Description
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Strategic Financial Management
1. ABC Ltd. needs to replace its machine that has less than required capacity and also is obsolete. The company needs to make a choice between (i) buy Machine A that is similar to its existing machine or (ii) buy Machine B that is more big and expensive. The cash flows of the two alternatives are as follows:
Years 0 1 2 3 4 5
Machine A(in lakhs) -25 0 5 20 14 14
Machine B(in lakhs) -40 10 14 16 17 15
The company’s cost of capital is 10 per cent. Kindly advise the finance manager (which machine is a better option for the firm based on relevant calculations) using the following techniques: Profitability Index and Discounted Payback Period. (10 Marks)
2. Calculate price of equity shares according to Walter model for the following three companies
Cold Ltd Warm Ltd Brewing Ltd
Internal Rate of Return 15% 25% 40%
Cost of equity 20% 15% 30%
EPS Rs 8 6 10
DPS Rs 6 4 8
Suggest in the case of each company what should be the ideal dividend payout ratio depending on the relationship between Internal Rate of Return and Cost of equity.
(10 Marks)
3. A company’s current operating income is ₹10 lakhs. The firm has ₹10 lakhs of 10 percent debt outstanding. Determine the value of the firm using Net Income Approach if the cost of equity capital is estimated to be 12%. Estimate as the finance manager of the company:
a. Value of the Equity of the firm (5 Marks)
b. Overall cost of capital of the firm (5 Marks)
For Nmims answersheets contact
[email protected]
+91 95030-94040
doc_936466478.docx
For Nmims answersheets contact
[email protected]
+91 95030-94040
Strategic Financial Management
1. ABC Ltd. needs to replace its machine that has less than required capacity and also is obsolete. The company needs to make a choice between (i) buy Machine A that is similar to its existing machine or (ii) buy Machine B that is more big and expensive. The cash flows of the two alternatives are as follows:
Years 0 1 2 3 4 5
Machine A(in lakhs) -25 0 5 20 14 14
Machine B(in lakhs) -40 10 14 16 17 15
The company’s cost of capital is 10 per cent. Kindly advise the finance manager (which machine is a better option for the firm based on relevant calculations) using the following techniques: Profitability Index and Discounted Payback Period. (10 Marks)
2. Calculate price of equity shares according to Walter model for the following three companies
Cold Ltd Warm Ltd Brewing Ltd
Internal Rate of Return 15% 25% 40%
Cost of equity 20% 15% 30%
EPS Rs 8 6 10
DPS Rs 6 4 8
Suggest in the case of each company what should be the ideal dividend payout ratio depending on the relationship between Internal Rate of Return and Cost of equity.
(10 Marks)
3. A company’s current operating income is ₹10 lakhs. The firm has ₹10 lakhs of 10 percent debt outstanding. Determine the value of the firm using Net Income Approach if the cost of equity capital is estimated to be 12%. Estimate as the finance manager of the company:
a. Value of the Equity of the firm (5 Marks)
b. Overall cost of capital of the firm (5 Marks)
For Nmims answersheets contact
[email protected]
+91 95030-94040
doc_936466478.docx