Strategic Financial Management-1st-2016-NMIMS

Strategic Financial Management-1st-2016-NMIMS
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Question 1: A company needs Rs.12 lacs for a new factory which would yield an EBIT of Rs. 200,000 annually. The company believes in maximizing the earnings per share to enhance shareholder value. It is considering the possibility of issuing equity shares plus raising a debt of Rs.200,000, Rs.600,000 or Rs.1,000,000. The current market price of the shares is Rs.40 per share which is expected to drop to Rs.25 per share if the borrowings were to exceed Rs.750,000.
Cost of borrowings is as under:
Upto Rs.250,000 - 10% p.a
Between Rs.250,001 and Rs.625,000 - 14% p.a
Beyond Rs.625,000 - 16% p.a
Tax rate is 50%. Work out the EPS that will meet the objective of the management. (10 Marks)
Question 2: Discuss in brief the Principles of Capital Budgeting. (10 Marks)
Question 3: (a) During the last few years, Mergers & Acquisitions have become a preferred route to have inorganic growth – some have succeeded whereas some have failed. Various reasons have been put forth as an argument to justify M&A as a route to growth. Briefly discuss the reasons behind M & A. (5 Marks)
Question 3(b): Dividends have been a great source of price manipulation in the stock markets, especially one time big dividends push the share price through the roof. However, MM has a different opinion making dividend irrelevant. What are the assumptions of MM hypothesis of irrelevance of dividends. (5 Marks)
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