Birla Institute of Technology & Science, Pilani

Work-Integrated Learning Programmes Division

First Semester 2017-2018
Comprehensive Examination (EC-3 Regular)
Course No. : BA ZG521/ MBA ZG521/ POM ZG513/ FIN ZG521/ POMSS ZG513
Course Title : FINANCIAL MANAGEMENT
Nature of Exam : Open Book
Weightage : 45% No. of Pages =2
Duration : 3 Hours No. of Questions = 8
Date of Exam : 05/11/2017 (AN)
Note:
1. Please follow all the Instructions to Candidates given on the cover page of the answer book.
2. All parts of a question should be answered consecutively. Each answer should start from a fresh page.
3. Assumptions made if any, should be stated clearly at the beginning of your answer.

Q.1. Harini Spinning Mills Pvt. Ltd. is a textile and garments export unit based out of Salem,
Tamilnadu. It has net working capital of Rs. 137 Crores, current liabilities of Rs. 372 Crores, and
inventory of Rs. 195 Crores. Given this information answer the following questions:
(a) Calculate the current ratio of Harini Spinning Mills? [2]
(b) Calculate the quick ratio of Harini Spinning Mills? [2]
(c) Compare and contrast current ratio vs. quick ratio? [1]

Q.2 (a) Lenova Computers is a US based computer and laptop manufacturing company. It has zero
coupon bonds on the market that have 15 years left to maturity. If the YTM on these bonds is
11.00 percent, what is the current price of these zero coupon bonds? (Assume semi-annual
compounding and $1000 principal.) [2]

Q.2 (b) Aakash Infrastructure Ltd. is a Gurugram based real estate developer with offices and
operations across India. The next dividend payment by Aakash Infrastructure Ltd. is expected
to be Rs. 27 per share. The dividends are expected to maintain a 4.5 percent growth rate
forever into the future. If the stock currently sells for Rs. 360 per share, what is the required
return for Aakash Infrastructure? [2]

Q.3. Given below are the returns of Samsung and LG over the past 5 years:

Year Samsung LG
2015 9% 15%
2014 19% 34%
2013 16% 12%
2012 -18% -24%
2011 12% 30%

(a) Calculate the expected return for Samsung and LG. [2 x 1 = 2]

(b) Calculate the standard deviation for Samsung and LG. [2 x 2 = 4]
(c) A fundamental principle in finance is that "Risk and Return go together." Using the
answers you obtained in part(a) and part (b) above briefly explain this principle. [2]

Q.4. HMT Watches Ltd. manufactures analogue wrist watches. We are given that the variable materials
cost is Rs. 210 per unit, and the variable labour cost is Rs. 290 per unit. Additionally, the fixed
costs for HMT are Rs. 18 Crores per year and the selling price is Rs. 1000 per unit. Calculate the
following:

(a) Quantity break-even point [2]

(b) Sales break-even point [2]

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Q.5. Jain Papers Ltd has a target capital structure of 55 percent common stock, 10 percent preferred
stock, and 35 percent debt. Its cost of equity is 16 percent, the cost of preferred stock is 9 percent,
and the cost of debt is 12 percent. The relevant tax rate is 40 percent.
(a) What is Jain’s WACC? [2]
(b) The company president has approached you about Jain’s capital structure. He suggests that
the company use more preferred stock financing rather than debt financing. He argues that
it costs less to raise preferred stock (9%) as compared to debt (12%). Is his line of thinking
correct? Based on what you have studied in this course, what would you tell the president?
[2]
Q.6. You are the CFO at Novartis Laboratories Ltd., which is considering the following two mutually
exclusive projects.
Year Cashflow (Project A) Cashflow (Project B)
0 -3,20,000 -45,000
1 21,000 20,000
2 55,000 15,000
3 40,000 20,000
4 4,50,000 12,000

All amounts are in Indian Rupees. Whichever project you choose, if any, you require a 16 percent
return on your investment.
(a) If you apply the payback criterion, which investment will you choose? Why?
(b) If you apply the discounted payback criterion, which investment will you choose? Why?
(c) If you apply the NPV criterion, which investment will you choose? Why?
(d) Among the three methods that we have considered in parts a, b, and c, which method is the
best? Why? [2 + 3 + 3 + 2 = 10]

Q.7. You have just recently joined as a junior loan officer at HDFC Bank. Your boss gives you two
customer files for you to analyze:

File #1 – Mr. Ram Narayan needs to purchase a car to get to his new job. His salary is Rs, 60,000
per month. He has been good about savings and has Rs. 2,50,000 in his savings account at your
bank. The car he wants to purchase will cost him Rs. 3,00,000 with 8% interest and a 4- year loan
term. His monthly payment on the car loan (EMI) would be Rs. 7,324 per month. He has no other
loans at this point in time and his credit report shows that he has one credit card with a limit of Rs.
25,000 and that he pays all his credit card bills on time.

File #2 – Rajesh Yadav has been unemployed for the past six months. He had a great job with a
top multinational and loved to buy clothes and electronic gadgets and go out with his friends, so
he only has Rs. 20,000 in his savings account. Rajesh needs the new car to go for job interviews.
The car Rajesh wants to purchase will cost him Rs. 600,000. Assuming 8% interest and 4-year
loan term, his monthly payments (EMI) on the car loan would be Rs. 14,648 per month. His credit
report shows that he has three credit cards with a total limit of Rs. 2,50,000 and he was late in
making a few payments on these credit cards during the past six months.

(a) What are the 5 C's of Credit Analysis? [3]

(b) Whom should HDFC bank lend the money based on the 5 C's of Credit Analysis? [3]

Q.8 (a) What is meant by Asymmetric information? Explain succinctly in a few sentences. [2]
Q.8 (b) Under the pecking-order theory, what is the order in which firms will obtain financing?
Explain succinctly in a few sentences. [2]

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