Download GTU (Gujarat Technological University) MBA (Master of Business Administration) 2018 Winter 2nd Sem 2820003 Financial Management Previous Question Paper

Seat No.: ________ Enrolment No.___________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA ? SEMESTER 2 ? EXAMINATION ? WINTER 2018

Subject Code: 2820003 Date: 26/12/2018

Subject Name: Financial Management

Time: 02:30 PM TO 05:30 PM Total Marks: 70

Instructions:

1. Attempt all questions.

2. Make suitable assumptions wherever necessary.

3. Figures to the right indicate full marks.

Q.1 (a) Answer the following MCQs 06

1

In finance, "working capital" means the same thing as

A. Total Assets. B. Fixed Assets.

C. Current Assets. D. Current Assets Minus Current

Liabilities.

2 Interest rates and bond prices

A. Move in the same direction. B. Move in opposite directions

C. Sometimes move in the same direction,

sometimes in opposite directions.

D Have no relationship with

each other (i.e., they are

independent).

3 You can use______ to roughly estimate how many years a given sum of money

must earn at a given compound annual interest rate in order to double that

initial amount .

A. Rule 415 B. The Rule of 72

C. The Rule of 78 D. Rule 144

4 All of the following influence capital budgeting cash flows EXCEPT:

A. Accelerated depreciation. B. Tax rate changes.

C. Salvage value. D. Method of project financing

used.

5 The term "capital structure" refers to:

A. Long-term debt, preferred stock, and

common stock equity.

B. Current assets and current

liabilities.

C. Total assets minus liabilities.

D. Shareholders' equity.

6 Walter model assumes that for future financing, a firm will rely only on

A. Debentures B. Term loans

C. Retained earnings D. External equity

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Page 1 of 5

Seat No.: ________ Enrolment No.___________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA ? SEMESTER 2 ? EXAMINATION ? WINTER 2018

Subject Code: 2820003 Date: 26/12/2018

Subject Name: Financial Management

Time: 02:30 PM TO 05:30 PM Total Marks: 70

Instructions:

1. Attempt all questions.

2. Make suitable assumptions wherever necessary.

3. Figures to the right indicate full marks.

Q.1 (a) Answer the following MCQs 06

1

In finance, "working capital" means the same thing as

A. Total Assets. B. Fixed Assets.

C. Current Assets. D. Current Assets Minus Current

Liabilities.

2 Interest rates and bond prices

A. Move in the same direction. B. Move in opposite directions

C. Sometimes move in the same direction,

sometimes in opposite directions.

D Have no relationship with

each other (i.e., they are

independent).

3 You can use______ to roughly estimate how many years a given sum of money

must earn at a given compound annual interest rate in order to double that

initial amount .

A. Rule 415 B. The Rule of 72

C. The Rule of 78 D. Rule 144

4 All of the following influence capital budgeting cash flows EXCEPT:

A. Accelerated depreciation. B. Tax rate changes.

C. Salvage value. D. Method of project financing

used.

5 The term "capital structure" refers to:

A. Long-term debt, preferred stock, and

common stock equity.

B. Current assets and current

liabilities.

C. Total assets minus liabilities.

D. Shareholders' equity.

6 Walter model assumes that for future financing, a firm will rely only on

A. Debentures B. Term loans

C. Retained earnings D. External equity

Page 2 of 5

Q.1 (b) Explain the following terms

1. Annuity Due

2. Share/stock split

3. Current yield

4. Systematic Risk

04

Q.1 (c) If you deposit Rs.3,000 today at 8 percent rate of interest in how many years

(roughly) will this amount grow to Rs.1,92,000 ? Work this problem using

the rule of 72?do not use tables

04

Q.2 (a) A Pro-forma cost sheet of a company provides the following particulars:

Particulars Amount per unit

Elements of cost:

Raw materials 80

Direct labour 30

Overhead 60

Total cost 170

30

Selling price 200

The following further particulars are available:

Raw materials in stock, on average, one month; Materials in process

(completion stage, 50 per cent), on average, half a month; Finished goods in

stock, on average, one month. Credit allowed by suppliers is one month;

Credit allowed to debtors is two months; Average time-lag in payment of

wages is 1.5 weeks and one month in overhead expenses; one-fourth of the

output is sold against cash; cash in hand and at bank is desired to be

maintained at Rs 3,65,000.

You are required to prepare a statement showing the working capital needed

to finance a level of activity of 1,04,000 units of production. You may

assume that production is carried on evenly throughout the year, and wages

and overheads accrue similarly. For calculation purposes, 4 weeks may be

taken as equivalent to a month.

07

Q.2 (b) The present credit terms of Globus Corporation are 2/10, net 40. It sales are

Rs.650 million, its average collection period is 30 days, its variable costs to

sales ratio, V, is 0.75, and its cost of capital is 10 percent. The proportion of

sales on which customers currently take discount, is 0.3. Globus is

considering relaxing its credit terms to 3/10, net 40. Such a relaxation is

expected to increase sales by Rs.30 million, increase the proportion of

discount sales to 0.5, and reduce the ACP to 20 days. Globus?s tax rate is 35

percent.

What will be the effect of liberalizing the cash discount on residual income?

FirstRanker.com - FirstRanker's Choice

Page 1 of 5

Seat No.: ________ Enrolment No.___________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA ? SEMESTER 2 ? EXAMINATION ? WINTER 2018

Subject Code: 2820003 Date: 26/12/2018

Subject Name: Financial Management

Time: 02:30 PM TO 05:30 PM Total Marks: 70

Instructions:

1. Attempt all questions.

2. Make suitable assumptions wherever necessary.

3. Figures to the right indicate full marks.

Q.1 (a) Answer the following MCQs 06

1

In finance, "working capital" means the same thing as

A. Total Assets. B. Fixed Assets.

C. Current Assets. D. Current Assets Minus Current

Liabilities.

2 Interest rates and bond prices

A. Move in the same direction. B. Move in opposite directions

C. Sometimes move in the same direction,

sometimes in opposite directions.

D Have no relationship with

each other (i.e., they are

independent).

3 You can use______ to roughly estimate how many years a given sum of money

must earn at a given compound annual interest rate in order to double that

initial amount .

A. Rule 415 B. The Rule of 72

C. The Rule of 78 D. Rule 144

4 All of the following influence capital budgeting cash flows EXCEPT:

A. Accelerated depreciation. B. Tax rate changes.

C. Salvage value. D. Method of project financing

used.

5 The term "capital structure" refers to:

A. Long-term debt, preferred stock, and

common stock equity.

B. Current assets and current

liabilities.

C. Total assets minus liabilities.

D. Shareholders' equity.

6 Walter model assumes that for future financing, a firm will rely only on

A. Debentures B. Term loans

C. Retained earnings D. External equity

Page 2 of 5

Q.1 (b) Explain the following terms

1. Annuity Due

2. Share/stock split

3. Current yield

4. Systematic Risk

04

Q.1 (c) If you deposit Rs.3,000 today at 8 percent rate of interest in how many years

(roughly) will this amount grow to Rs.1,92,000 ? Work this problem using

the rule of 72?do not use tables

04

Q.2 (a) A Pro-forma cost sheet of a company provides the following particulars:

Particulars Amount per unit

Elements of cost:

Raw materials 80

Direct labour 30

Overhead 60

Total cost 170

30

Selling price 200

The following further particulars are available:

Raw materials in stock, on average, one month; Materials in process

(completion stage, 50 per cent), on average, half a month; Finished goods in

stock, on average, one month. Credit allowed by suppliers is one month;

Credit allowed to debtors is two months; Average time-lag in payment of

wages is 1.5 weeks and one month in overhead expenses; one-fourth of the

output is sold against cash; cash in hand and at bank is desired to be

maintained at Rs 3,65,000.

You are required to prepare a statement showing the working capital needed

to finance a level of activity of 1,04,000 units of production. You may

assume that production is carried on evenly throughout the year, and wages

and overheads accrue similarly. For calculation purposes, 4 weeks may be

taken as equivalent to a month.

07

Q.2 (b) The present credit terms of Globus Corporation are 2/10, net 40. It sales are

Rs.650 million, its average collection period is 30 days, its variable costs to

sales ratio, V, is 0.75, and its cost of capital is 10 percent. The proportion of

sales on which customers currently take discount, is 0.3. Globus is

considering relaxing its credit terms to 3/10, net 40. Such a relaxation is

expected to increase sales by Rs.30 million, increase the proportion of

discount sales to 0.5, and reduce the ACP to 20 days. Globus?s tax rate is 35

percent.

What will be the effect of liberalizing the cash discount on residual income?

Page 3 of 5

OR

(b) Discuss the ?Bank Finance? as a tool for working capital finance.

Q.3 (a) The following data is available for Newton Limited:

Earnings per share = Rs.6.00

Rate of return = 18 percent

Cost of capital = 15 percent

a. If Walter?s valuation formula holds, what will be the price per share

when the dividend payout ratio is 30 percent? 40 percent?

b. If Gordon's basic valuation formula holds, what will be the price per

share when the dividend payout is 30 percent, 40 percent?

07

(b) What is NI and NOI approaches of capital structure? How both are

contradicting each other? Discuss with assumptions and graphs.

07

OR

Q.3 (a) Advaith Corporation has a net operating income of Rs.50 million. Advaith

employs Rs.200 million of debt capital carrying 12 percent interest charge.

The equity capitalization rate applicable to Advaith is 14 percent. What is the

market value and WACC of Advaith under the net income method? Assume

there is no tax.

07

(b) Explain the nature of the factors which influence the dividend policy of a

firm.

07

Q.4 (a) National Stores is trying to determine the economic order quantity for certain

type of transformers.The firm sells 400 numbers of these transformers

annually at a price of Rs.300 per piece. The purchase price per machine tool

to the firm is, however, Rs.230. The cost of carrying a transformer is Rs.40

per year and the cost of placing an order is Rs.180.

a. What is the total cost associated with placing one, four, eight , and ten

orders per year?

b. What is the economic order quantity?

07

(b) 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

If the two projects are Mutually exclusive and the cost of capital is 15

percent, which project should the firm invest in? Use NPV method to take

decision.

07

OR

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Page 1 of 5

Seat No.: ________ Enrolment No.___________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA ? SEMESTER 2 ? EXAMINATION ? WINTER 2018

Subject Code: 2820003 Date: 26/12/2018

Subject Name: Financial Management

Time: 02:30 PM TO 05:30 PM Total Marks: 70

Instructions:

1. Attempt all questions.

2. Make suitable assumptions wherever necessary.

3. Figures to the right indicate full marks.

Q.1 (a) Answer the following MCQs 06

1

In finance, "working capital" means the same thing as

A. Total Assets. B. Fixed Assets.

C. Current Assets. D. Current Assets Minus Current

Liabilities.

2 Interest rates and bond prices

A. Move in the same direction. B. Move in opposite directions

C. Sometimes move in the same direction,

sometimes in opposite directions.

D Have no relationship with

each other (i.e., they are

independent).

3 You can use______ to roughly estimate how many years a given sum of money

must earn at a given compound annual interest rate in order to double that

initial amount .

A. Rule 415 B. The Rule of 72

C. The Rule of 78 D. Rule 144

4 All of the following influence capital budgeting cash flows EXCEPT:

A. Accelerated depreciation. B. Tax rate changes.

C. Salvage value. D. Method of project financing

used.

5 The term "capital structure" refers to:

A. Long-term debt, preferred stock, and

common stock equity.

B. Current assets and current

liabilities.

C. Total assets minus liabilities.

D. Shareholders' equity.

6 Walter model assumes that for future financing, a firm will rely only on

A. Debentures B. Term loans

C. Retained earnings D. External equity

Page 2 of 5

Q.1 (b) Explain the following terms

1. Annuity Due

2. Share/stock split

3. Current yield

4. Systematic Risk

04

Q.1 (c) If you deposit Rs.3,000 today at 8 percent rate of interest in how many years

(roughly) will this amount grow to Rs.1,92,000 ? Work this problem using

the rule of 72?do not use tables

04

Q.2 (a) A Pro-forma cost sheet of a company provides the following particulars:

Particulars Amount per unit

Elements of cost:

Raw materials 80

Direct labour 30

Overhead 60

Total cost 170

30

Selling price 200

The following further particulars are available:

Raw materials in stock, on average, one month; Materials in process

(completion stage, 50 per cent), on average, half a month; Finished goods in

stock, on average, one month. Credit allowed by suppliers is one month;

Credit allowed to debtors is two months; Average time-lag in payment of

wages is 1.5 weeks and one month in overhead expenses; one-fourth of the

output is sold against cash; cash in hand and at bank is desired to be

maintained at Rs 3,65,000.

You are required to prepare a statement showing the working capital needed

to finance a level of activity of 1,04,000 units of production. You may

assume that production is carried on evenly throughout the year, and wages

and overheads accrue similarly. For calculation purposes, 4 weeks may be

taken as equivalent to a month.

07

Q.2 (b) The present credit terms of Globus Corporation are 2/10, net 40. It sales are

Rs.650 million, its average collection period is 30 days, its variable costs to

sales ratio, V, is 0.75, and its cost of capital is 10 percent. The proportion of

sales on which customers currently take discount, is 0.3. Globus is

considering relaxing its credit terms to 3/10, net 40. Such a relaxation is

expected to increase sales by Rs.30 million, increase the proportion of

discount sales to 0.5, and reduce the ACP to 20 days. Globus?s tax rate is 35

percent.

What will be the effect of liberalizing the cash discount on residual income?

Page 3 of 5

OR

(b) Discuss the ?Bank Finance? as a tool for working capital finance.

Q.3 (a) The following data is available for Newton Limited:

Earnings per share = Rs.6.00

Rate of return = 18 percent

Cost of capital = 15 percent

a. If Walter?s valuation formula holds, what will be the price per share

when the dividend payout ratio is 30 percent? 40 percent?

b. If Gordon's basic valuation formula holds, what will be the price per

share when the dividend payout is 30 percent, 40 percent?

07

(b) What is NI and NOI approaches of capital structure? How both are

contradicting each other? Discuss with assumptions and graphs.

07

OR

Q.3 (a) Advaith Corporation has a net operating income of Rs.50 million. Advaith

employs Rs.200 million of debt capital carrying 12 percent interest charge.

The equity capitalization rate applicable to Advaith is 14 percent. What is the

market value and WACC of Advaith under the net income method? Assume

there is no tax.

07

(b) Explain the nature of the factors which influence the dividend policy of a

firm.

07

Q.4 (a) National Stores is trying to determine the economic order quantity for certain

type of transformers.The firm sells 400 numbers of these transformers

annually at a price of Rs.300 per piece. The purchase price per machine tool

to the firm is, however, Rs.230. The cost of carrying a transformer is Rs.40

per year and the cost of placing an order is Rs.180.

a. What is the total cost associated with placing one, four, eight , and ten

orders per year?

b. What is the economic order quantity?

07

(b) 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

If the two projects are Mutually exclusive and the cost of capital is 15

percent, which project should the firm invest in? Use NPV method to take

decision.

07

OR

Page 4 of 5

Q.4 (a)

Calculate (a) the operating leverage, (b) financial leverage and (c) combined

leverage from the following data under situations I and II and financial plans,

A and B.

Installed capacity, 4,000 units

Actual production and sales, 75 per cent of the capacity

Selling price, Rs 30 per unit

Variable cost, Rs 15 per unit

Fixed cost:

Under situation I, Rs 15,000

Under situation II, 20,000

Capital structure:

Particulars Financial plan

A B

Equity Rs.10000

Rs.15000

Debt (@ 20% cost) Rs.10000 Rs.5000

Total Rs.20000 Rs.20000

07

(b) Explain in detail various sources of finance available for long term funding of

firm.

07

Q.5 Prepare cash budget for January-June from the following information: The

estimated sales and expenses are as follows:

Particulars Nov. Dec. Jan. Feb. March April May June

Sales (Rs) 2,00,000 2,20,000 1,20,000 1,00,000 1,50,000 2,40,000 2,00,000 2,00,000

Wages and

salaries (Rs)

30,000 30,000 24,000 24,000 24,000 30,000 27,000 27,000

Miscellaneous

Expense

27,000 27,000 21,000 30,000 24,000 27,000 27,000 27,000

1. 20 per cent of the sales are on cash and balance on credit.

2. The firm has a gross margin of 25 per cent on sales.

3. 50 per cent of the credit sales are collected in the month following the sales,

30 per cent in the second month and 20 per cent in the third month.

4. Material for the sale of each month is purchased one month in advance on a

credit for two months.

5. The time-lag in the payment of wages and salaries is one-third of a month

and of miscellaneous expenses, one month.

6. Debentures worth Rs 40,000 were sold in January.

7. The firm maintains a minimum cash balance of Rs 40,000. Funds can be

borrowed @ 12 per cent per annum in the multiples of Rs 1,000, the interest

being payable on monthly basis.

8. Cash balance at the end of December is Rs 60,000

14

OR

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Page 1 of 5

Seat No.: ________ Enrolment No.___________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA ? SEMESTER 2 ? EXAMINATION ? WINTER 2018

Subject Code: 2820003 Date: 26/12/2018

Subject Name: Financial Management

Time: 02:30 PM TO 05:30 PM Total Marks: 70

Instructions:

1. Attempt all questions.

2. Make suitable assumptions wherever necessary.

3. Figures to the right indicate full marks.

Q.1 (a) Answer the following MCQs 06

1

In finance, "working capital" means the same thing as

A. Total Assets. B. Fixed Assets.

C. Current Assets. D. Current Assets Minus Current

Liabilities.

2 Interest rates and bond prices

A. Move in the same direction. B. Move in opposite directions

C. Sometimes move in the same direction,

sometimes in opposite directions.

D Have no relationship with

each other (i.e., they are

independent).

3 You can use______ to roughly estimate how many years a given sum of money

must earn at a given compound annual interest rate in order to double that

initial amount .

A. Rule 415 B. The Rule of 72

C. The Rule of 78 D. Rule 144

4 All of the following influence capital budgeting cash flows EXCEPT:

A. Accelerated depreciation. B. Tax rate changes.

C. Salvage value. D. Method of project financing

used.

5 The term "capital structure" refers to:

A. Long-term debt, preferred stock, and

common stock equity.

B. Current assets and current

liabilities.

C. Total assets minus liabilities.

D. Shareholders' equity.

6 Walter model assumes that for future financing, a firm will rely only on

A. Debentures B. Term loans

C. Retained earnings D. External equity

Page 2 of 5

Q.1 (b) Explain the following terms

1. Annuity Due

2. Share/stock split

3. Current yield

4. Systematic Risk

04

Q.1 (c) If you deposit Rs.3,000 today at 8 percent rate of interest in how many years

(roughly) will this amount grow to Rs.1,92,000 ? Work this problem using

the rule of 72?do not use tables

04

Q.2 (a) A Pro-forma cost sheet of a company provides the following particulars:

Particulars Amount per unit

Elements of cost:

Raw materials 80

Direct labour 30

Overhead 60

Total cost 170

30

Selling price 200

The following further particulars are available:

Raw materials in stock, on average, one month; Materials in process

(completion stage, 50 per cent), on average, half a month; Finished goods in

stock, on average, one month. Credit allowed by suppliers is one month;

Credit allowed to debtors is two months; Average time-lag in payment of

wages is 1.5 weeks and one month in overhead expenses; one-fourth of the

output is sold against cash; cash in hand and at bank is desired to be

maintained at Rs 3,65,000.

You are required to prepare a statement showing the working capital needed

to finance a level of activity of 1,04,000 units of production. You may

assume that production is carried on evenly throughout the year, and wages

and overheads accrue similarly. For calculation purposes, 4 weeks may be

taken as equivalent to a month.

07

Q.2 (b) The present credit terms of Globus Corporation are 2/10, net 40. It sales are

Rs.650 million, its average collection period is 30 days, its variable costs to

sales ratio, V, is 0.75, and its cost of capital is 10 percent. The proportion of

sales on which customers currently take discount, is 0.3. Globus is

considering relaxing its credit terms to 3/10, net 40. Such a relaxation is

expected to increase sales by Rs.30 million, increase the proportion of

discount sales to 0.5, and reduce the ACP to 20 days. Globus?s tax rate is 35

percent.

What will be the effect of liberalizing the cash discount on residual income?

Page 3 of 5

OR

(b) Discuss the ?Bank Finance? as a tool for working capital finance.

Q.3 (a) The following data is available for Newton Limited:

Earnings per share = Rs.6.00

Rate of return = 18 percent

Cost of capital = 15 percent

a. If Walter?s valuation formula holds, what will be the price per share

when the dividend payout ratio is 30 percent? 40 percent?

b. If Gordon's basic valuation formula holds, what will be the price per

share when the dividend payout is 30 percent, 40 percent?

07

(b) What is NI and NOI approaches of capital structure? How both are

contradicting each other? Discuss with assumptions and graphs.

07

OR

Q.3 (a) Advaith Corporation has a net operating income of Rs.50 million. Advaith

employs Rs.200 million of debt capital carrying 12 percent interest charge.

The equity capitalization rate applicable to Advaith is 14 percent. What is the

market value and WACC of Advaith under the net income method? Assume

there is no tax.

07

(b) Explain the nature of the factors which influence the dividend policy of a

firm.

07

Q.4 (a) National Stores is trying to determine the economic order quantity for certain

type of transformers.The firm sells 400 numbers of these transformers

annually at a price of Rs.300 per piece. The purchase price per machine tool

to the firm is, however, Rs.230. The cost of carrying a transformer is Rs.40

per year and the cost of placing an order is Rs.180.

a. What is the total cost associated with placing one, four, eight , and ten

orders per year?

b. What is the economic order quantity?

07

(b) 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

If the two projects are Mutually exclusive and the cost of capital is 15

percent, which project should the firm invest in? Use NPV method to take

decision.

07

OR

Page 4 of 5

Q.4 (a)

Calculate (a) the operating leverage, (b) financial leverage and (c) combined

leverage from the following data under situations I and II and financial plans,

A and B.

Installed capacity, 4,000 units

Actual production and sales, 75 per cent of the capacity

Selling price, Rs 30 per unit

Variable cost, Rs 15 per unit

Fixed cost:

Under situation I, Rs 15,000

Under situation II, 20,000

Capital structure:

Particulars Financial plan

A B

Equity Rs.10000

Rs.15000

Debt (@ 20% cost) Rs.10000 Rs.5000

Total Rs.20000 Rs.20000

07

(b) Explain in detail various sources of finance available for long term funding of

firm.

07

Q.5 Prepare cash budget for January-June from the following information: The

estimated sales and expenses are as follows:

Particulars Nov. Dec. Jan. Feb. March April May June

Sales (Rs) 2,00,000 2,20,000 1,20,000 1,00,000 1,50,000 2,40,000 2,00,000 2,00,000

Wages and

salaries (Rs)

30,000 30,000 24,000 24,000 24,000 30,000 27,000 27,000

Miscellaneous

Expense

27,000 27,000 21,000 30,000 24,000 27,000 27,000 27,000

1. 20 per cent of the sales are on cash and balance on credit.

2. The firm has a gross margin of 25 per cent on sales.

3. 50 per cent of the credit sales are collected in the month following the sales,

30 per cent in the second month and 20 per cent in the third month.

4. Material for the sale of each month is purchased one month in advance on a

credit for two months.

5. The time-lag in the payment of wages and salaries is one-third of a month

and of miscellaneous expenses, one month.

6. Debentures worth Rs 40,000 were sold in January.

7. The firm maintains a minimum cash balance of Rs 40,000. Funds can be

borrowed @ 12 per cent per annum in the multiples of Rs 1,000, the interest

being payable on monthly basis.

8. Cash balance at the end of December is Rs 60,000

14

OR

Page 5 of 5

Q.5 Modern Limited has the following book value capital structure:

Equity capital (25 million shares, Rs.10 par) Rs.250 million

Preference capital, 10 percent (800,000 shares, Rs.100 par) Rs. 80 million

Retained earnings Rs. 50 million

Debentures 14 percent (2,000,000 debentures, Rs.100 par) Rs.200 million

Term loans, 14 percent Rs. 220 million

Rs.800 million

The next expected dividend per share is Rs.3.00. The dividend per share is

expected to grow at the rate of 10 percent. The market price per share is Rs.260.

Preference stock, redeemable after 8 years, is currently selling for Rs.90 per share.

Debentures, redeemable after 5 years, are selling for Rs.105 per debenture. The tax

rate for the company is 34 percent.

Calculate the average cost of capital using

a. Book value proportions, and

b. Market value proportions

14

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This post was last modified on 19 February 2020