Seat No.: ________ Enrolment No.

______________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA– SEMESTER -II - EXAMINATION- SUMMER-2023

Subject Code: 4529202 Date: 13/07/2023

Subject Name: Corporate Finance
Time: 10:30 AM TO 1:30 PM Total Marks: 70
Instructions:

1. Attempt all questions.

2. Make Suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
4. Use of simple calculators and non-programmable scientific calculators are permitted.

Q.1 Define: 14
a) Time Value of money
b) Profitability Index
c) WACC
d) Operating Cycle
e) Credit Standard
f) Opportunity Cost of capital
g) Retention Ratio
Q.2 (A) In what ways is the wealth maximization objective is superior to the profit maximization 07
objective? Explain.
Q.2 (B) Shree limited issues new debentures of Rs 20000 at par; the net proceed being Rs 18000; it 07
has a 13.5 percent rate of interest and 7 year maturity. The company’s tax rate is 52 percent.
What is the cost of debenture issue?
What will be the cost in 4 years if the market value of debentures at that time is Rs 22000?
OR
Q.2 (B) What is receivable management? Discuss credit policy variables. 07
Q.3 (A) Explain the MM approach on the bases of an optimum capital structure, Ignoring the corporate 07
income taxes. Use an illustration to show how homemade leverage by an individual investor
can replicate the same risk and return as provided by the levered firm.

(B) Prepare a case budget for the Mist Of Moon company for three months of May, June 07
& July. The company has a policy of maintaining a minimum cash balance of Rs
30,000. The company’s cash balance as on 30th April is Rs 30,000.

Month Actual Sales (Rs) Month Estimated Sales (Rs)

January 75,500 May 1,05,000
February 75,000 June 1,20,000
March 90,000 July 1,50,000
April 90,000 August 1,50,000

Consider the following additional information :

• Cash sales are 60% of the total sales. The remaining sales are collected equally
during the following two months.
• Cost of goods manufactured is 75% of sales. 80% of this cost is paid after 1
month and the balance is paid after 2 months of the post incurrence.
• Fixed operating expenses are Rs 15,000 per month. Variable operating
expenses are 10% of sales each month.
• Half yearly interest on 12%, Rs 4,50,000 debentures is paid during July.
• Rs 60,000 are expected to be invested in fixed assets during June.

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 • An advance tax of Rs 15,000 will be paid in July.
Determine, whether or not borrowing will be necessary during the period and if yes,
When and for how much.
OR
Q.3 (A) Radha limited is currently paying a dividend of Rs 2.00 per share. The dividend is expected 07
to grow at a 15 percent annual rate for three years, then at 10 percent rate for next three
years, after which it is expected to grow at a 5 percent rate forever.

(a) What is the present value of share if the capitalization rate is 9 percent?

(b) If the share is held for three years, what shall be its present value?

(B) Empire limited needs Rs 10,00,000 to build a new factory which will yield EBIT of 07
Rs 1,50,000 per year. The company has to choose between two alternative financing
plans: first plan 75 percent equity and 25 percent debt and second plan 50 percent
equity and 50 percent debt. Under the first plan share can be sold at Rs 50 per share,
and the interest on debt will be 14 percent. Under the second plan shares can be sold
for Rs 40 per share and the interest rate on debt will be 16 percent. Assume tax rate
35 percent.

(a) Determine EPS of both plans.

(b) ROE of both plan

Q.4 (A) Define working capital management. Explain determinants of working capital. 07
(B) Girja company has outstanding 50 lakh shares selling at Rs 120 per share. The company is 07
thinking of paying dividend of Rs 10 per share at the end of current year. The capitalization
rate for the risk class of this firm is 10 percent. Using Modigliani and Miller’s model

(a) Calculate the price of the share at the end of current year;
(i) if dividend are paid and (ii) if dividend are not paid.

(b) Determine the number of shares to be issued if the company earns Rs 9 crore, pays
dividend and makes new investment of Rs 6.60 crore?

OR
Q.4 (A) Firm L and Firm U are in the same risk class and are identical in every respect expect that 07
Firm L is levered and Firm U is unlevered. Firm L has 12 percent Rs 4,00,000 debentures
outstanding. Both firms earns 18 percent before interest and taxes on their total assets of Rs
8,00,000. Assume a corporate tax rate of 50 percent and pure equity capitalization rate of 15
percent.

(a) Compute the total value of firm using the NI approach.

(b) Compute the total value of firm using the NOI approach.

(B) What is an ordinary share? How does it differ from a preference share and debenture? 07
Explain its most important features.
Q.5 CASE STUDY 14

Anjan Limited is a leading manufacturer of automotive components. It supplies to the

original equipment manufacturers as well as the replacement market its project
typically have a short life as its introduces new models periodically.
You have recently joined Anjan Limited as a financial analysis reporting to Ravi
Sharma, The CFO of the company. He has provided you the following information
about two projects A and B, that are being considered by the executive committee of
Sona Limited :
• Project A is an extension of existing line. Its case flow will decrease over a
time.

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 • Project B involves new product. Building its market will take some time
enhance its case flow will increase over a time.

The expected net cash flows of the two projects are as follows.

Year Project A Project B

0 (15,000) (15,000)
1 11,000 3,500
2 7,000 8,000
3 4,800 13,000
4 3,000 15,000

Ravi Sharma believes that all the two projects have risk characteristic similar to the
average risk of the firm and hence the firms cost of capital 12%, will apply to them.

Questions:
a) What is payback period? Find the Payback periods of Project A and B? Rank
the project as per payback period.
b) What is the net present value (NPV)? Calculate the NPVs of projects A and
B.

OR
Q.5
Questions:
a) What is discounted payback period? Find the discounted payback periods of
project A and B.
b) Calculate the Profitability Index (PI) of Project A and B and state your
conclusion.

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