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Group Assignment 1

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30 views3 pages

Group Assignment 1

Assignment Type

Uploaded by

ssushmarao11
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Strategic financial management

Assignment 1

(Group Submission)

1. Delta Corp has an existing capital structure that comprises 2 million equity shares of $20
each. The tax rate is 40%. Delta Corp plans to raise an additional capital of $20 million
for financing a new project. It is evaluating two alternative financing plans:
1. Issue of equity shares (1 million equity shares at $20 each)
2. Issue debentures carrying 10 percent interest

Calculate the EPS under the two alternative financing plans for two levels of PBIT, say
$8 million and $4 million.

2. Omega Industries has an existing capital structure that comprises 500,000 equity shares
of $20 each. The tax rate is 30%. Omega Industries plans to raise an additional capital of
$5 million for financing a new project. It is evaluating two alternative financing plans:

1. Issue of equity shares (250,000 equity shares at $20 each)


2. Issue debentures carrying 12 percent interest

Calculate the EPS under the two alternative financing plans for two levels of PBIT, say
$3 million and $1.5 million.

3. Gamma Corporation has no debt outstanding and a total market value of $500,000.
Earnings before interest and taxes, EBIT, are projected to be $50,000 if economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be 25
percent higher. If there is a recession, then EBIT will be 40 percent lower. Gamma
Corporation is considering a $150,000 debt issue with a 6 percent interest rate. The
proceeds will be used to repurchase shares of stock. There are currently 10,000 shares
outstanding. Ignore taxes for this problem.

a. Calculate earnings per share (EPS) under each of the three economic scenarios before
any debt is issued. Also calculate the percentage changes in EPS when the economy
expands or enters a recession.
b. Repeat part (a) if the company goes through with recapitalization. What do you observe?

c. Draw a graph to show Break-even PBIT Level. Hint: Draw a graph for different PBIT
versus EPS without debt; PBIT versus EPS with debt.

4. Gamma Corporation has no debt outstanding and a total market value of $500,000.
Earnings before interest and taxes (EBIT) are projected to be $50,000 if economic
conditions are normal. If there is strong expansion in the economy, then EBIT will be 25
percent higher. If there is a recession, then EBIT will be 40 percent lower. Gamma
Corporation is considering a $150,000 debt issue with a 6 percent interest rate. The
proceeds will be used to refinance operations, which will increase the PBIT by $20,000.
There are currently 10,000 shares outstanding. Ignore taxes for this problem.

a. Calculate earnings per share (EPS) under each of the three economic scenarios before
any debt is issued. Also calculate the percentage changes in EPS when the economy
expands or enters a recession.

b. Repeat part (a) if the company goes through with the debt issue and the resulting PBIT
increase. What do you observe?

5. Select a Company: Choose a publicly traded company in India that interests you. Ensure
that the company has sufficient publicly available information on its corporate governance
and financial history. Conduct the following corporate governance analysis:

Board Composition:

• List the current members of the board of directors.


• Identify the composition ofs board member (e.g., CEO, Independent Director, etc.).
• Analyze the diversity of the board in terms of gender, ethnicity, and expertise.
• Describe the company's governance policies and practices.
• Explain the structure of key committees (e.g., Audit Committee, Compensation
Committee).

Financing Mix Analysis:

• Analyze the company's capital structure over the past 5 years.


• Identify the proportions of debt and equity financing used by the company.
• Discuss if any significant changes in the financing mix and the possible reasons
behind them.
• Discuss the types of financing instruments the company has issued (e.g., bonds,
preferred stock, common stock).

Compile your findings into a comprehensive report. The report should be structured as
follows:

Introduction: Briefly introduce the company and the purpose of the assignment.

Corporate Governance Structure: Detailed analysis of the board composition and


governance mechanisms.

Financing Mix Analysis: Historical analysis of the financing mix and current financing
strategy.

Conclusion: Summarize your findings and provide any insights or recommendations based
on your analysis.

References: Cite all sources of information used in your analysis

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