Finance Answers

Machine will cost Rs. 100,000 and the machine will generate annual cash flow Rs. 30,000 each for next 6 years . If cost of capital is 15% calculate NPV & IRR. Should machine be purchased

Empire Ltd. needs Rs. 10,00,000 to build a new factory will yield EBIT of Rs.1,50,000 year The company has to choose between two alternative financing plans : 75% Equity and 25% debt or 50% equity & 50% debt. Under the first plan shares can be sold at Rs. 50 per share and the interest rate on debt will be 14% . under the record plan the shares can be sold for Rs.40 per share and the interest rate on debt will be 16 percent. Determine EPS for each plant assuming a 50% tax rate

If national income increases from R150 billion to R200 billion, the money demand for transaction purpose will ______ and the demand curve for money will______.

1. decrease; make a leftward shift
2. increase; remain the same
3. cannot be determined; remain the same
4. increase; make a rightward shift

Q2. Crown Ltd has the following book value capital structure. Equity capital (shares of Rs 10 par value each) Rs 15 crore, 12% Preference capital (Rs 100 par value each) Rs 1 crore. Retained earnings Rs 20 crore, 11.5% Debentures (Rs 100 par value each) 10 crore and 11% Term loan Rs 12.5 crore. The next year expected dividend on equity is Rs 3.6 per share and has an expected growth rate of 7%. The market value is Rs 40/share. Preference stock, redeemable after 10 years is currently trading at Rs 75 per share. Debentures, trading at Rs 80 are redeemable after 6 years. Corporate tax rate is 40%. Calculate the WACC as per book value weights. Comment on the relevance of calculation of WACC.

Question 2

A perfectly competitive firm faces the short-run cost schedule shown in Table 1.

Output

Total Cost

12

1

20

2

26

3

32

Table 1

4

40

567

68

93

a) Calculate average total cost (ATC=TC/Q), marginal cost (MC=ATC/AQ) and marginal revenue (MR-ATR/AQ) for each level of output. The price per unit of output is £16.

[5 marks]

b) Plot ATC, MC and MR on a graph and mark the profit-maximising output. At what output is profit maximised?

[5 marks]

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BUS108 (2021)

c) How much profit/loss is made at the optimum level of output?

Page 3

[5 marks]

d) Assume market price declines to £9 per unit. If the firm's average variable cost is £9.5, should the firm shut down in the short run? In the long run? Explain.

[5 marks]

e) If the firm is typical of other firms, what price will it charge in the long run? Explain.

[5 marks]

Mr. Santos will deposit P10, 000 at the ABC bank at the end of each quarter for 2 years. If the bank gives out 9% compounded quarterly, find the amount to his credit just after the last deposit?

Which of the following statements is CORRECT?

Group of answer choices

One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.

Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.

One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.

One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.

One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.

What is the technical term for the American dollar?

Org Pvt. Ltd. is considering two mutually exclusive capital investments. The project’s expected net cash flows are as follows:

Expected Cash Flows:

Year Project A Project B

0 -400 -575

1 95 150

2 110 200

3 118 250

4 125 275

5 140 230

6 150 180

a. If you were told that each project’s cost of capital was 10%, which project should be selected using the NPV criteria?

b. What is each project’s IRR?

c. What is the regular payback period for these two projects?

d. What is the profitability index for each project if the cost of capital is 12%?

In the 2008 global financial crisis many banks faced both a liquidity shock and a solvency shock. Discuss the main causes of each of these shocks and explain how regulators and governments responded to the illiquidity/insolvency faced by banks.                                                                                      (25 marks)