Question 1) We want flexible budget as costs are too hard to predict. We need the flexibility to change budgeted costs as input price change. Does a flexible budget serve this purpose? Describe.
Question2) Indirect method of reporting cash flows from operating could create a erroneous impression about non-cash expenses (such as depreciation). What type of impression it could create and why is it erroneous.
Question 3) "Eeffect of price reduction is always to reduce the p/v ratio, to raise the B.E.P. and shorten the MOS." Describe with appropriate example.
Question 4) Equipment A has a cost of 75,000/- and net cash flow of ` 50,000/- and generate net cash flow of ` 15,000/- per year for six years. The required rate of return of both equipments is 11 per cent. Compute the IRR and NPV for each equipment. Which equipment must be accepted?
Question 5) "Investment, Financing and Dividend decisions are interrelated." Explain this statement.
Question 6) "There is nothing like the optimum capital structure for a firm" - Critically describe this statement.
Question 7) The following information are related to Sun Ltd.
Paid-up equity capital 10,00,000
Earnings of the company 1,00,000
Dividend paid 80,000
Price - Earning ratio (PIE) 20
No. of equity shares 1,00,000
Determine whether dividend payout of Sun Ltd., is optimal. [Use Walter's model].
Question 8) The following information are available in respect of companies M and N
Company M Company N
Equity share capital (`10 each) 20,00,000 10,00,000
14% Debentures 5,00,000 15,00,000
EBIT 5,00,000 5,00,000
Return on capital employed 20% 20%
Tax rate 40% 40%
From the above information, compute:
a) Financial leverage
b) Rate of return on equity share capital
c) Earnings per share
Also state which company's shareholders are in a better position financially?