Assignment Set – 1

Q1. Calculate the cost of equity for Triveni Ltd., which has issued equity shares with a face value of ₹1000 at a 8% premium. The expected dividend at the end of the year is 10%, and the annual dividend growth rate is 6%. Additionally, determine the cost of equity under the assumption of zero dividend growth. 5+5        

Ans 1.

Calculate the Cost of Equity for Triveni Ltd.

Given:

• Face Value of Share (FV) = ₹1000
• Issue Price = Face Value + 8% Premium = ₹1000 + 8% of ₹1000 = ₹1000 + ₹80 = ₹1080
• Expected Dividend (D₁) = 10% of Face Value = 10% × ₹1000 = ₹100
• Dividend Growth Rate (g) = 6% = 0.06

We are required to calculate:

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Q2. a) Compute the future value of ₹10,000 to be invested for a period of 5 years at an annual interest rate of 12%.

1. b) Compute the present value of ₹10,000 expected to be received after 5 years, assuming the same discount rate. 5+5

Ans 2.

(a) Compute the Future Value of ₹10,000 to be Invested for 5 Years at 12% Annual Interest

Given:

• Principal (P) = ₹10,000
• Rate of Interest (r) = 12% = 0.12
• Time Period (n) = 5 years

Formula:

Where:

FV = Future Value

P = Present Investment (Principal)

r = Annual Rate of Interest

Q3. a) What is leverage in financial management? Explain how it contributes to maximizing shareholders’ wealth

1. b) Define the concept of wealth maximization. How does it contrast with the notion of profit maximization? 5+5

Ans 3.

1. Leverage in Financial Management and How It Contributes to Maximizing Shareholders’ Wealth

In financial management, leverage refers to the strategic use of fixed-cost capital such as debt or preference shares to magnify potential returns on shareholders’ funds. It helps businesses optimize their capital structure by balancing risk and return. Leverage demonstrates how a firm’s earnings before interest and taxes (EBIT) influence the earnings available to equity shareholders.

Meaning and Types of Leverage

Leverage occurs when a company uses borrowed funds expecting that the returns from

Assignment Set – 2

Q4. Differentiate between the following concepts:

(a) Gross Working Capital and Net Working Capital, and

(b) Permanent Working Capital and Temporary Working Capital.       5+5     

Ans 4.

1. Difference Between Gross Working Capital and Net Working Capital

Working capital is an essential concept in financial management that represents the funds required for the day-to-day operations of a business. It ensures smooth functioning by maintaining adequate liquidity and short-term solvency. The two important measures of working capital are Gross Working Capital and Net Working Capital, which differ in meaning and purpose.

Meaning of Gross Working Capital

Gross Working Capital refers to the total amount of a company’s current assets. These

Q5. Critically analyze the major theories of capital structure, highlighting their key assumptions, implications, and relevance with appropriate examples  10       

Ans 5.

Capital structure refers to the proportion of debt and equity that a firm uses to finance its overall operations and growth. Determining an optimal capital structure is one of the most significant decisions in financial management because it affects the cost of capital, financial risk, and the value of the firm. Over the years, several theories have been developed to explain how debt and equity mix influences firm value. The major theories include the Net Income (NI) Approach, Net Operating Income (NOI) Approach, Traditional Theory, and

Q6. Given the following information for XYZ Ltd. – earnings per share of ₹10, capitalization rate of 10%, and return on investment of 15%:

(a) Compute the market price of the share using Walter’s Model for a dividend payout ratio of 50%.

(b) Assess whether the chosen payout ratio is optimal in accordance with Walter’s theory. 5+5         

Ans 6.

Walter’s Model – Calculation and Analysis

Given:

Earnings per share (E) = ₹10

Return on investment (r) = 15% = 0.15

Capitalization rate (k) = 10% = 0.10

Dividend payout ratio = 50%

Dividend (D) = 50% × 10 = ₹5