Corporate Finance- NMIMS Latest solved assignments

 

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NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course:  Corporate Finance

Assignment Marks: 30

Instructions:

·         All Questions carry equal marks.

·         All Questions are compulsory

·         All answers to be explained in not more than 1000 words for question 1 and 2 and for question 3 in not more than 500 words for each subsection. Use relevant examples, illustrations as far aspossible.

·         All answers to be written individually. Discussion and group work is not advisable.

·         Students are free to refer to any books/reference material/website/internet for attempting theirassignments, but are not allowed to copy the matter as it is from the source of reference.

·         Students should write the assignment in their own words. Copying of assignments from otherstudents is not allowed.

·         Students should follow the following parameter for answering the assignment questions.

 

For Theoretical Answer			For Numerical Answer
Assessment Parameter	Weightage		Assessment Parameter	Weightage
Introduction	20%		Understanding and usage of the formula	20%
Concepts and Application related to the question	60%		Procedure / Steps	50%
Conclusion	20%		Correct Answer & Interpretation	30%

 

1. Org Pvt. Ltd. is considering two mutually exclusive capital investments. The project’s expected net cash flows are as follows:

Expected Cash Flows

Year                              Project A                       Project B

0                                    -400                               -575

1                                      95                                 150

2                                     110                                200

3                                     118                                250

4                                     125                                275

5                                     140                                230

6                                     150                                180

 

a. If you were told that each project’s cost of capital was 10%, which project should be selected using the NPV criteria?

b. What is each project’s IRR?

c. What is the regular payback period for these two projects?

d. What is the profitability index for each project if the cost of capital is 12%?

(10 Marks)

 

SOLUTION:

 

Introduction:

 

The Capital of a company may comprise of both equity and debt. Each component of the Capital has its cost, and the Cost of Capital is the aggregate cost of acquiring them.

 

Net present value (NPV) is the difference between the discounted value of future cash inflows and the current cash outflow value

 

 

 

2. Assume that your father is now 55 years old and plans to retire after 5 years from now. He is expected to live for another 15 years after retirement. He wants a fixed retirement income of Rs. 1,00,000 per annum. His retirement income will begin the day he retires, 5 years from today, and then he will get 14 additional payments annually. He expects to earn a return on his savings @ 10% p.a., annually compounding. How much (to the nearest of rupee) must your father save today to meet his retirement goal? (10 Marks)

SOLUTION:

Introduction:

Every person intends to save for a rainy day. Most important is to save for the time after retirement. There are specific insurance plans like pension plans which take care of the policyholder after their retirement in the pension plan form. Just like investments, the goal of every individual is to get the maximum out of his savings. The savings can be done in any insurance scheme, financial institutions, etc. The given question is based on the concept of the annuity.

 

Concept and application:

 

 

 

3. Cummins India Ltd has the following capital structure, which it considers optimal:

Debt                                     25%

Preference Shares               10%

Equity shares                      65%

           Total                       100%

 

Applicable tax rate for the company is 25%. Risk free rate of return is 6%, average equity market investment has expected rate of return of 12%. The company’s beta is 1.10.

Following terms would apply to new securities being issued as follows:

1. New preference can be issued at a face value of Rs. 100 per share, dividend and cost of issuance will be Rs. 10 per share and Rs. 2 per share respectively.

2. Debt will bear an interest rate of 9%.

 

Calculate

a. component cost of debt, preference shares and equity shares assuming that the company does not issue any additional equity shares. (5 Marks)

SOLUTION:

Introduction:

A company needs funds to operate. These funds are woven into different forms in its capital. A company's capital structure is a mix of its various long and short-term components, viz. equity, reserves, preference shares, and debts. These funds are acquired at a cost. 

Debt is a cheaper source of finance, but it is to be repaid. Equity is not to be repaid, but it leads to dilution of ownership.

 

Concept and application:

 

1.    Cost of debt:

Debt is an external source of finance

 

 

b. WACC. (5 Marks)

Introduction:

The different components of capital may be present in the capital in a different proposition. WACC is the Cost of capital based on the weights of these components. These weights can be found either on the book value of the capital components or the market value. Weighted Average Cost of capital (WACC) may be called a financial metric used to measure capital's value to a firm. 

 

Concept and Application:

The company's capital may consist of some internally raised funds, and some funds may be borrowed from outside. All these funds have some cost, and WACC refers to calculating the Total Cost of capital as per such the Weight of different sources of capital. Thus, the weighted average Cost of capital is the cost of raising the capital apportioned to respective weights of various capital elements. The concept

 

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