FM- Tutorial 9 FM- Tutorial 9

1. Cash flows of the two projects are given.
Which project should be accepted under
Payback Period and Discounted Payback
Period if the cut off period is 3 years and
discount rate is 10%.
1. Cash flows of the two projects are given.
Which project should be accepted under
Payback Period and Discounted Payback
Period if the cut off period is 3 years and
discount rate is 10%.

Cash Flows Project One Project Two Cash Flows Project One Project Two
Initial cost $10,000 $15,000 Initial cost $10,000 $15,000
Year One $4,000 $7,000 Year One $4,000 $7,000
Year Two $4,000 $5,000 Year Two $4,000 $5,000
Year Three $4,000 $4,000 Year Three $4,000 $4,000

2. Calculate the NPV of the project, if 2. Calculate the NPV of the project, if discount
discount rate is 10%. Also calculate the rate is 10%. Also calculate the IRR of the
IRR of the Project. Project.

Cash Flows Project A Cash Flows Project A

Initial cost $20,00000 Initial cost $20,00000
Year One $6,00000 Year One $6,00000
Year Two $6,50000 Year Two $6,50000
Year Three $6,80000 Year Three $6,80000

Year Four $6,00000 Year Four $6,00000

Year Five $5,50000 Year Five $5,50000

Q3. The Servex Company has the following Q3. The Servex Company has the following
capital structure capital structure
Ordinary Shares (2,00,000 shares) 40,00000 Ordinary Shares (2,00,000 shares) 40,00000
10% Preference Share 10,00000 10% Preference Share 10,00000
14% Debentures 30,00000 14% Debentures 30,00000

The share of the company sells for Rs 20. It is
expected that company will pay next year a
dividend of Rs 2 per share, which will grow
at 7% forever. Assume a 40% tax rate.
1. Compute weighted average cost of capital
based on the existing capital structure.
2. Compute the new weighted average cost of
capital it the company raises an additional
of Rs 20,00000 by issuing 15% debenture.
This would result in increasing the
expected dividend to Rs 3 and leave the
growth rate unchanged, but the price of the
share will fall to Rs 15 per share.
The share of the company sells for Rs 20. It is
expected that company will pay next year a
dividend of Rs 2 per share, which will grow
at 7% forever. Assume a 40% tax rate.
1. Compute weighted average cost of capital
based on the existing capital structure.
2. Compute the new weighted average cost of
capital it the company raises an additional
of Rs 20,00000 by issuing 15% debenture.
This would result in increasing the
expected dividend to Rs 3 and leave the
growth rate unchanged, but the price of the
share will fall to Rs 15 per share