2. The following details are available for Gamma Ltd: Details Proposal A Proposal B Initial Cost A - Rs.10,00,000 B - Rs. 12,00,000 Expected life 4 years for A and 5 years for B Profits before tax after depreciation A - Rs. 3,00,000 each for first two years Rs. 3,50,000 each for next two years and for B - 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 companys 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)

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 firms 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. (5 Marks)