Solved problem Rs.

in million Profit & Loss Account for year ending 31st March 20X1 20X0 Net sales 1065 950 Cost of goods sold 805 720 Stocks 600 520 Wages and salaries 120 110 Other manufacturing expenses85 85 90 Gross profit 260 230 Operating expenses 90 75 Depreciation 50 40 Selling and general administration 40 35 Profit before interest and tax 170 155 Interest 35 30 Profit before tax 135 125 Tax 50 45 Profit after tax 85 80 Dividends 35 30 Retained earnings 50 50 Balance sheet as at 31st March 20X1 20X0 Sources of Funds Shareholders' funds 505 455 (a) Share capital 125 125 (b) Reserve and surplus 380 330 Loan funds 280 260 (a) Secured loans 180 160 (i) Due after 1 year 130 135 (ii) Due within 1 year 50 25 (b) Unsecured loans 100 100 (i) Due after 1 year 60 70 (ii) Due within 1 year 40 30 Total 785 715 Application of Funds Net fixed assets 550 495 Investments 30 25 (a) Long - term investments 20 20 (b) Current investments 10 5 Current assets, loans and advances 355 333 (a) Inventories 160 138 (b) Sundry debtors 120 115 ( c) Cash and bank balances 25 20 (d) Loans and advances 50 60 Less: Current liabilities and provisions 150 138 Net Current assets 205 195 Total 785 715 Classified Cash flow statement for period 1-4-20X0 to 31-3-20X1 A. Cash Flow from Operating Activities Net profit before tax and extraordinary items 135 Adjustments for Interest paid 35 Depreciation 50 Operating profit before working capital changes 220 Adjustments for Debtors (5)

Inventores Loans and advances Current liabilities and provisions Cash generated from operations Tax paid Net cash flow from operating activities B. Cash Flow from Investing Activities Purchases of fixed assets Net investment in marketable securities Net cash flow from investing activities C. Cash Flow from Financing Activities Proceeds from loans Interest paid Dividend paid Net cash flow from financing activities D. Net Increase in cash and cash Equivalents Cash and cash equivalents as on 1-4-20X1 Cash and cash equivalents as on 1-4-20X0

(22) 10 12 215 (50) 165 (105) (5) (110) 20 (35) (35) (50) 5 25 20

Solved problem 4.1 Current assets Current liabilities Minimum current ratio Maximum borrowing Solved problem 4.2 Current ratio Acid-test ratio Current liabilities Inventory turnover ratio Current assets Inventories Sales

1,600 1,000 1.25 1400

1.4 1.2 1,600 8 2,240 320 2,560

Solved problem 4.3 Net profit margin ratio 4% Current ratio 1.25 Return on net worth 15.23% Total debt to total assets ratio 0.4 Inventory turnover ratio 25 Solution are the figures in italics in the following statements Profit and Loss account Sales 2535.8 Cost of goods sold 1587.9 Operating expenses 700 Profit before interest and tax 247.9 Interest 45 Profit before tax 202.9 Tax provision at 101.4 50% Profit after tax 101.4 Balance sheet Net worth 666 Fixed assets Long-term debt: interest at Current assets 15% 300 Cash Accounts payable 144 Receivables Inventory Total 1110 Total Solved problem 4.4 Profit & Loss Account for year ending 31st 20X1 March Net sales 1065 Cost of goods sold 805 Stocks 600 Wages and salaries 120 Other manufacturing expenses85 85 Gross profit 260 Operating expenses 90 Depreciation 50 Selling and general administration 40 Profit before interest and tax 170 Interest 35 Rs.in million 20X0 950 720 520 110 90 230 75 40 35 155 30

930 180 18.6 60 101.4 1110

Profit before tax Tax Profit after tax Dividends Retained earnings Balance sheet as at 31st March Sources of Funds Shareholders' funds (a) Share capital (b) Reserve and surplus Loan funds (a) Secured loans (i) Due after 1 year (ii) Due within 1 year (b) Unsecured loans (i) Due after 1 year (ii) Due within 1 year Total Application of Funds Net fixed assets Investments (a) Long - term investments (b) Current investments Current assets, loans and advances (a) Inventories (b) Sundry debtors ( c) Cash and bank balances (d) Loans and advances Less: Current liabilities and provisions Net Current assets Total Current ratio Acid-test ratio Cash ratio Debt-equity ratio Interest coverage ratio Fixed charges coverage ratio Inventory turnover Debtors turnover Average collection period in days Fixed assets turnover Total assets turnover Gross profit margin Net profit margin Return on assets Earning power Return on equity

135 50 85 35 50 20X1 505 125 380 280 180 130 50 100 60 40 785 550 30 20 10 355 160 120 25 50 150 205 785 1.52 0.85 0.15 0.55 4.86 1.24 5.40 9.06 40.27 2.04 1.42 24.4% 7.98% 11.3% 22.7% 17.7%

125 45 80 30 50 20X0 455 125 330 260 160 135 25 100 70 30 715 495 25 20 5 333 138 115 20 60 138 195 715

Solved Problem 5.1 Proforma profit and Average loss percent of account sales for year 3 100.0 Budgeted 850.0 72.0 611.7 @ 238.3 8.3 70.8 5.8 48.9 Budgeted 45.0 @ 73.5 Budgeted 11.9 @ 85.4 1.7 14.2 @ 71.2 Budgeted @50% of PBT 35.6 @ 35.6 Budgeted 21.0 @ 14.6 Budgeted No change 300.0 10.0

Net sales Cost of goods sold Gross profit Selling expenses General and administration expenses Depreciation Operating profit Non-operating surplus deficit Profit before interest and tax Interest Profit before tax

Year 1 600

450 150 50 36 30 34 10 44 10 34

Year 2 720 500

220
60 40 40

80
-8

72
12

60

Tax Profit after tax Dividends(given) Retained earnings

Balance Sheets

14 20 12 8
Year 1 240 10

26

34
15

19
Year2 270 10

Fixed assets (net Investments Current assets, loans and advances Cash and bank Receivables Inventories . Loans and advances Miscellaneous expenditures & losses Total Liabilities Share capital Equity Preference Reserves and surplus Secured loans Bank borrowings Unsecured loans

5 80 125 25 15 500

6 90 144 30 10 560

0.8 12.9 20.4 4.2 Budgeted

7.1 109.5 173.2 35.4 5.0 640.2

100 20

100 20

Nochange No change Proforma P&L account 10.6

100.0 20.0

150 60

169 80

183.6 90.2

Public deposits Current liabilities and provision Trade creditors Provisions External funds requirement Total

11

No change

11.0

125 45

130 50

19.3 7.2 Balancing item

164.2 61.2 10.1 640.2

500

560

Note: The slight differences in figures between the above & the text is due to rounding off
Solved Problem 5.2 A/S S(in Rs. Million) L/S m S1 (in Rs. Million) d EFR(in Rs. Million) Solved Problem 5.3 m d A/E A/S0 g 0.8 80 0.4 0.06 100 0.4 4.4

0.05 0.3 2.4 1 9.17%

Solved problem 6.1 Investment today Interest rate No. of years of investment Future value Solved problem 6.2 Interest rate in percentage Doubling period as per rule of 72 69 Solved problem 6.3 Nominal rate of interest No. of compoundings in a year Effective rate of interest Solved problem 6.4 No. of annual deposits Amount of each deposit Rate of interest per annum Total period of deposit in years Future value of the annuity Solved problem 6.5 Period of deposit in years Amount of annual deposit Lumpsum payment at the end Implicit interest rate Solved problem 6.6 Future value Period Discount rate Present value Solved problem 6.7 No. of annuity payments Amount of annuity payment No. of years at the end of which the first annuity payment occurs Discount rate Value of the annuity at the end of the year 7 Present value of the annuity Solved problem 6.8 Discount rate Year Cash flow Present value Solved problem 6.9

5,000 9% 75 3,205,954.47

12 6 6.1

16% 4 17%

15 5,000 14% 15 219,212

5 6,000 44,650 20%

1,000,000 60 10% 3,284

12 10,000

8 14%

56,603 22,621

14% 0 5,000 27,230

1 6,000

2 8,000

3 9,000

4 8,000

Amount of deposit Interest rate No.of annual withdrawals Amount of each withdrawal Solved problem 6.10 Cost of the tour Amount of annual savings Rate of interest per annum on savings No. of years of waiting Solved problem 6.11 Amount of borrowal Monthly interest rate No. of monthly instalments Monthly instalment amount Loan amortisation schedule Month 1 2 3 4 5 6 7 8 9 10 11 12

200,000 10% 15 26,295

1,000,000 80,000 14% 7.72

80,000 1.25% 12 7,221 Beginning amount 80,000 73,779 67,481 61,104 54,647 48,109 41,490 34,788 28,002 21,132 14,175 7,132 Monthly instalment 7,221 7,221 7,221 7,221 7,221 7,221 7,221 7,221 7,221 7,221 7,221 7,221 Principal Remaining repayment balance 6,221 73,779 6,298 67,481 6,377 61,104 6,457 54,647 6,538 48,109 6,619 41,490 6,702 34,788 6,786 28,002 6,871 21,132 6,957 14,175 7,043 7,132 7,132 0

Interest 1000 922.2 843.5 763.8 683.1 601.4 518.6 434.8 350.0 264.1 177.2 89.1

Solved problem 7.1 Par value of the bond Coupon rate Maturity period in years Discount rate Settlement date(say) Maturity date Value of the bond(Price) Solved problem 7.2 Par value of the bond Market price of the bond Coupon rate Maturity period in years Settlement date(say) Maturity date Yield to maturity Reinvestment rate Future value of investment Realised yield to maturity Solved problem 7.3 Par value of the bond Coupon rate Maturity period in years No.of interest payments in a year Required rate of return Settlement date(say) Maturity date Value of the bond Solved problem 7.4 Current selling price per share Dividend expected next year Required rate of return Expected growth rate Solved problem 7.5 Growth rate in dividends Period of 18% growth rate in years Subsequent growth rate Period of 12% growth rate in years Growth rate after 8 years, forever Last dividend per share Required rate of return on equity Year 1 2 3 4 5 6 7 8

100 12% 5 15% 1/1/2007 12/31/2011 89.95

1,000 1,050 14% 5 1/1/2007 12/31/2011 12.59% 12% 1,889.40 12.47%

100 14% 5 2 16% 1/1/2007 12/31/2011 93.29

30 2 15% 8.3%

18% 4 12% 4 6% 2 15% Dividend 2.36 2.78 3.29 3.88 4.34 4.86 5.45 6.10

PV of dividend 2.05 2.11 2.16 2.22 2.16 2.10 2.05 1.99

Price of the share at the end of 8 years Present value of the price of the share at the end of 8 years Intrinsic value per share Solved problem 7.6 Current dividend Initial Supergrowth rate Period in years for the supergrowth rate Consequent stable growth rate Required return Intrinsic value of the share Solved problem 7.7 Current dividend Present growth rate Linearly declining period in years Stable rate after 8 years Required rate of return Intrinsic value per share

71.86 23.49 40.33

3 40% 5 12% 15% 327.60

5 50% 8 10% 18% 168.75

Solved problem 8.1 Return on a portfolio of half Return on Return on Cox's share each of Box's stock stock Box and Cox 100 150 125 110 130 120 120 90 105 140 60 100

High growth Low growth Stagnation Recession Current selling price of both the shares

Probability 0.3 0.4 0.2 0.1 100

Amount invested No.of shares/units that can be purchased Expected return Standard deviation Solved problem 8.2 Risk-free rate of return Expected rate of return on the market Expected dividend growth rate Dividend per share last paid Beta of the stock (a) Required rate of return on the stock Equilibrium price of the stock (b)(i) Increase in inflation premium New equilibrium price of the stock (b)(ii) increase in expected dividend growth rate New equilibrium price of the stock (b)(iii) Increased beta of the stock New equilibrium price of the stock Solved problem 8.3

Box Limited 1,000 10 1120 116.62

Portfolio where a unit consists of half share each of Box and Cox Limited Cox 1,000 1,000 10 1210 291.38 10 1165 89.58

9% 13% 7% 2 1.20

13.80% 31.47

2% 24.32

3% 57.89

1.3 29.72

Return on stock A (%) 1 10 2 15 3 18 4 14 5 16 6 16 7 18 8 4 9 (9) 10 14 11 15 12 14 13 6 14 7 15 (8) Beta 0.354 Alpha 6.81 RA = 6.81+0.354RM The characteristic line is Period

Return on market portfolio(%) 12 14 13 10 9 13 14 7 1 12 (11) 16 8 7 10

Solved Problem 9.1 Square of the deviation of the return on asset Return on 1 from its State of nature Probability Return on asset 1(%) asset 2(%) expected value 1 0.1 5 0 64 2 0.3 10 8 9 3 0.5 15 18 4 4 0.1 20 26 49 Expected value of the return on asset 1 = 13 Square of the deviation of the return on asset 2 from its expected value. 196 36 16 144

Expected value of the return on asset 2

14
4.00 7.27 29.00 1.00

(a)Standard deviation of the return on asset 1 = Standard deviation of the return on asset 2 = (b )Covariance between the returns on assets 1 and 2 = ( c) Coefficient of correlation between the returns on assets 1 and 2 = Solved Problem 9.2 Security no. 1 Proportion of the security in the portfolio 0.3 Standard deviation of the security Correlation coefficient between securities Correlation coefficient 6.0

0.5 9.0

0.2 10.0

1 and 2 0.4

1 and 3 0.6

2 and 3 0.7

Standard deviation of portfolio return

7.13

Solved Problem 9.3 Stock A Expected return (%) Standard deviation 16 15

Stock B 12 8 0.6 72

Coefficient of correlation between the two stocks (a) Covariance between the two stocks (b) Expected return of a portfolio in which A & B have weights of 0.6 & 0.4 (%)

14.40

(b) Risk of a portfolio in which A & B have weights of 0.6 & 0.4 (%) Solved Problem 9.4 Market return(%)

15.34

Aggressive Stock(%)

Defensive Stock(%)
8 16 2 0.571

6 2 20 30 (a) Beta of the aggressive stock Beta of the defensive stock (b) Probability Market return(%)

Aggressive Stock(%)

Defensive Stock(%)
8 16 16 12 13 6

0.5 6 2 0.5 20 30 Expected return on the aggressive stock(%) Expected return on the defensive stock(%) ( c) Expected return on the market portfolio(%) Market risk premium (5) = 7%+ix 6% The SML is (d) Required return of the aggressive stock (%) Alpha of the aggressive stock(%) Required return of the defensive stock (%) Alpha of fhe defensive stock (%)

19 -3 10.429 1.571

Product of the deviation of the return on asset 1 from its mean and the deviation of the return on asset 2 from its

112 18 8 84

Chapter 10 Solved problem 10.1 S 60 Cu Cd C E 50 34 0 u 1.4 B 16.19 r 0.12 d 0.8 0.94 40.48 R 1.12

Solved problem 10.2 S0 rf E t(in years) 120 110 0.12 0.4 0.5 d1 d2 N(d1) N(d2) 0.6612 0.3783 0.7458 0.6474 C0 22.42233

Chapter 11 Solved problem 11.1

Year Cash flow

0 (100,000.00)

20,000.00

2 30,000.00

40,000.00
BCR MIRR

4 50,000.00

30,000.00
1.19 15.97%

Cost of capital 0.12 NPV 19,042.88 IRR 18.69% Calculation of payback period Year 0 1 Unrecovered investment balance 100,000.00 80,000.00 Payback period in years 3.20 Calculation of discounted payback period Year 0 1 PV of cash flows (100,000.00) 17,857.14 Unrecovered balance 100,000.00 82,142.86 Discounted payback period in years 3.94

50,000.00

10,000.00 (40,000.00)

2 23,915.82 58,227.04

3 28,471.21 29,755.83

4 31,775.90 (2,020.07)

5 17,022.81

Solved problem 12.1 Economic life of computer(years) Depreciation rate(WDV) Tax rate

5 33.33% 50.00% Cash flow for the computer installation Year 0 1 2 3 Cost of computer (1,500,000) Savings in clerical cost 600,000 600,000 600,000 Savings in space cost 100,000 100,000 100,000 Operation and maintenance cost 250,000 250,000 250,000 Depreciation 500,000 333,333 222,222 Profit before tax (50,000) 116,667 227,778 Tax (25,000) 58,333 113,889 Profit after tax (25,000) 58,333 113,889 Net salvage value Initial flow (1,500,000) Operating flow 475,000 391,667 336,111 Terminal flow Net cash flow (1,500,000) 475,000 391,667 336,111 Solved problem 12.2 Original cost No. of years ago bought Depreciation rate Remaining life in years Tax rate Present book value Year Net investment in new hammer Increase in revenues Saving in operating cost Depreciation on new hammer Depreciation on old hammer Incremental depreciation on new hammer Incremental taxable profit Incremental tax Incremental profit after tax Net incremental salvage value Initial flow Operating flow Terminal flow Net cash flow Old hammer New hammer 1,000,000 1,600,000 2 0 33.33% 33.33% 5 5 50% 50% 444,444 Cash flow of the replacement project 0 1 2 3 (1,155,556) 200,000 200,000 200,000 150,000 150,000 150,000 533,333 355,556 237,037 148,148 98,765 65,844 385,185 (35,185) (17,593) (17,593) (1,155,556) 367,593 (1,155,556) 367,593 303,395 303,395 260,597 260,597 256,790 93,210 46,605 46,605 171,193 178,807 89,403 89,403

4 600,000 100,000 250,000 148,148 301,852 150,926 150,926

5 600,000 100,000 250,000 98,765 351,235 175,617 175,617 197,531 274,383 197,531 471,914

299,074 299,074

4 200,000 150,000 158,025 43,896 114,129 235,871 117,936 117,936

5 200,000 150,000 105,350 29,264 76,086 273,914 136,957 136,957 152,172 213,043 152,172 365,215

232,064 232,064

Solved problem 13.1 Discount rate

10%

Investment(Rs. million)

50 (Amts in Rs.million) Variance of the cash flows

Expected cash flow Probability Cash flow Expected NPV 0.4 15 0.3 20 0.3 30 21 2 0.4 20 0.4 25 0.2 30 24 3 0.3 25 0.5 30 0.2 40 30.5 11.84 The standardised difference between the specified point(NPV=0) and NPV The probability that the NPV will be less than 0 Year 1 Solved problem 13.2 Calculation of expected net present value Investment 30,000 Sales quantity 1,400 Price per unit 30 42,000 20 28,000 3,000 2,000 9,000 4,500 4,500

39

14

27.25 = =

Expected values Factors Initial investment 30,000 Cost of capital 10% Quantity manufactured and sold annually 1,400 Price per unit 30

Sales Variable cost Variable cost per unit per unit 20 Fixed costs 3,000 Variable costs Depreciation 2,000 Fixed costs Tax rate 50% Depreciation Life of the project in years 5 Pre-tax profit Net salvage value 0 Taxes Profit after taxes For sensitivity analysis proceed as follows.In cell B34 copy Cash flow the formula for NPV from cell E32. .Leave the adjcacent cell from operations to the left(A34) blank and then fill the various values of quantity manufactured, one below the other from cell A35 Salvage value onwards( in this case 800 and 1800). Highlight(select) A34 to B36 and then from the drop-down menu for Data, select table. In the dialogue box that appears, type against column input cell ,thecell reference E32 and click OK. The NPV values corresponding to the various quantity figures will be automatically filled in. Next give headings Quantity and NPV in cells A34 and B34 respectively as separately shown.To change the numerical value into text in cell B34 go to Format>Cells>Custom and against Type, type out " Net Net present value present value"

6,500 0

(5,360)

(5,360) 800 (16,732) 1,800 2,222 The following analysis is done using the above technique Price per unit 20 50 Solved problem 13.3 -Net present value (31,895) 47,711 ('000) 1 to 10

Quantity 800 1,800 Variable cost per unit 15 40

-Net present value (16,732) 2,222

-Net present value 7,908 (58,431)

Year 0 Investment (30,000) Variable costs as a percentage of sales 66.67% Tax rate 50.00% Sales per year 42,000 Variable costs per year 28,001 Fixed costs per year 3,000 Depreciation per year 2,000 Pre-tax profit per year 8,999 Taxes per year 4,499 Profit after taxes per year 4,499 Cash flow from operation per year 6,499 Accounting break-even level of sales 15,002 Calculation of the financial break-even level of sales Discount rate 10% Project life in years 5 Total of the present values of the cash inflows 24,637 Initial investment (30,000) Financial break-even level of sales (51,142) Solved problem 13.4 Certainty PV of certainty equivalent equivalent Expected cash flow value value (100,000) (100,000) (100,000) 40,000 38,000 34,545 38,000 34,200 28,264 36,000 30,600 22,990 34,000 27,200 18,578 32,000 24,000 14,902 30,000 21,000 11,854 Net present value 31,134

Year 0 1 2 3 4 5 6

(Amts in Rs.million) Standard deviation of the NPV

7.56 -1.566 5.87%

Solved problem 14.1 Project cost 20,000,000 Period in years 10 After-tax annual cash flow Tax rate Target debtequity ratio Cost of equity Pre-tax cost of debt Floatation cost of equity Floaion cost of debt WACC Average floatation cost NPV of the expansion project Solved problem 14.2 Tax rate Pre-tax cost of debt Debt equity ratio Risk-free rate Market risk premium Beta of the equity WACC

4,000,000 35% 1 16.90% 14% 12% 2% 13% 7% : 1

199,598

35% 10% 0.6 8% 7% 0.81 0.11 : 1

Formula used =B71/(B71+D71)*B70*(1-B69)+D71/(B71+D71)*(B72+B74*B73)

The above is obtained using the following steps

1. Enter the various given values leaving the value for beta blank. In the WACC value cell type the formula for that as shown 2.On the Tools menu, click Goal Seek. 3.In the Set cell box, enter the reference for the cell that contains the formula Here, this is cell B75. 4.In the To value box, type the result you want. Here it is 11%. 5 In the By changing cell box, enter the reference for the cell that contains the value you want to adjust viz. cell B74. 6 Click OK.

/(B71+D71)*(B72+B74*B73)

e the formula for that as shown

l B75. to adjust viz. cell B74.

Chapter 15 Solved problem 15.1 Discount rate System Initial outlay Annual operating costs Life in years Present value of costs UAE As the present value of costs associated with System B is less than that for A, the firm is advised to choose system B Solved problem 15.2 Initial outlay Project life in years Net annual cash inflow Opportunity cost of capital Term loan that can be raised for the project Interest rate for the term loan No. of annual instalments in which the term loan is repayable The first insalment falling due at the end of year Amount that can be raised by issuing equity Issue cost of equity Tax rate for the company Base case NPV The adjusted NPV after adjustment for issue cost Present value of tax shield associated with debt Adjusted NPV (Amounts in Rs.million) 13% A B 4 3 1.2 1 6 4 8.7971 5.9745 2.2006 2.0086

( Amounts in rupees) 15,000,000 6 3,750,000 18% 10,000,000 16% Debt outstanding at the beginiing 10,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000

5 2 5,000,000 8% 50% (1,883,990) (2,318,773) 2,177,333 (141,440)

Year 1 2 3 4 5 6

Present value of interest tax shield 689,655 594,530 410,021 265,100 152,356 65,671

Chapter 18 Solved problem ( Amount in rupees) Present stock price Rs. No.of shares required to subscribe to one rights share Subscription price Rs. a) Theoretical value per share of the ex-rights stock Rs. b) Theoretical value of a right Rs. 120 2 80 106.67 26.67

Chapter 19 Solved problem 19.1 (a) Net operating income Interest on debt Cost of debt Cost of equity Market value of debt Market value of equity Average cost of capital (b) Debt employed to finance a project Operating income earned by the project Net operating income Interest on debt Equity earnings Marketn value of equity Market value of debt Market value of the firm Average cost of capital

(Rs.in million) 40 10 12% 18% 83.33 166.67 16% 100 20 60 22 38 211.11 183.33 394.44 15.21%

Solved problem 19.2 Cost of debt Cost of capital Debt equity ratio Cost of equity

9% 12% 0.8 : 14.40%

Solved problem 19.4 tc tpe tpd Tax advantage of a rupee of debt( in rupees)

30% 10% 15% 0.26

Solved Problem 20.1 No. of equity shares of the company at present Amount of external financing required (Rs.) Tax rate for the company Alternatives for external financing No.of equity shares to be issued of face value Rs.10 Issue price of an equity share(Rs.) No.of preference shares to be issued of Rs.10 par Dividend to be paid on preference shares @ Amount to be raised through debentures(Rs.) Interest to be paid on debentures @ Amount of dividend to be paid Amount of interest to be paid PBIT (a) EPS-PBIT equation: EPS

A 5,000,000 20

B 3,000,000 20 4,000,000 11%

440000

9166666.667 =(B14-B13)*(1-D4)/(D2+B6)

PBIT =((C14-C13)*(1-D4)-C12)/(D2+C6)

To obtain the EPS-PBIT indifferent point for alternatives A and B, first have the formula(see comments) Solved Problem 20.2 Debt equity ratio Pre-tax cost of debt Tax ROI Target ROE

1.2 12% 30% 19.53% 0.2

Note
To start with, keep the cell B22 blank. Then use the Goal Seek feature in Tools and equate the formula to the given value of 20 percent, and show the changing cell to be B22. The correct ROI value that satisfies the target ROE value will appear in B22

Formula used =(B22+(B22-B20)*B19)*(1-B21) Solved Problem 20.3 (a) Amount of debt finance Interest rate on debt Annual interest on debt

( Amounts in Rs.million) 500 14% 70

Expected value of the net cash flows, without taking the interest on debt into account Expected value of the net cash flows, taking the interest on debt into account(A) Stanard deviation of the above net cash flows Specified value of the net cash flow(which signifies cash inadequecy) (B) Standardised difference between B and A(the z value) Probability of cash inadequecy (b)

160

90 90

0 -1 15.87%

We can use Goal Seek feature in Tools to get the z value ( in cell B39 )corresponding to a cumulative porbabiliy of 12.5 percent as shown below. z value -1.15 Probability of cash inadequecy 0.125

Again, use the Goal Seek feature as shown below to get the cash flow ( in cell B42 below) corresponding to a z value of -1.15 Cash flow that would give a z value of -1.15 56.5 z value -1.15

20,000,000 100,000,000 40% C 1,000,000 20

N OTE

80,000,000 14% 11200000 PBIT =(D14-D13)*(1-D4)/(D2+D6) In the cell B16 type out the formula (B14B13)*(1-D4)/(D2+B6)-((B14-C13)*(1-D4)-C12)/(D2+C6). You may use the Goal Seek feature in Tools and equate this formula to 0 to get the PBIT value in cell B14, which would then be the indifferent point This value would be obtained at the end only. You may leave this cell B14 blank while filling up the values

Solved problem 20.4 Corporate tax rate Alternative i No. of equity shares to be issued Issue price of an equity share No.of debentures to be issued Issue price of a debenture Interest rate on debenture No.of preference shares to be issued Issue price of a preferece share Interest rate on preference share EBIT EPS for (i) 10,000 20,000 40,000 60,000 100,000 Solved problem 20.5

50% ii 50,000 10 0 0 0 0 0 0 EPS for (ii) 0.1 0.2 0.4 0.6 1 -0.2 0 0.4 0.8 1.6 25,000 10 2,500 100 8% 0 0 0 iii 25,000 10 0 0 0 2,500 100 8% EPS for (iii) -0.6 -0.4 0 0.4 1.2

(Amounts in Rupees) Profit (earnings before interest and taxes) Less: Interest on debentures Income tax Profit after tax EPS PE ratio Existing debt 300,000 60,000 240,000 120000 120,000 3 10 500000 Interest rate on debentures Income tax rate No.of equity shares Face value of equity shares Ruling price of share in market Undistributed reserves Additional funds to be raised P/E ratio if debt-equity ratio is >35% Interest rate on additional amount borrowed, if debtequity ratio is >35% 12% 50% 40,000 10 30 600,000 200,000 8

Existing equity Funds currently employed Debt-equity ratio under Plan 1-issuing additional debt Debt-equity ratio under Plan 2-issuing additional equity Rate of return earned

1000000 1500000 0.41 0.29 20.00%

14%

Alternative-1 Debt issue Earnings before interest and taxes 340000 Interest on existing debentures 60000 Interest on additional debt 28000 Profit before tax 252000 Income tax 126000 Profit after tax 126000 No.of equity shares(assuming that additional share can be issued at the prevailing marke price of Rs.30) 40,000 Earning per share 3.15 PE ratio 8 Price of share 25.2

Debt Alternative issue -2 Equity issue 340000 60000 280000 140000 140000

46667 3 30

-0.2

Solved problem 21.1 Earning per share Rate of return on investments Rate of return required by investors

4 18% 15% Price per share as per Walter model 29.87 29.33 28.80

Payout ratio 40% 50% 60%

For the data in 21.1 what would be the price per share as per Gorden model? Price per share as per Gorden model 38.10 33.33 30.77

Payout ratio 40% 50% 60% Solved problem 21.2 Earning per share Rate of return on investments Dividend payout ratio Market price as per Gordon model Rate of return on investment Solved problem 21.3 Next year's price(Rs) Dividend )Rs) Total pre-tax payoff Current price Capital gain Dividend tax rate Tax rate on capital gains Post-tax dividend Post-tax capital gains Total post-tax return

5 0.16 0.4 50 20%

Firm X 180 180 154.28 26 10% 23.15 23.15

Firm Y 165 15 180 152.86 12 20% 10% 12 10.93 22.93

Note: As we wish to use the Goal Seek set up in Tools, ke with. The required values would get filled up automatically

1/Post-tax rate of return 6.67 6.67 The Steps 1. On the Tools menu, click Goal Seek. 2. In the Set cell box, enter the reference for the cell that contains the formula Here, this is cell B35. 3. In the To value box, type the result you want. Here it is 6.66667( i.e.1/0.15-see the Note above) 4 In the By changing cell box, enter the reference for the cell that contains the value you want to adjust viz. cell B28 for Firm X a 5 Click OK.

Note: As we have not filled in the current price value, postzero in the denominator and thus causing. a problem. So w the post-tax return and equate it to 1/0.15, i.e. 6.666667 in to get the corresponding share price in B28 and C28 respe

Seek set up in Tools, keep B28 and C28 blank to start et filled up automatically at the end.

current price value, post-tax return formula will have a causing. a problem. So we will consider the reciprocal of o 1/0.15, i.e. 6.666667 in the Goal Seek feature in Tools, ce in B28 and C28 respectively

viz. cell B28 for Firm X and C28 for Firm Y

Solved problem 22.1 EPS for 20X1(EPSt) DPS for 20X0(Dt-1) Target payout ratio( r) Adjustment rate( c) DPS for 20X1 according to the Lintner model(Dt)

3 1.2 0.6 0.7 1.62

Solved problem 23.1 Sales Materials consumed Credit period granted on 3,600,000 sales(months) Credit period extended 900,000 by suppliers(months) Period of arrear in payment of 720,000 wages(months) Period of arrear in payment of cash 80,000 expenses(months) Period of arrear in payment of total administraive 240,000 expenses(months) Period of advance payment of sales promotion 120,000 expenses(months) 25% 1 100,000 20% 2700000 1,080,000 960000 120,000 2,580,000 2,940,000 490000 75000 215000 Current Liabilities Sundry creditors Manufacturing expeses outstanding Wages outstanding Total administrative expenses outstanding 150000 80,000 60,000 20000 310000 2 2

Wages paid Manufacturing expenses outstanding at the end of the year

Total administrative expenses

Sales promotion expenses Gross profit Stocking period of raw materials and finished goods(months) Cash balance maintained Safety margin on working capital requirement Total manufacturing cost Manufacturing expenses Cash manufacturing expenses Depreciation Cash manufacturing cost Total cash cost Current assets Debtors Raw material stock Finished goods stock Pre-paid sales promotional expenses Cash balance Total current assets Working capital Safety margin on working capital Working capital required Solved problem 26.2 Profit and Loss account data

30000 100,000 910000 Total current liabilities 600000 120000 720000

Sales Cost of goods sold Inventory period in days Accounts receivable period in days Accounts payable period in days

80 56 68.4 63.9 55.4

(Rs. million) Balance sheet data Beginning End of of 20X1 20X1 Inventory 9 12 Accounts receivable 12 16 Accounts payable 7 10

Operating cycle in days Cash operating cycle in days

132.3 76.9

Solved problem 24.1 Given: Sales estimated : From January 20X1 through March 20X1 From April 20X1 to June 20X1 Sales for each of the months of November and December 20X0 Percentage of cash sales Percentage of credit sales Credit collection in percentage after one month Credit collection in percentage after two months Bad debt losses Cash receipt in April 2011 from sale of a machine Cash receipt in June 2011 by way of interest on securities Estimated purchases of material per month from January to March from April to June Approximate time taken to make payment for the purchases, after the date of purchase- in months The purchases for the month of December 20X0, for which payment is due in January 20X1 is Miscellaneous cash purchases per month planned from January through June Wage payments per month from January through June Manufacturing expenses per month from January through June General administration and selling expenses per month Dividend payment scheduled in June 20X1 tax payment scheduled in June 20X1 Payment in cash planned for purchase of machine in March 20X1 Cash balance as on 1st January 20X1 is Minimum cash balance required by the firm Solution: Forecast of Cash Receipts

150,000 200,000 120,000 0.30 0.70 0.40 0.60 0.00 70,000 3,000 60,000 80,000 1 60,000 3,000 25,000 32,000 15,000 30,000 35,000 80,000 28,000 30,000

Sales Credit sales Cash sales Collection of receivables (a) Previous month (b) Two months earlier Sale of machine Interest on securities Total receipts

Forecast of Cash Receipts November December 20X0 20X0 120,000 120,000 84,000 84,000 36,000 36,000 33,600

January 20X1 150,000 105,000 45,000 33,600 50,400

129,000 Forecast of Cash Payments December January 60,000 60,000 60,000 3,000 25,000 32,000 15,000

(Rs. in 000 February 60,000 60,000 3,000 25,000 32,000 15,000

Purchases Payment of accounts payable Cash purchases Wage payments Manufacturing expenses General, administrative and selling expenses Dividends

Taxes Acquisition of machinery Total payments (2to9) Summary of Cash Payments January 28,000 129,000 135,000 -6,000 -6,000 22,000 30,000 -8,000 0.10 2,500.00 10,000.00 200,000.00 287,720.53 463,161.60 135,000 135,000 (Rs. in 000s) February 137,400 135,000 2,400 -3,600 24,400 30,000 -5,600 March 150,000 215,000 -65,000 -68,600 -40,600 30,000 -70,600

Opening balance Receipts Payments Net cash flow (2-3) Cumulative net cash flow Opening balance + cumulative net cash flow Minimum cash balance required Surplus / (Deficit) Solved problem 24.2 Annual yield on marketable securities( Ix360) Fixed cost of effecting a marketable securities transaction(b) Standard deviation of the change in daily cash balance() Minimum cash balance to be maintained Return point(RP) Upper control limit(UL)

February 150,000 105,000 45,000 42,000 50,400

(Rs. in 000s) March April 150,000 105,000 45,000 42,000 63,000 200,000 140,000 60,000 42,000 63,000 70,000 235,000

May 200,000 140,000 60,000 56,000 63,000

June 200,000 140,000 60,000 56,000 84,000 3,000 203,000

137,400

150,000

179,000

(Rs. in 000s) March April 60,000 80,000 60,000 60,000 3,000 3,000 25,000 25,000 32,000 32,000 15,000 15,000

May 80,000 80,000 3,000 25,000 32,000 15,000

June 80,000 80,000 3,000 25,000 32,000 15,000 30,000

35,000 80,000 215,000 135,000 155,000 220,000

(Rs. in 000s) April May 235,000 135,000 100,000 31,400 59,400 30,000 29,400 179,000 155,000 24,000 55,400 83,400 30,000 53,400

June 203,000 220,000 -17,000 38,400 66,400 30,000 36,400

Solved problem 25.1 Expected increase in sales(S) Expected bad debt losses on increental in sales(bn) Contribution margin ratio(1-V) Average collection period in days(ACP)) Post tax cost of funds(k) Tax rate(t) Increase in residual income Solved problem 25.2 Average credit period in days currently allowed(ACP0) Present sales(S0) Cost of capital(k) Variable costs to sales ratio(V) Extended credit period in days considered(ACPN) Increase in sales expected(S) Bad debt proportion on the additional sales(bn) Tax rate Increase in residual income Solved problem 25.3 Credit terms discount period in days Discount allowed during the discount period Credit period allowed- in days Present sales(S) Average credit period in days currently allowed(ACP) Variable costs to sales ratio(V) Cost of capital(k) Proportion of sales on which discount is taken(p) Tax rate Increase in sales expected(S) DIS I Increase in residual income Solved problem 25.4 Present sales(S0) Average collection period(ACP0) in days Ratio of variable costs to sales(V) Cost of capital(k) Bad debt ratio(b0) Tax rate(t) Expected increase in sales(S) New average collection period(ACPN) in days New bad debt ratio(bn) Increase in residual income Solved problem 25.6(a) Month January February

9,000,000 10% 20% 50 12% 40% 420,000

45 80,000,000 13% 0.75 60 20,000,000 10% 35% 1,191,667 At present 15 2% 45 200,000,000 30 0.8 12% 0.5 40% Proposed 15 3% 45 210,000,000 27 0.8 12% 0.6 40% 10,000,000 1,780,000 1,066,667 260,000

100,000,000 30 0.75 14% 0.04 30% 10,000,000 40 0.05 194,444

End of quarter Sales(Rs.in million) receivables 40 3 50 20

March April May June July August September (Amounts in Rs.million) Receivables Daily sales( 30 days averaging) DSO((30 days averaging) Daily sales(60 days averaging) DSO( 60 days averaging) Solved problem 25.6 (b) Age bracket 0-30 31-60 61-90 End of quarter 1

60 60 50 40 50 50 50 63 2 31.5 1.833 34.4

40 5 18 25 4 20 30 End of quarter 2eceivables End of quarter 3 48 54 1.333 1.667 36 32.4 1.500 1.667 32.0 32.4

Quarter I 63.5% 31.7% 4.8%

Quarter II 52.1% 37.5% 10.4%

Quarter III 55.6% 37.0% 7.4%

Solved problem 26.1 Carrying cost per unit of inventory Fixed costs per order(F) No. of units required per year(U) Variable costs per unit ordered Purchase cost price per unit Price per unit(P) Percent carrying cost( C) EOQ in no. of units Time gap between two orders(in days) Solved problem 26.2 Annual requirement of the item Cost of the item per unit(Rs.) Cost per purchase order (Rs.) Inventory carrying cost per year (a) EOQ if there is no quantity discount (b) Order quantity Discount allowed Price per unit Annual quantity requirement Purchase cost Carrying cost No.of orders Total ordering cost Total cost

10 20 30,000 2 30 32 0.3125 346 87 4

90,000 3 300 20% 9,487 (Amts in Rs.) 3,000 0 3 90,000 270,000 900 30 9,000 279,900

4,500 2% 2.94 90,000 264,600 1,323 20 6,000 271,923

6,000 3% 2.91 90,000 261,900 1,746 15 4,500 268,146

Since the total cost is minimised when the order quantity is 6000, Modern Enterprises is advised to order 6000 units and avail of 3 percent discount. Solved problem 26.3 No. of units required per year(U) 2,000 Purchase price per unit(P) 30 Percent carrying cost( C) 25% Fixed costs per order(F) 1,000 EOQ 730 No. of orders placed 4.0 No. of units for each order(Q) 500.0 Total cost of carrying and ordering inventories when 4 orders of equal size are placed 5,875.0 Solved problem 26.4 Lead time Daily usage rate in tonnes Probability in days Probability 25 2 0.2 0.2 3 0.6 35 0.5 4 0.2 45 0.3 Stockout cost estimated per ton (Rs.) 8,000 Carrying cost per ton (Rs.) 2,000 (a) 2,000 Normal usage in tons 108

=SUMPRODUCT(A43:A45,B43:B45)*SUMPRODUCT(C43:C45,D43:D45) Possible Lead time levels of in days usage Daily usage rate Safety stock 25 2 50 2 35 70 2 45 90 25 3 75 3 35 105 3 45 135 27 25 4 100 4 35 140 32 4 45 180 72 Expected stockout cost 0 19,200 21,600 4,000 25,600 34,560 25,600 38,880 99,040

Safety stock (tonnes) 72 32 27

Stockout 0 40 45 5.0 72.0 32.0 27.0

Stockout cost(Rs.) 0 320,000 360,000 40,000 576,000 256,000 216,000

Probability 0.00 0.06 0.06 0.10 0.06 0.10 0.18

Carrying cost 144,000 64,000 54,000

Total cost 144,000 83,200 79,600

99,040

The optimal level of safety stock is 27 tons because at that level the cost is minimised. (a) The probability of stockout when the safety stock is 27 tons is: (0.06 + 0.10) = 0.16

Solved problem 27.1 Credit period(days) Discount period(days) Discount allowed Interest cost Solved problem 27.2

50 20 2% 24.5%

40 15 2% 29.4%

30 15 1% 24.2%

30 10 1% 18.2%

Rs.in million Current assets Inventories Debtors Cash Total current assets Current liabilities Trade creditors Provisions Total current liabilities Maximum permissible bank finance( MPBF) under the second method of Tandon Committee 70 60 15 145 40 20 60 48.75

Solved problem 28.1 Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Mean (Xi - X) 2 (Yi - Y) X1 X2 x2

2

Xi 0.8 1 1.2 0.75 0.65 1.1 0.85 0.65 0.95 1.05 0.6 0.75 0.7 0.65 0.8 0.7 0.55 0.65 0.80 0.595 1002 0.9 0.675 0.035

Yi 18 15 20 12 16 9 22 19 15 24 8 11 19 10 12 4 9 -9 13.00

(Xi - X) 2 (Yi - Y)2 (Xi - X)*(Yi -Y) 0.000 25.000 0.000 0.040 4.000 0.400 0.160 49.000 2.800 0.003 1.000 0.050 0.023 9.000 -0.450 0.090 16.000 -1.200 0.002 81.000 0.450 0.023 36.000 -0.900 0.023 4.000 0.300 0.063 121.000 2.750 0.040 25.000 1.000 0.003 4.000 0.100 0.010 36.000 -0.600 0.023 9.000 0.450 0.000 1.000 0.000 0.010 81.000 0.900 0.063 16.000 1.000 0.023 484.000 3.300 (Xi - X)*(Yi -Y) Y1 Y2 y2 17 8 58.941 9 10.35

xy 0.609 a 4.599 The discriminant function is =

dx

0.225 dy b 0.105 4.599 Xi + 0.105Yi

Solved problem 29.1 Amount Balance maturity in years Coupon rate Call premium on old bonds Issue cost on new bonds Unamortised portion of the issue cost on old bonds Marginal tax rate Cost of calling the old bonds Net proceeds of the new issue Tax savings on tax-deductible expenses Initial outlay Annual interest outflow on old bonds Tax savings on interest expenses and amortisation of issue costs of old bonds Annual interest ouflow on new bonds Tax savings on interest expenses and amortisation of issue costs of new bonds Annual net cash savings After-tax cost on new bonds Present value of the annual cash savings Net present value of refunding the bond Solved problem 29.2 Face value of the bond Coupon payable annually Years to maturity Redemption value Current market price Settlement date(Date of purchase,say) Redemption date a) Yield to maturiry b) Duration c) Volatility Solved problem 29.3 Face value 100,000 100,000 100,000 100,000 Forward rate for year1 For the two year government security PV of interest for the first year Second year cash flow (1+0.009)*(1+r2)= r2= For the three year government security PV of interest for the first two years Third year cash flow (1+0.009)*(1+0.124)*(1+r3)= Old bonds 300,000,000 5 16% 5% 6,000,000 5,000,000 35% 315,000,000 294,000,000 7,000,000 14,000,000 48,000,000 17,150,000 42,000,000 15,120,000 3,970,000 0.091 15,401,932 1,401,932 New bonds 300,000,000 5 14%

1000 16% 6 1,000 964.5 1/1/2007 12/30/2012 17% 4.24 3.62

Interest rate 0 10.50% 11.00% 11.50% 0.099 9,555 110,500 1.2354 0.124 18914.027 111000 1.37741

Maturity( years) Current price 1 91,000 2 99,000 3 99,500 4 99,900

r3= For the four year government security PV of the interest for the first three years Fourth year cash flow (1+0.009)*(1+0.124)*(1+0.115)*(1+r4) = r4 =

0.115 28122.753 111500 1.553 0.128

Solved problem 30.1 Cost of capital 10% Marginal tax rate 35% Depreciation rate (WDV) 40% Calculation of post-tax cash flows Year 0 Initial cost -1.5 Operating and other costs Depreciation Tax shield on operating costs and depreciation Net salvage value Post-tax cash flow -1.5 Present value of post-tax cash flow -1.562 Post-tax EAC 0.359 Lease rental 0.552 Solved problem 30.2 Post-tax cost of debt Depreciation rate(WDV) Marginal rate of tax Lease contract cash flows Year Cost of the plant Depreciation Loss of depreciation tax shield Lease payment Tax shield on lease payment Loss of salvage value Cash flow of lease NAL of lease

1 -0.250 0.6 0.2975 0.0475

2 -0.265 0.36

3 -0.281 0.216

Rs.in million 5

-0.298 -0.316 -0.335 0.1296 0.07776 0.047

0.21875 0.1739 0.14957 0.13768 0.133 0.6 -0.046 -0.107 -0.1482 -0.178 0.399

8% 25% 35% Rs. In million 3 4

0 50

1 12.5 -4.375 -14 4.900

50 -13.475 -4.256

9.375 7.0313 5.27344 3.95508 -3.2813 -2.4609 -1.8457 -1.384 -14 -14 -14 -14 4.900 4.900 4.900 4.900 -10 -12.381 -11.561 -10.946 -20.484

Solved Problem No. of shares outstanding Current stock price(So) Ratio of the warrants issued to the no. of outstanding shares Exercise price(E) Standard deviation of continuosly compounded annual returns() Time to expiration of warrants in years (t) Risk-free interest rate per year d1 = d2 = N(d1) = N(d2) = Value of a warrant(C0)

80,000,000 80 0.05 84 0.3 0.25 8% -0.1169 -0.2669 0.4535 0.3948 3.77

Case Study : BHARAT HOTELS COMPANY For year 0: Operating Revenues Rs.in million Room rent 1043 Food and beverages 678 Management fees for managed properties 73 Operating Expenses Materials 258 Personnel 258 Upkeep and services 350 Sales and general administration 350 No.of rooms owned at the beginning of year 1 Year Additions to rooms planned during the year (all at the beginning ) Investment (in million rupees) Assumptions:

Assets and Liabilities at the end of year 0 Owner's equity & liabilities Net worth 1126 Debt 900

Assets Net fixed assets Gross Block: Accumulated Net current assets

2026

2190 1 90 200

2 130 300

3 80 240

4 130 500

5 186 800

6 355 1400

Occupancy rate for year 1 Addition to occupancy rate per year for the next 6 years Average room rent(for both owned & managed) per day for year 1 Rate of increase per year in the average room rent per day till the year 7 Food and beverage revenues as a percentage of room rent Management fees for the managed properties as a percentage of room rent Depreciation as a percentage of the net fixed assets Effective tax rate Other information relevant for valuation Market value of equity at the end of year 0 The imputed market value of debt at the end of year 0 Beta of BHC's stock Risk -free rate of return Market risk premium Post-tax cost of debt Rate of growth per annum in free cash flow after 7 years Solution: Financial Projections PANEL I 1 2 3 2280 2410 2490 0.60 0.61 0.62 2,500 2875 3306 PANEL II* 1248 1543 1863

Rs. .

Rs Rs

Year A. Rooms B. Occupancy rate C. Average room rent ( in Rs.) D. Room rent from owned properties

4 2620 0.63 3802 2291

5 2806 0.64 4373 2866

6 3161 0.65 5028 3771

E. Food & beverage revenues F. Revenue from owned properties(D+E) G. Management fees from managed properties H.Total revenues ( F+G)

811 2060 87 2147

1003 2545 108 2653 PANEL III* 2 382 382 458 458 1680 973 132 841 673 805 446 359

1211 3074 130 3204

1489 3780 160 3940

1863 4729 201 4930

2451 6222 264 6486

Year I. Material expenses J. Personnel expenses K. Upkeep & services expenses L. Sales & general admn. Expenses M. Total operating expenses N. EBDIT( H- M) O. Depreciation P. EBIT Q. NOPLAT R. Gross Cash flow S. Gross investment( Fixed assets + Current assets) T. Free cash flow from operations (R_S) * All figures in million rupees Year A. Net current assets* B. Net current assets addition* C. Gross block* D. Capital expenses* E. Accrued depreciation* F. Net block (C+D_E) G. Depreciation * At the beginning of the year Cost of capital=Rs. Continuing value =Rs. Present value of continuing value = Rs. Value of non-operating assets = Rs. Market value of debt claims = Rs. Value of equity = Rs.

1 309 309 371 371 1359 788 120 668 534 654 302 352

3 461 461 553 553 2029 1176 140 1036 829 968 399 570

4 567 567 680 680 2495 1445 165 1280 1024 1189 712 478

5 709 709 851 851 3121 1809 210 1599 1279 1489 1085 404

6 933 933 1120 1120 4107 2380 293 2087 1669 1962 1848 114

17.0% 10,748 3,580 0 900 4,311

million million million million

=K28/(K28+K29)*(K31+K30*K32)+K29/(K28+K29)*K33 =I63*(1+K34)/(C76-K34) =C77/(1+C76)^I51 =F8 =NPV(C76,C63:I63)+C78+C79+C80

ANY

abilities at the end of year 0 (Rs.in million) Assets Net fixed assets Gross Block: Accumulated Net current assets

1510 2110 600 516 2026

7 150 1300 As a percentag e of the total revenues 15% 15% 18% 18% 30%

60% 1% 2,500 15% 65% 7% 7% 20%

Material expenses Personnel expenses Upkeep & services Sales & general Working

Rs. Rs.

3,050 million 900 million 0.921 12% 8% 9% 10%

7 3311 0.66 5783 4612

2998 7610 323 7933

7 1142 1142 1370 1370 5023 2910 363 2547 2038 2401 1716 685

2)+K29/(K28+K29)*K33

C80

Year

Solved Problem 32.2 Profit and Loss Account( Rs. In million) 1

Net sales Income from marketable securities Non-operating income Total income Cost of goods sold Selling and administrative expenses Depreciation Interest expenses Total costs and expenses PBT Tax provision PAT Dividend Retained earnings Equity capital Reserves and surplus Debt Total Fixed assets Investments Net current assets Total Tax rate EBIT for year 2= Tax on EBIT for year 2=
NOPLAT for year 2 = FCFF for year 2 = Solved Problem 32.3

5600 140 70 5810 3220 700 350 336 4606 1204 364 840 420 420 2100 1680 2520 6300 4200 1260 840
6300 1470 464.8 1005.2 389.2

6440 210 140 6790 3780 770 420 392 5362 1428 448 980 560 420 2100 2100 2940 7140 4550 1400 1190
7140

Balance Sheet

0.4

( Amounts in rupees million) No of years

Revenues EBIT Capital expenditure Depreciation Working capital as a percentage of revenues Corporate tax rate ( for all time) Paid-up equity capital (Rs.10 par) Market value of debt

High growth phase Base Year 4 3,000 500 350 250 25% 30% 400 1,200 25%

Growth rate during high growth phase 20% 20% 20% 20%

Stable growth period

Growth rate during stable growth period 10% 10%

25%

Pre-tax cost of debt Debt - equity ratio Risk-free rate Market risk premium Equity beta WACC Calculation of forecasted FCF Year Revenues EBIT(1-t) Capital expenditure - depreciation working capital FCFF PV of FCF during the explicit forecast period Terminal value of the cash flow PV of the terminal cash flow Value of the firm 0 3000 350 100

13% 1 is to 1 11% 7% 1.129 14.00%

12.14% 2 is to 3 10% 6% 1 13.00% Terminal year 6842.88 798.34 155.52 642.82

1 3600 420 120 150 150 569.32 21,432.92 12,689.34 13,258.66

2 4320 504 144 180 180

3 5184 604.8 172.8 216 216

4 6220.8 725.76 207.36 259.2 259.2

Solved problem 33.1 Gross margin Ratio of selling , general and administrative expenses to sales Discount rate Tax rate Growth rate in sales if new strategy adopted Period of growth in years under new strategy Ratio of depreciation to net fixed assets at the beginning of the year under the new strategy Year Sales Gross margin Selling and general administration Profit before tax Tax Profit after tax Fixed assets Net current assets Total assets Equity Profit after tax Depreciation Capital expenditure Increase in net current assets Operating cash flow Present value of the operating cash flow stream Residual value Present value of the residual value Total shareholder value Pre-strategy value Value of the strategy Solved problem 33.2

20%

10% 15% 30% 20% 3

10% Current values 0 10000 2000 1000 1000 300 700 4000 2000 6000 6000

1 12000 2400 1200 1200 360 840.00 4800 2400 7200 7200

Income statement projections 2 3 4 14400 17280 17280 2880 3456 3456 1440 1728 1440 1728 432 518.4 1008.00 1209.60 Balance sheet projections 5760 6912 2880 3456 8640 10368 8640 10368 Cash Flow projections 1008.00 1209.60 480 576 1440.00 1728.00 480.00 576.00 (432.00) (518.40) 1728 1728 518.4 1209.60 6912 3456 10368 10368 1209.60 691.2 691.20 0.00 1209.60

840.00 400 1200.00 400.00 (360.00) (980.55) 8064 5302.21 4321.66 4666.67 -345.01

Annual costs(exclu ding depn. Project life Salvage Annual Interest and value revenues taxes) Investment outlay in years 5,000 4 0 6,000 4,000 Debtequity Cost of Post-tax ratio equity cost of debt Depreciation Tax rate Straight line 40% 4/5 18% 9%

Cost of capital 14.00% Calculation of EVA over the project life Year 1 Revenues 6,000 Costs 4,000 PBDIT 2,000 Depreciation 1250 PBIT 750 NOPAT 450 Cash flow 1700 Capital at charge 5000 EVA -250 NPV( using EVA) (46.7) NPV(using cash flow) (46.7)

2 6,000 4,000 2,000 1250 750 450 1700 3750 -75

3 6,000 4,000 2,000 1250 750 450 1700 2500 100

4 6,000 4,000 2,000 1250 750 450 1700 1250 275

Solved problem 33.3 Cost of the equipment 2,000,000 Economic life in years 4 Expected salvage value 600,000 Cost of capital 12% PV of salvage value 381,311 PV of annuity 1,618,689 Annuity amount 532,928 Depreciation charge under sinking fund method Capital 2,000,000 1,707,072 1,378,992 1,011,543 Capital charge 240000 204848.6 165479.1 121385.165 Annuity amount 532,928 532,928 532,928 532,928 Depreciation 292,928 328,080 367,449 411,543 Solved problem 33.4 NOPAT Investment in fixed assets Investment in current assets Economic life in years Salvage value of fixed assets Cost of capital Annual depreciation End of year Net value of fixed assets Investment in current assets Total capital employed( book value) ROCE for year 5 ROGI for year 5 Economic depreciation CVA for year 5 (Amounts in Rs.million) 21.085 250 50 14 0 10% 17.86 1 2 232.14 214.29 50 50 282.14 9.22% 12.98% 8.937 0 264.29

3 196.43 50 246.43

4 178.57 50 228.57

5 160.71 50 210.71

Solved problem 34.1 Videsh Limitrd Swadesh Limited 5 5 60 50 1,000,000 800,000 5% 6 9450000 1575000 0.71875

Earnings per share Market price per share No. of shares Expected synergy gain Target post-merger EPS Total earnings post-merger Total no.of post-merger shares for the EPS to be 6 Exchange ratio Solved problem 34.2 Market price per share No. of outstanding shares PV of gains to be generated Exchange ratio agreed to Share of Black&Co.that will be owned by the shareholders of White &Co. PV of Black&Co. post-merger True cost of merger Solved problem 34.3 Total current earnings(E) No.of outstanding shares(S) Market price per share(P) (a) & (b) P/E ratio of the combined entity Synergy gain Maximum exchange ratio acceptable to Alpha shareholders Minimum exchange ratio from the point of view Beta shareholders (c) Synergy gain Level of P/E multiple at which lines ER1 and ER2 will intersect

Black&Co 70 20,000,000 200,000,000 0.5

White&Co. 32 15,000,000

0.27273 2,080,000,000 87,272,727.27

Alfa Corporation Beta Corporation 50,000,000 20,000,000 20,000,000 10,000,000 30 20 12 0 11 5%

0.8

0.657 0

11.43

Solved problem 37.1 Rate( Forward period Rupees per in months USD) 50 3 50.8 6.40%

Spot Forward time in months Annualised premium Solved problem 37.2 US UK Current spot exchange rate in USD per GBP Period in days for which forward rate is sought Required forward rate in USD per GBP Solved problem 37.3 Current spot rate for USD in Rupees Expected inflation rate in India Expected inflation rate in the US Expected spot rate of USD in Rupees in one year Solved problem 37.4 One - year US nominal interest rate One - year Indian nominal interest rate Current spot rate for USD in Rupees Expected spot rate of USD in Rupees in one year Solved problem 37.5 Current spot exchange rate of GBP in Rupees Risk-free rate of interest in India Risk-free rate of interest in UK Required rupee return

Period in days 90 90 1.5 90 1.5074

Interest rate 1.75% 1.25%

51 6% 2.50% 52.74

5% 10% 49.5 51.86

70 10% 6% 20% Expected Cash flow exchange in Cash flow in rate(Rs per rupees(mi pounds(million) GBP llion) -50 70.00 -3500 20 72.64 1452.8 30 75.38 2261.5 20 78.23 1564.5 10 81.18 811.8 578.06

Year 0 1 2 3 4 NPV in rupees(million)

Solved problem 40.1 Amount of stock X owned(Rs. million) Amount of Y that should be short sold to minimise the risk(Rs. million) Hedge ratio Amount that should be deposited in a bank to create a zero value hedge(Rs million) Solved problem 40.2 Current stock index Period in months Six-months stock index futures trading at Risk-free annual interest rate Average annual dividend yield on index stocks Solved problem 40.3 Spot price per ton Futures price per ton for a one year contract Risk-free interest rate PV of storage cost per ton PV of convenience yield per ton

2 2.5 0.8 0.5

1400 6 1500 11% 3.86%

4500 5000 12% 200 235.71