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FIN 514 Financial Management

MBA Program
Final Assignment
Spring 2021

Instructions:
1. Write answers maintaining the question order.
2. Write in notebook. Computer typed answers are not acceptable.

Q 1: Name a company which performance has been impacted (positively or negatively) by the
ongoing pandemic? How did the company’s performance got affected? (Write in Max 2 Pages) 4

Q 2: Explain the steps of valuation using dividend discount model shortly. 3

Q 3: At first, input the last 2 year's data Income Statement for your assigned company (see Appendix)
in your notebook. Then calculate Degree of Operating Leverage, Degree of Financial Leverage and
Degree of Total Leverage (using the % change method) assuming second last year as base year. 8

For example: ABC Company Ltd (input the values like the following statement)

Demo Statement Base Year New Year

30-Jun 30-Jun
For example: ABC Company Ltd’s
2019 2020 latest annual report is for June 30
Sales 100 120 2020. So take 2019 as the base year
and calculate the DOL, DFL and DTL
Operating profit or EBIT 40 50 taking change in data from 2019 to
2020.
Net Profit for the year 20 30

Divide by: No. of Shares 10 10

EPS 2 3

Q 4: Input the last year's Shareholders' Equity Data for your assigned company in the
following format. Also collect the latest stock price of your company from DSE. 5

Shareholder’s Equity
Share Capital (…… Shares Par
value TK 10 ) ……
Reserve ……
Other Items …..
Retained earnings ……
Total shareholder's equity ……..

Then show the impact of the following -

a) 10% Cash Dividend on Shareholders' Equity Statement 2

b) What kind and percentage of dividend your assigned company has paid in the last 4
years? What kind of dividend policy the company is following? 3
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Q 5: DSS Corporation is considering a new project to manufacture widgets. The cost of the
manufacturing equipment is Tk. (see Appendix). The cost of shipping and installation is an
additional Tk.10,000. The asset will be depreciated under straight line depreciation method.
Sales are expected to be Tk. 200,000 in year 1 and expected to grow at 10% per year upto
year 4. Operating expenses will be 55% of sales. The project will require an increase in net
working capital of Tk. 10,000. At the end of four years, DSS plans on ending the project and
selling the manufacturing equipment for Tk. 25,000. The marginal tax rate is 40%. 8

Required:

a) What is the initial investment outlay associated with the machine? 1.5

b) What are the operating cash flows in year 1, 2, 3 and 4? 4.5

c) What is the terminal cash flow in year 4? 1

d) Estimate (summarize) the relevant (total after-tax) cash flows for the project 1

Q 6: Project A and B, of equal risk, are alternatives for expanding Rosa Company’s
capacity. The cost of capital is (see Appendix) . The cash flows for each project are shown in
the following table. - 5

a) Calculate each project’s payback period and comment on projects acceptance if maximum

acceptable payback period is 3 years. 2

b) Calculate the net present value (NPV) for each project and provide comment. 3

Q 7: Since its inception, Eco Plastics Company has been revolutionizing plastic and trying to
do its part to save the environment. As the chief financial officer of a young company with
lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The
CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-
term debt, preferred stock, and common stock. The target capital structure for Eco is given by
the weights in the following table: 7
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At the present time, Eco can raise debt by selling …..(see appendix)-year bonds with a
$1,000 par value and a 10.5% annual coupon interest rate. Eco’s corporate tax rate is 40%,
and its bonds generally require and flotation costs of $32 per bond when being sold.

Eco’s outstanding preferred stock pays a 9% dividend and has a $95-per-share par value with
a selling price of $92. The cost of issuing and selling additional preferred stock is expected to
be 5% per share.

Because currently pays a dividend $2 per share to its common stockholders and dividend is
expected to grow at a constant rate of 2%. Its common stock is selling for $..... (see appendix)
per common stock. It is planning to issue a new common stock for financing new project.
Floatation cost per new common stock will be $4.

a. Calculate Eco’s current after-tax cost of long-term debt.

b. Calculate Eco’s current cost of preferred stock.

c. Calculate Eco’s current cost of new common stock.

d. Calculate the market value weights of different sources of financings. Using the weights
and costs, calculate Eco’s current weighted average cost capital. How would you interpret
this value?
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Appendix