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    NOC24-MG39-Rerun-Assignment-3

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    NOC24-MG39-Rerun-Assignment-3

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    6 views4 pages

    NOC24-MG39-Rerun-Assignment-3

    Uploaded by

    bhangedarshana127

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    © All Rights Reserved
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    of 4

    Mergers, Acquisitions and Corporate Restructuring

    Assignment – Week 3

    1. Weighted average cost of capital (WACC) does not include:


    a. Cost of debt
    b. Cost of equity
    c. Standard cost
    d. Cost of preference share
    Explanation: We need the cost of debt, cost of preference share, and cost of equity to
    calculate the Weighted average cost of capital (WACC).
    2. Which among these is an overvalued firm?
    a. Market price > Intrinsic value
    b. Market price < Intrinsic value
    c. Market price = Intrinsic value
    d. No intrinsic value

    L
    Explanation: When the market price of a share is more than its intrinsic value, it is called an

    E
    overvalued share.

    T
    3. As per the capital asset pricing model:
    a. Ke = Rf + βe * Rm

    P
    b. Ke = Rf – βe * (Rm – Rf)

    N
    c. Ke = Rf + βe * (Rm – Rf)
    d. Ke = Rf + βe * (Rm+ Rf)
    Explanation: Refer to the section “Cost of Equity (Ke) – CAPM” of session 13
    4. Discounted Cash flow-based valuation includes all except:
    a. Dividend discount model
    b. Free cash flow to the firm
    c. Free cash flow to equity
    d. Price-Earnings Multiple

    Explanation: Price earning multiple is a relative valuation technique.


    5. One of the disadvantages of Discounted Cash flow (DCF) based valuation:
    a. Reflects time value of money
    b. Multi-period
    c. Very much time consuming
    d. Rigorous
    Explanation: DCF valuation technique is more time consuming than relative valuation
    techniques.
    6. As per CAPM (capital asset price model), find the cost of equity (Ke) from the given
    inputs: Rf (risk-free rate of return) =5%, Rm (market rate of return) = 12%, βe (beta of
    the stock) = 2
    a. 14%
    b. 15%
    c. 19%
    d. 21%

    Explanation: 5%+2*(12%-5%) = 19%

    7. Net operating profit after tax (NOPAT) can be calculated as:


    a. NOPAT = Earnings before interest and tax (EBIT) x (1 + Tax rate)
    b. NOPAT = Earnings before interest and tax (EBIT) x (Tax rate)
    c. NOPAT = Earnings before interest and tax (EBIT) x interest rate
    d. NOPAT = Earnings before interest and tax (EBIT) x (1 – Tax rate)

    L
    Explanation: Refer to the section “Concept of free cash flow” of session 14.

    E
    8. The capital structure of SBS ltd. includes equity of 8,000 shares @ Rs 10 and long-
    term debt of Rs.1,20,000. If the cost of equity is 20%, and the cost of long-term debt

    T
    10%, calculate the WACC of the company:

    P
    a. 13%
    b. 14%

    N
    c. 15%
    d. 16%
    Explanation: WACC = Kd*Wd + Ke*We = 10%*(Rs.1,20,000/ (Rs.1,20,000+8,000*Rs.10))
    + 20%*(Rs.80,000/ (Rs.80,000+Rs.1,20,000)) = 6%+ 8%= 14%

    9. The capital structure of SKS ltd. includes equity of 8000 shares @ Rs 10 and long-
    term debt of Rs. 1,20,000 and preference capital of 100,000. If the cost of equity is
    20%, and the cost of long-term debt 10%, cost of preference share is 15%. calculate
    the WACC of the company:
    a. 15.33%
    b. 16.33%
    c. 14.33%
    d. 18.33%

    Explanation: WACC = Kd*Wd + Ke*We + Kp*Wp = 10%*(120,000/


    (120,000+8,000*10+100000)) + 20%*(80,000/ (8,000*10 +120,000+100000)) +
    15%*(100,000/ (8,000*10 +120,000+100000)) = 4%+5.33%+5%= 14.33%
    10. Unlevered beta of the share, Debt-equity ratio and tax rate for a company are 1.2, 0.5
    and 30% respectively. Find the levered beta.0.999

    a. 0.888
    b. 1.62
    c. 0.777
    d. 0.42
    Explanation: Explanation: Levered Beta = 1.2* [1+(1-.30) *0.5] = 1.62
    Levered beta of the share, Debt-equity ratio and tax rate for a company are 1.5, 0.7 and 30%
    respectively. Find the unlevered beta.
    a. 0.999
    b. 2.777
    c. 3.067
    d. 1.006
    Explanation: Unlevered Beta = 1.5/ [1+(1-.30) *0.7] = 1.006

    L
    11. The retention ratio can be calculated by:

    E
    a. Dividend payout ratio minus 1
    b. 1 minus return on equity

    T
    c. 1 minus Dividend pay-out ratio

    P
    d. 1 minus retained earnings

    N
    Explanation: The retention ratio is the percentage of net income kept by the company as
    retained earnings whereas the Dividend payout ratio is the remaining portion of net income
    paid to shareholders as dividends.
    12. Calculate present market price of equity share using Zero-Growth model. Given,
    expected dividend per share Rs 20, Cost of equity is 10%.
    a. Rs.200
    b. Rs.2
    c. Rs.20
    d. Rs.2,000

    Explanation: P0= D/Ke = Rs.20/10%= Rs.200

    13. Price-earnings multiple is a method of relative valuation. State whether the statement
    is true or false:
    a. True
    b. False

    Explanation: Refer to slide # 9 of session # 11.


    14. which one of the following is not a relative valuation method based on non-financial
    measures?
    a. Enterprise value to installed capacity (select manufacturing sectors)
    b. Enterprise value to Gross Merchandise Value (E-commerce)
    c. Enterprise value to Square Feet Area (Retail Business)
    d. Enterprise value to EBITDA
    Explanation: Enterprise value to EBITDA is a relative valuation method.

    Relative Valuation*# Based on non-financial measures

    E L
    P T
    N

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