Subject Name: Corporate Finance
Full Marks:30 Duration: 1 Hour
Part – A
Attempt 5 questions
Each question carries 2 Marks (2 X 5)
1. What are the solutions for agency problems?
OR
How do you understand by agency problem? What are the types of agency problems?
2. What is stock split? What are the advantages of it?
OR
How would you value a bond? Write formula and its parameters
3. What is the formula is used in basic Bond Valuation?
OR
Discuss the criticisms of Miller and Modigliani position.
4. How to calculate the economic value of asset?
OR
What do you mean by discount and premium value of bond?
5. How can the probability theory be utilized in analyzing risk of investment projects?
OR
What is the difference between average cost and marginal cost of capital?
6. What is the difference between independent and contingent investments?
OR
How will a firm go about determining its ‘Optimum capital structure?
7. Can working capital be negative? What are its implications?
OR
Write the objectives of capital budget decisions.
8. How do you enumerate the direct and indirect bankruptcy costs?
OR
What do you mean by management of debtors?
9. What are the factors that affect cash flow forecasts in capital budgeting?
OR
How do you explain the Coefficient of Variation?
10. What do you understand by (a) accept-reject decision, and (b) ranking decision?
2
OR
What do you understand by capital rationing in the context of capital investment decisions?
Part – B Attempt 6 questions
Each question carries 5 Marks (5 X 6)
11. How do you explain the concept of Risk? How can risk be measured?
OR
What do you mean by Par value, discount, premium, yield to maturity terms related to financial assets?
12. What is sensitivity analysis? What are its advantages and limitations?
OR
What factors critical to the valuation of an asset of a firm? Explain any two of them.
13. What are the factors that affect cash flow forecasts in capital budgeting?
OR
Briefly describe the trade-off theory of capital structure?
14. A project is estimated to cost Rs 1,00,000 with a life of 5 years. Estimated profits 5 (before tax) for the first 3 years are: Rs (-) 5,000(loss),Rs.20,000, Rs.60,000 respectively. The rate of depreciation is 20% per annum under the diminishing balance method and the rate of Tax is 50%.
Calculate estimated net cash flows for the first 3 years.
OR
State the order in which firms will obtain financing under the pecking order theory. Also state, in brief, the rational for the order.
15. How do you distinguish between gross working capital and net working capital?
OR
M/s G Itd produces a product which has a monthly demand of 4,000 units. The product requires a component X which is purchased at Rs20.For Every finished product, one unit of component is required. The ordering cost is Rs120 per order and holding cost is Rs10% per annum.
You are required to calculate:
1. E.O.Q
2. If the minimum lot size to be supplied is 4000 units, what is extra cost, the company has to incur?
3. What is the minimum carrying cost,the company has to incur?
16. What are the assumptions of Gordon’s model of dividend theory? Write on the Significance of Dividend Policy.
OR
What is the Modigliani-Miller irrelevance hypothesis? Critically evaluate its assumptions.
Part – C Attempt 5 questions
Each question carries 10 Marks (10 X 5)
17. How do you explain the factors are critical to the valuation of an asset of a firm?
OR
What do you understand by cost of capital? Explain how you would compute
cost of capital with respect to the following:
(a) Equity capital, (b)Retained earning, (c)Debentures.
18. ABC Ltd paid a dividend of Rs 4 per share at the end of the year. It is expected to
grow by 8% each year for the next 4 years. The market price of the share is
expected to be Rs60 at the end of 4 years.
Assume 12% required rate of return of investors, at what price should the share of ABC ltd sell?
Assume,PVF1,12=0.893,PVF2,12=0.797,PVF3,12=0.712,PVF4,12=-0.636
,PVF5,12=0.567
OR
Exide Ltd has assets of Rs1,60,000 which have been financed with Rs52,000
of debt,R$90,000 of equity, and a general reserve of Rs18,000.
The firm’s total profits after interest and taxes for the year end, were Rs13,500.It pays 8% interest on borrowed funds and is in the 50% tax bracket.
It has 900 equity shares of Rs100 each selling at a market price of Rs120 per share.
What is the weighted average cost of capital?
19.The following information is available for
A.Corporation. B. Earning per share:Rs4.00
C. Rate of return on investments:18%
D. Rate of return required by shareholders:15%
What will be the price/share as per Walter Model if the payout ratio is 40%, 50%, 60%?
OR
M/s ABC Ltd has following financial information:
20. Profit before depreciation, interest and tax R$80,000; depreciation
Rs10,000; interest Rs5,000;tax rate 40%;cost of capital 10%;equity share capital Rs200,000;reserves and surplus and surplus Rs100,000;debt capital Rs100,000.
Calculate EVA of the company.
Equipment X has a cost of Rs75,000 and net cash flow of Rs20,000 per year for 6 years.
A substitute equipment Y would cost Rs50,000 and generate net cash flow of Rs14,000 per year for 6 years. The required rate of return of both equipments is 11%.
Given:PVAF6,0.15-3.784 and PVAF6,0.16-3.685 Calculate the IRR and NPV for the equipments.
OR
M/s Dollar &Co has sales, variable cost and fixed cost amount to Rs75,00,000, Rs42,00,000 and Rs6,00,000 respectively. The company borrowed Rs45,00,000 at 9% and its equity capital total Rs55,00,000.
Calculate the following items:
1) ROI of the company.
2) Does it have favourable financial leverage?
3) If the company belongs to an industry whose asset turnover is 3,does it have a high or low asset turnover?
4) What are the OL,FL, and Combinbed leverage of the company?
5) If sales drop to Rs50,00,000, What will be the new EBIT?
21. What methods do you suggest for estimating working capital needs? Illustrate 10
your answer.
OR
What do you understand by operating cycle? Explain the operating cycle concept 10 of working capital management.
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