corporate finance

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Joined: Fri Dec 11, 2015 7:22 am

corporate finance

Postby gitimamishra01 » Sat Dec 26, 2015 3:42 pm

I have the following doubts in QUIZ 6 of corporate finance
Q1 - Won't the NPV of the first project be greater than the second. Also the COC isn't mentioned.
Q2 - In case of unconventional cash flows, NPV is always the best method. IRR may produce multiple or no IRR. How is the answer A when it has to be MOST LIKELY TRUE
Q5 - There are two selling price given in the question 50 & 18, which do we have to take?
Q9 - Shouldn't the new units be 25,000? Also the new contribution increased by 20% so should'nt it be 12?
Q16 - the growth isn't adde to the dividend calculated to get at next year's dividend and as EBITDA is of this year the dividend will aslo be of the current year.
Q17 - Perez caterers ltd’s D/E should be 1.25as it is 5/4

Please reply as soon as possible


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Re: corporate finance

Postby edupristine » Wed Dec 30, 2015 1:18 pm

Ques 1: Net cash flow for the 1st year in the figure will be 2000 in place of 1000
Since, they have same outflows. So we can imply that project A shall have higher NPV as it has higher IRR.

Ques 2 We are really sorry. Actually the question should be Which of the following is most likely to be true?
And answer should be :In case of unconventional cash flows, IRR is not the best method. In case of unconventional cash flows, NPV is always the best method. IRR may produce multiple or no IRR.

Ques 5: Dexter Corp’s shares sell in the market at $18. This year’s PAT is expected to be $200,000. The company has a policy to retain company’s profits to the extent of expected Capital Expenditure, which is $110,000 since last year and is expected to remain for next 2 years. The company has 50,000 shares of $10 each and the market price of each share is $18. Calculate the cost of equity.
Solution: g = RR*ROE = (110,000)/200,000] * 200,000/(50,000*18) = 0.55 * 0.22 = 0.12.
D1 = (110,000)/50,000 = $2.20.
kce = 2.2/18 + 0.12 = 0.24.

Ques 9: Yes you are correct. New units will be 25,000 and the new contribution is increased by 12%.

Ques 16: Dividend shall be calculated after considering the growth.

Ques 17: Yes you are right. It should be 1.25.

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