BBA/B.Com Corporate Finance Dec 2024

Description

Corporate Finance

December 2024 Examination

 

 

Q1. The Ambani has two alternative proposals under consideration. Project Ghee requires a capital outlay of Rs. 25,00,000 and Project Oil requires Rs.50,00,000. Both are estimated to provide a cash flow for five years:

Project Ghee Rs. 9,00,000 per year and Project Oil Rs. 17,50,000 per year. The cost of capital is 14%. Show which of the two projects is preferable from the view point of

(i) Net present value method    (5 Marks)

(ii) Profitability Index     (5 Marks)

Ans 1.

Introduction

In corporate finance, decision-making about capital investments involves evaluating various project proposals to determine which one maximizes shareholder value. Two key methods to assess investment opportunities are the Net Present Value (NPV) and the Profitability Index (PI). These methods help evaluate the expected return from projects relative to their costs, considering the time value of money. NPV provides the value added by the project to the company, while PI measures the per-unit return on investment. Both methods are essential for financial managers to make informed decisions, especially when faced with multiple projects that require significant capital outlay but offer different cash flow patterns.

In this case, we will assess

 

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Q2. Determine the FCFE and PV of FCFE using the values given below.          (10 Marks)

Year	2023	2024	2025	2026	2027
Net Profit	11377	12204	14126	15638	17449
Add: Depreciation	2824	3031	3221	3414	3618
Less: Changes in Working Capital	-129	380	1130	883	1253
Less: Capital Expenditure	-5000	-5000	-5000	-5000	-5000
Add: Net Changes to Debt	0	0	0	0	0
n (years)	1	2	3	4	5

 

Risk free rate  7%

Equity risk premium  8%

Ans 2.

Introduction

In corporate finance, Free Cash Flow to Equity (FCFE) represents the amount of cash available to equity shareholders after accounting for all expenses, taxes, working capital needs, and capital expenditures. It is a key metric in valuation models, particularly in determining the intrinsic value of a company using discounted cash flow (DCF) methods. FCFE provides insight into the actual cash flow available to investors, making it crucial for investment decisions and assessing the financial health of a business.

To further refine the evaluation, the

 

 

Q3a. From the following data of Asian Industries, Find out the Operating cycle of the company. (5 Marks)

	INR in Crores
Total Revenue (we assume all are Credit Sales)	2100
Cost of Raw materials (Total Purchase)	800
Opening Inventory	350
Closing Inventory	320
Opening Accounts Receivables	124
Closing Accounts Receivables	180

 

Ans 3a.

Introduction

The operating cycle is a vital metric in financial analysis, particularly in determining a company’s efficiency in managing its working capital. It represents the time taken by a company to convert its inventory and other resources into cash flow from sales. By analyzing the operating cycle, businesses can evaluate their liquidity and the efficiency of their operations. For Asian Industries, we will calculate the operating cycle based on the inventory and accounts receivables

 

Q3b. Arts Pvt. Ltd has taken a loan from a bank of $10 million for business expansion at a rate of interest of 8%, and tax rate is 20%. Calculate the cost of debt.       (5 Marks)

Ans 3b.

Introduction

The cost of debt represents the effective rate that a company pays on its borrowed funds. It is a critical component in determining a firm’s weighted average cost of capital (WACC), which helps in evaluating the overall cost of financing. For Arts Pvt. Ltd., calculating the cost of debt is essential to understand the financial burden of borrowing $10 million for business expansion. Since interest payments on debt are tax-deductible, the tax shield reduces the actual cost incurred by the