NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Strategic Financial Management

Internal Assignment Applicable for December 2020 Examination

1. The following is the capital structure of Alpha Limited as on 31st March 2020
Equity Shares : 10000 shares ( of Rs 100 each) Rs 10,00,000
12% Preference Shares ( of Rs 100 each) Rs 10,00,000
10% Debentures Rs 12,00,000

The market price of the company’s share is Rs 120 and it is expected that a dividend of
Rs 10 per share would be declared by the company . The dividend growth rate is 5%. If
the tax rate is 30%, calculate Weighted Average Cost of Capital(WACC) by book
value & market value method. Assume market value of Preference shares and
Debentures to be same as the book value. Comment on the results.

2. The following details are available for Gamma Ltd:
Details Proposal A Proposal B
Initial Cost Rs.10,00,000 Rs. 12,00,000
Expected life 4 years 5 years
Profits before tax after
depreciation

Rs. 3,00,000 each for first two
years
Rs. 3,50,000 each for next two
years

Rs. 3,00,000 each for first two
years
Rs. 3,50,000 each for next three
years

Calculate Discounted Payback period and suggest which one is better if the
discounting factor is 10% and tax rate 30%. Show in detail relevant calculations and
use Straight Line Method of Depreciation. (10 Marks)

3. A company’s current earnings before interest and taxes are Rs 5,00,000. The firm
currently has outstanding Rs 10 lakh of debts at an average cost of 8 per cent. Its cost
of equity capital is estimated to equal 12 per cent.

a. Determine the current value and overall capitalisation rate of the firm using the Net
Income Approach. Comment on the impact of increase in debentures on the value of
the firm as per Net Income Approach. (5 Marks)

NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Strategic Financial Management

Internal Assignment Applicable for December 2020 Examination

b. The firm is considering reducing its debt by Rs 5 lakhs. The cost of debt and EBIT is
expected to be unaffected. However, the firm’s cost of equity capital is to be reduced to
10 per cent due to decrease in financial risk. Would you recommend the proposed
action (Based on value of firm and overall cost of capital)? Show relevant calculations
using Net Income Approach.