Corporate Finance DEC 2025

Description

Corporate Finance

Dec 2025 Examination

 

 

Q1. An Indian FMCG company is experiencing rapid sales growth but is facing frequent cash flow shortages, leading to delayed supplier payments and missed opportunities for bulk inventory discounts. The CEO is concerned that poor liquidity management could undermine the company’s reputation and growth prospects. The finance manager must analyze the situation and implement effective working capital management strategies to optimize cash flow and maintain smooth operations. How should the finance manager apply working capital management principles to resolve the company’s liquidity challenges, ensuring operational efficiency and the ability to capitalize on new business opportunities? (10 Marks)

Ans 1.

Introduction

In a fast-moving consumer goods (FMCG) company, sales growth is both an opportunity and a challenge. Rapid expansion requires substantial liquidity to finance day-to-day operations, manage supplier relationships, and exploit bulk purchasing discounts. In this case, although sales are rising, frequent cash flow shortages have led to delayed supplier payments and missed opportunities for cost savings. Such liquidity constraints threaten the company’s reputation, bargaining power, and ability to sustain momentum in a highly competitive market. Working capital management thus becomes critical. By optimizing receivables, payables, and inventory, the finance manager can strike a balance between liquidity and profitability. Applying sound

 

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Q2(A). A perpetuity pays Rs.25,000 at the end of each year. However, due to inflation, the payment increases by 4% annually. The appropriate discount rate is 10%. After 15 years, the perpetuity is expected to be replaced by a new instrument that pays a fixed Rs.60,000 per year in perpetuity, discounted at 8%. Calculate the present value of this entire cash flow stream as of today, considering the change in payment structure and discount rates after year 15. (5 Marks)

Ans 2a.

Introduction

Valuation of financial instruments often involves analyzing cash flows that change over time due to inflation, growth, or structural replacement. In this case, the perpetuity begins with a payment that grows annually, reflecting inflation adjustments, and continues for a fixed period. After fifteen years, the structure shifts to a new perpetuity that provides a fixed payment discounted at a different rate. Understanding such a scenario requires dividing the cash flow stream into phases

 

Q2(B). A company issues Rs.50,00,000 in 8% redeemable preference shares at a 5% premium, redeemable at par after 6 years. Annual dividend is paid on face value. The issue expenses are 2% of the face value. Calculate the cost of preference shares, considering the effect of issue expenses and premium, and interpret how this cost would impact the company’s overall cost of capital if preference shares constitute 20% of the capital structure. Show all intermediate steps. (5 Marks)

Ans 2b.

Introduction

Preference shares represent a hybrid financing option that combines the features of debt and equity. Investors expect fixed dividends, while companies benefit from raising long-term funds without diluting control. In this case, redeemable preference shares are issued at a premium with annual dividends and are later redeemed at face value. The inclusion of issue expenses further affects the net proceeds. Calculating their cost requires understanding both the dividend obligation and the redemption value to arrive at a realistic measure of financing cost.

Concept and Application

The cost of redeemable preference shares reflects the return expected by investors after