MCO-16 Course –VI : Financial Management
1. Distinguish between ‘relevance’ and irrelevance theories of dividends.
2. A company is considering an investment proposal with an investment of ‘ 40,00,000. Advice the company regarding the selection of the project based on DCF techniques.
Project A Project B (in Rs)
Cash flows (before taxes) 1 12,00,000 15,00,000
2 10,00,000 15,00,000
3 8,00,000 15,00,000
4 20,00,000 15,00,000
5 10,00,000
Assume a cost of capital of 10% and tax rate of 40%.
3. A company has on its books the following amount and specific cost of each type of capital.
Type of Capital Book Market Specific
Capital Value Cost (%)
Debt ‘ 4,00,000 3,80,000 5
Preference 1,00,000 3,80,000 8
Equity 6,00,000 12,00,000 15
Retained earnings 2,00,000 ——— 13
13,00,000 19,60,000
Determine the weighted average cost of capital using:
a) Book value weights and
b) Market value weights
How are different? Can you think of a situation where the weighted average
cost of capital would be the same using either of the weights?