Description
| SESSION | JULY – AUGUST 2024 |
| PROGRAM | BACHELOR OF COMMERCE (B.COM) |
| SEMESTER | III |
| COURSE CODE & NAME | DCM2102 FINANCIAL MANAGEMENT |
Assignment Set – 1
1a. A company expects to receive Rs 120,000 annually for the next 10 years. If the discount rate is 15%, what is the present value of this annuity?
- Describe different sources of long-term financing available to a company 5+5
Ans 1.
a. Present Value of an Annuity
To calculate the present value (PV) of an annuity, the formula is:
Where:
- = Annual cash inflow (Rs 120,000)
- = Discount rate (15% or 0.15)
- = Number of years (10)
Calculation:
- Substitute the given values into the formula:
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2a. ABC Corporation forecasts an annual EBIT of $300,000. With $800,000 in 8% bonds and a 10% cost of equity capital, along with a corporate tax rate of 25%, determine the firm’s value.
- b) Discuss the advantage of the wealth maximization objective of financial management over profit maximization.
Ans 2.
a. Valuation of ABC Corporation
The firm’s valuation is calculated using the following formula under the Modigliani-Miller approach:
Where:
- EBIT = \300,000 $
- Debt = \800,000 $
- PQR Ltd is evaluating a $250,000 investment project that is anticipated to produce $60,000 annually for the next four years. With a discount rate of 18%, compute the NPV and provide a recommendation on the project’s financial viability 8+2
Ans 3.
Net Present Value (NPV) Calculation for PQR Ltd
Formula for NPV:
Where:
- = Cash inflow at time ($60,000 annually)
- = Discount rate (18% or 0.18)
- = Time period (years)
- = Initial investment ($250,000)
Step-by-Step Calculation:
- Identify Parameters:
- Initial Investment ( ) = $250,000
- Annual Cash Inflows ( ) = $60,000
Assignment Set – 2
- Calculate the cost of equity for X Ltd, which issued Rs 100 equity shares at a 10% premium. The expected dividend at year-end is 15%, growing annually at 8%. Also, find the cost of equity if dividends do not grow. 5+5
Ans 4.
Cost of Equity Calculation for X Ltd
Formula for Cost of Equity ( ):
- When Dividends Grow Annually (Gordon Growth Model):
- Where:
- = Expected dividend at year-end (Rs 15, i.e., 15% of Rs 100)
- = Current market price of the share (Issued at 10% premium = Rs 100 + 10% of Rs 100 = Rs 110)
- For X Company, which earns Rs 5 per share, capitalized at 10%, and has an 18% return on investment:
- a) Calculate the share price at a 25% dividend payout ratio using Walter’s model.
- b) Determine if this is the optimal payout ratio per Walter’s theory. 7+3
Ans 5.
Analysis of Dividend Policy for X Company Using Walter’s Model
Walter’s model provides a framework for determining the value of a company’s shares based on its dividend payout policy. It considers the return on investment (ROI), cost of equity, and dividend payout ratio.
Formula for Walter’s Model:
Where:
- = Market price per share
- = Dividend per share ( )
- Differentiate between:
(a) Gross Working Capital and Net Working Capital.
(b) Permanent Working Capital and Temporary Working Capital.
Ans 6.
Differentiation Between Various Concepts of Working Capital
Working capital is a critical aspect of financial management, representing the funds available for the day-to-day operations of a business. It ensures smooth functioning by maintaining a balance between current assets and liabilities. The distinctions between different types of working capital provide a deeper understanding of its components and applications.
(a) Gross Working Capital and Net Working Capital
Gross Working Capital:
Gross working capital refers to the total value of a company’s current assets. These assets
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