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FM Assignment

The document outlines key concepts in financial management, specifically the differences between NPV and IRR, along with various numerical questions and answers related to capital budgeting, cost of capital, leverage analysis, and EBIT-EPS analysis. It provides decision rules for project acceptance based on NPV and IRR, as well as calculations for NPV, IRR, and other financial metrics. Additionally, it discusses the implications of leverage on business risk and the impact of debt on EPS.

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sanchaybansal3215
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12 views5 pages

FM Assignment

The document outlines key concepts in financial management, specifically the differences between NPV and IRR, along with various numerical questions and answers related to capital budgeting, cost of capital, leverage analysis, and EBIT-EPS analysis. It provides decision rules for project acceptance based on NPV and IRR, as well as calculations for NPV, IRR, and other financial metrics. Additionally, it discusses the implications of leverage on business risk and the impact of debt on EPS.

Uploaded by

sanchaybansal3215
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

FINANCIAL MANAGEMENT ASSIGNMENT

1. Difference between NPV and IRR


Basis NPV IRR
Meaning Difference between present value of cash inflows
Rateand
of return
present
at which
value of
NPVcash
becomes
outflows.
zero.
Decision Rule Accept project if NPV > 0 Accept project if IRR > Cost of Capital
Reinvestment Assumption Cash inflows reinvested at Cost of Capital Cash inflows reinvested at IRR
Multiple Values Single value always May have multiple IRRs
Preference in Conflicts NPV preferred Not preferred

2. Numerical Questions with Answers


Capital Budgeting
1. Calculate NPV for investment of ■1,50,000 with inflows ■50,000 for 5 years at 10% discount
rate. (Ans: NPV ≈ ■39,620)
2. Project A & B have equal cost. A: NPV = ■30,000, B: NPV = ■40,000. Which project? (Ans:
Project B)
3. Calculate IRR: Initial ■1,00,000; inflow ■30,000 for 5 years. (Ans: ≈ 18%)
4. PI Calculation: PV inflow ■2,20,000, Cost ■2,00,000. (Ans: PI = 1.10, Accept)
5. Payback: Investment ■1,20,000; inflows 40k, 40k, 40k. (Ans: 3 years)
Cost of Capital
1. Cost of equity via Dividend Model: D1=■5, P0=■50, g=5%. (Ans: 15%)
2. After-tax cost of debt: Coupon 10%, tax 30%. (Ans: 7%)
3. WACC: Weights E=60%, D=40%; Ke=14%, Kd(after tax)=8%. (Ans: 11.2%)
4. Cost of Preference: Dividend ■8, Price ■100. (Ans: 8%)
5. Ke via CAPM: Rf=6%, β=1.2, Rm=12%. (Ans: 13.2%)
Leverage Analysis
1. DOL = %∆EBIT/%∆Sales: Sales ↑10%, EBIT ↑20%. (Ans: DOL=2)
2. DFL = %∆EPS/%∆EBIT: EPS ↑30%, EBIT ↑15%. (Ans: DFL=2)
3. DCL = DOL × DFL = 2×3. (Ans: 6)
4. Calculate EBIT break-even: Fixed ■2,00,000; Contribution ■40/unit; Qty=6000. (Ans:
EBIT=■40,000)
5. High leverage means high business risk? (Ans: Yes)
EBIT - EPS Analysis
1. EBIT=■3,00,000; Interest=■1,00,000; Shares=20,000. EPS? (Ans: ■10)
2. Select financing: Debt vs Equity given interest cost (Ans: Choose structure with higher EPS)
3. EBIT Indifference: EBT equal under two capital structures. (Ans: Solve break-even EBIT)
4. EPS at EBIT ■4,00,000: I=■50,000; Tax 30%; Shares=25k (Ans: EPS = ■11.2)
5. Higher debt ↑EPS? (Ans: Yes, but ↑financial risk)

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