# Corporate Finance NMIMS Solution June 20

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Q1. Alpha Ltd is expecting an annual earnings before interest and tax of . 1.5 Lakhs. The company has 10% debentures of . 4 lakhs and cost of Equity capital is 12%. Calculate the total value of the firm and the overall cost of capital of the firm according to Net Income Approach. Also comment what will happen to the value of the firm and the overall cost of capital if debt is increased in the capital structure.

Q2. The Capital structure of ABC Ltd, is as under:

Equity share capital | Rs. 100 Lacs |

10% Debentures | Rs. 50 Lacs |

- The sales for the year 2019 are 1.5 Lac units@ Rs. 40per unit
- Also, the variable cost per unit is 20 % of sales revenue
- 12 Lacs is the fixed operating cost.
- Assume Income tax rate as 40 %

Calculate Operating, Financial and Combined Leverage of the firm and interpret the result.

Q3. Neha would retire 30 years from today and she would need . 6,00,000 per year after her retirement, with the first retirement funds withdrawn one year from the day she retires. Assume a return of 7% per annum on her retirement funds and if her planning is for 25 years after retirement, Calculate:

- How much lumpsum she should deposit in her account today so that she has enough funds for retirement? (5 Marks)
- How much she should deposit each year so that she has enough funds for retirement?

**Previous Sem Assignment for Apr 20**

### MBA Assignment Question

- ABC Ltd. is considering two financing plans to raise Rs. 8,00,000. The key information is as follows:

Expected EBIT is Rs. 2,40,000.

Cost of Debt is 10% and cost of Preference Shares is 10%.

Tax rate is 50%.

Equity shares of the face value of . 10 each will be issued at a premium of Rs. 10 per share.

Calculate Earnings per share for plan 1 and 2 and suggest which one is better. (10 Marks)

- A Project costs Rs. 60,000 and is expected to generate cash inflows as:

- The following information is given for Alpha Ltd.

Calculate the market price per share using

a. Gordon’s Dividend Model (5 Marks)

b. Walter’s Dividend Model (5 Marks)

#### Last MBA Question with Short Ans

**Q1. Assume that ABC Ltd has equity share capital of 15,00,000 divided into shares of Rs. 150 each. What will happen to EPS if entire capital was raised through debts?**

**Answer:**

INTRODUCTION

A corporation’s profit when divided by the remaining shares of its common stock is called Earning per Share (EPS). The resulting number is known as an indicator of a company’s profitability. EPS has to be reported by the company that is adjusted for extraordinary items and potential share dilution. If the EPS of a company’s is higher, the company is considered more profitable.

**Q2. Alpha Ltd is expecting an annual Earnings Before Interest and Tax of 1,50,000. ..What happens to the value of the firm when more debentures are issued?**

**Answer:**

INTRODUCTION

The net income approach, net operating income approach, and traditional approach are 3 theoretical outlines for how an organization should set its debt-equity mix. All three examines how an organization’s cost of capital changes with the debt-equity mix and hunt for the lowest worth of the cost of capital, hence the maximum value of the firm, to identify the best mix. They reach at different conclusions as they make different assumptions about creditors’ and investors’ reactions to increasing debt. The net income approach makes the simplest assumptions, that neither creditors nor investors increase their required rates of return as an organization takes on debt. The cost of capital drops as higher-cost equity is replaced with lower-cost debt. This approach settles that the optimal financing mix is all debt.

**Q3. Mr. Mehta works as a Management Consultant in XYZ Ltd. Net Present Value of the project and suggest whether project is to be accepted or not**

**Answer:**

INTRODUCTION

In finance, the net present value (NPV) or net present worth (NPW) appears to a sequence of cash flows taking place at different times. The present value of a cash flow is dependent upon the interval of time between now and the cash flow. It is also dependent upon the discount rate. NPV accounts for the time value of money. It provides a way for evaluating and comparing capital projects or financial products with cash flows spread over time such as loans, investments, payouts from insurance contracts and several different applications.

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