Birla Institute of Technology & Science, Pilani

Work-Integrated Learning Programmes Division

Second Semester 2018-2019
Comprehensive Examination (EC-3 Regular)

Course No. : BA ZG521

Course Title : FINANCIAL MANAGEMENT
Nature of Exam : Open Book
Weightage : 45% No. of Pages =2
Duration : 3 Hours No. of Questions = 6
Date of Exam : 05/05/2019 (AN)
Note:
1. Please follow all the Instructions to Candidates given on the cover page of the answer book.
2. All parts of a question should be answered consecutively. Each answer should start from a fresh page.
3. Assumptions made if any, should be stated clearly at the beginning of your answer.

Q.1. The capital structure of XYZ Ltd. is as follows: [12]

Debentures 13.5 percent (500,000 debentures, Rs 100 par) Rs 50 million
Equity Capital (10 million shares, Rs 10 par) Rs 100 million
Term loans, 12 percent Rs 80 million
Preference capital, 11 percent (100,000 shares, Rs 100 par) Rs 10 million

The next expected dividend per share is Rs 1.50. The dividend per share is expected to grow
at the rate of 7 percent. The market price per share is Rs 20. Preference stock, redeemable
after 10 years, is currently selling for Rs 75 per share. Debentures, redeemable after 6 years,
are selling for Rs 80 per debenture. The tax rate for the company is 50 percent. Calculate the
WACC using market value as weights?

Q.2 (a) The required return on the market portfolio is 15 percent. The beta of stock A is 1.5. The
required return on the stock is 20 percent. The expected dividend growth on stock A is 6
percent. The price per share of stock A is Rs.86. What is the expected dividend per share
of stock A next year? [1]

Q.2 (b) In continuation of the above case, what will be the combined effect of the following on
the price per share of stock? [5]
(a) The inflation premium increases by 3 percent.
(b) The decrease in the degree of risk-aversion reduces the differential between the
return on market portfolio and the risk-free return by one-fourth.
(c) The expected growth rate of dividend on stock A decrease to 3 percent.
(d) The beta of stock A falls to 1.2

Q.3. A firm's current assets and current liabilities are 25,000 and 18,000 respectively. How much
additional funds can it borrow from banks for short term, without reducing the current ratio
below 1.35? [5]

Q.4. For ABC & Co. we have the following data:

Unit selling price = Rs.300
Variable cost per unit = Rs. 200
Fixed costs = Rs. 4,000
Interest costs = Rs. 3,000
(a) Calculate DOL, DFL and DTL when the output is 100 units? [3]
(b) Calculate Break even output? [3]

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Q.5 (a) ABC Ltd is facing gloomy prospects. The earnings and dividends are expected to decline
at the rate of 5 percent. The previous dividend was Rs.2.00. If the current market price is
Rs.10.00, what rate of return do investors expect from the stock of ABC? [3]

Q.5 (b) The risk-free return is 8 percent and the return on market portfolio is 16 percent. Stock
X's beta is 1.2; its dividends and earnings are expected to grow at the constant rate of 10
percent. If the previous dividend per share of stock X was Rs.3.00, what should be the
price per share of stock X? [3]

Q.6. ABC Ltd. is evaluating a project whose expected cash flows are as follows:
Year Cash flow
0 -530,000
1 150,000
2 180,000
3 240,000
4 250,000

The cost of capital for ABC is 15 percent.

(a) What is the NPV of the project? [4]

(b) What is the IRR of the project? [3]
What is the BCR of the project? [3]

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