corporate finance nmims dec 2018 solved assignment help
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Q1.
ABC Co. sells 10,000 units at a price of Rs. 10 per unit. ABC’s total fixed
cost is Rs. 20,000, Interest expense 10,000, and variable cost is Rs. 6 per
unit. Find ABC’s degree of operating leverage, degree of financial leverage and
find degree of total leverage.
ABC’s
parent company has Rs. 2.5 million is assets that are currently financed by
100% equity. Its EBIT is Rs.600,000 and its tax rate is 30%. If ABC’s parent
changes its capital structure to include 40% debt, what is its ROE before and
after the change? Assume interest rate on debt is 10%. Comment why the ROE
increases after adding debt. Assuming all other things remain same, how will
the ROE change if interest on debt is suddenly increased to 20%? Elaborate on
the same.
Answer:
|
s.no
|
Particulars
|
Amount (Rs.)
|
|
1
|
Output
|
10000
|
|
2
|
Selling
price per unit
|
10
|
|
3
|
Variable
cost per unit
|
6
|
Q2.
Kuber Company has a target capital structure of 50% debt and 50% equity, with
an after tax cost of debt of 8%. Cost of retained earnings is 14%. Its profit
after tax is Rs, 250,000. Kuber is considering the following projects to invest
in
|
Project
|
Size of project
|
IRR of project
|
|
Project A
|
100000
|
12.0%
|
|
Project B
|
120000
|
11.5%
|
|
Project C
|
120000
|
11.0%
|
|
Project D
|
120000
|
10.5%
|
|
Project E
|
100000
|
10.0%
|
Find
the company’s weighted average cost of capital.
If
the company accepts all the projects that it could invest in just from its
profit after tax and considering their IRRs, which projects should it take up?
Give reason. What will be its total investment in these projects? Taking into
account its target capital structure, how much of equity portion should the company
invest in these projects? If the company follows Irrelevance Approach (Modigliani
and Miller) or residual dividend policy, what will be its dividend payout
ratio?
Answer: Calculation of WACC
|
Fund source
|
Amount
|
Ratio
|
Cost
|
Weighted cost
|
|
Debt
|
50000
|
0.5
|
0.08
|
0.04
|
|
Equity
|
50000
|
0.5
|
0.14
|
0.07
|
|
|
100000
|
|
|
0.11
|
Q3.
Hi-Tech company’s partial balance sheet for 2 years is given below
|
|
Year 2017
|
Year 2018
|
|
Current Assets (Rs. Lakhs)
|
|
|
|
Raw materials
|
20
|
30
|
|
Finished goods
|
15
|
15
|
|
Receivables
|
10
|
30
|
|
Other current assets
|
5
|
7
|
|
Current liabilities (Rs. Lakhs)
|
|
|
|
Creditors
|
25
|
35
|
|
Other current liabilities
|
15
|
20
|
Due
to a new product launch, Hi-Tech’s sales grew at a faster pace in year 2018.
Hi- Tech’s working capital bank had been assessing its Maximum Permissible Bank
Finance (MPBF) under Method 1 till 2017, but due to a credit squeeze it
suddenly changed to Method 2 in year 2018.
a)
What is the change in net working capital between 2018 and 2017?
b)
What is the change in MPBF limit assigned by the bank from year 2017 to 2018? With
this change in MPBF limit, will the working capital financing from the bank increase
or decrease?
Answer: a)
Net working capital
|
|
Year 2017
|
Year 2018
|
|
Current Assets (Rs.
Lakhs)
|
|
|
|
Raw materials
|
20
|
30
|
|
Finished goods
|
15
|
15
|
|
Receivables
|
10
|
30
|
|
Other current assets
|
5
|
7
|
|
Total
(A)
|
50
|
82
|
|
Current liabilities
(Rs. Lakhs)
|
|
|
Complete Assignment available for NMIMS
in rs 250 per assignment only
You can call us 87-55555-879
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