Institute of Innovation in Technology and Management

BBA
FINANCIAL MANAGEMENT
ASSIGNMENT-1: Introduction to Financial Management

Q.1. “Wealth maximization is a better criterion than profit maximization.” Do you agree?
Explain.

Q.2. “Financial Management is more than procurement of funds.” What do you think are the
responsibilities of a finance manager?

ASSIGNMENT-2: Time Value of Money

Q.1. Explain the concept of Time Value of Money with the help of an example.

Q.2. Solve the following problems:

1. A deposits Rs 10, 00,000 for 5 yrs @ 8% interest. How much the deposit will grow? (compounding
technique-CVF)

2. A deposits Rs 5,000 at end of each year for 4 yrs @ 6% interest. How much the deposit will grow at
end of 4 years? (compounding technique-CVAF)

3. Find the present value Rs 1000 receivable after 6 yrs @ 10% discount. (discounting technique-PVF)

4. Find the present value for Rs. 13,148 deposited at the end of each year in bank on which
interest is credit @ 10% p.a. for 15 years. (discounting technique-PVAF)

5. What is the present worth of operating expenditure of Rs. 1, 00,000 per year which are assumed to
be incurred continuously throughout in 8 year period if the effective annual rate of interest is 12%?
(Ans. Rs.4,96,800)

6. What is the present value of cash flows of Rs.750 per year forever (a) at an interest rate of 8% and
(b) at an interest rate of 10%? (Ans. (a) 9,375 and (b) Rs. 7,500)

7. A 5-years annuity of Rs. 5,000 is deposited in a bank @ 10% interest rate compounded annually. Find
out the total amount available to the depositor at the end? (Ans. Rs.30,525)

8. A company has issued debentures of Rs. 50 lakhs to be repaid after 7 years. How much should the
company invest in a sinking fund earning 12% in order to be able to repay debentures?
. (Ans. 4,95,589)
9. Ten years from now, Mr. X will start receiving a pension of Rs. 3,000 a year. The payment will
continue for sixteen years. How much is the pension worth now, if his interest rate is 10%? .
(Ans. Rs. 9,952)

10. A deposit is made now and that will earn 8% compounded annually. It is decided to withdraw
Rs.5000 in 3rd year and rs.7, 000 in 6th year. (Ans. PV=Rs. 8,380)

ASSIGNMENT-3: COST OF CAPITAL

1. (a) ABC Ltd. issues 20,000, 8% preference shares of ₹100 each. Redeemable after 8 years at

a premium of 10%. The cost of issue is ₹2 per share. Calculate the cost of preference share

capital. (Ans. Kp=9.13%)

(b) A company issues ₹ 20,00,000, 10% redeemable debentures at a discount of 5%. The costs of

floatation amount to ₹50,000. The debentures are redeemable after 8 years. Calculate before tax

and after tax. Cost of debt assuring a tax rate of 55%. (Ans. Kd=5.11%)

(c ) The current market price of the shares of A Ltd. is ₹ 95. The floatation costs are ₹5 per share

amounts to ₹ 4.50 and is expected to grow at a rate of 7%. You are required to calculate the cost

of equity share capital. (Ans. Ke=11.73%

(d) A firm is considering an expenditure of ₹75 lakhs for expanding its operations. The relevant

information is as follows :

Number of existing equity shares =10 lakhs

Market value of existing share =₹100

Net earnings =₹100 lakhs

Compute the cost of existing equity share capital and of new equity capital assuming that new shares
will be issued at a price of ₹92 per share and the costs of new issue will be ₹ 2 per share.

(Ans. Ke=11.11%)

2. Determine WACC using Book values weights based on the following data:

Book value structure:

Debentures: ₹110 per debenture

Preference shares: ₹ 120 per share

Equity shares: ₹ 22 per share

Dividend expected on equity shares at the end of the year is ₹.2 per share; anticipated growth rate

in dividends is 7%. Company pays all its earnings in the form of dividends. Corporate tax rate is

40%.

3. The following is the capital structure of Simons Company Ltd. As on 31.12.2010:

Equity shares: (10,000 shares of ₹100 each) ₹10,00,000

10% Preference shares of ₹100 each ₹ 4,00,000

12% Debentures ₹6,00,000

The market price of the company’s share is ₹110 and it is expected that a dividend of ₹10 per

share would be declared after 1 year. The dividend growth rate is 6%:

i. If the company is in 40% tax bracket, compute the weighted average cost of capital

(BV).

ii. Assuming that in order to finance an expansion plan, the company intends to borrow

a fund of ₹10 lacs bearing 14% rate of interest, what will be the company’s revised

WACC? The financing decision is expected to increase dividend from ₹ 10 to ₹12 per

share. However, market price of equity share is expected to decline from ₹ 110 to ₹

105 per share.

(Ans. WACC=11.70%, Revised WACC=11.38%, Revised Ko=17.43%

using (a) book value weights, and (b) market value weights:

The after-tax cost of different sources of finance is as follows:

Equity Share Capital: 14 per cent; Retained Earnings: 13 per cent;

Preference Share Capital: 10 per cent; Debentures: 5 per cent.

(Ans. As per BV, ko=10.75%, as per MV, Ko= 11.13%)

5. A limited company has the following capital structure:

Equity Share Capital (2,00,000 Shares) ₹40,00,000

6% Preference Shares ₹ 10,00,000

8% Debentures ₹.30,00,000

The market price of the company’s equity share is Rs 20. It is expected that company will pay a

current dividend of Rs 2 per share which will grow at 7 per cent for ever. The tax rate may be

presumed at 50 per cent. You are required to compute the following.

(a) A weighted average cost of capital based on existing capital structure.

(b) The new weighted average cost of capital if the company raises an additional ₹20,00,000 debt

by issuing 10 per cent debentures. This would result in increasing the expected dividend to Rs 3

and leave the growth rate unchanged but the price of share will fall to ₹15 per share.

(c) The cost of capital if in (b) above, growth rate increases to 10 per cent.

(Ans.10.75%,13.60% ,14.80%)

6. The following estimates of the cost of debt and cost of equity capital have been made at
various level of the debt-equity mix for ABC Ltd.

Assuming no tax, determine the optimal debt equity ratio for the company on the bsis of overall

cost of capital, WACC.

(Ans. Optimum debt-equity mix at 30% debt and 70 % equity with ko=10.75%)

ASSIGNMENT-4: CAPITAL STRUCTURE

Q.1. Write a brief note on the following:

a. Optimum Capital Structure

b. Comparison of NI and NOI Approach

c. Assumptions of MM Approach of capital structure

d. Factors affecting capital structure

e. Financial structure Vs. Capital Structure

f. Book value Vs. Market value weights in cost of capital

Practical questions:

Q.1. A company’s current operating income is ₹4 lakhs. The firm has ₹10 lakhs of 10% debt outstanding.
Its cost of equity caital is estimated to be 15%.

i. Determine the current value of the firm, using traditional approach.

ii. Calculate firm’s overall capitalization rate.

iii. The firm is considering to increase its leverage by raising an additional ₹5,00,000
debt and using the proceeds to retire the amount of equity. As a result of increased

financial risk, the rate of interest is likely to go upto 12% and ke to 18%. Would you

recommend the plan?

(Ans. V=₹30,00,000, Ko=13.33%, New plan may not be recommended as the value is expected to go
down to ₹27,22,222)

Q.2. (a) A Company expects a net income of ₹1,00,000. It has ₹ 2,50,000, 8%debentures. The equality
capitalization rate of the company is 10%. Calculate the value of the firm and overall capitalization rate
according to the net income approach (ignoring income tax). (b) If the debenture debts are increased to
₹4,00,000. What shall be the value of the firm and the overall capitalization rate?

(Ans. a) Ko=9.52%, V=₹10,50,000, b) Ko=9.26%, V=₹10,80,000)

Q.3. Abinaya company Ltd. expresses a net operating income of ₹2,00,000. It has ₹8,00,000 to 7%
debentures. The overall capitalization rate is 10%. (a) Calculate the value of the firm and the equity
capitalization rate (or) cost of equity according to the net operating income approach.

(b) If the debenture debt is increased to ₹12,00,000. What will be the effect on the value of the firm, the
equity capitalization rate? (Ans. a) Ke=12%, b) Ke=14.5%)

Q.4. A Company Ltd., projected net operating income of ₹75,000. It has ₹3,00,000, 8% debentures.

(a) Calculate the value of the firm according to 10 net opening income and overall capitalization rate is
10%.

(b) If debenture debt is increased to ₹5,00,000. What is the value of the firm and the equity capitalization
rate?

(Ans. (a) ₹ 7,50,000, (b) 11.33%, 14%)

Q.5. According to Traditional approach, compute the market value of the firm, value of shares and the
average cost of capital from the following information:

Net Operating Income 1,00,000

Total Investment 7,00,000

Equity capitalization Rate:

(a) if the firms uses no debt 7%.

(b) if the firm uses ₹ 2,00,000 debentures 8%

(Ans. 7%, 7.69%, 8.33)

Q.6. Companies U and L are identical in every respect expect that the former does not use debt in its
capital structure, while the latter employs ₹6,00,000 of 15% debt. Assuming that

(a) all MM assumptions are met ,

(b) the corporate tax rate is 50%,

(c) EBIT ₹2,00,000, (d) equity capitalization rate of unlevered company is 20%,what will be the value
of the firms U and L? Also, determine the weighted average cost of capital for both the firms.

(Ans. Unlevered firm: Vu=₹5,00,000, Ko=Ke=20%; Levered form: VL= ₹8,00,000, Ke=27.5%,
Ko=12.5%)