Professional Documents
Culture Documents
PART A
1. The current market price of a companys share is Rs. 90 and the expected dividend per
share next year is Rs. 4.50. If the dividends are expected to grow at a constant rate of 8
percent, calculate the cost of equity
2. The equity stock of RAX Limited is currently selling for Rs. 30 per share. The dividend
expected next year is Rs. 2.00. The investors required rate of return on this stock is 15
percent. If the constant growth model applies to RAX Limited, What is the expected growth
rate?
3. Each of the following projects requires a cash outlay of Rs. 10,000. You are required to
suggest which project should be accepted if the standard payback period is 5 years
Project
Project Y
Year
X(Rs)
(Rs)
Project Z(Rs.)
1
2,500
4,000
1,000
2
2,500
3,000
2,000
3
2,500
2,000
3,000
4
2,500
1,000
4,000
5
2,500
UNIT 4
PART B
From the following capital structure of a company, calculate the overall cost of capital
using (a) book value weights (b) market value weights
Source
Book value
Market Value
45000
90000
Retained earnings
15000
10000
10000
Debentures
30000
30000
1
4200
4200
2
4800
4500
3
7000
4000
4
8000
5000
5
2000
1000
4. Two projects M and N which are mutually exclusive are being under consideration. Both
of them require an investment of Rs. 1, 00,000 each. The net cash inflows are estimated as
under
Year
M(Rs)
N(Rs)
1
10,000
30,000
2
3
4
40,000
30,000
60,000
50,000
80,000
40,000
5
90,000
60,000
The companys targeted rate of return on investments is 12%. You are required to assess the
projects on the basis of their present values using (1) NPV method (2) Profitability index method
UNIT 4
1.
PART C
cost of debt
cost of equity
12
10
12
20
12.5
30
5.5
13
40
14
50
6.5
16
60
20
You
You are required to determine the optimal debt equity mix for
the company by calculating the composite cost of capital
2.
cost of debt
cost of equity
15
10
15
20
15.5
30
7.5
16
40
17
50
8.5
19
60
9.5
20
You are required to determine the optimal debt equity mix for the company by calculating
the composite cost of capital
Janaki products Ltd has two projects under consideration which are mutually exclusive. The cost of each of them is Rs. 1,
00,000. Determine which project is better based on payback period, ARR, NPV, PT and IRR methods. The discount rate is
10%.
Year
Project A(Rs.)
Project B(Rs.)
1,00, 000
20,000
80,000
40,000
60,000
60,000
40,000
80,000
20,000
1,00,000
UNIT 5
PART A
1. The earnings per share of a company is Rs. 10. It has an internal rate of return of 15
percent and the capitalization rate of its risk class is 12.5 percent. The dividend per share
is Rs. 4. If Walters model is used what is the price of the share.
2. The following data is available about XYZ ltd. Earnings per share; Rs.5, Rate of return
required by shareholders: 16%. Assume Gordon model, what rate of return should be
earned on investment to ensure that the market price of share is Rs. 50 when the dividend
payout ratio is 40%.
3. From the following, calculate DOL, DFL and DCL
(Rs. In Lakhs)
EBIT
PBT
FIXED COST
1120
320
700
5. A firm has sales of Rs. 20, 00,000. Its variable cost is Rs. 14, 00,000 and Fixed cost Rs. 4,
00,000 and debt Rs. 10, 00,000 at 10% rate of interest. Find out the leverages.
UNIT 5
PART B
1. Explain about the NI approach and NOI approach of capital structure theory.
2. Calculate the degree of operating leverage, financial leverage and combined leverage for
the following firms
A
B
C
Output (units)
60000
15000
100000
Fixed cost
7000
14000
1500
Variable cost / unit
0.20
1.50
0.02
Interest on borrowed funds
4000
8000
Selling price per unit
0.60
5.00
0.10
3. The following information is available in respect of ABC Ltd.
EPS
Rate of return
Required rate of return
Find out the market price of the share under Gordon model if the firm follows a
payout of 50% or 25%
Rs. 10
20%
16%
4. A company earns Rs. 10 per share at an internal rate of 15 percent. The firm has a policy
of paying 40 percent of earnings as dividends. If the required rate of return is 10 percent,
determine the price of share under (a) Walter model (b) Gordon model
80,000 units
Rs. 2,40,000
Rs. 10
Rs. 4
Rs. 1,20,000
1,00,000 units
Rs. 2,50,000
Rs. 8
Rs. 8
Rs. 50,000
UNIT 5
PART C
1. The present share capital of A Ltd consists of 1000 shares selling at Rs. 100 each. The
company is contemplating a dividend of Rs. 10 per share at the end of the current
financial year. The company belongs to a risk class for which appropriate capitalization
rate is 20%. The company expects to have a net income of Rs. 25000. What will be the
price of the share at the end of the year if (i) dividend is not declared (ii) if dividend is
declared? Assume the company pays the dividend and has to make new investment of Rs.
48000 in the coming period, how many new shares to be issued to finance the investment
programme
2. The V co currently has 100000 outstanding shares selling at Rs.100 each. The firm has
net profit s of Rs.1000000 and wants to make new investments of Rs.2000000 during the
period. The firm is also thinking of declaring a dividend of Rs.5 per share at the end of
the current fiscal year. The firms opportunity cost of capital is 10%. What will be price of
the share at the end of the year if (1) if dividend not declared (2) if dividend declared (3)
how many new shares must be issued