Assignment Set – 1

Q.1. Calculate the cost of equity for Triveni Ltd., which has issued equity shares with a face value of ₹1000 at an 8% premium. The expected dividend at the end of the year is 10%, and the annual dividend growth rate is 6%. Also determine the cost of equity assuming zero dividend growth. (5+5 = 10 Marks)

Ans 1.

The cost of equity is the minimum rate of return that equity shareholders expect on their investment. It is a critical input in capital budgeting, portfolio valuation, and the computation of the weighted average cost of capital. The Dividend Growth Model, also called Gordon’s Model, is commonly used to estimate the cost of equity when dividends grow at a constant rate over time.

Given Data

Cost of Equity – Triveni Ltd.

Given:

• Face Value (FV) = ₹1000

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Q.2. (a) Compute the future value of ₹10,000 invested for 5 years at 12% p.a. (b) Compute the present value of ₹10,000 expected after 5 years at the same discount rate. (5+5 = 10 Marks)

Ans 2.

Time value of money is a cornerstone of financial management, reflecting the principle that money available today is worth more than the same amount in the future due to its potential earning capacity. Future value and present value calculations are essential tools for investment appraisal, capital budgeting, and financial planning decisions in all business organizations.

Time Value of Money

(a) Future Value

Given:

• PV = ₹10,000

Q.3. (a) What is leverage and how does it contribute to maximizing shareholders’ wealth? (b) Define wealth maximization and contrast it with profit maximization. (5+5 = 10 Marks)

Ans 3.

Leverage and wealth maximization are central concepts in financial management. They guide how managers deploy debt capital, manage risk, and make decisions that enhance long-term shareholder value. Understanding the distinction between wealth and profit maximization is particularly important for setting the correct financial objective for any business organization.

Concept and Types of Leverage

Leverage refers to the use of fixed costs or fixed-charge capital to amplify returns available to

Assignment Set – 2

Q.4. Differentiate between: (a) Gross Working Capital and Net Working Capital, and (b) Permanent Working Capital and Temporary Working Capital. (5+5 = 10 Marks)

Ans 4.

Working capital management is a critical aspect of financial management that ensures a firm maintains sufficient liquidity to meet its short-term obligations while efficiently using its current assets. Understanding the distinctions between gross and net working capital, as well as permanent and temporary working capital, helps managers plan financing strategies and maintain operational continuity.

Gross Working Capital versus Net Working Capital

Gross working capital refers to the total investment in current assets of the firm. It includes

Q.5. Critically analyze the major theories of capital structure, highlighting their key assumptions, implications, and relevance with appropriate examples. (10 Marks)

Ans 5.

Capital structure refers to the mix of debt and equity used by a firm to finance its assets. The choice of capital structure affects the cost of capital, firm value, and financial risk. Several theories have been proposed to explain the optimal capital structure, each with distinct assumptions, implications, and real-world relevance for corporate financial management.

Modigliani-Miller Theory

Modigliani and Miller proposed in 1958 that in a perfect capital market without taxes, the

Q.6. Given EPS = ₹10, capitalization rate = 10%, ROI = 15%: (a) Compute market price using Walter’s Model at 50% payout ratio. (b) Assess whether this payout ratio is optimal per Walter’s theory. (5+5 = 10 Marks)

Ans 6.

Walter’s Model, developed by James E. Walter, establishes a relationship between dividend policy and the market price of shares. It argues that the dividend decision matters significantly when the firm’s return on investment differs from its cost of equity. This model provides a direct formula for computing share price based on earnings, dividends, and return on investment.

Given Data

Walter’s Model