- 1)The finance manager of Kargil Engineering Ltd., is analyzing a project with a life of 5 years, which requires an initial investment in equipment and machinery of Rs.80 lakh. The equipment is expected to have a 5-year lifetime and have no salvage value which is to be depreciated on straight line basis. The project is expected to generate revenues of Rs.40 lakh each year for the 5 years and have operating expenses (not including depreciation) amounting to 30% of revenues. The tax rate is 40%. What is the Internal Rate of Return (IRR) of the project?
- 2)The following information is given about the debentures issued by Merc Ltd.:
Face Value = Rs.100
Rate of interest = 10% p.a.
Amount realized per debenture = Rs.96
Corporate tax rate = 40%
Debenture is redeemable at a premium of 2% after 6 years. The difference between? redemption price and net amount realized is to be written off over the life of debenture and the amount so written off is tax-deductible. The cost of debenture capital is ?
- 3)B O Ltd., is intending to acquire substantial shares in S P Ltd., to acquire control in the company. The beta of SPL?s shares is 1.5 and the current market price of its each share is Rs.88. The company is consistently paying a dividend of Rs.17 per share every year and is expected to pay the same amount even in the future. The risk-free rate is 9% and the market rate of return is 15%. How much extra amount should BOL pay for each share over the current market price so that the price of the share of SPL is at equilibrium as per the CAPM approach?
- 4)The Navadurga company has the following capital structure:
Equity Shares (1,00,000) Rs.100,00,000
10% Preference Shares Rs. 20,00,000
14% Debentures Rs. 30,00,000
The current market price of the share is Rs.150. The expected dividend next year is Rs.15 per share, which will grow at 7% forever. If the company raises an additional Rs.50,00,000 debt by issuing 15% debentures, the expected dividend increases to Rs.20 and the price of share falls to Rs.125. The growth rate remains the same. What is the weighted average cost of capital for the firm, assuming a tax rate of 50% ?
- 5)A manufacturing company plans to sell 30,000 units of its products during the next year. The expected cost of goods sold per unit is as follows:
Raw material Rs 100
Manufacturing expenses Rs 30
Selling, administration and financial expenses Rs 20
Selling price Rs 200
The duration at various stages of the operating cycle is expected to be as follows:
Raw material stage 2 months
Work-in-progress stage 1 month
Finished goods stage ? month
Debtors stage 1 month
Assuming a monthly sales level of 2,500 units, what is the gross working capital requirement of the company? (Assume manufacturing expenses are incurred uniformly throughout the production stage)
- 6)K Silk Ltd., has furnished the following details for the current financial year:
Sales Rs.450 lakh
Average collection period 90 days
Bad debt losses 5% of sales
Collection expenses Rs.1 lakh
Cost of funds 15%
Variable cost to sales ratio 60%
The company is contemplating to enhance the collection efforts to reduce the amount of receivables and the incidence of bad debt losses. In view of the above, the company has undertaken a new program which is likely to reduce the average collection period to 60 days, decrease bad debt losses to 3% of sales but increase the collection expenses by Rs.4 lakh. Assuming that the sales remain constant, what would be the change in profits ?
- 7)Consider the following data of ?M/s. X Ltd.:
Operating profit Rs.1,00,000
Profit after tax Rs. 50,000
10% Preference shares Rs.1,00,000
Degree of total leverage 4
Tax rate 20%
If EBIT has to increase by 10%, by how much should the sales be increased ?
8)You are the owner of a small business which has the following balance sheet:
Current assets ????10,000 ???????? ??????????Accounts payable ??????????????????2,500
Net Fixed Assets 20,000 ?????? ??????????Accruals ?????????????????????????????????2,500
?????????? Long Term Debt ?????????????????10,000
?????????? Common Equity ?????????????????15,000
- Total Assets ??????30,000 ???????? ??????????Total Liability and Equity 30,000
Fixed and current assets are fully utilized, and the sales/assets and sales/spontaneous liabilities ratios will remain constant. Next year you expect sales to increase by 50 percent. You also expect to retain Rs.2,250 of next year's earnings within the firm. What is next year's additional external fund requirement ?
Initial cash investment
Earning before tax
Annual Cash flow
IRR 0 1 2 3 4 5 40.00
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