Financial Management — Winter 2024

Discuss in detail the steps involved in a public issue.

Prepare the Loan amortisation schedule from the following information: Loan amount: Rs.15,00,000 Tenure of loan: 5 years Interest: 13% p.a. Repayment: 5 equal annual instalment first instalment beings at the end of the year 1.

Abond with a face value of Rs.1,000, an 8% coupon rate is currently selling for Rs.925. If the bond has 3 years remaining to maturity, what is its yield to maturity (YTM)?

Imperial Industries is currently at its target debt-equity ratio of 0.8 : 1. It is considering a proposal to expand capacity which is expected to cost Rs.600 million and generate after-tax cash flows of Rs.150 million per year for the next 10 years. The tax rate for the firm is 35 percent. Ganesh, the CFO of the company, has considered two financing options :

Issue of equity stock. The required return on the company’s new equity is percent and the issuance cost will be 10 percent. (ii) Issue of debentures at a yield of 14 percent. The issuance cost will be 2 percent. 1. Calculate the WACC for Imperial Industries. 2. Derive Imperial Industrie’s weighted average flotation cost. 3. Calculate the NPV of the proposal after incorporating the flotation costs.

Madhu Corporation has the following book value capital structure: Amount (Rs. in Particulars million) Equity Capital (30 million shares, Rs.10 par) Rs. 300 million Preference Capital, 15% (1,000,000 shares, Rs.100 par) Rs. 100 million Retained Earnings Rs. 100 million Debentures 11% (2,500,000 debentures, Rs.100 par) Rs. 250 million Term Loans, 13% Rs. 300 million Total Rs.1050 million The next expected dividend per share is Rs.4.00. The dividend per share is expected to grow at the rate of 15 percent. The market price per share is Rs.80. Preference stock, redeemable after 6 years, is currently selling for Rs.110 per share. Debentures, redeemable after 6 years, are selling for Rs.102 per debenture. The tax rate for the company is 35 percent. Calculate the average cost of capital using market value approach.

Explain the Net Operating Income (NOI) and Net Income (NI) approaches to capital structure theories briefly, along with a diagram. Also, comment on which approach is more rational or practical. Page 1 of

“Leverage is Double Edge Sword” Explain this with appropriate illustrations.

You are the Financial Manager of a mid-sized manufacturing company, and you are faced with a situation where your company has a short-term cash shortage to meet day- to-day requirements. You need to arrange financing to cover this gap. What are the possible financing options you can explore, and what factors would you consider when selecting the appropriate financing option? Page 2 of

Credit allowed by suppliers is for 2 months.

Credit allowed to debtors is 3 months.

The average time-lag in payment of wages and overhead expenses is 1 month.

25% of the output is sold against cash; cash in hand and at the bank is desired to be maintained at Rs 100000. You are required to prepare a statement showing the working capital requirements to finance a level of activity of 100000 units of production. (Take 12 months for the calculation purpose)

Anish Corporation currently provides 45 days of credit to its customers. Its present sales are Rs. 80 million. The firm's cost of capital is 13 percent and the ratio of variable costs to sales is 0.75. Anish is considering extending its credit period to 60 days. Such an extension is likely to push sales up by Rs 20 million. The bad debt proportion on additional sales would be 10 percent. The tax rate for Anish is 35 percent. Should the Anish Corporation adopt new policy? support your argument with necessary calculations.

What are the problems with IRR? Is there any method which is an improvement over IRR? If yes, explain the same. Page 3 of

Calculate the IRR for both the projects and advise which project company should opt for based on IRR decision criteria

Calculate the payback period for both the projects and advise which project company should opt for based on payback decision criteria.

Calculate the NPV for both the projects and advise which project company should opt for based on NPV decision criteria.

Apexa Ltd is in the business of manufacturing automobile spare parts. The firm is considering two mutually exclusive technologies for the manufacture of hydraulic brakes, project Xand Y. The cost of these technologies is Rs. 1500 lakh and Rs.1600 lakh respectively. Depending upon various features of the product obtainable from these two technologies, the firm has developed a forecast of cash flows for five years; the life of each project. These cashflows are as below: (Rs. in Lakh) Year Project X Project Y Project Xis a familiar technology and therefore the firm feels that the current cost of capital of 12% is the appropriate discount rate. Whereas Project Yis considered riskier t han option Aand therefore the firm would like to use a discount rate of 15%.