OBE: OPEN BOOK EXAMINATION_A

[This question paper contains XX printed pages.]

Your Roll No: …………………..
Sr. No. of Question paper : XXXX
Unique Paper Code : 12481303

Name of the Paper : Corporate Finance

Name of the Course : B.A (Hons.) Business Economics
Semester : III
Duration : 3 Hours

Maximum Marks : 75

Instructions for candidates:

1. This paper contains 6 questions. Attempt ANY FOUR questions.

2. All questions carry equal marks.

Q1. (a) ‘The profit maximization is not an operationally feasible criterion’. Do you agree with
the above statement? Illustrate.

(b) Ten years from now, Mr Ahuja will start receiving a pension of ₹25,000 a year. The
payment will continue for 15 years. How much is the pension worth now if his interest rate
is 12% per annum.
(8.75, 10)
Q2. (a) There are different capital budgeting techniques available for evaluation and selection
of a proposal. Critically evaluate the traditional techniques which can be used by a firm.

(b) Zydus Ltd purchased a machine ten years back for ₹1,90,000 which has been depreciated
to a book value of ₹90,000. It originally had a projected life of 19 years with no salvage
value. There is a proposal to replace this machine. A new machine will cost ₹2,80,000 and
result in reduction of operating cost by ₹42,000 per annum for next 9 years. The existing
machine can now be scrapped away for ₹60,000. The new machine will also be depreciated
over 9 years period as per straight line method with the salvage value of ₹55,000. Find out
whether the existing machine be replaced given that the tax rate applicable is 30% and cost
of capital is 10%. (Profit or loss on sale of asset is to be considered for tax purposes)

(8.75, 10)

Q3. (a) XYZ limited is considering the purchase of new machine. Two alternative machines A&B
1
 have been suggested, each having initial cost of ₹10,00,000 and requiring ₹50,000 as
additional working capital at the end of 1st year. Net cash Flows are expected to be as
follows:

Year Machine A Machine B

1 ₹1,00,000 ₹3,00,000

2 ₹3,00,000 ₹4,00,000

3 ₹4,00,000 ₹5,00,000

4 ₹6,00,000 ₹3,00,000

5 ₹4,00,000 ₹2,00,000

The required rate of return on capital is 10%. You are required to compare using
Profitability Index of the machines and state which alternative you should consider to be
financially preferable.

(b) The Capital Structure of Transnational Limited as on 31/3/2021 is as follows:

Equity Capital: 100,00,000 Equity Shares of ₹10 Crores

₹10 each
Reserves ₹2 Crores
14% Debentures of ₹100 Each ₹3 Crores

TOTAL ₹15 Crores

For the year ended 31/3/2021, the company paid equity dividend at 20%. As the company is
a market leader with good future, dividend is likely to grow by 5% every year. The equity
shares are at ₹80 per share in the stock exchange. Income tax rate applicable to the company
is 50%.
Solve the following parts:
a) The current weighted cost of capital.
b) The company has plans to raise a further ₹ 15 crores by way of long term loan at 16%
interest. When this takes place the market value of Equity shares is expected to fall to
₹50 per share. What will be the new weighted average cost of the company?
(8.75, 10)

Q4 .(a) The Balance sheet of Luck Ltd. as on 31/3/2021 is as follows:

Liabilities Rs Assets Rs
Equity Capital 60,000 Fixed Assets 1,50,000
Retained Earnings 20,000 Current Assets 50,000
10% Long term 80,000
Debt
Current Liabilities 40,000
2,00,000 2,00,000

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 Total Asset Turnover ratio of the company is 3, its fixed operating costs are ₹1,00,000 and
its variable operating cost ratio is 40%. Calculate the different types of leverages for the
company given that the face value of shares is ₹10.

(b) Changi Ltd. requires ₹ 6,00,000 for financing its new project. The EBIT of the company is
likely to be ₹2,00,000 and the applicable tax rate is 50%. Currently the company has
₹1,00,000 equity capital with face value of ₹10 each share. The cost of borrowing is given as
under:
Amount (₹) Cost
Up to 2,00,000 12%
2,00,000 to 4,00,000 14%
Above 4,00,000 15%

The company has following plans for raising ₹6,00,000:

Debt Equity Total Capital
PLAN I ₹1,00,000 ₹5,00,000 ₹6,00,000
PLAN II ₹3,00,000 ₹3,00,000 ₹6,00,000
PLAN III ₹5,00,000 ₹1,00,000 ₹6,00,000
Advise which financing plan is best for the company under given circumstances.
(8.75, 10)

Q5. (a) Two companies are identical in all respects except that X Ltd. Has debt of ₹5,00,000
borrowed at the rate of 12% whereas Y Ltd. Has no debt in its capital structure. The total
assets of both the companies amount to ₹15,00,000 on which the companies have earnings
of 20%. You are required to do the following:
a. Calculate value of companies and cost of capital using NI approach taking cost of
equity as 18%.
b. Calculate value of companies and cost of equity using NOI approach taking cost of
capital as 18%.
c. Compare the results and comment on the difference of the two approaches.
(b) Using the data given below:
i. EPS ₹7
ii. P/E 10
iii. Ke 12%
iv. No of outstanding shares 75,000
v. Expected dividend ₹5
vi. Expected net income ₹ 5,00,000
vii. New investment ₹ 8,00,000
Show using MM hypothesis, the payment of dividend does not affect the values of the firm.
(8.75, 10)

Q6. (a) “In a period of rising capital costs and scarce funds, the working capital is one of the most
important areas requiring management review and a large number of factors influence the
working capital needs of the firm.” Explain.
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(b) Prepare an estimate of working capital requirement from the following information of a
trading concern:
a. Annual sales ₹1,00,000
b. Selling price (per unit) ₹8
c. Percentage of net profit on sales 25%
d. Average credit period allowed to customers 8 weeks
e. Average credit period allowed by suppliers 4 weeks
f. Average stock holding in terms of sales requirement 12 weeks
g. Allow 10% for contingencies
(8.75, 10)