Bangladesh University of Professionals

Faculty of Business Studies

Department of Business Administration in Accounting & Information Systems
Semester Final Examination Jan-June 2020
BBA in AIS
Course Name & Code: Corporate Finance (ACT 3102)

Time: 02 hours Full Marks: 50

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Instructions

• Answer any 05 (Five) questions.

• Marks shown against each question in bracket.
• Answer all parts of each question consecutively.
• Answer each question from a fresh sheet.
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Question No. 1 (10)

Consider a four-year project of Square Pharmaceuticals Ltd. with the following information:

Particulars Amount ($)

Initial Investment 430,000
Product Price 45
Variable Cost 34
Fixed Cost 280,000
Quantity Sold 80,000
Tax Rate 40%
Depreciation Straight-line
Salvage Value 30,000

Conduct a sensitivity analysis to show how sensitive Operating Cash Flow is to changes in quantity
sold.

Question No. 2 (5 + 3 + 2 = 10)

Beximco is comparing two different capital structures. Plan 1 would result in 1400 shares of stock
and $70,000 in debt. Plan 2 would result in 2,800 shares of stock and $18,000 in debt. The interest
rate on debt is 12% and tax rate is 40%.

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 a. Compare both of these plans to an all-equity plan assuming EBIT will be $13,700. The all-
equity plan would result in 3,700 shares of stock outstanding. Which of the three plans has
the highest EPS and the lowest one?
b. In part (a) what are the break-even levels of EBIT for each plan as compared to that for an all-
equity plan? Is one higher than the other? Why?
c. When will EPS be identical for Plans 1 and 2?

Question No. 3 (2 + 2 + 2 + 4 = 10)

Renata Ltd., an all-equity firm, is considering an investment of $2.6 million that will be depreciated
according to the straight-line method over its three-year life. The project is expected to generate
earnings before taxes and depreciation of $714,000 per year for 3 years. The investment will not
change the risk level of the firm. The company can obtain a 3 year, 9% loan to finance the project
from a local bank. All principal will be repaid in one balloon payment at the end of the third year. The
bank will charge the firm $52,000 in flotation fees, which will be amortized over the three-year life
of the loan. If the firm financed the project entirely with equity, the firm’s cost of capital will be 14%.
The corporate tax rate is 40%.
a. Calculate the NPV of an all-equity firm.
b. Calculate the financing side-effects of flotation costs.
c. Calculate the financing side-effects of tax subsidy.
d. Using the Adjusted Present Value (APV) method, calculate the APV value and determine
whether the firm should undertake the project.

Question No. 4 (8 + 2 = 10)

Healthcare Pharmaceuticals made an estimate for a project’s perpetual cash flow where annual sales
revenue will be $875,000; annual cost of goods sold will be $380,000; annual general and
administrative costs will be $225,000. The project will require a debt of $250,000 with an interest
rate of 9%. The project must maintain a debt-to-equity ratio of 0.40 and cost of unlevered equity is
18%.
a. If the corporate tax rate is 40%, then make a valuation of this project using Flow to Equity
approach.
b. If the initial investment of the project is $900,000, should they accept the project?

Question No. 5 (5 + 5 = 10)

a. Is stock repurchase a form of dividend? How? What is the impact of stock repurchase on a
company’s balance sheet?

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 b. As a shareholder, do you prefer to get a cash dividend or a stock dividend? Place your
arguments in favor of your opinion.

Question No. 6 (3 + 5 + 2 = 10)

ACI Limited is attempting to select the best of two mutually exclusive projects. The initial investment
and after-tax cash inflows associated with these projects are shown in the following table.
Cash Flows Project X Project Y
Initial Investment $(50,000) $(200,000)
Year 1 10,000 -
Year 2 30,000 248,000
Year 3 25,000 -

a. Calculate the payback period for each project.

b. Calculate the internal rate of return (IRR) for each project.
c. Which project would you recommend & why?

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