Strategic Financial Management (SFM) — Summer 2019

value of equity share of the company: 2000, 9% preference share of Rs.100 each Rs. 2,00,000 50,000 equity shares of Rs. 10 each, Rs. 8 per share Rs. 4,00,000 paid up Expected profit before tax per year Rs. 2,18,000 Rate of tax 40% Transfer to general reserve every year 20% Normal rate of earning 15%

Discuss the steps in Financial Planning process.

Acompany has estimated following demand level of its product. Sales (units ) 10,000 12,000 14,000 16,000 18,000 Probability 0.10 0.15 0.25 0.30 0.20

It has assumed that the sales price of Rs. 6 per unit, marginal cost of Rs. 3.5 per unit, and fixed cost of Rs. 34,000. What is the probability that (a) the company will continue to incur loss (c) the company will make profit of at least Rs. 10,000. Aproject involves an outlay of Rs.100,000. Its expected cash flow at the end

of the year 1 is Rs. 40,000. Thereafter it decreases every year by Rs. 2000. It has an economic life of 6 years. The certainty equivalent factor is CEFt= 1- 0.05t. Calculate the net present value of the project if the risk free rate of return is 10%. Page 1 of

Project X & Project Yhas similar life and yield. The initial investment is Rs.80 lakhs each. Both the projects are new business model and hence cash flow cannot be accurately projected. The probability distributions for the first year for both the projects are given below and are expected to be same for the entire tenure of the projects. Project X Project Y Cash Flows Cash Flows Probability Probability (Rs. Lakhs) (Rs. Lakhs) 12 0.10 8 0.10 14 0.20 12 0.25 16 0.40 16 0.30 18 0.20 20 0.25 20 0.10 24 0.10 Decide which projected to be selected using coefficient of variation.

Explain the causes of Industrial Sickness. Calculate (a) the operating leverage, (b) financial leverage and (c) combined

leverage from the following data under situations Iand II and financial plans, Aand B. Installed capacity, 4,000 units Actual production and sales, 75 per cent of the capacity Selling price, Rs 30 per unit and Variable cost, Rs 15 per unit Fixed cost: Under situation I, Rs 15,000 and Under situation II, 20,000 Capital Structure Financial Plans A B Equity Rs. 10,000 Rs. 15,000 Debt (0.20 interest) Rs. 10,000 Rs. 5,000

The initial investment outlay for a capital investment project consists of Rs. 100 lakhs for plant and machinery and Rs. 40 lakhs for working capital. Other details are summarized below: Sales: 1 lakh units of output per year Selling Price: Rs. 120 per unit of output Variable Cost: Rs. 60 per unit of output Fixed Overheads (excluding depreciation): Rs. 15 lakhs per year Rate of depreciation on plant and machinery: 25% on WDV method Salvage Value of plant and machinery: Equal to the WDV at the end of year Tax rate: 40% Time horizon: 5 years Post-tax cut off rate: 12% Indicate the financial viability of the project by calculating the net present value.

07 Determine the sensitivity of the project’s NPV if selling price decrease by 10%.

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Determine the sensitivity of the project’s NPV if variable cost increase by 10%.

07 Page 2 of Determine the sensitivity of the project’s NPV if variable cost increase by 5%

and selling price increase by 5%. Acompany has share capital of Rs. 25,00,000 consists of 25,000 shares of Rs.

100 each. The management is planning to raise another Rs. 20,00,000 for expansion. It has following four alternatives: I. It can raise entire amount through ordinary shares. II. It can raise 50% through ordinary shares and 50% through long term borrowings at 8% p.a. III. It can raise Rs. 25% through ordinary shares and 75% through long term borrowing at 9% p.a. IV. It can raise Rs. 50% through ordinary shares and 50% through preference shares with 5%. EBIT is Rs. 8,00,000 and tax rate is 50%. Determine EPS of alternative-I.

07 Determine EPS of alternative-II.

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Determine EPS of alternative-III.

07 Determine EPS of alternative-IV.

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