MANIPAL ACADEMY OF HIGHER EDUCATION, DUBAI CAMPUS
School of Business
III SEMESTER BBA FIRST INTERNAL EXAMINATION – 26th October 2023
COURSE: Corporate Finance (BBA2302)
(Regulation 2021)
Time: 2 Hours
MAX.MARKS: 40
Instructions to Candidates:
 Section A – Multiple Choice Questions (5 * 1 = 5 Marks)
 Section B – Scenario Analysis – Compulsory four Questions (5* 3 Marks = 15
Marks)
 Section C – Long answer questions (2* 10 Marks = 20 Marks)
Section A : - Multiple Choice Questions (5 *1 = 5 Marks)
Q1. What is the net present value of a project with the following cash flows if the
required rate of return is 12 percent?
A. -$1,574.41
B. -$1,208.19
C. -$842.12
D. $729.09
E. $1,311.16
Q2. You are considering a project with an initial cost of $7,800. What is the payback
period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year
over the next four years, respectively?
A. 3.21 years
B. 3.28 years
C. 3.36 years
D. 4.21 years
E. 4.29 years
Q3. A project has an initial cost of $35,000 and a 3-year life. The company uses straightline depreciation to a book value of zero over the life of the project. The projected net
income from the project is $1,200, $2,300, and $1,800 a year for the next 3 years,
respectively. What is the average accounting return?
A. 8.72 percent
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B. 10.10 percent
C. 11.26 percent
D. 14.69 percent
E. 15.14 percent
Q4. XYZ Co, which has an issued capital of 1 million shares, having a current market
value of $2.80 each, makes a rights issue of one new share for every two existing shares
at a price of $2.30. What is the TERP
A. $3.50
B. $2.63
C. $3.00
D. $2.50
E. $3.63
Q5. New York Deli's has 7 percent $100 preference shares outstanding that sells for $36
a share. What is the cost of irredeemable preference shares?
A. 13.68 percent
B. 14.00 percent
C. 14.29 percent
D. 19.44 percent
E. 19.80 percent
Section B –Compulsory fivee Questions (5* 3 Marks = 15 Marks)
Q6. Pepsi Ltd issued 60,000 10% preference shares of $100 each redeemable after 7
years at a premium of 5%. The cost of issue is $3 per share. [3 Marks]
(i)
Calculate COC.
(ii)
Calculate COC if they are issued at premium of 10 % and redeemed at par.
(iii)
Calculate COC if issued at discount of 5% and redeemed at par.
Q7. XYZ Company’s share is currently quoted in market at $63. It is about to pay a
dividend of Rs.3 per share and investors expect a growth rate of 10% per year. [*Use ex
div price per share]
Calculate: [3 Marks]
(i)The company’s cost of equity capital (i.e., re)
(ii)The indicated market price per share, if anticipated growth rate is 12%. (using the
above re , calculated in (i) calculate P0 )
Q8. A company is about to pay an ordinary dividend of 15c a share. The share price is
180c. The accounting rate of return on equity is 10.5% and 25% of earnings are paid out
as dividends. Calculate the cost of equity for the company. [3 Marks]
Q9. You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
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project. Neither project has any salvage value.
Should you accept or reject these projects based on payback analysis? [3 Marks]
Q10. An investment has the following cash flows and a required return of 13 percent.
Based on IRR, should this project be accepted? Why or why not? [3 Marks]
Section C – Long answer question (2*10 Marks =20 Marks)
Q11. XYZ Ltd. is contemplating the purchase of a new production machine with a cost
of $700,000. The machine is projected to yield the following cash inflows before taxes
over the next six years:
Year 1: $250,000
Year 2: $320,000
Year 3: $350,000
Year 4: $310,000
Year 5: $290,000
Year 6: $270,000
For tax purposes, the machine will be depreciated using the reducing balance method
at a rate of 20% per annum. By the end of year 6, the machine's scrap value will be
$60,000 before taxes.
To support this machine, XYZ Ltd. will need an increase in working capital of $50,000 at
the outset of the investment, which will be fully recouped by the end of Year 6.
The corporate tax rate is 25%, and XYZ Ltd.'s desired rate of return is 12%.
Calculate NPV and comment on the decision
[10 Marks]
Q12. Use the above question to calculate IRR and comment on the decision. [10 Marks]
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Formulae:
 TERP
 DVM (assuming constant diveidends)
The formula for valuing a share is therefore:
P0 = D
re
D = constant dividend from year 1 to infinity
P0 = share price now (year 0) re = shareholders’ required return, expressed as a decimal.
For a listed company, since the share price and dividend payment are known, the shareholders’
required return can be found by rearranging the formula:
re = D/ P0
 DVM Constant Growth Model
 Gordon Model:
g = bre
re = accounting rate of return on equity
b = earnings retention rate.
 Irredeemable Preference Shares
 Redeemable Preference Share:
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Kpr = D+1/n(MV-NP) x 100
½(MV+NP)
 ACCOUNTING RATE OF RETURN (ARR)
Average Profits = Total cash flow less depreciation
Number of years
Average investment = Initial investment plus residual value
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 INTERNAL RATE OF RETURN (IRR)
IRR=
L+
NL
NL-NH
x
(H-L)
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