Explain the main features of debentures

Reference no: EM131102088

1. Last date of submitting the assignment is 15th July 2016. No assignment will be entertained after the due date.

2. You can prepare the assignment using lecture notes, online sources or suggested text book.

3. You are asked not to give your assignment to other students because copying or transcribing may affect your marks adversely.

4. University observes the plagiarism policy of only up to 20%, hence your assignment should not be plagiarized more that the prescribed limit.

5. A good presentation of diagrams, figures and examples can enhance the quality of your assignment.

6. The materials of this assignment may be used in Final Exam.

7. There is no limit for pages. I need reasonable answers of all the questions.

Questions:

Question 1. Explain the main features of debentures.

Question 2. (a) What is optimum capital structure?

(b) Compute the market value of the firm, value of shares and the average cost of capital from the following information.
Net operating income Rs. 2, 00,000
Total investment Rs. 5, 00,000
Equity capitalization Rate:

(a) If the firm uses no debt 10%
(b) If the firm uses Rs. 25,000 debentures 11%
(c) If the firm uses Rs. 4, 00,000 debentures 13%

Assume that Rs. 5, 00,000 debentures can be raised at 6% rate of interest whereas Rs. 4, 00,000 debentures can be raised at 7% rate of interest.

Question 3. A company has on its books the following amounts and specific costs of each type of capital.

Type of Capital Book Value Rs. Market Value Rs. Specific Costs (%)
Debt 4,00,000 3,80,000 5
Preference 1,00,00 1,10,000 6
Equity 6,00,00 9,00,000 18
Retained Earning 2,00,00 3,00,000 13

13,00,000 16,90,00

Determine the weighted average cost of capital using:

(a) Book value weights, and
(b) Market value weights.
Question 4. Explain different types of leverage with the help of examples..

Question 5. (a) What are the factors affecting the dividend policy?

(b) Critically appraise the Modigliani and Miller's approach of dividend policy.

Question 6. (a) A project costs Rs. 20, 00,000 and yields annually a profit of Rs. 3, 00,000 after depreciation @ 12½% but before tax at 50%. Calculate the pay-back period.
Profit after depreciation 4, 00,000
Tax 50% 1, 50,000
1, 50,000
Add depreciation:
20, 00,000 12.5 % 2, 50,000

(b) From the following information, calculate the net present value of the two projects and suggest which of the two projects should be accepted a discount rate of the two.

Reference no: EM131102088

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