LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034

B.Com. DEGREE EXAMINATION – CORPORATE SECRETARYSHIP

Date: 13-06-2024 Dept. No. Max. : 100 Marks

SECTION A – K1 (CO1)
Answer ALL the questions (10 x 1 = 10)
1 Definitions.
a) Financial Management.
b) Optimum capital structure.
c) Combined cost of capital.
d) Capital budgeting.
e) Gross working capital.
2 Match the following
a) Rights issue - Incremental cost
b) Net income approach - NPV becomes zero
c) Marginal Cost - Current liability
d) IRR - Existing shareholders
e) Tax payable - No corporate taxes
SECTION A – K2 (CO1)
Answer ALL the questions (10 x 1 = 10)
3 Fill in the blanks.
a) Financial Management helps in having in trade-off between ______ and profitability.
b) Capital structure refers to the mix of a firm’s permanent _____ financing.
c) Cost of capital is the ____ rate of return expected by investors.
d) _______is the ratio of the present value of future cash flows of the project to the initial investment
required for the project.
e) According to ______ approach, maturity of sources of funds should match the nature of assets to be
financed.
4 True or False
a) Under profit maximization objective, the definition of profit is unclear.
b) MM approach assumes that the capital market is not perfect.
c) Cost of capital does not depend on the prevailing income tax rates.
d) Net present value is not a capital budgeting technique.
e) Working capital means the funds available for day-to-day operations of an enterprise.
SECTION B – K3 (CO2)
Answer any TWO of the following in 100 words each. (2 x 10 = 20)
5 Enumerate the importance of Financial Management.
6 The capital structure of Tom Gilbert Ltd. Consists of the following securities
45,000 10% Preference shares of Rs.100 each –Rs. 45,00,000.
5,00,000 Equity shares of Rs.10 each –Rs.50,00,000
The company’s operating profit is Rs.12, 00,000. The company is in 40% tax bracket.
You are required to find out the financial leverage of the company. What would be the new financial
leverage if the operating profit increases to Rs.18,00,000 and interpret your results.
7 A company was recently formed to manufacture a new product. It has the following capital structure:
(i) 9% Debentures- Rs.10,00,000.
(ii) 7% Preference shares-Rs.4,00,000.
(iii) Equity shares (48,000 shares)-Rs.16,00,000.
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 (iv) Retained earnings-Rs.10,00,000.
The market price of equity share is Rs.80. A dividend of Rs.8 per share is proposed. The
company has marginal tax rate of 50% and shareholder’s individual tax rate is 25%.
Compute after tax weighted average cost of capital of the company.
8 From the following information, prepare a statement showing working capital required by the company:
Expected ratios of cost to selling price:
(a) Raw materials- 55%
(b) Direct labour-20%
(c) Overheads- 15%
(d) Raw materials required in stock- 2 months
(e) Processing period- 1 month
(f) Finished goods in stock on an average- 2 months
(g) Recovery from customers after- 1 month
Other details:
Level of production per month- 20,000 units
Selling price per unit- Rs.20
Margin on sales- 10%
SECTION C – K4 (CO3)
Answer any TWO of the following in 100 words each. (2 x 10 = 20)
9 Describe the theories of capital structure.
10 Visaka Ltd is presently financed entirely by equity shares. The current market value is Rs.6,00,000. A
dividend of Rs.1,20,000 has just been paid. This level of dividends is expected to be paid indefinitely.
The company is thinking of investing in a new project involving an outlay of Rs.5,00,000 now and is
expected to generate net cash receipts of Rs.1,05,000 per annum indefinitely. The project would be
financed by issuing Rs.5,00,000 debentures at the market rate of 18%. Ignoring tax consideration:
(a) Calculate the value of equity shares and the gain made by the shareholders if the cost of equity
rises to 21.6%.
(b) Prove that weighted average cost of capital is not affected by gearing.
11 A company has to choose one of the following two mutually exclusive projects. Investment required
for each project is Rs.1,50,000. Both the projects have to be depreciated on straight line basis. The tax
rate is 50%.
Year Profit before depreciation
Project X (Rs) Project Y (Rs)
1 42,000 42,000
2 48,000 45,000
3 70,000 40,000
4 70,000 50,000
5 20,000 1,00,000
Calculate payback period.
12 Shradda & Co desires to purchase a business and has consulted you and one point on which you are
asked to advise them is the average amount of working capital which will be required in the first year’s
working.
You are given the following estimates and are instructed to add 10% to your computed figures to allow
for contingencies.
(a) Average amount locked up in stock:
Stock of finished goods-Rs. 5,000.
Stock of stores and materials-Rs. 8,000.
(b) Average credit given:
Inland sales- 6 weeks – Rs.3,12,000.
Export sales- 1.5 weeks-Rs. 78,000.
( c ) Lag in payment of wages and other outgoings:
Wages- 1.5 weeks-Rs.2,60,000.
Stores, materials etc- 1.5 months-Rs. 48,000.
Rent, royalties etc.- 6 months –Rs. 10,000.
Clerical staff salary-1.5 month –Rs. 62,400.
Manager salary- 1.5 month-Rs. 4,800.
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 Miscellaneous expenses- 1.5 months –Rs. 48,000.
(d) Payment in advance:
Sundry expenses (paid quarterly in advance) Rs. 8,000.
( e ) Undrawn rofits on the average throughout the year –Rs.11,000.
Set up your calculations for the average amount of working capital required
SECTION D – K5 (CO4)
Answer any ONE of the following in 250 words (1 x 20 = 20)
13 Explain the role of a finance manager.
14 Rose Ltd issued 10,000 10% debentures at Rs.100 each at par. The debentures are redeemable after 10
years at a premium of 5%. If the tax rate is 50%. Calculate the cost of debt before tax and after tax.
SECTION E– K6 (CO5)
Answer any ONE of the following in 250 words (1 x 20 = 20)
15 The existing capital structure of CBC Ltd is as follows:
Equity shares of Rs.100 each- Rs.40,00,000
Retained earnings- Rs.10,00,000
9% Preference shares-Rs.25,00,000
7% Debentures-Rs.25,00,000
Company earns a return of 12% and tax on income is 50%.
Company wants to raise Rs.25,00,000 for its expansion project for which it is considering following
alternatives
a) Issue of 20,000 equity shares at a premium of Rs.25 per share.
b) Issue of 10% preference shares
c) Issue of 9% Debentures
Projected that the P/E ratios in the case of equity, preference shares and debentures financing would be
20, 17 and 16 respectively.
Which alternative would you consider to be the best. Give reasons for your choice.
16 It is proposed to introduce a new machine to increase the production capacity of department X. Two
machines are available. Type ‘A’ and Type ‘B’ . The following information is available.
Details A B
Rs Rs
Cost of Machine 3,50,000 6,30,000
Estimated life (years) 7 10
Estimated savings in scrap p.a 20,000 32,000
Additional cost of indirect materials p.a 10,000 16,000
Estimated savings in wages:
Employees not required 15 20
Wages per employees per annum 10,000 16,000
Additional cost of maintenance p.a 7,200 12,000
Additional cost of supervision p.a 24,000 36,000
The rate of taxation can be regarded as 50% of profit. Which machine can be recommended for
purchase?

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