NMIMS University 2005 Diploma Business Administration Corporate Finance - Question Paper
Corporate Finance
NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES
(Deemed University)
DISTANCE LEARNING PROGRAMMES IN MANAGEMENT
MAY 2005 EXAMINATION
CORPORATE FINANCE
DBM / PGDBM I / DFM / PGDFM I /PFDFM II
DATE: 7 / 5 / 2005 TOTAL MARKS: 100
TIME: 10 AM TO 1 PM
Instructions:
1. Question 1 is compulsory. Attempt any four (4) questions from Q. 2 to Q. 6.
2. All questions carry equal marks.
3. Make assumptions wherever necessary in your paper and state them in your answer.
4. Working notes must form part of your answers.
5. Wherever there are sub-questions, answers to them must be together at the same place as the main question.
Q1 A) Select the answers from the choices given (10 marks)
1. Under the Internal Rate of Return (IRR) method, all intermediate cash flows are assumed to be reinvested at:
a) Banks Prime Lending Rate (PLR)
b) Internal Rate of Return
c) Average Rate of Return
d) Net Profit Margin
2) What is the indifference level or indifference point?
a) The level of sales for which the EPS is the same for two alternative financial plans
b) The level of EBIT at which EPS is zero
c) The level of Sales a which EBIT is zero
d) The level of EBIT at which the EPS is same for two alternative financial plans
3) Which of the following is not a time-adjusted technique for evaluating investment decisions?
a) Net Present Value
b) Internal Rate of Return
c) Pay Back Period
d) Profitability Index
4) The use of funds with fixed financial charges, in order to achieve a growth in EPS, higher than the growth in EBIT is called:
a) Capital Budgeting
b) Operating Leverage
c) Financial Leverage
d) Arbitrage
5) What is the basis of calculation of the Average Rate of Return (ARR)?
e) Future cash flows
f) Present value technique
g) Accounting Information
h) Arbitrage
5) According to the pecking order theory, what is the correct order of preferences financial mangers have for raising funds?
a) No fixed order of preference
b) Debt, Equity, Retained Earnings
c) Equity, Debt, Retained Earnings
d) Retained Earnings, Debt, Equity
6) With what is the rate of return on a proposed investment compared with, for deciding whether or not to accept an investment decision?
a) Net Present Value
b) Average industry profit margin
c) Cost of capital
d) Internal Rate of Return
7) To calculate Economic Value Added (EVA), which measure of earnings do we use?
a) Net sales
b) Operating Profit
c) Profit before Taxes
d) Net Operating Profit after Taxes
8) According to Modigliani-Miller Hypothesis, investors are indifferent to dividends because:
a) Because dividend payment involves a number of procedures under the Companies Act and share holders do not like the company to spend time on these legal formalities
b) An increase in share price on payment of dividends is exactly offset by a decline in the share price as the same earnings are distributed over a larger number of shares.
c) Investors know that shares are a risky business and therefore they do not expect to receive dividends at all.
d) None of the above.
9) What is the cost of debt in debentures are issued at a price other than the face value?
a) The internal rate of return which equates the issue price of the debentures with the present value of all coupon payments and maturity value
b) The coupon rate of interest
c) Coupon payments as a percentage of the issue price
d) None of the above
Q1 B) ABC Co. Ltd. paid a dividend of Rs. 3/- per share last year. The companys EPS is Rs.12/- and its market multiplier is 1.5. According to the Graham-Dodd model, what will be the companys current share price? Also calculate the share price if the dividend per share is increased to Rs. 4/- while the EPS remains the same. (10 marks)
Q2) A firm expects to pay a dividend of Rs. 3/- in year 1, followed by an increase in the dividend by Rs. 2/- over the previous year in each of the following years. This pattern is expected to follow up to year 10. Assuming the opportunity cost of 12% as the discount rate, find the price of each share using the dividend discount model.
Q3) The following data is available for a project, which involves an initial investment of Rs. 13.50 lakhs and has a life of seven (7) years.
The project starts yielding returns only from the 2nd year onwards, which are tabulated below:
|
Year |
Annual after tax cash flows (Rs. lakhs) |
|
1 |
0 |
|
2 |
1.00 |
|
3 |
2.50 |
|
4 |
3.50 |
|
5 |
3.50 |
|
6 |
5.50 |
|
7 |
7.10 |
Calculate the internal rate of return of the project. Also advice if you would accept or reject the project, if the companys cost of capital is 12%. (20 marks)
Q4 A) A company is expecting its EBIT to be Rs. 1.40 lakhs. Its WACC is 14%. The company has borrowings of Rs. 4.00 lakhs at 10% rate of interest. What will be the value of the company according to the Net Operating Income Approach?
(10 marks)
Q4 B) The earnings per share of a XYZ Corp. is Rs.1.00 and it pays out a dividend of Rs. 50/- per share. The companys rate of return on investments is 14% and its capitalization rate is 18%. According to Gordons dividend capitalization model, what will the companys share price be? (10 marks)
Q5) Company PQR Ltds equity capital is Rs. 12,00,000/- comprising 1,20,000 shares of rs.10/- each. The company has also issued 60,000 debentures of Rs.10/- each and 4,000 preference shares of Rs.100/- each.
The debentures carry a coupon rate of 13% payable annually. They have been issued for a period of 4 years and on maturity, will be redeemed at face value.
The Beta of the companys shares is 1.1 and the required rate of return on the market portfolio is 18% while the risk free rate is 6.5%.
The preference shares carry a dividend of 14%.
Using the above information compute PQR Ltds cost of debt, cost of equity and WACC. (20 marks)
Q6) Write sort notes on any four (4) of the following:
i) Cash flow vs. Accounting profits
ii) Economic Value Added
iii) Financial Leverage
iv) Operating Leverage
v) Pecking order of finance
vi) Lease Financing (5 marks each)
| Earning: Approval pending. |
