126355

1. Q1. A company is considering a project with an initial outlay of Rs.2,00,000 comprising of machinery worth Rs.1,80,000 and
balance towards working capital exclusively for this project Rs.20,000. The opportunity cost of funding is 13% p.a. The machi nery
can be used for 5 years at the end of which there is no salvage value. The machinery is to be depreciated as per Straight Line
Method. Tax rate applicable is 40%.
Estimated Annual sales and expenses are given below:
Year
Sales
Rs.
Expenses excluding depreciation
Rs.
1 1,20,000 35,000
2 1,30,000 40,000
3 1,40,000 40,000
4 1,40,000 25,000
5 1,30,000 30,000
Calculate:
1) Payback period
2) Net Present Value
3) Profitability Index
4) Accounting Rate of Return
Q2. The details of Capital Investment project are given below:

2. Initial Investment for Plant and Machinery
Rs. 120
Lakhs
Additional Investment in Working Capital
Rs. 20
Lakhs
Sales (units) per year for years 1 to 5 1 Lakh
Sellling price per unit Rs.100
Variable cost per unit Rs.40
Fixed Overheads (Excluding Depreciation) per year from year 1
to 5
Rs. 20
Lakhs
Rate of Depreciation on Plant and Machinery 25% on W.D.V.
Method
Salvage value of Plant and Machinery = W.D.V. at the end of
year 5
Applicable Tax Rate 30%
Time Horizon 5 Years
Cost of Capital 14%
Calculate the Net Present Value, Profitability Index and Pay back period.
Q3 A company can make either of two investments. Assuming Straight Line Method of Depreciation, calculate:

3. 1) Accounting Rate of Return
2) Internal Rate of Return
X Y
Cost of Investment Rs. 1,80,000 2,60,000
Expected Life (No Salvage Value) 5 Years 5 Years
Expected Net Income after Tax Rs.
Year
1 15,000 22,000
2 12,000 26,000
3 18,000 28,000
4 25,000 20,000
5 24,000 26,000
Q4. After conducting a survey that costs Rs.1,00,000, AT Ltd. decided to undertake a project for introducing a new product. The
company’s cut off rate is 14%. It was estimated that project will cost Rs.34,00,000 in plant and machinery in addition to working
capital of Rs.5,00,000. The scrap value of plant and machinery at the end of 6 years was estimated at Rs.4,00,000 After providing

4. for depreciation on straight line basis, profit before tax were estimated as follows:
Year Rs.
1 4,00,000
2 7,00,000
3 11,00,000
4 7,00,000
5 6,00,000
6 2,00,000
Tax rate applicable is 30%. Tax on Capital Gains to be ignored. Calculate Net Present Value, Profitability Index and Payback
Period. Should the project be accepted?
Q5. The Company has the following capital structure:
Equity Shares (4,00,000 shares) Rs.1,10,00,000
6% Preference Shares Rs.60,00,000

5. 8% Debentures Rs.1,30,00,000
The share of a company sells for Rs.18. It is expected that company will pay next year a dividend of Rs.3 per share which will grow
at 7% forever. Assume a 40% tax rate.
1. Compute the weighted average cost of capital based on existing capital structure.
2. Compute the new weighted average cost of capital if the company raises an additional Rs.1,00,00,000 debt by issuing 10%
debentures. This would result in increasing the expected dividend to Rs.4 and leave growth rate unchanged, but the price of share
will fall to Rs.13 per share.
3. Compute the cost of capital if in (2) above growth rate increases to 11%.
Q6. You are required to determine the optimum debt equity mix for the company by calculating composite cost of capital.
Debt as Percentage of
Total Capital
Employed
Cost of Debt (After Tax)
%
Cost of
Equity %
0 7 13
10 7 13.5
20 8 14
30 8.75 14.75
40 9 15.50
50 9.5 17
60 9.75 21

6. Q7. A company issued 10% debentures of the face value Rs.1000 redeemable at par after 15 years. Assuming 35% tax rate and
8% floatation cost, determine the before-tax and after-tax cost of debt, if the debentures are issued at (i) Par (ii) 10% Discount (iii)
5% Premium
Q8. The existing Capital Structure is as follows:
Equity Shares of Rs.100 each Rs.8,00,000
Retained Earnings Rs.2,00,000
9% Preference Shares Rs.5,00,000
7% Debentures Rs.5,00,000
Company earns a return on Capital Employed of 30% and tax on income is 40%. Company wants to raise Rs.10,00,000 for its
expansion project for which it is considering the following options:
a. issue of 8,000 equity shares at a premium of Rs.25 per share.
b. Issue of 12% preference shares
c. Issue of 11% debentures.
It is expected that the return on capital employed would remain the same after expansion.
(i) Suggest which capital structure alternative the company should select on the basis of EPS.
(ii) Calculate the financial break even point for the three plans
(iii) Calculate the indifference level of EBIT for different plans.
Q9. A company issued 5,000; 12% Preference shares of the face value Rs.100 redeemable at par after 5 years. Assuming 35%
tax rate and 10% floatation cost, determine the cost of preference shares, if the preference shares are issued at (i) Par (i i) 10%
Discount (iii) 5% Premium

7. Q10. From the following capital structure, calculate the overall cost of capital using (a) Book Value weights (b) Market value weights
Source Book Value Rs.
Market Value
Rs.
Equity shares of
Rs.10 each 10,50,000 25,00,000
Retained Earnings 3,50,000 -
Preference share
Capital 2,00,000 2,00,000
Debentures 4,00,000 3,00,000
The after tax cost of different sources of finance are Equity share capital 16%, Retained Earnings 14%, Preference Shares 12%
and Debentures 10%.

8. Q11. A company needs Rs.15 Lakhs for the installation of new factory which would yield an annual EBIT of Rs.4,00,000. The
company has the objective of maximising the earnings per share. It is considering the possibility of issuing equity shares plus
raising a debt of Rs.3,00,000, Rs.6,00,000 or Rs.10,00,000. The current market price per share is Rs.60 which is expected to drop
to Rs.45 per share if the market borrowings were to exceed Rs.7,50,000.
Cost of borrowings are indicated as under:
Upto Rs.2,50,000 - 12% p.a.
Between Rs. 2,50,001 and Rs.6,25,000 - 14% p.a.
Between Rs. 6,25,001 and Rs. 10,00,000 - 16% p.a.
Assume tax rate as 35%, and calculate:
(i) Suggest which capital structure alternative the company should select on the basis of EPS.
(ii) Calculate the financial break even point for the three plans
(iii) Calculate the indifference level of EBIT for three plans.