Marketing of Services

Question 1: The Balance Sheet of Delta Ltd. shows of Rs270 million book value of long term debenture. The before tax yield to maturity of the debenture is 9 percent. Delta Ltd is expected to pay Rs.2.50 dividend in the next year and the analysts are expecting the future growth rate of dividend would be around 7%. Market price of Delta stock currently hovering around Rs.50 per share. Number of outstanding shares of Delta is 90,00,000. The relevant tax rate is 40%.

1. Calculate after tax cost of debt for the Delta Ltd.
2. Calculate cost of equity of the firm
3. Calculate relevant weights for Debt and Equity Capital for Calculate of WACC.
4. Calculate the WACC for Delta.                                                                            (1+1+1+1=4 Marks)

Answer: 1

1. After Tax cost of Debt = 5.4%
2. Cost of Equity = (2.5/50) *100+7% = 5% +7% = 12%
3. Relevant Weights for Debt = 270/(270+450) = 37.5% and for Equity = 450/(270+450) = 62.5%
4. WACC= 5.4*37.5% + 12*62.5% = 2.025+7.5 = 9.03%

Question 2:N&B Ltd. gets 10,000 bolts annually from one of its suppliers at a cost of Rs.3.00 per bolt. The operations manager of the firm given a proposal of manufacturing the bolts in-house. He has calculated the cost of manufacturing per bolt would be Rs.2.50. The cost of bolt producing machine is Rs. 15,000. The policy of the firm is to follow Written Down Value (WDV) method of depreciation and the rate of depreciation would be 20%. The expected life of the machine is 5 years. If the firm’s tax rate is 35% and the cost of capital is 10% should the firm accept the proposal of the operations manager? Support your answer with necessary calculation.                                                                                                                                                            (7 Marks)

Question 3:Consider a project with following cash flows.

Calculate Modified Internal Rate of Return of the Project.                                                                      (4 Marks)

Question 4:

Additional Information:

Risk free rate = 4%; Operating Income of the firm = 40,000 ; Tax Rate = 50% ; Total Capital = 4,00,000; All earnings are paid as dividends.