Strategic Financial Management April 2026
Q.1: Pharmaco Ltd. is a growth-oriented pharmaceutical firm. Its latest financials show Earnings Per Share (EPS) = Rs.12. Management currently pays Dividend per Share (Div) = Rs.4. The firm’s internal rate of return on retained earnings is r = 14% and its cost of capital (k) is 10%.
a) Using Walter’s model, calculate the market price per share (P?) under the current dividend policy. Show all steps.
b) Calculate P? if the firm adopts (i) a zero-payout policy (Div = 0) and (ii) a 100% payout policy (Div = EPS = Rs.12). Show steps.
c) Based on your calculations, evaluate which dividend policy (current / zero payout / full payout) maximizes the firm’s market price per share. Briefly justify.
Answer:
Introduction:
The determination of how company's profits will be distributed is a very significant step in financing related to the future of a company and it's called the dividend decision. Investors commonly investigate the effect of a company's dividend policy on their current levels of income and the effectiveness of the company's overall strategy. One of the more frequently discussed theories related to the effects of a firm's dividend policy in relation to share price is Walter's Model, which relates firm dividend payout, Internal Rate of Return and Cost of Capital to develop a firm share price.
According to Walter's Model, the price of a share of common stock depends upon whether the firm's return on retained earnings is higher than the return required by shareholders. When the firm's internal rate of return (r) is greater than the cost of capital (k), the firm will issue fewer dividends since reinvestment of profits will create a higher return to the shareholder. On the other hand, whenever this situation is not true, paying higher dividends becomes advantageous.
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Q.2: “A mid-size Indian pharmaceutical company, Zencare Biotech Ltd., is planning a major expansion into regulated international markets. The Board expects the finance team to align the firm’s long-term financing, investment, and dividend decisions with its strategic plan.
As the Strategic Finance Manager, evaluate how Strategic Financial Management (SFM) can support Zencare in achieving this expansion. In your answer, apply SFM concepts such as strategic planning, investment decisions, financing decisions, dividend decisions, success factors, and constraints. Recommend the key strategic financial actions the company must take to ensure long-term value creation.”
Answer:
Introduction:
Strategic Financial Management (SFM) is the method used to plan, manage and control financial resources in ways that ensure an organisation achieves its long-term objectives. SFM differs from everyday financial management by connecting all financial decisions with the business's overall strategic plan. Therefore, SFM has particular relevance and importance to organisations either planning to expand internationally into regulated international markets, such as the USA and Europe, or those already operating internationally, such as Zencare Biotech Ltd., because of the importance of significant capital investments, risk management, and long-term planning, required to successfully expand globally. In addition, when expanding internationally into the regulated markets listed above, organisations will have to meet strict regulatory requirements, as well as incur high levels of research and development costs and face intense competition. Thus, the financial decisions made within the organisation need to be linked to its overall strategic objectives in order to achieve sustainable growth and profits.
Q3 (A) “Riviera Hotels Ltd. is planning to introduce an automated kitchen system across its premium resorts. You are asked to create a risk-adjusted NPV estimate using the following data and recommend whether the project should be accepted.
- Initial Investment: Rs.40,00,000
- Expected Annual Cash Inflows (5 years): Rs.12,00,000 per year
- Base Discount Rate (WACC): 10%
- Project Risk Premium: +3% (due to uncertain tourist demand and technology risk)
Create a complete risk-adjusted capital budgeting evaluation by:
(i) computing the risk-adjusted discount rate,
(ii) calculating NPV using that rate,
(iii) interpreting whether the project should be accepted.”
Answer:
Introduction:
Capital budgeting evaluates financial decision processes that businesses use to determine capital investments. It allows management to analyze how much a new project may yield in earnings versus the costs of investing in that project. One of the most common methods for conducting capital budgeting is using the Net Present Value (NPV) calculation. With NPV, the present value of future cash inflows or cash outflows is determined and then compared to the current investment (initial outlay). When capital investments have greater uncertainty (or higher risk), companies will use modified discount rates when calculating the NPV of expected cash inflows and outflows from capital investments that include an element of risk. This method is commonly referred to as the risk-adjusted discount rate calculation. Riviera Hotels Ltd. intends to implement an automated kitchen system within its high-end hotels; however, the implementation of this technology will be subject to both technology-related and tourist demand uncertainties as related to the cash inflows that the hotels will generate.
Q3 (B) “Sunbeam HealthTech Ltd., a mid-sized Indian wearable wellness device manufacturer, is planning to acquire FitTrack Analytics Pvt. Ltd., a health-tech startup that specialises in AI-driven health monitoring algorithms. The Board wants a strategic blueprint before approving the deal.
Create a comprehensive post-merger integration (PMI) plan for this acquisition. Your plan should cover key integration areas, value-creation levers, cultural alignment mechanisms, and risk-mitigation strategies.”
Answer:
Introduction:
Sunbeam HealthTech, an emerging Indian manufacturer of wearable wellness devices, plans to grow its technology capabilities through the acquisition of FitTrack Analytics, an early-stage company focused on creating artificial intelligence-based algorithms for health monitoring. The acquisition will allow Sunbeam to incorporate advanced analytics into its products, improve user experience, and maintain a competitive advantage in the rapidly changing health-tech industry. It will require an effective post-merger integration (PMI) plan that provides for operational, technological, and cultural integration of two different organizations. A well-structured PMI will maximise synergies, minimise disruption, and generate long-term value for stakeholders.