10. M/S Siphon Limited, a fast growing foreign company wants to expand its total assets by
50 percent by the end of the cun-ent year. Given below are the company's capital structure
which it considers to be optimal.

8 90 debentures Rs. 4,00,000 |
9 °0 preference Rs. 1,00,000 |
shares

Equity shares | Rs. 5,00,000 |
Total | Rs. 10,00,000 |

There are no short-term debts. The additional capital proposed to be increased by 50°0 will
be as follows:

‎New debentures would be sold at I 1 percent coupon rate and will be sold at par.‏ ٭
‎Preference shares will have a 12 percent rate and will also be sold at par.‏

‎* Equity shares cun-ently selling at Rs. 100 can be sold to net the company Rs. 95.
The shareholders’ required rate of return is 10 be consisting of a dividend yield of
10% and an expected grm&th rate of 7°0.

‎* Retained earnings for the year are estimated to be Rs. 50,000

‎൭

‎The colporate tax is 35% (ignore depreciation)

‎You are required to calculate the following values for the additional capital to be raised:

‎(a) What is the required amount of capital budget OR what is the additional capital
proposed to be raised by the company?

‎(b) How much of the capital budget additional capital must be financed by extemal equity
(that is, issue of new equity shares) to maintain the capital structure?

‎(c) Calculate the cost of (i) new issues of equity shares and (ii) retained eamings

‎(d) Calculate the weighted average cost of additional capital using marginal weights.

‎(3x10 marks = 30 marks)

‎Part C
Compulsory question, the question carries 20 marks

‎11. M/S Meghalaya Limited has to select one of the following two projects. The estimated cash
flows relate to four years and the initial investment for the projects are as follows:

‎Paniculars Project X (Rs) Project Y (Rs)
Initial investment | 11000 | 1000 10000
Cash inflows

‎TS year 6000 1000
2" year 2000 1000
3 "year 1000 2000
4 year 5000 10000

‎The cost of capital in Project X is 10% and Project ۷ is 15 °0. Calculate NPV and IRR for
the Project X and Project Y.

‎(20 marks)

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