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Anil Surendra Modi School of Commerce
Programme: B Com (Hons.)
Semester: IV Academic Year: 20 – 2021
Subject: Corporate Finance II Marks: 50
Date: _________ Time:-________
Final Examination/ Re-ExaminatioDuration: - 2 Hrs
N.B.:-
1. All questions are compulsory.
2. Question no.01 carries 15 marks
3. Question no. 02 to 04 carries10 marks each.
4. Question no. 05 carries 5 marks
5. Ordinary and Scientific calculators are allowed.
6. Question paper is in excel format. It has be downloaded through link provided.
7. Entire paper is in single workbook however, there are separate sheets for each quest
8. Students have to solve in the same worksheet in which question appears.
9. Solution has to be outlined with thick borders and questions area should not be distu
10. Working notes have to be prepared in detail, wherever necessary, for every question
11. Upload the same excel workbook, which is downloaded after attempting the answers
12. Access to Internet sites, other than those required to conduct exam are prohibited.
rough link provided.
arate sheets for each question / sub question.
estion appears.
ns area should not be disturbed.
essary, for every question or sub question in the same work sheet.
er attempting the answers to questions.
uct exam are prohibited.
Question 1 ……………………………………………….……………………………………………………………………………………………………………………
Avengers Public limited is reputed company from FMCG sector. It has established its brand for last 20 years.
The company is planning to expand its business in cosmetics market by leveraging its reputation and brand image.
The marketing manager of the company has already done its market research and came to conclusion that there will be
for the cosmetic product after covid pandemic. He wants to explore online marketing channel so that distribution cost w
overall profiabiliy will increase.
The finance manager has studied the entire propsal received from marketing department and came to the conclusion th
company has to go for initial public offer if it wants to expand business. The shares are likely to be listed after an initial p
He wants to know the price at which shares should be offered to the public. Following is the data collected by him to fin
expected price of the shares.
The summarised income statement of the recent financial year 2020-21 is given below.
Particulars (in lakhs) 2020-21
Income 400
Expenditure 240
Operating profit (PBDIT) 160
-Depreciation 48
-Interest 32
PBT 80
-Provisions for taxation 24
Net profit 56
Because of heavy investment in capital expenditure, it is expected to have high growth for the next five years.
Following information is estimated by the strategic team for the next five years.
Amount in lakhs 2021-22 2022-23 2023-24 2024-25 2025-26
Revenue growth (year on year) 12% 16% 20% 18% 15%
Operating exp (% of sales) 72% 74% 68% 62% 59%
Total Interest expense 42 47 53 58 62
(including existing debt)
Depreciation expenses 64 61 59 54 52
Increase in Capital spending 80 84 112 120 128
Increase in Working capital 14 12 11 13 16
After a high growth period of five years, 6% constant growth rate in Free cash flow to firm(FCFF) is projected till perpetu
The firm falls in the 30% tax bracket. The total of 1.5 Crores shares would be outstanding.
There is a company with similar risk characteristics which is listed and whose average beta is 0.9
The risk free rate is 7% and the market risk premium is 6%.
The company is funded with 80% equity and 20% debt.
After tax cost of debt is 9% p.a.
Find out the intrinsic value of per share using Free cash flow to firm.
Solution to Question 1
…………………………………………………………(15 Marks)
or last 20 years.
tion and brand image.
conclusion that there will be very good demand
el so that distribution cost will be reduced and
nd came to the conclusion that
to be listed after an initial public offer (IPO) shortly.
e data collected by him to find out the
he next five years.
CFF) is projected till perpetuity.
Question 2 …………………………………………………………………………………………………………………………………(10 Marks)
Mr.Murugun has started a business of manufacturing e-cycle which can be used as alternative mode of transportati
He expects that that industry will grow very fast in the near future but there will be lot of competiotion from etrepr
He wants to develop the strong network of distributors and wholesellers and follow aggressive marketing te
Present sales of the company is only Rs. 45,00,000/- per annum with 30 days credit period.
He is planning to increase the credit period to win new customers and to increase the profits.
Present variable costs are 75% of sales and the total fixed costs Rs. 4,00,000/- per annum.
In case sales is more than Rs.75,00,000/- per annum then fixed cost increases by 15%.
Existing bad debts is 4% of credit sales.
The company expects pre-tax return on investment @ 20%.
Followings are the estimates made by him regarding credit policy.
Proposed Credit Policy I II III IV
Average Collection Period (days) 40 45 60 75
Bad debts (% of Sales) 5% 6% 7% 9%
Expected Annual Sales 6,000,000 6,500,000 7,200,000 8,000,000
Required: Which credit policy should the company adopt? Assume 360-days a year.
Solution to Question 2
…………(10 Marks)
tive mode of transportation.
ompetiotion from etrepreneurs.
aggressive marketing techinique.
Question 3 …………………………………………………………………………………………………………………………………(10 Marks)
Sundar Ltd has 2,00,000 equity shares outstanding for year 2020.
The current market price of the shares is Rs. 150 each.
Company is planning to pay dividend of Rs.15/- per share.
Required rate of return is 12%.
Based on Modigliani-Miller Approach, calculate the market price of the share of the company,
when the recommended dividend is (a) declared; and (b) not declared.
How many new shares are to be issued by the company at the end of the year on the assumption that
net income for the year is Rs. 60,00,000/- and the investment budget is Rs. 80,00,000/-,
when (a) Dividend declared; and (b) Dividend not declared.
Show that market value of shares at the end of the accounting year will remain the same,
whether dividends are distributed or not declared.
Solution to Question 3
…(10 Marks)
Question 4 …………………………………………………………………………………………………………………………………(10 Marks)
Omega international Ltd. is the leading manufacturer of mobile phones and television sets in India.
Till now company was importing majority of raw materials like chips, panels from China.
Profit margin was very low since the company was depedent on china for availability of raw materials.
It was decided by newely appointed managing director to take benefit of government schemes and
start procuring raw materials from local market. This will result in substaintial reduction in cost of production.
The factory manager is keen to manufacture the component in his own factory for increasing the profitability
of the company.
Following is the estimate prepared by the factory manager.
New investment of Rs.4,50,000 is required for setting up of the machinery.
The expected life of machine is six years and has no scrap value.
It is expected that 18,000 units will be produced and sold each year at a selling price of Rs.40 per unit.
It is expected that the variable costs to be Rs.15 per unit and fixed costs to be Rs.3,00,000 per year.
The cost of capital of Omega Pvt Ltd. is 14% (Ignore tax and depreciation)
Calculate expected net present value of the project.
You are required to measure the sensitivity of the project’s net present value to a change in the variable cost per unit.
Solution to Question 4
…(10 Marks)
of production.
e profitability
variable cost per unit.
Question 5 ………………………………………………………………………………………………………………………………....( 5 Marks)
What are the determinants of Dividend policy. Explain in brief.
Solution to Q.5
………....( 5 Marks)
