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.
1. What do you understand by Divestiture ? Explain its salient features and distingish it from Spin-offs and Carve-outs. How would you assess the divestiture programme of a company ? Discuss.
2. Distinguish between a convertible debenture and a call option. Discuss their implications to the investors and the company issuing them.
(b) What do you mean by target pay-out ratio? Why should the risky companies have lower target pay-our ratio and more gradual adjustment rates ? Discuss the implications of tax-free dividends in the hands cf the shareholders.
3. (a) What do you mean by Venture Capital ? Expiain its main feaiures. What are the different stages at which financing may be required by a Venture Capital undertaking?
(b) Give a brief account of the financial instruments through which Venture Capital investment is made.
4. (a) What is Social Cost-Benefit Analysis ? Why is considered necessary for the economic appraisal of a project? Explain giving suitable examples.
(b) Why is Project Control necessary? Distinguish between Physical Asset Control and Financial Resource Control.
5. A Limited Company has the fallowing capital structure:
| Rs. | ||
| Equity Share Capital (2,00,000 shares) | 40,00,000 | |
| 6% Preference Shares | 10,00,000 | |
| 8% debentures | 30,00,000 | |
| 80,00,000 |
The market price of the company's equity share is Rs. 20. It is expected that the company will pay a dividend of Rs. 2 per share at the end of the current year which will grow at 7 per cent for ever. The tax rate may be presumed at 50%.
You are required to compute the following :
(a) A weighted average cost of capital on the existing capital structure.
(b) The new weighted average cost of capital if the company raises an additional Rs. 20,00,000 debt by issuing 10 per cent debentures. This would result in increasing lhe expected dlvidend to Rs. 3 and leave the growth rale unchanged but the price of the share will fall to Rs. 15 per share.
(c) The cost of capital if in (b) above the growth rate increases to 10 per cent.
6 . A company has a machine which has been in operation for 2 years. Its remaining estimated useful life is 10 years, with no salvage value at the end. Its current market value is Rs. 1,00,000. The Management is considering a proposal to purchase an improved model of a machine, which gives increased production. The relevant particulars are as follows :
| Existing Machine | New Machine | |
| Purchase price | Rs. 2,40,000 | |
| Rs. 4,00,000 | ||
| Estimated life | 12 Years | 10 Years |
| Salvage value | - | - |
| Annual operating hours | 2000 | 2000 |
| Selling price per unit | Rs. 10 | Rs. 10 |
| Output per hour | 15 units | 30 units |
| Material cost per unit | Rs. 2 | Rs. 2 |
| Labour cost per unit | Rs. 20 | Rs. 40 |
| Consumable stores per year | Rs.2,000 | Rs. 5.000 |
| Repairs and maintenance p.a. | Rs. 9,000 | Rs. 6,000 |
| Working capital | Rs. 25.000 | Rs. 40,000 |
The company follows the straight line method of depreciation and is subject to 50% tax. Should the existing machinery be replaced by the new one ? Assume that the company's required rate of return is 15% and the loss on sale af maehinerv is tax deductible.
7. Distinguish between :
(a) Leasing and Hire Purchase
(b) Horizontal Merger and Vertical Merger
(c) Differential Voting Righis Shares and Preference Shares
(d) Fixed Rate of Interest and Floating Rate of Interest
8. Write explanatory notes on any four of the following :
(a) Globalisation
(b) EBIT - EPS Analysls
(c) Sensitivity Analysis
(d) Special Drawing Rights
(e) Decision Tree Analysis
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