Examination Paper Semester I: Financial Management
IIBM Institute of Business Management
IIBM Institute
of Business Management
Semester-1
Examination Paper MM.100
Financial
Management
Section A:
Objective Type (30 marks)
· This section
consists of multiple choice & Short Notes.
· Answer all the
questions.
· Part One carries
1 mark each & Part two carries 5 marks each.
Part one:
Multiple
choices:
1. The approach focused mainly on
the financial problems of corporate enterprise
a. Ignored non-corporate enterprise
b. Ignored working capital
financing
c. External approach
d. Ignored routine problems
2. These are those shares, which
can be redeemed or repaid to the holders after a lapse of the
stipulated period
a. Cumulative preference shares
b. Non-cumulative preference
shares
c. Redeemable preference shares
d. Perpetual shares
3. This type of risk arise from
changes in environmental regulations, zoning requirements, fees,
licenses and most frequently
taxes
a. Political risk
b. Domestic risk
c. International risk
d. Industry risk
4. It is the cost of capital that
is expected to raise funds to finance a capital budget or investment
proposal
a. Future cost
b. Specific cost
c. Spot cost
d. Book cost
5. This concept is helpful in
formulating a sound & economical capital structure for a firm
a. Financial performance
appraisal
b. Investment evaluation
c. Designing optimal corporate
capital structure
d. None
Examination Paper Semester I: Financial Management
IIBM Institute of Business Management
6. It is the minimum required
rate of return needed to justify the use of capital
a. From investors
b. Firms point
c. Capital expenditure point
d. Cost of capital
7. It arises when there is a
conflict of interest among owners, debenture holders and the management
a. Seasonal variation
b. Degree of competition
c. Industry life cycle
d. Agency costs
8. Some guidelines on shares
& debentures issued by the government that are very important for the
constitution of the capital
structure are
a. Legal requirement
b. Purpose of finance
c. Period of finance
d. Requirement of investors
9. It is that portion of an
investments total risk that results from change in the financial integrity of
the investment
a. Bull- bear market risk
b. Default risk
c. International risk
d. Liquidity risk
10. _____________ measure the
systematic risk of a security that cannot be avoided through
diversification
a. Beta
b. Gamma
c. Probability distribution
d. Alpha
Part Two:
1. What is Annuity
kind of cash flow?
2. What do
understand by Portfolio risk?
3. What do you
understand by ‘Loan Amortization’?
4. What is the
Difference between NPV and IRR?
END OF SECTION A
Examination Paper Semester I: Financial Management
IIBM Institute of Business Management
Section B: Case
lets (40 marks)
· This section
consists of Case lets.
· Answer all the
questions.
· Each Case let
carries 20 marks.
· Detailed
information should form the part of your answer (Word limit 150 to 200 words).
Case let 1
This case provides the
opportunity to match financing alternatives with the needs of different
companies.
It allows the reader to
demonstrate a familiarity with different types of securities. George Thomas was
finishing some weekend reports on
a Friday afternoon in the downtown office of Wishart and Associates,
an investment-banking firm.
Meenda, a partner in the firm, had not been in the New York office since
Monday. He was on a trip through
Pennsylvania, visiting five potential clients, who were considering the
flotation of securities with the
assistance of Wishart and Associates. Meenda had called the office on
Wednesday and told George's
secretary that he would cable his recommendations on Friday afternoon.
George was waiting for the cable.
George knew that Meenda would be recommending different types of
securities for each of the five
clients to meet their individual needs. He also knew Meenda wanted him to
call each of the clients to
consider the recommendations over the weekend. George was prepared to make
these calls as soon as the cable
arrived. At 4:00 p.m. a secretary handed George the following telegram.
George Thomas, Wishart and
Associates STOP Taking advantage of offer to go skiing in Poconos STOP
Recommendations as follows: (1)
common stock, (2) preferred stock, (3) debt with warrants, (4)
convertible bonds, (5) callable
debentures STOP. See you Wednesday STOP Meenda. As George picked
up the phone to make the first
call, he suddenly realized that the potential clients were not matched with
the investment alternatives. In
Meenda's office, George found folders on each of the five firms seeking
financing. In the front of each
folder were some handwritten notes that Meenda had made on Monday
before he left. George read each
of the notes in turn. APT, Inc needs $8 million now and $4 million in
four years. Packaging firm with
high growth rate in tri-state area. Common stock trades over the counter.
Stock is depressed but should
rise in year to 18 months. Willing to accept any type of security. Good
management. Expects moderate
growth. New machinery should increase profits substantially. Recently
retired $7 million in debt. Has
virtually no debt remaining except short-term obligations.
Sandford
Enterprises
Needs $16 million. Crusty
management. Stock price depressed but expected to improve. Excellent growth
and profits forecast in the next
two year. Low debt-equity ratio, as the firm has record of retiring debt
prior to maturity. Retains bulk
of earnings and pays low dividends. Management not interested in
surrendering voting control to
outsiders. Money to be used to finance machinery for plumbing supplies.
Sharma
Brothers., Inc.
Needs $20 million to expand
cabinet and woodworking business. Started as family business but now has
1200 employees, $50 million in
sales, and is traded over the counter. Seeks additional shareholder but not
willing to stock at discount.
Cannot raise more than $12 million with straight debt. Fair management.
Good growth prospects. Very good
earnings. Should spark investor's interest. Banks could be willing to
lend money for long-term needs.
Sacheetee Energy
Systems
The firm is well respected by
liberal investing community near Boston area. Sound growth company.
Stock selling for $16 per share.
Management would like to sell common stock at $21 or more willing to
Examination Paper Semester I: Financial Management
IIBM Institute of Business Management
use debt to raise $ 28 million,
but this is second choice. Financing gimmicks and chance to turn quick
profit on investment would appeal
to those likely to invest in this company.
Ranbaxy Industry
Needs $25 million. Manufactures
boat canvas covers and needs funds to expand operations. Needs longterm
money. Closely held ownership
reluctant surrender control. Cannot issue debt without permission of
bondholders and First National
Bank of Philadelphia. Relatively low debt-equity ratio. Relatively high
profits. Good prospects for
growth Strong management with minor weaknesses in sales and promotion
areas. As George was looking over
the folders, Meenda's secretary entered the office. George said, "Did
Meenda leave any other material
here on Monday except for these notes?” She responded, "No, that's it,
but I think those notes should be
useful. Meenda called early this morning and said that he verified the
facts in the folders. He also
said that he learned nothing new on the trip and he sort of indicated that, he
had wasted his week, except of
course, that he was invited to go skiing at the company lodge up there".
George pondered over the
situation. He could always wait until next week, when he could be sure that he
had the right recommendations and
some of the considerations that outlined each client's needs and
situation. If he could determine
which firm matched each recommendation, he could still call the firms by
6:00 P.M. and meet the original
deadline. George decided to return to his office and match each firm with
the appropriate financing.
Question:
1. Which type of financing is
appropriate to each firm?
2. What types of securities must
be issued by a firm which is on the growing stage in order to meet
the financial requirements?
Case let 2
This case has been framed in
order to test the skills in evaluating a credit request and reaching a correct
decision. Perluence International
is large manufacturer of petroleum and rubber-based products used in a
variety of commercial
applications in the fields of transportation, electronics, and heavy
manufacturing.
In the northwestern United
States, many of the Perluence products are marketed by a wholly-owned
subsidiary, Bajaj Electronics
Company. Operating from a headquarters and warehouse facility in San
Antonio, Strand Electronics has
950 employees and handles a volume of $85 million in sales annually.
About $6 million of the sales
represents items manufactured by Perluence. Gupta is the credit manager at
Bajaj electronics. He supervises
five employees who handle credit application and collections on 4,600
accounts. The accounts range in
size from $120 to $85,000. The firm sells on varied terms, with 2/10, net
30 mostly. Sales fluctuate
seasonally and the average collection period tends to run 40 days. Bad-debt
losses are less than 0.6 per cent
of sales. Gupta is evaluating a credit application from Booth Plastics, Inc.,
a wholesale supply dealer serving
the oil industry. The company was founded in 1977 by Neck A. Booth
and has grown steadily since that
time. Bajaj Electronics is not selling any products to Booth Plastics and
had no previous contact with Neck
Booth. Bajaj Electronics purchased goods from Perluence
International under the same
terms and conditions as Perluence used when it sold to independent
customers. Although Bajaj
Electronics generally followed Perluence in setting its prices, the subsidiary
operated independently and could
adjust price levels to meet its own marketing strategies. The Perluence's
cost-accounting department
estimated a 24 per cent markup as the average for items sold to Pucca
Electronics. Bajaj Electronics,
in turn, resold the items to yield a 17 per cent markup. It appeared that
these percentages would hold on
any sales to Booth Plastics. Bajaj Electronics incurred out-of pocket
expenses that were not considered
in calculating the 17 per cent markup on its items. For example, the
contact with Booth Plastics had
been made by James, the salesman who handled the Glaveston area.
Examination Paper Semester I: Financial Management
IIBM Institute of Business Management
James would receive a 3 per cent
commission on all sales made Booth Plastics, a commission that would
be paid whether or not the
receivable was collected. James would, of course, be willing to assist in
collecting any accounts that he
had sold. In addition to the sales commission, the company would incur
variable costs as a result of
handling the merchandise for the new account. As a general guideline,
warehousing and other
administrative variable costs would run 3 per cent sales. Gupta Holmstead
approached all credit decisions
in basically the same manner. First of all, he considered the potential
profit from the account. James
had estimated first-year sales to Booth Plastics of $65,000. Assuming that
Neck Booth took the, 3 per cent
discount. Bajaj Electronics would realize a 17 per cent markup on these
sales since the average markup
was calculated on the basis of the customer taking the discount. If Neck
Booth did not take the discount,
the markup would be slightly higher, as would the cost of financing the
receivable for the additional
period of time. In addition to the potential profit from the account, Gupta was
concerned about his company's
exposure. He knew that weak customers could become bad debts at any
time and therefore, required a
vigorous collection effort whenever their accounts were overdue. His
department probably spent three
times as much money and effort managing a marginal account as
compared to a strong account. He
also figured that overdue and uncollected funds had to be financed by
Bajaj Electronics at a rate of 18
per cent. All in all, slow -paying or marginal accounts were very costly to
Bajaj Electronics. With these
considerations in mind, Gupta began to review the credit application for
Booth Plastics.
Question:
1. How would you judge the
potential profit of Bajaj Electronics on the first year of sales to Booth
Plastics and give your views to
increase the profit.
2. Suggestion regarding Credit
limit. Should it be approved or not, what should be the amount of
credit limit that electronics
give to Booth Plastics.
Section C:
Applied Theory (30 marks)
· This section
consists of applied theory questions.
· Answer all the
questions.
· Each question
carries 15 marks each.
· Detailed
information should form the part of your answer (Word limit 200-250 words).
1. Honey Well Company is
contemplating to liberalize its collection effort. Its present sales are Rs.
10 lakh, its average collection
period is 30 days, its expected variable cost to sales ratio is 85 per
cent and its bad debt ratio is 5
per cent. The Company’s cost of capital is 10 per cent and tax are
is 40 per cent. He proposed
liberalization in collection effort increase sales to Rs. 12 lakh
increases average collection
period by 15 days, and increases the bad debt ratio to 7 percent.
Determine the change in net
profit.
2. Explain the concept of working
capital. What are the factors which influence the working capital?
S-1-91110
END OF SECTION B
END OF SECTION C
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