B.Com DCM2102 FINANCIAL MANAGEMENT

Description

SESSION	JULY – AUGUST 2024
PROGRAM	BACHELOR OF COMMERCE (B.COM)
SEMESTER	III
COURSE CODE & NAME	DCM2102 FINANCIAL MANAGEMENT

 

 

Assignment Set – 1

 

1a. A company expects to receive Rs 120,000 annually for the next 10 years. If the discount rate is 15%, what is the present value of this annuity?

1. Describe different sources of long-term financing available to a company 5+5

Ans 1.

a. Present Value of an Annuity

To calculate the present value (PV) of an annuity, the formula is:

 

 

 

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2a. ABC Corporation forecasts an annual EBIT of $300,000. With $800,000 in 8% bonds and a 10% cost of equity capital, along with a corporate tax rate of 25%, determine the firm’s value.

1. b) Discuss the advantage of the wealth maximization objective of financial management over profit maximization.

Ans 2.

a. Valuation of ABC Corporation

The firm’s valuation is calculated using the following formula under the

 

 

3. PQR Ltd is evaluating a $250,000 investment project that is anticipated to produce $60,000 annually for the next four years. With a discount rate of 18%, compute the NPV and provide a recommendation on the project’s financial viability 8+2

Ans 3.

Net Present Value (NPV) Calculation for PQR Ltd

Formula for NPV:

Where:

• = Cash inflow at time  ($60,000 annually)
• = Discount rate (18% or 0.18)
• = Time period (years)
• = Initial investment ($

 

 

Assignment Set – 2

 

4. Calculate the cost of equity for X Ltd, which issued Rs 100 equity shares at a 10% premium. The expected dividend at year-end is 15%, growing annually at 8%. Also, find the cost of equity if dividends do not grow. 5+5

Ans 4.

Cost of Equity Calculation for X Ltd

Formula for Cost of Equity ( ):

1. When Dividends Grow Annually (Gordon Growth Model):

• Where:
  • = Expected dividend at year-end (Rs 15, i.e., 15% of Rs 100)
  • = Current market

 

5. For X Company, which earns Rs 5 per share, capitalized at 10%, and has an 18% return on investment:
6. a) Calculate the share price at a 25% dividend payout ratio using Walter’s model.
7. b) Determine if this is the optimal payout ratio per Walter’s theory. 7+3

Ans 5.

Analysis of Dividend Policy for X Company Using Walter’s Model

Walter’s model provides a framework for determining the value of a company’s shares based on its dividend payout policy. It considers the return on investment (ROI), cost of equity, and dividend payout ratio.

Formula for Walter’s Model:

Where:

 

 

 

6. Differentiate between:

(a) Gross Working Capital and Net Working Capital.

(b) Permanent Working Capital and Temporary Working Capital.      

Ans 6.

Differentiation Between Various Concepts of Working Capital

Working capital is a critical aspect of financial management, representing the funds available for the day-to-day operations of a business. It ensures smooth functioning by maintaining a balance between current assets and liabilities. The distinctions between different types of working capital provide a deeper understanding of its components and applications.

(a) Gross Working