Paper - F.5 : STRATEGIC FINANCIAL ... - Surana college

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IV Semester M.B.A. Degree Examination, June 20ll
(2007-08 Scheme)
Nlanagement
F.5 : STRATEGIC FINANCIAL MANAGEMENT
pc - 01s
Time : 3 Hours Max. Marks : 75
SECTION _ A
1. Answer any six of the following sub-questions. Each carries two
marks.
( Zx6=12)
a) What is a conglomerate
b) What is spin-off ?
c) What do you understand by ESOP ?
d) Define operating free cash flow.
e) What is balanced score card ?
D What are cost drives ?
g) Define value creation.
h) What do you mean by hostile takeover ?
i) What is prison pill ?
SECTION _ B
Answer any three of the following questions. Each question carries eight
marks.
(3x8=24)
2. $Ihat are the key steps in Marakan approach to value based management ?
3. Discuss the various forms of corporate restructuring.
P.T.O.

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4. Acme Limited is considering a capital project for which the following information
is available.
Investment outlay : 1000 Debt Equity ratio : 1 :1
Project life
5 years Depreciation (for tax puqpose) : Straight line
Salvage value
zero Tax rate
:407o
Annual revenue
2000 Annual cost (excluding
Cost of equity
l87o depreciation interest and taxes) : 1400
Cost of debt after tax
I0Vo
a) Calculate the EVA of the project over its life
b) Compute the NPV of the project.
5. Rajesh International earns a return on equity of 2|Vo.Its dividend payout ratio
is 0.40. Equity shareholders of Rajesh require a return of !8%o.The book value
per share is Rs. 50.
a) what is the market price per share, according to Marakon model ?
b) If the return on equity falls to 22bo,what should be the payout ratio to
ensure that the market price per share remains unchanged ?
6. Discuss the key drivers of free cash flows.

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SECTION _ C
Answer any two questions. Each question carries 12 marks.
(2x12=24)
7' Televista Corporation is expected to grow at a higher rate for 4 years; thereafter
the growth rate will fall and stabilise at a lower level. The following information
available:
Base Year (year 0) Information
Revenues
EBIT
Capital expenditure
Depreciation
Working Capital as a percentage of revenues
Corporate tax rate (for all time)
Paid up equity capital (Rs l0 per)
= Rs. 1600 million
= Rs. 240 miilion
= Rs. 200 million
= Rs. 120 million
= 25 percent
= 35 percent
= Rs. 180 million
Market value of debt
= Rs. 600 million
Inputs for the High Growth period
Length of the high growth period
= 4 years
Growth rate in revenues, depreciation, EBIT
and capital expenditure
Working capital as a percentage of revenues
Cost of debt
Debt equity ratio
= 20 percent
= 25 percent
= 15 percent
= 1.5: I

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Risk-freerate
Market risk premium
= 12 percent
= 7 Percent
Equity beta = 1.25
Inputs for the Stable Growth Period
Expected growth rate in revenues and EBIT =
10 percent
Capital expenditures are offset by depreciation
Working capital as a percentage of revenues = 25 percent
Cost of debt
Debt-equity ratio 1.1
Risk-freerate
=
14 percent (Pre-tax)
12 percent
Market risk premium
= 6 Percent
Equity beta = 1.00
Calculate the value of the firm.
8. Unique Steel Ltd. is contemplating to acquire Sema Mainframe Ltd. The
following information is available in respect of companies.
Unique Steel Ltd.
Sema Mainframe
No. of Equrty shares 10,00,000 6,00,000
Earnings after tax (Rs.) 50,00,000 18,00,000
Market value per share (Rs.) 20 13

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i) What is the present EPS of both the companies ?
ii) What would be the new EPS for Unique Steel Ltd., if the proposed merger
takes place by exchange of equity shares and the exchange ratio is based on
the current market prices ?
iii) What should be the exchange ratio, if Sema Mainframe wants to ensure the
same earnings to members as before merger takes place ?
9. Define strategic financial management. Explain the scope and constituents of
strategic financial management.
SECTION _ D
Case Study :
10. The Profit and Loss Account and Balance Sheet of Hitech
(1x15=15)
Limited for three
years (Year 1, Year 2 andYear 3) are given below :
Profit and Loss Account
Net sales
Income from marketable securities
Non-operating income
Total income
Cost of goods sold
Selling and general administration expenses
I
350
350
200
45
Rs. in Million
400 460
10 15
5 10
4r5 485
230 27A
50 55

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Depreciation
20
25
30
Interest expenses
20
24
28
Total costs and expenses
285
329
383
PBT
65
86
t02
Tax provision
20
26
32
PAT
45
60
70
Dividend
20
30
40
Retained earnings
25
30
30
Balance Sheet
123
Equity capital
Reserves and surplus
Debt
Total
Fixed assets
' Investments
Net current assets
Total
130 150 150
90 120 1s0
150 180 210
370 450 510
250 300 325
60 90 100
60 60 85
370 450 510
The tax rate for Hitech Limited is 40 percent. During year Zthe firm made a rights
issue of Rs. 20 million at par.

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a) Calculate tle following for years 2 and 3
r) EBIT
ii) Taxes on EBIT
iii) NOPLAT
iv) Net investment
v) Operating free cash flow
vi) Net operating cash flow
vii) Free cash flow to the firm.
b) Give the break-up of the financing flow for years 2 and,3.
I .) Calculate the following key drivers of FCF for years 2 and 3
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i) Invested capital
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ii) ROIC
iii) Growth rate.