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Strategic Financial Management [email protected] +91 95030-94040 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. (10 Marks) 2. Companies X and Y are into the same business with different capital structures. Calculate the weighted average cost of capital of X and Y. Assume income tax rate of 30%. (10 Marks) 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. (5 Marks) (b) Would the investment decision be the same based on IRR approach? Explain. (5 Marks) www.answersheets.in [email protected] [email protected] +91 95030-94040