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UNIT 4

PART A

1. The current market price of a companys share is Rs. 90 and the expected dividend per
share next year is Rs. 4.50. If the dividends are expected to grow at a constant rate of 8
percent, calculate the cost of equity
2. The equity stock of RAX Limited is currently selling for Rs. 30 per share. The dividend
expected next year is Rs. 2.00. The investors required rate of return on this stock is 15
percent. If the constant growth model applies to RAX Limited, What is the expected growth
rate?

3. Each of the following projects requires a cash outlay of Rs. 10,000. You are required to
suggest which project should be accepted if the standard payback period is 5 years
Project
Project Y
Year
X(Rs)
(Rs)
Project Z(Rs.)
1
2,500
4,000
1,000
2
2,500
3,000
2,000
3
2,500
2,000
3,000
4
2,500
1,000
4,000
5
2,500
UNIT 4

PART B

1. From the following capital structure, calculate the weighted average


cost of capital
Source of capital
Share capital

Reserves & Surplus


Preference share capital
Debenture
2.

From the following capital structure of a company, calculate the overall cost of capital
using (a) book value weights (b) market value weights
Source

Book value

Market Value

Equity share capital (Rs. 10 / share)

45000

90000

Retained earnings

15000

Preference share capital

10000

10000

Debentures

30000

30000

The after tax cost of different sources of finance is as follows


Equity share capital 14% , Retained earnings 13%, Preference share capital 10% and Debentures 5%

3. From the following two projects,


calculate
A. Net Present Value
B. Profitability Index
Project
A
B
Investment
Rs. 20000
Rs. 15000
Cash inflows

1
4200
4200
2
4800
4500

3
7000
4000

4
8000
5000

5
2000
1000

Suggest which project to be accepted if


discount rate is 12%

4. Two projects M and N which are mutually exclusive are being under consideration. Both
of them require an investment of Rs. 1, 00,000 each. The net cash inflows are estimated as
under
Year
M(Rs)
N(Rs)
1
10,000
30,000

2
3
4

40,000
30,000
60,000

50,000
80,000
40,000

5
90,000
60,000
The companys targeted rate of return on investments is 12%. You are required to assess the
projects on the basis of their present values using (1) NPV method (2) Profitability index method

UNIT 4

1.

PART C

In considering the most desirable capital structure of a company, the following


estimates of the cost of debt and equity (after tax) have been made at various levels of
debt equity mix

Debt as percentage of total capital employed

cost of debt

cost of equity

12

10

12

20

12.5

30

5.5

13

40

14

50

6.5

16

60

20

You
You are required to determine the optimal debt equity mix for
the company by calculating the composite cost of capital
2.

In considering the most desirable capital structure of a company, the following


estimates of the cost of debt and equity (after tax) have been made at various levels of
debt equity mix

Debt as percentage of total capital employed

cost of debt

cost of equity

15

10

15

20

15.5

30

7.5

16

40

17

50

8.5

19

60

9.5

20

You are required to determine the optimal debt equity mix for the company by calculating
the composite cost of capital

3. Discuss the mechanics, merits and demerits of capital budgeting techniques.


3.A company has to choose one of the following two mutually exclusive projects. The cash flows
are
Proje
1
2
3
4
5
ct
X
4200
4800
7000
8000
2000
Y
4200
4500
4000
5000
1000
Project X requires an investment of Rs. 20000 and Project Y requires an investment of Rs.
15000.
Calculate (a) Payback period (b) Internal rate of return (c) NPV (d) PI (e) ARR
4.

Janaki products Ltd has two projects under consideration which are mutually exclusive. The cost of each of them is Rs. 1,
00,000. Determine which project is better based on payback period, ARR, NPV, PT and IRR methods. The discount rate is
10%.
Year

Project A(Rs.)

Project B(Rs.)

1,00, 000

20,000

80,000

40,000

60,000

60,000

40,000

80,000

20,000

1,00,000

UNIT 5
PART A
1. The earnings per share of a company is Rs. 10. It has an internal rate of return of 15
percent and the capitalization rate of its risk class is 12.5 percent. The dividend per share
is Rs. 4. If Walters model is used what is the price of the share.
2. The following data is available about XYZ ltd. Earnings per share; Rs.5, Rate of return
required by shareholders: 16%. Assume Gordon model, what rate of return should be
earned on investment to ensure that the market price of share is Rs. 50 when the dividend
payout ratio is 40%.
3. From the following, calculate DOL, DFL and DCL
(Rs. In Lakhs)
EBIT
PBT
FIXED COST

1120
320
700

4. Calculate operating leverage , financial leverage and combined leverage from


the following data
(Rs.)
200000
0.7
65000
15000

Sales (100000 units)


Variable cost per unit
Fixed cost
Interest charges

5. A firm has sales of Rs. 20, 00,000. Its variable cost is Rs. 14, 00,000 and Fixed cost Rs. 4,
00,000 and debt Rs. 10, 00,000 at 10% rate of interest. Find out the leverages.
UNIT 5
PART B
1. Explain about the NI approach and NOI approach of capital structure theory.
2. Calculate the degree of operating leverage, financial leverage and combined leverage for
the following firms
A
B
C
Output (units)
60000
15000
100000
Fixed cost
7000
14000
1500
Variable cost / unit
0.20
1.50
0.02
Interest on borrowed funds
4000
8000
Selling price per unit
0.60
5.00
0.10
3. The following information is available in respect of ABC Ltd.
EPS
Rate of return
Required rate of return
Find out the market price of the share under Gordon model if the firm follows a
payout of 50% or 25%

Rs. 10
20%
16%

4. A company earns Rs. 10 per share at an internal rate of 15 percent. The firm has a policy
of paying 40 percent of earnings as dividends. If the required rate of return is 10 percent,
determine the price of share under (a) Walter model (b) Gordon model

5. From the following information, calculate the leverages


Particulars
Company X
Company Y
Output
Fixed cost
Selling price per unit
Variable cost per unit
Interest

80,000 units
Rs. 2,40,000
Rs. 10
Rs. 4
Rs. 1,20,000

1,00,000 units
Rs. 2,50,000
Rs. 8
Rs. 8
Rs. 50,000

UNIT 5

PART C

1. The present share capital of A Ltd consists of 1000 shares selling at Rs. 100 each. The
company is contemplating a dividend of Rs. 10 per share at the end of the current
financial year. The company belongs to a risk class for which appropriate capitalization
rate is 20%. The company expects to have a net income of Rs. 25000. What will be the
price of the share at the end of the year if (i) dividend is not declared (ii) if dividend is
declared? Assume the company pays the dividend and has to make new investment of Rs.
48000 in the coming period, how many new shares to be issued to finance the investment
programme
2. The V co currently has 100000 outstanding shares selling at Rs.100 each. The firm has
net profit s of Rs.1000000 and wants to make new investments of Rs.2000000 during the
period. The firm is also thinking of declaring a dividend of Rs.5 per share at the end of
the current fiscal year. The firms opportunity cost of capital is 10%. What will be price of
the share at the end of the year if (1) if dividend not declared (2) if dividend declared (3)
how many new shares must be issued