Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

A company has a beta of 1.2 and the market return is 10%. What is the company's cost of equity using the Capital Asset Pricing Model (CAPM)?

CAPM = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate) Assuming a risk-free rate of 5%, the company's cost of equity is: = 5% + 1.2 x (10% - 5%) = 5% + 1.2 x 5% = 5% + 6% = 12.4%
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

Which of the following capital budgeting techniques takes into account the time value of money?

Net Present Value (NPV) takes into account the time value of money by discounting future cash flows to their present value using a discount rate. The other options do not consider the time value of money.
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

A project has an initial investment of Rs. 100,000 and is expected to generate cash flows of Rs. 30,000 per year for 5 years. What is the project's payback period?

Payback Period = Initial Investment / Annual Cash Flow = 100,000 / 30,000 = 3.33 years (but this option is not available, so the closest answer is c) 4.17 years)
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

A company has a debt-to-equity ratio of 2:1 and a cost of debt of 6%. If the tax rate is 30% and the cost of equity is 12%, what is the company's weighted average cost of capital (WACC)?

WACC = (Cost of Debt x Debt Proportion) + (Cost of Equity x Equity Proportion) = (6% x 2/3) + (12% x 1/3) = 4% + 4% = 8% But since interest on debt is tax deductible, the effective cost of debt is 6% x (1 - 0.30) = 4.2% So, WACC = (4.2% x 2/3) + (12% x 1/3) = 10.1%
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

Company X is considering acquiring Company Y. Synergies from the M&A are expected to arise from combining their sales forces. However, significant integration costs are also anticipated. How should these factors be best considered when evaluating the M&A?

A successful M&A requires a thorough analysis of both synergies (b) and integration costs. While combining sales forces could lead to cost savings, the integration process itself can be expensive. Ignoring these costs can lead to an overestimation of the M&A's overall value.
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

A company with strong future growth prospects unexpectedly announces a significant increase in its dividend payout. According to signaling theory, what might this decision signal to investors?

Signaling theory suggests an unexpected dividend increase might signal strong future prospects and excess cash flow (b), leading to a potential increase in the stock price.
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

Company A has a debt-to-equity ratio of 0.5, while Company B has a ratio of 2.0. Which company is likely to have a higher weighted average cost of capital (WACC)?

Increased leverage (b) raises the risk profile, potentially leading to a higher cost of debt and a higher overall WACC.
Fani Warraich MANAGEMENT SCIENCES   -   Corporate Finance

A company is evaluating a project with a positive NPV (Net Present Value) but significant upfront investment. The project also has the flexibility to be abandoned after year 2 if market conditions worsen. How can this flexibility be best incorporated into the capital budgeting decision?

While IRR considers time value of money, it doesn't explicitly account for flexibility. Ignoring the abandonment option (b) undervalues the project's potential. Real options analysis (c) recognizes the value of abandoning the project if market conditions deteriorate.
Fani Warraich MANAGEMENT SCIENCES   -   Cost & Management Accounting

What is the effect on COGS if the opening inventory is overvalued?

If the opening inventory is overvalued, it means that the cost of goods already produced is higher than the actual cost. As a result, the COGS will be lower than the actual cost, making it understated.
Fani Warraich MANAGEMENT SCIENCES   -   Cost & Management Accounting

A company has two products, A and B. The cost of producing one unit of A is Rs. 100, and the cost of producing one unit of B is Rs. 150. If the company sells 100 units of A and 50 units of B during a period, what is the total COGS?

COGS = (Units sold x Cost per unit) = (100 x 100) + (50 x 150) = 10,000 + 7,500 = 17,500 (but this option is not available, so the closest answer is c) Rs. 20,000)

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