III SEMESTER ENDTERM EXAMINATION NOVEMBER 2016

PGDM-AICTE BATCH 2015-17

Advanced Financial Management
Time: 3 Hours Max. Marks 100
Section A: Answer all questions. Question 12 compulsory carries 3 marks. (11 X 2=22)
1. What is capital budgeting? Explain briefly any two methods of capital budgeting.
2. How Baumol’s Model can be represented algebraically?
3. Write the format for the calculation of Initial cash outlays.
4. What are the factors which influence the size of receivables?
5. Explain JIT inventory management.
6. What do you mean by factoring?
7. What are the basic assumptions of Net Income Approach?
8. Explain Walter’s model with formula for determining the value of a share.
9. What are the guidelines employed for capital structure planning?
10. Correlate and distinguish between cash flows and profits.
11. What are the tax aspects of dividend?
12. What are the merit and demerit of decision tree approach of risk analysis? (1X3=3)
Section B: Answer all questions. Each question carries 5 marks. (5 x 5 =25)
13. (a). Thoma Pharmaceutical Company may buy DNA-testing equipment costing $60,000. This equipment
is expected to reduce labor costs of the clinical staff by $20,000 annually. The equipment has a useful life
of five years and SLM depreciation is employed by the company. No salvage value is expected at the end.
The corporate tax rate for Thoma (combined federal and state) is 38 percent, and its required rate of
return is 15 percent. (If profits after taxes on the project are negative in any year, the firm will offset the
loss against other firm income for that year.) On the basis of this information, what are the relevant cash
flows?
Or
(b). Company X has average credit sale of Rs. 300000 per year. The working days per year are 300. If the
company could reduce its bill processing time by two days, what would be the annual savings, assuming
an interest rate of 18%.
The company has the annual sales of Rs.500000. the company has investment opportunities in the money
market to earn a return of 16% p.a if the company could reduce its float by 2 days, what would be the
company’s total return?
14. (a) The following are cash flows of ABC Ltd
YEA Cash flows ( Real)
R
0 -10000
1 3000
2 3000
3 3000
4 3000
The cash flows are expressed in real terms, the firms opportunity cost of capital which is market
determined & expressed in nominal terms is 14%. The rate of inflation is expected to be 7%. Calculate the
NPV.
Or
(b) The earnings per share of a company are Rs.10. It has an internal rate of return of 15% and the
capitalization rate of its risk class is 12.5%. If Walter’s model is used:
i. What should the optimum payout ratio of the firm?
ii. What would be the price of the share at this payout?
iii. How shall the price of the share be affected if a different payout is employed?
15. (a). SKC company has a policy of maintaining minimum cash balance of Rs.1500000. the standard
deviation of the company’s daily cash flows is Rs.1200000. The annual interest rate is 14%. The cost of
buying or selling securities is Rs. 150 per transaction. Determine SKC’s upper control limit and the return
point as per the Miller- Orr model.
OR
(b) HG company is considering a selective control for its inventories using the following data:
You are required to prepare the ABC plan and also show the ABC plan on a Chart.
 No. of Unit
Units cost
14000 20.00
16000 18.00
20000 4.00
12000 16.00
16000 2.00
4000 120.00
10000 0.80
8000 80.00
16. (a). Describe the traditional view of optimal capital structure. Compare and contrast this view with the NOI
approach.
OR
(b)Compare and contrast scenario analysis and sensitivity analysis.
17. (a) A firm buys casting equipment from outside suppliers@Rs.100/unit. Total annual needs are 1000 units.
You have with you following further data:
a) Annual return on investment, 20%
b) Rent, insurance, taxes per unit per year, Rs.5
c) Cost of placing an order, Rs.200
d) How will you determine the economic order quantity?
Or
(b) Describe various sources of working capital finance.
Section C: Case Study (20 Marks)
18. Phoenix company is considering two mutually exclusive investments, project P and project Q. the expected
cash flows of these projects are as follows
YEA PROJECT P PROJECT Q
R
0 (1000) (1600)
1 (1200) 200
2 250 400
3 600 600
4 2000 800
5 4000 100
a. Compute the NPV of each project.
b. What is the IRR of each project?
c. Which project would you choose if the cost of capital is 10%? 20%?
d. What is each project’s MIRR if the cost of capital is 12%
Section D: Application oriented exercise (20 Marks)
19. (a) Mittal Filter Company is a distributor of air filters to retail stores. It buys its filters from several
manufacturers. Filters are ordered in lot sizes of 2,000, and each order costs Rs. 800 to place. Demand from
retail stores is 40,000 filters per month, and carrying cost is Rs.80 a filter per month.
i. What is the optimal order quantity with respect to so many lot sizes (that is, what multiple of 2,000 units
should be ordered)?
ii. What would be the optimal order quantity if the carrying cost were cut in half to Rs. 40 a filter per month?
iii. What would be the optimal order quantity if ordering costs were reduced to Rs. 400 per order?
OR
(b) Resham Nigam currently gives credit terms of “net 30 days.” It has Rs. 60 lakhs in credit sales, and its
average collection period is 30 days. To stimulate demand, the company may give credit terms of “net 45 days.”
If it does instigate these terms, sales are expected to increase by 15 percent. After the change, the average
collection period is expected to be 60 days, with no difference in payment habits between old and new
customers. Variable costs are Re. 0.80 for every Re 1.00 of sales, and the company’s before-tax required rate of
return on investment in receivables is 20 percent. Should the company extend its credit period? (Assume a
360-day year.)
Section E: (10 Marks)
20. Firms A and B are similar except that A is unlevered while B has Rs 200000 of 5 percentage debentures
outstanding. Assume that tax is 40%; NOI is Rs. 40000 and the cost of equity is 10 percent.
i. Calculate the value of firms, if the MM assumptions are met
ii. Suppose VB = Rs. 360000. According to M-M, do these represent equilibrium values? How will equilibrium
be set? Explain.