final project

1. ATTEMPT ALL QUESTION
Q1: AAA Company is considering new production machine costing $60000 and is likely to produce
cash return after tax of $20000 per year for 6 year. The unlevered cost of equity capital of company is
20%. The company intends to finance the project with 60% debt, which will bear interest rate of 16%?
The loan will be paid equal principal amount at the end of each is of 6 years. Flotation cost on financing
amount to $1000 tc=30%. What is APV (adjusted present value of project). Is project acceptable?
Q2: AA CO. Contemplating rising $15M by issuing debt. Following are the alternatives
 A 10 years 8%,-Convertible-Debentures with a $50 conversion price and $ 1000 face value.
 A 10 year 10% -Straight-Bonds each bond has one warrant to purchase 5 shares for a $50 a
share.
The co has 40 % tax rate and currently MPS is $40 it’s earning before interest and taxes are constant
25% of total capitalization. Currently total capitalization $ 40M: appear as 10% long term debt =$ 10m,
CS (@par $5) = $5m. Additional paid in capital = $20M and R/E = $5 million. Compute:
a) total capitalization,
b) EPS under each alternative before and after conversion / exercise
Q3: Warid Company plans to raise Rs 6 million. It can issue 14% TFCs or 12 % preference shares
ordinary shares can be sold at Rs 50 per share. The possible capi tal structure as follows:
(i) All ordinary shares
(ii) 50% ordinary shares and 50 TFC’S
(iii) 30 % ordinary shares, 50% TFCs & 20% Preferred Shares.
Assume expected EBTT level is Rs 1.2 million corporate tax rate is 50%.
a) Construct EPS & EPIT Chart for each financing method
b) Calculate indifference point between plan 1 and plan 3 (Algebraically & Graphically)
And also interpret the result
Q4: DDD Company has $ 1.5 M in EBIT; currently it is all equity finance. It may issue $3 M perpetual
debt at 20% interest to purchase stock thereby recapitalizing the corporation. There are no personal
taxes

2. a) If the corporate tax is 50% what is income to all security holders
i) If the company remains all equity financed
ii) If it is recapitalized
b) What is the present value of debt tax shield
Show calculations by two methods
c) The required return on equity for company stock is 20% while it remain all equity finance
i) What is the value of firm if unlevered
ii) What is the value of firm if recapitalized
Q5: write short note on any of the two
a) Risk in capital budgeting
b) Fixed income financing
c) Corporate restructuring
d) Dividend policy