Strategic Financial Management NMIMS assignment Solution June 2023

Description

NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Strategic Financial Management
Internal Assignment Applicable for December2022 Examination
Assignment Marks: 30

Instructions:
All Questions carry equal marks.
 All Questions are compulsory
 All answers to be explained in not more than 1000 words for question 1 and 2 and for
question 3 in not more than 500 words for each subsection. Use relevant examples,
illustrations as far as possible.
 All answers to be written individually. Discussion and group work is not advisable.
 Students are free to refer to any books/reference material/website/internet for attempting
their assignments, but are not allowed to copy the matter as it is from the source of
reference.
 Students should write the assignment in their own words. Copying of assignments from other
students is not allowed.
 Students should follow the following parameter for answering the assignment questions.
1. ABC Limited is looking at expanding its business and wants to invest in a new plant to
boost its production capacity. The plant has a life of three years. The details are as follows.
For Theoretical Answer
Assessment Parameter Weightage
Introduction 20%
Concepts and Application
related to the question
60%
Conclusion 20%
For Numerical Answer
Assessment Parameter Weightage
Understanding and usage
of the formula
20%
Procedure / Steps 50%
Correct Answer &
Interpretation
30%
NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Strategic Financial Management
Internal Assignment Applicable for December2022 Examination
 The plant would depreciate in three years from the acquiring cost of Rs. 4,20,000 to zero
in three years. There would be no salvage value at the end of three years. The depreciation
would be on a straight line basis.
 The additional revenue from the plant would be ~ Rs. 6,00,000 in year 1, Rs. 7,00,000 in
year 2 and 3.
 The input cost (raw material) is expected to be ~ Rs. 3,00,000 for year 1 and 2 and Rs.
4,00,000 in year 3.
Assuming a tax rate of 30% and a discount rate of 20%, you are required to
1. Arrive at the expected annual cash flows (after-tax)
2. Compute the net present value of the investment and determine if the investment is
financially viable?
(10 Marks)
2. As an investor in the equity market you become aware of investment opportunity in 3
corporates. Assuming that the cost of equity is 8%, compute the fair value of X Limited,
Y Limited and Z Limited using the Dividend discount model.
a. Given the history of the company, X Limited is expected to pay a uniform dividend of Rs.
5.00 per share.
b. Being in the IT Industry, Y Limited is expected to pay a dividend of Rs. 4.00 per share
and an increase of 5% year on year thereafter.
c. A pharmaceutical company, Z Limited has been paying a dividend of Rs. 2.00 over for
the last 3 years. The company is expected to do extremely well and increase the dividend
pay-out by 7% year on year. This year the dividend expected is Rs. 8.00.
Additionally, what is the biggest lacuna in the Dividend Discount Model in valuing
stocks? Give an example to explain.
(10 Marks)
NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Strategic Financial Management
Internal Assignment Applicable for December 2021 Examination
3. As an Investment Banker your client, LMN Limited is looking at a restructuring its
business. You extract the following data from the financials of the company.
Particulars Rs. Crs.
Equity capital (Face value Rs. 10) 1,000.00
Debentures (@ 12%) 400.00
Long Term unsecured loan (@15%) 200.00
Total 1,600.00
The company has been paying a dividend of 20% per annum (historically). The stock of
LMN Limited is listed at Rs. 20 on the NSE.
You are required to
a. Compute the cost of Equity capital. (5 Marks)
b. Weighted Average cost of capital of LMN Limited. (5 Marks)
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