TYBMS SEM 6 Financial: Strategic Financial Management (Q.P. April 2023 with Solution)

 Paper/Subject Code: 86011/Finance: Strategies Financial Management

TYBMS SEM 6

Financial: 

Strategic Financial Management

(Q.P. April 2023 with Solution)

N.B. 1) Q. 1 is compulsory.

2) Q.2 to Q.5 are compulsory with internal choice.

3) Figures to the right indicate full marks.

4) Workings should form part of your answer.

5) Use of simple calculator is allowed.

Q.1 (A) Choose correct alternative and rewrite the statement: (Any 8)

1. Under Walter dividend policy if r <ke, the firm should have _________ payout ratio

a) Zero dividend

b) 100% dividend

c) Any dividend

d) 50% dividend

2. _________ is a situation where a constraint or budget is placed on the total size of capital expenditures during a particular period.

a) Capital budgeting

b) Capital rationing

c) Cost of capital

d) Leverage

3. The relationship between dividend per share and earning per share is 

a) Dividend yield ratio

b) Dividend payout ratio

c) Book value per share

d) Price Earnings ratio

4. PI of a project is the ratio of present value of inflows to _______

a) Initial cost

b) PV of outflows 

c) Total cash inflows

d) Total outflows

5. ______ represents those funds which are required to manage day-to-day business operations.

a) Long term capital

b) Short term capital 

c) Working capital

d) None of above

6. _______ is a schematic representation of several decisions followed by different chances of the occurrence.

a) Sensitivity analysis

b) Probability techniques

c) Risk Adjusted Discounting Rate

d) Decision Tree

7. Net Profit for calculation of EVA is

a) NPAT

b) NPBT

c) NOPAT

d) NOP

8. If a profit-making company is absorbed into a loss-making company, then this is a case of _______

a) Hostile takeover bid

b) Horizontal merger

c) Reverse Merger

d) Takeover

9. In case of Sub-Standard Asset (unsecured), provision for NPA should be made at

a) 15%

b) 25%

c) 40%

d) 100%

10. Which among the following is short term sources of working capital financing?

a) Bill discounting

b) Letter of credit

c) Commercial paper 

d) All of the above

Q.1 (B) State whether given statements are True or False: (Any 7)

1. MM model deals with irrelevance of dividend decision.

Ans: True

2. Under Walter dividend policy, if r < ke, the firm is indifferent between dividends and investments.

Ans: True

3. Capital budgeting deals with long term decisions.

Ans: True

4 An estimation of the present value of cash for high-risk investments is known as adjusted discounting rate. 

Ans: False. The correct term is "risk-adjusted discount rate." It represents the discount rate adjusted for the level of risk associated with an investment.

5. Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled.

Ans: True

6. In order to protect the earnings available to shareholders, the swap ratio should be based on EPS.

Ans: False. The swap ratio in a merger is typically based on the relative valuation of the merging companies, not solely on earnings per share (EPS)

7. Trade credit is a spontaneous source of finance.

Ans: True

8. In hostile takeover bid, the price of the merger depends upon the mutual consent. 

Ans: False. In a hostile takeover bid, the price of the merger is typically determined by the acquiring company's offer, without the consent of the target company's management.

9. Vertical merger involves a merger between two firms operating and competing in the same kind of business.

Ans: False. A vertical merger involves firms operating at different stages of the production or distribution process, while a horizontal merger involves firms in the same line of business.

10. Working capital represent those funds which are required to manage long term business operations.

Ans: False. Working capital represents funds required for day-to-day operations, not long-term business operations.

Q.2 (A) Butter Ltd provided you with the following information:

Earnings Per Share is Rs. 18

Rate of return expected by investors is 12% 

Internal rate of return is 15%

Calculate the price per share by 'Gordon Approach', if dividend payout ratio is 25% and 75%. 

Video Solution:

Q.2 (B) Akshay Ltd. is considering new projects for investments. The two alternative investment proposal are Project 'Red' and Project 'Blue'. The cost of each project is estimated to be Rs. 75,00,000. The cash inflows from the projects are expected as follows: (8)

Years	Red	Blue
1	22,50,000	42,50,000
2	17,50,000	27,50,000
3	15,00,000	16,00,000
4

The current yield on government securities is 8% and the risk premium for Project Red is 5% and Project Blue is 7%. Which investment should be preferred by Akshay Ltd.?

Discounting Factors	Year 1	Year 2	Year 3	Year 4
13%	0.885	0.783	0.693	0.613
15%	0.870		0.658	0.572

OR 

Q.2 (A) Porel Ltd. has an earning per share of Rs. 15 and an equity capitalisation rate of 10%. The company has an option of adopting either 40% or 60% dividend payout ratio. Compute the market price of the company's quoted shares as per Walter's Model if it can earn a return of 15% on its retained earnings.            (7)

Q.2 (B) Sandeep Ltd is considering one of two mutually exclusive proposals. Project 'MI' and project 'CSK', which require cash outlay of Rs 76,50,000 and Rs. 86,25,000 respectively. The certainty equivalent (C.E.) approach is used.in incorporating risk in capital budgeting decisions. The current yield on government bonds is 8% and this considered as the risk- free rate of return. The expected net cash flow and their certainty equivalents are as follows: (8)

Year	Project MI		Project CSK
	Cash flow (Rs.)	C.E	Cash flow (Rs.)	C.E
1	40,50,000	0.9	50,50,000	0.8
2	45,00,000	0.7	40,50,000	0.7
3	50,00,000	0.6	45,00,000	0.9

Present value factors of Rs. 1-discounted at 8% at the end of year 1,2 and 3 are 0.926, 0.857 and 0.794 respectively. You are required to suggest the company as to which project should be accepted.

Q.3 (A) Saloni Ltd has Rs. 70,00,000 allocated for capital budgeting purposes. The proposals and associated profitability indexes have been determined.                    (7)

Project	Initial investment	Profitability Index
A	21,00,000	1.22
B	10,50,000	0.95
C	24,50,000	1.20
D	31,50,000	1.18
E	14,00,000	1.20
F	28,00,000	1.05

i) Calculate the Net Present Value for each of the projects

ii) Which of the above investments should be undertaken? Assume that projects are indivisible and there is no alternative use of the money allocated for capital budgeting.

Q.3 (B) Calculate Economic Value Added (EVA) with the help of the following information of Hypothetical Ltd.

Particulars
Financial leverage	1.4 times
Equity Capital	Rs. 170 lakhs
Reserves & Surplus	Rs. 130 lakhs
10% Debentures	Rs. 400 lakhs
Tax Rate	30%
Cost of Equity	17.5%

OR

Q.3 (A) Whale Ltd is studying the possible acquisition of Shark Ltd. by way of merger. The following data are available.

Company	After tax earnings	No. of equity shares	Market price per share
Whale	Rs. 1,25,00,000	10,00,000	Rs. 187.50
Shark	Rs. 37,50,000	2,50,000	Rs. 150

i) If the merger goes through by exchange of equity shares and exchange ratio is set according to the current market price, what is the new earnings per share of Whale Ltd. after merger.

ii) Shark Ltd wants to be sure that their earnings per share is not diminished by the merger, what exchange ratio is relevant to achieve the objective?

Q.3 (B) From the following information, compute the amount of provision to be made in the Profit & Loss Account of Bharosa Bank:

Assets Classification	Rs. (in lakhs)
Standard Sub-Standard (Fully secured) Doubtful: (Fully secured) For Less one year (Realisable Value of Security Rs. 3500) For two years (Realisable Value of Security Rs. 1500) For more than 3 years  Loss Assets	50,000 32,500     15,750   5,250 2,500 1750

Q.4 A company is considering taking up of one of two projects 'Alpha' and 'Beta'. Both the projects have the same life, require equal investment of Rs. 80 lakhs each and both are estimated to have almost the same yield. As the company is new to this type of business, the cashflows arising from the projects cannot be estimated with certainty. An attempt was, therefore, made to use probability to analyse the pattern of cashflow from either project during the first year of operation. The pattern is likely to continue during the life of these projects. The results of the analysis are as follows (15)

Project Alpha		Project Beta
Cash flow (Rs.)	C.E	Cash flow (Rs.)	C.E
12	0.10	8	0.10
14	0.20	12	0.25
16	0.40	16	0.30
18	0.20	20	0.25
20	0.10	24	0.10

Which of the two projects would be riskier based on the criteria of coefficient of variation.

OR 

Q.4 Natsya Ltd. requests you to prepare a statement showing the working capital requirements forecast for a level of activity of 1,09,200 units of production. The following information is available for your calculation.

Cost Element	Rs.
Raw Materials Direct Labour Overhead Total Cost Profit Selling Price per unit	63 28 52.50 142.50 42 185.50

 i) Raw materials are in stock on average one month.

ii) Materials are in process, on average 2 weeks.

iii) Finished goods are in stock, on average one month.

iv) Credit allowed by the suppliers one month. v) Credit allowed to debtors - 2 months;

vi) Lag in payment of wages-1½ weeks.

vii) Lag in payment of Overheads - one month.

20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs. 42,000. It is to be assumed that production is carried on evenly throughout the year. Wages and overheads accrue similarly and a time period of 4 weeks is equivalent to one month. 

Also Calculate Maximum Permissible Bank Finance as per Tandon committee assuming that core current assets are 25% of total asset.

Q.5 (A) What is sensitivity analysis? What are its merits?    (8)

Ans: Sensitivity analysis is a technique used to assess how sensitive a model's output is to changes in its input variables. In simpler terms, it's a "what-if" analysis that helps you understand how much the final result of a model or decision might change if the underlying assumptions or data points vary.

• Identifies critical factors: It pinpoints the input variables that have the greatest influence on the final outcome.
• Evaluates robustness: It helps assess how reliable the model's output is when faced with changes in assumptions.
• Informs decision-making: By understanding how sensitive the outcome is to different factors, you can make more informed decisions considering potential variations.

Merits of sensitivity analysis:

• Reduced Risk: By identifying critical factors and potential variations in outcomes, you can make risk management strategies more effective.
• Improved Planning: Understanding how different scenarios can play out allows for more flexible and adaptable planning.
• Enhanced Communication: Sensitivity analysis can be a valuable communication tool, helping stakeholders visualize the impact of various assumptions.
• Better Resource Allocation: By focusing resources on the most critical factors, you can optimize resource allocation for maximum impact.
• Uncovering Hidden Relationships: Sometimes, sensitivity analysis can reveal unexpected relationships between variables in your model, leading to deeper insights.

Applications of sensitivity analysis:

• Financial Modeling: Assessing the impact of changes in interest rates, inflation, or revenue on financial projections.
• Project Management: Analyzing how variations in project costs, timelines, or resource availability can affect project outcomes.
• Scientific Research: Evaluating the robustness of research conclusions by making slight changes to experimental conditions or assumptions.
• Marketing: Understanding how changes in pricing, advertising strategies, or market conditions might impact sales forecasts.

(B) Define working capital? Explain various strategies of working capital financing. (7)

Ans: 

Working Capital: 

Working capital refers to the current assets needed by a company to cover its short-term liabilities and operating expenses. It's essentially the lifeblood of day-to-day business operations, ensuring smooth functioning and timely payments. Here's a breakdown of the concept:

Formula:

Working Capital = Current Assets - Current Liabilities

Components:

• Current Assets: These are assets that can be readily converted into cash within a year. Examples include cash, accounts receivable (money owed by customers), and inventory (goods for sale).
• Current Liabilities: These are obligations that a company needs to pay within a year. Examples include accounts payable (money owed to suppliers), accrued expenses (expenses incurred but not yet paid), and short-term loans.

Importance:

• Maintaining adequate working capital ensures a company can:
  • Pay its bills on time.
  • Meet payroll obligations.
  • Take advantage of purchase discounts offered by suppliers.
  • Invest in growth opportunities.

Working Capital Financing Strategies: Managing the Flow

Companies employ various strategies to manage their working capital needs. Here are some common approaches:

1. Managing Current Assets:

• Inventory Management: Implementing efficient inventory control systems to minimize stock levels and optimize cash flow.
• Accounts Receivable Management: Implementing effective credit policies, offering early payment discounts, and collecting outstanding dues promptly.

2. Managing Current Liabilities:

• Negotiating Payment Terms: Extending payment terms with suppliers to free up cash for other purposes (needs careful management to avoid late payment penalties).
• Factoring: Selling accounts receivable to a third party at a discount to receive immediate cash.

3. Short-Term Financing Options:

• Line of Credit: A flexible source of borrowing, allowing companies to draw funds as needed up to a pre-approved limit.
• Commercial Paper: Unsecured short-term debt instruments issued by corporations to raise funds at competitive rates.
• Accounts Payable Financing: Borrowing against unpaid invoices, providing immediate cash while delaying payments to suppliers.

Choosing the Right Strategy:

The optimal working capital financing strategy depends on factors like the company's size, industry, and growth stage. It's crucial to find a balance between maintaining sufficient liquidity and minimizing financing costs.

Q.5 Write Short Notes on: (Any three) 

a. Corporate Governance

Ans: 

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It's essentially the framework that establishes who has power, how decisions are made, and how stakeholders' interests are balanced. 

• Accountability: The board of directors and management are accountable to shareholders and other stakeholders for the company's performance and actions.
• Transparency: Companies should be transparent in their financial reporting, business practices, and decision-making processes.
• Fairness: All stakeholders, including shareholders, employees, customers, and the community, should be treated fairly.
• Responsibility: Companies have a responsibility to act ethically, sustainably, and in the best interests of all stakeholders.
• Risk Management: A strong governance framework includes effective risk management practices to identify, assess, and mitigate potential risks to the company.

Benefits of Good Corporate Governance:

• Increased Investor Confidence: Strong governance practices can attract investors by demonstrating a company's commitment to transparency and accountability.
• Improved Decision-Making: Clear processes and structures can lead to better decision-making by management.
• Reduced Risk: Effective risk management helps companies avoid scandals, financial losses, and reputational damage.
• Enhanced Long-Term Value: Good governance practices contribute to a company's long-term sustainability and value creation.

Challenges in Corporate Governance:

• Balancing Interests: Balancing the needs of different stakeholders can be challenging.
• Regulation vs. Flexibility: Striking a balance between necessary regulations and allowing companies flexibility to operate efficiently.
• Enforcement: Ensuring that governance rules and practices are effectively enforced.

b. Decision Tree Analysis

Ans: 

Decision Tree Analysis: Making Informed Choices

Decision tree analysis is a valuable tool used in various fields, including finance, business, and project management. It helps visualize and analyze complex decision-making processes with multiple possible outcomes. Here's a breakdown of its key aspects:

• A flowchart-like diagram representing different decision points, potential outcomes, and associated probabilities.
• Branches represent choices or events that can occur.
• Leaves represent the final results or consequences of each decision path.

Benefits:

• Clarity and Organization: Simplifies complex decisions by structuring them visually.
• Identification of Trade-offs: Helps identify potential risks and rewards associated with different choices.
• Improved Risk Management: Allows for assessing the likelihood of different outcomes and making risk-adjusted decisions.
• Quantitative Analysis: Probabilities and values can be assigned to outcomes, enabling a more objective evaluation of options.

Steps involved:

1. Define the problem or decision.
2. Identify potential solutions or courses of action.
3. Determine the possible outcomes for each decision.
4. Assign probabilities to each outcome (if possible).
5. Estimate the value or cost associated with each outcome.
6. Analyze the tree and choose the option with the most desirable outcome.

Applications:

• Capital budgeting: Evaluating investment projects and choosing the most profitable option.
• Product development: Deciding on features and marketing strategies for a new product.
• Risk management: Identifying potential risks and developing mitigation plans.
• Marketing campaigns: Choosing the most effective channels and strategies for a marketing campaign.

c. Advantages of XBRL

Ans: 

Advantages of XBRL (extensible Business Reporting Language)

XBRL is a digital format for business reporting that offers significant advantages over traditional methods like PDFs or spreadsheets. Here are some key benefits of using XBRL:

• Transparency and Accuracy: Financial data is tagged with specific definitions, ensuring clarity and reducing errors due to manual data entry.
• Improved Comparability: Data from different companies becomes easily comparable because it uses standardized tags and definitions. Investors and analysts can readily assess financial performance across companies.
• Automation and Efficiency: XBRL enables automated data analysis and processing, saving time and resources for both preparers and users of financial information.
• Reduced Costs: Streamlining reporting processes with XBRL can lead to cost savings for companies in terms of preparation, filing, and analysis.
• Enhanced Decision-Making: Easier access to accurate and comparable data empowers better financial decisions for investors, regulators, and company management.
• Flexibility: XBRL can accommodate various reporting requirements, making it adaptable to different industries and regulations.

d. Types of Mergers

Ans: 

Types of Mergers

Mergers occur when two companies combine into a single entity. There are several reasons why companies might merge, such as to gain market share, increase efficiency, or expand into new markets. The type of merger that a company pursues depends on its strategic goals and the relationship between the merging companies. Here's a breakdown of some common types of mergers:

1. Horizontal Merger:

• Description: This type of merger involves companies that compete directly in the same industry and product/service market.
• Example: A merger between two large cola companies.

2. Vertical Merger:

• Description: This type of merger combines companies at different stages of the production process (upstream or downstream).
• Example: A paper manufacturer merging with a timber company that supplies its raw materials.

3. Conglomerate Merger:

• Description: This type of merger involves companies in completely unrelated industries or markets.
• Example: A retail clothing store merging with a fast-food restaurant chain. (This type of merger is less common as it can be challenging to achieve synergies.)

4. Market Extension Merger:

• Description: This type of merger involves companies that sell similar products or services but in different geographic markets.
• Example: A regional grocery store chain merging with another regional grocery store chain in a different part of the country.

5. Product Extension Merger:

• Description: This type of merger involves companies that sell different but related products or services in the same market.
• Example: A company that makes smartphones merging with a company that makes smartwatch accessories.

e. Commercial Paper

Ans: Commercial paper is a short-term, unsecured debt instrument issued by large corporations and financial institutions. Here's a breakdown of its key characteristics:

• A promissory note sold by companies to raise funds.
• Similar to an IOU, but issued in a formal financial setting.

features:

• Short-term: Maturities typically range from a few weeks to 270 days (less than a year).
• Unsecured: Not backed by any collateral, so the issuing company's creditworthiness is crucial.
• Discount issuance: Usually sold at a discount to its face value, reflecting prevailing market interest rates. Investors earn a return by the difference between the purchase price and the face value redeemed at maturity.
• Large denominations: Minimum denominations are typically high (e.g., $100,000) and only accessible to institutional investors or wealthy individuals.
• Funding needs: Used to finance short-term liabilities like payroll, accounts payable, or inventory purchases.

Benefits for issuers (companies):

• Relatively cheap source of funding: Compared to other options like bank loans, commercial paper can be a lower-cost way to raise short-term capital.
• Flexibility: Maturities can be tailored to specific funding needs.

Benefits for investors:

• High liquidity: Can be easily bought and sold in the secondary market before maturity.
• Relatively safe: Issued by reputable corporations with high credit ratings, reducing default risk.
• Attractive returns: Can offer competitive returns compared to other short-term investments like money market accounts.

Elective: Operation Research (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: International Finance (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Brand Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April		Solution

Elective: HRM in Global Perspective (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Innovation Financial Service (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April		Solution

Elective: Retail Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
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2025	April

Elective: Organizational Development (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Project Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: International Marketing (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2023	April	Download	Solution
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2025	April

Elective: HRM in Service Sector Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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Elective: Strategic Financial Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Media Planning (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Workforce Diversity (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2023	April	Download	Solution
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Elective: Financing Rural Development (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2023	April	Download	Solution
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2024	November	Download
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Elective: Sport Marketing (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2023	April	Download	Solution
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2024	November	Download
2025	April

Elective: HRM Accounting & Audit (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
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2025	April

Elective: Indirect Tax (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Marketing of Non-Profit Organization (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April

Elective: Indian Ethos in Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
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2025	April