INSTITUTE OF INNOVATION IN TECHNOLOGY & MANAGEMENT PAPER: FINANCIAL MANAGEMENT PAPER CODE: BBA CAM 303

PROGRAMME: BBA CAM V (MORNING) SEMESTER QUESTION BANK UNIT 4 THEORY QUESTIONSA. Objective type Questions: I. 1. State, with reasons in brief, whether the following statements are True or False. In the Walters model, the DP ratio should depend upon the relationship between r and ke. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Constant DP ratio refers to stability of dividend. Net operating cycle is equal to Gross operating cycle minus Deferral period. Working capital management involves financing & management of all current assets. Baumols model of cash management assumes a constant rate of use of cash. Concentration banking helps in increasing collection. Inventory management does not include management of work-in-progress. ABC analysis helps to ascertain the minimum level of stock of raw material. The equity shareholders get the residual profit of the firm. If ke = r, then under Walters Model, DP Ratio is irrelevant. Constant Dividend Per Share Policy is considered as Stable Dividend Policy. The operating cycle is equal to the total manufacturing period in a firm. In Hedging Approach, the permanent working capital is financed partly from longterm sources. II. Fill in the blanks with suitable word:

1. Working Capital is defined as excess of _________ over __________. 2. The formula to calculate Dividend Payout Ratio is ______________. 3. Gross Working capital is equal to ___________. 4. Hedging Approach to working capital deals with financing of ___________. 5. Miller-Orr model deals with _________________. 6. Average inventory in EOQ model is of ________. 7. Cost of not carrying sufficient inventory is known as _____________.

8. In the EOQ model, EOQ will ___________ if order cost increases. 9. EOQ determines the order size when total inventory costs are ______________. 10. If A= Annual Requirement, O = Order cost and C= Carrying cost per unit per annum, then EOQ is ________. 11. __________Model of Dividend policy stresses on investors preference for current dividend than higher future capital gains. 12. Dividend declared by the company must be paid in _____ days. B. Give short answers to the following: 1. Rationale of stable dividend policy. 2. GDRs. 3. Book-building process 4. EOQ. 5. Factoring 6. Venture Capital 7. Depositories 8. Commercial Paper 9. Operating cycle 10. Significance of ABC Analysis 11. Baumols model of cash management 12. Venture capital 13. Concentration Banking. 14. Concept of Loan Syndication C. Long Answer type Questions: 1. (a) What do mean by inventory? What is the need for holding inventory? Why inventory management is important? (b) What are the costs and benefits associated with inventory? (c) What are the objectives of inventory management? 2. What do you mean by working capital management? State its importance. Explain the factors having a bearing on working capital needs. 3. Explain theory of relevance of dividend payment. 4. Explain the method of preparation of cash budget. 5. What is inventory re-order point? How is it determined? 6. Explain the different models of dividend policy with their assumption and an example.

7. Explain the main determinants of dividend policy of a firm. PRACTICAL QUESTIONSI.

Questions based on Dividend Policy: 1. Determine the market value of equity shares of the company from the following information as per Walters Model: Earnings of the company Dividend paid No. of shares outstanding Price-earning ratio Rate of return on investment Rs. 5,00,000 Rs. 3,00,000 1,00,000 8 15%

Are you satisfied with the current dividend policy of the firm? If not, what should be the optimal dividend payout ratio? 2. ABC Ltd has a capital of Rs. 10 lakh in equity shares of Rs. 100 each. The shares are currently quoted at par. The company proposes to declare a dividend of Rs.10 per share at the end of the current financial year. The capitalization rate for the risk class to which the company belongs is 12%. What will be the market price of the share at the end of the year, if: a) Dividend is not declared b) Dividend is declared c) Assuming that the company pays the dividend and has net profit of Rs. 5,00,000 and makes new investments of Rs. 10,00,000 during the period, how many new shares must be issued? Use the MM Model. 3. Z Ltd. has 10 lakh equity shares outstanding at the beginning of the year 2006. The current market price of the share is Rs. 150 each. The company recommended Rs.8 per share as dividend. The capitalization rate is 12%. (i) Based on MM Approach, calculate the market price of the share of the company, when the recommended dividend is: (a) Declared (ii) (b) Not Declared

How many new shares are to be issued by the company at the end of the accounting year on the assumption that the Net income for the year is Rs.

2 crores and the investment budget is Rs. 4 crores when dividends are distributed? What will be the market value of shares at the end of accounting year?

4. The earnings per share of a company is Rs. 8 and the rate of capitalisation applicable is 10%. the company has before it an option of adopting (i) 50%, (ii) 75% or (iii) 100% Dividend payment ratio. Compute the market price of the companys quoted shares as per Walters Model if it can earn a return ofa) 15% b) 10% c) 5% on its retained earnings 5. A firm had paid dividend at Rs. 2 per share last year. the estimated growth of the dividends from the company is estimated to be 5% p.a. Determine the estimated market price of the equity share if the estimated growth rate of dividends (i) rises to 8% and (ii) falls to 3%. Also, find out the present market price of the share, given that the required rate of return of the equity investors is 15.5%.

II.

Questions based on Inventory Management: 1. ABC Ltd. purchases 9,000 units of spare parts for its annual requirement, ordering on month usage at a time. Each spare part costs Rs. 20. The ordering cost per order is Rs. 15 and the carrying charges are 15% of unit cost. Do you think, it is a correct policy? If not, suggest a more economical purchase policy for the company. Also, find out total annual cost of inventory ordering and carrying. 2. A firm purchases 2000 units of a particular item per year at a unit cost of rs. 20. The ordering cost is Rs. 50 per order and the inventory carrying cost is 25%. a) Determine optimal order quantity and minimum total cost including Purchase cost. b) If a 3% discount is offered by the supplier for purchases in a lot of 1000 or more, should the firm accept the offer? 3. The finance department of a corporation provides the following information: (i) Carrying cost p.u. of inventory is Rs. 10.

(ii) (iii)

Fixed cost per order is Rs. 20 No. of units required is 30,000 per year

Determine EOQ, total number of orders in a year and time-gap between 2 orders.
III.

Questions based on Working Capital Management: 1. Calculate the Working capital requirement for Horizon Ltd. From the following information: Rs. (per unit) Raw material Direct labour Overhead Total cost Profit Selling price 160 60 120 340 60 400

Raw material is held in stock on an average for 4 weeks. Materials are in process on an average for 2 weeks. Finished goods are in stock on an average for 4 weeks. Credit allowed by suppliers is 4 weeks. Credit allowed to debtors is 8 weeks. Lag in payment of wages is 11/2 weeks. Time lag in payment of overhead expenses is 4 weeks. Cash sales Cash in hand/bank Expected level of production 2. The data of ABC Ltd. is as under: Production of the year Finished goods inventory Raw materials inventory Production process Credit allowed by creditors Credit given to debtors Selling price p.u. Raw material Direct wages 69,000 units 3 months 2 months consumption 1 month 2 months 3 months Rs. 50 each 50% of selling price 10% of selling price of total sales Rs. 50,000 1,04,000 units

Overheads

20% of selling price

There is a regular production on sales cycle, wages and overheads accrue evenly. Wages are paid in the next month of accrual. Material is introduced in the beginning of production cycle. Work-in-process involves use of full unit of raw materials in the beginning of manufacturing process and other conversion cost equivalent to 50%. You are required to find out working capital requirement of the ABC Ltd. 3. The relevant information for XYZ Ltd. for the year ended 2009 are given below: Sales Cost of goods sold Rs. 80,000 Rs. 56,000 Opening Inventory Accounts Receivables Accounts Payables Rs. 9,000 Rs. 12,000 Rs. 7,000 Closing Rs. 12,000 Rs. 16,000 Rs. 10,000

What is the length of Net Operating cycle: Assume 365 days in a year. 4. A company provides you the following facts. Estimate the Net Working Capital required for the project. Estimated cost per unit of productionRaw material Direct labour Overheads (including depreciation of Rs. 10 p.u.) Total cost Additional information: a) Selling price : Rs. 200 p.u. b) Level of activity: 1,56,000 units of production p.a. c) Raw materials in stock: average 4 weeks d) WIP (assume 50% completion stage in respect of conversion costs and 100% completion in respect of materials): average 2 weeks e) Finished goods in stock: average 4 weeks f) Credit allowed by suppliers: average 4 weeks g) Credit allowed to debtors: average 8 weeks h) Lag in payment of wages: average 1.5 weeks i) Cash at bank is expected to be Rs. 25,000. Rs. 80 p.u. Rs. 30 p.u. Rs. 70 p.u. Rs. 180 p.u.

You may assume that production is carried on evenly during the year. All nsales are on credit basis. Add 10% to your computed figure to allow for contingencies.
IV.

Questions based on Receivable Management: 1. The management of Akruti Ltd. is considering to change its present credit policy. the details of the options are given below: Sales (in Rs.000) Credit policy Sales VC (80% of sales) FC Present A 50 40 6 56 44.8 6 45 B 60 48 6 60 C 62 49.6 6 75

Average collection period 30 (days)

Firms rate of investment is 20%. Assuming 360 days in a year advise which of the options is best.
V.

Questions based on Cash Management: 1. Lal & Co. has given the forecast sales for January 2010 to July 2010 and actual sales for November and December 2009 as under. With the other particulars given, prepare a Cash Budget for the months i.e., from January to May 2010. (i) Sales Nov. 2009 Dec. 2009 Jan. 2010 Feb. 2010 Mar. 2010 Apr. 2010 May 2010 June 2010 July 2010 (ii) (iii) Rs. 1,60,000 1,40,000 1,60,000 2,00,000 1,60,000 2,00,000 1,80,000 2,40,000 2,00,000

Sales 20% cash and, 80% credit, credit period 2 months. Variable expenses 5% on turnover, time lag half month.

(iv) (v)

Commission 5% on credit sales payable in 2 months. Purchases are 60% of the sales. Payment will be made in 3rd month of purchases.

(vi) (vii)

Rent Rs.6,000 paid every month. Other payments: Fixed assets purchases-February Rs. 36,000 and March Rs. 1,00,000; Taxes-Apr 40,000.

(viii) Opening cash balance Rs. 50,000. *****