Q1.You have a choice of receiving Rs. 25,000, six years from now or Rs. 50,000, twelve years from now. At what implied annual interest rate should you be indifferent between the two ?
Q2.You borrow Rs. 10,000 at 14 percent compound annual interest for four years. The loan is repayable in four equal annual installments payable at the end of each year. What is the annual payment that will completely amortize the loan over four years?
Q3.Niranjan wishes to purchase an annuity contract that shall pay him Rs. 7,000 a year for the next 20 years. The company to whom Niranjan approaches imputes a compound annual interest of 6 percent in the annuity contracts. How much will Niranjan pay for this annuity?
Q4.You are entitled to receive Rs. 1,000 every alternate year end, starting two years from now to the next 20 years. At 10% compound annual interest, what is the present value of this receipt?
Q5.Ram is considering two different saving plans, The first plan would have him deposit Rs. 500 every 6 months and he would receive interest at an annual rate of 7%, compounded semiannually. Under the second plan he would deposit Rs. 1000 every year with a rate of interest of 7.5% compounded annually. The initial deposits will be made six months and one year from now respectively. Which plan is better? (at the end of ten years).
Q1.What do you understand by Cost of Capital? What are its components?
Q2.How is Cost of Debt different from Cost of Equity in terms of Risk and Return? Will it be correct to say that debt is a cheaper instrument than equity in a Tax environment? In case yes, do you agree that companies should lever their capital structure with as much debt as possible?
Q3.Under what circumstances the weighted average cost of capital should be taken as the relevant discounting factor in Capital Budgeting?
Q4.The dividend discount model considers dividends to have a bearing on the market value of shares.However, empirically it has been noticed that many companies do not give dividends; however, their share prices continuously rise. Explain this apparently unusual phenomenon. Try to relate the concept to the ultimate objective of financial management i.e. wealth maximization.
Q5.In case a company goes into a phase of deep turmoil resulting into negligible profits and zero taxes, what would happen to the cost of debt funds for cost of capital purposes?
Q6.Do the funds provided by sources such as accounts payable and accruals have a cost of capital? Explain.
Q7.ABC Ltd currently pays dividend of Rs 2 per share, and this dividend is expected to grow at 15 % annual rate for three years, and then at 10 % rate for the next three years, after which it is expected to grow at a 5 % rate forever. What value would you place on this stock if the required rate of return was 18%?
Q8.ABC Ltd has 9 % non callable Rs 100 face value preference shares outstanding .On January 1 the market price per share is Rs 73. Dividends are paid annually on December 3 1.If you require a 12% annual return on this investment, what is this stocks intrinsic value to you on January 1?
Q9.Using the dividend valuation model, is it possible to have a situation where a company grows 30 percent per year forever. (Ignore inflation).
Q10.Why would growth rate in earnings and dividend of a company not likely to continue in the long future?
Q1.Compare NPV to IRR. Why could there be conflicts in project rankings?
Q2.What is the risk adjusted discount rate (RADR) approach to project selection? How is it similar to the CAPM approach? How is different from a CAPM approach?
Q3.A fully depreciated factory (except cost of land bought 53 years ago fo 10,000) is lying idle for long. Five years back 9,00,000 was offered for the vacant plant. Presently it may sell for 15,00,000. Similar plant elsewhere would cost only 3,00,000.COC is 15%. Tax rate & CG rate 35%. There is a one time chance of getting a five years contract. Investment in building & equipment of 13,00,000 to be depreciated at the income tax rates provided elsewhere.. Additional charge for the same is allowed by income tax authorities in the terminal year. WC investment Rs. 4,25,000 recoverable at end. There is a plan to borrow 50% of the required investment at 10% for 10 years. Compute NPV, IRR and payback period. Following details are also available, • Selling price 25/Unit fixed for project life of 5 years.
• Sales volume 1,00,000 units per annum.
• Cash costs increase with inflation @ 4%
• Expenses (1st year) and other details are as follows RM – 10,00,000 (10/Unit) : DL – 4,00,000 (4/Unit) Other Material – 1,00,000 : Factory OH – 2,50,000 (IT Depreciation – 1st year 2,10,000 : 2nd Year 3,46,000 : 3rd year 2,26,000 : 4th Year 1,50,000 : 5th Year 1,38,000).
Q1.What is the critical assumption inherent in the Capital Asset Pricing Model as it relates to the acceptance criteria for risk investments?
Q2.Instead of using a expected return on market portfolio and the risk free rate of return in a CAPM approach to estimating the required return on equity , how would one use a firms debt cost in a CAPM type approach to estimate the firms required rate of return on equity?
Q3.What is the purpose of proxy companies in the application of the capital asset pricing model to estimating required returns?
Q4.Should companies in the same industry have approximately the same required rate of returns on investment projects? Why or why not?
Q5.If you use debt funds to finance a project, is the after tax cost of debt the required return for the project? As long as the project earns more than enough to pay interest and service the principal, does it not benefit the firm?
Q6.Should a company with multiple divisions establish separate required rates of returns for each division as opposed to using an overall weighted cost of capital ? Explain.
Q7.For a company investing in capital projects, how is value created by using required return calculations?
Q8.What are the sources of value creation through capital investment decisions?
Q1.Define operating leverage and the degree of operating leverage. How are the two related?
Q2.Define financial leverage and the degree of financial leverage. How are the two related?
Q3.Your friend suggests, “ Firms with high fixed operating costs show extremely dramatic fluctuations in operating profits for any given change in sales volume”. Do you agree? Why or why not?
Q4.In financial leverage, why not simply increase leverage as long as the firm is able to earn more on the employment of the funds thus provided than they cost? Would not the earnings per share increase?
Q5.The EBIT- EPS chart suggests that the higher the debt ratio, the higher are the earnings per share for any level of EBIT above the indifference point. Why firms do sometimes chose financing alternatives that do not maximise EPS?
Q1.ABC paint company has fixed operating costs of Rs 3 million a year. Variable operating costs are Rs 1.75 per half pint of paint produced, and the average selling price is Rs 2 per half pint. a- What is the annual break even point in half pints? In rupees of sales? b- If variable operating costs decline to Rs 1.68 per half pint, what would happen to the operating break even point? c- If fixed costs increase to Rs 3.75 million per year, what would be the effect on the operating break even point? d- Compute the degree of operating leverage at the current sales level of 16 million half pints. e- If sales are expected to increase by 15 % from the current sales position of 16 million half pints , what would be the resulting percentage change in operating profit(EBIT) from its current position?
Q2.ABC Ltd has a DOL of 2 at its current production and sales level of 10,000 units. The resulting operating income figure is Rs 1,000. 1. If sales are expected to increase by 20 percent from the current 10,000 unit sales position, what would be the resulting operating profit figure? 2. At the company’s new sales position of 12,000 units, what is the firm’s new DOL figure?
Q3.Somesh Cricket Bat Company currently has Rs 3 million in debt outstanding, bearing an interest rate of 12%. It wishes to finance a Rs 4 million expansion programme and is considering three alternatives: additional debt at 14 percent (option 1), preferred stock with a 12% dividend (option 2), and the sale of common stock at Rs 16 per share (option 3). The company currently has 8,00,000 shares of common stock outstanding and is in 40% tax bracket. 1. If earnings before interest and taxes are currently Rs 1.5 million, what would be earnings per share for the three alternatives, assuming no immediate increase in operating profit? 2. Develop a breakeven or indifference chart for these alternatives. What are the approximate indifference points? 3. Compute the degree of financial leverage for each alternative at the expected EBIT level of Rs 1.5 million? 4. Which alternative do you prefer? How much would EBIT need to increase before the next alternative would be better (in terms of EPS)
Q4.Geetika Regulator Company currently has 100,000 shares of common stock outstanding with a market price of Rs. 60 per share. It also has Rs. 2 million in 6 percent bonds. The company is considering a Rs. 3 million expansion program that it can finance with all common stock at Rs. 60 a share (option 1), straight bonds at 8 percent interest (opton 2), preferred stock at 7 percent (option 3), and half common stock at Rs. 60 per share and half 8 percent bonds (option 4). a. For an expected EBIT level of Rs. 1 million after the expansion program, calculate the earnings per share for each of the alternative methods of financing. Assume a tax rate of 50 percent. b. Calculate the indifference points between alternatives. What is your interpretation of them?
Q5.Geetika Regulator Company (See Problem above) expects the EBIT level after the expansion program to be Rs. 1 million, with a two-thirds probability that it will be between Rs. 600,000 and Rs. 1,400,000. a. Which financing alternative do you prefer? Why? b. Suppose that the expected EBIT level were Rs. 1.5 million and that there is a two-thirds probability that it would be between Rs. 1.3 million and Rs. 1.7 million. Which financing alternative would you prefer? Why?
Q6.A firm has sales of Rs 75 lakhs. Its variable cost and fixed costs are Rs 42 lakhs and Rs 6 lakhs respectively. It has a debt of Rs 45 lakhs at 9% and equity of Rs 55 lakhs. a- What is the firms ROI b- Does the firm have a favourable financial leverage? c- If the firm belongs to an industry whose asset turnover is 3, does it have a high or low asset leverage? d- What are the operating, financial and combined leverage of the firm? e- If sales drop to Rs 50 lakhs, what will be the new EBIT? f- At what level the EBT of the firm will be equal to zero?