14MBA22

USN

||Jai Sri Gurudev||

BGS Institute of Technology
Department of Management Studies
II SEM MBA II Internals- Financial Management
Max. Marks: 50

Time: 2hr
Part A- Answer any two ( 3 marks)

1. A firm can invest Rs.12000 in a project with a life of 4 years. The projected cash inflows are as follows:
Year1:Rs.3000, Year 2: Rs.4000, Year 3: Rs.5000, Year 4:Rs.3500
The cost of capital is 10%. Calculate the NPV of the project.
2. Define Swap and Mention its types.
3. Define derivative and Mention its types.
Part B- Answer any two ( 7 marks)
4. There are two projects X & Y. each project requires an investment of Rs.10000. you are required to rank these
projects according to pay back method.
Year
Cash flows
Project X
Project Y
1
3000
2000
2
4000
3000
3
5000
4000
4
7000
8000
5
8000
9000
5. Rank the following projects using Net present value and payback period:
Project
Initial Investment
Annual cash flows
Life in years
A
500000
100000
7 years
B
600000
150000
5 years
C
650000
125000
9 years
D
800000
200000
5 years
E
750000
220000
6 years
6. The expected cash flows of a project are as follows:
Year
0
1
2
3
4
Cash flow
-100000
20000
30000
40000
50000
The cost of capital is 12%. Calcualte: NPV, Profitability Index & pay back Period

5
30000

Part C- Answer any three ( 10 marks)

7. There are two projects X & Y. each project requires an investment of Rs.10000. you are required to rank these
projects according to pay back method.
Year
Cash flows
Project X
Project Y
1
3000
2000
2
4000
3000
3
5000
4000
4
7000
8000
5
8000
9000

8. Assuming that a firm pays tax at 50%, compute the after tax cost of capital, in the following cases:
A perpetual bond sold at par, coupon rate of interest being 7%.
A ten year 8% Rs.1000 bond, sold at rs.950 less underwriting commission.
Rs. 100 par value, preference share sold at Rs.100n with a 9% dividend and redemption price of Rs.110, if a
company redeems in 5 years.
An ordinary share selling at a current market price of Rs.120 and paying a current dividend of rs.9 per share,
which is expected to grow at a rate of 8%.
9. From the following capital structure of a company, calculate the overall cost of capital using I) Book value
weights ii) Market Value weights
Source
Book value
Market value
Cost of capital
Equity share (Rs.10 shares) 45000
90000
14%
Retained earnings
15000
13%
Preference share capital
10000
10000
10%
Debentures
30000
30000
5%
10. A company in consultations with its merchant bankers has come up with the following levels of new
financing from various sources and the corresponding costs. Determine the breaking points and prepare
weighted marginal cost of capital schedule.
Source
%
Range (Rs.cr)
Cost
Equity
50%
0 to 10
16%
Above 10
17%
Debt
30%
0 to 15
7%
Above 15
8%
Preference
20%
0 to 12
12%
Above 12
13%
11. ABC Ltd. has the following book value capital structure:
Rs. In Millions
Equity capital (10 Million shares @ 10/share)
Rs.100
Preference capital-11% (100000 shares, Rs.100 per share)
Rs.10
Retained earnings
Rs.120
Debentures, 13.5% (500000 debentures, Rs.100 each)
Rs.50
The next expected dividend per share is Rs.1.50. the dividend per share is expected to grow @ 7%. The market
per share is Rs.20. preference shares, redeemable after 10 years is currently selling at for Rs.75 per share.
Debentures redeemable after 6 years are selling for Rs.80 per debenture. The tax rate is 50%. Calculate te
weighted average cost of capital Using book value weights.
Project A and project B cost a corporation Rs.50000 and Rs.25000 respectively. Their cash flows are given
below. You are requested to find out the IRR for each project and decide on that basis which project is more
profitable.
Year
Cash flows
Project A
Project B
1
5000
10000
2
15000
10000
3
30000
10000
4
20000
10000
5
10000
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