# Strategic Financial Management PGDSCM

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Course : Strategic Financial Management
1. Bajaj Limited expects to see a growth of 20% every year in free cash flow to equity (FCFE) over
the next 3 years. The growth is likely to decline to 10% over the subsequent two years. After that, it
is expected to be at a stable level of 6% per year. The FCFE in the current year is Rs 20 per equity
share.
Compute the fair value per share based on the FCFE approach. Assume 20% cost of equity.
2. Companies X and Y are into the same business with different capital structures.
XY
Number of outstanding equity
shares 200000 100000
Face Value per share (Rs) 10 10
Market price per share (Rs) 15 20
Dividend per share (Rs) 2 3
Growth in dividend (YOY %) 0% 10%
No of debentures 0 10000
Market price per debenture (Rs) 95
Interest rate (on face value Rs 100) 10%
Calculate the weighted average cost of capital of X and Y. Assume income tax rate of 30%.
3. A manufacturer is exploring a proposed production of premium quality widgets. The required
machine would cost Rs 2 lakhs and has a useful life of 5 years. For the purpose of tax, relevant
depreciation allowed on the machine is 20 percent on written down value basis. The salvage value is
realizable at the end of 5 years. Initial working capital required is Rs 100,000 and is expected to
remain constant year on year. Widgets can be sold at Rs 8 each. Around 75,000 widgets can be
sold per year. A cash fixed cost of Rs 50,000 is expected to be incurred every year. Variable cost is
estimated to be Rs 4 per widget. The tax rate is 30%.
Assume 20% cost of capital.
(a) Evaluate the proposal based on its NPV.
(b) Would the investment decision be the same based on IRR approach? Explain.
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