It will have no salvage value if sold at the
end of 5 years. Advice the company., whether or not the old machine be replaced ? Capital gain on sale of old machine is
also subject to the same rate of tax i.e. 40%.
Q3a) Bharat Ltd has the following capital structure on 31 March, 2023:
Rs
Equity shares (Paid up value Rs10) 80,00,000
10% Preference shares 20,00,000
14% Debentures 60,00,000
Total 1,60,00,000
The shares of a company currently sells for Rs 25. It is expected that the company will pay a dividend of Rs 2 per share
which will grow at 7 per cent forever. Assume a 50 percent tax rate. You are required to compute a weighted average cost
of capital on existing capital structure.
b) Distinguish between Book Value and Market Value in calculation of overall cost of capital.
Q4a) X Ltd. provides the following details:
Installed capacity 150000 units
Actual production and sales 100000 units
Selling price per unit Re 1
Variable cost per unit Re 0.50
Fixed costs Rs 38000
Funds required Rs 1,00,000
Financing Plans
Capital structure A B C
Equity shares of Rs 100 each to be issued at 25% 60% 40% 35%
premium
15% Debt 40% 60% 50%
10% Preference shares Rs 100 each - - 15%
Assume Income tax 40%.
Calculate
i. Degree of operating leverage, financial leverage and combined leverage for each financial plan.
ii. The indifference point between Plan A and B.
iii. The financial break-even point for each plan and suggest which plan has more financial risk.
Q5 a) Distinguish between Net Income approach and Net operating Income approach.
b) Given the financial data of two companies A Ltd. and B Ltd. Calculate the values of the two firms using Modigilliani –
Miller approach:
A Ltd. B Ltd.
EBIT 150000 150000
Debt 400000 -
Rate 10% -
Equity capitalization rate - 15%
Corporate tax 35% 35%
Q6 The two companies , U and L , belong to an equivalent risk class. These two firms are identical in every respect that U
company is unlevered while company L has 10% debentures of Rs 500,000. The other relevant data regarding their are as
follows :
Particulars L Ltd. U Ltd.
EBIT 100000 100000
Equity capitalization rate 0.16 0.125
There are no corporate taxes. Find the value of the two companies and illustrate the use of Arbitrage method for creating
equilibrium in the value of the two companies.
Q7a) Discuss the models showing relevance and irrelevance of payment of dividend payment on valuation of companies.
b) A company has net profit of Rs 500000 and currently has 100000 shares outstanding . Out of the net profit, the
company is planning to disburse Rs 1,00,000 as dividends to the existing shareholders. If the shareholder’s expected rate
of return is 16% and firm’s required rate of return is 13%, find the market price of the share using Walter model and what
will be optimum dividend payout ratio. Also find the market price of the share using Walter model at the optimum
dividend payout ratio.
Q8 A company provides you the following facts. Estimate the net working capital required for the project.
Estimated cost per unit of production
Cost element
Raw Material Rs 80
Direct labour Rs 30
Overheads (including depreciation Rs 10 per unit) Rs 70
Total Cost Rs 180
Additional information
Selling price Rs 200 per unit
Level of activity: 156000 units of production per annum
Raw material in stock : Average 4 weeks.
Work in progress (Assume 50 percent completion stage in respect of conversion costs and 100 per completion in respect of
material): Average 2 weeks.
Finished Goods in stock : Average 4 weeks
Credit allowed by suppliers : Average 4 weeks
Credit allowed to debtors: Average 8 weeks
Lag in payment of wages : Average 1.5 weeks
Cash at bank is expected to be Rs 25000
You may assume that production is carried out evenly during the years. All sales are on credit basis. Add 10% to your
computed figure to allow for contingencies.
Q9. The management of Zita Ltd is considering to change its present credit policy . The details of the options are
given below :
Credit Policy Present A B C
Sale 50 56 60 62
VC (80% of sales) 40 44 48 49.6
Fixed cost 6 6 6 6
Avg. Collection 30 45 60 75
period
Firm’s rate of investment is 20%. Assuming 360 days in a year , advise which of the option is best ?
Q10. Write short note on the following :
i. Cash discount
ii. Cost and Benefits of extending credit period
iii. Factors determining working capital requirement
iv. Operating Cycle.
