VI Semester B.
COM Examination June /July 2025
(NEP)
Commerce
COM 6.1: Advanced Financial Management
Time:2 .30Hours [Link]: 60
KEY ANSWERS
Prepared by
MR. PARVEEZ ULLA MR. Ambarish
Dept of commerce Academic Advisor
Christ Academy Institute for Advance Studies. Pinnacle School of Commerce & Management
Hulhalli,Begur-Koppa Road,Bengaluru-87 M.C Halli ,off Sarjapura, Chikkatirupathi Road
Bengaluru-562125
MR. MAHENDRA S.G MR. CHANDRASHEKAR K
Dept of commerce Dept of commerce& Administration
Dharmasagara First Grade College SVVN Degree College,Neralur-107
Dommasandra-125
MR. SANTHOSH HR MR. PRADEEP KUMAR C R
Dept of commerce& Administration Dept of commerce
SVVN Degree College,Neralur-107 Dept of commerce &Administration.
Swamy Vivekananda Rural First Grade
College Chandapura-81
MR. PRASHANTH KUMAR H
Dept of commerce
Dept of commerce &Administration.
Swamy Vivekananda Rural First Grade
College Chandapura-81
SECTION - A
1. a) Maximization of the Value of the Firm , 2. Capital Budgeting Decisions, 3. Evaluation of
Financial Performance 4. Management of Working Capita
b) Risk analysis means It is the process of evaluating and quantifying the potential risks associated
with financial investments, decisions, or strategies.
c) [Link] Dividend.,2) Stock Dividend 3) Property Dividend 4) Scrip Dividend
d)
Merger Acquisition
One company buys another company, typically
Two companies agree to combine their operations with the intent of gaining control of the acquired
into a single, new entity. company's operations, assets, and decision-
making.
The acquired company ceases to exist as a
The merger results in a new company, often with separate legal entity and is absorbed into the
a new name and potentially new ownership acquiring company.
e) An agency relationship, or principal-agent relationship, is a legal arrangement where one party (the
principal) gives another party (the agent) the authority to act on their behalf. The agent can make
decisions and take actions that legally bind the principal.
𝐷 30
f) Ke=𝑀𝑃 𝑋100 = 𝑋100 = 42.85%
70
g) 1) Climate Change. 2) Biodiversity Loss 3) Air and Water Pollution 4) Deforestation
h) A leveraged buyout (LBO) is the acquisition of another company using a significant amount of
borrowed money (bonds or loans) to meet the cost of acquisition. The assets of the company being
acquired are often used as collateral for the loans, along with the assets of the acquiring company
SECTION -B
2. Cost of Preference share
i).In case of Discount @ 5%
40,000
Kp= 𝑋100 = 8.42%
4,75,000
D=5,00,000X8/100=40,000, NP=5,00,000-25,000 (5,00,000X5/100)=4,75,000
i).In case of Premium @ 5%
40,000
Kp= 𝑋100 = 7.61%
5,25,000
D=5,00,000X8/100=40,000, NP=5,00,000+25,000(5,00,000X5/100)= 5,25,000
3. .Certainty equivalent Technique
Year Expected Cash Certainty Certain PV (Risk free 5%) Cash inflow
Equivalent Cash inflow
coefficient
1 10,00,000 0.90 9,00,000 0.952 8,56,800
2 15,00,000 0.85 12,75,000 0.907 11,56,425
3 20,00,000 0.82 16,40,000 0.864 14,16,960
4 25,00,000 0.78 19,50,000 0.823 16,04,850
Total Present Value 50,35,035
Total Investment 45,00,000
NPV 5,35,035
𝐸𝑃𝑆 𝑜𝑓 𝑇𝑟𝑎𝑔𝑒𝑡 𝑐𝑜𝑚𝑝𝑎𝑛𝑦
4. Exchange ratio Under EPS=
𝐸𝑃𝑆 𝑜𝑓 𝐴𝑐𝑢𝑖𝑟𝑖𝑛𝑔 𝑐𝑜𝑚𝑝𝑎𝑛𝑦
3
= 𝟎. 𝟔
5
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 18,00,000
Calculation of EPS of Beerabal Ltd(Traget Com) = = =3
𝑁𝑂 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 6,00,000
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 40,00,000
Calculation of EPS of Tenali Ltd(Acquiring Com) = = =5
𝑁𝑂 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 8,00,000
𝑀𝑃 𝑜𝑓 𝑇𝑟𝑎𝑔𝑒𝑡 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝟐𝟖
Exchange ratio Under MPS= = 𝟎. 𝟔𝟔
𝑀𝑃 𝑜𝑓 𝐴𝑐𝑢𝑖𝑟𝑖𝑛𝑔 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝟒𝟐
5. A) Horizontal Mergers When two or more companies dealing in same product or service join
together, it is known as a horizontal merger.
B) Vertical Mergers : A vertical merger represents a merger of firms engaged at different stages
of production and distribution of the same product or service
C) Conglomerate Mergers: This type of transaction is usually done for diversification reasons and
is between companies in unrelated industries.
D) Market-Extension Mergers: A market-extension merger is a merger between companies that sell
the same products or services but that operate in different markets.
6. Integrated report: It is a report which communicates how an organizational strategy, governance,
performance and decisions lead to creation of value for the business. The purpose of integrated report
is to create, preserve and maintain value of the business for long period of time
Contents of Integrated Report: Governance ,Organizational overview , External environment ,
Business strategy and resource allocation , Risks and opportunities
The purpose of an integrated report : Holistic View, Long-Term Value Creation , Transparency
, Stakeholder Engagement, Risk Management
SECTION -C
7. Project M
Year Cash Probability(f) fx d=(X- d2 Fd2
Flow(X) mean=14,000)
A 10,000 0.1 1,000 -4,000 1,60,00,000 16,00,000
B 12,000 0.2 2,400 -2,000 40,00,000 8,00,000
C 14,000 0.4 5,600 0 0 0
D 16,000 0.2 3,200 2,000 40,00,000 8,00,000
E 18,000 0.1 1,800 4,000 1,60,00,000 16,00,000
∑ 𝒇𝒙 = ∑ 𝒇𝒅𝟐 =
𝑵=𝟏
14,000 48,00,000
∑ 𝒇𝑿 𝟏𝟒,𝟎𝟎𝟎
Mean= = =14,000
𝑵 𝟏
∑ 𝒇𝒅𝟐 48,00,000
S.D= √ =√ =√48,00,000 = 2,190.89
𝑁 1
Project N
Year Cash Probability(f) fx d=(X- d2 Fd2
Flow(X) mean=18,000)
A 26,000 0.1 2,600 8,000 6,40,00,000 64,00,000
B 22,000 0.15 3,300 4,000 1,60,00,000 24,00,000
C 18,000 0.5 9,000 0 0 0
D 14,000 0.15 2,100 -4,000 1,60,00,000 24,00,000
E 10,000 0.1 1,000 -8,000 6,40,00,000 64,00,000
∑ 𝒇𝒅𝟐
∑ 𝒇𝒙 =
𝑵=𝟏 =1,76,00,000
18,000
∑ 𝒇𝑿 𝟏𝟖,𝟎𝟎𝟎
Mean= = =18,000
𝑵 𝟏
∑ 𝒇𝒅𝟐 1,76,00,000
S.D= √ =√ =√1,76,00,000 = 4,195.23
𝑁 1
0r
Project M
Year Cash d=(X- d2 Probability(f) Pd2
Flow(X) mean=14,000)
A 10,000 -4,000 1,60,00,000 0.1 16,00,000
B 12,000 -2,000 40,00,000 0.2 8,00,000
C 14,000 0 0 0.4 0
D 16,000 2,000 40,00,000 0.2 8,00,000
E 18,000 4,000 1,60,00,000 0.1 16,00,000
∑𝑥 N-1 ∑ 𝒇𝒅𝟐 =
48,00,000
= 70,000
∑𝑿 𝟕𝟎,𝟎𝟎𝟎
Mean= 𝑵 = =14,000
𝟓
∑ 𝒇𝒅𝟐 48,00,000
S.D= √ =√ =√48,00,000 = 2,190.89
𝑁 1
Project N
Year Cash d=(X- d2 Probability(f) Fd2
Flow(X) mean=18,000)
A 26,000 8,000 6,40,00,000 0.1 64,00,000
B 22,000 4,000 1,60,00,000 0.15 24,00,000
C 18,000 0 0 0.5 0
D 14,000 -4,000 1,60,00,000 0.15 24,00,000
E 10,000 -8000 6,40,00,000 0.1 64,00,000
∑ 𝒇𝒅𝟐
𝑵=𝟏
∑𝑥 =1,76,00,000
= 90,000
∑ 𝒇𝑿 𝟗𝟎,,𝟎𝟎𝟎
Mean= = =18,000
𝑵 𝟓
∑ 𝒇𝒅𝟐 1,76,00,000
S.D= √ =√ =√1,76,00,000 = 4,195.23
𝑁 1
8. WACC
A) Book Value Weights
Source Rs Book Value Weights Specific Cost Total
or Proportion % Product
Debentures 5,00,000 26.32 0.10 2.63%
Preference Shares 2,00,000 10.53 0.08 0.84%
Equity Shares 10,00,000 52.63 0.12 6.32%
Retained Earnings 2,00,000 10.52 0.13 1.37%
Total 19,00,000 100 WACC 11.16%
B) Market Value
Source Rs Book Value Weights Specific Cost Total
or Proportion % Product
Debentures 3,80,000 22.49 % 0.10 2.25 %
Preference Shares 1,10,000 6.51 % 0.08 0.52 %
Equity Shares 9,00,000 53.25 % 0.12 6.39 %
Retained Earnings 3,00,000 17.75 % 0.13 2.31 %
Total 16,90,000 WACC 11.47 %
or
A) Book Value Weights
Source Rs Book Value Specific Cost % Total Product
Weights or
Proportion %
Debentures 5,00,000 26.32 % 10 % 263.2
Preference Shares 2,00,000 10.53 % 8% 84.24
Equity Shares 10,00,000 52.63 % 12 % 631.56
Retained Earnings 2,00,000 10.52 % 13 % 136.76
Total 19,00,000 ∑ 𝑾 =100 % ∑ 𝑾𝑿 = 𝟏, 𝟏𝟏𝟓. 𝟕𝟔
∑ 𝑾𝑿 𝟏,𝟏𝟏𝟓.𝟕𝟔
WACC= ∑𝑾
= = 𝟏𝟏. 𝟏𝟓 𝟎𝒓 𝟏𝟏. 𝟏𝟔
𝟏𝟎𝟎
B) Market Value
Source Rs Book Value Weights Specific Cost Total Product
or Proportion %
Debentures 3,80,000 22.49 % 10 % 224.9
Preference Shares 1,10,000 6.51 % 8% 52.08
Equity Shares 9,00,000 53.25 % 12 % 639
Retained Earnings 3,00,000 17.75 % 13 % 230.75
Total 16,90,000 ∑ 𝑾 =100 %
∑ 𝑾𝑿 = 𝟏𝟏𝟒𝟔. 𝟕𝟑
∑ 𝑾𝑿 𝟏𝟏𝟒𝟔.𝟕𝟑
WACC= ∑𝑾
= = 𝟏𝟏. 𝟒𝟔 𝟎𝒓 𝟏𝟏. 𝟒𝟕
𝟏𝟎𝟎
or
A) Book Value Weights
Source Rs Book Value Specific Cost % Total Product
Weights or
Proportion %
Debentures 5,00,000 0.26 10 % 2.6
Preference Shares 2,00,000 0.11 8% 0.88
Equity Shares 10,00,000 0.53 12 % 6.36
Retained Earnings 2,00,000 0.10 13 % 1.3
Total 19,00,000 WACC 11.14
B) Market Value
Source Rs Book Value Weights Specific Cost Total Product
or Proportion
Debentures 3,80,000 0.22 10 % 2.2
Preference Shares 1,10,000 0.07 8% 0.56
Equity Shares 9,00,000 0.53 12 % 6.36
Retained Earnings 3,00,000 0.18 13 % 2.34
Total 16,90,000 WACC 11.46
[Link] Price Under Gordon’s Model
Payout =70% Payout 50% Payout 40%
Retention(b) =30% Retention(b) =50% Retention(b) =60%
r=20% or 0.20 r=20% or 0.20 r=20% or 0.20
K=16 % or 0.16 K=16 % or 0.16 K=16 % or 0.16
𝑫 𝑫 𝑫
P= 𝑲−𝒈 P= 𝑲−𝒈 P= 𝑲−𝒈
D= Earning X Payout ratio D= Earning X Payout ratio D= Earning X Payout ratio
30X70/100=21 30X50/100=15 30X40/100=12
g=bXr g=bXr g=bXr
=0.30X0.20=0.06 0.50X0.20=0.1 0.60X0.20=0.12
𝑫 𝑫 𝑫
P= 𝑲−𝒈 P= 𝑲−𝒈 P= 𝑲−𝒈
𝟐𝟏 𝟐𝟏 𝟏𝟓 𝟏𝟓 𝟏𝟐 𝟏𝟐
=𝟎.𝟏 = 210 per share =𝟎.𝟎𝟔= 250 per share =𝟎.𝟎𝟒= 300 per share
𝟎.𝟏𝟔−𝟎.𝟎𝟔 𝟎.𝟏𝟔−𝟎.𝟏 𝟎.𝟏𝟔−𝟎.𝟏𝟐
or
Payout =70% Payout 50% Payout 40%
Retention(b) =30% Retention(b) =50% Retention(b) =60%
r=20% or 0.20 r=20% or 0.20 r=20% or 0.20
K=16 % or 0.16 K=16 % or 0.16 K=16 % or 0.16
𝑬(𝟏−𝒃) 𝑬(𝟏−𝒃) 𝑬(𝟏−𝒃)
P= P= P=
𝑲𝒆−𝒓(𝟏−𝒃) 𝑲𝒆−𝒓(𝟏−𝒃) 𝑲𝒆−𝒓(𝟏−𝒃)
𝟑𝟎(𝟏−𝟎.𝟑𝟎)
= 𝟎.𝟏𝟔−𝟎.𝟐𝟎 (𝟎.𝟑𝟎) 30(1 − 0.50) 𝟑𝟎(𝟏 − 𝟎. 𝟔𝟎)
0.16 − 0.20(0.50) 𝟎. 𝟏𝟔 − 𝟎. 𝟐𝟎(𝟎. 𝟔𝟎)
30(0,70)
𝟑𝟎(𝟎. 𝟓𝟎) 𝟑𝟎(𝟎. 𝟒𝟎)
0.16 − 0.06
𝟎. 𝟏𝟔 − 𝟎. 𝟏 𝟎. 𝟏𝟔 − 𝟎. 𝟏𝟐
𝟐𝟏 𝟐𝟏
=𝟎.𝟏 = 210 per share 𝟏𝟓 𝟏𝟓 𝟏𝟐 𝟏𝟐
𝟎.𝟏𝟔−𝟎.𝟎𝟔 =𝟎.𝟎𝟔= 250 per share =𝟎.𝟎𝟒= 300 per share
𝟎.𝟏𝟔−𝟎.𝟏 𝟎.𝟏𝟔−𝟎.𝟏𝟐
10. A merger, in business terms, is the combining of two or more companies into a single entity. It
essentially involves two or more companies agreeing to unite their operations, assets, and liabilities, forming a
new company or the surviving company being one of the original entities.
1).Adaptation to Market Changes 2) Cost Reduction 3) Merger or Acquisition 4) Diversification or Focus
5) Financial Restructuring 6) Technological Advances 7) Globalization 8) Leadership Changes 9)
Regulatory Compliance 10) Response to Economic Conditions
11.
1) Insider Trading 2) Market Manipulation 3) Misleading Financial Reporting 4) Conflicts of Interest 5)
Predatory Lending 6) Payday Lending and High-Interest Loans 7) Derivatives and Risk Management 8)
Executive Compensation 9) Socially Irresponsible Investments 10) Credit Rating Agencies 11) Microfinance
and Consumer Protection .
