## November 29, 2011

### MB0045 [Financial Management] Set2 Assignments

MB0045 – Financial Management
(Book ID: ) Assignment Set-2
2nd Sem Spring/Fall Assignments

Note: Each question carry 10 Marks. Answer all the questions.

1. A. What is the cost of retained earnings? (3 Marks)
B. A company issues new debentures of Rs.2 million, at par; the net proceeds being Rs.1.8 million. It has a 13.5 per cent rate of interest and 7 years maturity. The
company’s tax rate is 52 per cent. What is the cost of debenture issue? What will be the cost in 4 years if the market value of debentures at that time is Rs.2.2 million? (7 Marks)

2. Volga is a large manufacturing company in the private sector. In 2007 the company had a gross sale of Rs.980.2 crore. The other financial data for the company are given below: (10 Marks)
You are required to calculate:

 Items Rs. In crore Net worth 152.31 Borrowing 165.47 EBIT 43.17 Interest 34.39 Fixed cost (excluding interest) 118.23

1. Debt equity ratio
2. Operating leverage
3. Financial leverage
4. Combined leverage. Interpret your results and comment on the Volga’s debt policy
3. Explain Miller and Modigliani Approach to capital structure theory.

4. How to estimate cash flows? What are the components of incremental cash flows?

5. What are the steps involved in capital rationing?

6. Equipment A has a cost of Rs.75,000 and net cash flow of Rs.20000 per year for six

years. A substitute equipment B would cost Rs.50,000 and generate net cash flow of Rs.14,000 per year for six years. The required rate of return of both equipments is 11 per cent. Calculate the IRR and NPV for the equipments. Which equipment should be accepted and why?