Description

Financial Management
June 2024 Examination
1. Mr. Ratan has two alternative proposals under consideration.
Project Capital Outlay
Big Basket 30,00,000
Tata max 60,00,000
Both are estimated to provide a cash flow for five years:
Project Cash Inflows
Big Basket 15,00,000
Tata max 28,00,000
Cost of capital 11%
Show which of the two projects is preferable from the view point of
(i) Net present value method
(ii) Profitability Index (10 Marks)
Ans 1.
Introduction
Financial management involves making strategic decisions that ensure optimal utilization of
financial resources to maximize shareholder value. Two fundamental tools commonly employed
in financial management are the Net Present Value (NPV) method and the Profitability Index
(PI). These tools assist in evaluating the viability and profitability of investment projects by
considering the time value of money. This analysis is crucial, as it helps in determining whether
an investment will yield returns that exceed the cost of capital. Here, we examine two investment
proposals for Mr. Ratan: “Big Basket” with a capital outlay of ₹30,00,000 and “Tata max”
requiring ₹60,00,000. By applying NPV and PI calculations, we aim to discern which project
It is only half solved
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2. A company named Renuka Pvt. Ltd raised capital from the market by using below given
sources:
Bank Loan 40,00,000
Equity Share Cap 60,00,000
Total Capital 1,00,00,000
Interest rate on Loan 11%
Beta of Renuka 1.55
Rf 7%
Rm 14.0%
Tax Rate 25%
Compute the overall cost of capital of Renuka Limited (10 Marks)
Ans 2.
Introduction
The overall cost of capital for a company is a crucial metric used to evaluate the efficiency with
which a company utilizes the capital it acquires to generate returns. For Renuka Pvt. Ltd,
understanding this metric is essential as it raises capital through a mix of equity and debt. This
combined cost, known as the Weighted Average Cost of Capital (WACC), provides a
comprehensive picture of the expense the company incurs in financing its operations. WACC is
particularly significant for investment decisions, pricing of financial instruments, and corporate
valuation. It integrates the cost of equity and the cost of debt, adjusting for the tax shield benefits
of debt financing. By calculating the WACC, Renuka Pvt. Ltd can assess how much interest the
company owes for every rupee it finances, guiding strategic financial planning and investment
3a. Kindly suggest the factors which are used to access the working capital requirement of
mid- size restaurant located in tier 2 city on India. (5 Marks)
Ans 3a.
Introduction
Assessing the working capital requirements of a mid-size restaurant in a Tier 2 city in India
involves a detailed analysis of various financial and operational factors. This analysis ensures that
the restaurant can meet its day-to-day expenses efficiently, support smooth operations, and
maintain a buffer for unforeseen expenditures. Identifying these factors is crucial for the financial
health and sustainability of the business.
Concept and Application
1. Sales Cycle and Seasonality: The working capital needs of a restaurant are closely tied to its
3b. ABC Retailers operates a chain of grocery stores in a Tier 2 city in India. They purchase
goods from suppliers on credit terms of 30 days and sell them to customers on cash terms.
On average, it takes 10 days for the goods to be sold after they are received from the
suppliers. The company takes an additional 5 days to collect payments from customers.
Calculate the operating cycle for ABC Retailers. (5 Marks)
Ans 3b.
Introduction
The operating cycle is a critical financial metric for ABC Retailers, a grocery store chain
operating in a Tier 2 city in India. This measure reflects the length of time taken from purchasing
inventory to collecting cash from sales. Understanding this cycle helps the company manage its
cash flow efficiently, ensuring they have adequate resources to meet business needs and maintain
operational stability.
Concept and Application