Corporate Finance Assignment 2024 25

Q1. A company is considering a project with an initial outlay of Rs.2,00,000 comprising of machinery worth Rs.1,80,000 and balance towards
working capital exclusively for this project Rs.20,000. The opportunity cost of funding is 13% p.a. The machinery can be used for 5 years at the
end of which there is no salvage value. The machinery is to be depreciated as per Straight Line Method. Tax rate applicable is 40%.

Estimated Annual sales and expenses are given below:

Year Sales Rs. Expenses excluding depreciation Rs.

1 1,20,000 35,000

2 1,30,000 40,000

3 1,40,000 40,000

4 1,40,000 25,000

5 1,30,000 30,000

Calculate:

1) Payback period
2) Net Present Value
3) Profitability Index
4) Accounting Rate of Return
Q2. The details of Capital Investment project are given below:

Rs. 120
Initial Investment for Plant and Machinery Lakhs
Rs. 20
Additional Investment in Working Capital Lakhs
Sales (units) per year for years 1 to 5 1 Lakh
Sellling price per unit Rs.100
Variable cost per unit Rs.40
Rs. 20
Fixed Overheads (Excluding Depreciation) per year from year 1 to 5 Lakhs
Rate of Depreciation on Plant and Machinery 25% on W.D.V. Method
Salvage value of Plant and Machinery = W.D.V. at the end of year 5
Applicable Tax Rate 30%
Time Horizon 5 Years
Cost of Capital 14%

Calculate the Net Present Value, Profitability Index and Pay back period.

Q3 A company can make either of two investments. Assuming Straight Line Method of Depreciation, calculate:
1) Accounting Rate of Return
2) Internal Rate of Return

X Y

Cost of Investment Rs. 1,80,000 2,60,000

Expected Life (No Salvage Value) 5 Years 5 Years
Expected Net Income after Tax Rs.
Year

1 15,000 22,000

2 12,000 26,000

3 18,000 28,000

4 25,000 20,000

5 24,000 26,000

Q4. After conducting a survey that costs Rs.1,00,000, AT Ltd. decided to undertake a project for introducing a new product. The company’s cut
off rate is 14%. It was estimated that project will cost Rs.34,00,000 in plant and machinery in addition to working capital of Rs.5,00,000. The
scrap value of plant and machinery at the end of 6 years was estimated at Rs.4,00,000 After providing for depreciation on straight line basis,
profit before tax were estimated as follows:

Year Rs.

1 4,00,000

2 7,00,000

3 11,00,000

4 7,00,000

5 6,00,000

6 2,00,000

Tax rate applicable is 30%. Tax on Capital Gains to be ignored. Calculate Net Present Value, Profitability Index and Payback Period. Should the
project be accepted?

Q5. The Company has the following capital structure:

Equity Shares (4,00,000 shares) Rs.1,10,00,000
6% Preference Shares Rs.60,00,000
8% Debentures Rs.1,30,00,000

The share of a company sells for Rs.18. It is expected that company will pay next year a dividend of Rs.3 per share which will grow at 7%
forever. Assume a 40% tax rate.
1. Compute the weighted average cost of capital based on existing capital structure.
2. Compute the new weighted average cost of capital if the company raises an additional Rs.1,00,00,000 debt by issuing 10% debentures. This
would result in increasing the expected dividend to Rs.4 and leave growth rate unchanged, but the price of share will fall to Rs.13 per share.
3. Compute the cost of capital if in (2) above growth rate increases to 11%.

Q6. You are required to determine the optimum debt equity mix for the company by calculating composite cost of capital.

Debt as Percentage of Cost of Debt (After Tax) Cost of Equity

Total Capital Employed % %
0 7 13
10 7 13.5
20 8 14
30 8.75 14.75
40 9 15.50
50 9.5 17
60 9.75 21

Q7. A company issued 10% debentures of the face value Rs.1000 redeemable at par after 15 years. Assuming 35% tax rate and 8% floatation
cost, determine the before-tax and after-tax cost of debt, if the debentures are issued at (i) Par (ii) 10% Discount (iii) 5% Premium
Q8. The existing Capital Structure is as follows:
Equity Shares of Rs.100 each Rs.8,00,000
Retained Earnings Rs.2,00,000
9% Preference Shares Rs.5,00,000
7% Debentures Rs.5,00,000

Company earns a return on Capital Employed of 30% and tax on income is 40%. Company wants to raise Rs.10,00,000 for its expansion project
for which it is considering the following options:
a. issue of 8,000 equity shares at a premium of Rs.25 per share.
b. Issue of 12% preference shares
c. Issue of 11% debentures.
It is expected that the return on capital employed would remain the same after expansion.
(i) Suggest which capital structure alternative the company should select on the basis of EPS.
(ii) Calculate the financial break even point for the three plans
(iii) Calculate the indifference level of EBIT for different plans.

Q9. A company issued 5,000; 12% Preference shares of the face value Rs.100 redeemable at par after 5 years. Assuming 35% tax rate and 10%
floatation cost, determine the cost of preference shares, if the preference shares are issued at (i) Par (ii) 10% Discount (iii) 5% Premium

Q10. From the following capital structure, calculate the overall cost of capital using (a) Book Value weights (b) Market value weights

Market Value
Source Book Value Rs. Rs.
 Equity shares of Rs.10
each 10,50,000 25,00,000
Retained Earnings 3,50,000 -

Preference share Capital 2,00,000 2,00,000

Debentures 4,00,000 3,00,000

The after tax cost of different sources of finance are Equity share capital 16%, Retained Earnings 14%, Preference Shares 12% and Debentures
10%.

Q11. A company needs Rs.15 Lakhs for the installation of new factory which would yield an annual EBIT of Rs.4,00,000. The company has the
objective of maximising the earnings per share. It is considering the possibility of issuing equity shares plus raising a debt of Rs.3,00,000,
Rs.6,00,000 or Rs.10,00,000. The current market price per share is Rs.60 which is expected to drop to Rs.45 per share if the market borrowings
were to exceed Rs.7,50,000.

Cost of borrowings are indicated as under:

Upto Rs.2,50,000 - 12% p.a.
Between Rs. 2,50,001 and Rs.6,25,000 - 14% p.a.
Between Rs. 6,25,001 and Rs. 10,00,000 - 16% p.a.

Assume tax rate as 35%, and calculate:

(i) Suggest which capital structure alternative the company should select on the basis of EPS.
(ii) Calculate the financial break even point for the three plans
(iii) Calculate the indifference level of EBIT for three plans.

Q12. SUNBURN Ltd. a mid-sized company specializing in precision engineering. Their success has been attributed to a combination of skilled
workforce and advanced machinery. However, one of their critical machines, used for precision cutting and shaping, is approaching the end of
its operational life. It is considering an investment proposal for which the relevant information is as follows:
Purchase price of new machine Rs. 25,00,000
Installation Costs Rs. 5,00,000
Increase in working capital in year zero Rs. 6,25,000
Scrap value of new asset after 4 years Rs. 8,75,000
Revenues for new machine (Annual) Rs. 53,75,000
Cash expenses on new machine (Annual) Rs. 23,75,000
Current Book value (Old machine) Rs. 10,00,000
Present scrap value of old machine Rs. 12,50,000
Revenue from old machine (Annual) Rs. 48,12,500
Cash expenses on old machine (Annual) Rs. 28,12,500
Planning period 4 years
Depreciation on new machine: 92% of the cost is to be depreciated in the ratio of 5:8:6:4 over 4 years.
Existing asset is depreciated at a rate of Rs. 2,50,000 p.a.
Tax rate is 40% on both revenues as well as capital gains/losses
Q13. InnovateTech Solutions, a cutting-edge technology firm, has recently experienced exponential growth, leading to an array of potential
investment opportunities. However, due to budget constraints and capital rationing, the company is forced to carefully evaluate and prioritize its
projects. InnovateTech Solutions has Rs. 20,00,000 allocated for Capital Budgeting purpose. The following proposals and associated NPV has
been determined

Project Outflow NPV

A 6,00,000 1,32,000
B 3,00,000 (15,000)
C 7,00,000 1,40,000
D 9,00,000 1,62,000
E 4,00,000 80,000
F 8,00,000 40,000
Which of the above investments should be undertaken based on NPV

i) the projects are indivisible (provide different alternatives available)

ii) the projects are completely divisible

Also calculate the NPV & Combined PI of the selected projects of all the projects undertaken

Q14. From the following information prepare Cash Budget for the period of March to August 2019.

Month Sales Purchase Wages Administrative Exp Selling Exp.

Factory Exp.

January 1,70,000 80,000 15,000 10,000 5,000 7,000

February 1,60,000 84,000 16,000 11,000 5,500 7,500

March 1,82,000 83,000 16,800 8,000 4,500 6,500

April 1,55,000 83,000 12,000 10,500 4,750 6,800

May 1,65,000 76,000 18,000 12,000 5,400 7,400

June 2,00,000 68,000 16,000 9,600 5,700 7,000

July 1,80,000 70,000 17,000 8,000 5,000 6,000

August 2,20,000 58,000 16,500 9,600 5,500 5,500

Additional Information:

1. Opening Cash Balance on 1st March, 2019 Rs. 20,000

2. Period of credit allowed to customers and by suppliers – one month
3. Lag in payment of Factory expenses, Administrative Expenses and selling Expenses – One month.
4. Machinery purchases for Rs. 30,000 in March payable on delivery.
5. Building purchased in April for Rs. 1,50,000 payable in two equal instalments in May and July.
6. 5% commission of sales payable two months after sales.
7. Delay in the payment of wages- one month.
Q15. Assuming no taxes and the earnings before interest and taxes (EBIT) and interest at 12% and Equity Capitalization rate, Calculate the total
market value of each firm V ltd, W ltd, X ltd, Y ltd & Z Ltd from the following data

Firm EBIT (Rs.) Interest (Rs.) Equity Capitalization Rate (ECR)

V Ltd 5,00,000 60,000 11%

 W Ltd 6,50,000 84,000 15%

X Ltd 7,20,000 1,50,000 13%

Y Ltd 4,80,000 54,000 16%

Z Ltd 9,00,000 1,80,000 14%

Also Determine the WACC for all the companies.