SVKM'S NMIMS

ANIL SURENDRA MODI SCHOOL 0F COMMERCE/SCHOOL OF COMMERCE

AcademicYear: 2022-2023

Program B.Sc.Finance Year: 11 Semester: Ill

Subject: Corporate Finance -11 Batch: 2021-2024

Date : 13 December 2022 Time0830amto 10.30am 2(hrs) ~

Marks:50 No. of pages:rfu

FINAL EXAMINATION
Instructions
> Question No. 1 is compulsory (All sub-parts). The total marks for question number I
are 20

® > Attempt Any 3 Questions from question number 2 to question number 5. Each
question carries 10 marks.
> Figures in brackets on the right-hand side indicate full marks
> Both ordinary and scientific calculators are allowed.
> AIL workings must form part of the solution.

Ouestion 1
a. Sequence Ltd cunently earns an EPS of Rs. 2, and its shares trade at a PAI multiple of 11.
The company's current capital structure consists of Equity Share Capital of Rs. 30 lakhs
(FV Rs.10 each), Reserves & Surplus of Rs. 20 lakhs and a 10% Bank Loan of Rs.10
lakh. The company's current degree of Operating Leverage is 1.5. The company plans to
start a new product line that would increase sales by 30°/o, and the variable cost-to-sales
ratio would not change. For the new product line, the company is contemplating the
• following options to raise funds of Rs.15 lakhs.

Option 1 Option 2
Equity Shares (FV Rs.10) 50% 30%

Debentures (FV Rs. 50) 30% 50%

14% Preference Share (FV Rs.10) 20% 10%

New Equity Shares will be issued at the current Market Price. New Debentures have been
assigned a AAA credit rating, which implies a spread of 250 basis points over the risk-free

1/4
rate. The current risk-free interest rate is 6.5%, and the applicable tax rate is 30°/o. The
Debentures will be issued at face value. New Preference Shares will be issued at par.

You are required to:

Compute the cunent EBIT and the EBIT after raising funds. (2 Marks)
Compute EPs and Financial Leverage under each of the plans. (6 Marks)
Compute the Market price per share for plan 1 if the Pfl ratio increase by 20% and also
calculate the Market price per share for plan 2 if the PAI ratio decrease by 10%.
(2 Marks)

b. Write Short notes on (2.5 Marks x 2 = 5 Marks)

i. Preference shares
ii. Takeoutfinancing

c. State Modigliani and Miller's proposition I related to capital structure. Illustrate how the
arbitrage mechanism works with the help of an example. (5 Marks)

ANSWER ANY THREE (Question Number 2 to Question Number 5...10 Marks Each)

Ouestion 2
The selected financial data for A, 8 and C companies for the current year ended March 31
are as follows:

Particulars A 8 C ®
Variable Expenses as a % of sales 60 50 40

Interest Rs. 1000 Rs. 4000 Rs. 6000

Degree of operating leverage 4:1 3:1 2.5:1

Degree of Financial Leverage 3:1 5:1 2.5: 1

Income tax rate 30% 30% 30%

(a) Prepare income statements for A, B, and c companies. (6 Marks)

(b) Corment on the financial position and structure of these companies. (4 Marks)

•?-/+
 Ouestion 3
Amrit Corporation has the following book value capital structure:

Equity Capital (5 million Shares, Rs. 10 par) Rs. 50 million

Preference Share,12% (50,000 Shares, Rs.100 par) Rs. 5 million
Retained Earnings Rs. 40 million
Debentures 14% (2,50,000 debentures, Rs. 100 par) Rs. 25 million
Term loans,13% Rs. 40 million
The company's last year Earning per share was Rs. 5, and it maintains a dividend pay-out ratio
of 60% and returns on equity of 10%. The market price per share is Rs. 20.8. Preference stock,
redeemable after 10 years, is currently selling for Rs. 90 per share. Debentures, redeemable
• after 6 years, sell for Rs. 75 per debenture. The tax rate is 40%.

a. Calculate the cost of capital using Market value proportions (6 Marks)

b. Define the marginal cost of capital if it needs Rs. 50 million next year, assuming the
amount will be raised by 60% equity, 20% debt, and 200/o retained earnings. Equity
issues will fetch a net price of Rs. 14, and debt will cost 13% (before tax) up to 4 million
and beyond 4 million 1 5% (before tax). (4 Marks)

Ouestion 4
You are working as a finance manager with Allied Biotech Limited. The earnings availal]le
for its equity shareholders are Rs. 1,00,00,000. It has 10 lakh equity shares outstanding. Its
share is currently sold at Rs. 90 per share. The company is currently contemplating the

• :::;n:;feRinsine7f#oS#.in cash dividends. The board of Allied Bioteeh Lid. has asked you

a. The cunent EPs and the pAl ratio (2 Marks)

b. If the firm can repurchase shares at Rs. 97 per share, how many equity shares can be
repurchased instead of the cash dividend? (2 Marks)
c. The EPs after the proposed share repurchase. (2 Marks)
d. Calculate equilibrium share repurchase price (2 marks)
e. Are the equity shareholders who have not sold their shares financially better off than
those who have sold their shares when shares are repurchased at Rs.100 or Rs. 95?
(2 marks)

5/4
Ouestion 5
a. Bakers Ltd intends to acquire Takers Ltd by merger, and the following information is
available in respect of the companies:
Bakers Ltd Takers Ltd
Number of Equity Shares 10,00,000 6,00,000
Earnings after Tax Qs.) 50,00,000 18,00,000

Market Value per Share (Rs.) 42 28

Iftheproposedmergertakesplace,whatwouldbetheneweamingpricepershareforBakers
Ltd? Assume that the merger takes place by exchange of equity shares and the exchange ratio
is based on the current market price 9 (3 Marks).
What should be the exchange ratio if Bakers Ltd wants to ensure that the EPS after the merger
stands the same as the current? (2 Marks)

b. Examine the major motives for Mergers & Acquisitions (M & A) and state various
ways in which a company generates synergy in M & A. (5 Marks)

************************END 0F QUESTION PAPHR***********************

4/4.