1. Get Answers of following Questions here
MBA Semester 2-SUMMER 2015
MB0045 - FINANCIAL MANAGEMENT
Q1. Critically analyze the four broad areas of strategic financing decision.
Strategic financing decision is concerned with the procurement of the least cost funds, and
its effective utilisation for maximisation of the net wealth of the firm. There exists a close
relation between the maximisation of net … Get complete Answers on www.smuHelp.com
Q2. 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.
FVIFA stands for "Future Value Interest Factor for an Annuity".
FVIFA calculated by expression [(1+i)n
– 1] / i)
Where,
i = Rate of interest
n = Time horizon or number of years
How is it different from Sinking fund factor? … Get complete Answers on www.smuHelp.com
Q3. A firm owns a machine furnishes the following information :
Rs.
Book value of the machine 1,10,000
Current market value 80,000
Expected salvage value after the end of five years of
remaining useful life
NIL
Annual cash operating costs 36,000
The firm’s cost of capital 15 %
Corporate tax rate 35 %
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.
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) 10,500
-------------------
2. 90,500
Present value of cash … Get complete Answers on www.smuHelp.com
Q4. 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?
Capital Asset Pricing Model – 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 model,
… Get complete Answers on www.smuHelp.com
Q5. Jharkhand Mining ltd. has to select one of the two alternative projects whose
particulars are furnished below:
Project E Project F
Rajrappa, Hazaribagh Tatisilwai,
Ranchi
Rs. Rs.
Initial Outlay 11,87,200 10,06,700
Net Cash Inflow :
End of year 1 10,00,000 1,00,000
2 2,00,000 1,00,000
3 1,00,000 2,00,000
4 1,00,000 10,00,000
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?
Solution:
The PV of Re. 1, to be received at the end of each year, at different cost of capital, is the
following:
… Get complete Answers on www.smuHelp.com
3. Q6. 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:
Credit period 1 month 2 months 3 months
Increase in sales
by
-- 10 % 30 %
Bad debts on
sales
1 % 2 % 5 %
Fixed costs will increase by Rs. 75,000 when sales increase by 30 %. The company
requires a pre-tax return on investment of 20 %.
Evaluate the profitability of the proposals and recommend the best credit period for
the company.
Solution:
The change of credit period from 1 month to 2 months is expected to increase the profit by rs
55667, which is more than rs 48583. Hance, the firm may … Get complete Answers on
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