Final Mock Test
Paper 4 – Financial Management
Section: All Sections
Batch: CAP II December 2024 Date: Kartik 28, 2081
Full Marks: 100 Time: 3 Hours
Working notes should form part of the answer. Make assumptions wherever necessary.
Q. No. 1.
XYZ Limited is thinking of replacing its existing machine by a new machine which would cost Rs 60lakhs. The
company’s current production is Rs 80,000 units, and is expected to increase to 1,00,000 units, if the new
machine is bought. The selling price of the product would remain unchanged at Rs 200 per unit. The following
is the cost of producing one unit of product using both the existing and new machine:
Unit cost (Rs)
Existing Machine New Machine (1,00,000 units) Difference
(80,000 units)
Materials 75.0 63.75 (11.25)
Wages & Salaries 51.25 37.50 (13.75)
Supervision 20.0 25.0 5.0
Repairs and Maintenance 11.25 7.50 (3.75)
Power and Fuel 15.50 14.25 (1.25)
Depreciation 0.25 5.0 4.75
Allocated Corporate Overheads 10.0 12.50 2.50
183.25 165.50 (17.75)
The existing machine has an accounting book value of Rs 1,00,000, and it has been fully depreciated for tax
purpose. It is estimated that machine will be useful for 5 years. The supplier of the new machine has offered to
accept the old machine for Rs 2,50,000. However, the market price of old machine today is Rs 1,50,000 and it is
expected to be Rs 35,000 after 5 years. The new machine has a life of 5 years and a salvage value of Rs.
2,50,000 at the end of its economic life.
Assume corporate Income tax rate at 40%, and depreciation is charged on straight line basis for Income-tax
purposes. Further assume that book profit is treated as ordinary income for tax purpose. The opportunity cost of
capital of the Company is 15%.
Required:
(i) Estimate net present value of the replacement decision.
(ii) Estimate the internal rate of return of the replacement decision.
(iii) Should Company go ahead with the replacement decision? Suggest. [20 Marks]
Year(t) 1 2 3 4 5
PVIF0.15,1 0.8696 0.7561 0.6575 0.5718 0.4972
PVIF0.20,1 0.8333 0.6944 0.5787 0.4823 0.4019
PVIF0.25,1 0.80 0.64 0.512 0.4096 0.3277
PVIF0.30,1 0.7692 0.5917 0.4552 0.3501 0.2693
PVIF0.35,1 0.7407 0.5487 0.4064 0.3011 0.2230
Q.No.2
a) XYZ Limited has following book value capital structure:
Particulars Amount (In lakhs)
Equity Capital (in shares of Rs. 100 each, fully paid - up at par) 1,200
9% Preference Share Capital (in shares of Rs. 100 each, fully paid- up at par 1,000
Retained Earnings 600
11% Debenture (of Rs. 100 each) 900
13% Term Loan 360
Preference share, redeemable after 8 years, is currently selling at Rs. 90 per share. Debentures, redeemable
after 3 years, are selling at Rs. 75 per debenture. The next expected dividend per share on equity shares is Rs.
24 and the dividend per share is expected to grow at the rate of 5%. The market price per share is Rs. 350. The
income tax rate for the company is 40%.
Required:
a) Calculate the weighted average cost of capital using market value proportion and
b) Determine the weighted marginal cost of capital for the company, if it raises Rs 400 lakhs next year, given
the following information:
i) The amount will be raised by equity and debt in equal proportions.
ii) The company expects to retain Rs. 120 lakhs earnings next year.
iii) The additional issue of equity shares will result in the net price per share being fixed at Rs. 275
[8 Marks]
b) A company‘s capital structure consists of the following:
Rs. in million
Equity shares of Rs. 100 each 20
Retained earnings 10
9% Preference share 12
7% Debenture 8
50
The company is planning for an expansion. The expansion involves Rs. 25 million for which following
alternatives are available:
Issue of 200,000 equity shares at premium of Rs. 25 per share. Issue of 10% pref. shares.
Issue of 8% debentures.
The company‘s EBIT is at the rate of 12% on its capital employed which is likely to remain unchanged after
expansion.
It is estimated that P/E ratio in the case of equity shares, preference shares and debentures financing would be
21.4, 17 and 15.7 respectively.
Income tax rate is 50%.
Required:
Which of those alternatives of financing would you recommend and why? [7 Marks]
Q.No.3.
a) Consider the balance sheet of Maya Limited as on 31 December 2019. The company has received a large
order and anticipates the need to go to its bank to increase its borrowings. As a result, it has to forecast its cash
requirements for January, February, and March 2020. Typically, the company collects 20 percent of its sales in
the month of sale, 70 percent in the subsequent month, and 10 percent in the second month after the sale. All
sales are credit sales.
Equity and Liabilities Amount Assets Amount
(000) (000)
Equity shares capital 100 Net fixed assets 1,836
Retained earnings 1,439 Inventories 545
Long-term borrowings 450 Accounts receivables 530
Accounts payables 360 Cash and bank 50
Loan from banks 400
Other liabilities 212
2961 2961
Purchases of raw materials are made in the month prior to the sale and amounts to 60 percent of sales. Payments
for these purchases occur in the month after the purchase. Labour costs, including overtime, are expected to be
Rs1, 50,000 in January, Rs 2, 00,000 in February, and Rs 1, 60,000 in March. Selling, administrative, taxes, and
other cash expenses are expected to be Rs 1, 00,000 per month for January through March. Actual sales in
November and December and projected sales for January through April are as follows (in thousands):
Month Rs Month Rs Month Rs
November 500 January 600 March 650
December 600 February 1,000 April 750
On the basis of this information:
a) Prepare a cash budget for the months of January, February, and March
b) Determine the amount of additional bank borrowings necessary to maintain a cash balance of Rs
50,000 at all times
c) Prepare a Proforma balance sheet for March 31. [10 Marks]
b) Mr. X is to invest his funds in two securities, P & Q. The relevant information is as follows:
P Q
Expected return 12% 20%
Standard deviation 10% 18%
Coefficient of correlation “r‟ between P & Q = 0.15
He has decided to consider only five portfolios of P & Q as follows:
(a) All funds invested in P
(b) 50% of funds in each of P & Q
(c) 75% funds in P and 25% in Q
(d) 25% funds in P and 75% in Q
(e) All funds invested in Q
Required: [5 Marks]
i) Calculate return under different portfolios.
ii) Calculate Risk factor associated with these portfolios.
iii) Which portfolio is best for him from the risk point of view?
iv) Which portfolio is best for him from the return point of view?
Q.No.4
a)
A company is planning to set up a new production facility which is estimated to cost Rs. 5 million and is
expected to produce EBIT of Rs. 0.5 million. The financing of investments required will be done via taking
bank loan and right issue of equity shares. The rate of interest expected on bank loan are as follows:
Amount of bank loan Rate of interest
Up to Rs. 1 million 9%
For next up to Rs. 1 million 10%
For next up to Rs. 1 million 11%
You are required to advise best financing alternative for shareholder’s wealth maximization and explain the
effect of leverage on the result based on RoCE. [6 Marks]
b) Alpha & Omega Ltd. is considering three financing plans:
Financial Plans Equity Debt Preference Share
A 100% - -
B 50% 50% -
C 50% - 50%
Total funds to be raised = Rs. 200 Million
Rate of interest on debt = 12%
Corporate tax rate = 35%
Dividend on preference share = 9%
Face value of equity shares = Rs. 10 each. There shares will be issued at a premium of Rs.10 per share.
Required: [6 marks]
Determine indifference points for financial plans A and B; and plans A and C.
c) Define Du-Pont Analysis of ROE. [3 marks]
Q.No.5
a) The following particulars relates to Reliable Balance Fund – 1 scheme:
S.NO Particulars Amount
1 Investment in Fixed deposit 4,000,000
2 Investment in Shares at cost
Life Insurance Companies 3,500,000
Banking Companies 2,500,000
Hydropower companies 5,500,000
Non – Life Insurance companies 7,500,000
3 Cash and Other Assets in Hand (even throughout the fund period) 1,000,000
4 Expenses payables as on closing date 2,000,000
5 No of units outstanding 1,000,000
The particulars relating to sectoral index are as follows:
Sector Index on date of purchase Index on the valuation date
Life Insurance Companies 1400 2500
Banking Companies 1350 1100
Hydropower Companies 1500 2100
Non – Life Insurance Companies 1800 3700
You are required to compute:
i) Net Asset value of the fund
ii) Net Asset value per unit
iii) If the period under consideration is 3 years, and the fund has distributed Rs. 2 per unit per year as
cash dividend, ascertain the net return (Annualized) [5 Marks]
b) The assets of Sona Ltd. consist of fixed assets and current assets, while its ratio of other current liabilities and
bank credit comprise of 2:1.
Following information are also available:
Share capital Rs. 575,000
Working capital (CA - CL) Rs. 150,000
Gross margin 25%
Inventory turnover 5 times
Average collection period 1.5 months
Current ratio 1.5:1
Quick ratio (Quick assets/ Current liabilities.) 0.8: 1
Reserves & surplus to Bank & cash 4 times
Required:
Prepare the balance sheet of the company as on 32nd Ashadh 2075. [5 Marks]
c) Z Ltd. is presently financed entirely by equity shares. The current market value is Rs. 600,000. A dividend of
Rs. 120,000 has just been paid. This level of dividend is expected to be paid indefinitely. The company is
thinking of investing in a new project involving an outlay of Rs. 500,000 now and is expected to generate net
cash receipts of Rs. 105,000 per annum indefinitely. The project would be financed by issuing Rs. 500,000
debentures at the market interest rate of 18%. Ignore tax consideration.
Required: [5 Marks]
i) Calculate the value of equity shares and the gain made by the shareholders if the cost of equity
rises to 21.6% after investment in new project.
ii) Prove that weighted average cost of capital is not affected by gearing.
Q.No.6
Write Short Notes on:
a) Insider Trading
b) Terminal Value Approach in Capital Budgeting
c) Random Walk Theory
d) Financial Distress
[2.5 x 4 = 10 marks]
Q.No.7
Distinguish Between:
a) Capital market and money market
b) Risk aversion and Risk diversification
c) Mezzanine debt and Subordinated debt
d) Permanent and Temporary Working Capital
[ 2.5 x 4 = 10 marks]
