Strategic Financial Management

September 2021 Examination

 

1. Calculate Economic Value Added (EVA) if the Earnings before Interest and tax is Rs 20, 00,000. The capital structure of the firm consists of Debt-Equity ratio of 2: 3, pretax cost of debt is 14% and the tax rate is 35%. The equity beta is 1.5. The risk free rate of return is 9% and risk premium is 5%. Total borrowed capital of the firm is Rs 45, 00,000. Comment on the value of EVA. (10 Marks)

 

Ans 1.

 

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2. A company is considering a project whose machine cost will be ₹ 72,000. It has a life expectancy of four years and the tax rate is 30%. Estimated profits before depreciation and tax is as follows: (10 Marks)

 

Year            PBDT (₹)

 

 1                   20,000

 2                   25,000

 3                   27,000

 4                   30,000   

 

The cost of capital is 10% and the company follows straight line depreciation method. Compute Net Present Value and Discounted Payback Period and comment on the values.

 

Ans 2.

 

3. A Company expects an operating income of ₹ 1, 50,000. The equality capitalization rate of the company is 12%.

 

1. a) Calculate the value of the firm and overall capitalization rate according to the net

Income approach if it has ₹ 3, 00,000, 8% debentures. Comment on the value of the cost of capital in the case of Net Income Approach when the proportion of debt is changed in the capital structure. (5 Marks)

Ans 3a.

 

1. b) If the debentures are increased to ₹ 4, 00,000, 8% debentures. What shall be the value of the firm and the overall capitalization rate? Interpret the result. (5 Marks)

 

Ans 3b.