Section A

1. a. AML Ltd. Currently pays a dividend of Rs. 2 per share and this
dividend is expected to grow at the rate of 15% for the next three
years, then at the rate of 10% for next three years after which the
growth rate will decline to 5 % and remain at that level forever.
You are required to determine:
i) The value of the company’s stock if the required rate of
return is 18%?
ii) Whether the value will be different if the investor is
expected to hold the stock for three years? (7)
1. b. There are three mutually exclusive projects with the following cash
flows:
Year Project A Project B Project C
0 - Rs. 10,000 Rs. 5,000 - Rs. 15,000
1 Rs. 8,000 Rs. 5,000 Rs. 10,000
2 Rs. 7,000 - Rs. 8,000 Rs. 0,000
The cost of capital is 12%. You are required to select one of these
projects:
i) Which project would you pick using the NPV Rule?
ii) Which project would you pick using the IRR Rule?
iii) Is there any conflict in ranking? How would you explain the
conflict? (7)

Section B

2. “Wealth maximization may reflect the most efficient use of society’s

economic resources and thus lead to a maximization of society’s
economic well being.” In the light of this statement, do you consider
shareholder wealth maximization to be a valid objective for a
commercial firm? Give reasons for your answer. (14)
3. The shares of Isabella Ltd. Are selling at Rs. 240 per share. The firm
has paid dividend @ Rs 24 per share. The estimated growth of the
company is approximately 5% per year. Determine the cost of equity
capital of the company. (14)
4. A company has sales of Rs. 1,00,000. The variable costs are 40% of
the sales value and fixed costs are Rs. 30,000.Interest on long term
debt is Rs. 10,000. Calculate composite leverage and illustrate its
impact if sales increases by 5%. (14)
5. “Working Capital Management deals with decisions regarding the
appropriate mix and level of current assets and current liabilities.”
Elucidate the statement. (14)
6. Shekhawati Tubes & Pumps is contemplating of relaxing its collection
effort with a view to increase its sales. At present annual sales of the
company are 200 lakh, average collection period is 45 days, bad debt
losses are 2 percent of sales, contribution to sales ratio is 20 percent
and cost of funds to the company is 15 percent. It is expected that
once the collection effort is relaxed the sales would increase by Rs.50
lakh, average collection period would increase to 60 days and and bad
debt losses would increase to 4 percent. What is the net incremental
benefit to the company? (14)
7. Write short notes on any two:
a. NOI Approach
b. MM Approach
c. EVA (7+7)