Corporate Finance Formulae Book - DOC - DOC

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					                                                FM05
                                          Corporate Finance
                                              Assignment No.I

Assignment Code: 2011FM05A1                                   Last Date of Submission: 31st March 2011
                                                              Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

                                                   Section-A
Ques. 1       In applying the NPV rule, when you are faced with the problem of deciding what to
              discount, you should stick to the three general rules:
              (i) Only the cash flow is relevant
              (ii) Always estimate cash flows on an incremental basis.
              (iii) Be consistent in your treatment of inflation.
              Please elaborate this statement

Ques. 2       “Debt is a cheaper source of financing with no side effects”- Elucidate and comment
              on its correctness.
Ques. 3       “Market Efficiency is the only real factor affecting the financing decision ” – Critically
              Examine.
Ques. 4       What do you mean by Investment Decision in Capital Budgeting? What are different
              methods to find out the value of a project in capital budgeting?

                                                   Section-B

       You have been given the following information on a project:
      It has a 5-year lifetime
      The initial investment in the project will be Rs.25 million, and the investment will be depreciated straight
       line, down to a salvage value of Rs.10 million at the end of the fifth year.
      The revenues are expected to be Rs.20 million next year and to grow 10% a year after that for the
       remaining 4 years.
      The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.
      The tax rate is 40%.


       a. Estimate the pre-tax return on capital, by year and on average, for the project.
       b. Estimate the after-tax return on capital, by year and on average, for the project.
       c. If the firm faced a cost of capital of 12%, should it take this project.




                                                                                      Page No. 1 of 3
                                              FM05
                                        Corporate Finance
                                           Assignment No.II

Assignment Code: 2011FM05A2                                Last Date of Submission: 15th May 2011
                                                           Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

                                                 Section-A
Ques. 1       Briefly explain the factors that determine the cash needs of a firm. What are the basic
              strategies of efficient cash management? Illustrate with suitable examples the effect
              of these on the operating cash requirements of a firm.
Ques. 2       Explain the merger-waves with suitable examples.
Ques. 3       A Company has large amount of cash surplus, during the most part of the year.
              Discuss in detail the various options available to the company in investing the idle cash


Ques. 4       A firm is currently selling a product @ Rs. 10 per unit. The most recent annual
              sales (all credit) were 30,000 units. The variable cost per unit is Rs. 6 and the average
              cost per unit, given a sales volume of 30,000 units, is Rs. 8. The total fixed cost is Rs.
              60,000. The average collection period may be assumed to be 30 days.

              The firm is contemplating a relaxation of credit standards that is expected to result in a
              15 per cent increase in unit sales; the average collection period would increase to 45
              days with no change in bad debt expenses. It is also expected that increased sales
              will result in additional net working capital to the extent of Rs. 10,000. The increase in
              collection expenses may be assumed to be negligible. The required return on
              investment is 15 per cent.

              Should the firm relax the credit standard?


                                                 Section-B
       Rubberman Corporation, a manufacturer of consumer plastic products, is evaluating its capital structure.
       The balance sheet of the company is as follows (in millions):

                     Assets                              Liabilities
                     Fixed Assets      4000              Debt              2500
                     Current Assets    1000              Equity            2500

       In addition, you are provided the following information:

       (a) The debt is in the form of long term bonds, with a coupon rate of 10%. The bonds are currently rated
       AA and are selling at a yield of 12% (the market value of the bonds is 80% of the face value).

       (b) The firm currently has 50 million shares outstanding, and the current market price is Rs.80 per share.
       The firm pays a dividend of Rs.4 per share and has a price/earnings ratio of 10.

       (c) The stock currently has a beta of 1.2. The six-month Treasury bill rate is 8%.


                                                                                  Page No. 2 of 3
(d) The tax rate for this firm is 40%.




I. What is the debt/equity ratio for this firm in book value terms and also in market value terms?

II. What is the debt/(debt+equity) ratio for this firm in book value terms and also in market value terms?

III. What is the firm's after-tax cost of debt?

IV. What is the firm's cost of equity?

V. What is the firm's current cost of capital?




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