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ASSIGNMENT
Course Code : MS - 42
Course Title : Capital Investment and Financing Decisions
Assignment Code : MS-
42/TMA/SEM-I/2014
Coverage : All Blocks
Note : Attempt all the
questions and submit this assignment on or before 30th April , 2014 to the
coordinator of your study centre.
1.
What is cost of capital ? Explain how is the cost of long term debt, preference
capital, equity capital and retained earnings are calculated? Discuss the
relationship between EBIT and EPS.
Ans
: Cost of capital :
The cost of
capital is a term used in the field of financial investment to refer to the
cost of a company's funds (both debt and equity), or, from an investor's point
of view "the shareholder's required return on a portfolio company's
existing securities". It is used to evaluate new projects of a company as
it is the minimum return that investors expect for providing capital to the
company, thus setting a benchmark that a new project has to meet. For an
investment to be worthwhile, the expected return on capital must be greater
than the cost of capital. The cost of capital is the rate of return that
capital could be expected to earn in an alternative investment of equivalent
risk. If a project is of similar risk to a company's average business
activities it is reasonable to use the company's average cost of capital as a
basis for the evaluation. A company's securities typically include both debt
and equity, one must
2.
a) Discuss the concept of project life cycle. Explain the different steps
involved in the
process
of designing and using of Work
Breakdown Structure. Explain in what ways may the Work Breakdown Structure be used as
a key document to monitor and control a project ?
Ans
: Concept of project life cycle :
he project life
cycle consists of four phases, initiation, planning, execution (including
monitoring and controlling) and evaluation. The MPMM Project Management
Methodology is an excellent resource for this part of the Unit. The Initiation
phase begins by defining the scope, purpose, objectives, resources,
deliverables, timescales and structure of the project. The next step is to
develop a Business Case, including several possible solutions and
b) What
is the need for economic appraisal of a project ? Explain process of the
economic appraisal of a project.
Ans
: Need for economic appraisal of a
project :
Economic
appraisal is a systematic means of analysing all the costs and benefits of
various ways in which a project objective can be met. In essence, economic
appraisal shows:
- Whether the benefits of a project
exceed its costs;
- Which among a range of options to
achieve an objective has the highest net
- benefit; or
- Which option is the most cost
effective, where benefits are equivalent.
Economic
appraisal is more commonly
3.
What is meant by Social Cost Benefit Analysis? Explain how the Social Cost -
Benefit Analysis of a project is
undertaken ?
Ans
: Social Cost Benefit Analysis :
Social
cost-benefit analysis is a systematic and cohesive economic tool(method) to
survey all the impacts caused by an urban development project. It comprises not
just the financial effects (investment costs, direct benefits like tax and
fees, et cetera), but all the social effects, like: pollution, safety, indirect
(labour) market, legal aspects, et cetera. The main aim of a social
cost-benefit analysis is to attach a price to as many effects as possible in
order to uniformly weigh the above-mentioned heterogeneous effects. As a
result, these prices reflect the value a society attaches to the caused
effects, enabling the decision maker to form a statement about the net social
welfare effects of a project.
4.a)
Explain the various financial instruments through which companies can raise
funds from capital markets.
b)
What is financial engineering and explain those factors which contribute
towards financial engineering? Discuss the innovations that have taken place in
fixed income securities.
Ans
: a) Financial Markets
There is not one
financial market, but rather many markets, each dealing with a particular type
of financial instrument. But all financial markets perform crucial functions.
By providing a mechanism for quickly and cheap buying and selling of
securities, financial markets offer liquidity. Financial markets allow the
interaction of buyers and sellers to determine the price and the price conveys
important information about the prospects
b)
What is financial engineering and explain those factors which contribute
towards financial engineering? Discuss the innovations that have taken place in
fixed income securities.
Ans
: Financial engineering :
Financial
engineering is a multidisciplinary field involving financial theory, the
methods of engineering, the tools of mathematics and the practice of
programming. It has also been defined as the application of technical methods,
especially from mathematical finance and computational finance, in the practice
of finance. Despite its name, financial engineering does not belong to any of
the fields in traditional engineering. In the United States United
States
5.
Problem: Calculate the cost of capital in the following cases:
(i)
X Ltd. issues 12% debentures of face value Rs. 100 each and realizes Rs. 95
per debentures. The debentures are
redeemable after 10 years at a premium of 10%.
(ii)
Y Ltd. issues preference shares of face value Rs. 100 each carrying 14%
dividend and the realizes Rs. 92 per
share. The shares are repayable after 12 years at par.
Note:
Both companies are paying income – tax at 50%.
Ans
: 1.X Ltd. issues 12% debentures of face value Rs. 100 each and realizes Rs. 95
per debentures. The debentures are
redeemable after 10 years at a premium of 10%.
Cost
of Debt :
kd = [Int
+ (RV – SV) / N] (1 – t)k / {(RV + SV) / 2}
Int=Annual
interest to be paid i.e. Rs. 12
t=Company’s
effective tax rate i.e. 50% or 0.50
Dear students get fully solved
assignments
Send your semester &
Specialization name to our mail id :
“ help.mbaassignments@gmail.com ”
or
Call us at : 08263069601
(Prefer mailing. Call in emergency )
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