ASSIGNMENT 1

Case Let on Agency Conflict 15 Marks

Lean Conductors Ltd is a mid-sized Public limited company engaged in the manufacture and sale
of electrical cables. As a public limited company the organization was performing reasonably
well, earning steady profits and declaring a stable dividend of 12-15%. The CEO was feeling the
urge to expand the business and taste the growth of business operations and profits. He started
addressing various options and shortlisted 2 options namely manufacture of LED bulbs and solar
panels. He called the Gen Mgr. - Finance for a discussion in this regard to probe the matter
further. He also went on to share his dream of making the company a larger one and his belief in
people like the GM who needs to stay and grow with the organization. The GM felt excited at
this prospect and started making a project report. He decided in his own mind the solar panel
project with a larger profit margin looked to be a better one than LED bulbs which was dealer
intensive and lesser in terms of unit margin.

Feeling the need to expand rapidly on the investment of the company and make it bigger and
become a CFO in the bargain, he chose the solar panel project which was more capital intensive.
An assumption about a capital structure and cost congruent to the existing structure was assumed
and the projected financials were prepared.

The board of directors representing the majority of shareholders believing in the

recommendations of the report adopted it for implementation. The project faced various hurdles
in its implementation such delay in signing collaboration agreements, inflated cost due to poor
supply of money in the market, downturn of the economy and so on. The project cost started
spiraling up and to fund the expansion the funds of the existing business line were inducted into
the new project since no further borrowing could be made. The company slipped into the red and
reached a stage of bankruptcy without the new project even taking off.

Questions:

1. Trace the conflict between the management and the shareholders in this case study.
2. Is the act of the GM Finance an error or sin?
3. Where do you think the CEO went wrong?
4. What according to you is the approach the CEO should have taken?
 ASSIGNMENT 2

Time Value of Money 10 Marks

2. Compute the Future Value & Present Value of the following Cash Flows:

Year CF Year CF
1 2000 1 4500
2 2000 2 6000
3 2000 3 12000
4 2000 4 9000
5 2000 5 10000

Take rate as r = 7.5%

Take rate as r = 10%

ASSIGNMENT 3

Weighted Average Cost of Capital 15 Marks

XYZ Ltd. wishes to raise finance of Rs. 10, 00,000 for meeting its investment plans. It has
Rs. 240000 in form of Retained earnings.

The following details avail:

Debt/equity mix 30% / 70%

Earnings per share = Rs/ 4 Dividend payout: 50% of earnings

Cost of debt up to Rs. 1, 80,000- 10% before tax

beyond Rs 1,80,000-16% before tax

Expected growth of dividend 10%, current market price : Rs. 44 and Tax rate 50%
 Calculate:

a) Determine the pattern for raising additional finance,

b) Determine the post-tax average cost
c) Cost of retained earnings
d) Cost of equity
e) Overall all Weighted Average Cost of capital

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