1. MS - 42
Management Programme
ASSIGNMENT
FIRST SEMESTER
2011
MS-42: CAPITAL INVESTMENT AND
FINANCING DECISIONS
School of Management Studies
INDIRA GANDHI NATIONAL OPEN UNIVERSITY
MAIDAN GARHI, NEW DELHI – 110 068

2. ASSIGNMENT
Course Code : MS - 42
Course Title : Capital Investment and Financing Decisions.
Assignment Code : MS-42/SEM - I /2011
Coverage : All Blocks
Note: Assignments Solved by www.distpub.com
1. Find the present value of Rs. 2,000 due in 6 years if money is worth compounded semi-
annually. (b) Ascertain the present value of an amount of Rs. 8,000 deposited now in a
commercial bank for a period of 6 years at 12% rate of interest.
2. You are required to determine the weighted average cost of capital (K) of the K.C. Ltd.
using (i) book value weights; and (ii) market value weights. The following information is
available for you perusal. The K.C. Ltd.’s present book value capital structure is:
Debentures (Rs. 100 per debenture) 8,00,000
Preference shares (Rs. 100 per share) 2,00,000
Equity shares (Rs. 10 per share) 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are debentures @ Rs.
110, preference shares @ Rs. 120 and equity shares @ Rs. 22. Anticipated external
financing opportunities are:
(i) Rs. 100 per debenture redeemable at par : 20-year maturity, 8% coupon rate, 4%
flotation costs, sale price Rs. 100.
(ii) Rs. 100 preference share redeemable at par: 15-year maturity, 10% dividend rate,
5% floatation costs, sale price Rs. 100.
(iii) Equity shares Rs. 2 per share flotation costs, sale price Rs. 22.
In addition, the dividend expected on the equity share at the end of the year Rs. 2 per
share; the anticipated growth rate in dividends in 5% and the company has the practice of
paying all its earning in the dorms of dividends. The corporate tax rate is 50%
3. Explain the various theories of capital structure and discuss the factors influencing
pattern of capital structure.

3. 4. A company is considering which of two mutually exclusive projects it should undertake.
The Finance Director thinks that the project with the higher NPV should be chosen
whereas the Managing Director thinks that the one with the higher IRR should be
undertaken especially as both projects have the same initial outlay and length of life. The
company anticipates a cost of capital of 10% and the net after-tax cash flows of the
projects are as follows:
Year 0 1 2 3 4 5
Class flows:
Project X (200) 35 80 90 75 20
Project Y (200) 218 10 10 4 3
Required
(a) Calculate the NPV and IRR of each project
(b) State, with reasons, which project you would recommend.
(c) Explain the inconsistency in the ranking of the two projects.
The discount factors are as follows:
Year 0 1 2 3 4 5
Discount factors (10%) 1 0.91 0.83 0.75 0.68 0.62
(20%) 1 0.83 0.69 0.58 0.48 0.41
5. Discuss about economic appraisal and explain Social Cost Benefit Analysis.
6. Explain in detail the various non traditional sources of long term financing.
7. Write short notes on the following.
a) Leveraged recapitalization
b) Merger as a source of value addition
c) Financial Engineering
d) Modigliani – Miller Hypothesis