Exercises

Q1. Information about a firm is given below:

Q2. ABC Ltd. has 1.2 million common shares outstanding and following sets of information is applicable to it:
a. Dividend per share (DPS) is 0.30 when net income (NI) is INR 800,000. If the expected investments to be made is INR 1,000,000, estimate the total amount of debt to be raised to fund these investments.
b. If in the previous case, net income would be INR 300,000, estimate the total amount of debt to be raised.
c. If the investments of INR 1,000,000 is to be met by 50% debt and equity each, what will be the DPS if the net income realized would be INR 650,000.
d. If the firm has to maintain a debt-equity ratio of 50% always for its funding requirements and has to pay a DPS of 0.30 when the net income realized is INR 650,000, what will be the maximum investment the firm can make.

Q3. DEF Ltd. is presently an unlevered firm whose cost of equity is 12%. It is contemplating to recapitalize itself so that the resulting debt-equity ratio in market value terms would become 30:70 at the end of third year from now and remain as it is forever. It is estimated that the firm will be taking debt for the three years, whose interest is payable at the end of the year at a rate of 8% p.a., as follows: Time (t=) | 0 | 1 | 2 | Debt taken at the start of the year (INR Mn) | 120 | 180 | 240 |

It is also estimated that the free cash flow to the firm (FCFF) would be growing at a rate of 5% p.a. after year 3. The distribution of FCFF for year end 1-3 is as follows: Time (t=) | 1 | 2 | 3 | FCFF (INR Mn) | -80 | 20 | 65 |

If the risk-free rate is 4.70%, market risk premium is 6%, applicable tax-rate is 40% and the value of all non-operating assets at t=0 is INR 120 MN, estimate the following: a. Total present value of Tax-shields for next three years. b. Total present