MBA (3rd Sem) MBA/29/FM-302/T/ODD/13-14

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1 Full Marks : 70 MBA/29/FM-302/T/ODD/ MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM-302 Time : 3 Hours The figures in the right-hand margin indicate marks. Candidates are required to give their answers in their own words as far as practicable. GROUP-A (Multiple Choice Type Questions) 1. Choose the correct alternatives for any ten of the following: 10 1=10 i) It cost of capital goes up, NPV of a capital expenditure proposal will a) remain unaffected b) go up c) go down d) cannot be determined ii) In capital rationing, ranking of capital expenditure proposals is usually done on the basis of a) NPV b) IRR c) Profitability Index d) None iii) In choosing between two capital assets, one with short life span and the other with comparatively longer life and different acquisition costs and running costs, which of the following methods is most suitable? a) NPV b) IRR c) MIRR d) Equivalent annual costs iv) Example of systematic risk is a) inflation b) money supply c) interest rate d) All of these v) If a firm takes in more debts the WACC a) will increase b) will reamin constant c) will decrease d) cannot be said [2]

2 vi) IRR is a) that rate where PV of cash inflows are greater than P.V. of cash outflows. b) the rate where cash inflows are exactly equal to cash outflows. c) the rate where P.V. of cash inflows are exactly equal to P.V. of cash outflows. d) the rate where cash inflows are greater than cash outflows. vii) An Agency cost arises due to a) Cost overrun in implementing new projects b) Failure of budgeted cost c) Restrictions imposed by the supplier of debt capital d) Rise in the cost of production viii) LBO stands for a) Leveraged Buy outs b) London Bank Operation c) Leveraged Buying Option d) None of these ix) Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure? a) An increase in costs incurrred when filing for bankruptcy b) An increase in the corporate tax rate c) An increase in personal tax rate d) A decrease in the firm's business risk. x) A company plans to pay its first dividend of Rs.10 in two years time with dividends expected to grow thereafter at a rate of 10% per annum. If the relevant cost of equity capital is 15%, what should be the current market value of the share to the nearest rupee? a) 100 b) 174 c) 182 d) 200 xi) A transaction through which a firm sells a portion of it's assets to another firm is called a) Absorption b) Consolidation c) Spin off d) Divertitura. [3] [4]

3 xii) In a stock split, the par value of the share is a) increased b) reduced c) same d) Partially increased GROUP-C (Long Answer Type Questions) Answer any three of the following: 3 15=45 7. The following information is available for A Ltd. Net operating income = Rs.40 million GROUP-B (Short Answer Type Questions) Answer any three of the following : 5 3=15 2. Explain the costs and benefits of debt financing. 3. Do the profitability Index and NPV criterion of evaluating Investment proposal lead to the same acceptance-rejection and ranking decision? In what situation will they give conflicting result? 4. Explain the scenarios which will lead to your choice between IRR and MIRR methods while evaluating capital projects. Give examples. 5. What is the difference between maximizing stock holder wealth and stock prices? 6. Enlist and explain the benefits of buyback of shares. Int on debt = Rs.10 million Cost of equity = 18% Cost of debt = 12% a) What is the average cost of capital? 5 b) What happens to the average cost of capital if it employs Rs.100 million of debt to finance a project which earns an operating income of Rs.20million Assume there are no taxes A company is considering a proposal of installing a drying equipment. The equipment would involve a cash outlay of Rs.6,00,000 and working capital of Rs.80,000. The expected life of the project is 6 years without any salvage value. Assume that the company is allowed to charge depreciation on straight line basis for tax purposes and that the tax rate is 50%. the estimated before tax cash flows are given below : [5] [6]

4 Before tax cash flows Year If the company's opportunity cost of capital is 12%, calculate. a) the equipment's NPV. 10 b) the equipment's IRR a) Explain the concept of risk and return in respect to valuation of shares. 3 b) Explain the relationship between coupon rate, required yield and price of bond in the cases of premium bond, par bond and discount bond. 4 c) A bond has the undernoted features: Face value = Rs.1,000 Coupon rate = 11% per annum payable annually Tenure = 3 years Redemption is at par Current market price = Rs.1,100 If rate of return expected by the market on a similar security is 10% per annum i) compute its intrinsic value ii) is the bond overvalued or undervalued? iii) compute the current yield of the bond iv) set up an equation for YTM of the bond a) Compare between takeover and acquisition. 3 b) What are the different types of merger? Explain. 6 c) Differentiate between a holding company and a subsidiary company. 3 d) Enlist three benefits of mergers and acquisitions Write short notes on any three of the following : 3 5 a) Agency cost and methods of reducing it b) Capital Rationing c) Modigliani Miller Proportions d) MVA (Market Value added) e) Spin offs [7] [8]

5 12. Alpha Corporation plans to acquire Beta Corporation. The following information is available: Alpha Beta Total current earning, E Rs.50million Rs.20million No. of outstanding shares, S 20 million 10 million Market price per share, P Rs.30 Rs.20 a) What is the maximum exchange ratio acceptable to the shareholders of Alpha Corporation if the PE ratio of the combined entity is 12 and there is no synergy gain? b) What is the minimum exchange ratio acceptable to the shareholders of Beta Corporation if the PE ratio of the combined entity is 11 and there is a synergy benefit of 5%? c) Assuming that there is no synergy gain, at what level of PE multiple will the lines ER 1 and ER 2 intersect? [9]

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