INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

GHAZIABAD

Subject Code : IMT-59 Subject Title : Financial Management

(b)

Time allowed : 180 minutes

Maximum : 50 marks

Instructions: (a) Answer any four questions choosing from Section-A and each question carries 9 marks.
Section-B (Case Study) is compulsory and case study carries 14 marks. No doubts/clarifications shall be entertained. In case of doubts/clarifications make reasonable assumptions and proceed.

SECTION-A (Answer any four questions from this section)

Q.1 Q.2 Q.3 Critically evaluate the goals of maximization of profit and maximization of return on equity. Financial institutions are set to emerge as financial supermarkets in India. Comment on the statement with respect to the evolution of Universal banking in India. a) How is the rate of return on an asset defined? b) The risk free return is 8 percent and the expected return on market portfolio is 12 percent. If the required return on a stock is 15 percent, what is its beta? Q.4 a) A Rs. 100 par value bond, bearing a coupon rate of 12 percent will mature after 7 years. What is the value of the bond if discount rate is 10%? b) Rohit deposits Rs 200,000 in a bank account which pays 10 percent interest. How much can he withdraw annually for a period of 15 years? Q.5 Q.6 Q.7 Distinguish between business risk and financial risk? What factors influence business risk? What does Working Capital Management encompass? What functional decisions are involved, and what underlying principle or trade-off influences the decision process? Write short notes on: a) Bonus Issue and Stock Split b) Pay Back Period c) Weighted Average Cost of Capital

SECTION-B (Case Study is compulsory)

Royal Industries is considering the replacement of one of its moulding machines. The existing machine is in good operating condition, but is smaller than required if the firm is to expand its operations. The old machine is 5 years old, has a current salvage value of Rs 300,000 and a remaining depreciable life of 10 years. The machine was originally purchased for Rs 750,000 and is being depreciated at Rs 50,000 per year for tax purposes. The new machine will cost Rs 1,500,000 and will be depreciated on a straight line basis over 10 years, with no salvage value. The management anticipates that, with the expanded operations, there will be need of an additional net working capital of Rs 300,000. The new machine will allow the firm to expand current operations, and thereby increase annual revenues of Rs 400,000 and variable operating cost from Rs 2,000,000 to Rs 2,100,000.The Companys tax rate is 50%and its cost of capital is 10% A) B) Should the company replace its existing machine? Discuss the benefits of the evaluation technique chosen by you?

ETEDecember 2007

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IMT-59