Description

SESSION JUL – AUG 2024
PROGRAM BACHELOR OF BUSINESS ADMINISTRATION
(BBA)
SEMESTER III
COURSE CODE & NAME DBB2104 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?
b. Describe different sources of long-term financing available to a company
Ans 1a.
To calculate the present value of an annuity, we use the following formula:
PV = C × [1 ― (1 + r) ―n
r ]
Where:
 PV = Present value of the annuity
 C = Annual cash inflow (Rs 120,000)
 r = Discount rate (15% or 0.15)
 n = Number of years (10)
Step-by-Step Calculation:
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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 2a.
To determine the firm’s value, we will use the Modigliani and Miller (MM) Proposition I
with Taxes formula:
VL = VU + Tc × D
Where:
 VL = Value of the leveraged firm
 VU = Value of the unleveraged firm
 Tc = Corporate tax rate (25% or 0.25)
 D = Value of debt (bonds)
 VU =
EBIT × (1 ― Tc)
re , where re is the cost of equity (10% or 0.10).
3. 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
Ans 3.
Net Present Value (NPV) Calculation
The Net Present Value (NPV) is calculated using the following formula:
NPV = Σ( CFt
(1 + r)t)- C0
Where:
 CFt = Cash flow in year t
 r = Discount rate (18% or 0.18)
 t = Year
 C0 = Initial investment ($250,000)
Step 1: Given Data
 Initial investment (C0) = $250,000
 Annual cash inflow (CFt) = $60,000
 Discount rate (r) = 18% or 0.18
 Project duration = 4 years
Step 2: Calculate Present Value of Cash Inflows
Assignment Set – 2
4. 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.
Ans 4.
Cost of Equity Calculation
The cost of equity represents the return required by investors for investing in the equity of a
company. It can be calculated under two scenarios: with dividend growth and without
dividend growth. Here, we calculate the cost of equity for X Ltd, which issued equity shares
at a premium.
Given Data
 Face Value of Share (FV) = Rs 100
 Premium = 10% of face value = Rs 10
5. 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.
Ans 5.
Walter’s Model Calculation
Given Data:
 Earnings per share (E) = Rs 5
 Cost of equity capital (r) = 10% or 0.10
 Return on investment (rOI) = 18% or 0.18
 Dividend payout ratio = 25% or 0.25
Formula:
Walter’s model for share price is:
P =
D
r +
(E ― D) × (rOI/r)
r
Where:
 P = Price per share
 D = Dividend per share = E × Dividend payout ratio
6. Differentiate between:
a. Gross Working Capital and Net Working Capital.
b. Permanent Working Capital and Temporary Working Capital.
Ans 6.
a. Gross Working Capital vs. Net Working Capital
Gross Working Capital
Gross Working Capital refers to the total current assets of a company. Current assets include
cash, accounts receivable, inventories, marketable securities, and other assets that can be
converted into cash within a year. It represents the funds invested in short-term assets to
ensure smooth operations. Gross Working Capital emphasizes the company’s ability to meet
short-term obligations and manage liquidity. For instance, if a company has current assets of
Rs 500,000, this amount is considered its Gross Working Capital.
Gross Working Capital is particularly significant in industries where managing current assets