NMIMS - Strategic Financial Management

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NMIMS

Master of Business Administration - MBA Semester 4

Strategic Financial Management

Q1. From the following information of the two projects calculate the net present value and suggest which of the two projects should be accepted assuming a discount rate of 10%.

	Project X	Project Y
Initial Investment	Rs. 25000	Rs. 30000
Estimated Life	5 years	5 years
Scrap Value	Rs. 1500	Rs. 2000

The profits before depreciation and after taxes are as follows:-

Years	1	2	3	4	5
Project X	5000	10000	12000	7000	3000
Project Y	20000	10000	7000	5000	2000

Answer. Calculation of NPV:-

Q2. Nisha has completed her MBA and has joined a company which was going to raise fund from long term sources such as Debt and Equity. Nisha was asked by her manager to prepare a report on which could be a better source of funding for the firm mentioning the advantages of each to be presented to the Management so that it is easy for them to take the decision. Help her to prepare the report.

Answer. The business environment of a firm has a presence of various lenders and investors. However, the firm/business needs to make a choicebetween the lenders and investors. The possible sources of fund for acompany can be debt, equity or any combination thereof. The equityholders are the owners of the company while the debt holders are thecreditors of the firm to whom a fixed amount of payment (principaland interest) is made on a regular basis.In debt financing, a promise is made to pay back the borrowed amountalong with an interest. On the other hand, in equity finance

Q3. The following information is given for Delta Ltd.

Earnings per share                                       Rs. 15

Dividend per share                                       Rs. 5

Cost of Capital                                              15%

Internal Rate of Return on Investment    20%

Retention Ratio                                             65%

Calculate the market price per share using

a. Gordon’s Dividend Model

b. Walter’s Dividend Model

Answer. Given:

E = Earnings is Rs. 15 per share

k = Cost of capital to the firm is 15%

r = Return on investment of 20%

D = dividend = Rs. 5

b = retention

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