NISM-Series XV: Research Analyst Certification Mock Test Case Study-2

Explanation:

In the context outlined, debt financing necessitates interest payments, leading to a total repayment exceeding the initial sum, irrespective of business revenue. In equity financing, shareholders acquire ownership without repayment obligations. Consequently, Option 1 poses the highest financial risk for Mega Industries Ltd., as it involves consistent debt payments, potentially impacting the company’s financial stability.

(Note – Case study solutions can be found in the ‘Short Notes’ section as a downloadable PDF.)

Explanation:

The formula for calculating post-tax returns is: Post-tax returns = R – (R * TR%), where R represents the rate of return on the investment and TR% is the investor’s tax bracket in percentage.

In the given example, the calculation would be:

Post-tax returns = 16 – (16 * 25%)

= 16 – 4 = 12%

(Note – Solutions for case studies in the NISM book are available in our ‘Short Notes’ section as a downloadable PDF.)

Explanation:

Stock dilution, also known as equity dilution, occurs when a company issues new equity, reducing existing shareholders’ ownership percentage. Both Option 2 and Option 3 involve issuing new equity, leading to potential high dilution.

Hence, Option 1, involving raising debt, is expected to cause minimal dilution for existing shareholders.

(Note – Solutions for case studies in the NISM book can be found in our ‘Short Notes’ section as a downloadable PDF.)