Strategic Financial Management NMIMS Assignment 2023
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Q1) Sun Ltd plans to invest INR 500,000 in a project with the following cash flows:
Cash flow after tax year 1 = INR 100,000
Cash flow after tax year 2 = INR 300,000
Cash flow after tax year 3 = INR 200,000
Cash flow after tax year 4 = INR 200,000
The discount rate is 5 per cent and the risk adjusted discount rate is 20 per cent. Determine the NPV of the project using the risk adjusted discount rate. Will your decision be the same if the risk adjusted discount rate is increased to 22 per cent?
Q2) Mergers and Acquisitions are a part of corporate restructuring exercises. Discuss the different forms and types of mergers and acquisitions.
Q3) a) An investor purchases a August call option on Tata Motor’s stock, with an exercise price of Rs. 440. Determine the intrinsic value today if Tata Motor’s stock is trading at i) Rs. 420 ii) Rs. 460
Q3) b) Apple Ltd has deployed a capital of 400 million in Orange Ltd a 100 per cent owned subsidiary company and it incurs a cost of 10 per cent. The after-tax profit generated by the subsidiary company is INR 45 million. Compute the EVA generated by the company?
April 2023
Q1. The capital structure of Orient Ltd in book value terms is given below:
TABLE BELOW
| Equity shares (30 million shares, Rs. 10 par) | Rs.300 million |
| 11% Preference shares (1.5 million shares, Rs.100 par) | Rs.150 million |
| 8 % debentures (1.5 million, Rs.100 par) | Rs.150 million |
| Total | Rs.600 million |
Market price of equity share Rs. 100
Market price of preference share Rs. 90
Market price of debentures Rs. 90
The expected dividend per share is Rs. 4 and the dividend is expected to grow at the rate of 10 percent. Preference shares are redeemable after 10 years and debentures are redeemable after 5 years. Compute the average cost of capital at market value assuming a tax rate of 30 percent. (10 Marks)
Q2. Ramesh and Suresh have been managing their family business well for the last 5 years. Now the two brothers decide to expand the business and have hired you (merchant banker) to help them with their IPO process to raise funds from the market by offering a 30 percent stake. With your vast experience, you did an excellent job and the IPO was a success. Being a family-managed business, they did not have a dividend policy, but now Ramesh feels they should pay a high dividend and Suresh feels the profits should be retained in the business. The family has approached you for advice. You are required to make a presentation explaining the relevance/irrelevance to the new Board. (10 Marks)
Q3. Company Simpson is contemplating the purchase of Company Wilson. Managements of both companies have suggested two alternative proposals for exchange of shares as indicated below:
Alternative 1 – In proportion to the earnings per share of two companies
Alternative 2 – 0.5 share of Simpson Ltd for one share of Wilson Ltd
The details of both the companies are given below:
| Simpson Ltd | Wilson Ltd | |
| No. of shares | 3,00,000 | 2,00,000 |
| Market price per share | ₹30.00 | ₹20.00 |
| EPS | ₹4.00 | ₹2.25 |
You are required to:
- Calculate the total earnings after the merger under both alternatives and the number of shares (5 Marks)
- Show the impact of EPS on the shareholders of Simpson Ltd under both alternatives (5 Marks)
Sep 2022
1. A realty major DFL Ltd. has planned an outlay of Rs. 48 crore towards launches of housing and commercial projects in the medium term. The following financial information is available for the project-
a. Depreciation would be on a straight-line basis over six years and salvage value is assumed to be nil.
b. Revenue in each of the years 1 to 6 from different projects are expected to be as follows:
i. Rs. 12 crore from premium luxury housing
ii. Rs. 5 crore from value homes in Gurugram, Chandigarh tri city and Chennai
iii. It also expects Rs. 7 crore from its office joint venture project with Hines
iv. Rs. 2.5 crore from an IT park in Noida
v. The remaining Rs. 2.5 crore will come up from commercial projects in Delhi and Gurugram
c. Variable costs are expected to be Rs.10 crore per annum for all the projects and annual fixed costs Rs .2 crore.
d. Corporate tax rate can be assumed at 25% and the appropriate discount rate at 15%.
You are required to determine the NPV of the project. (10 Marks)
2. A December 2021 news article in Economic Times stated that Serum Institute of India (SII) has topped the Burgundy Private Hurun India list for the biggest value creator. It has experienced a rapid upswing in its revenues due to producing more than a billion COVID-19 vaccines for distribution in India and abroad. Given its early foray into manufacturing critical COVID-19 vaccines, SII has seen its value soar 127 per cent in 2021 to .1.8 lakh crore. Valuation is an essential financial exercise that caters to a wide variety of financial objectives. Explain the discounted cash flow approach and the multiples approach of valuation. (10 Marks)
3. Some analysts believe that a company’s dividend policy is often seen as a testament to its confidence in future earnings growth and sustainability of the business. In the past, shareholders have lodged complaints about companies denying them dividends despite possessing spare cash balances. As a result, SEBI mandated top 500 listed companies (based on market capitalization) to formulate a dividend distribution policy. This mandate was recently revised and is now applicable to top 1,000 listed companies. In response to the revised mandate, many companies like Bajaj Auto have changed their dividend policy in January 2022. However, the Modigliani-Miller (MM) model states that the present value of the firm is independent and unaffected by future dividend payments.
a. State the MM dividend irrelevance theory. (5 Marks)
b. Do you feel that the above-mentioned belief is a limitation of the Model? Also, please elaborate on the other criticisms cited for the MM Model. (5 Marks)
June 22 NMIMS
Q1. A Financial Express news article of February 3, 2022, mentioned that Alphabet, on February 1, 2022, has announced that its Board of Directors has approved and declared a 20-for-1 stock split. In light of this news, explain what is a stock split and how is it different from a bonus issue made by the company? (10 Marks)
Q2. For the first time any BBB-rated Asian company outside of Japan has issued a 40-yeardollar bond. In January 2022, Resilience Ltd. raised $1.5 billion in a 10-year issue at a coupon or interest rate of 2.875%, $1.75 billion in a 30-year bond at a 3.625%, and $750million in a 40-year issue at a 3.75% coupon rate. The coupon frequency for the 30-yearbond is semi-annual and for the others is annual. You’re required to compute the value of the bonds if their face value is $1,000 and the applicable rate is 6.9 percent. (10 Marks)
Q3. In India, the year 2021 saw an immense surge in mergers and acquisitions. This was mainly propelled by first-time buyers and steered by the growth of industry disruptors across multiple sectors and business activities. The acquisition of Indian payments giantBillDesk by technology investors Prosus NV was the largest merger and acquisition deal in the Indian fintech industry. Proses has its own Fintech business PayU. This acquisition will help PayU to become one of the leading online payments providers, globally, with a presence in over 20 markets and increased total payments volume (TPV)of over US$4 billion.
- With this deal in the backdrop, explain mergers and acquisitions as a restructuring tool. (5 Marks)
- Identify and explain the type of merger seen here. Also, elucidate the other types of mergers and acquisitions in brief. (5 Marks)
Old Assignment Question
Q1. The following is the capital structure of Alpha Limited as on 31st March 2020
Equity Shares: 10000 shares (of Rs 100 each) Rs 10,00,000
12% Preference Shares (of Rs 100 each) Rs 10,00,000
10% Debentures Rs 12,00,000
The market price of the company’s share is Rs 120 and it is expected that a dividend of Rs 10 per share would be declared by the company. The dividend growth rate is 5%. If the tax rate is 30%, calculate Weighted Average Cost of Capital (WACC) by book value & market value method. Assume market value of Preference shares and Debentures to be same as the book value. Comment on the results.
Q2. The following details are available for Gamma Ltd:
| Details | Proposal A | Proposal B |
| Initial Cost | Rs.10,00,000 | Rs. 12,00,000 |
| Expected life | 4 years | 5 years |
| Profits before
tax after depreciation |
Rs. 3,00,000 each for first two years
Rs. 3,50,000 each for next two years |
Rs. 3,00,000 each for first two years
Rs. 3,50,000 each for next three years |
Q3. Calculate Discounted Payback period and suggest which one is better if the discounting factor is 10% and tax rate 30%. Show in detail relevant calculations and use Straight Line Method of Depreciation.
A company’s current earnings before interest and taxes are Rs 5,00,000. The firm currently has outstanding Rs 10 lakh of debts at an average cost of 8 per cent. Its cost of equity capital is estimated to equal 12 per cent.
Determine the current value and overall capitalisation rate of the firm using the Net Income Approach. Comment on the impact of increase in debentures on the value of the firm as per Net Income Approach.
The firm is considering reducing its debt by Rs 5 lakhs. The cost of debt and EBIT is expected to be unaffected. However, the firm’s cost of equity capital is to be reduced to 10 per cent due to decrease in financial risk. Would you recommend the proposed action (Based on value of firm and overall cost of capital)? Show relevant calculations using Net Income Approach.
June 2020
Q1. From the following information of the two projects calculate the net present value and suggest which of the two projects should be accepted assuming a discount rate of 10%
TABLE GIVEN BELOW
| Project X | Project Y | |
| Initial Investment | Rs. 25,000 | Rs. 30,000 |
| Estimated Life | 5 years | 5 years |
| Scrap Value | Rs. 1,500 | Rs. 2,000 |
The profits before depreciation and after taxes are as follows:
| Years | 1 | 2 | 3 | 4 | 5 |
| Project X(Rs) | 5,000 | 10,000 | 12,000 | 7,000 | 3,000 |
| Project Y(Rs) | 20,000 | 10,000 | 7,000 | 5,000 | 2,000 |
Q2. Nisha has completed her MBA and has joined a company which was going to raise fund from long term sources such as Debt and Equity. Nisha was asked by her manager to prepare a report on which could be a better source of funding for the firm mentioning the advantages of each to be presented to the Management so that it is easy for them to take the decision. Help her to prepare the report.
Q3. The following information is given for Delta Ltd.
| Earnings per share | Rs. 15 |
| Dividend per share | Rs. 5 |
| Cost of Capital | 15% |
| Internal Rate of Return On Investment | 20% |
| Retention Ratio | 65% |
Calculate the market price per share using
- Gordon’s Dividend Model (5 Marks)
- Walter’s Dividend Model (5 Marks)
Previous Year NMIMS Solved Assignments
Strategic Financial Management-NMIMS Solution-June 19
NMIMS Solution Update
Q1. You are considering an investment project. The project has a life of three years.
Project Information:
Initial investment into a new machine, which would cost Rs.4,50,000.
Machine is to be depreciated to zero over three years (straight line depreciation) with no salvage value at the end.
Operating revenue is expected to be Rs. 6,00,000 per year.
Operating costs for raw materials expected to be Rs.3,00,000 per year.
Assume tax rate is 30% and the discount rate is 20%.
a. Compute after-tax cash flows every year.
b. Evaluate the project NPV. Would you accept the project? (10 Marks)
Q2. Compute the fair value of the following three stocks. Assume cost of equity to be 10%
Stock A is expected to pay a uniform dividend of Rs. 3.50 per share forever.
Stock B is expected to pay a dividend of Rs. 2.00 per share next year. Dividends are expected to grow at 5% YOY per year forever.
Stock C has paid a dividend of Rs. 2.50 per share in the current year. The dividend is expected to increase by Rs. 0.50 per year for the next three years. Thereafter, dividend is expected to remain constant. (10 Marks)
Q3. Rate of return on treasury bills (risk-free short-term government papers) is around 6%. The expected rate of return on a market portfolio is 14%. Applying the capital asset pricing model (CAPM), answer the following:
a. What is the expected rate of return on a stock with a beta of 0? Is it a risk-free investment? (5 Marks)
b. A stock currently trades at Rs. 60 per share. The stock is expected to pay a dividend of Rs. 5 per share next year and you expect to sell the share then for Rs. 65. You estimate the beta of the stock to be 0.8. Is the stock overpriced or underpriced? (5 Marks)
