Questions and Answers
What is the payback period for a firm with a capital expenditure of F 40,00,000 and cash inflows after tax (CFAT) of F 5,00,000 per annum?
5 years
What is the cost of perpetual preference shares with a face value of &200 each, assuming no tax, if they have a 12% dividend rate?
8%
What does financial leverage refer to?
The use of debt to increase the potential return on investment
What are the objectives of cash management?
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How much should a person save annually to accumulate $1,00,000 for his daughter's marriage by the end of 10 years at an interest rate of 8%?
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Study Notes
Capital Budgeting
- The payback period is the time it takes for a firm to recover its capital expenditure from the cash inflows after tax (CFAT).
Cost of Capital
- The cost of perpetual preference shares is calculated as the dividend rate divided by the face value of the shares, assuming no tax.
- In this case, the cost of perpetual preference shares is 12% (dividend rate) divided by ₹200 (face value).
Financial Leverage
- Financial leverage refers to the use of debt to increase the profitability of a firm.
Cash Management
- The objectives of cash management are to manage the firm's cash flows to ensure liquidity and profitability.
Time Value of Money
- To accumulate a certain amount of money (e.g. $1,00,000) for a specific purpose (e.g. daughter's marriage) by the end of a certain period (e.g. 10 years), a person should save annually, taking into account the interest rate (e.g. 8%).
- The savings amount can be calculated using the formula for future value of a series of payments.
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