Advanced Corporate Finance 2nd Set MBA Assignments
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Q1. Give an overview of various Accounting Standards in India. How do they compare with International Accounting Standards & U.S. GAAP?
Q2 Explain in detail the Accounting Standard (AS19) for leasing and Hire Purchase agreement.
Q3 Illustrate how Goodwill and shares are valued.
Case Study Solution
Cholamandalam Chemicals Limited
Dilemma of Equity
The management of Cholamandalam Chemicals Limited is considering proposals for expansion of plant capacity that would enable it to produce a range of new chemical products. The expansion plan is estimated to cost Rs. 10, 00,000. After several rounds of discussions with the company’s investment bankers, the following three alternatives emerged.
1. Issue 10,000, 10 percent cumulative, non participating preference shares of Rs 100 at par.
2. Issue 5,000 , 10 per cent cumulative, participating preference shares of Rs 100 at Rs 200
3. Issue 40,000 equity shares of Rs 10 at Rs 25.
The company estimates that the additional investment would give a return of 25 percent per year after payment of all expenses including income tax. Net profit for the latest year stands at Rs 140000/- Currently, the shareholders’ equity of company consists of the following:
a) Authorized capital of 10,000.
b) 5000 shares – 10 percent cumulative, non – participating preference shares of Rs. 100
c) 10 per cent cumulative, participating preference shares of Rs 100.
d) 100,000 equity shares of Rs 10.
e) Issued capital of 60,000 equity shares of Rs 10 fully paid.
Apart from the above, the company has retained earnings of Rs 2,75,000. The company plans to distribute the entire net profit in the coming year.
Q.No 1: From the stand point of the company’s existing shareholders, which is the best alternative? Should the company proceed with the expansion? Explain.
Q.No 2: What other factors should the company consider in making its decision?
Section C
Q1: In an expanding business, under assumptions of constant working capital policy, we would normally expect the reported operating profit (excluding depreciation and amortization) to be:
(A): The same as the reported operating cash flow.
(B): Greater than the reported operating cash flow.
(C): Less than the operating cash flow.
(D): Completely independent of the operating cash flow.
Q2: Earnings per share can be calculated as:
(A): Use the income statement to determine earnings after taxes (net income) and divide by the previous period’s earnings after taxes. Then subtract 1 from the previously calculated value.
(B): Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares outstanding.
(C): Use the income statement to determine earnings after taxes (net income) and divide by the number of common and preferred shares outstanding.
(D): Use the income statement to determine earnings after taxes (net income) and divide by the forecasted period’s earnings after taxes. Then subtract 1 from the previously calculated value.
Q3: “Shareholder wealth” in a firm is represented by:
(A): The number of people employed in the firm.
(B): The book value of the firm’s assets less the book value of its liabilities.
(C): The amount of salary paid to its employees.
(D): Number of shares held X market price of shares
Q4: Mergers and Acquisitions in unrelated industries are called:
(A): Horizontal Mergers
(B): Vertical Mergers
(C): Conglomerate Mergers
(D): Privatization
Q5: One means for a company to “go private” is
(A): divestiture.
(B): the pure play.
(C): the leveraged buyout (LBO).
(D): the prepackaged reorganization.
Q6: In the long run, a successful acquisition is one that:
(A): enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.
(B): enables the acquirer to diversify its asset base.
(C): increases the market price of the acquirer’s stock over what it would have been without the acquisition.
(D): increases financial leverage.
Q7: ____________________ involves fusion of one or more companies where the companies lose their individual identity and a new company comes into existence to take over the business of companies being liquidated.
(A): Amalgamation
(B): Demerger
(C): Reverse Merger
(D): Leveraged Buyouts
Q8: ____________________ involves fusion of one or more companies where the companies lose their individual identity and a new company comes into existence to take over the business of companies being liquidated.
(A): Amalgamation
(B): Demerger
(C): Reverse Merger
(D): Leveraged Buyouts
Q9: A firm can acquire another firm __________.
(A): only by purchasing the assets of the target firm
(B): only by purchasing the common stock of the target firm
(C): by either purchasing the assets or the common equity of the target firm.
(D): None of the above are methods of acquiring the target firm
Q10: The following are the examples of changes in corporate control except:
(A): Mergers and Acquisitions
(B): LBOs
(C): Proxy Fights
(D): Spin-offs and Carve Outs
Q11: Privatization is a:
(A): Sale of a government-owned company to private investors.
(B): Sale of private companies to the government.
(C): Sale of publicly traded company to private investors.
(D): None of the above.
Q12: The purpose of corporate restructuring is:
(A): To focus on asset utilization and profitable investment opportunities.
(B): To reorganize or divest less profitable or loss making businesses/products.
(C): The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital.
(D): All Of the above
Q13: Which is not the method adopted for the corporate valuation?
(A): The Book Value Method
(B): The Adjusted book value method
(C): Discounted cash flow method
(D): Cut-rate Method.
Q14: Why should a company go for transfer pricing?
(A): To maximize the company’s total profitability.
(B): To increase internal specialization.
(C): To complement the capacity utilization of the supplier division.
(D): All of the above
Q15: Value Engineering (VE) involves designing a product from different angles at a ________cost by reviewing the functions needed by customers.
(A): Higher
(B): Lower
(C): Moderate
(D): Defined
Q16: In a market based transfer pricing, the price charged by the selling division is __________ as that charged by outside suppliers.
(A): Less
(B): Same
(C): Both (a) & (b)
(D): More
Q17: By using a __________, the firm can independently control considerable assets with a very limited amount of equity.
(A): Joint venture
(B): Leveraged buyout (LBO)
(C): Spin-off
(D): Consolidation
Q18: How is economic value added (EVA) calculated?
(A): It is the difference between the market value of the firm and the book value of equity.
(B): It is the firm’s net operating profit after tax (NOPAT) less a dollar cost of capital charge.
(C): It is the net income of the firm less a dollar cost that equals the weighted average cost of capital multiplied by the book value of liabilities and equities.
(D): None of the above
Q19: A firm has a DOL of 4.5 at Q units. What does this tell us about the firm?
(A): If sales rise by 4.5% at the firm, then EBIT will rise by 1%.
(B): If EBIT rises by 4.5% at the firm, then EPS will rise by 1%.
(C): If EBIT rises by 1% at the firm, then EPS will rise by 4.5%.
(D): If sales rise by 1% at the firm, then EBIT will rise by 4.5%
Q20: What is the difference between economic profit and accounting profit?
(A): Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt.
(B): Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period.
(C): Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows.
(D): All of the above are
Q21: The adjusted present value (APV) is best described as being __________.
(A): equal to the discounted value of all cash flows after the discount rate is adjusted upward for additional risk
(B): equal to the discounted value of operating cash flows plus the present value of any tax-shield benefits less any flotation costs
(C): equal to the discounted value of operating cash flows plus the present value of any tax-shield benefits
(D): equal to the discounted value of operating cash flows less any flotation costs
Q22: To fully align business goals, one needs:
(A): Full support of the top management linked with the strategic process
(B): A research company which ensures that the company’s performance is not distorted by its internal assumptions
(C): Both (a) and (b)
(D): None of the above
Q23: The market price represents:
(A): Focal judgment of all market participants
(B): Performance index
(C): Report card of a firm’s progress
(D): All of the above
Q24: The principal of maximization of shareholder wealth provides rational guide for:
(A): Running a business
(B): The efficient allocation of resources in society
(C): Both (a) and (b)
(D): None of the above
Q25: From an _____________ point of view, MVA is the best final measure of a company’s performance.
(A): Shareholder’s
(B): Investor’s
(C): Government’s
(D): All of the above
Q26: The amount of current assets required to meet a firm’s long-term minimum needs is referred to as __________ working capital.
(A): permanent
(B): temporary
(C): net
(D): gross
Q27: “Net working capital” means the same thing as __________.
(A): total assets
(B): fixed assets
(C): current assets
(D): current assets minus current liabilities.
Q28: Which of the following statements is most correct?
(A): For small companies, long-term debt is the principal source of external financing.
(B): Current assets of the typical manufacturing firm account for over half of its total assets.
(C): Strict adherence to the maturity matching approach to financing would call for all current assets to be financed solely with current liabilities.
(D): Similar to the capital structure management, working capital management requires the financial manager to make a decision and not address the issue again for several months.
Q29: The dividend-payout ratio is equal to
(A): the dividend yield plus the capital gains yield.
(B): dividends per share divided by earnings per share.
(C): dividends per share divided by par value per share.
(D): dividends per share divided by current price per share.
Q30: Interest rates and bond prices
(A): move in the same direction.
(B): move in opposite directions.
(C): sometimes move in the same direction, sometimes in opposite directions.
(D): have no relationship with each other (i.e., they are independent).
Q31: For an all-equity financed firm, a project whose expected rate of return plots should be rejected.
(A): above the characteristic line
(B): above the security market line
(C): below the security market line
(D): below the characteristic line
Q32: Which of the following are relevant in formulating and implementing business strategy?
(A): The rivalry amongst existing organizations within the industry.
(B): The bargaining power of suppliers.
(C): The bargaining power of customer.
(D): All of the above
Q33: The aim of ____________ is to create a viable link between organization’s objectives and resources and its environmental opportunities.
(A): Strategic planning
(B): Financial planning
(C): Both (1) & (2)
(D): None of the above
Q34: ______ maintains a balance between the inflow and outflow of funds so that liquidity is ensured.
(A): Strategic planning
(B): Financial planning
(C): Both (1) & (2)
(D): None of the above
Q35: Financial management is concerned with the of_______ assets with some overall goal in mind.
(A): Acquisition
(B): Financing
(C): Management
(D): All of the above
Q36: The cost of equity capital, i.e., ke and the cost of debt, kd remain unchanged when B/S, the degree of leverage varies in
(A): Net Income Approach
(B): Net Operating income Approach
(C): MM Approach
(D): None of the above
Q37: If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is 15% that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of Capital (WACC)?
(A): 10.53%
(B): 7.53%
(C): 9.53%
(D): 11.35%
Q38: A financial manager is responsible for deciding whether or not new manufacturing equipment should be purchased to replace existing equipment. The firm has sufficient cash available to make the purchase. The new equipment would reduce labor expenses and wo
(A): I only
(B): I and II only
(C): II and III only
(D): I and III only
Q39: Which of the following is not part of working capital management?
(A): Credit period to buyers
(B): Proportion of current assets to be financed by long term debt
(C): Dividend payout
(D): Cash credit limit
Q40: Which are the factors influencing “dividend policy” in a company?
(A): Profitability of operations
(B): Effective tax rate of the enterprises
(C): Expectations of the investor
(D): All of the above
