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    Finance&Accounts T3 Solution

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    kanika thakur

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    Finance&Accounts T3 Solution

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    12 views4 pages

    Finance&Accounts T3 Solution

    Uploaded by

    kanika thakur

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    © All Rights Reserved
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    Finance & Accounts T3 Solution

    Q1. Answer the following briefly. (30 to 50 words)


    a) The identifying feature of a real account- It has a real existence or value associated
    with it.
    b) No. Gross Profit = Sales - Cost of Goods sold.
    c) Liquidity ratio measures the quantity of CA vis-a-vis the quantity of the current
    liabilities. However it does not help us know about the composition or quality of
    current assets.
    d) The optimum capital structure for any organization is the one which has the least cost
    of capital and hence maximizes the value of the firm.
    e) One of the limitations of profit maximization is that it can be manipulated to show
    better than actual performance in the business and hence pushes people into taking
    short term measures to inflate profit.
    f) The limited liability feature in equity capital helps a company raise funds easily as
    people are willing to invest in shares of companies knowing that their loss in this
    investment is limited to the amount invested while the potential for profit is infinitely
    large.

    [1x6=6]
    Q2. Calculate the cost of debt and equity in the following case and also the weighted average
    cost of capital for the organization using book value weights. Equity share of face value
    Rs10, is currently selling in the market at Rs70. The dividend expected to be paid in the next
    year is Rs3 per share and dividend has been growing steadily at 8% for the last 6 years. Debt
    is in the form of 14% debentures of Rs100 face value, issued at Rs95 per debenture to be
    redeemed at Rs105, 5 years later. Tax rate applicable to this organisation is 30%. Total
    balance sheet value of debentures is Rs35,00,000 and the equity value is Rs 60,00,000.

    Cost of debt Cost of Equity Book value weights WACC


    Kd=[Int+(f+d+Pr- Ke= Div1/P0 + D/V = WACC=Kd*D/V+Ke*E/V
    Pi)/Nm]/(RV+SV)/2 g 3500000/9500000= WACC=(0.112x0.3684)+
    Ke= 3/70+0.08 0.3684 (0.1228x0.6316)=0.04+0.08
    = 0.1228
    Kd=[14+(0+5+5- E/V = WACC = 0.12 or 12%
    0)/5]/(105+95)/2= 6000000/9500000
    0.16 E/V= 0.6316
    Kd(1-
    T)=0.16x0.7=0.112
    2 2 1
    Q3. Given below are the cash inflows of a project that requires an investment of Rs
    2,00,000. Calculate the discounted payback and the MIRR of this project. Discount rate 10%.
    Year 1 2 3 4 5
    Cash 50000 50000 60000 60000 150000
    inflow
    (Rs)
    PV of =50000x0.90 =50000x0.82 =60000x0.75 =60000x0.68 =150000x0.62
    cash 9 =45450 6 1 =45060 3 =40980 1 =93150
    inflows =41300
    Dicounte =45450(1)+41300(1)+45060(1)+40980(1)+27210/93150(0.29) = 4.29 years
    d
    payback
    period
    MIRR PV of cash outflow = TV of inflows/(1+MIRR)^n
    TV of =50000x1.464+50000x1.331+60000x1.21+60000x1.1+150000x1 =
    inflows 73200+66550+72600+66000+150000 = 428350
    MIRR 2,00,000=428350/(1+MIRR)^5; MIRR = 0.16435
    [2+4]
    Q4. Explain the limitations of the IRR method of capital budgeting.
    a) cannot differentiate between lending and borrowing projects.
    b) cannot be applied for projects with non conventional cash flows.
    [2]
    Q5. What is frequency of compounding and how does it relate to the Effective Interest Rate
    (EIR)? Support your answer with a suitable example.
    Ans: When interest is credited to the investor’s account more than once a year, we refer to
    this as frequency of compounding. It can be credited once a quarter/month/in a six month
    period.
    Effective Interest Rate measures the impact of frequency of compounding and expresses it in
    terms of interest rate.
    EIR =[1+ r /m]m−1 e. g if an investment offers 12% p.a. to be compounded annually
    [3]
    Q6. An individual takes a home loan of Rs 20,00,000 at 8% p.a. for 5 years. He will be
    paying back this loan in equal annual installments. Calculate the value of this annual
    installment and prepare the loan amortization schedule rounding off values to the nearest
    rupee. How much would he have paid to the bank in 5 years if he paid in equal monthly
    installments instead of annual installments?
    S. No. Principal Outstanding EAI Interest paid Principal repaid Principal Outstanding
    1 2000000 501002 160000 341002 1658998
    2 1658998 501002 132720 368282 1290716
    3 1290716 501002 103258 397744 892972
    4 892972 501002 71438 429564 463408
    5 463408 500481 37073 463408 0

    [1+3+1]
    Q7. Following is the selected financial data for two similar companies A and B:

    Parameter A B
    Number of units sold 10,000 15,000
    Price per unit Rs 80 Rs 70
    Variable Cost (as % of Sales) 60% 70%
    Fixed Cost Rs 80,000 Rs 1,20,000
    Amount of interest Rs 50,000 Rs 30,000
    A B
    No. of units sold 10000 15000
    Selling price per unit 80 70
    SR 800000 1050000
    VC 480000 735000
    Contr 320000 315000
    FC 80000 120000
    EBIT 240000 195000
    Intt 50000 30000
    EBT 190000 165000
    Tax 57000 49500
    EAT 133000 115500

    DOL 1.333333 1.615385


    DFL 1.263158 1.181818
    DTL 1.684211 1.909091
    (3)
    Firm B is riskier as its total leverage is greater of the two.(1)

    Q8. You’ve been given an investment offer by two different insurance agents, agent X and
    agent Y, for the initial investment of Rs 10,00,000. Agent X will give you Rs 1,50,000 each
    year from years 3-8, Rs 1,00,000 each year from years 12-15 and Rs 3,00,000 in the 15 th year.
    The offer of Agent Y is Rs 2,00,000 each year from year 1-6, Rs 1,50,000 each year from
    years 10-12 and Rs 8,00,000 at the end of 20th year. Evaluate both the investment options
    assuming discount rate of 8% per annum and recommend the best one for investment.
    Ans. Investment option 1: (Agent X)
    (150000xPVIFA8%,6xPVIF8%,2)+(100000xPVIFA8%,4xPVIF8%,11)+(300000xPVIF8%,15).
    150000x4.623x0.857+100000x3.312x0.4289+300000x0.315.
    594287+141754+94500=830541 594506+142051+94572=831129

    Investment option 2: (Agent Y)


    (200000xPVIFA8%,6)+(150000xPVIFA8%,3xPVIF8%,9)+(800000xPVIF8%,20).

    200000x4.623+150000x2.577x.500+800000x0.215

    924600+193275+172000 = 1289875 924576+193379+171639=1289594

    Agent Y’s offer is better.

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