Strategic Financial Management December 2023

Description

Assignment Sample Solution: Strategic Financial Management December 2023

NMIM$ Global Access

School for Continuing Education (NGA-SCE)

Course: Strategic Financial Management December 2023

Internal Assignment Applicable for December 2023 Examination

Question 1
A company is evaluating two investment projects, Project A and Project B, each with different levels of risk and an initial investment of Rs. 3,00,000. The risk-free rate of return is 5%. The expected cash flows and their probabilities for each project are as follows:
Project A:
Expected Cash Flow in Year 1: Rs.100,000
Expected Cash Flow in Year 2: Rs.150,000
Expected Cash Flow in Year 3: Rs.200,000
Project B:
Expected Cash Flow in Year 1: Rs.80,000
Expected Cash Flow in Year 2: Rs.120,000
Expected Cash Flow in Year 3: Rs.180,000
The company’s financial analysts have determined that Project A has a beta of 1.2, while Project B has a beta of 0.8. The market risk premium is 8%.
Calculate the risk-adjusted discount rate for each project using the Capital Asset Pricing Model (CAPM) and then determine which project the company should choose based on the risk-adjusted Net Present Value (NPV) criteria. (10 Marks)

Question 2
There are several ways in which Mergers and Acquisitions can be categorized. Explain the different types of Mergers and Acquisitions (M&A) that companies can pursue to achieve.
strategic objectives and growth. Provide examples of each type and discuss the reasons behind their adoption. (10 Marks)

Question 3a
A stock option is for 100 shares of the underlying stock. Ayush, a trader buys one call option contract on stock of Alpha Ltd. with a strike price of Rs.25. He pays Rs.150 for the option. Assuming on the option’s expiration date, Alpha Ltd.’s shares are selling for Rs.35; compute the gain/loss incurred by Ayush. (5 Marks)

Question 3b
Xenon Ltd. is a multinational manufacturing company, and its management team is evaluating the financial performance of its various divisions. They want to assess each division’s contribution to shareholder value using Economic Value Added (EVA). The company’s cost of capital is 10%.

Division A Division B
Total Capital Employed Rs.20,000,000 Rs.15,000,000
Operating Profit Rs.3,500,000 Rs.2,800,000
Tax Rate 30% 25%
Calculate the Economic Value Added (EVA) for each division and determine which division is creating more value for the shareholders. (5 Marks)

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