Paper: Mangagement Accounting

General Instructions:

Code: 471A

The Student should submit this assignment in the handwritten form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept The student should only use the Rule sheet papers for answering the questions. The student should attach this assignment paper with the answered papers.

Failure to comply with the above Four instructions would lead to rejection of assignment. Specific Instructions:
There are four Questions in this assignment. The student should answer all the four questions. Marks allotted 100. Each Question carries equal marks (25 marks) unless specified explicitly

Question No 1
Nav Udyog. A venture capital fund has specialized in providing bridge finance to young technocrafts in Biotechnology sector. The fund has received an investment proposal from Intellect Ltd., a Bio-tech firm, to finance its recent project with equity investment of Rs.10 crores. The firm is an existing profit making organization with a dividend track record of 3 years. The current EPS of the company is Rs.5. the expected growth on EPS for the next year is as follows: Growth in EPS (%) 0 25 35 40 Probability 0.20 0.30 0.40 0.10

The venture fund reckons that the P/E ratio for this industry will be as follows: P/E ratio 8 9 12 Probability 0.30 0.40 0.30

The fund finances every project for 1 year. The fund invests only ion those projects where the probability of getting target return of 35% is atleast 75%. The fund is expected to dispose of its investment at industry PE ratio. What should be the price at which Nav Udyog would make the investment? Question No 2. A) S.K. Lab a pharmaceutical company in Western India was expected to have revenues of Rs.50 lakhs in 2003, and report net income of Rs.9 lakhs in that year. The firm had a book value of assets is Rs.110 lakhs and a book value of equity of Rs.58 lakhs at the end of 2002. its

market value, then was Rs.85 per share. The firm was expected to maintain sales in its niche product, a multivitamin tablet, and grow at 5% a year in the long term, primarily by expanding into the genetic during market. The beta of S.K Lab treated in Mumbai Stock Exchange was 1.25. The return on 10 year GOI bond in India in 2002 was 7% and the risk premium for stocks over bond is assumed to be 3.5%. Do you consider the market price as the fair value of the shares of S.K. Lab? B) Discuss the different dividend models for valuation of shares Question No 3: a) How would you value a real estate?

b) When will Economic Value Added increase? c) What are the different levels of market efficiency?

d) What are the RBI guidelines for valuation of shares in care of disinvestment by foreign investors? e) What is the methodology of 'Brand' valuation?

Question No 4: a) A company is considering raising Rs.100 lakhs by one of the two alternative methods viz. 14 percent Institutional term loan and 13 percent non-convertible debentures. The term loan portion would attract no major incidental cost. The debentures would have to be issued at a discount of 2.5 percent and would involve Rs.1 lakhs as cost of issue. Advice the Company as to the better option based on the effective cost of capital in each case. Assume a tax rate of 35 percent

b) In valuing a firm should you use the marginal or effective tax rate? c) Smart Air Ltd. is a telecommunications firm that generates Rs. 300 lakhs in pre-tax operating income, and reinvested Rs. 60 lakhs in the most recent financial year. As a result of tax deferrals, the firm has an effective tax rate of 20%, while its marginal tax rate is 40%. Both the operating income and the reinvestment are expected to grow 10% a year for 5-year and 5% thereafter. The firm's cost of capital is 9% and is expected to remain unchanged over time. Estimate the value of Smart Air Ltd. using the different assumptions about tax rates. The effective tax rate 20% is to be considered.

(i)

(ii)

The marginal tax rate 40% is to be considered.