Description

Corporate Finance – II
December 2023 Examination

1) The TDSL firm has 5 lakh shares in outstanding/circulation. The company is now
selling at Rs. 200 per share, with an EPS of 12 and a P/E multiple of 16.67.
Show the effects of a 10% stock bonus on TDSL EPS, stock price, PE Ratio, and total
number of shares outstanding, as well as the effects of a stock dividend on total cost,
cost per share, and total number of shares held for an investor who owns 1000 shares of
TDSL at a cost of 120 each. (10 marks)
Ans 1.
Introduction
Bonus stocks are additional shares issued to contemporary shareholders based on how many
stocks they own at no more incredible value. The general public needs clarification on bonus
troubles with stock splits. That is because, just like stock splits, in a bonus issue, the company
stocks increase. But, in an advantage issue, additional shares are offered to existing
shareholders at zero cost in percentage to the claims they own in the company. In contrast, in
the inventory split, the face price of the share is reduced.
So, bonus stocks increase the company’s share capital, whereas, in a stock split, the share
capital remains the same, but in each instance, the range of shares rises, and the share charge
It is only half solved
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2) HDFC stock was trading at Rs. 700 per share at the end of 2023, while analysts
expected its intrinsic value to be Rs. 850. HDFC’s needed return on equity was
projected to be 7% per year.
Estimate the expected one-year return on the stock if the market price is expected to
converge to intrinsic value in one year and the expected two-year return on the stock if
the market price is expected to converge to intrinsic value in two years. (10 marks)
Ans 2.
Introduction
Intrinsic value can be defined as a philosophical concept wherein the value of an item or
Endeavour is derived in and of itself—or, in non-specialist’s phrases, independently of other
factors. Financial analysts build models to determine what they consider to be the intrinsic
value of an organization’s inventory of doors of what its perceived (MP) market price can be
on any specific day.
The discrepancy between an analyst’s envisioned intrinsic cost and the market price will
become a degree of investing chance. Those who recollect such a model’s reasonably good
intrinsic value estimations and who might invest based on the ones estimations cost investors.

3) a) DETERMINE the cost of equity capital for TECH Mahindra Ltd., which has a
risk-free rate of return of 15%. The beta of the firm is 1.60, and the return on the
market portfolio is 22%. (5 Marks)
Ans 3a.
Introduction
The equity fee is the return an organization wishes to decide if funding aligns with capital goback
desires. Businesses use it as a capital budgeting threshold (CPT) for the needed return
rate. A company’s cost of equity depicts the compensation that the market needs (MD) in
exchange for owning the capita asset and bearing the ownership uncertainty. The cost of

b) DIVIS LAB’s current ratio is 5:1, while accounting bodies’ standard current ratio is
2:1? Do you believe DIVIS LAB should aim to reduce its present ratio? (5 Marks)
Ans 3b.
Introduction
Usually, it is a financial metric that enables stockholders and buyers to assess a company’s
capability to pay off its current liabilities with its present property. In other words, it offers a
good idea of a company’s existing assets against its disadvantages.
The said ratio is also known as the (WCR) working capital ratio. It’s one of the few liquid
ratios that can gauge a company’s capability to use cash equivalents and cash to satisfy