NMIMS BBA – B.Com Corporate Finance Solved Answer Assignment

Corporate Finance

NMIMS BBA – B.Com Corporate Finance Solved Answer Assignment

 Q 1. The following information is made available in respect of a company

Equity Capitalization rate15%

Earnings per share.20

Assuming a rate of return to be (i) 10% and (ii) 20%.

Using Walter’s Model calculates the market price per share if the dividend Payout were

 (i) 0% (ii)25% (iii)50 % (iv)75% and (v) 100%  In each case. (10 Marks) –

ANS:

Introduction

The formula for Walter’s Model is straightforward. It is intended to separate the expected earnings per portion by the required return rate and then subtract the current worth of the predictable future dividends. The present worth of the predictable future dividends is calculated by multiplying the expected dividend per share by the expected dividend payout ratio and dividing it by the obligatory degree of interest.

NMIMS BBA – B.Com Corporate Finance Solved Answer Assignment

Concepts and Applications

Walter’s Model calculates the marketplace price per part of a company based on its expected dividend payout ratio, salaries per part & the required degree of profit by the investors. The formula for Walter’s Model is as follows:

P0 = E / Ke – D(1 – payout ratio) / Ke

Where,

P0 = Market price per share E = Earnings per share Ke = Equity Capitalization rate D = Dividend per part Payout proportion = %age of salaries remunerated out as bonuses

Given information:

Conclusion

Investors should be aware of some limitations of Walter’s Model. Firstly, the Model assumes that the company’s earnings are constant, which may not be true in the real world. Secondly, the archetypal undertakes that the disbursement payout ratio remains continuous with time, which might not be the case in the real world, as companies may change their dividend policies occasionally. Thirdly, the Model assumes that the obligatory degree of profit by investors is constant, which may not be the circumstance in the actual domain, as the required rate of return may fluctuate depending on various economic and market conditions.

NMIMS BBA – B.Com Corporate Finance Solved Answer Assignment

Q 2. A company currently sells its goods on credit. The average collection period is 45 days. It presently sells 2, 00,000 units at Rs.40 per unit. The variable cost per unit is Rs.30 and the average cost per unit is made within 10 days. is Rs.35.It is considering offering a cash discount of 1% if payment is made within 10 days? In such a case sales are expected to increase to 2, 50,000 units, and the average collection period is expected to fall to 30 days. Assuming that 50% of debtors in terms of value will avail of the cash discount and the expected rate of return on investment is 30% should the proposed discount be offered? (10 Marks)

ANS:

Introduction

A higher discount percentage may attract more customers but also reduce the profit margins significantly. The target audience is another important factor to consider while analyzing discounts. Different customer segments may have varying price sensitivities, and therefore, businesses need to tailor their discount strategies to meet each segment’s needs. For example, offering discounts to high-value customers may lead to better customer retention, while offering discounts to low-value customers may not significantly impact revenue.

NMIMS BBA – B.Com Corporate Finance Solved Answer Assignment

Concepts and Applications

To analyze the proposed cash discount, we need to compare the costs and benefits of offering the discount.

First, let’s calculate the current situation without the cash discount:

• Sales revenue = 2,00,000 x Rs.40 = Rs. 80,00,000
• Variable cost = 2,00,000 x Rs.30 = Rs. 60,00,000
• Contribution margin = Rs. 80,00,000 – Rs. 60,00,000 = Rs. 20,00,000
• Average cost per unit = Rs. 35
• Gross profit per unit = Rs. 40 – Rs. 35 = Rs. 5
• Gross profit margin = Rs. 5/Rs. 40 = 12.5%
• Average collection period = 45 days
• Average accounts receivable = (45/365) x Rs. 80,00,000 = Rs. 9,89,041
• Cost of capital = 30%

Conclusion

Businesses also need to consider the impact of discounts on customer satisfaction. Offering discounts may increase customer satisfaction, as customers perceive discounts as a sign of appreciation and value. However, offering discounts may also lead to negative perceptions, such as questioning the product or service’s quality or wondering why the product or service was initially priced higher.

Q 3a. Explain the concept of the “Working Capital Cycle”. (5 Marks)  

ANS:

Introduction

The length of the Working Capital Cycle could have a significant influence on a company’s money flow & financial stability. If the cycle is too long, a company may struggle to meet its financial obligations and may need to rely on external financing to cover its expenses.

Concepts and Applications

The Working Capital Cycle is a crucial aspect of managing the financial operations of any business, whether large or small. It refers to the duration of the time period it proceeds for a business to change its savings in catalog, financial records receivable & other assets into cash and then use that cash to pay off its liabilities.

Conclusion

In conclusion, the Working Capital Cycle is a fundamental concept in finance that every business owner and manager should understand. By focusing on the three key cycle stages, companies can optimize their cash flow, reduce their financial risk, and improve their overall financial performance.

Q3b. Amar Cable Corporation Ltd. is considering investing in Machine

A The following information is made available

Determine the payback period of machine A. (5 Marks)

ANS:

Introduction

The payback period is an important monetary metric utilized to evaluate the success of speculation. It represents the quantity of time period it grosses for a business to recuperate its early savings from the money movements produced by the investment.

Concepts and Applications

We will calculate the cumulative cash flows for each year until they add up to the initial investment. The payback period will be the year in which the increasing money movements are equivalent to or exceed the initial savings.

Year 1: CFAT = Rs. 3,00,000 Cumulative cash flow after Year 1 = Rs. 3,00,000

Year 2: CFAT = Rs. 3,50,000 Cumulative cash flow after Year 2 = Rs. 6,50,000

Year 3: CFAT = Rs. 4,50,000 Cumulative cash flow after Year 3 = Rs. 11,00,000

Year 4: CFAT = Rs. 2,50,000 Cumulative cash flow after Year 4 = Rs. 13,50,000

Year 5: CFAT = Rs. 1,50,000 + salvage value of Rs. 50,000 = Rs. 2,00,000 Cumulative cash flow after Year 5 = Rs. 15,50,000

Conclusion

While the reimbursement period provides a useful snapshot of an investment’s profitability, it does not proceed into the interpretation of the phase worth of cash or the overall effectiveness of the investment beyond the payback period.