Financial Management

What are deferred taxes, and how do they come into being?
Deferred taxes arise because of the timing difference of some expenses as recorded for financial
reporting purposes. It is the difference between taxes actually paid and taxes shown as being paid on
firm’s public statements. (Taxes that will be paid in the future).

What is cash budget? What are the usual steps involved in preparing a cash
budget?
A cash budget is an estimation of the cash inflows and outflows for a business over a specific period of
time. This budget is used to assess whether the entity has sufficient cash to operate.

Steps

1. Determine the beginning cash balance

2. Add receipts
3. Deduct disbursements
4. Calculate the cash excess or deficiency
5. Determine financing needed
6. Establish the ending cash balance

Write a note on cost of capital? Explain independent, mutually

exclusive and Contingent projects?
Cost of Capital

A firm’s cost of capital is defined as the cost of the funds (debt, preferred and common equity) supplied
to it and used to finance investments made by a company.

Independent Project

An independent project is one whose acceptance or rejection does directly eliminate other projects
from consideration.

Mutually Exclusive Projects

A mutually exclusive project is one whose acceptance precludes the acceptance of one or more
alternative proposals.

Contingent Projects

A contingent project is one whose acceptance is dependent on the adoption of one or more other
projects.
 Financial Management

What are the primary types of real options in capital budgeting?

Real options in capital budgeting can be classified in the following manner.

1. Investment Timing Options

2. Abandonment Option
3. Shutdown Options
4. Growth Options
5. Designed-In Options

Why is corporate long term debt riskier than government long term debt?
A low debt to equity ratio is a sign that the company is growing or thriving, as it is no longer relying on
its debt and is making payments to lower it. ... A company's long-term debt may also put bond investors
at risk in an illiquid bond market.

Another common division of government debt is by duration until repayment is due. Short term
debt is generally considered to be for one year or less, and long term debt is for more than ten
years.
 Financial Management

Long Question:
Clarke Equipment currently pays a common stock dividend of Rs 3.50 per share. The common stock price
is Rs 60. Analysts have forecast that earnings and dividend will grow at an average annual rate of 6.8
percent for the foreseeable future.

a. What is marginal cost of retained earnings?

b. What is the marginal cost of new equity if the issuance costs per share are Rs 3?

Solution:

a)

Ke = (D1/Po) + g
. ( . )
= + .

= . %
b)

. ( . )
K’e= + 0.068

= 0.134 or 13.4%
 Financial Management

Long Question:
Jenkins Properties had gross fixed assets of 1000 at the end of 2010. By the end of 2011, these had
grown to 1100. Accumulated depreciation at the end of 2010 was 500 and it was 575 at the end of 2011.
Jenkins has no interest expenses. Jenkins expected sales during 2011 to total 500. Operating expenses
(exclusive of depreciation) were forecasted to be 125. Jenkin’s marginal tax rate is 40 percent.

a. What was Jenkin’s 2011 depreciation expense?

b. What was Jenkin’s 2011 earnings after taxes (EAT)?
c. What was Jenkin’s 2011 after-tax cash flow?
d. Show that EATS less the increase in net fixed assets is equivalent to after-tax cash flow less the
increase in gross fixed assets.

Solution:

a)

Depreciation expense = Increase in accumulated depreciation

= 575 - 500
b)

Sales 500
Operating Expense -125
Depreciation -75
EBT 300
Taxes -120
EAT 180

c)
ATCF = EAT + Depreciation
= 180 + 75
= 225

d)

Increase in net fixed assets

100 increase in gross fixed assets
-75 increase in accumulated depreciation
25 increase in net fixed aasets
EAT less increase in NFA = ATCF less increase in GFA
180 – 25 = 225 – 100
155 = 155
 Financial Management

Long Question
Project S cost Rs. 15000,and its expected cash flows would be Rs 4500 per year for 5 years. Mutually
exclusive project L costs 37500, and its expected cash flows would be 11100 per year for 5 years, If both
projects have a WACC of 14 %, which project would you recommend? Explain.

Solution:
The NPV for Project S would be:

NPV = 4,500 / 1.14 + 4,500 / 1.14^2 + 4,500 / 1.14^3 + 4,500 / 1.14^4 + 4,500 / 1.14^5 -
15,000

NPV = 448.86

For project L:

NPV = 11,100 * ( ( 1 - 1 / 1.14^6 ) / ( 1 - 1 / 1.14 ) - 1 ) - 37,500

NPV = 607.20

Project L has the higher net present value and therefore is an investment that can obtain
you the desired return even at a higher cost so it would be recommendation.