MANAGEMENT PROGRAMME
Term-End Examination
June, 2005
MS-42 : CAPITAL INVESTMENT AND FINANCING DECISIONS
Time : 3 hours
Maximum Marks : 100
(Weightage 70%)
(i) There are three Sections A, B and C in this paper
(ii) Students who have registered for MS-42 prior to July 2004 semester should attempt any five questions from Section A and C.
(iii) Students who have registered for MS-42 for July 2004 Semester and afterwords should attempt any five questions from Section B and C.
(iv) All questions carry equal marks.
(v) Present value tables will be provided, if asked for.
SECTION A
1. Distinguish between Mergers and Take-overs. What are the motivating forces for mergers and take-overs? Discuss the salient features of the guidelines prescribed for take-overs in India.
2. (a) Why do the companies prefer stable dividend policy ? Explain the three forms in which stability may be maintained while distributing dividends.
(b) What are Non-Voting shares and Differential Voting Rights shares? Why are they issued by companies?
3. What do you understand by Securitisation of Assets ? How does it bring liquidity to illiquid assets ? What types of assets are suitable for securitisation ? Explain the process of securitisation and its advantages to the various parties.
4. ABC Ltd. is considering to acquire an additional computer to supplement its time sharing services. It has two options :
(i) To purchase the computer for Rs. 22 lakh, and (ii) To lease the computer on an annual rental (payable at the end of the year) of Rs. 5 lakh plus 10% of gross revenue from sharing services. An amount of Rs. 6 lakh is also payable at the end of year 3.
The revenues from time sharing services are estimated at Rs. 22,50,000, Rs. 25,00,000 and Rs. 27,50,000 for first, second and third year respectively. The computer has a salvage value of Rs. 10,00,000 at the end of 3rd year.
Annual operating cost (excluding depreciation and lease rent) is estimated at Rs. 2,00,000 per annum and an additional revenue expense of Rs. 2,00,000 is payable for training in the beginning of the first year. Both these expenses are to be borne by the lessor in case of lease.
Funds for purchase are to be acquired at the rate of 16% and are repayable Rs. 5,00,000, Rs. 8,50,000 and Rs. 8,50,000 at the end of 1st year, 2nd year and 3rd year respectively. The firm pays tax at the rate of 50% and provides depreciation at straight line method.
Which of the two options shoulcl the company choose ? Show detailed calculations.
5. Hindustan Chemicals Ltd. has paid, up equity capital of Rs. 60,00,000 divided into 6,00,000 equity shares of Rs. 10 each. The current market price of the share is Rs 24. During the current year, the company has paid a dividend of Rs. 6 per share. The company has also previously issued 14% preference shares of Rs. 10 each aggregating Rs. 30 lakhs and 13% 50,000 Debentures of Rs. 100 each. The company's corporate tax rate is 40%, growth in dividends equity shares is expected at 5%.ln case of preferences hares the company has received only 95% of the face value of shares after deducting issue expenses.
Calculate the Weighted Average Cost of Capital on the basis of book value weights and market value weights.
6. (a) Any successful project plan must contain nine key elements. List these items and briefly describe the composition of each element.
(b) Explain the concept of Project Life Cycle.
7. Explain and distinguish between Internal Rate of Return Method and Net Present Value Method of evaluating investment proposals. Which one would you prefer and why? Why is Profitability Index prepared for evaluating projects? Discuss.
8. Write short notes on the following :
(a) Social Cost Benefit Analvsis
(b) Leveraged Buyout
(c) Venture Capital
(d) Fixed and Floating Rates of Interest
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