Corporate Finance — Winter 2024

Explain following terms with examples

Annuity Due

Multi-period compounding

Profitability Index

Weightage Average cost of capital

Shareholder’s wealth maximization

Capital rationing.

Financial leverage

Give arguments to support the view that ‘Dividends are relevant’

From the information and the assumption that the cash balance in hand on 1 January2021 is Rs 72,500, prepare a cash budget. Assume that 50 per cent sales are cash sales. Assets are to be acquired in the months of February and April. Therefore, provisions should be made for the payment of Rs 8,000 and Rs 25,000 for the same. An application has been made to the bank for the grant of a loan amount of Rs 30000 and it is hoped that the loan will be received in the month of May. Office and Materials Salaried Production Sales Selling Month Purchases & Wages Over-heads (Rs) Over - (Rs) (Rs) (Rs) heads (Rs) January 72,000 25,000 10,000 6,000 5,500 February 97,000 31,000 12,100 6,300 6,700 March 86,000 25,500 10,600 6,000 7,500 April 88,000 30,600 25,000 6,500 8,900 May 102,500 37,000 22,000 8,000 11,000 June 108,700 38,800 23,000 8,200 11,500 It is anticipated that a dividend of Rs 35,000 will be paid in June. Debtors are allowed one month’s credit. Creditors for material purchased and overheads grant one month’s credit. Sales commission at 3 percent on sales is paid to the salesman each month.

Consider the following information for Saurabh Enterprise. Rs in lakhs EBIT 1120 PBT 320 Fixed cost 700 Calculate % change in EPS if sales increased by 5%.

What is financial risk? How does it differ from business risk? How does the use Page 1 of of financial leverage result in increased financial risk?

A Pro forma cost sheet of a company provides the following data: Cost (per unit): Rs Raw Materials 52.0 Direct Labour 19.5 Overheads 39.0 Total Cost (per unit) 110.5 Profit 19.5 Selling Price 130.0 The following is the additional information available: Average raw materials in stock: one month; average material in process: half a month. Credit allowed by suppliers: one month; credit allowed to debtors; two months. Time lag in payment of wages: one and a half weeks. Overheads: one month. One-fourth of sales are on cash basis. Cash balance is expected to be Rs 1,20,000. You are required to prepare a statement showing the working capital needed to finance a level of activity of 70,000 units if output. You may assume that production is carried on evenly, throughout the year and wages and overheads accrue similarly.

Describe the traditional view on the optimal capital structure.

You are planning to buy a house for Rs 500000 and immediately make a payment of Rs 100000. You finance the balance amount at 12 % for 20 years with equal annual installments. How much are the annual instalments?

Looking into decreasing sales in last 12-months Vaibhav enterprise is thinking of liberalizing their credit policy. Will this be right decision? What do you mean by liberal credit policy?

Acompany’s share is currently selling at Rs 60. The company in the past paid a constant dividend of Rs. 1.50 per share, but now it is expected to grow at 10%compound rate over a very long period. Should the share be purchased if the required rate of return is 12%?

What are the basic financial decisions? What should be the objective of financial manager while making such decisions?

The following is the capital structure of Sanket Ltd as on 31 December 2023. (₹ million) Equity capital (paid up) 563.50 Reserves and surplus 485.66 10% Preference shares 84.18 15% Term loans 377.71 Total 1.511.05 The share of the company is currently selling for Rs 36. The expected dividend next year is Rs. 3.60 per share anticipated to be growing at 8 per cent indefinitely. The redeemable preference shares were issued on 1 January 2017 with twelve-year maturity period. Asimilar issue today will be at Rs 93. The market price of 10% preference share is Rs 81.81. The company had raised the term loan from a financial institution in 2019. Asimilar loan will cost 10% today. Page 2 of Assume an average tax rate of 35 per cent. Calculate the weighted average cost of capital for the company using book value weights.

Shashank Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined Shashank Limited as a financial analyst reporting to Ravi Sharma, the CFO of the company. He has provided you the following information about three projects, A, B, and Cthat are being considered by the Executive Committee of Shashank Limited: • Project Ais an extension of an existing line. Its cash flow will decrease over time. • Project Binvolves a new product. Building its market will take some time and hence its cash flow will increase over time. • Project Cis concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost initially which will be followed by a huge benefit for one year. However, in the year following that some cost will be incurred to raze the pavilion. The expected net cash flows of the three projects are as follows. Year Project A (Rs) Project B (Rs) Project C (Rs) 0 (15,000) (15,000) (15,000) 1 11,000 3,500 42,000 2 7,000 8,000 (4,000) 3 4,800 13,000 - Ravi Sharma believes that all the three projects have risk characteristics similar to the average risk of the firm and hence the firm's cost of capital, viz. percent, will apply to them. You have been asked to prepare a report for the executive committee, covering the following:

(a) What is payback period and discounted payback period? Find the payback period and the discounted payback period of Projects Aand B.

(b) What is net present value (NPV)? What are the properties of NPV? Calculate the NPV of projects A, B, and C.

What is internal rate of return (IRR)? What are the problems with IRR? Calculate the IRR for Projects A, B.