SDM IMD 2019-20

Shri Dharmasthala Manjunatheshwara Institute for Management Development

Mysuru
PGDM End Term - Examination – March 2020
Term – III – Batch 2019-21
Course Title : Corporate Finance II Subject Code : CF-II
Duration: 75 minutes Max. Marks : 40 marks
Instructions to Candidates:
1. Laptops are permitted inside the hall. MS-Excel can be used for analyzing and
calculation purpose. Wi-Fi to be disabled. This is a closed book examination.
2. The output should be neatly copied from the spreadsheet and interpretation
where ever necessary must be provided.
3. Do not scribble or overwrite. Such papers may not be considered for valuation.

Subject cod : CF-II-PGDM No.

Answer ALL questions
1. Longstreet Communications Inc has the following capital structure which it considers
to be optimal. Debt 25%, preferred stock 15% and equity 60%. LCI’s tax rate is 40%.
Debt could be sold at an interest rate of 9%. New preferred stock could be sold to the
public at a price of $100 per share, with a dividend of $9. Floatation costs of $5 per
share. Investors expect earnings and dividend to grow @6% in the future. LCI paid a
dividend of 3.70 $ per share and its stock currently sells at a price of $60 per share.
(12 marks)

a. Find the component cost of debt, preferred stock and equity. (6 marks)
b. What is the WACC? (6 marks)

2. In the case study of Hill Country Snack Foods, answer the following briefly,
(10 marks)
a. Why was the company averse to use of debt in the capital structure? (3 marks)
b. Suppose the company had issued extra dividend apart from the regular dividend/
issued bonus shares, will it have addressed the problem of the Company? (7 marks)

3. Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $150000.
30% of customers pay on the 10th day and take discounts; the other 70% on average,
50 days after purchase, (10 marks)
a. What is the days sales outstanding? (3 marks)
b. What is the average amount of receivables? (3 marks)
c. What would happen to average receivables if Snider toughened its collection
policy with the result that all non-discount customers paid on the 45th day?
(4 marks)

4. Answer briefly to the following questions- (8 marks)

a. Operating and Financial Leverage (3 marks)
b. Based on the leverage analysis discussed in the class of Indigo Ltd, what is its
impact on the overall financial performance of the Airline? (5 marks)

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PGDM Document