Subject Code: IMT-61

Subject Name : CORPORATE FINANCE

Notes:
a. Write answers in your own words as far as possible and refrain from copying from the text books/handouts.
b. Answers of Ist Set (Part-A), IInd Set (Part-B), IIIrd Set (Part – C) and Set-IV (Case Study) must be sent
together.
c. Mail the answer sheets alongwith the copy of assignments for evaluation & return.
d. Only hand written assignments shall be accepted.
A. First Set of Assignments: 10 Questions, each question carries .5 marks.
B. Second Set of Assignments: 5 Questions, each question carries 1 marks.
C. Third Set of Assignments: 5 Questions, each question carries 1 marks. Confine your answers to 150
to 200 Words.
D. Forth Set of Assignments: Two Case Studies : 5 Marks. Each case study carries 2.5 marks.

ASSIGNMENTS
PART– A

1. ‘Profit maximization is not an operationally feasible criterion’. Do you agree? Illustrate your views.
2. Discuss the fundamental principle behind the concept of ‘value of time’.
3. There is a direct relationship between risk and return in every area of financial management. Explain.
4. A firm is considering the following project:
CASH FLOWS (Rs) FOR FIVE YEARS

0 1 2 3 4 5
-50000 +11300 +12769 +14429 +16305 +18421

(a) Calculate the NPV for the project if the cost of capital is 10%. What is the project’s IRR?
(b) Recompute the project’s NPV assuming a cost of capital of 10% for years 1 and 2, 12% for years
3 and 4 and 13% for year 5. Can the IRR method be used for accepting or rejecting the project
under these conditions of changing cost of capital over time? Why or why not?
5. Define cost of capital. Explain its significance in financial decision-making.

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 PART– B

1. A company requires Rs 500,000 to construct a new plant. The feasible financial plans are as follows: (i)
The Company may issue 25,000 common shares at Rs 10 per share and 2,500 debentures of Rs 100
denomination bearing an 8 per cent rate of interest. (ii) The Company may issue 50,000 common
shares at Rs 10 per share. (iii) The Company may issue 25,000 common shares at Rs 10 per share
and 2,500 preference shares at Rs 100 per share bearing an 8 per cent rate of dividend.
If the company’s earnings before interest and taxes are Rs 10,000, Rs 20,000, Rs 40,000, Rs 60,000
and Rs 1,00,000, what are the earnings per share under each of the three financial plans? Which
alternative would you recommend and why?
2. Explain the NI and NOI approaches of financing the capital structure with hypothetical examples.
3. Discuss the Modigliani and Miller approach, and critically analyse the hypothesis.
4. The following is the summarized balance sheet of Philips India Ltd as on 31 March 2002 and 2003.
Prepare the cash flow statement for the year ended 2003.
Liabilities 2002 2003 Assets 2002 2003
Share Capital 1350000 1350000 Fixed Assets 1200000 960000
General Reserve 900000 930000 Investments 150000 180000
Profit & Loss a/c 168000 204000 Stock 720000 630000
Creditors 504000 402000 Debtors 630000 1365000
Provision for Taxation 225000 30000 Bank 447000 591000
Mortgage Loan - 810000
Total 3147000 3726000 Total 3147000 3726000

Additional Information:
(a) Investments costing Rs 24,000 were sold during the year for Rs 25,500.
(b) Provision for tax made during the year was Rs 27,000.
(c) During the year, a part of the fixed assets costing Rs 30,000 were sold for Rs 36,000. The profit
was included in the profit and loss account.
(d) Interim dividend paid during the year amounted to Rs 1,20,000.

5. What are the important ratios used to assess the financial position of a company?

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 PART – C

1. What is the difference between hire purchase and lease finance?

2. A firm has applied for working capital finance from a commercial bank. You are requested by the bank
to prepare an estimate of the working capital requirements of the firm. You may add 10% to your
estimated figure to account for exigencies. The following is the firm’s projected profit and loss account:

Particulars Rupees
Sales 2247000
Cost of Goods Sold 1637100
Gross Profit 609900
Administrative expenses 149800
Selling expenses 139100
Profit before tax 321000
Tax Provision 107000
Profit after Tax 214000
The cost of goods sold is calculated as follows:

Particulars Rupees
Material Used 898800
Wages & other mfg. expenses 668750
Depreciation 251450
1819000
Less: Stock of finished goods 181900
(10% product not yet sold)
Cost of Goods Sold 1637100

The figures given above relate only to the goods that have been finished, and not to work in progress;
goods equal to 15% of the year’s production (in terms of physical units) are in progress, on an average
requiring full material but only 40% of other expenses. The firm has a policy of keeping two months’
consumption of materials in stock. All expenses are paid one month in arrear. Suppliers of material
grant one and a half month’s credit; 20% sales are made in cash while the remaining is sold on two
months’ credit. 70% of income tax has to be paid in advance in quarterly instalments.

3. What synergies exist in a (a) horizontal merger, (b) vertical merger and (c) conglomerate merger?
4. What are the different forms of public-sector enterprises? Explain with the help of a chart.
5. Explain overcapitalization. What are the advantages & evils of overcapitalization?

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 CASE STUDY-1
The following is the capital structure of Simon co.as on 31st March 2008

Equity Shares : 10000 shares ( of Rs 100 each) 10,00,000

12% Preference Shares ( of Rs 100 each) 4,00,000
10% Debentures 6,00,000
20,00,000

The market price of the company’s share is Rs 110 & it is expected that a dividend of Rs 10 per share would be
declared at the end of current year . The dividend growth rate is 6%.

(i) If the tax rate is 35% compute the WACC by book value & market value weights
(ii) For expansion the company intends to borrow a fund of Rs 10 lakh bearing 12% rate of interest,
what will be revised WACC ? The financing decision is expected to increase dividend from Rs 10 to
Rs 12 per share & the market price of share will reduce to Rs 105 per share

CASE STUDY-2

While corporate finance is concerned with treasury operations; working capital management; and project
evaluation and investor relations, cash management refers to the collection, concentration and disbursement
of cash. It encompasses a company‘s level of liquidity, its management of cash balance and its short-term
investment strategies. The need for effective cash flow management is felt due to uncertainty in cash flows
and the lack of synchronization of inflows and outflows. Although companies want to hold as little cash as
possible, they would also keep enough reserves to face contingencies that may occur.

At CPL Ltd, a study was conducted on the measures used for collections management.

The Company was aware of the benefits of a cash management system. They realized that a CMS would help
optimize working capital management, speed up the realization of receivables, allow the Company to stress on
core competency and make use of their bankers’ sophisticated technology and expertise. CPL realized that as
banks have centres at many locations, CMS would be an additional revenue generator and they would not
charge high amounts from companies for their service.

The Company had very recently started working on Real Time Gross Settlement (RTGS) for collections and
1.5 per cent of their business, i.e., about Rs 2 crore, was being handled through RTGS. There were two ways
of implementing RTGS, one was through taking mandate from dealers and triggering a file for billing and
debiting their account. This was in tandem with the dealer’s stock management system which was maintained
by the Company. There was always a chance of legal issues as the dealer could later accuse the Company of
making numerous debit entries. Therefore, this option was avoided and the Company opted for the method
wherein the money was first transferred by the stockist as and when required by crediting the Company’s
account; subsequently a mail was sent by the company’s bankers along with a PDF file attachment which was
password protected. After processing this file, the order was sent to the warehouse and shipments were
effected.
On an average, there were forty to fifty RTGS transactions per month. None of the dealers were forced to shift
to RTGS. It was totally voluntary.

The Company had been using both cheques and demand drafts as collection instruments; the discretion being
made based on the credit history of the stocklist. The Company accepted only DDs from new stockists for a
period of three to six months and only after that, depending on their payment record, could they use either of
the two instruments. They used RTGS only for stockists paying through the DD mode and not through
cheques.

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 The turnaround time for RTGS was two to three hours but in order to avail the facility, the transaction had to
be made before a fixed time every day, that is, 10 a.m., the Mumbai account would be credited between 10
a.m. and 12 noon. However, in remote areas, the transfer would take place between 1 and 3 p.m. In case of
clogging of transactions, the RBI would use the priority assigned by sending the banks to their transactions as
per their value.

CPL planned to run both the cheque-based system and RTGS parallely because it did not want to compel the
dealers to travel from remote areas just for remitting through RTGS.

It would be advantageous for stockists to shift to RTGS because a commitment was made to them that their
orders would be shipped the same day in case of payments through RTGS, which otherwise was not made.
The Company wished to encourage their bankers to provide RTGS free of cost to itself as well as its dealers
or offer it at a very low price.

The legal issues related to RTGS were solved by taking cheques from dealers. If the dealers failed to pay post
dispatch, the Company had the right to deposit the cheques. If the cheques were dishonoured, the Company
could sue that dealer.

The percentage of collection under RTGS was 1.5 per cent, but which was estimated to increase to at least 10
per cent in the short run and 40 per cent in the long run as soon as viewing rights were given.
The mapping of dealer information was in bad shape and at times CP Ltd had to just respond on the basis of
guesswork.

CPL soon began to benefit from the use of RTGS. Not only did costs come down by Rs 1.25 (to Rs 2) per
1000 but DD making charges were also eliminated. The administration charges for RTGS were prohibitive.
The Company felt that RTGS was the way ahead but for that they would first have to map RTGS entries
manually which was not a bright proposition. So automatic mapping of data was required. In addition, it was
discovered that since charges for T+1 transactions were very high, they had arrangements with two banks,
one handling T+1 and the other handling T+6. They were receiving customized MIS from their two bankers.
The time lag of two to three days for making DDs was done away with. The Company was facing the following
problems:
(i) Often, important information related to the sender’s identification was missing.
(ii) In the absence of an automatic update system, they had to manually update the system into ERP.
(iii) No mapping was being done during reconciliation.
(iv) Dealers were unwilling to share the expenditure on RTGS. So they were unaffected by the charges by
the bank for the RTGS.
(v) There were many sender banks and they all followed different formats. Therefore, to match them
manually was difficult.
(vi) The file sent by the bankers did not contain sufficient information and could not be directly linked to
ERP which necessitated manual intervention which was laborious and expensive.

It was found that although the transition of the Company to RTGS seemed a little troublesome due to the
collection network, on the whole, it was better to be a part of the system at the formation stage so that it could
be customized according to the needs instead of allowing others to get the system organized or designed.
Questions:
1. What is the role of a CMS in corporate finance?
2. What drawbacks in the existing collection system did the RTGS system seek to improve on?
3. In your opinion, was the RTGS system able to improve the Company’s collection management?
Analyse.

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