Question 1)a) The share capital of a company is Rs.8, 00, 000 with shares of face value Rs.10. It has a debt capital of Rs.5, 00, 000 at 12% interest rate. The sales of the company are 2, 50, 000 units per annum at a selling price of Rs.5 per unit and the variable cost per unit is Rs.3. The fixed cost is Rs.1, 00, 000 and tax rate is 50%. If the sales increase by 20% calculate the percentage increase in EPS, degree of operating and financial leverages at the two output levels. Comment on the behavior of leverages when the production is increased by 20%.
b) Describe the following terms with appropriate examples.
• Non- operating surplus
• Intangible fixed assets
• Sundry creditors
• Fixed liabilities
• Prepaid expenses
Question 2)a) A company purchased a machine for Rs. 5,,00,000 having a zero salvage value and a discounted payback period of 7.5 years. The firm follows straight line method of depreciation at a rate of 10%. If the cash flows are evenly distributed and the tax rate is 40%, what is the annual PBT on the machine? Also find out the IRR and NBCR of the machine if the cost of capital is 12%.
b) Find out the cost of capital of a company that is employing equity capital and term loans in the ratio 3:2 and paying a constant dividend of 12.5% per year and an interest of 14% per year. The tax rate is 40%.