CORPORATE FINANCE
1. MCARTECH Pvt. Ltd. is considering two mutually exclusive capital investments. The project’s expected net cash flows are as follows:
| Expected Cash Flows | ||
| Year | Project A | Project B |
| 0 | -500 | -875 |
| 1 | 100 | 150 |
| 2 | 110 | 200 |
| 3 | 120 | 250 |
| 4 | 175 | 375 |
| 5 | 240 | 530 |
| 6 | 300 | 680 |
a. If you were told that each project’s cost of capital was 12%, which project should be selected using the NPV criteria?
c. What is the profitability index for each project if the cost of capital is 12%?
c. What is the regular payback period for these two projects?
2. Assume that you plan to take a housing loan with a tenor of 20 year. The loan has to be repaid in equal monthly installments. Considering that the loan amount is Rs. 50 lakhs and the interest rate on loan is 9% p.a., what would be the equated monthly installment (EMI)?
3. LT India Ltd has the following capital structure, which it considers optimal:
| Debt | 35% |
| Equity shares | 65% |
| Total | 100% |
Applicable tax rate for the company is 25%. Risk free rate of return is 6%, average equity market investment has expected rate of return of 12%. The company’s beta is 1.10. Debt will bear an interest rate of 9% p.a.
Calculate:
a. Component cost of debt and equity shares assuming that the company does not issue
any additional equity shares.
b. Weighted Average Cost of Capital (WACC).
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