# Smu Question Paper

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Smu Question Paper
Q1. The following data is available in respect of a company :
Equity Rs.10lakhs,cost of capital 18%
Debt Rs.5lakhs,cost of debt 13%
Calculate the weighted average cost of funds taking market values as weights assuming tax rate as 40%.
Answer: We Know that, WACC = We Ke + WpKp +Wr Kr + WdKd + WtKt WACC = 0.67*.18+0.33*13(1-.40) =0.146 or 14.6%

A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All capital sources – common stock, preferred stock, bonds and any other long-term debt – are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

Q2. ABC Ltd. provides the information as shown in table 6.21 regarding the cost, sales, interests and selling prices. Calculate the DFL.

Q3. Two companies are identical in all respects except in the debt equity profile. Company X has 14% debentures worth Rs. 25,00,000 whereas company Y does not have any debt. Both companies earn 20% before interest and taxes on their total assets of Rs. 50,00,000. Assuming a tax rate of 40%, and cost of equity capital to be 22%, find out the value of the companies X and Y using NOI approach?
Hint: use the formula K0 = [B/(B+S)]Kd + [S/(B+S)]Ke

Answer: S= 1000,000/.22 =4545454.5 B=25,00,000 =K0=[25,00,000/[2500000+4545454.5)].14+[4545454.5/2500000+4545454.5)].22 0.0496+.142 =.1915 or 19.15% V = 5000000/0.1915 = 26,109,660.57

* Critical assumption is ko remains constant. * An increase in cheaper debt funds is exactly offset by an increase in the required rate of return on equity. * As long as ki is constant, ke is a linear function of

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