Subject: Strategic Corporate Finance

 Instructions:
       Answer all the four questions.(Generally we give 4 questions, each question carries 25 marks)
       Marks allotted 100. Each Question carries equal marks.
        Word limit is 250-300 words      
General Instructions:
       The Student should submit this assignment in the handwritten form (not in the typed format)
       The Student should submit this assignment within the time specified by the exam dept
       Each Question mentioned in this assignment should be answered within the word limit specified
       The student should only use the Rule sheet papers for answering the questions.
       The student should attach this assignment paper with the answered papers.
     Failure to comply with the above Five instructions would lead to rejection of assignment.         

1. The board of directors of Corporate Ltd is considering two investments, each of which is
expected to have a life of five years. The company does not have either the physical capacity or the
funds to undertake both investments. Forecast profits and other financial data for the two
investments are:

Investment 1 Year
0 1 2 3 4 5
Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Non current assets (500)
Working capital (50)
Forecast revenue 370 500 510 515 475
Forecast cost 300 325 335 330 325
Finance charges 15 15 15 15 15
Depreciation 100 100 100 100 100
Profit before tax (45) 60 60 70 35

Investment 2 Year
0 1 2 3 4 5
Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Non current assets (450)
Working capital (50)
Forecast revenue 420 510 575 550 510
Forecast cost 310 385 420 400 350
Finance charges 15 15 15 15 15
Depreciation 80 80 80 80 80
Profit before tax 15 30 60 55 65

Additional information

 The company pays tax at 33 per cent. Writing-down allowances are available on the initial
investment in both projects at 25 per cent per year. Tax is payable/receivable 1 year in arrears.
 The data is in real terms, that is, it contains no increases for inflation. This has been ignored
on the grounds that both revenue and costs are expected to increase by 5 per cent per year.
 The company’s nominal cost of capital is 12 per cent per year. Its target accounting rate of
return (average profit before tax as a percentage of average investment) is 25 per cent.
 All cash flows may be assumed to occur at the end of the year except the initial capital cost
and working capital.
 For each project the value of working capital expected to be re1esed back to the project’s
cash flows at the end of year 5 is Rs.50,000 nominal. There will be no other terminal value of the
investment.
 The Rs.50,000 left over if investment 2 is chosen (i.e. the difference between the initial
investment of Rs.5,50,000 in investment 1 and Rs.5,00,000 in investment 2) could be invested in
the money market at between 6 percent and 7 per cent.

Requirement
Assume that you are the financial manager with Corporate Ltd. Recommend to the board which
investment, if either, should be selected using whatever methods of evaluation you think
appropriate. Include in your report a discussion of the various methods of evaluation and any non-
financial factors which might be relevant to the decision.

Note: Your cash flows should be presented in nominal (as opposed to real) terms.

akhilesh.tayal@gmail.com

2. A company is seized with the problem of choosing one of the two investment proposals with the
following probability distribution of expected cash flows in each of the next three years. Determine
which project is more risky.

Proposal A Proposal B
Probability Cash flows Probability Cash flows
Rs. Rs.
0.10 1,500 0.10 1,000
0.20 1,750 0.25 1,500
0.40 2,000 0.30 2,000
0.20 2,250 0.25 2,500
0.10 2,500 0.10 3,000

1. State the factors which are responsible for over-capitalization and under-capitalization. You
are required to suggest ways and means to provide remedy to such a state of affairs.
1. Compare and contrast the NI and NOI approach.

3. Modern Steel Company is considering two mutually exclusive projects. The expected investment
outlay of these projects is Rs.1500; net cash flow information for both projects is as under:

Year Project A Project B

Rs. Rs.
1 575 450
2 510 450
3 430 450
4 278 450
5 278 450

Which project should Modern Steel Company select and why?

4. Explain the importance of general economic conditions in planning the capital structure.
Answer:-
1.
General Economic Conditions: While planning the capital structure, the general
economic conditions should be considered. If the economy is in the state of depression,
preference will be given to equity form of capital as it will be involving less amount of risk.
But it may not be possible always as the investors may not be willing to take the risk.
Under such circumstances, the company may be required to go in for borrowed capital. If
the capital market is in boom and the interest rates are likely to decline in further, equity
form of capital may be considered immediately, leaving the borrowed form of capital to be
tapped in future. It may also be possible to raise more equity capital in boom as the
investors may be ready to take risk and to invest.

2. Bookmark hai answer