NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Strategic Financial Management
Internal Assignment Applicable for December 2020 Examination
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1. The following is the capital structure of Alpha Limited as on 31st March 2020
Equity Shares : 10000 shares ( of Rs 100 each) Rs 10,00,000
12% Preference Shares ( of Rs 100 each) Rs 10,00,000
10% Debentures Rs 12,00,000
The market price of the company’s share is Rs 120 and it is expected that a dividend of Rs 10 per share would be declared by the company . The dividend growth rate is 5%. If the tax rate is 30%, calculate Weighted Average Cost of Capital(WACC) by book value & market value method. Assume market value of Preference shares and Debentures to be same as the book value. Comment on the results.
(10 Marks)
2. The following details are available for Gamma Ltd:
Details
Proposal A
Proposal B
Initial Cost
Rs.10,00,000
Rs. 12,00,000
Expected life
4 years
5 years
Profits before tax after depreciation
Rs. 3,00,000 each for first two years
Rs. 3,50,000 each for next two years
Rs. 3,00,000 each for first two years
Rs. 3,50,000 each for next three years
Calculate Discounted Payback period and suggest which one is better if the discounting factor is 10% and tax rate 30%. Show in detail relevant calculations and use Straight Line Method of Depreciation. (10 Marks)
3. A company’s current earnings before interest and taxes are Rs 5,00,000. The firm currently has outstanding Rs 10 lakh of debts at an average cost of 8 per cent. Its cost of equity capital is estimated to equal 12 per cent.
a. Determine the current value and overall capitalisation rate of the firm using the Net Income Approach. Comment on the impact of increase in debentures on the value of the firm as per Net Income Approach. (5 Marks)
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