Chapter : Nature of Financial Management Q 1 : In what ways is the wealth maximization objective superior to the profit maximization objective?

Explain.

Chapter : Concepts of Value and Return Q 2 : [3 questions counted as 1] (1) Determine the present value of the cash inflows of Rs 3,000 at the end of each year for next 4 years and Rs 7,000 and Rs 1,000 respectively, at the end of years 5 and 6. The appropriate discount rate is 14 per cent. (2) Assume that you are given a choice between incurring an immediate outlay of Rs 10,000 and having to pay Rs 2,310 a year for 5 years (first payment due one year from now); the discount rate is 11 per cent. What would be your choice? Will your answer change if Rs 2,310 is paid in the beginning of each year for 5 years? (3) A bank has offered a deposit scheme, which will triple your money in 9 years; that is, if you deposit Rs 100 today, you can receive Rs 300 at the end of 9 years. What rate of return would you earn from the scheme?

Chapter : Valuation of Bonds and Shares Q 3 : [3 questions counted as 1] (1) Suppose you buy a one-year government bond that has a maturity value of Rs 1,000. The market interest rate is 8 per cent. (a) How much will you pay for the bond? (b) If you purchased the bond for Rs 904.98, what interest rate will you earn on your investment?

(2) A company's share is current selling at Rs 60. The company, in the past, paid a constant dividend of Rs 1.50 per share, but it is now expected to grow at 10 per cent compound rate over a very long period. Should the share be purchased if required rate of return is 12 per cent? (3) The earnings of a company have been growing at 15 per cent over the past several years and are expected to increase at this rate for the next seven years and thereafter, at 9 per cent in perpetuity. It is currently earning Rs 4 per share and paying Rs 2 per share as dividend. What shall be the present value of the share with a discount rate of 12 per cent for the first seven years and 10 per cent thereafter?

Chapter : Beta Estimation and the Cost of Equity Q 4 : The returns on the share of Delite Industries and the Sensex for the past five years are given below:

Sensex (%) Delite (%) -12.5 -5.1 1.7 6.7 7.2 7.1 11.5 18.9 6.3 11.9

Calculate the average return on Delite's share and Sensex. What is

Delite's beta?

Chapter : Capital Budgeting Decisions Q 5: [2 questions counted as 1] (1) A firm is considering the following project:

Cash Flows (Rs) C0 C1 C2 C3 C4 C5 -50,000 +11,300 +12,769 +14,429 +16,305 +18,421

(a) Calculate the NPV for the project if the cost of capital is 10 per cent. What is the project's IRR? (b) Recompute the project's NPV assuming a cost of capital of 10 per cent for C1 and C2, of 12 per cent for C3 and C4, and 13 per cent for C5. Should the project be accepted? Can the internal rate of return method be used for accepting or rejecting the project under these conditions of changing cost of capital over time? Why or why not?

(2) Under what circumstances do the net present value and internal rate of return methods differ? Which method would you prefer and why?

Chapter : The Cost of Capital

Q 6 : A company is considering the possibility of raising Rs 100 million by issuing debt, preference capital, and equity and retaining earnings. The book values and the market values of the issues are as follows: (Rs in million) Book Value Market Value Ordinary shares 30 60 Reserves 10 Preference shares 20 24 Debt 40 36 Total 100 120

The following costs are expected to be associated with the abovementioned issues of capital. (Assume as 35 per cent tax rate.) (i) The firm can sell a 20 year, Rs 1,000 face value debenture with a 16 per cent rate of interest. An underwriting fee of 2 per cent of the market price would be incurred to issues the debentures. (ii) The 11 per cent, Rs 100 face value preference issue can fetch Rs 120 per share. However, the firm will have to pay Rs 7.25 per preference share as underwriting commission. (iii) The firm's ordinary share is currently selling for Rs 150. It is expected that the firm will pay a dividend of Rs 12 per share at the end of next year, which is expected to grow at a rate of 7 per cent. The new ordinary shares can also be sold at a price of Rs 145. The firm should also incur Rs 5 per share flotation cost.

Compute the weighted average cost of capital using (i) book value weights (ii) market value weights.

Chapter : Financial and Operating Leverage Q 7 : A company is considering to raise Rs 200,000 to finance modernization of its plant. The following three financing alternatives are feasible. (i) The company may issue 20,000 shares at Rs 10 per share, (ii) The company may issue 10,000 shares at Rs 10 per share and 1,000 debentures of Rs 100 denomination bearing a 14 per cent rate of interest, (iii) The company may issue 5,000 shares at Rs 100 per share and 1,500 debentures of Rs 100 denominations bearing a 14 per cent rate of interest. If the company's profits before interest are (a) Rs 5,000, (b) Rs 12,000, (c) Rs 25,000, what are the respective earnings per share, rate of return on total capital and rates of return on total equity capital, for each of the three alternatives? Which alternative would you recommend and why? If the corporate tax rate is 35 per cent, what are your answers to the above questions? How do you explain the difference in your answers?