Corporate Finance
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Q1: Calculate the degree of operating leverage and degree of financial leverage for the following firms:
Firms

A

B

Sales (Rs.)
Variable cost p.u
Fixed cost (Rs.)
Output (units)
Interest

3,60,000
20
72,000
6,000
40,000

7,50,000
150
1,40,000
1,500
80,000

Q2. A Project costs Rs 60,000 and is expected to generate cash inflows as:
Year

Cash inflows(Rs)

1

10,000

2

12,000

3

15,000

4

18,000

5

20,000

6

22,000

Calculate the Net Present Value of the project if the cost of capital is 10%. (10 Marks)
Q3. Solve the following:
a) A company earns 5 per share. The cost of capital is 10%, the rate of return on investment is 14% and the dividend payout ratio is 25%. Calculate the value of each share by using Walter’s Model. (5 Marks)
b) XYZ Limited has a paidup share capital of Rs. 10 lakhs of Rs. 10 each. The company has a dividend payout rate of 10%. Annual growth rate is expected to be 4%. The capitalisation rate is 20%. Calculate the value of the share of XYZ based on Gordon’s Model. (5 Marks)