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Epdgm Term 2 Alliance University: Corporate Finance

The document contains two cases related to corporate finance. The first case asks to calculate the future value and present value of different cash flows using interest rates of 7.5% and 10%. The second case asks to recommend two companies for an investor to invest ₹15,00,000 over 3 years based on the cost of equity calculated using CAPM for different companies in the FMCG and Oil & Gas sectors. The document also contains a third case to calculate the weighted average cost of capital given different sources of funds.

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35 views

Epdgm Term 2 Alliance University: Corporate Finance

The document contains two cases related to corporate finance. The first case asks to calculate the future value and present value of different cash flows using interest rates of 7.5% and 10%. The second case asks to recommend two companies for an investor to invest ₹15,00,000 over 3 years based on the cost of equity calculated using CAPM for different companies in the FMCG and Oil & Gas sectors. The document also contains a third case to calculate the weighted average cost of capital given different sources of funds.

Uploaded by

Georgekutty George
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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EPDGM TERM 2

ALLIANCE UNIVERSITY

CORPORATE FINANCE
1. Compute the Future Value & Present Value of the following Cash Flows:
a) Take rate as r = 7.5%

Year CF
1 2000
2 2000
3 2000
4 2000
5 2000

b) Take rate as r = 10%

Year CF
1 4500
2 6000
3 12000
4 9000
5 10000

Answer

r = 10%
Year CF PV FV
1 4500 4090.909 6588.45
2 6000 4958.678 7986
3 12000 9015.778 14520
4 9000 6147.121 9900
5 10000 6209.213 10000

r = 7.50%
Year CF PV FV
1 2000 1860.465 2670.938
2 2000 1730.665 2484.594
3 2000 1609.921 2311.25
4 2000 1497.601 2150
5 2000 1393.117 2000
2. Case Study

INVESTMENT PLANNING

An investor Mr. RCS wants to earn the maximum return from his investment plan of Rs 15,00,000 for a tenure of
3 years. He is open to higher risk investment as much as upto earning a return of 55% per year. But, with multiple
avenues opened-up, he is confused with which instrument, he should invest at. The following details are available
from the NSE India database:

FMCG Sector Oil & Gas Sector


Company Beta Company Beta
Marico 1.90 HPCL 1.42
P&G -1.12 BPCL 0.97
HUL 0.94 IOC 1.03
Colgate 1.16 MRPL -1.76

NIFTY FMCG 24.20% NIFTY Oil & Gas 18.50%

He is very keen to invest in only two (2) company of the same sector. You have to recommend the investor Mr. RCS
about the best two company after the elaborate calculations of CAPM for each company with considering the Risk
Free Rate as 6.0%.

Answer

Under CAPM cost of equity is calculated with the below formula:-

Ke = Rf + Beta(Rm-Rf)

Cost of equity/ Expected return = Risk free return + Beta * ( Market return- Risk free return)

Risk Free return = 6%

FMCG Sector Oil & Gas Sector


Company Beta Ke Company Beta Ke
Marico 1.9 40.58% HPCL 1.42 23.75%
P&G -1.12 -14.38% BPCL 0.97 18.13%
HUL 0.94 23.11% IOC 1.03 18.88%
Colgate 1.16 27.11% MRPL -1.76 -16.00%

NIFTY FMCG 24.20% NIFTY Oil & Gas 18.50%

Choose HUL & Colgate

Sum of the return

HUL 23.11%
Colgate 27.11%

Total 50.22%
3. Compute the Weighted Average Cost of Capital from the following data:

Source of Amount
Funds (Rs) Cost (%)
Debt 3000000
Equity 4500000
Preference 2000000 13
Reserves 500000 11
Total Capital 1,00,00,000

You can take the following information:


a) Tax Rate = 25%
b) The Debt Capital is raised from the irredeemable instrument with an interest rate of just 8% and is
issued at par value of Rs 1000 each. There is a floatation cost of Rs 20 each for the debt instrument.
c) T-Bill return is 6%; Systematic risk is around 1.00; and Market return of 12%.

Answer
Tax Rate = 25%

Source of Funds
Amount (Rs) Cost (%)
Debt 3000000
Equity 4500000
Preference 2000000 13
Reserves 500000 11
Total Capital 1,00,00,000

Calculations:

2)Cost of Debt/Kd
Ke= Interest(1-Tax)/Net Proceeds
Given,
Tax= 25%
Int. Rate= 8%
Par value= INR 1,000.00
FC= INR 20.00

Now, Net Proceeds = INR 980.00

Interest = INR 80.00

So, Ke= 6.12%


1) Cost of Equity/Ke
Cost of equity/ Expected return = Risk free return + Beta * ( Market return- Risk free return)
RF= 6%
Beta 1
Rm= 12%

Ke= 12.00%

Source of Funds
Amount (Rs) Cost (%) Weighted Weighted Cost
Debt 3000000 6.122% 30.000% 1.837%
Equity 4500000 12.000% 45.000% 5.400%
Preference 2000000 13.000% 20.000% 2.600%
Reserves 500000 11.000% 5.000% 0.550%
Total Capital 10000000 Ko = 10.387%

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