AMITY INTERNATIONAL BUSINESS SCHOOL

FINANCE SAP ASSINGNMENT

SUBMITTED TO Mr NISHANT AGARWAL SUBMITTED BY RASHMEET KAUR A1802011436

ASSIGNMENT

1. Which one of the following is a flow measure? (a) (b) (c) (d) (e) EVA NPV IRR BCR None of the above

2. According to financial theory, the goal of financial management should be to: (a) (b) (c) (d) (e) Maximise the sales of the firm. Maximise the tax contribution to the society Maximise the present wealth of the firms equity holders Maximise the dividend payments to the shareholders. None of the above

3. If you were scheduled to receive Rs 100,000 five

years hence, but you wish to sell your contract note for its present value, which type of compounding would you rather have the purchaser of your contract note to use to find the purchase price, 8 percent compounded: (a) (b) Continuously Quarterly

(c) (d) (e)

Semi-annually Annually Monthly

4. According to the rule of 69, the doubling period is equal to (a) (b) (c) (d) (e) 0.25 + (69/ Interest rate) 0.35 + (69/ Interest rate) 0.69 + (0.35/ Interest rate)

0.69 + (0.25 / Interest rate) None of the above

5. For a depositor, when the frequency of compounding is increased (a) (b) (c) (d) (e) Additional gains increase Additional gains dwindle Additional gains are unaffected There are no additional gains None of the above

6. Present value interest factor of a perpetuity represents (a) (b) (c) Interest rate in percentage terms Reciprocal of interest rate in percentage terms Reciprocal of interest rate in decimal terms

(d) (e)

Interest rate in decimal terms None of the above

7. The present value of a perpetuity of one rupee when

the interest rate is r percent is : (a) (b) (c) (d) (e) 1/r 1/ r2 1/r0.5 2 r2 None of the above

8. The present value of an annuity due is equal to the present value of a regular annuity multiplied by : (a) (b) (c) (d) (e) r (1 + r) 1/r r(1 + r) None of the above

9. As discount rate increases ,NPV of a simple project (a) (b) Increases at a decreasing rate Decreases at an increasing rate

(c) (d) (e)

Decreases at a decreasing rate Decreases at a steady rate None of the above

10. When time-varying discount rates are involved the suitable investment criterion is (a) (b) (c) (d) (e) NPV IRR MIRR Discounted Pay Back Period None of the above

11. If initial investment is Rs. 10 million and NBCR is 0.2, the NPV is (a) (b) (c) (d) (e) Rs. 50 million Rs. 2 million Rs. 8 million Rs. 5 million None of the above

12. IRR is unreliable for ranking projects when (a) (b) (c) (d) Life of the projects are long Projects have different patterns of cash flow Projects have decreasing cash flows Both a and c

(e)

None of the above

13. IRR may be viewed as the rate of return earned on (a) (b) (c) (d) (e) Initial investment over the life of the project Compounded rate of return on the initial investment Time-varying current investment balance Time-varying cumulative investment balance None of the above

14. If you do not know the discount rate for a project, the

right investment criterion to be used will be (a) (b) (c) (d) (e) IRR MIRR NPV BCR None of the above

15. The IRR of a capital investment (a) (b) Changes when the cost of capital changes Is equal to annual cash flows divided by the projects cost when the cash flows are an annuity Is similar to the yield to maturity on a bond Must exceed the cost of capital in order for the firm to accept the investment

(c) (d)

(e) (f)

Both b and d are true Both c and d are true

MINI CASE

The latest balance sheet of Orient Ltd. is given below

(Rs. in lakhs)

Liabilities Equity capital Preference capital Reserves and Surplus Debentures Working capital loan Current liabilities & Provisions 5,600 230 3,900 4,000 2,400 1,850 17,980

Assets Fixed assets Investments Current assets, loans and advances 11,400 980 5,600

17,980

The target capital structure of Orient Ltd. has 60 percent equity, 10 percent preference, and 30 percent debt. Orient Ltds preference capital has a post-tax cost of 12 percent. Orient Ltds debentures consist of Rs. 1000 par, 15 percent coupon payable annually, with a residual maturity of 4 years. The market price of these debentures is Rs. 980. Working capital loan carries an interest rate of 16 percent. Orient Ltds equity stock is currently selling for Rs. 120 per share. Its last dividend was Rs. 2.00 per share and the dividend per share is

expected to grow at a rate of 12 percent per year in future.

Orient Ltds equity beta is 0.92, the risk-free rate is 9 percent, and the market risk premium is 10 percent. Orient Ltds tax rate is 32 percent.

(i)

What is Orient Ltd.s average pre-tax cost of debt? (Use the approximate yield formula)

(ii) What is Orient Ltds cost of equity using the constant growth dividend discount model?

(iii) What is Orient Ltds post tax weighted average cost of capital? Use the CAPM to estimate the cost of equity and employ the weights in the target capital structure.

ANS SOLUTION

(I)

Kd = ( Int + RV SV/N )/ RV + SV/2

= (150 + 1000 980/4) 1000+980/2

= 150 + 5/ 990 = 15.7 %

(II)

K e = D1/ P0 + g

D1 = D (1 + g )

= 2 (1 + .12 )

= 2.24 %

Ke = 2.24/120 + .12

= 13.867 %

(III) Ke = Rf + B( Rm Rp )

= 9 + 0.92 * 10

= 9 +9.2

= 18.2%

Kd = ( Int (1- t) + RV SV/N )/ RV + SV/2

= (150 (1 - .32) + 1000 980/4) / 1000 + 980/2

= 15.7(1 -.32 )

= 3.2 %

Weighted Average Cost of capital

after tax cost Equity capital preference share capital debt 12 18.2 10.676

weights 0.1 0.6 0.3

after tax cost *weights 1.2 10.02 3.2

Weighted average cost of capital = 14.42 %