PES Institute of Technology Department of MBA Financial Management (12MBA25)

5 Marks Questions (Skill Based) 1) You will receive a sum of Rs.1,10,000/- after 6 years. Assuming an interest rate of 9%, today, what is the value of that sum? 2) Indian Bank will give an interest of 10% per anum on a fixed deposit of Rs.1,00,000/- kept by you for 4 years. What is the value of your deposit on maturity? 3) If a debenture of Rs.50,000/- requires an interest payment of Rs.6,000/- p.a. and assuming a tax rate of 35%, what is the cost of capital? 4) A company issues 5,000, 12% debentures of Rs.100 each at a discount of 5%. The

commission payable to the underwriters and brokers is RS.25,000/-. The debentures are redeemable after 5 years. Compute the after tax cost of debt assuming a tax rate of 50%. 5) A company issues 1,000 10% preference shares of Rs.100 each at a discount of 5%. Costs of raising capital are Rs.2,000. Compute the cost of preference capital. 6) Compute the after tax cost of capital of a preferred share sold at Rs.100 with a 9% dividend and a redemption price of Rs.110, if the company redeems it in five years. 7) 8) Retained earnings are cost free source of fund. Comment. A firms Ke(return available to share holders) is 15%, the average tax rate of share holders is 40% and it is expected that 2% is brokerage cost that share holders will have to pay while investing their dividends in alternative securities . what is the cost of retained earnings ? 9) You have come across the following investment opportunity: Rs 2,000 at the end of each year for the first 5 years plus Rs 3,000 at the end of each year from years 6 through 9 plus Rs 5,000 at the end of each year from years 10 through 15. (a) (b) How much will you be willing to pay for this investment if your required rate of return is What will be your answer if payments are received at the beginning of each year?

14 per cent?

10) You have an opportunity cost of capital of 15 per cent. Will you accept the following investment? Cash Flows (Rs) C0 C1 + 50,000 56,000

11)

Project P has the following cash flows: Cash Flows (Rs) C0 C1 C2 800 + 1,200 400

Calculate the projects IRRs. If the required rate of return is 25 per cent, would you accept the project? Why? 12) The expected earnings of firms A and B are Rs 120,000 with a standard deviation of Rs 30,000. Firm A is non-levered. Firm B is levered and has to pay annual interest charges of Rs 30,000. Which firm is more risky? Why? A large chemical company is considering acquiring two small companies. The following is the financial data about two companies:

13)

What would be the effect on companies profitability and risk if sales fluctuate by 10 per cent? If the chemical company intends to acquire a less risky firm, which one should it buy? Give reasons. (5+5+5). 14) Assume an annual rate of interest of 15 per cent. The sum of Rs 100 received immediately is equivalent to what quantity received in ten equal annual payments, the first payment to be received one year from now. What could be the annual amount if the first payment were received immediately? 15) Assume that you are given a choice between incurring an immediate outlay of Rs 10,000 and having to pay Rs 2,310 a year for 5 years (first payment due one year from now); the discount rate is 11 per cent. What would be your choice? Will your answer change if Rs 2,310 is paid in the beginning of each year for 5 years?