IES’s Management College and Research Centre, Mumbai

(FINAL EXAMINATION)

Date: 26/04/2022 Day: Tuesday Time: 11.00 am to 02.00 pm Duration: 03 hrs.

Program: PGDM Term: III Course: Financial Decision Making Max. Marks: 60
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Note:
1. Attempt any three questions from Q.1 to Q.4 carrying 10 marks each.
2. Attempt any two questions from Q.5 to Q.7 carrying 10 marks each.
3. Q.8 of 10 marks is compulsory.
4. Give proper workings wherever needed and also state your assumptions, if any clearly.
5. Be precise and neat in your presentation.
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Q. No. (Questions) (Marks) *COs
Q.1 A firm has earnings per share of Rs.150 and the cost of equity capital of the company 10 CO3
is 12.5 per cent and the retained earnings can be reinvested at IRR of 10%. It is
assumed that Walter’s model of dividend policy is applicable to the company. Find
out the market price per share of the company if the dividend payout ratio is 40 per
cent. Is this an optimum payout ratio? If not then what will be the optimum dividend
payout ratio. Also calculate the market price per share at this ratio.

Q.2 JMT Ltd. which is considering two financial plans provides you the following 5 CO3
A information:

(a) Total funds to be raised Rs.4,00,000

(b) Financial Plans:
Plan A: 50% through equity and balance through 8% debt
Plan B: 50% through equity and balance through 8% preference shares
(c) Tax rate: 35%
(d) Equity shares of the face value of Rs.10 each will be issued at premium of
Rs.10 per share.
(e) Expected EBIT - Rs.1,60,000
Determine for each plan EPS and Financial Break Even Point.

B The total assets of the company is Rs.2,00,000. It’s total sales is Rs.6,00,000, 5 CO3
debt/equity ratio is 1:3, total operating costs is Rs.3,40,000 and its variable operating
cost ratio is 40%. The face value of the share is Rs.10 each and the interest rate is
12%. The income tax rate is 35%. Calculate:

a. The EPS and

b. The operating, financial and combined leverage.

Q.3 Henry Ltd. and Harry Ltd. belong to the same risk class - these companies are 5 CO3
A identical in all respects except that Henry Ltd. has no debt in its capital structure,
whereas Harry Ltd. employs debt in its capital structure. The relevant financial
particulars of the two companies are given below :-
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 Henry Limited Harry Limited
EBIT Rs.10,00,000 Rs.10,00,000
Debt Interest Rs.3,00,000
Equity earnings Rs.10,00,000 Rs.7,00,000
Debt Capitalization rate - 10%
Equity capitalization rate 16% 18%

Mr. Wilson owns 10% worth of Harry Ltd. equity. As per Modigliani and Miller
approach what arbitrage will he resort to?

B X Ltd. has submitted the following details: 5 CO3

Earnings before Interest & Taxes = Rs.2,00,000

Debt borrowed at the rate of 10% = Rs.10,00,000
Overall Capitalization rate (K0) = 12.5%

Find out the value of firm under NOI approach (i) at present leverage, (ii) when Debt
is increased by Rs.4,00,000 and (iii) when Debt is decreased by Rs.4,00,000.

Q. 4 Following are the extracts of liabilities and assets as on 31st March of Galaxy 10 CO3
Technologies Ltd. (GTL)

Liabilities Rs.in lakhs

Share capital 30
Retained earnings 40
Term loan 20
Debentures 30
Trade creditors 25
Provision 05
Total 150
Assets Rs.in lakhs
Net fixed assets 50
Inventories 40
Debtors 30
Cash 10
Marketable securities 20
Total 150

Sales for the current year Rs.160 lakhs, while net profit after taxes was Rs.20 lakhs.
GTL paid dividends of Rs.10 lakhs to equity shareholders.

Assume that sales will increase by 50% during the next year and fixed assets increase
by 10%. Also assume that profit margin ratio and dividend pay-out ratio would
remain unchanged and current assets and current liabilities will increase by the same
percentage as sales. Prepare GTL’s projected Balance Sheet as on 31st March and
calculate the external fund requirement / additional fund available.

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Q.5 If Mr. Anil invests in a saving bank account Rs.1,000 at 5% interest compounded 5 CO2
A annually, then what amount he will receive at the end of first year, at the end of 3
years, at the end of 5 years and at the end of 10 years.

B Determine the present value of the annuity consisting of cash inflows of Rs.1,000 per 5 CO2
year for 5 years. The rate of interest is 12%.

Q.6 The equity stock of Raj Ltd. is currently selling for Rs.300 per share. The dividend 2 CO2
A expected next year is Rs.20.00. The investors’ required rate of return on this stock is
15%. If the constant growth model applies to Raj Ltd., what is the expected growth
rate?

B The following facts are available: 2 CO2

Risk-free rate = 9 per cent

Required rate of return on market portfolio = 15 per cent
Beta coefficient of the shares = 1.5
Expected dividend next year = Rs.30
Growth rate in dividends/earnings = 10 per cent

Compute the price at which the shares should sell?

C Wealth Ltd.’s previous dividend was Rs.120. Earnings and dividends are expected to 3 CO2
grow at a rate of 10%. The required rate of return on Wealth Ltd.’s stock is 15%.
What should be the market price of Wealth Ltd.’s stock now?

D The P/E multiples of some of the leading FMCG companies (as on 31st March 2020) 3 CO2
are as under:
1. Dabur India Ltd. - 64.33
2. Nestle India Ltd. - 77.41
3. Godrej Consumer Products Ltd. - 33.99
4. Hindustan Unilever Ltd. - 67.98
5. Colgate Palmolive (India) Ltd. - 42.05
6. ITC Ltd. – 14.44
7. Marico – 28.86
8. Gillette India Ltd. - 68.89
9. Procter and Gamble Hygiene and Health Care Ltd. – 81.03
The financials of Dabur India Ltd. (in Rs. Cr.) are as under:
Total Revenue - 6,547.93
Total Expenses - 5,044.58
Total Tax Expenses - 239.06
No of outstanding shares - 176.70

Calculate the TMP of Dabur India Ltd. using P/E multiple.

Q.7 A bond has 5 years remaining until maturity. It has a par value of Rs.1,000. The 5 CO2
A coupon interest rate on the bond is 10%. Compute the yield to maturity at current
market price of (i.) Rs.1,100 (ii.) Rs.1,000 and (iii.) Rs.900, assuming interest is
paid annually.
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 B The face value of a 5-year, 10% bond is Rs.1,000. The interest is payable semi- 5 CO2
annually. Assuming 12% required rate of return of investor, calculate the value of the
bond.

Q. 8 Write short notes on any TWO 10 CO1

a. Financial markets
b. Difference between equity and debt instruments
c. Derivative products – forward, futures and options

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