SVKM'S NMIMS

SARLA ANIL MODI SCHOOL OF ECONOMICS

Academic Year: 2018-2019

Program: B.Sc.Economics Year: Ill Semester: V

Subject: Corporate Finance Batch: 2017-20

` Date: 8th|anuary, 2019 ' Time: 11:00 am to 01:00 pin (2 hrs.)

Marks: 50 No.ofpagesLi
Re Examination

Instructions:

1. You can use Excel to solve the problems,

2. Answer all the questions given.
3. Each question should be started on a separate Excel sheet.
4. Outline all your assumptions.
5. Show all your caiculations. I will cut points if you do not show your calculations.

Questions:

1. Ace Supplies is a sports store, reported earnings per share of INR 5.20 in 2017, on
which it paid dividends per share of INR 2.28. Earnings are expected to grow 12% a year
from 2018 to 2022, during which period the dividend payout ratio is expected to remain
unchanged. From 2023, the earnings growth rate is expected to drop to a stable 5%, and
the payout ratio is expected to increase to 65% of earnings. The firm has a beta of 1.65
currently, and it is expected to have a beta of 1.10 from 2023. The treasury bond rate is
6,25%. Market risk premium is 5.5%.
a. What is the expected price of the stock at the end of 2023?
b. What is the value of the stock, using the two-stage dividend discount model?
Use th6 FCFE model.
c, What is the Dividend Discount Model?
(10 points)

2. You are trying to assess the value of a small kirana store that is up for sale. The store
generated a cash flow to its owner of INR 200,000 in the most year of operation, and is
expected to have growth of about 7% a year in perpetufty.
a. If the rate of return required on this store is 12%, what would your assessment be of
the value of the store?
b. What would the growth rate need to be to justify a price of lNR 4 million for this
store?
c. What would be the lRR if the price paid was INR 4 million, at a 7% growth rate?
d. What is the difference between NPV and IRR? Which is a better measure and why?

(5 points)

`i'i.,
3.GETCorpiscurrentlyexperiencingabaddehiratioof7%.MrPatelisconvincedthat,
withtightercreditcontrols,hecanreducethisratioto2%;however,heexpectssalesto
dropby10%asaresult.Thecostofgoodssoldis55%ofthesellingprice.PerlNR100of
current sales, what is Mr Patel's expected profit under the old and proposed credit
standards? ,
(5 points)

4. Company ABc is attemptingto acquire company XYZ. Selected financial data is

for both companies in the table below:
Company ABC Company
lNR10,000,000 lNR1,000,000
Earnings available for common
stock
1,000,000 50,000
Number of shares of stock
outstanding
lNR100 lNR120
Market price per share
Company ABC has sufficient authorized but unissued shares to carry out the proposed
merger. Assume no synergies.
(a) Calculatethe EPs ofcompanyABcand companyxYzbeforethe merger.
(b) lfthe ratio of exchange is 1,8, what will bethe earnings pershare of the merged
company?
(c) Repeat part {a! if the ratio of exchange is 2.0.
(d} Repeatpart{a!iftheratioofexchangeis2.2
(e) Discussthe principal illustrated byyouranswersto parts (a)through (d)
(5 points)

5. Avid Works Pvt. Ltd., which provides education services to colleges, reported earnings
pershareoflNR2.83in2017onrevenuespershareoflNR21.50.Ithadnegligiblecapital
expenditures,whichwerecoveredbydepreciation,buthadtomaintainworkingcapital
at30°/oofrevenues.Revenuesandeamingsareexpectedtogrow20%ayearfrom2018
to2022,afterwhichthegrowhhrateisexpectedtodeclinelinearlyoverthreeyearsto
5a/oin2025.Thefirmhasadebtratioof159ro,whichftintendstomaintaininthefuture.
The stock has a beta of 1.20, which is expected to remain unchanged for the period of
the analysis. The treasury bond rate is 7%. Market risk premium is 5.5%
a. Estimate the value per share, using the free cash flow to equity model.
b. What is the value per share if the growth rate declined linearly over 3 years to 100/o in
2025?
c.AssumenowthatyoufindoutthatthewaythatAvidWorksisgoingtocreategrowth
isbygivingeasiercredittermstotheirclients.Howwouldthataffectyourestimateof
value? (Will it increase or decrease?) (15 points)

6,AlphaEatsisanFMCGcompany,hasabetaof1.21.ThecompanyhasdebtoflNR15
billion. The market value of equity is INR 10 billion. The marginal tax rate is 40%. ,
a. Estimate the unlevered beta for Alpha Eats.
b. Estimate the effect of reducing the debt ratio {D/(D+E}} by 10 percentage points each
year for the next two years on the beta of the stock. (5 points)

7. All Time Ltd has earnings before interest and taxes of INR 3.8 bimon, and faces a
marginal tax rate of 36.5%. It currently has lNR 27 billion in debt outstanding, and a
market value of equfty of INR 55 billion. The beta for the stock is 1.35, and the pre-tax
cost of debt is 6.80%. The Government Bond rate is 6%.
a. Estimate the current cost of capital. Market risk premium is 5.5%.
b. What is the formula for WACC? (5 points}
r\
S-,S-S
SARLA ANIL MODI SCHOOL OF ECONOMICS
AcademicYear: 2017-18
Year: IIIsemester : V
Progran: B.Sc. aEconomics)
Batch: 2015-18 ,
Subject: Corporate Finance ,
Date : 03 May 2018 , Time: 11.00 am to 1.00 pin(2 Hrs)+

Marks: 50 ,
RE EXArmATION

Instructions:

1. This exam paper has to be solved in Excel.

2. Answer all the questions given.
3. Each question should be started on a separate Excel Sheet.
4. Outline all your assumptions.
5. Show all your calculations. Points will get cut if you do not show your calculation5.

Questions:

1. XYZ Ltd, a manufacturer of hardware products, reported earnings per share of lNR
4.20 in 2016, on which it paid dividends per share of lNR 1.38. Earnings are expecte.d to
grow 10% a year from 2017 to 2021, during which period the dividend payout ratio is
expected to remain unchanged. From 2022, the earnings growth rate is expected to
drop to a stable 5%, and the payout ratio is expected to increase to 65% of earnings. The
firm has a beta of 1.55 currently, and it is expected to have a beta of 1.10 from 2022.
The treasury bond rate is 6.25%. Market risk premium is 5.5%.
a. What is the expected price of the stock at the end of 2022?
b. What is the value of the stock, using the two-stage dividend discount model?
Use the FCFE model.
c. What is the Dividend Discount Model?
(10 points)

2. Thermocharge Ltd sells chemicals and systems for cleaning, sanitizing, and
maintenance. It reported earnings per share of INR 2.35 in 2015, and expected earnings
growth of 16% a year from 2016 to 2020, and 7% a year after that. The capital
expenditure per share was lNR2.25, and depreciation was lNR1.125 per share in 2015..
Both are expected to grow at the same rate as earnings from 2016 to 2020. Working
capital is expected to remain at 5% of revenues, and revenues which were INR1,000
million in 2015 are expected to increase 6% a year from 2016 to 2020, and 4% a year
after that. The firm currently has a debt ratio (D/(D+E)) of 5%, but plans to finance
future investment needs (including working capital investments) using a debt ratio of
20%. The stock is expected to have a beta of 1.00 for the period of the analysis, and the
government bond rate is 6.50%. (There are 63 million shares outstanding.)

1/5
 `--`\`

A. Assuming that capital expenditures and depreciation offset each other after 2020,
estimate the value per share.

a. Assuming that capital expenditures continue to be 200% of depreciation even after

2020, estimate the value per share.

C. What would the value per share have been, if the firm had continued to finance new
investments with its old financing mix (5%)? Assume capex equals 200% of depreciation
after 2020

D. Is it fair to use the same beta for this analysis?

E. What type of risk does beta measure?

•`u
F. What happens to the beta when a company takes on more debt? Does it increase or
decrease? Why? Share the equation that shows the relationship between beta and
debt.

(15 points)

3. You are trying to assess the value of a small retail store that is up for sale. The store
generated a cash flow to its owner of lNR 200,000 in the most year of operation, and is
expected to have growth of about 5% a year in perpetuity.
a. If the rate of return required on this store is 10%, what would your assessment be of
the value of the store?
b. What would the growth rate need to be to justify a price of lNR 3 million for this
store?
c. What would be the IRR if the price paid was lNR 3 million, at a 5% growth rate?
d. What is the difference between NPV and lRR? Which is a better measure and why?

IRE
(10 points)

4. India Live has a beta of 1.1 and debt outstanding of lNR 1.34 billion. The stock price is
lNR18.25, and there are 183.1 million shares outstanding. The expected ratings and the
costs of debt at different levels of debt for India Live are shown in the following table
(the treasury bond rate is 7%, market risk premium of 5.50/o, and the firm faced a tax
rate of 40%):

Cost of Debt
D/(D+E) Rating
(Pre-tax)
0% AAA 6.23%
10% AAA 6.23%

2/3
 20% A+ 6.93%
30% A- 7.43%
40% 88 8.43%
50% 8+ 8.93%
60% 8- 10.93%
70% CCC 11.93%

80% CCC 11.93%

90% CC 13.43%

A. Estimate the cost of capital at the current debt ratio.

a. Estimate the costs of capital at debt ratios ranging from 0% to 90%,

(5 points)

5. Noorie Toys is currently experiencing a bad debt ratio of 8%. Mr Shah is convinced
that, with tighter credit controls, he can reduce this ratio to 2%; however, he expects
sales to drop by 8% as a result. The cost of goods sold is 55% of the selling price. Per lNR
100 of current sales, what is Mr Shah's expected profit under the old and proposed
credit standards?
(5 points)

6. CompanyA is attemptingto acquire company B. Selected financial data is

presented for both companies in the table below:
Item Company A Company B
Earnings available for common lNR10,000,000 lNR1,000,000
stock
Number of shares of stock 1,000,000 50,000
outstanding
Market price per share lNR100 lNR120
Company A has sufficient authorized but unissued shares to carry out the proposed
merger. Assume no synergies.
(a) Calculatethe EPsofcompanyAand company B beforethe merger.
(b) lfthe ratioof exchange is 1.8,whatwill betheearnings pershareofthe merged
company?
(c) Repeat part (a) if the ratio of exchange is 2.0.
(d) Repeat part (a) if the ratio of exchange is 2.2
(e) Discussthe principal illustrated byyouranswersto parts (a) through (d)
(5 points)