NMIMS MBA Corporate Finance Solved Answer Assignment
15
Oct
2024
Corporate Finance
1. Compute the NPV and IRR for project whose initial cost is 30,000 and cash inflows are 14000, 8200, 12000, 15000, 22000. Discount Rate is 10%. Cost of Capital if borrowed is 15%.
Show value of NPV at IRR as discount factor.
Based on the above calculations, should the project be considered?(10 Marks)
Ans
Introduction:
Choosing how much money to put into an acquisition is one of the most important choices a company or business must make. Decisions regarding the valuation of resources are another name for it. Analyzing the potential returns on an investment project and choosing which investment proposal to pursue is known as a capital appraisal.
Concept and application:
A company can have access to a variety of investment opportunities. However, it is only possible to select or accept some available choices with it. Because there is always a limit on the total funds that are available with the company, the company is compelled to choose the project that is both the best fit for its purpose and is accessible within the limits of the total funds that are available with the company.
Conclusion:
The net present value of the proposed undertaking with a starting investment of 30,000 yen is 22,386 yen. The current value of all of the money inflows is 52386. Because the NPV is positive, it is reasonable to assume that carrying out the project will be profitable for the company.
2. Calculate the Cash Cycle using the following information. (Assume 360 days in a year).
30% of sales are on credit and 80% of purchases are on credit (10 Marks)
Ans
Introduction:
The process by which a company turns its investments into inventory and cash is called the Cash Conversion Cycle. This occurrence is used to determine how long it takes a company to complete this process. Therefore, it assesses the amount of time, expressed as the number of days, that a company spends converting its input resources into cash.
Concept and application:
It is mathematically presented as follows:
Cash Conversion Cycle = DIO + DSO – DPO
Here:
DIO = Days Inventory Outstanding
DSO = Days Sales Outstanding
DPO = Days Payable Outstanding
Days Sales Outstanding (DSO):
DSO is equal to the average amount of receivables multiplied by 365. It is the typical number of days a business must collect all its outstanding debts and obligations. It is, therefore, the time it takes for a company to receive cash after sales have been made. This is how it is determined:
DSO = Average accounts receivable * 365
Total credit sales
Days Payable Outstanding (DPO):
The number of days a business takes on average to pay its payables is the days payable outstanding. Therefore, it is the average number of days that it takes the company to clear its invoices by making payments to its trade creditors or suppliers.
DPO= Average accounts payable *365
Cost of goods sold
Conclusion:
In the scenario that has been presented, the DIO for the business is 12.76 days. It suggests that the business purchases raw materials from its suppliers, keep those raw materials in the production process, converts those raw materials into finished goods, and then sells those finished goods to customers within approximately thirteen days of the raw materials being purchased.
3. a. In the following balance sheet calculate the Current Ratio and the Acid Test Ratio –
Ans
Introduction:
Comparing various financial ratios is the focus of ratio analysis, which is a subfield of financial management. The purpose of ratio analysis is to assess a company’s liquidity or solvency situation, profitability, and other factors. Two or more numbers from a company’s financial statements are compared to determine a ratio.
Concept and application:
Calculating ratios is done for a few different reasons. Some of which are:
Comparison- One of the most critical aspects of determining ratios is to compare the company’s performance to that of other comparable businesses operating in the same sector to ascertain where the company stands in the market.
Trend analysis: Analysis of trends can be accomplished with the help of ratios, which provide insight into a company’s financial performance patterns. The obtained direction can be used to make predictions regarding future economic performance and the anticipated turbulence, which cannot be determined using the ratios for a single period.
Conclusion:
The company’s current ratio in 2015 was 0.928:1, and the quick ratio of the business in that same year was 0.12:1. In 2016, the current balance went down to 0.886:1, while the short percentage went up to 0.13:1.
b. Sanghvi & Sons P.Ltd. is a private limited company with almost 80% shareholding with the Sanghvi family. It has now a requirement of Rs. 400 crores for a project to be undertaken. Currently it has a debt-equity ratio of about 1.5:1. The management of the company feels that a ratio of up to 2:1 is acceptable. Discuss whether the company should fund its requirements by Debt or Equity and various considerations for the same.
Ans
Introduction:
A business can only maintain continuous activities with sufficient financial resources. It is possible to acquire money from a variety of different sources. The company’s owners can contribute some of it, or it could be obtained through borrowing. These other funding avenues are what the company’s capital framework is made up of.
Concept and application:
The company must find the best way to incorporate all these different types of funding into its overall capital framework. The financial manager is responsible for analyzing the available options and selecting the one that will generate the highest revenues per share.
Conclusion:
Because Sanghvi and Sons P. Ltd. have a debt-equity ratio of 1.5:1, it can be deduced that the proportion of total debt in the organization’s capital structure is equivalent to having 1.5 times as much equity as that present. In addition, it is exploring the possibility of raising money by borrowing 400 crores.
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