Corporate Finance NMIMS June18

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Q1. A Project costs Rs. 1,00,000 and is expected to generate cash inflows as:

Year Cash inflows(Rs.)
1 20,000
2 22,000
3 25,000
4 28,000
5 20,000

The cost of capital is 12%. Calculate Profitability Index and suggest whether project should be accepted or not. (10 Marks)

Q2. Alok works in an organization which has debt and equity in its capital structure. The net income of the firm is Rs. 2,00,000. The organization pays Rs. 50,000 every year as interest component to debenture holders. Calculate the weighted average cost of capital if the cost of equity is 12% and cost of debt is 9%. If the company’s new project will provide a return of 10%, suggest whether company should make the investment or not. (10 Marks)

Q3. Mr. Sharma was working with Delta Ltd for the past five years. The company was planning for expansion and required a funding of Rs. 20,00,000 for the same. He was considering two financial plans and expected EBIT due to expansion was Rs. 8,00,000. Apart from equity (Face value Rs. 10) , if the company raised debt, cost of debt was 8%. Tax rate is 35%. Calculate EPS for each financial plan and suggest which financial plan is better for the firm.

3a) Plan A: Funding through 100% equity (5 Marks)

3b) Plan B: Funding through 50% Equity and 50 % Debt (5 Marks)

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