Unique Paper Code :61017908

Name of the Paper : Strategic Corporate Finance

Name of the Course : BBA (FIA) (CBCS)

Semester : VI

Duration : 3 Hours

Maximum Marks : 75

Instructions to Candidates:

Attempt any 4 questions out of given six. All questions carry equal marks.

1. (A) XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd.’s shares are currently
traded at Rs. 25. It has 2,00,000 shares outstanding and its profits after taxes (PAT)
amount to Rs. 4,00,000. ABC Ltd. has 1,00,000 shares outstanding. Its current market
price is Rs. 12.50 and its PAT are Rs. 1,00,000. The merger will be effected by means of
a stock swap (exchange). ABC Ltd. has agreed to a plan under which XYZ Ltd. will offer
the current market value of ABC Ltd.’s shares:

(i) What is the pre-merger earnings per share (EPS) & P/E ratios of both the companies?
(ii) If ABC Ltd.’s P/E ratio is 8, what is its current market price? What is the exchange
ratio? What willXYZ Ltd.’s post-merger EPS be?
(iii) What must bethe exchange ratio for XYZ Ltd.’s to have pre and post-merger EPS
same?
(4+4+4=12)
(B) Briefly explain the application of Target Costing as a tool for getting global
competitiveness with the help of an illustration. How Life Cycle Costing can supplement
it.
(6.75)

2. (A) ABC Ltd. is considering an investment of $ 5 Million in a project. The output of the
project can sell maximum for 2 years. Cash inflows of the project are uncertain as
exhibited in the table given below. Ignoring tax and assuming cost of capital to be 15%,
find the NPV. Will your answer change if the company has the option of abandoning the
project at the end of 1 year? If this option exercised, the assets of the project will be sold,
at the end of 1st year, for $ 1.75 million.
 Year 1 Year 2
Net cash inflow Probability Net cash inflow Probability
$ 2 Million 0.60
$ 1 Million 0.30
$ 3 Million 0.40

$ 2.5 Million 0.35 $ 2.25 Million 0.45

$ 3.5 Million 0.55

0.35 $ 3.5 Million 0.50

$ 4Million
$ 4.25 Million 0.50

(14)
(B) What are the difference between financial option and real option? Discuss any two
type of real option.
(4.75)

3. A firm that has existing assets in which it has capital invested of Rs.250 million. Assume
these additional facts about the firm.
a) The after-tax operating income on assets in place is Rs. 15 million. This return on capital
of 15% is expected to be sustained in the future and the company has a cost of capital of
10%.
b) At the beginning of each of the next 5 years, the firm is expected to make investment of
Rs.15, Rs. 12, Rs. 9, Rs. 12, Rs.13 million each year respectively. These investments are
also expected to earn 30% as a return on capital and the cost of capital is expected to
remain 10%.
c) All assets and investments are expected to have infinite life with no growth.

You are required to calculate value of the firm by using economic value added approach.

(12)

(B)Being an entrepreneur prepare and present an exit strategy keeping in view that this
strategy would helps the business, investors and stakeholders.
(6.75)

4. (A)LBM Ltd. has Rs.14,500 million debt on its book. The estimated market value of this
debt is Rs.12,915 million. The present value of operating lease which is Rs.1,753 million
is added to this market value of debt to arrive at a total market value of the debt at
Rs.14,668 million. The market value of equity for this period is Rs.55,101 million; the
market price per share is Rs. 22.26, and there are 2475.093 million shares outstanding.
Proportionally, 21.02% of the overall financing mix is debt, and the remaining 78.98% is
equity. The beta is 1.24; Treasury bond rate is prevailing at 4%; estimated market risk
premium is 4.82%; the estimated pre-tax cost of debt for Star Ltd. is 5.25%. The tax rate
used for the analysis is 37.30%.Calculate WACC. What will be the impact of doubling
the beta on the WACC?
(4+2 = 6)

(B) Develop a cost saving strategy (at least 10%) for chain of electric vehicle battery
swapping / charging station projects in Delhi. (6)
(C) From the following information provided of a company, calculate Altman’s Z score
and comment on the financial health of the Co.
(Rs.)
Equity Share Capital (of Rs. 10 each) 600,000
15% Preference Share Capital (of Rs. 100 150,000
each)
Fixed Assets 680,000
Current Assets 370,000
Current Liabilities 100,000
12% Debenture 200,000
General Reserve 120,000
Sales 10,00,000
EBT 110,000
Market value of each equity share 12
Market value of each preference share 112
Interest on debenture 24,000
(6.75)

5. “Public Private Partnership is a successful model for developing Infrastructure of the

country. It is an effective alternative source of Financing.” Critically examine the
statement with the help of a real-life PPP project. Also mention the issues and challenges
in designing the PPP.
(18.75)

6. Case Study:

D. Bikes (DB) is large national bike manufacturing company established in the year
1980.The company has a strong position in the market and has also traditionally achieved
a goodmarket share however facing tough competition. The Board of DB recognizes that
it needs tomake fundamental changes to its production approach to combat
increasedcompetition from foreign manufacturers. DB is now being seen as non-
lucrative, pollutive andwith less safety features in comparison to the foreign bikes. The
Board plans to address thisby improving the quality of its bikes as well as financial
performance.

The components are sourced directly by DB. Suppliers are located worldwide. Suppliers
areevaluated on an ongoing basis, including an assessment of whether to utilize new
oralternative suppliers to improve capacity and performance. The company is having lot
ofcomponents piled up in stock and few of them are becoming obsolete. There is lots
ofreworking as both internal and external failure are more, so the wastage of resources
inreworking needs to be controlled. The Board is convinced that Lean Manufacturing is
the bestapproach to be adopted.

In DB, production process is grouped by function and production teams comprised

anumber of permanent members, who had acquired their positions through seniority anda
few newly selected specialist staff who had yet to get their position in any team.The
process of making a bike can be roughly divided into stamping, welding,
painting,assembly and inspections, which takes about 11-12 hours in total. The standard
time tomanufacture a similar bike in industry is 8-9 hours. The nature of end product
demand isunstable due to economic factors. However, DB forecasts demand based on its
internalpolicies and historical trends. DB sells its bikes in retail stores located in over 10
metro cities.It focuses on building close relationships with retailers, working with them to
sell its bikes in acompelling manner.

Statement Showing ‘Total Quality Costs’

Particulars of Costs Rs.
Prevention Costs:
Supplier Review 2,50,000
Appraisal Costs:
Equipment Testing (36 × 1,600 hrs.) 57,600
Internal Failure Costs:
Down Time 15,40,000
Manufacturing Rework ( 456 × 3,200 bikes) 14,59,200
External Failure Costs:
Customer Complaints (70 × 2,000 hrs.) 1,40,000
Warranty Repair (3,120 × 2,600 bikes) 81,12,000
Total Quality Costs 1,15,58,800

You are required to answer the following:

a) Critically analyze the quality costs of D. Bikes and give your suggestions.
b) Advise on two measures to reduce the non-conformance cost/failure cost.
c) Give suggestion to improve the production capacity and performance.
(6.75+6+6=18.75)