Chapter 1:
a. Introduction to Financial Management
b. Major financial decisions
c. Profit maximization vs wealth maximization
Chapter 2: Time value of Money
a. Future Value/ Compounding (Lump sum and annuity)
b. Present Value/ Discounting (Lump sum and annuity)
c. Perpetuity
d. Loan Amortization
Chapter 3: Capital Budgeting Decisions
a. Net Present Value
b. Internal Rate of Return
c. Payback period
d. Profitability Index
Chapter 4: Financing Decision
a. EBIT-EPS Analysis
b. Comparative Analysis of funding decision based on EBIT-EPS Analysis
c. Indifference Level of EBIT
Chapter 11
TECHNIQUES OF CAPITAL BUDGETING
1. Modern Pharmaceuticals is evaluating a project whose expected cash flows are
as follows:
Year Cash flow
0 -530,000
1 150,000
2 180,000
3 240,000
4 250,000
The cost of capital for Modern Pharmaceuticals is 15 percent.
(i) What is the NPV of the project?
(ii) What is the IRR of the project?
(iii) What is the BCR of the project?
2. Megatronics Limited is evaluating a project whose expected cash flows are as
follows:
Year Cash flow
0 -500,000
1 100,000
2 200,000
3 300,000
4 100,000
(i) What is the NPV of the project if the cost of capital is 10 percent?
(ii) What is the IRR of the project?
(iii) What is the BCR?
3. You are evaluating a project whose expected cash flows are as follows :
Year Cash flow
0 -1,000,000
1 200,000
2 300,000
3 400,000
4 500,000
What is the NPV of the project (in '000s) if the discount rate is 10 percent
for year 1 and rises thereafter by 2 percent every year?
4. Your company is considering two projects, M and N. Each of which requires an initial
outlay of Rs.240 million. The expected cash inflows from these projects are:
Year Project M Project N
1 85 100
2 120 110
3 180 120
4 100 90
What is the discounted payback period for each of the projects if the cost of
capital is 15 percent?
5. Sulabh International is evaluating a project whose expected cash flows are as
follows:
Year Cash flow
0 (1,000,000)
1 100,000
2 200,000
3 300,000
4 600,000
5 300,000
(i) What is the NPV of the project, if the discount rate is 14 percent for the
entire period?
(ii) What is the NPV of the project if the discount rate is 12 percent for year 1
and rises every year by 1 percent?
6. The cash flow streams for four alternative investments, A, B, C and D, are :
Year A B C D
0 (2,00,000) (3,00,000) (2,10,000) (3,20,000)
1 40,000 40,000 80,000 2,00,000
2 40,000 40,000 60,000 20,000
3 40,000 40,000 80,000 -
4 40,000 40,000 60,000 -
5 40,000 40,000 80,000 -
6 40,000 30,000 60,000 -
7 40,000 30,000 40,000 -
8 40,000 20,000 40,000 -
9 40,000 20,000 40,000 200,000
10 40,000 20,000 40,000 50,000
Calculate the payback period, net present value, internal rate of return, and
benefit cost ratio for the four alternatives and choose the best among them.
7. What is the internal rate of return of an investment which involves a current
outlay of Rs.300,000 and results in an annual cash inflow of Rs.60,000 for 7
years ?
9. If an equipment costs Rs.500,000 and lasts 8 years, what should be the
minimum annual cash inflow before it is worthwhile to purchase the equipment
? Assume that the cost of capital is 10 percent.
10.Phoenix Company is considering two mutually exclusive investments, Project P
and Project Q. The expected cash flows of these projects are as follows :
Year Project P Project Q
0 (1,000) (1,600)
1 (1,200) 200
2 (600) 400
3 (250) 600
4 2,000 800
5 4,000 100
(i) What is the IRR of each project?
(ii) Which project would you choose if the cost of capital is 10 percent? 20
percent?
11.Your company is considering two mutually exclusive projects, A and B. Project
A involves an outlay of Rs.100 million which will generate an expected cash
inflow of Rs.25 million per year for 6 years. Project B calls for an outlay of
Rs.50 million which will produce an expected cash inflow of Rs.13 million per
year for 6 years. The company's cost of capital is 12 percent.
a. Calculate the NPV and IRR of each project
b. What is the NPV and IRR of the differential project (the project that
reflects the difference between Project B and Project A)
12.Your company is considering two projects, Project M and Project N, each of
which requires an initial outlay of Rs.50 million. The expected cash inflows from
these projects are :
Year Project M Project N
1 11 38
2 19 22
3 32 18
4 37 10
(i) What is the payback period for each of the projects?
(ii) What is the discounted payback period for each of the projects if the cost
of capital is 12 percent?
(iii) If the two projects are independent and the cost of capital is 12
percent, which project(s) should the firm invest in?
(iv) If the two projects are mutually exclusive and the cost of capital is
10 percent, which project should the firm invest in?
(v) If the two projects are mutually exclusive and the cost of capital is 15
percent, which project should the firm invest in?
EBIT-EPS Analysis
PLANNING THE CAPITAL STRUCTURE
1. Omax Limited’s present capital structure consists of 20 million equity shares of
Rs. 10 each. It requires Rs. 100 million of additional financing. It is considering
two alternatives:
Alternative 1: Issue of 3 million equity shares of Rs. 10 par at Rs. 20 each
and 4 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.
Alternative 2: Issue of 4 million equity shares of Rs. 10 par at Rs. 20 each
and debentures for Rs. 20 million carrying an interest rate of
11 percent.
The company’s tax rate is 33 percent? What is the EPS-EBIT indifference point?
2. Sun Limited’s present capital structure consists of 60 million equity shares of
Rs.10 each. It requires Rs.80 million of additional financing. It is considering
two alternatives:
Alternative 1: Issue of 5 million equity shares of Rs.10 par at Rs.12 each
and 2 million preference shares of Rs.10 par, carrying a
dividend rate of 10 percent.
Alternative 2:Issue of 4 million equity shares of Rs.10 par at Rs.15 each
and debentures for Rs.20 million carrying an interest rate of
17 percent
The company’s tax rate is 35 percent? What is the EPS-EBIT indifference
point?
3. A company’s present capital structure consists of 20,000,000 shares of equity stock.
It requires Rs.100,000,000 of external financing for which it is considering three
alternatives.
Alternative A Issue 5,000,000 equity shares of Rs.10 par at Rs.20 each
Alternative B Issue 3,000,000 equity shares of Rs.10 par at Rs.20 each and
4,000,000 preference shares of Rs.10 par carrying 11 per cent
dividend.
Alternative C Issue 1,000,000 equity shares of Rs.10 par at Rs.20 each and
Rs.80 million of debentures carrying 14 per cent interest rate.
The company’s tax rate is 40 per cent.
(a) What is the EPS – PBIT equation for the three alternatives?
(b) What is the EPS – PBIT in difference point for alternatives A & B?
4. CS 1996 Dec. The ZBB Ltd. needs Rs.500,000 for construction of a new plant. The
following three financial plans are feasible:
(i) The company may issue 50,000 equity shares at Rs.10 per share.
(ii) The company may issue 25,000 equity shares at Rs.10 per share and 2,500
debentures of Rs.100 denomination bearing an 8% rate of interest.
(iii) The company may issue 25,000 equity shares at Rs.10 per share and 2,500
preference shares at Rs.100 per share bearing 8% rate of interest
If the company’s profit before interest and taxes are Rs.10,000, Rs.20,000, Rs.40,000,
Rs.60,000 and Rs.1,00,000, what are the earnings per share under each of the three
financial plans? Assume corporate tax rate to be 50%.
