DECEMBER 2016 EXAMINATION

DFM 01
ACCOUNTING & FINANCE FOR MANAGERS
Time: Three Hours Maximum Marks: 100
Note:
1. The paper is divided in three sections: SECTION-A and SECTION-B.
2. There are five questions in SECTION-A. Students are required to attempt ANY THREE.
3. All the questions of SECTION-B (Case Study) are compulsory.

SECTION-A (20 Marks each)

1. a) What is financial market? Briefly highlight the classification of Indian Financial System,
and write a short note on the various types of financial markets with examples of
financial instruments. [2+ 10]

b) Discuss the nature and scope of financial management. What are the goals of financial
management? [4+4]

2. a) What is Du Pont analysis of profitability of a firm? Explain and enumerate the elements
of this analysis. [8]

b) Rubber Industries Ltd. has the following capital structure:

9% preference shares if Rs.100 each Rs.10,00,000

Ordinary Shares of Rs.10 each Rs.40,00,000
Total Rs.50,00,000

The following information is available for financial year just concluded:

Profit after taxation Rs.22,00,000
Market price of ordinary share Rs.20
Dividend paid on equity shares Rs.2

You are required to find out the following:

i) The dividend yield on the ordinary shares
ii) The cover for the preference and ordinary dividends
iii) The earnings yield
iv) The P/E ratio [4x3]

3. The sales and profit figures of Midas Inc. for two successive years are as follows:
Previous year Current year
Number of units sold 15000 20500
Sales (Rs. In lakhs) 3750 5125
Profit/loss (Rs.) 825 1178.75

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 Based on the above information, you are required to determine the following:
a) amount of fixed costs incurred by the firm
b) breakeven point for the firm ( in rupee and unit terms)
c) amount of sales to earn profit of Rs. 25 crores
d) margin of safety if actual sales is 17.5 crores.

4. a) Discuss any four factors with relevant examples in determining the capital structure of a
firm. [8]

b) Fine Contact Ltd. is an all equity firm having 40,000 equity shares of Rs.25 each, market
value being Rs.160 per share. The annual profit of the company is Rs.12,80,000. All the
profits are distributed as dividends. The firm is planning to raise funds for expansion
either by right issue at a price of Rs.120 per share , in the ratio of 1:4 or issue of 10%
debt of the equal amount.
Mr. X is a shareholder of Fine Contact Ltd. having 10,000 shares. Calculate and
compare, the effect of income of Rs.X of (i) borrowing the cash required to take up the
right, and (ii) the firm deciding to make the debt issue instead of right issue. Assume no
taxes. [12]

5. a) High vision Ltd. has current sales of Rs.20,00,000. The company is planning to introduce
a cash discount policy of 2/10, net 30. As a result, the company expects the average
collection period to go down by 10 days and 80% of the sales opt for the cash discount
facility. If the company’s required return on investment in receivable is 20%, should it
introduce the new discount policy? [12]

b) Explain the EOQ (economic order quantity) model of inventory control? What are its
shortcomings? [8]

SECTION-B (40 Marks)

Case Study (Compulsory)

Dilip & Co. is considering five different projects namely A, B, C, D and E on hand. The initial outlays,
annual cash flows and life of the projects are as under:

A B C D E
Initial outlay (Rs. Lakhs) 100 150 175 180 135
Expected annual cash inflow 22 34 49 43 37
(Rs. Lakhs)
Life of project( years) 10 9 6 8 7

6. Case Questions:

a) Find NPV and Profitability index of each project assuming the cost of capital at 15%.
b) Rank the projects in order of preference based on PI criteria.

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 c) Rank the projects in order of preference based on NPV criteria.
d) If firm faces the capital constraint of Rs 500 lakhs and projects can be implemented in
parts, what amount of wealth can be created when projects are chosen on the basis of
(i) PI criteria, (ii) NPV criteria?

PVF
Value YEARS
% of 1 2 3 4 5 6 7 8 9 10 11
Rate
14 .877 .769 .675 .592 .579 .456 .400 .351 .308 .270 .237
15 .870 .756 .658 .572 .497 .432 .376 .327 .284 .247 .215
16 .862 .743 .641 .552 .476 .410 .354 .305 .263 .227 .195

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