Masters of Business Administration- MBA Semester 2
MB0045 – Financial Management - 4 Credits
(Book ID: B1134)
Assignment Set- 1 (60 Marks)
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Note: Each question carries 10 Marks. Answer all the questions.
1. A company has issued a bond with face value of Rs.1000 , with 10% pa coupon rate payable annually and a tenure of 10 years to maturity. At the end of 10 years, the bond will be redeemed at a premium of 10% to face value .
a) At what price would you buy the bond if the prevailing interest rate is 12% pa on investments of similar risk?
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b) What is the YTM of the bond if the prevailing price is same as calculated in a) above.
c) What is the current yield of the bond at the given price?
d) If the coupon rate is paid semi-annually, at what price would you buy the bond at the 12% pa prevailing interest rate?
2. Given the following details for a company:
Net operating income 200,000
Overall cost of capital 20%
Value of the firm 1000,000
Cost of debt 15%
Interest 75,000
Market value of debt 500,000
Market value of equity 500,000
a) Given the assumptions of the net operating income approach, what will be the cost of equity, if the market value of debt is 200,000.
b) Given the assumptions of the net income approach, what will be the overall cost of capital with Market value of debt of 200,000.
3. Given the following projects , rank them on the basis of NPV, MIRR and Payback period if the cost of capital is 10% pa.
Project A Project B Project C
Year Cash flow Year Cash flow Year Cash flow
0 -10000 0 -10000 0 -10000
1 5000 1 5000 1 5000
2 7000 2 8000 2 8500
3 8000 3 6500 3 9000
4 15000 4 11000 4 12000
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4. Given the following information, calculate Degree of operating leverage, Degree of Financial leverage, Degree of total leverage.
Quantity sold 100,000 units
Variable cost per unit 200
Selling price 800
Fixed cost 10,000
Number of equity shares 50,000
Debt 1000,000 @ 15%pa
Preference shares 10,000 of Rs.100 each @ 10%
Tax rate 30%
5. Explain the following concepts :
a) Operating cycle
b) Total inventory cost
c) Price earnings ratio
d) Financial risk
6. Explain the Net operating income approach to capital structure theories.
Masters of Business Administration- MBA Semester 2
MB0045 – Financial Management - 4 Credits
(Book ID: B1134)
Assignment Set- 2 (60 Marks)
======================
Note: Each question carries 10 Marks. Answer all the questions.
1. Given the following information, prepare a cash budget:
Month
Sales
Purchases
Wages
Production overheads
Selling overheads
Jan
100000
40000
10000
6000
6000
Feb
120000
45000
15000
6500
6500
March
150000
35000
18000
7000
6600
April
160000
30000
20000
7700
6800
May
175000
25000
22000
8000
6200
June
200000
20000
24000
8500
6300
The company has a policy of selling its goods at 50% cash and the balance on credit. On credit sales, 50% is paid in the following month and balance 50% two months from the sale. Purchases are paid one month from the month of purchase. Wages are paid in the following month and overheads are also paid in the following month. The company plans a capital expenditure, in the month of April, for Rs. 25,000.
The company has a opening balance of cash of Rs. 40,000 on 1st Jan 2010. Prepare a cash budget for Jan to June.
2. Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement.
Raw material 60
Direct labour 22
Overheads 44
Total cost 126
Profit 18
Selling price 140
The following additional information is available:
Average raw material in stock one month
Average materials in process 15 days
Credit allowed by suppliers one month
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Credit allowed to debtors two months
Time lag in payment of wages 15 days
Time lag in payment of overheads one month
Sales on cash basis 20%
Cash balance to be maintained 80,000
You are required to prepare a statement showing the working capital required to finance a level of activity of 100,000 units of output. You may assume production is carried out evenly throughout the year and payments occur similarly. Assume 360 days in a year.
3. Given the following information, calculate the weighted average cost of capital.
Capital structure in millions
Equity capital ( Rs.10 par value) 2
14% preference share capital Rs.100 each 1.5
Retained earnings 2
12% Debentures Rs.100 each 4
8% term loan 0.5
Total 10
The market price per equity share is Rs. 45. The company is expected to declare a dividend per share of Rs.5 and dividends are expected to grow at 15% pa. The preference shares are redeemable at Rs. 115 after 5 years and are currently traded at Rs. 90 in the market. Debentures will be redeemed after 5 years at Rs.110. The corporate tax rate is 30%. Calculate the Weighted average cost of capital.
4. Calculate the present value of the following options:
a) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa
b) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa payable semi annually
c) Rs. 5000 to be received every year for 5 years if the prevailing interest rate is 10% pa
d) Rs. 5000 to be received after 5 years and Rs. 10,000 to be received after 10 years
5. Explain each of the following:
a) Operating cycle
b) Shareholders wealth maximisation
c) Capital rationing
d) Economic order quantity
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6. a) Discuss the advantages of ordering Economic order quantity of inventory.
b) Discuss the Dividend discount model of measuring cost of equity.
