Mid term paper

PEPS to be bubbled means increase in PEPS required is 100%. DC = 2 means, 1% change in Sales brings 2% change in PEPS. Hence, to bring 100% increase in PEPS, sales need to increase by I. E. By RSI 215,000. C. By how much the Sales should be increased, if BIT is to be tripled ? Measure of leverage that links BIT with Sales is DOLL. DOLL is 1. 869 in this case. BIT change in Sales brings 1. 869 % change in PEPS. Hence, to bring 200% increase in PEPS, sales need to increase by 107% I. E. By RSI 890100. D. What would be the impact of increasing fixed cost proportion in cost structure of the firm on the operating leverage ? Show demonstration.

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And also show what would be the percentage increased required in sales to double the PEPS. [2+3] Fixed cost proportion in cost structure is linked with operating leverage. Higher the fixed cost proportion in cost structure, higher will be the operating leverage. Show one example of it. 9. Answer the followings: a) What are the factors to be taken into consideration by Finance Manager in order to maximize the wealth of shareholders ? Explain with examples. B) What is agency problem and agency cost ? What can be the ways to prevent agency costs in a profit making company ? Section C The question carries 25 marks. 10.

As an investment advisor, you have been approached by a client called Peter for advice on his investment plan. He is 30 years old and has RSI. 300,OHO in his bank. He plans to work for 20 years and retire at the age of 50, so that he can pursue his hobbies and travel widely in his post-retirement period. His present salary is RSI. 600,000 per year. He expects his salary to increase at the rate of 12 percent per year until his retirement. Peter has decided to invest his bank balance and future savings in a balanced mutual fund scheme which he believes will provide a return of 10 percent per year. You concur with his assessment.

Peter seeks your help in answering several questions given below. In answering these questions, ignore the tax factor. (I) Once he retires at the age of 50, he would like to withdraw RSI. 1,000,000 per year for his consumption needs for the following 30 years (His life expectancy is 80 years). Each annual withdrawal will be made at the beginning of the year. How much should be the value of his investments be when he turns 50, to meet his retirement need? Withdraw RSI. 1,OHO, 000 per year from the beginning of the 21st year for a period of 30 years? Assume that the savings will occur at the end of each year.

Remember that he already has some bank balance. ( Approximate it to the nearest ‘000) [10] Peter needs 10,369,700 when he reaches the age of 50. His bank balance of RSI 300,000 will grow to: 300,000 (1 . 10)20 = (ill) Suppose Peter wants to donate RSI. 800,OHO per year in the last 10 years of his life to a charitable cause. Each donation would be made at the beginning of the year. Further, he wants to bequeath RSI. 3,000,000 to his son at the end of his life. How much should he have in his investment account when he reaches the age of 50 to meet this need for donation and bequeathing? (Approximate it to the nearest ‘000. 10] One more question: Peter wants to find out the present value of his lifetime salary income. For the sake of simplicity, assume that his current salary of RSI 600,000 will be paid exactly a year from now, and his salary is paid annually. What is the present value of his lifetime salary income, if the discount rate applicable to the same is 8 percent? Remember that Peter expects his salary to increase at the rate of 12 percent per year until retirement. [This is the case of Growing Annuity – Finite Time. The formula and example of such case can be seen in the lecture slide of time value of money]

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