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You are on page 1of 6

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

cost of capital

Source of capital

Share capital

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

45000

90000

Retained earnings

15000

10000

10000

Debentures

30000

30000

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

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

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

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

debt equity mix

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.

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

debt equity mix

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.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

the following data

(Rs.)

200000

0.7

65000

15000

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

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

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