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 Title Name Amity Solved Assignment MFM 3rd Sem for Strategic Financial Management University AMITY Service Type Assignment Course Master-in-Finance-Management-(MFM) Semister Semester-III Cource: Master-in-Finance-Management-(MFM) Short Name or Subject Code Strategic Financial Management Commerce line item Type Semester-III Cource: Master-in-Finance-Management-(MFM) Product Assignment of Master-in-Finance-Management-(MFM) Semester-III (AMITY)

# Solved Assignment

Questions :-

Strategic Financial Management

ASSIGNMENT A

1. . Answer any five of the questions below.
 At the end of five years, how much is the initial deposit of Rs 25,000 worth if the compounding annualrate is 10%. Also compute the worth of ‘the initial deposit if the interest is compounded semiannually and quarterly. 2 . Ramesh requires Rs 100,000 at the end of 5 years so he decides to keep certain equal amount out of his income at . the end of each year in his bank account. The bank pays an interest of 8% per annum. How much should Ramesh save each year? 3 Star hotels ltd have two investment proposals that are as follows. .

Project A

 Period Cost Net Cash Flow 0 Rs 9,000 Rs 0 1 Rs 1,000 2 Rs 1,000 3 Rs 1,000

Project B

 Period Cost Net Cash Flow 0 Rs 12,000 Rs 0 1 Rs 5,000 2 Rs 5,000 3 Rs8,000

Compare both the projects on the basis of its payback period, Net present value and its profitability index using discount rate of 15%.

4  A company is planning to buy a new machine for Rs 2, 00,000 with life for 2 yrs. The cost of capital is 12 %.

.

The cash flow after tax generated from the machine for 2 yrs are:

 Year Cash flow after Probability tax 1 Rs 1,00,000 0.4 1 Rs 1,20,000 0.6 2 Rs 80,000 0.5 2 Rs 1,20,000 0.5

The cost of capital is 12% and risk free rate is 5%.

Using the decision tree approach find out whether the investment should be made or not?

5 .     Answer any three questions out of the following

. a)   What is operating cycle? How important is it for the management of working capital?

1. Distinguish between ( i) Gross and net working capital
1. Permanent and temporary working capital
2. How do working capital management policies impact a firm’s risk and profitability ?
3. The balance sheet of X ltd as om 31 March 2010 is
 Liabilities ( Rs) Assets (Rs) Current Liabilities 1,00,000 Current assets 1,50,000 Long Term 2,50,000 Fixed assts 2,00,000 Liabilities Total 3,50,000 Total 3,50,000

Calculate the current ratio for the firm

1. e) From the data provided below calculate the operating cycle.
 Credit sales Rs 5,00,000 Cost of goods sold Rs 2,50,000 Purchases Rs 1,20,000 Average raw material stock Rs 60,000 Average work in progress Rs 55,000 Average finished goods stock Rs 92,000 Average creditors Rs 60,000 Average debtors Rs 1,50,000 6 . The balance sheet and income statement of R Electricals is given below. Balance Sheet Income statement Cash Rs 400 Net sales ( all credit) Rs 12,680 Accounts Receivable Rs 1,300 Cost of goods sold Rs 8,930 Inventories Gross profit Rs 3,750 Rs 2,100 Current Assets Selling, general and Rs 2,230 Rs 3,800 administration Net Fixed Assets Rs 3,320 expenses Interest Expense Rs 460 Total Assets Rs 7,120 Profit before taxes Rs 1060 Accounts payable Rs 320 Taxes Rs 390 Accruals Rs 260 Profit after taxes Rs 670 Short term loans Rs 1,100 Current Liabilities Rs 1,680 Long term debt Rs 2,000 Net worth Rs 3,440 Total Liabilities and net Rs 7,120 worth Source Cost Equity Rs 4,50,000 18% Preference shares Rs 1,00,000 11% Debentures Rs 3,00,000 8% Retained earnings Rs 1,50,000 18% Rs 10,00,000

On the basis of information given above calculate current ratio, acid test ratio, the average collection period, inventory turnover ratio, net profit margin and return on equity.

Calculate the weighted average cost of capital from the following information provided

From the data given below find out the price of the share according to the Gordon’s model when dividend payout is 25% and 50%.

• Earnings per share = Rs 8
• Rate of return on investment = 16%
• Return expected by share holders = 12%

ASSIGNMENT B

Case Detail :

Read the case study and answer the questions given at the end.

Case Study

Mergers and acquisitions in banking sector have become familiar in the majority of all the countries in the world. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry. Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entities are involved in the same kind of business or commercial activities. Sometimes, non-banking financial institutions are also merged with other banks if they provide similar type of services. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. Both government banks and private sector banks are adopting policies for mergers and acquisitions.

In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share.

Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sector and this kind of merger may result in monopoly and job cuts.

Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the banking sector. Nevertheless, there are many challenges that are still to be overcome through appropriate measures.

Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority of a particular country. For example, the mergers and acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).Indian competition law grants a maximum time period of 210 days for the determination of the combination, which comprises acquisitions, mergers, amalgamations and the like. One needs to take note of the fact that this stated time frame is clearly distinct from the minimum compulsory wait period for applicants.

As per the law, the compulsory period of waiting for applicants can either be 210 days starting from the day of notice filing or receipt of the Commission´s order, whichever occurs earlier.

The threshold limits for firms entering business combinations are substantially high under the Indian law. The threshold limits are set either in terms of the asset value or in terms the firm´s turnover. Indian threshold limits are greater than those for the EU. They are twice as high when compared with UK.

The Indian law also provides for the modern day phenomenon of merger and acquisitions, which are cross border in nature. As per the law domestic nexus is a pre-requisite for notification on this type of combinations.

It can be noted that Competition Act, 2002 has undergone a recent amendment. This has replaced the voluntary notification regime with a mandatory regime. Of the total number of 106 countries, which possess competition laws only 9 are thought to be credited with a voluntary notification regime. Voluntary notification regimes are generally associated with business uncertainties. Post-combination, if firms are seen to be involved in anti-competitive practices de-merger shows the way out.

Indian Income Tax Act has provision for tax concessions for mergers/demergers between two Indian companies. These mergers/demergers need to satisfy the conditions pertaining to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable situation

In case of an Indian merger when transfer of shares occurs for a company they are entitled to a specific exemption from the capital gains tax under the “Indian I-T tax Act”. These companies can either be of Indian origin or foreign ones.

A different set of rules is however applicable for the ´foreign company mergers´. It is a situation where an Indian company owns the new company formed out of the merger of two foreign companies.

It can be noted that for foreign company mergers the share allotment in the merged foreign company in place of shares surrendered by the amalgamating foreign company would be termed as a transfer, which would be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the ´Indian I-T Act´ states that, global income accruing to an Indian company would also be included under the head of ´scope of income´ for the Indian company.

Question No,

Q1. Discuss the reasons they encourage mergers in the banking sector?

Q2. Discuss the legal implications of merger in India?

ASSIGNMENT C

Question No.  1

Compounding technique shows---

Options

1. Present Value
2. Future Value
3. Both present and future value
4. None of the above.

Question No.  2

An infinite series of periodic cash flows growing at a constant rate is---

Options

1. Annuity
2. Perpetuity
3. Future value
4. compounding

Question No.  3

Working capital represents---

Options

1. the capital raised by the company
2. capital required to meet day to day expenses
3. Equity capital of the company
4. Total capital of the company

Question No.  4

An example of liquidity ratio is---

Options

1. Current ratio
2. Debt –equity ratio
3. Debtors turnover ratio
4. Return on equity

Question No.  5

Discounting techniques in capital budgeting include---

Options

1. NPV
2. Profitability Index
3. Payback period
4. None of the above

Question No.  6

Net Profit Ratio Signifies---

Options

1. Operational Profitability
2. Liquidity Position
3. Big-term Solvency
4. Profit for Lenders.

Question No.  7

ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5, 00,000. What are the Current Assets?

Options

1. 5,00,000
2. 10,00,000
3. 15,00,000
4. 25,00,000

Strategic Financial Management

Assignment A

Q 2. Ramesh requires Rs 100,000 at the end of 5 years so he decides to keep certain equal  amount    out of his income at the end of each year in his bank account. The bank pays an interest of 8% per annum. How much should Ramesh save each year?

Ans.2 PVF= F.V. X PVF05, .08

F.V. = 1, 00,000

PVF05, .08 = 0.681 X 1, 00,000

P.V. = Rs. 68,100

Thus, Ramesh will have to invest Rs. 68,100 in order to get Rs.1, 00,000

Q.3.  Star hotels ltd have two investment proposals that are as follows.

Project A

 Period Cost Net Cash Flow 0 Rs 9,000 Rs 0 1 Rs 1,000 2 Rs 1,000 3 Rs 1,000

Project B

 Period Cost Net Cash Flow 0 Rs 12,000 Rs 0 1 Rs 5,000 2 Rs 5,000 3 Rs8,000

Compare both the projects on the basis of its payback period, Net present value and its profitability index using discount rate of 15%.

Ans 3.

Pay Back period (Project A) = Initial investment/ Annual Cash flow

PBP = 9000/1000 = 9 Years

Pay Back Period (Project B) = E + B/C

Where, E= No. of years just before the final recovery

B= Balance of cash flow to be recovered

C= Cash Flow of the year of final recovery

Thus, PBP (Project B) = 2 + 6000/8000 = 2.75 Years

Thus, Project B must be opted for.

Profitability Index or Benefit- Cost Ratio = PV of cash Flows/ Initial Outlay

Year    Project A    PV Factor       PV            Project B        PV Factor    Cash Flow

1        1000       0 .870                       870            5000          0.870               4350

2        1000       0 .756                       756             5000         1.626               8130

3        1000       0.658                        658             8000         2.283               18264

2284                                                    30,744

Profitability Index (Project A) = 2284/9000=0.2537 or 25.37%; Project B: 30,744/12000=2.562

5 .     Answer any three questions out of the following

. a)   What is operating cycle? How important is it for the management of working capital?

1. Distinguish between ( i) Gross and net working capital
1. Permanent and temporary working capital
2. How do working capital management policies impact a firm’s risk and profitability ?
3. The balance sheet of X ltd as om 31 March 2010 is
 Liabilities ( Rs) Assets (Rs) Current Liabilities 1,00,000 Current assets 1,50,000 Long Term 2,50,000 Fixed assts 2,00,000 Liabilities Total 3,50,000 Total 3,50,000

Calculate the current ratio for the firm

1. e) From the data provided below calculate the operating cycle.
 Credit sales Rs 5,00,000 Cost of goods sold Rs 2,50,000 Purchases Rs 1,20,000 Average raw material stock Rs 60,000 Average work in progress Rs 55,000 Average finished goods stock Rs 92,000 Average creditors Rs 60,000 Average debtors Rs 1,50,000

Ans. 5. A) OPERATING CYCLE: - It refers to the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company is larger than that of a trading firm or vice-a-versa. The operating cycle of a manufacturing co. involves three phases:

• Acquisition of resources such as raw material, labour, power and fuel, etc.
• Manufacturing of the product which includes conversion of raw material into work-in progress into finished goods.
• Sales of a Product either for cash or on credit. Credit sales create account receivable for collection.

Purchase                                              Cash                                        Accounts Receivables

Work-in-Progress                                             Finished Stock

Fig: Operating cycle of a Manufacturing Company

The formula for calculating Operating Cycle is as follows:

O.C. = (RMCP+WIPCP+FGCP+DCP) – CDP

IMPORTANCE OF OPERATING CYCLE TO THE MANAGEMENT OF WORKING CAPTIAL

The operating cycle represents the time interval over which additional funds called working capital should be obtained in order to carry out the firm’s operation. The firm has to negotiate working capital from sources such as commercial banks. The negotiated sources of working capital financing are called non-spontaneous sources. If net operating cycle of a firm increases, it means further need for negotiated working capital.

1. b) i) Gross and Net Working Capital:- gross working capital refers to the sum total of all the assets. Thus, it is a traditional concept which includes only current assets and not current liabilities. Thus, it is also known as quantative concept of working capital.

Gross Working Capital = Total Current Assets

Net Current Assets: - It refers to the difference between the total current assets and total current liabilities. Thus, net working capital is a qualitative concept. In practice when we talk of working capital, it means net working capital and not gross working capital.

Net Working Capital = Total Current Assets – Total Current Liabilities

1. B) ii) Permanent Working Capital and Temporary Working Capital:-

Permanent working Capital- The minimum amount of capital which should always remain in the business throughout the year is known as permanent working capital. Such kind of capital is found in those business whose nature is permanent i.e. the same business is run throughout the year. For example the working capital invested in iron and steel business is a kind of permanent working capital.

Temporary Working Business: The working capital invested in such a business whose nature is not permanent but temporary is called temporary working capital. For example the working capital invested in the business of woollen clothes in winters or soft-drinks in summers. More over the working capital here keeps on varying from season to season and thus also known as seasonal working capital.

Ans.d)  Current Ratio of X Ltd for the year ending March 2010 = Current Assets / Current liabilities

Current Assets = 1, 50,000; Current Liabilities = 1, 00,000

Current Ration = 1, 50,000 / 1, 00,000 = 1.5: 1

Ans. C.R= 1.5: 1

Question 6. The balance sheet and income statement of R Electricals is given below

Balance Sheet

Income statement

Cash

Rs

400

Net sales ( all credit)

Rs 12,680

Accounts Receivable

Rs 1,300

Cost of goods sold

Rs 8,930

Inventories

Gross profit

Rs 3,750

Rs 2,100

Current Assets

Selling, general and

Rs 2,230

Rs 3,800

Net Fixed Assets

Rs 3,320

expenses

Interest Expense

Rs 460

Total Assets

Rs 7,120

Profit before taxes

Rs 1060

Accounts payable

Rs

320

Taxes

Rs 390

Accruals

Rs 260

Profit after taxes

Rs 670

Ans 6. Current Ratio = C.A. / C.L

Where C.A. = 3800; C.L. = 1680

Thus, C.R= 3800/1680= 2.26:1

Acid Test Ratio = Quick Assets/ Quick Liabilities

Q.A = 3800-2100=1700

Q.L. = 1680 (Given)

Thus, Q.R. or Acid Test ratio = 1700/1680 = 1.01:1

Average Collection Period = 365/ Debtor’s Turnover Ratio

D.T.R. = Net credit sales/ average accounts receivables

D.T.R. = 12680/1300 = 9.75 time’s (approx.)

Average collection Period = 365/9.75 = 37.44 or 37 days (approx.)

Inventory Turnover Ratio = COGS / Average stock

= 8930/ 2100 = 4.25 Times

Net Profit Ratio = N.P. /Net sales X 100

N.P. Ratio = 670/12680 X 100 = 5.28%

ROE = Net Profit after interest and tax / No. of equity shares

670/ 3440 X100 = 19.48%

Q.7.

 Short term loans Rs 1,100 Current Liabilities Rs 1,680 Long term debt Rs 2,000 Net worth Rs 3,440 Total Liabilities and net Rs 7,120 worth Source Cost Equity Rs 4,50,000 18% Preference shares Rs 1,00,000 11% Debentures Rs 3,00,000 8% Retained earnings Rs 1,50,000 18% Rs 10,00,000

On the basis of information given above calculate current ratio, acid test ratio, the average collection period, inventory turnover ratio, net profit margin and return on equity.

Calculate the weighted average cost of capital from the following information provided

From the data given below find out the price of the share according to the Gordon’s model when dividend payout is 25% and 50%.

• Earnings per share = Rs 8
• Rate of return on investment = 16%
• Return expected by share holders = 12%

Ans 7. Computation of Weighted Average Cost of Capital

Source                         Amount (Rs.)              Cost of Capital                       Specific Cost   WACC

Equity                          450,000                                   0.18                       0.45                       0.081

Preference shares         100,000                                   0.11                        0.10          0.011

Debentures                  300,000                                   0.08                         0.30         0.024

Retained earnings        1, 50,000                                 0.18                         0.15         0.027

10, 00,000                                                                               0.143

Thus, the WACC = 0.143 or 14.3%

ASSIGNMENT B

CASE STUDY

Case Study

Mergers and acquisitions in banking sector have become familiar in the majority of all the countries in the world. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry. Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entities are involved in the same kind of business or commercial activities. Sometimes, non-banking financial institutions are also merged with other banks if they provide similar type of services. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. Both government banks and private sector banks are adopting policies for mergers and acquisitions.

In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share.

Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sector and this kind of merger may result in monopoly and job cuts.

Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the banking sector. Nevertheless, there are many challenges that are still to be overcome through appropriate measures.

Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority of a particular country. For example, the mergers and acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).Indian competition law grants a maximum time period of 210 days for the determination of the combination, which comprises acquisitions, mergers, amalgamations and the like. One needs to take note of the fact that this stated time frame is clearly distinct from the minimum compulsory wait period for applicants.

As per the law, the compulsory period of waiting for applicants can either be 210 days starting from the day of notice filing or receipt of the Commission´s order, whichever occurs earlier.

The threshold limits for firms entering business combinations are substantially high under the Indian law. The threshold limits are set either in terms of the asset value or in terms the firm´s turnover. Indian threshold limits are greater than those for the EU. They are twice as high when compared with UK.

The Indian law also provides for the modern day phenomenon of merger and acquisitions, which are cross border in nature. As per the law domestic nexus is a pre-requisite for notification on this type of combinations.

It can be noted that Competition Act, 2002 has undergone a recent amendment. This has replaced the voluntary notification regime with a mandatory regime. Of the total number of 106 countries, which possess competition laws only 9 are thought to be credited with a voluntary notification regime. Voluntary notification regimes are generally associated with business uncertainties. Post-combination, if firms are seen to be involved in anti-competitive practices de-merger shows the way out.

Indian Income Tax Act has provision for tax concessions for mergers/demergers between two Indian companies. These mergers/demergers need to satisfy the conditions pertaining to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable situation

In case of an Indian merger when transfer of shares occurs for a company they are entitled to a specific exemption from the capital gains tax under the “Indian I-T tax Act”. These companies can either be of Indian origin or foreign ones.

A different set of rules is however applicable for the ´foreign company mergers´. It is a situation where an Indian company owns the new company formed out of the merger of two foreign companies.

It can be noted that for foreign company mergers the share allotment in the merged foreign company in place of shares surrendered by the amalgamating foreign company would be termed as a transfer, which would be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the ´Indian I-T Act´ states that, global income accruing to an Indian company would also be included under the head of ´scope of income´ for the Indian company.

Question No,

Q1. Discuss the reasons they encourage mergers in the banking sector

ANS 1. Reasons for encouraging Mergers in the banking sector are:-

1. To reap the benefits of economies of scale
2. With the help of mergers, banking sector, the banks can achieve significant growth in their operations and minimise their expenses to a considerable extend.
3. In the process of merger, competition is reduced because merger eliminates competition from banking sector as it is a kind of horizontal merger.

Q2. Discuss the legal implications of merger in India?

Ans 2. Legal Implications of Merger in India are as follows:-

1. Indian competition law grants a maximum time period of 210 days for the determination of combination, like amalgamation, merger, acquisition, etc.
2. As per law, the compulsory period of waiting for applicants can either be 210 days starting from the day of notice filing or receipt of Commissioner’s order, whichever occurs earlier.
3. The Indian laws provides for the modern day phenomena on of merger and acquisition, which are cross border in nature.
4. The competition Act, 2002 has replaced the voluntary notification regime with a mandatory regime.

ASSIGNMENT C

Question No.  1

Compounding technique shows---

Options

1. Present Value
2. Future Value
3. Both present and future value
4. None of the above.

Question No.  2

An infinite series of periodic cash flows growing at a constant rate is---

Options

1. Annuity
2. Perpetuity
3. Future value
4. compounding

Question No.  3

Working capital represents---

Options

1. the capital raised by the company
2. capital required to meet day to day expenses
3. Equity capital of the company
4. Total capital of the company

Question No.  4

An example of liquidity ratio is---

Options

1. Current ratio
2. Debt –equity ratio
3. Debtors turnover ratio
4. Return on equity

Question No.  5

Discounting techniques in capital budgeting include---

Options

1. NPV
2. Profitability Index
3. Payback period
4. None of the above

Question No.  6

Net Profit Ratio Signifies---

Options

1. Operational Profitability
2. Liquidity Position
3. Big-term Solvency
4. Profit for Lenders.

Question No.  7

ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5, 00,000. What are the Current Assets?

Options

1. 5,00,000
2. 10,00,000
3. 15,00,000
4. 25,00,000

Question No.  8

Financial Planning deals with---

Options

1. Preparation of Financial Statements
2. Planning for a Capital Issue
3. Preparing Budgets
4. All of the above

Question No.  9     &

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January 29, 2015