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INSTITUTE OF MANAGEMENT TECHNOLOGY CENTRE FOR DISTANCE LEARNING

GHAZIABAD End-Term Examinations – December 2008

Subject Code : IMT-59 Time Allowed : 3 Hours Subject Name: Financial Management Max. Marks : 50

Notes: (a) Answer any FOUR questions choosing from SECTION-A. SECTION-B (CASE STUDY) is compulsory. Each Question

(SECTION-A) carries 9 MARKS and (SECTION-B) Case Study carries 14 MARKS. (b) No doubts/clarifications shall be entertained. In case of doubts/clarifications make reasonable assumptions and proceed. (c) For students enrolled in January 2008 and July 2008 batches, the Question Paper would be treated for 70 marks

instead of 50 marks. SECTION-A MARKS : 36

Q.1 “Contrast the objective of maximizing earnings with that of maximizing wealth”. Comment Q.2 Define the following

a) Operating Cycle

b) Pay back Period

c) Yield to maturity

Q.3 (a) Exactly ten years from now Sri Chand will start receiving a pension of Rs 3000/- a year .The payment will continue for sixteen years . How much is the pension worth now, if rate of interest is 10%.

(b) How long will it take to double your money if it grows at 12% annually? Q.4 The managing director of a company decides that his company will not pay any dividend till he

survives. His current life expectancy is 20 years .After that time it is expected that the company could pay dividends of Rs 30 per share indefinitely .At present the firm could afford to pay Rs 5 per share forever. The required rate of this company’s shareholders is 10%. What is the current value of the share ? What is the cost to each shareholder of the managing directors policy?

Q.5 What are the different approaches for financing ‘WORKING CAPITAL REQUIREMENT’?

Q.6 Describe the traditional view on the optimum capital structure. Compare and contrast this view with the net operating income approach.

Q.7 Under what conditions do the NPV and IRR methods lead to the same investment decision? Discuss with examples.

SECTION-B (Case Study) MARKS : 14

Sagar industries is planning to introduce a new product with a projected life of 8 years. The project, to be set up in a backward region, qualifies for a one time tax free subsidy from the government of Rs 20 lakhs. Initial equipment cost will be Rs 140 lakhs and an additional equipment costing Rs 10 lakhs will be needed at the beginning of the third year. At the end of 8 years , the original equipment will have no resale value, but the supplementary equipment can be sold for Rs 1 lakh. A working capital of Rs 15 lakh will be needed. The sales volume over the eight year period have been forecast as follows:

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Year Units

1 80000

2 120000

3-5 300000

6-8 200000

A sale price of Rs 100 per unit is expected and variable expenses will amount to 40% of sales revenue. Fixed cash operating costs will amount to Rs 16 lakhs per year. In addition, an extensive advertising campaign will be implemented , requiring an annual outlay as follows:

Year Rupees

1 30,00,000

2 15,00,000

3-5 10,00,000

6-8 4,00,000

The company is subject to 50% tax rate and considers 12% to be an appropriate after tax cost of capital for this project. The company follows the straight line method of depreciation. Should the project be accepted?