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Corporate Finance
Jun 2025 Examination
Q1. Atlas Auto Components, a manufacturer of premium car accessories, reported total revenue of Rs.42,00,000 in the past financial year. The company produced and sold 21,000 units of its flagship product, high-performance car seat covers. The cost structure for the year was as follows:
– Raw Materials: Rs.7,20,000
– Labour Costs: Rs.11,40,000
– Manufacturing Overheads: Fixed: Rs.2,10,000Variable: Rs.1,75,000
To expand its market reach, Atlas Auto Components also spent Rs.1,80,000 on advertising and sales promotions, which are categorized as fixed expenses. Additionally, the company has an outstanding loan of Rs.18,00,000, borrowed at an interest rate of 7.5%.
Required:
Based on the above information, calculate the Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL), and Degree of Total Leverage (DTL) to assess the company’s financial risk and operational efficiency.
Comment on its financial position based on the Leverages. (10 Marks)
Q2. NovaTech Solutions Pvt. Ltd., a technology infrastructure company, is planning a large-scale expansion by setting up an advanced AI-driven manufacturing facility. The estimated capital requirement for the project is Rs.750 crores. The management is evaluating whether to raise the funds through debt, equity, or a combination of both.
Company’s Current Financial Position:
– Existing Equity Base: Rs.1,200 crores
– Existing Debt: Rs.1,440 crores
– Current Debt-Equity Ratio: 1.2:1
– Maximum Acceptable Debt-Equity Ratio: 2:1
– Current Return on Equity (ROE): 27%
– Cost of Debt: 9%
– Earnings Before Interest and Taxes (EBIT): Rs.600 crores
– Corporate Tax Rate: 30%
The company is considering three possible funding strategies:
- Full Debt Financing: Raising the entire Rs.750 crores through debt.
- Full Equity Financing: Issuing new shares worth Rs.750 crores.
- Hybrid Approach: Raising Rs.450 crores through debt and Rs.300 crores through equity.
Maximum Acceptable Debt-Equity Ratio: 2:1.
Advise on the best way to finance it discussing on each option w.r.t. its advantages and disadvantages. (Hint: Consider impact profitability and any other ratios as may be appropriate) (10 Marks)
Q3 (A) ABC Ltd., a consumer electronics company, has provided the following financial details for the year ending 2024:
– Current Assets: Rs.12,00,000
– Current Liabilities: Rs.6,00,000
– Cash & Cash Equivalents: Rs.1,80,000
– Inventory: Rs.3,00,000
– Net Credit Sales: Rs.24,00,000
– Accounts Receivable: Rs.4,00,000
Required: Calculate any the below Liquidity ratios and briefly comment on the company’s liquidity position:
- Current Ratio
- Quick Ratio (Acid-Test Ratio)
- Accounts Receivable Turnover Ratio (5 Marks)
Q3 (B) Sancha House is putting up a new Ice Cream Factory whose initial cost is Rs. 300,000. It expects to get inflows of Rs. 154000, Rs. 155,000, Rs. 175,000, Rs. 182,000 and Rs. 198,000. Cost of borrowing for this project is 11%. Calculate the NPV and decide whether it is a good proposal to invest in. (5 Marks)
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