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MS-4 june-2008

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MS-4 -   june-2008


l. (a) What do you understand by the concept of conservatism ? Why is it also called the concept of prudence ? Why is it not applied as strongly today as it used to be in the Past ?

(b) What is a Balance Sheet ? How does a Funds Flow Statement differ from a Balance Sheet ? Enumerate the items which are usually shown in a Balance Sheet and a Funds Flow Statement'

2. (a) Why does depreciation need to be provided on fixed assets and what are the usual methods of providing depreciation

(b) Discuss the role of the Board of Directors in dividend decision

3. What do you understand by Discounted Cash Flow Techniques of Capital Budgeting ? Briefly explain the Net Present Value Method and Internal Rate of Return Method. which of the two would you rank better and why ?

4. Distinguish between :

(a) Financial Leverage and operating Leverage

(b) Cash Budget and Cash Flow Statement


(d) Preference shares and Rights shares

A company manufactures a single product in its factory utilising 60% of its capacity. The details are given below :


Sales (6,000 units)                                                              540000

Direct materials                                                                     96000

Direct labour                                                                         120000

Direct expenses                                                                      18000      

Fixed overheads :

Factory                                                                                 200000

Administration                                                                         21000

Selling and Distribution                                                         25000

12.5 % of factory overheads and 20% of selling and distribution overheads are variable with production and sales. Administrative overheads are wholly fixed. Since the existing product could not achieve budgeted level for two consecutive years, the Company decides to introduce a new product with marginal investment but largely using the existing plant and machinery.

The cost estimates of the   new product are as follows :

Cost elements                                                             Rs. per unit

Direct materials                                                               16

Direct labour                                                                      15

Direct expenses                                                                   1.5

Variable factory overheads                                               2.0

Variable selling and distribution overheads                    1.50

It is expected that 2,000 units of the new product can be sold at a price of Rs. 60 per unit. The fixed factory overheads are expected to increase by t}o/o, while fixed

selling and distribution expenses will go up by Rs. 12,500 annually. Administrative overheads remain unchanged.

However, there will be an increase of working capital to the extent of Rs. 75,000, which would take the total cost of the project to Rs. 8.75 lakh

The company considers that 20% pre-tax and interest return on investment is the minimum acceptable to justify any new investment.

You are required to

(a) Decide whether the new product be introduced.

(b) Make any further observations /recommendations

about profitability of the company on the basis of

the above data after making assumption that the present investment is Rs. 8 lakh.

6- Explain fully the following statements :

(a) "Lower the Break-even point, better it is

(b) "Greater the variability of cash flows, higher should be the minimum cash balance

(c) "Weighted average cost of capital would always be higher, if the market value weights are used. "

(d) "Capitalisation of reserves is different from capital resgrves. "

7 Why do you understand by the term 'pay-out ratio' ? What factors are taken into consideration while determining pay-out ratio ? should a company follow a fixed pay-out ratio policy ? Discuss fully.

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