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Q1) Raja Corporation is considering the risk characteristics of a project. The firm has identified that the following factors with their respective expected values have

Q1) Raja Corporation is considering the risk characteristics of a project. The firm has identified that the following factors with their respective expected values have a bearing on the NPV of this project:

Sr. No. Particulars Amount (Rs)
1. Initial Investment 30,000
2. Cost of capital 10%
3. Quantity manufactured and sold annually 1400
4. Price per unit 30
5. Variable cost per unit 20
6. Fixed cost 3000
7. Depreciation 2000
8. Tax rate 50%
9. Life of the project 5 years
10. Net salvage value Nil

Assume that the following underlying variables may have values as shown below:

Underlying Variables Pessimistic Optimistic
Quantity manufactured and sold 800 1800
Price per unit Rs 20 Rs 50
Variable cost per unit Rs 40 Rs 15

Required:

(A) Calculate the sensitivity of net present value to variation in (i) quantity manufactured and sold (ii) price per unit.

(B) Calculate the accounting breakeven point and the financial breakeven point

Q 2. Modern corporation is currently at its target debt-equity ratio of 0.5:1. It is considering a proposal to expand capacity which is expected to cost Rs 500 million and generate after tax cash flows of Rs130 million per year for the next eight years. The tax rate for the firm is 30 percent. Ram the CEO of the company, has considered two financing options (i) Issue of equity stock. The required return on the company's new equity is 20 percent and the issuance cost will be 12 percent. (ii) Issue of debentures at a yield of 13 percent. The issuance cost will be 3 percent.

Required:

a) What is the WACC for Modern?

b) What is the Modern's weighted average flotation cost?

c) What is the NPV of the proposal after taking into account the flotation coast ?

Q3. The balance sheet of Rama cables Ltd. on December 31, 20X0 is given below:

Amt Rs 000

Liabilities & Capital Amount Assets Amount
Share capital 150 Fixed assets 400
Retained earnings 180 Inventories 200
Long-term borrowings 80 Receivables 150
Short-term bank borrowings 200 Cash 50
Trade creditors 140
Provisions 50
Total 800 800

The sales of the firm for year ending on 31st December were Rs10, 00,000. Its profit margin on the sales was 6 percent and its dividend payout ratio was 50 percent. The tax rate was 60 percent. Rama cables expects its sales to increase by 30 percent in the year 20X1. The ratio of assets to sales and spontaneous current liabilities to sales would remain unchanged. Likewise the profit margin ration, tax rate and dividend payout ratio would remain unchanged.

Required:

Estimate the external funds requirement for the year 20X1.

answer all THREE question

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