PGDM Mid Term Examination – February 2024

Term 3 – PGDM 2023 – 25

Course Title: Corporate Finance
Faculty: Dr.M.Sriram/Dr.K.Riyazahmed
Duration: 70 minutes Max. Marks: 25
Mode of Exam: Online (Moodle)
Instructions to Candidates:
1. This is an open book examination.
2. All questions are compulsory.
3. All excel sheets to be uploaded in Moodle. The duration is inclusive of uploading excel sheets on
Moodle.
4. Wifi to be disabled.

ICLO’s
ICLO 1: To develop an understanding on the importance of corporate finance decisions.
ICLO 2: Assess the essence of the time value of money and its relevance to investment decisions.
ICLO 3: An orientation on the valuation of equity and bonds.
ICLO 4: To assess the importance of cost of capital, capital structure decisions, and its relevance in
investment decisions.
ICLO 5: To provide insights on the importance of working capital management in corporate finance
decisions

1. You are analyzing two mutually exclusive projects with the following cash flows (8 marks)

(values in USD-U.S Dollar) (ICLO 2)

Year Project A Project B

0 -400000 -400000

1 250000 100000

2 150000 150000

3 125000 170000
---
4 165000

The discount rate is assumed to be 10%

a. Estimate the payback period and IRR of the projects (3 marks)

b. Calculate the NPV of the respective projects (2 marks)
c. Which project would you select from among the two and what would be the basis of selecting a
project? (3 marks)

PGDM Question Paper

 2. You just turned 35 and have been saving for an around the world vacation. You want to take the
trip to celebrate your 40th birthday. You have sent aside as of today, USD 15000 for such a trip.
You expect the trip will cost USD 25000. The financial instruments you have invested USD
15000 in have been earning on an average of 8%. (5 marks) (ICLO 1)

a. Will you have enough money in that vacation account on your 40 th birthday to take the trip?
What will be the surplus, or shortfall, in that account when you turn 40? (2.5 marks)
b. If you had to, you could further fund the trip by making, starting today, five equal USD 600
contributions to the account. If you adhered to such a plan, how much will be in the account on
your 40th birthday? (2.5 marks)

3. Your company has been offered a contract for the development and delivery of a solar powered
military troop transport vehicle. The request for proposal provides all the necessary technical
specifications and it also stipulates that two working, economically feasible prototypes must be
delivered in 4 years, at which time you will receive your only customer payment- a single and
final payment of USD 50 million. Assume an interest rate of 18%. (5 marks) (ICLO 1)

a. What lump sum dollar amount would you be willing to accept today instead of the USD 50
million in four years? (2.5 marks)

b. Alternatively, what four-year receipts, starting a year from now, would you be willing to
accept? (2.5 marks)

4. 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
USD100 per share, with a dividend of USD9. Floatation costs of USD5 per share. Investors
expect earnings and dividend to grow @6% in the future. LCI paid a dividend of 3.70 USD per
share and its stock currently sells at a price of USD60 per share. (7 Marks) (ICLO4)

a. Find the component cost of debt, preferred stock and equity. (4 marks)
b. What is the WACC? (3 marks)

PGDM Question Paper