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Corporate Finance
April 2022 Examination
Q1.
The capital structure of ABC Pvt. Ltd is as follows:
Equity
share capital (each share of Rs. 10) = Rs. 10, 00,000
Debentures
with a coupon rate of 9.5% = Rs. 8, 00,000
Reserves
and surplus = Rs. 7, 00,000
Revenue
from the business activities for the company is Rs. 1.50 crores. Its variable
cost is 8% of the revenue; fixed operating cost is Rs. 48 lakhs, and the
company pays income tax at a rate of 25%.
a.
Calculate financial leverage, operating leverage, and combined leverage for the
company.
b.
Determine the likely level of EBIT for EPS of (i) Rs. 20, (ii) Rs. 30, and
(iii) Rs. 45
Introduction:
EBIT
stands for earnings before interest and taxes and measures an organization's
profitability. Sales minus charges, without taxes and interest, are EBIT.
Operational earnings, operating profit, and profit before interest and taxes
are all terms used to explain EBIT. EBIT (income before interest and taxes)
refers to a company's internet profits earlier than deducting earnings tax and
interest prices. EBIT is a metric for studying a company's fundamental
operations without considering
Q2.
The equity shares of a publicly-traded company are priced at Rs. 450 with a P/E
(Price to Earnings) ratio of 15. The announces a dividend of Rs. 9 per share.
The company's shareholders expect the dividend to grow at a rate of 6% every
year, and the cost of equity for the company is 15%. According to the dividend
relevance approach suggested by Walter and Gordon, what would be the impact of
dividend announcement on the market price of the shares of the company if the
required rate of return for investors is (i) 12%, (ii) 15% and (iii) 18%. (10
Marks)
Introduction:
A
dividend is a payment made with the aid of an organization to its stockholders.
When an organization makes earnings or has a surplus, it could distribute a
portion of that income to shareholders. Any money that isn't always dispersed
is re-invested inside the corporation. The Gordon growth model (GGM) is used to
calculate a stock's intrinsic value primarily based on a chain of dividends
that upward push at a consistent pace inside the future. It is a commonplace
and fundamental dividend bargain model choice (DDM). The GGM solves for the
current price
Q3.
A manufacturing company forecast that it will likely sell 6,00,000 units for
the year 2021. The processing cost of an order is Rs. 150, and the carrying
cost per inventory unit is Rs. 12. The lead time of an order is eight days.
a.
What would be the economic order quantity (EOQ) and re-order point assuming 300
days in a year. (5 Marks)
Introduction:
The
purchase order amount for replenishment that minimizes universal stock costs is
the EOQ. When the inventory level reaches the reorder factor, the purchase
order is activated. The EOQ is estimated to reduce the number of expenditures,
including buying prices (which may include quantity discounts), stock
maintaining costs, ordering costs, and so on. Order quantity
Qb.
The company implements business process reengineering, which results in a
reduction of 20% in the cost of an order, 10% in carrying cost per unit of
inventory, and 25% in the lead time of order. What would be the new EOQ and
re-order point? (5 Marks)
Introduction:
The
reorder point (ROP) is the inventory level that causes a movement to refill
that stock inventory. It is the minimal amount of an object that a corporation
has available so that after the stock goes below that degree, the item should
be reordered. It's usually estimated as the projected
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