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Quantitative problems in Advanced Financial Management Part -I

Quantitative problems in Advanced Financial Management Part -I. K.Viswanathan. From the mid- sem question paper. Work out the answers for any four of the following , showing the steps used:

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Quantitative problems in Advanced Financial Management Part -I

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  1. Quantitative problems in Advanced Financial ManagementPart -I K.Viswanathan

  2. From the mid-sem question paper Work out the answers for any four of the following , showing the steps used: Consider the following data of Phoenix Ltd: P=Rs 40, V=Rs. 24; F= Rs. 80000; I=Rs. 30,000; T=50%;Dp=Rs. 10000. What is its DFL with the level of output of (Q) 20000 units?

  3. From the mid-sem question paper Work out the answers for any four of the following , showing the steps used: 2. The management of Reliable textiles subscribes to NOI approach and believes that its cost of debt and equity capital will remain at 9% and 12% respectively. If the D/E ratio is 0.8, what is the cost of equity?

  4. From the mid-sem question paper Work out the answers for any four of the following , showing the steps used: 3. The following is the information on August corporation: EPS=Rs.4; Rate of return on investments=18%; Rate of return expected by shareholders =15%;What will be the price of share as per Walter model if payment ratio is 40%? 50%? 60%?

  5. From the mid-sem question paper Work out the answers for any four of the following , showing the steps used: The following information is available for Cannon Corporation: M=0.05;d=0.30;A/E=2.4; A/S0=1.00; What growth rate can be sustained with internal equity?

  6. From the mid-sem question paper Work out the answers for any four of the following , showing the steps used: 5. The market price of a Rs. 1000 par value bond carrying coupon rate of 14% and maturing after 5 yrs is 1050. What is the YTM on this bond? What will be the realized yield to maturity, if the re-investment rate is 12%?

  7. From the mid-sem question paper Work out the answers for any four of the following , showing the steps used: 6. A Rs. 100 par value bond bears coupon rate of 14% and matures after 5 yrs. Interest is payable semi- annually? Compute the value of the bond if the required rate is 16%.

  8. Worked out questions from University papers  Qn Paper B-8258: 1. The B/S of International Ltd as on 31st March 2008 is as under: ( All figures in lakhs) Total assets T/O of the Company is 3; its fixed cost is 1/6 of sales and variable operating cost is 50% of sales. The corporate tax rate is 35%. You are required to: Calculate operating, financial and total leverage Calculate the market price of the share if the P/E multiple is 2.5 Calculate the level of EBIT if the EPS is (a) 15 (b) 25.

  9. Worked out questions from University papers 2. a. ABC Co. LTD has net present value of the assets Rs. 100 lac which includes cash balance of Rs. 10 lacs. It has 1,00,000 equity shares and no preference capital or debt funds. The company has to make the decision about declaring dividend. At the same time it is also exploring the possibility of investing in a new project. The company has 3 options:- Do not declare any dividend and invest available cash of Rs. 10 lacs in the new project. The present value of the future cash flows generated by this project is Rs. 20 lacs. Pay Rs. 10 per share as dividend. This will take away the entire cash balance of Rs. 10 lacs. Pay dividend as suggested in the second option and also invest in a new project through a fresh equity issue of 1 lac shares of Rs. 10 each. This investment will have the same effect on the company as in the first option. i.e. Rs. 20 lacNPV from the project. Give your recommendation to the company as to which is the best option if the company wants to maximise its share value. b. The following information is available in respect of the company: Capitalisation Rate ( Ke) = 0.12 EPS =Rs. 15. Rate of return on investment ( r) = (i) 0.15 (ii) 0.10 The company wants to know the effect on the market price of its shares under the two possibilities of r= 0.15 and 0.10 under the two options (i) if it does not declare any dividend and (ii) If it declares Rs. 15 as dividend . Using Walter’s model explain the results obtained by you.

  10. Worked out questions from University papers 3. Following information is available from the books of XYZ Ltd. ( Rs. In Lakhs) Sales 500 Cost of Raw Materials 200 Labour cost for manufacturing 100 Interest on borrowings 60 The capitalisation rate for the debt is 10% and the capitalisation rate for the entire firm is 12.5%. Assuming that the firm does not retain any earnings and there is no tax, as per net operating income approach – What is the total market value of the firm? What is the market value of the debt of the firm? What is the market value of the equity of the firm? What is the equity capitalisation rate ?

  11. Worked out questions from University papers 4. A firm has sales of Rs. 10,00,000/-Variable Cost is Rs. 70%, total cost is Rs. 9,00,000/- and the debt of Rs. 500,000 at 10% rate of interest. If tax rate is 40% calculate :- Operating leverage Financial leverage Combined leverage If the firm wants to double up its earnings before interest and tax ( EBIT), how much of a raise in sales would be needed on a percentage basis?

  12. Worked out questions from University papers 5. ABC Co Ltd is expecting 10% return on total assets of Rs. 50 lakhs. The co has outstanding shares of 20000. The directors of the co have decided to pay 40% of earnings as dividends. The rate of return required by the shareholders is 12.5%. Rate of return expected on investments is 15%. Determine the price of shares using Walter model. b. The current market price of shares of X ltd. Is Rs. 120 per share. The co is considering Rs. 6.40 as dividend per share. The co belongs to the risk class in which capitalisation rate is 9.60%. Based on M& M approach calculate the market price of shares if the co declares dividend and if it does not declare dividend. What do you learn from it?

  13. Worked out questions 6. Consider the following information on Evita Ltd: Net Operating Income Rs. 210 lakhs Corporate Tax Rate 30% Market (as well as book) value Rs. 300 lakhs Capitalisation rate applicable for the risk class of the firm 16% What is the value of Evita Ltd as per Miller and Modigliani approach?

  14. Worked out questions 7. The following information is available on Random Musicals. Earning per share Rs. 5.00 Rate of return required by shareholders 16% Applying Gordon valuation model , what rate oif return should be earned on investments to ensure that the market price is Rs.50 when the dividend pay out is 40%?

  15. Worked out questions 8. The stocks of firms X and Y are considered to be equally risky. Investors expect the share of firm X- the firm which does not plan to pay dividend to be worth Rs. 180 next year. From the share of Y investors expect to be paid a dividend of Rs. 15. and they expect the market value of the share to be Rs. 165 in the next year. Dividends are taxed 20%. Capital gains are taxed 10%.What will be the current price of the shares of X and Y, if each of them offers post tax rate of return of 15%. Assume Radical position applies.

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