Special Study in Finance April – 2002 60 Marks Note: (1) Section I, Question No. 1 and 2 are compulsory. (2) Attempt any three questions from Section II. Section — I (1) Concept Testing: (a) What is Buy-Back of Shares? (b) Explain the provisions of MAT. (c) Explain primary and collateral security with examples. (d) Explain why internal Accruals are considered as the cheapest source of finance. (e) Explain role of a lead Manager. (2) The following data is available in respect of Jay Textiles Ltd.: 1) The company was incorporated in 1982 with the Promoters having an experience of more than 35 years in the textile field and is a brand leader in micro yarn. 2) The company proposes to borrow the term loan under TUFs (Technology Upgradation Fund Scheme). 3) The present installed capacity is 10 machines or 6000 TPA of polyester texturised yarn. 4) The additional investment will increase the installed capacity by 3600 TPA. 5) The present and proposed set up is at Silvassa backward area and enjoys Income tax holiday for 5 years. Tax Rate is 40%. 6) GIIC, GSFC and SBI financed the present unit. All the accounts are regular. 7) The project will lead to economies of scale, reduced cost of productions higher production due to yarn speed being faster due to latest generation machine, best quality due to the modernized machine. 8) The expected ROl of the project is 18%. 9) Depreciation for Project is Rs. 400 Lacs every year. 10) The cost of proposed project and the means of finance are as follows: (15 ) (15 )
Transcript
Special Study in FinanceApril – 2002
60 Marks
Note:(1) Section I, Question No. 1 and 2 are compulsory.(2) Attempt any three questions from Section II.
Section — I
(1) Concept Testing:
(a) What is Buy-Back of Shares?(b) Explain the provisions of MAT.(c) Explain primary and collateral security with examples.(d) Explain why internal Accruals are considered as the cheapest source of
finance.(e) Explain role of a lead Manager.
(2) The following data is available in respect of Jay Textiles Ltd.:
1) The company was incorporated in 1982 with the Promoters having an experience of more than 35 years in the textile field and is a brand leader in micro yarn.
2) The company proposes to borrow the term loan under TUFs (TechnologyUpgradation Fund Scheme).
3) The present installed capacity is 10 machines or 6000 TPA of polyester texturised yarn.
4) The additional investment will increase the installed capacity by 3600 TPA.
5) The present and proposed set up is at Silvassa backward area and enjoysIncome tax holiday for 5 years. Tax Rate is 40%.
6) GIIC, GSFC and SBI financed the present unit. All the accounts are regular.
7) The project will lead to economies of scale, reduced cost of productions higher production due to yarn speed being faster due to latest generation machine, best quality due to the modernized machine.
8) The expected ROl of the project is 18%.
9) Depreciation for Project is Rs. 400 Lacs every year.
10) The cost of proposed project and the means of finance are as follows:
(15)
(15)
TY BMS – Sem VI Page 1 of 3 Special Study in Finance
Special Study in FinanceApril – 2002
60 Marks
Proposed Project Rs. In LacsCost of ProjectLand and Site DevelopmentFactory Building
27155
Plant and Machinery Electrical Installation Misc. Fixed AssetsPre-operative ExpenseContingenciesMargin Money for Working Capital
16042410206793
TOTAL 2000
Means of FinancePromoter’s FundAdditional Equity Share CapitalInternal Cash Accrual
Rs. In Lacs
300500
Term Loan 1200TOTAL 2000
11) The Term lending institution has Interest rate of 13% for similar risk project and the loan is repayable in 5 years with installment and interest repayable at the end of each year.
General Manager of the Term Lending Institution has requested you to
(a) Prepare Flash Report from the point of view of the Term lending institution.(b) Evaluate the project for Profitability in the next 5 years.(c) Calculate the Debt Service Coverage ratio for the Term Loan.
Section — II
(3) Company A wishes to takeover Company B. The financial details of the two companies are given as under:
Particulars Company A (Rs.) Company B (Rs.)
(10)
Equity Shares (Rs.10 per share) Share Premium AccountProfit and Loss Account10% Preference Shares10% Debentures
1,00,000Nil
38,00020,00015,000
50,0002,0004,000
Nil5,000
Total 1,73,000 61,000Fixed AssetsNet Current Assets
1,22,00051,000
35,00026,000
Total 1,73,000 61,000Maintainable Annual Profits (after tax) Market Price per Equity share (Rs.) Price Earnings Ratio
26,0002410
15,00027
9
TY BMS – Sem VI Page 2 of 3 Special Study in Finance
Special Study in FinanceApril – 2002
60 Marks
In order to determine the terms of exchange ratio, the company has approached you for valuation of shares based on:
(i) Net Asset Value(ii) Earning per share(iii) Market price per share
(4) M/s Onward Technology has short listed two projects A and B for final consideration. It wants to take up only one project of the two and not both. The investment required for project A is Rs.190 Lakhs while that for project B is Rs.400Lakhs. The other details related to Project A and B are given below:
PROJECT AYear Depreciation Profit Before Tax Profit After Tax
I 24 78 56II 20 82 60III 16 100 74
(10)
PROJECT BYear Depreciation Profit Before Tax Profit After Tax
I 78 104 82II 64 118 92III 54 260 186
The cost of capital of company is 14% and the present value of Re.1 at the end of first, second and third year @ 14% rate is 0.8772, 0.7695 and 0.6750 respectively. Using Net Present Value Method, which project would you recommend.
What will be your answer under Pay Back Period Method?
(5) Discuss “Companies prefer to issue bonus shares to payment of dividend but investor prefer dividend to bonus shares”.
(6) Describe the impact of corporate taxation on corporate financing. Elucidate your answer with suitable examples.
(7) Discuss briefly the contents of a prospectus for issue of shares.
(10)
(10)
(10)
TY BMS – Sem VI Page 3 of 3 Special Study in Finance
Special Study in FinanceApril – 2003
60 Marks
Note:(1) Section I, Question No. 1 and 2 are compulsory.(2) Attempt any three questions from Section II.
Section — I
(1) Concept Testing:
(a) Pari Passu Charge.(b) Authorized and Subscribed Capital.(c) Internal Rate of Return.(d) Statement in Lieu of Prospectus.(e) ROI Composition.
(2) You are approached by a Financial Institution to appraise the following
project:
Name of the Borrower: Blue Lines Chemicals Private Limited
Proposed loan is taken to set up a chemical unit for processing industrial waste
into a marketable product XYZ. The product has a demand for 50,000 Litres. The
processing costs include variable cost Rs. 5 per Litre and fixed cost (excluding
depreciation) Rs.30,000 per year. Advertising expenses are also expected to be Rs.
20,000 per year.
XYZ can be sold at Rs.10 per Litres. Raw Material (Industrial Waste) is available
at Re. 1 per Litre. The Capital Cost of Chemical Unit is Rs. 7,50,000. The company has
applied for a loan of Rs. 6,00,000 for a term of 10 years that is over the life of the asset.
The promoters of this company are young, dynamic and highly qualified people but are
doing the venture for the first time.
The Promoters are unable to provide any collateral security for the loan except
Personal Guarantee of their parents. They have thought of this project after market
research. The said research has stated in the risk factors about invasion of South Korea
in Chemical Market and drastic reduction in Selling Price of similar products.
The above unit is a SSI unit and its average tax rate is 20%.
Interest Rate is 12% p.a. Loan is repayable equally in 10 annual installments along with
interest at the end of each year. You are required to:
Questions:
1) Give the Cashflow generated by the above project for the first 3 years only.
2) Calculate the Debt Service Coverage ratio for the above 3 years.
3) Prepare Flash Report presenting the above information to the FinancialInstitution.
(15)
(15)
TY BMS – Sem VI Page 1 of 3 Special Study in Finance
Special Study in FinanceApril – 2003
60 Marks
Section — II
(3) The following is the abridged financial statement of Auto Company.
The Management of the company proposes the following:(1) Payment of Cash Dividend @ 10%.(2) Issue Bonus Share to existing shareholders in the ratio of 1 share for every 10shares held.
Calculate:(a) Value of Shares before the above proposals.(b) Value of Shares after Cash Dividend but before Bonus.(c) Value of Shares after Cash Dividend and after Bonus.(d) Retained Earnings after the above proposals.(e) Value of Assets and Liabilities after the above proposals.
(4) The total available budget for the company is Rs. 20 Lacs. The Projects have been
ranked in the order of Profitability.
Project Cost (Rs. In Lacs) Profitability Index
M 6N 5O 7P 2Q 5R 13
1.501.251.201.151.101.40
(a) Calculate(i) Cash Inflow for each of them projects.(ii) Net Present Value for each of the projects.
(b) Which projects should be undertaken by the company in order to maximize the Net Present Value under Capital Rationing assuming that the each Project is indivisible?
(5)
(5)
(5)
(a) Explain the provisions of MAT and its implications of Corporate Financing
(b) Explain whether Dividend declared to shareholders reduces the tax liability
under MAT.
(5)
(5)
TY BMS – Sem VI Page 2 of 3 Special Study in Finance
Special Study in FinanceApril – 2003
60 Marks
(6)(a) Discuss the role of Merchant banker in the following:
(i) Portfolio Management.(ii) Mergers and Acquisition.
(b) Explain briefly four qualities of good Merchant banker.
(7) Discuss the various theories of explaining Dividend Policy of the company.
(6)
(4)
(10)
TY BMS – Sem VI Page 3 of 3 Special Study in Finance
Special Study in FinanceApril – 2004
60 Marks
Note:(1) Answer all the questions in Section I.(2) Answer any three questions from Section II. Each question in this Section carries 10 marks.
Section — I
(1) Attempt the following:
(a) What is authorized share capital?(b) What is margin money?(c) What is stock split?(d) What is DCF technique in capital budgeting?(e) What is statement in lieu of prospectus?
(2) The Directors of the following two Indian Companies have approached you
with their concern for the current scenario and future prospects
(1) Madhur Products Limited is an established company in the field of dairy
products, chocolates and ice creams. It has a decent track record of Dividend,
which averages @ 40 % p.a. The Company has also a good record of Bonus
issue. The last Bonus Issue ‘was made in September, 2000.
The Company feels that due to the conspiracy hatched by its competitors with
the help of widespread network of distributors, the Company’s products were
shown to have been contaminated and it was also widely shown on the media
that under the wrappers of many of their chocolates and ice creams, there was
a layer of fungus and decayed dry fruits. The snaps and live interview of the
consumers complaining about the inferior quality and “totally unsafe for human
consumption” shouts, drastically brought down the sale in the last quarter of the
Financial Year 2003—04.
The Directors immediately undertook damage controlling steps and through
wide scale advertisement campaign tried to restore the public confidence.
However the current years performance is very much lower than the earlier
years and any prudent financial consultant would not recommend dividend more
than 20% this year.
The Directors are of the opinion that the sale would again pick up from the
second quarter of the next year and there will be a complete normally
thereafter.
(15)
(15)
TY BMS – Sem VI Page 1 of 3 Special Study in Finance
Special Study in FinanceApril – 2004
60 Marks
(2) HU-MA-NE Software Ltd. is a well established company in the field of
software development, e—service provider and man power consultancy service.
Its clients is mainly in the banking, airways and transport sector. Almost 60% of
the revenue comes from overseas clients. It has shown a steady growth
and progress for last five years and has paid dividend of 15%, 15%, 17%, 20%
and
25% and still a large amount of profits were ploughed back every year. Till
December, 2003 everything was going smoothly, but all of a sudden the
overseas countries having maximum business associates, saw the rise of anti-
outsourcing agitations. The problem got further aggravated by rupee becoming
stronger day by day against the US dollar. The Company some how managed
to complete the ongoing contract but is not so sure of the future prospects. The
Company is also in the process of finalizing new business ventures with “non-
affected countries” and also taking steps to expand its operations more in India.
The Company is hopeful of getting the better results for all its efforts.
Give your guidance in each of the case, with special reference to
the issues related to Dividend/Bonus policy and future share price
behavior on the stock exchange.
Section — II
(3) Monica Engineering Ltd. gives you the following information of their income for the
year ended 31.3.2003:(10)
SalesCost of salesGross ProfitAdd: Transfer from Contingency ReserveLess: Office Overheads Selling and distribution DepreciationProvision for Income tax Transfer to General Reserve Proposed DividendNet profit carried to Balance sheet
(1) The Carried Forward business loss from last year is Rs. 4,05,600.(2) Depreciation allowable as per Income Tax Act is Rs. 9,20,300.(3) Corporate Tax rate is 35% + Surcharge @ 5% and MAT u/s 115 JB is @ 7.50%
+ Surcharge @ 5%.
You are required to calculate the amount of tax payable by the Company for the year ended 31.3.2003 after taking into account the provisions of MAT u/s 115JB of LT. Act,1961.
TY BMS – Sem VI Page 2 of 3 Special Study in Finance
Special Study in FinanceApril – 2004
(4) What are the key steps involved in obtaining term loans?
(5) Discuss in brief method of valuation of Equity Shares.
60 Marks(10)
(10)
(6) The existing manufacturing units has yearly fixed overheads of Rs.1,00,000. It
wished to expand the production by purchasing one of the two types of machinery
Model A and Model B, each costing Rs.5,00,000 and having the estimated life of 5
years. The estimated annual Sales and Cost under both of these models are given
as under:
(10)
Model A (Rs.) Model B (Rs.)
Sales 20,00,000 24,50,000
Materials 9,20,000 11,12,200
Labour 4,12,450 5,67,800
Variable Overheads 3,80,900 4,95,670
Compute the comparative profitability of each model of machinery under the
payback period and also calculate payback profitability. Ignore depreciation and
taxation.
(7) Write Short Notes on:
(a) International Sources of Finance(b) Underwriting of shares
(10)
Page 3 of 3Special Study in
Finance
Special Study in FinanceApril – 2005 60 Marks
Note:(1) Answer all the questions in Section I.(2) Answer any three questions from Section II. Each question in this Section carries 10 marks.
Section — I
(1) Attempt the following:
(a) What is the principle underlying Discounted Cash Flow Techniques in CapitalInvestment Decisions?
(b) What is a Shelf Prospectus?(c) What are the matters covered in a Marketing Appraisal of a Term Loan
Appraisal?(d) What do you understand by the term stock-split and consolidation of shares?
What is their impact on the Balance sheet of a company?(e) State the main functions of Securities and Exchange Board of India.
(2) Royal Industries has for many years enjoyed a moderate stable growth in
sales and earnings. In recent years it is facing stiff competition in a plastic product
line and consequently its sales have been declining. Apprehending further decline in
its sales, its management is planning to move eventually out of plastic business
altogether and develop a new diversified product line in growth oriented industries.
To execute the proposed investment plan of this year a capital outlay of Rs. 12
crores is necessary to purchase new facilities to start manufacturing a new product.
The estimated rate of return on fresh investment is 20 percent per annum.
The company has been paying a dividend of Rs. 1.50 per share on 4 crore
outstanding shares. The dividend policy has been to maintain a stable dividend of
Re. 1 raising it only when it appears that earnings have reached a new permanently
higher level. The directors may change such a policy if there are compelling reasons to
do so. Total earning of the current year are Rs. 10 crores. The current market
price of the equity share is Rs. 15 and the firm’s Debt/Assets ratio is 40%. Current
costs of various forms of financing are:
Debentures 13%, New equity shares sold at Rs. 15, Required rate of
return is 10 percent.
(i) What would be an appropriate policy for the company?
(ii) What assumptions, if any, do you make in your investors’ preference for
dividends versus capital gains?
(15)
(4)(3)
TY BMS – Sem VI Page 1 of 3 Special Study in Finance
Special Study in FinanceApril – 2005
60 Marks
(3) ABC Ltd. has made a rights offer (to its existing shareholders) of one share for
every 3 shares held @ Rs. 25 per share. The current market price per share of the
company is Rs. 40. A presently holds 1000 equity shares of the company. Before
deciding on the acceptance of the rights offer, he would like to know answers to the
following questions:
(i) What is expected to be the market price of the share after the rights issue?
(ii) What is the value of the right to the shareholder per shares held by him?
(iii) If he renounces his shares in favor of his friend for a price which is the value
of the right, what would be the change in his wealth?
(iv) What would be the change in his wealth if he remains dormant and let go the
right offer? Advise him.
Section — II
(4) Discuss the financial ratios used for appraisal of Term Loan Proposals.
(5) What are Mutual Funds?
What is meant by NAV of a Mutual Fund Scheme? What
are the different types of Mutual Fund Schemes? Which
is the regulatory body of Mutual Fund Schemes?
(6) What is Capitalization of Reserves? What are the guidelines issued by SEBI with in
this regard? How does it affect the Balance sheet of a company?
(7) Following are the data on a capital project evaluated by the management of EFG
Ltd.
(2)(2)(2)(2)(2)
(2)
(10)
(2)(2)(5)(1)
(10)
(10)
Annual Cost SavingUseful LifeIRR
Profitability IndexNPV
Cost of Capital Cost of Project Payback Salvage Value
Rs. 40,0004 years
15%1.064
????0
Find the missing value considering the following table of thediscount factors only:
Discount Factor 15% 14% 13% 12%1st Year 0.869 0.877 0.885 0.8932nd Year 0.756 0.769 0.783 0.7973rd Year 0.658 0.675 0.693 0.7124th Year 0.572 0.592 0.613 0.636
Total 2.855 2.913 2.974 3.038
TY BMS – Sem VI Page 2 of 3 Special Study in Finance
Special Study in FinanceApril – 2005
60 Marks
(8) The Balance sheet of Ganesh Ltd. as on 31-3-2005 was as under:
Liabilities Rs. Assets Rs.
(10)
2,000 Equity Shares of
Rs.100 each
2,00,000 Land & Building 1,25,000
General Reserve 50,000 Machinery 75,000
Profit & Loss A/c 25,000 Investment at Cost
(Market Value Rs. 37,5000)
45,000
Creditors 45,000 Debtors 50,000
Provision for Taxation 20,000 Stock 37,500
Provident Fund 17,500 Cash & Bank 25,000
Total 3,57,500 Total 3,57,500
Additional Information:
(i) Land & Building and Machinery are valued at Rs. 1,37,500 and Rs. 55,000
respectively.
(ii) Of the total debts Rs. 2,500 are bad.
(iii) Goodwill is to be valued at Rs. 25,500
(iv) The normal dividend declared and paid by such
type of companies is 15% on the paid-up capital
(v) The average rate of dividend, declared and paid
by the company is 18% on its paid-up capital.
Calculate the fair value of an equity share of the company.
TY BMS – Sem VI Page 3 of 3 Special Study in Finance
Special Study in FinanceApril – 2006
60 Marks
Note:(1) Section I is compulsory(2) Answer any three questions from Section II(3)Use of simple calculators is permitted(4)Figures to the right indicate marks(5)Make suitable assumptions wherever required.(6) Working notes, if any, shall form part of your answers.
Section — I
(1) Answer the following:
(a) What are the types of share capital?(b) What is MAT?(c) What is IRR?(d) What is social wealth?(e) What is Capital Rationing?
(15)
(2)
(a) Mr. Anil Sane, a fresh MBA, wishes to start a Manufacturing Unit from his
ancestral factory premises. He has Rs.1,05,200 in his bank account. His
parents have promised to gift him Rs.3,50,000.
He has estimated the project cost at Rs.18,00,000 of which machinery will
be Rs.15,25,000 and the remaining amount will be for furniture and fittings. The
bank finance is available to the extent of 80% of the project cost. He expects
first year’s sales at Rs.40,00,000 with annual increase of 20% every year over
previous year. The cost of sales will be 80% of sales. The rate of interest on
loan will be 10% on reducing balance method. The loan is repayable @
Rs.3,00,000 at the end of every year. He charges depreciation @ 20% on his
fixed assets under straight line and his other overheads for three years are
Rs.2,00,000, Rs.3,00,000 and Rs.3,60,000 per year respectively. You are
required to prepare the Projected Profit & Loss account and Projected Balance
Sheet for the first three years of operations to be presented to the bankers,
assuming that the first year is also a full year of 12 months activities and rate of
income tax is flat @ 30%
(b) Also find out any five plus points of the above loan proposal from Banker’s
Point of view.
(10)
(5)
TY BMS – Sem VI Page 1 of 3 Special Study in Finance
Special Study in FinanceApril – 2006
60 Marks
Section — II
(3) Evaluate the merits of Internal Funding and External Funding.
(4) Discuss recent controversies related to IPOs and multiple Demat Accounts.
(5) Explain the impact of inflation on corporate financing, covering al the aspects in
detail.
(6) M/s Maha Sweet would like to setup a food-processing unit. The technology for the
processing is always on improvement and hence the propose unit would become
obsolete within four years of operation and would be scrapped. The company
estimates to achieve sales of Rs.50 lakh in the first year of operation. This will be
double every year. Net profit margin is 50%. Initial Outlay is Rs.5 crores. Company
will also pump-in initial working capital of Rs.1 crore. Scrap value of the unit is Rs.1
crore. Depreciation on SLM basis.
Present Value table of Re.1 is as follows:
Years 1 2 3 4
17% 0.855 0.731 0.624 0.534
18% 0.847 0.718 0.609 0.516
(10)
(10)
(10)
(10)
Calculate:
(a) Payback Period
(b) Payback Profitability
(c) NPV at 17% discounting rate
(d) NPV at 18% discounting rate
(e) IRR
TY BMS – Sem VI Page 2 of 3 Special Study in Finance
Special Study in FinanceApril – 2006
60 Marks
(7) Gems Ltd. Gives you the following information as on 31.3.2006
1 Tangible Fixed Assets Rs.15 lacs
2 Patents Rs.5 lacs
3 Investments Rs.1 lacs
4 Current Assets Rs.10 lacs
5 Long Term Loan Rs.5 lacs
6 Current Liabilities Rs.3 lacs
7 Share Capital:
(10)
20,000 – 10% Pref. Shares of Rs.10 each
50,000 – Equity Shares of Rs.10 each
8 Average Profit after tax, but before dividend
on Pref. Shares
Rs.2 lacs
Rs.5 lacs
Rs.4 lacs
9 Normal Rate of return for industry 19%
The patents are worthless while 50% of the fixed assets are appreciated by 20%
From the above you are required to calculate value of an equity share of the company
under:
(1) Net Worth Basis
(2) Yield Basis
(3) Fair Value Basis
**********
TY BMS – Sem VI Page 3 of 3 Special Study in Finance
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