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From the information given below, suggest the management as to which project is preferable
based on pay-back period. Two projects A and B, each project needs an investment of Rs. 30,000.
The standard cut off period for the company is 5 years.
Year
Project A (Rs)
10000
10000
4000
6000
8000
Project B (Rs)
8000
8000
12000
6000
7000
The initial investment required for Project A is Rs. 32400. It is expected to generate cash inflows
of Rs. 16000, Rs. 14000 and Rs. 12000 through its three years life period. Compute the Internal
Rate of Return of the Project A.
According to Walters Model the optimum Payout Ratio can be either Zero or 100%.. Explain
the circumstances when it is true.
Three firms A, B and C has EPS to be Rs. 100. The Capitalization rate or cost of equity is given to
be 10%. The Rate of Return (r) for Firm A, B and C are 17%, 10, and 7% respectively. Show the
affect of dividend policy on the market price of shares, using Gordons model when dividend
payout ratio is 0%, 40%, 80% and 100% .
In the income Statement of Income of Aura Cycles the sales are 10, 50,000, Variable Cost of 7,
67,000 and Fixed Cost of 75000. EBIT is given to be 2, 08,000. The amount of Interest is 1,
10,000 and the Tax rate applicable is 30%. Calculate the:
(A) Operating Leverage (B) Financial Leverage (C) Combined Leverage
Itemize the relationship between debt and value of the firm apropos of a related form of Leverage.
80000
160000
180000
60000
An investment project costs Rs. 25000 and it creates cash inflows through a period of five years. The cash flows are
Rs. 9000, Rs. 8000, Rs. 7000, Rs. 6000 and Rs. 5000 from first year to fifth year. The required rate of return is
assumed to be 10 Percent. Find out the
(A) Net Present Value
(B) Profitability Index
In the income Statement of Income of Aura Cycles the sales are 20, 50,000, Variable Cost of 17, 67,000 and Fixed
Cost of 55000. EBIT is given to be 1, 80,000. The amount of Interest is 1, 20,000 and the Tax rate applicable is 40%.
Calculate the:
(A) Operating Leverage (B) Financial Leverage (C) Combined Leverage
The contention that dividends have an impact on the share price has been characterized as the Bird in hand
argument. Elucidate the essentials of this argument. Why this argument is considered Fallacious?
Three firms A, B and C has EPS to be Rs. 100. The Capitalization rate or cost of equity is given to be 10%. The Rate
of Return (r) for Firm A, B and C are 17%, 10, and 7% respectively. Show the affect of dividend policy on the
market price of shares, using Walters model when dividend payout ratio is 0%, 40%, 80% and 100% .
The existence of Financial and Operating Leverage is always complementary. Do you agree? Vindicate your
views with suitable examples.
Rita, who is 30 years old is planning for her government investment. She invested in government scheme
which promise to pay interest @ 9% pa compounded annually on the payment of yearly installment of Rs.
10000. Calculate the amount payable by government at the end of 10 years.
Write a short note
A. Factoring
B. Lease financing
An asset has following possible returns with associated possibilities. Calculate a) variance b) Standard variation
YEAR
RETURN
PROBABILITY
2008
30
0.10
2009
20
0.20
2010
10
0.40
2011
0.20
2012
-10
0.10
You have Rs.80,000 available today for investment. You want to invest it for 5 years. Bank of India is offering
Interest @7.25%p.a compounded annually. Axis Bank is offering Interest @7%p.a compounded semi-annually.
Punjab National Bank is offering interest @8% pa compounded annually. Which bank you will choose to invest
in and Why?
The following table gives dividend and share price data for Hind Manufacturing Company.
Calculate his A.)Annual rate of return B.) Average rate of return
Year
1994
2.50
12.25
1995
2.50
14.20
1996
2.50
17.50
1997
3.00
16.75
1998
3.00
18.45
1999
3.25
22.25
2000
3.50
23.50
Mr. Sharma is appointed as a financial manager of JCT Ltd Being CEO of the company you have to advice Mr.
Sharma regarding what financial decisions he has to take for the company.
Amount
Debenture
3,00,000
Preference
1,50,000
Equity
3,50,000
Question 1.The initial investment in a project is Rs. 200,000. The project has an
expected life of 5 years and zero salvage value. The company uses straight line
method for depreciation. Tax rate is 40%. The estimated earnings before
depreciation and before tax from the project are as below. Calculate NPV .
year
Earnings
before Dep.
And Tax
70000
80000
120000
90000
60000
Discount
Rate=10%
Question 2.A Co. has an investment opportunity costing Rs. 40000 with the
following expected net cash flows after taxes and before depreciation.
Year
Net Cash
Flow
7000
7000
7000
7000
7000
8000
10000
15000
10000
10
4000
Calculate:
A firm is considering two mutually exclusive projects X and Y, the details are as:
Project X
Project Y
Investment
43,500
36,000
Cash flows in years
1
10,000
15,000
2
12,000
13,000
3
13,000
12,000
4
14,000
10,000
5
16,000
10,000
Compute for both the projects and give decision which project is beneficial:
1. Payback period.
2. NPV at 10% discount rate.
3. Profitability Index at 10% discount rate.
Find the ARR for a project having a life of 5 years will cost Rs.4,00,000. Its stream of income before
depreciation (straight line method)is expected to be Rs.1,00,000; Rs.1,20,000; Rs.1,60,000;
Rs.1,70,000;Rs.2,00,000 during the life of the project and applicable tax rate is 40%.
Find the market value of the firm and average cost of capital from the following information
NOI
Rs.3.5 lacs
Total investment
Rs.15 lacs
Equity capitalization rate is 10% and firm not uses any debts.
What is dividend? Explain the Walters Model based on dividend.
What is optimum capital structure? Why is it important for any firm?
A company is considering an investment proposal to purchase a machine costing Rs.50,000 with a life
of 5 years and no salvage value. Applicable tax rate is 35% and straight line method is used for
providing depreciation. The estimated cash flows before depreciation and tax from the machine are as
follows:
Year
1
2
3
4
5
CFBT 10,000
10,692
12,769
13,462
20,385
Compute and comment about the decision of the proposal:
1. Average rate of return
2. NPV at 10% discount rate
A companys EBIT is Rs.1.5 lacs and having 8% debentures of Rs.8 lacs. Overall capitalization rate is
12%. Find value of the firm and Equity capitalisation rate.
X Ltd. Has 20% debt and 80% equity in its capital structure. The cost of debt is 10% and cost of
equity is 15%. Find overall cost of capital of the firm.
How does Gordons Model differ from Walters Model in valuation of the firm based on Dividend?
18 %
Cost of Capital-
15%
What will be price per share as per Walter model if dividend payout ratio is 40%? 50%? 60%.
The Indage products limited capital structure consists of 12000 equity share of 10 each and 160000 debentures of 10% with sales of 120
Its fixed cost is 200000 and variable cost ratio to sales is 40%.The income tax rate is 50%.Calculate all three leverage.
.A company is considering purchasing a machine .Three machines are available X, Y AND Z.The details are:
Cost
50000
60000
70000
Estimated scrap
5000
7500
10000
Life in years
12
10
13
Average profit
before tax and
depreciation
10000
14000
18000
Cash flow
1st
4000
2nd
4000
3rd
3000
4th
3000
5th
2000
Is the investment desirable? Discuss according to NPV assuming PV factor for first-five year are.909,.826,.751,.683,.621 respectively.
Critically Analyse Walter and Gordon Model of Dividend Theories?
Write a short note on
(A)Financial Leverage v/s operating Leverage (B)Net v/s Gross Working Capital
Year
Project X
Project Y
-3000
-4000
1000
1500
1200
2500
2000
5000
4000
6000
What is the NPV of each project if the cost of capital is 10 percent? Which project would you choose in this case?
Find out the payback period for each of the above mentioned projects?
ABC Ltd. has been earning Rs 10 per share. The firm is in the business where it can use these earnings in projects that provide a
return of 15%. The firms cost of capital is 10%.What is the price of the share of ABC Ltd under Walters model if it
follows payout of (a) 0% (b) 40% ?
Explain the concept of Time value of money? Why the value of the money
changes over the period of time?
Explain in detail, the various factors that affect the value of the money in due
course of time.
Define the concept of Risk and Return. In the case of Single Asset, how is it
measured?
Explain the role of Compounding in the estimation of time value of money
with a suitable example.
Explain the role of Discounting in the estimation of time value of money with
a suitable example.
Illustrate the effect of Dividend policy of a firm on Market price of its shares using Walter model
taking hypothetical example.
Volga is a large manufacturing and marketing company in the private sector. In 2014, the company
had a gross sales of Rs. 982.2 crores. Other financial data if the company is given below:
Net Worth- Rs. 152.31 crores
Borrowing- Rs.165.47 crores
EBIT- Rs. 43.17 crores
Interest- Rs. 34.39 crores
Fixed cost (excluding interest) Rs. 118.23 crores
Calculate: a) Operating leverage, b)Financial leverage, Combined leverage and interpret the results
Explain the meaning of Working capital and also explain the determinants of working capital.
A machine will cost Rs.5,00,000 and will provide annual cash inflow of Rs. 1,50,000 for a period of 6
years. Calculate:
a) Payback Period
b) Accounting rate of return
Should company invest in this machine? Justify your answer.
A project will cost Rs.5,00,000. Its stream of earnings before depreciation, interest and taxes during
the first year through 5 years is expected to be Rs.1,90,000, Rs.1,70,000, Rs.1,60,000, Rs. 1,20,000
and Rs.2,00,000 respectively. Assume 40% tax rate and depreciation on straight line basis. Calculate:
a) Net Present Value
b) Profitability Index