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Strategic Financial Management
April 2023 Examination
Q1. The capital structure of Orient Ltd in book value terms is given below:
TABLE BELOW
Equity shares (30 million shares, Rs. 10 par) Rs.300 million
11% Preference shares (1.5 million shares, Rs.100 par) Rs.150 million
8 % debentures (1.5 million, Rs.100 par) Rs.150 million
Total Rs.600 million
Market price of equity share Rs. 100
Market price of preference share Rs. 90
Market price of debentures Rs. 90
The expected dividend per share is Rs. 4 and the dividend is expected to grow at the rate of 10 percent. Preference shares are redeemable after 10 years and debentures are redeemable after 5 years. Compute the average cost of capital at market value assuming a tax rate of 30 percent. (10 Marks)
Ans 1.
Introduction
Capital structure is an organization’s specific mix of equity and debt to finance its general growth and operations. Equity capital arises from the possession of shares in a company for its potential to produce and earn earnings capital in the future. Financial debt is available in car loan issues and bonds, while equity might be available in preferred stock, common stock, or retained incomes. Temporary borrowings are also considered to be part of the capital structure.
Capital structure can be a mixture of an organization’s temporary financial obligation, continuing
Q2. Ramesh and Suresh have been managing their family business well for the last 5 years. Now the two brothers decide to expand the business and have hired you (merchant banker) to help them with their IPO process to raise funds from the market by offering a 30 percent stake. With your vast experience, you did an excellent job and the IPO was a success. Being a family-managed business, they did not have a dividend policy, but now Ramesh feels they should pay a high dividend and Suresh feels the profits should be retained in the business. The family has approached you for advice. You are required to make a presentation explaining the relevance/irrelevance to the new Board. (10 Marks)
Ans 2.
Introduction
Going public is generally known as IPOs, the initial sale of possession with supplies by a personal business to the public or retail capitalists. Businesses can use it to raise funds for funding development or other usages.
IPOs are generally associated with high-growth businesses, and there are different reasons organizations might choose to transform the public. Going public can help a firm with new resources to purchase development and growth, help to expand its tasks and procedures, and
Q3. Company Simpson is contemplating the purchase of Company Wilson. Managements of both companies have suggested two alternative proposals for exchange of shares as indicated below:
Alternative 1 – In proportion to the earnings per share of two companies
Alternative 2 – 0.5 share of Simpson Ltd for one share of Wilson Ltd
The details of both the companies are given below:
Simpson Ltd Wilson Ltd
No. of shares 3,00,000 2,00,000
Market price per share ₹30.00 ₹20.00
EPS ₹4.00 ₹2.25
You are required to:
a. Calculate the total earnings after the merger under both alternatives and the number of shares (5 Marks)
Ans 3a.
Introduction
In business, acquiring a company means obtaining that company to expand its business. Companies do hostile takeovers and consent purchasing. Either way, the company acquires another business. Among the two, the business acquires the maximum variety of shares of the various other companies
b. Show the impact of EPS on the shareholders of Simpson Ltd under both alternatives (5 Marks)
Ans 3b.
Introduction
Gaining profits by creating earnings is the sole objective of running a company. Every service deals tooth and nail to make it through on the market. As it is a competitive time, every company is seeking opportunities to grow and expand their company. A firm can create revenue by making an item and selling it to the
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