Larsen Ltd an engineering company, is engaged in diverse activities. The manager of Larsen ltd felt the need of buying a new machine to replace the old machine.
finance
Description
MB 721–
FINANACIAL MANAGEMENT
# Instruction:
IF you feel some data is missing in any of the problem you may assume a
relevant data and justify your assumption #
1.
Larsen
Ltd an engineering company, is engaged in diverse activities. The manager of
Larsen ltd felt the need of buying a new machine to replace the old machine.
The cost of the new machine at time of purchase, including delivery and
installation, is $200,000. If it is purchased, Larsen will incur costs of
$5,000 to remove the present equipment and revamp its facilities. This $5,000
is tax deductible at time 0.
Depreciation
for tax purposes will be allowed as follows
|
Year |
Depr. For tax purposes |
|
1 |
$40,000 |
|
2 |
$70,000 |
|
3 |
$30,000 |
|
4 |
$30,000 |
|
5 |
$30,000 |
The book value and tax value of the existing machine
is $100,000 and a remaining useful life of 10 years. However, the existing machine
can be sold for only $40,000 and is being depreciated for book and tax purposes
using the straight-line method over its actual life.
Management has provided you with the following
comparative manufacturing cost data:
|
|
Present Equipment |
New Equipment |
|
Annual capacity (units) |
400000 |
400000 |
|
Annual costs: |
|
|
|
Labour |
$30000 |
$25000 |
|
Depreciation |
10000 |
14000 |
|
Other (all cash) |
48000 |
20000 |
|
Total annual costs |
$ 88000 |
$ 59000 |
At the end of 10 years, the existing machine has an
expected salvage value equal to its removal costs. At the end of ten years, the
new machine has an expected salvage value of $60,000 which will be taxable. And
it has no removal costs. No changes in working capital are required with the
purchase of the new machine. There will not be any changes in the volume of
sales in the coming ten years. The company's cost of capital is 16 %, and its
tax rate is 40%. Determine the net present value of the project. (15 marks)
2.
Voltas
Limited, just declared a dividend of $ 14.00 per share. Mr. B is planning to
purchase the share of Voltas Limited, anticipating increase in growth rate from
8% to 9%, which will continue for three years. He also expects the market price
of this share to be $ 360.00 after three years.
You are
required to determine:
a.
the maximum
amount Mr. B should pay for shares, if he requires a rate of return of 13% per
annum.
b.
the
maximum price Mr. B will be willing to pay for share, if he is of the opinion
that the 9% growth can be maintained indefinitely and require 13% rate of return
per annum.
c.
the price
of share at the end of three years, if 9% growth rate is achieved and assuming
other conditions remaining same as in (ii) above. (5 marks)
3. The following
data are available for a bond
|
Face
value |
Rs. 1,000 |
|
Coupon
Rate |
16% |
|
Years
to Maturity |
6 |
|
Redemption
value |
Rs. 1,000 |
|
Yield
to maturity |
17% |
What is the current market price? Calculate the expected market price,
if increase in required yield is by 75 basis points. (5 marks)
4.
Following
data is available in respect of two companies having same business risk:
Capital employed = Rs. 2,00,000, EBIT = Rs. 30,000
Ke =
12.5%
|
Sources |
Levered Company (Rs.) |
Unlevered Company(Rs.) |
|
|
|
|
|
Debt (@10%) |
1,00,000 |
Nil |
|
|
|
|
|
Equity |
1,00,000 |
200000 |
|
|
|
|
Investor is holding 15% shares in levered company.
CALCULATE increase in annual earnings of investor if he switches his holding
from Levered to Unlevered company. Also discuss about arbitrage and reverse
arbitrage (5 marks)
ALL THE BEST
