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Corporate Finance
Dec 2025 Examination
Q1.
A large Indian conglomerate is considering increasing its leverage by issuing
more long-term debt to finance a new business unit. The management is attracted
by the lower after-tax cost of debt and the potential to enhance returns to
equity holders. However, some board members are concerned about the risk of
financial distress and the impact on the company’s credit rating. The finance
manager is required to analyze the situation and advise on the optimal level of
debt in the capital structure. Given the scenario, how should the finance
manager apply the trade-off theory of capital structure to balance the benefits
of debt (such as tax shields) against the increased financial risk and
potential costs of financial distress? (10 Marks)
Q2.
A firm is considering restructuring its capital structure to minimize its
Weighted Average Cost of Capital (WACC). The current structure is as follows:
|
Source |
Market
Value (Rs. lakhs) |
Cost
(%) |
|
Equity |
800 |
15 |
|
Preference
Shares |
200 |
11 |
|
Debt |
500 |
8
(pre-tax) |
The
firm is considering increasing its debt to Rs.700 lakhs by redeeming Rs.200
lakhs of equity, keeping the total capital constant. The cost of equity will
rise to 17% due to increased financial risk, and the cost of debt will increase
to 9% (pre-tax). The tax rate is 35%. Calculate the WACC before and after
restructuring. Critically evaluate whether the restructuring achieves the
objective of minimizing WACC, and discuss the implications for the firm’s risk
profile. (10 Marks)
Q3(A).
A firm is considering restructuring its capital by redeeming Rs.50,00,000 of
12% debentures (trading at 95% of face value) and replacing them with new 10%
debentures to be issued at 98% of face value. The company’s tax rate is 30%.
The flotation cost for the new issue is 2% of the face value. The existing
debentures have
5
years to maturity. Calculate the net annual after-tax interest savings (or
cost) for the company over the next 5 years, considering the premium/discount
on redemption and issue, flotation costs, and tax shield. Assume straight-line
amortization of all premiums/discounts and flotation costs over 5 years. (5
Marks)
Q3
(B). A company is
evaluating a project
that requires an
initial investment of Rs.2,50,00,000. The project is expected to
generate the following after-tax cash flows (in Rs.) over 4 years:
|
Year |
Cash
Flow |
|
1 |
70,00,000 |
|
2 |
90,00,000 |
|
3 |
1,10,00,000 |
|
4 |
1,30,00,000 |
The
project is financed with 60% debt (interest rate: 10%, perpetual,
tax-deductible) and 40% equity (cost: 16%). The corporate tax rate is 30%.
Calculate the Adjusted Present Value (APV) of the project, clearly showing the
base case NPV (all-equity financed), the present value of the interest tax
shield, and the final APV. Interpret the result in terms of project
acceptability. (5 Marks)
Dear students, get fully
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Do send your query at :
or call us at :
08263069601
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assignments available with 100% surety and refund)
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