Strategic Financial Management NMMS Apr19

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Strategic Financial Management NMMS Apr19

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Q1. Fusion Limited’s dividend is growing at a rate of 12% per annum. This growth rate is expected to continue for 3 years. Thereafter, the growth rate will decline to 8% for the next 2 years. After that, the year on year growth in dividends is expected to be a stable 6% rate forever. If the last dividend was Rs 6 per share and the required rate of return on equity is 20%, what is the fair value per share.

Q2. Mr. Rathi is about to retire. His employer offers him post-retirement benefits by way of the following two options
a) A consolidated amount of Rs 15 lacs
b) An annual pension of Rs 3 lacs in the 1st year, Rs 4 lacs in the 2nd year, Rs 5 lacs in the 3rd year and Rs 6 lacs in the 4th year.
Which option should Mr. Rathi go for, assuming a discount rate of 10%? (10 Marks)

Q3. Alpha Limited has a debt equity ratio of 3:2. The pre-tax cost of debt is 12%. Effective tax rate for the company is 30%. The equity beta of Alpha is 1.5. Market risk premium is 8% and the risk-free rate is 7%.
a) Discuss and Compute the cost of equity of Alpha Limited (5 Marks)
b) Discuss WACC and determine the WACC based on after tax cost of debt and cost of equity? (5 Marks)

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