Hi-Tech company’s partial balance sheet for 2 years is given below Due to a new product launch, Hi-Tech’s sales grew at a faster pace in year 2018.

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 Corporate Financeinfo_at_answersheets.in91
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•  Corporate Finance
• 1. ABC Co. sells 10,000 units at a price of
  Rs. 10 per unit. ABCs total fixed cost is Rs.
  20,000, Interest expense 10,000, and variable
  cost is Rs. 6 per unit. Find ABCs degree of
  operating leverage, degree of financial leverage
  and find degree of total leverage. ABCs parent
  company has Rs. 2.5 million is assets that are
  currently financed by 100 equity. Its EBIT is
  Rs.600,000 and its tax rate is 30. If ABCs
  parent changes its capital structure to include
  40 debt, what is its ROE before and after the
  change? Assume interest rate on debt is 10.
  Comment why the ROE increases after adding debt.
  Assuming all other things remain same, how will
  the ROE change if interest on debt is suddenly
  increased to 20 ? Elaborate on the same (10
  Marks)

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• 2. Kuber Company has a target capital structure
  of 50 debt and 50 equity, with an after tax
  cost of debt of 8. Cost of retained earnings is
  14. Its profit after tax is Rs, 250,000. Kuber
  is considering the following projects to invest
  in
• Project Size of
  project
  IRR of project
• Project A 100,000
  
  12.0
• Project B 120,000
  
  11.5
• Project C 120,000
  
  11.0
• Project D 120,000
  
  10.5
• Project E 100,000
  
  10.0
•  

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• Find the companys weighted average cost
  of capital. If the company accepts all the
  projects that it could invest in just from its
  profit after tax and considering their IRRs,
  which projects should it take up? Give reason.
  What will be its total investment in these
  projects?
• Taking into account its target capital
  structure, how much of equity portion should the
  company invest in these projects? If the company
  follows Irrelevance Approach (Modigliani and
  Miller) or residual dividend policy, what will be
  its dividend payout ratio? (10 Marks)

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• 3. Hi-Tech companys partial balance sheet for 2
  years is given below

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• Due to a new product launch, Hi-Techs
  sales grew at a faster pace in year 2018.
  HiTechs working capital bank had been assessing
  its Maximum Permissible Bank Finance (MPBF) under
  Method 1 till 2017, but due to a credit squeeze
  it suddenly changed to Method 2 in year 2018.
•  
• a) What is the change in net working capital
  between 2018 and 2017? (5 Marks)
•  
• b) What is the change in MPBF limit assigned by
  the bank from year 2017 to 2018? With this change
  in MPBF limit, will the working capital financing
  from the bank increase or decrease? (5 Marks)

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