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64 Financial Management<br />
MODEL QUESTIONS<br />
1. Define capital structure.<br />
2. Differentiate the capital structure and <strong>financial</strong> structure.<br />
3. What is optimum capital structure?<br />
4. Discuss the various factors affecting the capital structure.<br />
5. Explain the capital structure theories.<br />
6. XYZ Ltd., expects a net in<strong>com</strong>e of Rs. 1,50,000. The <strong>com</strong>pany has 10% of<br />
5,00,000 Debentures. The equity capitalization rate of the <strong>com</strong>pany is 10%.<br />
(a) Calculate the value of the firm and overall capitalization rate according to<br />
the net in<strong>com</strong>e approach (ignoring in<strong>com</strong>e tax).<br />
(b) If the debenture debt is increased to Rs. 7,50,000 and interest of debt is change<br />
to 9%. What is the value of the firm and overall capitalization rate?<br />
(Ans. (a) Rs. 15,00,000, 10% (b) Rs. 15,75,000 and 9.52%)<br />
7. A Company Ltd., projected net operating in<strong>com</strong>e of Rs. 75,000. It has Rs. 3,00,000,<br />
8% debentures.<br />
(a) Calculate the value of the firm according to 10 net opening in<strong>com</strong>e and overall<br />
capitalization rate is 10%.<br />
(b) If debenture debt is increased to Rs. 5,00,000. What is the value of the firm<br />
and the equity capitalization rate? (Ans. (a) Rs. 7,50,000, (b) 11.33%, 14%)<br />
8. According to Traditional approach, <strong>com</strong>pute the market value of the firm, value<br />
of shares and the average cost of capital from the following information:<br />
Net Operating In<strong>com</strong>e 1,00,000<br />
Total Investment 7,00,000<br />
Equity capitalization Rate:<br />
(a) if the firms uses no debt 7%.<br />
(b) if the firm uses Rs. 2,00,000 debentures 8%<br />
(c) if the firm uses Rs. 4,00,000 debentures 9%<br />
Assume that Rs 2,00,000 debentures at 6% rate of interest whereas Rs. 4,00,000<br />
debentures at 6% rate of interest whereas Rs. 4,00,000 debentures at 7% rate of<br />
interest. (Ans. 7%, 7.69%, 8.33)