ASSIGNMENT 01 FINANCIAL MANAGEMENT

TO BE SUBMITTED TO YOUR RESPECTIVE TUTORIAL FACULTIES LATEST BY 08.04.2017 (SATURDAY)

Q1. A machine will cost Rs 100000 and will provide annual net cash inflow of Rs 30,000 for six years. The cost of capital is
15%. Calculate NPV and IRR.
Q2. A project costs Rs 81,000 and is expected to generate net cash inflow of Rs 40,000, Rs 35,000 and Rs 30,000 over its
life of 3 years. Calculate the internal rate of return of the project.
Q3. Consider the following projects
Cash Flow (Rs)
Projects C0 C1 C2 C3 C4
A -1,000 600 200 200 1000
B -1,000 200 200 600 1000
C -1,000 100 100 100 1600
D -1,000 0 0 300 1600
Calculate the project payback period. If the standard payback period is 2 years which project will you select?
Q4. A bond of Rs 1000 is currently sold for Rs 200. It will be fully repaid after 25 years. The tax rate is 30%. What is the
after tax cost of the bond?
Q5. A company has paid a dividend of Rs 3 per share for last 20 years and it is expected to continue so in the future. The
companys share had sold for Rs 33 twenty year ago, and its market price is also Rs 33. What is the cost of the share?
Q6. The Keshari Engineering Ltd. Has the following capital structure, considered to be optimum, on 31 June 2003.
14% Debt 95,000
10% Preference 31,250
Ordinary equity 3,75, 000
The company has 15 million shares outstanding. The share is selling for Rs 25 per share and the expected dividend per
share is Rs 1.50, which is expected to grow at 10%. Tax rate is 30%.
You are required (i) calculate the after-tax cost of each component (ii) Weighted average cost of capital
Q7. Gaggle Internet, Inc. is evaluating its cost of capital under alternative financing arrangements. In consultation with
investment bankers, Gaggle expects to be able to issue new debt at par with an interest rate of 8% and to issue new
preference share with Rs 2.50 per share dividend at Rs 25 a share. The ordinary share of Gaggle is currently selling
for Rs 20 a share. Gaggle expects to pay a dividend of Rs 1.50 per share next year. Retention ratio is 30%, return on
equity is 25% and tax rate is 35%. Calculate the overall cost of capital.
Q8. Kross Ltd, a company that sells bicycles, had sales last month of Rs 40,000, EBIT of Rs 4,000, net income of Rs 1800,
an interest expense of Rs 1000, and earnings per share (EPS) of Rs 1.8. The DOL was 6.0. Sales for the coming month
are expected to be Rs. 44,000.
A. Calculate DFL and DCL.
B. What was the profit before taxes last month?
C. What is the profit before taxes expected to be for the coming month?

Q9. Two firms A and B have the following information

Sales Variable Costs Fixed Costs
Firm A 1800 450 900
Firm B 1500 750 375
You are required to calculate (a) profit to sales ratio (b) degree of operating leverage for both the firms.
If the sales increase by 20% what shall be the impact on the profitability of the two firms?
Q10. AB Ltd. needs Rs 10 lakh for expansion. The expansion is expected to yield an annual EBIT of Rs 1,60,000. In
choosing a financial Plan, AB Ltd. has an objective of maximizing EPS. It is considering the possibility of issuing equity
shares and raising debt of Rs 100000 or Rs 400000 or Rs 600000. The current market price per share is Rs 25 and is
expected to drop to Rs 20 if the funds are borrowed in excess of Rs 500000. Funds can be borrowed at the rates
indicated below: (a) up to Rs 100000 at 8%; (b) over Rs 100000 upto Rs 500000 at 12%; (c) over Rs 500000 at 18%.
Assume a tax rate of 50%. Determine the EPS for the three financing alternatives.