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School for Continuing Education (NGA-SCE)
Course: Strategic financial management
Internal Assignment Applicable for
September 2020 Examination
Assignment Marks: 30
Ques. 1. The following is the capital
structure of Alpha Limited as on 31st March 2020
Equity Shares: 10000 shares (of Rs 100 each) Rs 10,00,000
12% Preference Shares (of Rs 100 each) Rs 10,00,000
10% Debentures Rs
12,00,000
The market price of the company’s share is Rs
120 and it is expected that a dividend of Rs 10 per share would be declared by
the company. The dividend growth rate is 5%. If the tax rate is 30%, calculate
Weighted Average Cost of Capital (WACC) by book value & market value
method. Assume market value of Preference shares and Debentures to be same as
the book value. Comment on the results.
Answer: Computation of WACC on the basis of book value weights
|
Source |
Weight(W)* |
C/C |
W * C/C |
|
Equity shares |
0.31 |
15 |
4.65 |
|
12% Preference shares |
0.31 |
12 |
3.72 |
Ques. 2. The following details are available
for Gamma Ltd:
|
Details |
Proposal A |
Proposal B |
|
Initial Cost |
Rs.10,00,000 |
Rs. 12,00,000 |
|
Expected life |
4 years |
5 years |
|
Profits before tax after depreciation |
Rs. 3,00,000 each for first two
years Rs. 3,50,000 each for next two years |
Rs. 3,00,000 each for first two
years Rs. 3,50,000 each for next three
years |
Calculate Discounted Payback period and
suggest which one is better if the discounting factor is 10% and tax rate 30%.
Show in detail relevant calculations and use Straight Line Method of
Depreciation.
Answer: Payback period is defined as the
length of time required to recover the initial cash out lay. Discounted payback
period is more reliable than simple payback period since it accounts for time
value of money. It is interesting to note that if a project has negative net
present value it won't pay back the initial investment.
Discounted cumulative cash flow of PROPOSAL A
|
Year |
Cash flow |
Cash flows after |
Deprec- iation |
Net cash flow |
P.V Factor (10%) |
Amount |
Discounted cumulative |
|
0 |
-1000000 |
-1000000 |
- |
-1000000 |
1 |
-1000000 |
-1000000 |
Ques. 3. A company’s current earnings before
interest and taxes are Rs 5,00,000. The firm currently has outstanding Rs 10
lakh of debts at an average cost of 8 per cent. Its cost of equity capital is
estimated to equal 12 per cent.
a. Determine the current value and overall
capitalisation rate of the firm using the Net Income Approach. Comment on the
impact of increase in debentures on the value of the firm as per Net Income
Approach.
b. The firm is considering reducing its debt
by Rs 5 lakhs. The cost of debt and EBIT is expected to be unaffected. However,
the firm’s cost of equity capital is to be reduced to 10 per cent due to
decrease in financial risk. Would you recommend the proposed action (Based on
value of firm and overall cost of capital)? Show relevant calculations using
Net Income Approach.
Answer: a) Current value and overall capitalisation rate of the firm using the Net
Income Approach
|
Particulars |
Amount (Rs.) |
|
Net operating income (EBIT) |
500000 |
|
Less: Interest on debentures (8% of
1000000) |
80000 |
|
Earnings for shareholders (A) |
420000 |
|
Equity capitalisation rate (B) |
0.12 |
Dear students, get fully solved assignments of
NMIMS University for December 2020 batch.
Do send your query at:
Call us at: 08263069601
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