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ASSIGNMENT 1
Case Let on
Agency Conflict
15 Marks
Lean
Conductors Ltd is a mid-sized Public limited company engaged in the manufacture
and sale of electrical cables. As a public limited company the organization was
performing reasonably well, earning steady profits and declaring a stable
dividend of 12-15%. The CEO was feeling the urge to expand the business and
taste the growth of business operations and profits. He started addressing
various options and shortlisted 2 options namely manufacture of LED bulbs and
solar panels. He called the Gen Mgr. - Finance for a discussion in this regard
to probe the matter further. He also went on to share his dream of making the
company a larger one and his belief in people like the GM who needs to stay and
grow with the organization. The GM felt excited at this prospect and started
making a project report. He decided in his own mind the solar panel project
with a larger profit margin looked to be a better one than LED bulbs which was
dealer intensive and lesser in terms of unit margin.
Feeling the
need to expand rapidly on the investment of the company and make it bigger and
become a CFO in the bargain, he chose the solar panel project which was more
capital intensive. An assumption about a capital structure and cost congruent
to the existing structure was assumed and the projected financials were
prepared.
The board of
directors representing the majority of shareholders believing in the
recommendations of the report adopted it for implementation. The project faced
various hurdles in its implementation such delay in signing collaboration
agreements, inflated cost due to poor supply of money in the market, downturn
of the economy and so on. The project cost started spiraling up and to fund the
expansion the funds of the existing business line were inducted into the new
project since no further borrowing could be made. The company slipped into the
red and reached a stage of bankruptcy without the new project even taking
off.
Questions:
Question.1 Trace the conflict between the management and the
shareholders in this case study.
Answer: Opportunity
to management increases their compensation. They are as follows:
1) Excessive
consumption of perquisites
2)
Manipulation of earnings and dividends (when compensation is in the form of
share)
3) Maximizing
the size of the firm rather than its value.
4) By setting
up shell companies.
Question.2 Is the act of the GM Finance an error or sin?
Answer: It’s
a sin and more specifically it would be greed. The GM chose to pursue status
& personal growth instead of acting in the shareholders' interests. As GM
Finance, he should be aware of the current market status and should have
analyzed risk before choosing the capital-intensive solar panel project. In
Question.3. Where do you
think the CEO went wrong?
Answer: Firstly,
the CEO wanted to fulfil his urge by expanding the business and tasting the
growth of business operations and
Question.4 What according to you is the approach the CEO should
have taken?
Answer: Keeping
the personal agenda aside, he should have focused firstly on the maximization
of shareholder's wealth and after that he could have focused on the expansion
of the business. As GM had already discovered two options i.e. manufacturing of
LED bulbs and Solar Panels which would help in expanding the business. So for
better decision CEO could have asked the GM to prepare reports on both the
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ASSIGNMENT 2
Time Value of
Money
10 Marks
Question.
1. Compute the Future Value & Present Value of the following Cash Flows:
Take rate
as r = 7.5% |
Take rate
as r = 10% |
Formulas Used:
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ASSIGNMENT 3
Weighted Average Cost of Capital
15 Marks
XYZ Ltd.
wishes to raise finance of Rs. 10, 00,000 for meeting its investment plans. It
has Rs. 240000 in form of Retained earnings.
The following
details avail:
Debt/equity
mix 30% /
70%
Earnings per
share Rs/
4
Dividend
payout: 50% of
earnings
Cost of debt up
to Rs. 1, 80,000 10% before tax
beyond Rs 1,80,000
16% before tax
Expected
growth of dividend 10%,
Current
market price : Rs.
44 and
Tax rate 50%
Calculate:
a)
Determine
the pattern for raising additional finance,
Answer
: Determining the pattern for raising
additional finance:-
b)
Determine the post-tax average cost
Answer
:
The
post-tax average cost is 6.20%
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