NMIMS - Corporate Finance

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NMIMS

Master of Business Administration - MBA Semester 3

Corporate Finance

Q1. Alpha Ltd is expecting annual earnings before interest and tax of Rs. 1.5 Lakhs. The company has 10% debentures of Rs. 4 lakhs and cost of Equity capital is 12%. Calculate the total value of the firm and the overall cost of capital of the firm according to Net Income Approach. Also comment what will happen to the value of the firm and the overall cost of capital if debt is increased in the capital structure.

Answer. Value of the Equity of the firm

Particulars	If Debt is 400000	If debt is 500000
Current Opening Income	150000	150000
Less : Interest on Debt 10%	40000	50000
Earnings for share Holders	110000	100000
Equity Capitalisation rate	0.12	0.12
Value of Equity	916667	833333

           

Q2. The Capital structure of ABC Ltd is as under:

Equity share capital                          Rs. 100 Lacs

10% Debentures                                Rs. 50 Lacs

●       The sales for the year 2019 are 1.5 Lac units@ ₹ 40per unit

●       Also, the variable cost per unit is 20 % of sales revenue

●       Rs. 12 Lacs is the fixed operating cost.

●       Assume Income tax rate as 40 %

Calculate Operating, Financial and Combined Leverage of the firm and interpret the result.

Answer.

Q3. Neha would retire 30 years from today and she would need Rs. 6, 00,000 per year after her retirement, with the first retirement funds withdrawn one year from the day she retires. Assume a return of 7% per annum on her retirement funds and if her planning is for 25 years after retirement, calculate:

a. How much lump sum she should deposit in her account today so that she has enough funds for retirement?

b. How much she should deposit each year so that she has enough funds for retirement?

Answer. a) Cash PV annuity factor = (1 – (1/(1+r)^n))/r

= (1 – (1/(1+0.07)^25))/0.07

= (1 – (1/(1.07)^25)/0.07

= (1 – (1/5.427)/0

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