HOMEWORK OF QUANTITATIVE COURSES

HOME WORK No. : 3

Term: II Course Code: COM303 Course Title: Management of Finances Max. Marks: 15

Name of the planner: Amarjit Saini ID of the planner: 11337

Date of Allotment: 25/3/2011

Date of Submission 5/4/2011

Note: Submission 5 Marks

Tesr: 10 Marks

PART-A
1. Given the following information, you are required to compute (i) Capitalization (ii) Capital
Structure and (iii) Financial Structure

Liabilities Rs
Equity Share Capital 10,00,000
Preference Share Capital 5,00,000
Long Term Loans 4,00,000
Retained Earnings 6,00,000
Capital Surplus 50,000
Current Liabilities 1,50,000

2. Firms X and Y are expect that firm X is not levered while firm Y is levered. The following data
relate to them.

Particulars Firm X Firm Y

Assets 5,00,000 5,00,000
Debt Capital 0 2,50,000 (9%)
Equity Share Capital 5,00,000 2,50,000
No. of Shares (50,000) (25,000)
ROA 20% 20%
Calculate EPS for both firms, assuming tax rate of 50%. Will it be advantageous to firm Y to
raise the level of debt capital to 75%
3. Company X and Y are identical in all respects including risk factors except for debt/equity, X
having issued 10% debentures of Rs 18 lakhs while Y has issued only equity. Both the
companies earn 20% before interest and taxes on their total assets of Rs 30 Lakh.
Assuming a tax rate of 50% and capitalization rate of 15% for an all equity company. Compute
the value of companies by using
1. Net Income Approach
2. Net Operating Income Approach.

PART-B

4. ABC company has currently an ordinary share capital of Rs 25 lakhs, consisting of

25,000shares of Rs 100 each. The management is planning to raise another Rs 20 lakh to
finance a major programme of expansion through one of four possible plans.

1. Entirely through ordinary shares.

2. Rs 10 lakh through ordinary shares and 10 lakh from debt @ 8%
3. Rs 5 lakh from equity and 15 lakh from debt @ 9%
4. Rs 10 lakh from equity and 10 lakh from preference shares @ 9%.

The company’s expected EBIT will be 8 Lakhs. Assuming a corporate tax rate of
50%, determine the EPS and find the best suitable plan for the company.

5) A company expects a net operating income of Rs 1,00,000. It has Rs 5,00,000 6%

debentures. The overall capitalization rate is 10%. Calculate the value of the firm and the
equity according to Net-operating income approach. If the funds from debt(debentures) is
increased to 7,50,000. What will be the effect on the value of the firm and the equity
capitalization rate?

6) A company has earning before interest and taxes of Rs 1,00,000. It expects a return on its
investment at a rate of 12.5%. You are required to find out the value of firm according to
the MM approach.