PART II : FINANCIAL MANAGEMENT 1. Answer the following ...

More documents

Recommendations

Info

= Rs. 100,000 ÷ Rs. 20,000 = 5 years. (b) Calculation of Net Present Value (NPV) and Internal Rate of Return (IRR) for Equipment A and Equipment B Equipment A: NPV = 20,000 � PVAF6,0.11 – 75,000 = 20,000 � 4.231 – 75,000 = 84,620 – 75,000 = Rs. 9,620 IRR = 20,000 � PVAF6,r = 75,000 PVAF6,r = 75,000 / 20,000 = 3.75 From the present value of an annuity table, we find: PVAF6,0.15 = 3.784 PVAF6,0.16 = 3.685 � 3.784 �3.75 � Therefore, IRR �r �0.15 �0.01 � � �3.784 �3.685� Equipment B: = 0.15 + 0.0034 = 0.1534 or 15.34%. NPV = 14,000 � PVAF6,0.11 – 50,000 = 14,000 � 4.231 – 50,000 = 59,234 – 50,000 = Rs. 9,234 IRR = 14,000 � PVAF6,r = 50,000 PVAF6,r = 50,000/14,000 = 3.571 From the present value of an annuity table, we find: PVAF6,0.17 = 3.589 PVAF6,0.18 = 3.498 �3.589 �3.571� Therefore, IRR �r �0.17 �0.01 � � �3.589 �3.498� = 0.17 + 0.002 = 0.172 or 17.20%. Recommendation: Equipment A has a higher NPV but lower IRR as compared to Equipment B. Therefore, Equipment A should be preferred since the wealth of the shareholders will be maximized. 118
4. (a) Calculation of Weighted Average Cost of Capital (WACC) WACC = (Weight of equity) × (Cost of equity) + (Wei ght of debt) × (Before-tax cost of debt) × (1 - Tax rate) = (0.7) × (0.12) + (0.3) × (0.08) × (1 - 0.3) = 0.084 + 0.0168 = 0.1008 = 10.08%. (b) Calculation of Return on Equity (ROE) and Debt Ratio Return on Equity = Net Income ÷ Amount of Equity Invested Debt Ratio = Amount of Debt Financing ÷ Total Assets Calculations of the Two Ratios for Both Financing Arrangements 119 Option A Option B Sales revenue Rs. 5,00,000 Rs. 5,00,000 Cost of sales 2,00,000 2,00,000 General & administrative expense 1,00,000 1,00,000 Interest expenses 24,000 70,000 Taxable income Rs.1,76,000 Rs.1,30,000 Tax payable (30%) 52,800 39,000 Net income Rs.1,23,200 Rs.91,000 Equity invested 7,00,000 3,00,000 1,23,200 91,000 Return on Equity 7,00,000 3,00,000 = 17.6% = 30.3% 3,00,000 7,00,000 Debt Ratio 10,00,000 10,00,000 5. (a) Working Notes: (i) Calculation of Sales Fixed Assets 1 � Sales 3 26,00,000 1 � � � Sales �Rs.78,00,000 Sales 3 = 0.3 = 0.7
Page 1 and 2: PART II : FINANCIAL MANAGEMENT 1. A
Page 3 and 4: Direct wages 10% of works cost Stoc
Page 5 and 6: Other current assets 254 170 Total
Page 7 and 8: Interest expense (37) (28) (21) Int
Page 9 and 10: (b) Suppose Adit has borrowed a 3-y
Page 11: C = = 2�2 , 62, 500�12�25 0.
Page 15 and 16: Long term loan 2 � � Long term
Page 17 and 18: Less: Initial Investment 400.00 400
Page 19 and 20: F = Face value of preference shares
Page 21 and 22: (Rs. 19,802 �Rs. 18,082) � 2 =
Page 23 and 24: Current assets include cash and cas
Page 25 and 26: Machinery Account Rs. Rs. Balance b
Page 27 and 28: 11. (a) Computation of Effective Co
Page 29 and 30: Hence, the raw material consumption
Page 31 and 32: These are some of the benefits from
Page 33: onds, preference shares or any othe

PART II : FINANCIAL MANAGEMENT 1. Answer the following ...

Create successful ePaper yourself

Delete template?

Save as template?