Exhibit 3.

1
Balance Sheet of Horizon Limited as at March 31, 20x1
Rs in million
20 x 1 20x0
EQUITY AND LIABILITIES
Shareholders’ Funds 500 450

Share capital (Par value Rs.10) 100 100

Reserves and surplus 400 350

Non-current Liabilities 300 270

Long-term borrowings 200 180

Deferred tax liabilities (net) 50 45

Long-term provisions 50 45

Current Liabilities 200 180

Short-term borrowings 40 30

Trade payables 120 110

Other current liabilities 30 30

Short-term provisions 10 10

1,000 900

ASSETS
Non-current Assets 600 550

Fixed assets 500 450

Non-current investments 50 40

Long-term loans and advances 50 60

Current Assets 400 350

Current investments 20 20

Inventories 160 140

Trade receivables 140 120

Cash and cash equivalents 60 50

Short-term loans and advances 20 20

1000 900
 Exhibit 3.2

Statement of Profit and Loss for Horizon Limited for Year Ending March 31, 20x1

Rs. in million

20X1 20X0

Revenues from Operations 1290 1172

Other Income 10 8

Total Revenues 1300 1180

Expenses

Material expenses 600 560

Employee benefit expenses 200 180

Finance costs 30 25

Depreciation and amortisation expenses 50 45

Other expenses 240 210

Total expenses 1120 1020

Profit before exceptional and extraordinary Items and tax 180 160

Exceptional Items

Profit before Extraordinary Items and Tax 180 160

Extraordinary Items

Profit Before Tax 180 160

Tax Expense 50 40

Profit (Loss) for the period 130 120

Earning Per Equity Share

Basic ( in Rs.) 13

Diluted ( in Rs.) 13
 Exhibit 3.5
Cash Flow Statement
(Rs. in million)
Formula
A. CASH FLOW FROM OPERATING ACTIVITES

PROFIT BEFORE TAX 180 =B53

Adjustments for :
∙        Depreciation and amortisation 50 =B45
∙        Finance costs 30 =B44
∙        Interest income* ­10 =-B39

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 250 =sum(B65:B69)

Adjustments for changes in working capital :

∙        Trade receivables and short­term  loan and advances
­20 =-(B27-C27)
∙        Inventories ­20 =-(B26-C26)

=(B15-C15)
∙        Trade payables, short­term provisions, and other current liabilities 
10

CASH GENERATED FROM OPERATIONS 220 =B70+B72+B73+B74

∙        Direct taxes paid ­50 =-B54

NET CASH FROM OPERATING ACTIVITIES 170 =B75+B76

B. CASH FLOW FROM INVESTING ACTIVITIES

∙        Purchase of fixed assets ­100 =-(B21-C21+B45)
∙        Increase of non­current investments ­10 =-(B22-C22)
∙        Reduction in long­term loans and advances 10 =(C23-B23)
∙        Interest income 10 =B39

NET CASH USED IN INVESTING ACTIVITIES ­90 =SUM(B79:B82)

C. CASH FLOW FROM FINANCING ACTIVITIES

∙        Increase in long term borrowings 20 =B10-C10
∙        Increase in short­term borrowings 10 =B14-C14
∙        Increase in deferred tax liabilities  5 =B11-C11
∙        Increase in long­term provisions 5 =B12-C12
∙        Dividend paid -80 =-(B55-(B8-C8))
∙        Finance costs ­30 =-B44
NET CASH FROM FINANCING ACTIVITIES   ­70 =SUM(B85:B90)
NET CASH GENERATED(A +B+C) 10 =B77+B83+B91

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50 =C28

CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 60 =B28

* It is assumed that the entire other income is interest income.

 Amplified Sources and Uses of Cash Statement ( Rs.in million)
Sources Formula

Net profit =B55 130

Depreciation and amortisation =B45 50

Increase in long­term borrowings =B10-C10 20

Increase in deferred­tax liabilit=B11-C11 5

Increase in long­term provisions =B12-C12 5

Increase in short­term borrowings=B14-C14 10

Increase in trade payables =B15-C15 10

Decrease in long­term loans and a=-(B23-C23) 10

Total sources =SUM(G6:G13) 240

Uses of Cash Statement ( Rs.in million)
Uses Formula

Dividend payment =G6-(B8-C8) 80

Purchase of fixed assets =B20-C20+B45 100

Increase in non­current in =B22-C22 10

Increase in inventories  =B26-C26 20

Increase in trade receivab =B27-C27 20

Total uses =SUM(J6:J13) 230

Net addition to cash =G14-J14 10
 Exhibit 4.1 Balance Sheet of Horizon Limited as on March 31, 20X1
(Rs.in million)
EQUITY AND LIABILITIES 20X1 20X0

· Shareholders’ Funds 500 450

∙        Share capital (Par value Rs.10) 100 100
∙        Reserves and surplus  400 350
· Non-current Liabilities 300 270
∙        Long­term borrowings 200 180
∙        Deferred tax liabilities (net) 50 45
∙        Long­term provisions   50 45
· Current Liabilities 200 180
∙        Short­term borrowings  40 30
∙        Trade payables 120 110
∙        Other current liabilities  30 30

∙        Short­term provisions  10 10
1,000 900
ASSETS
· Non-current Assets 600 550
∙        Fixed assets 500 450
∙        Non­current investments 50 40
∙        Long­term loans and advances  50 60
· Current Assets 400 350
∙        Current investments  20 20
∙        Inventories  160 140
∙        Trade receivables 140 120
∙        Cash and cash equivalents  60 50
∙        Short­term loans and advances   20 20
1000 900

Exhibit 4.2
Statement of Profit and Loss for Horizon Limited for Year Ending March 31, 20X1
(Rs.in million)

20X1 20X0

∙        Revenues from Operations 1290 1172

∙        Other Income 10 8
∙        Total Revenues 1300 1180
∙        Expenses
∙  Material expenses 600 560
∙  Employee benefit expenses 200 180
∙  Finance costs 30 25
∙  Depreciation and amortisation expenses                50
50 45
∙  Other expenses 240 210
∙        Total Expenses 1120 1020
 Profit before Exceptional and 
Extraordinary  Items and Tax 180 160
∙        Exceptional Items
∙        Profit before Extraordinary Items and Tax
180 160
∙        Extraordinary Items
∙        Profit Before Tax 180 160
∙        Tax Expense 50 40
∙        Profit (Loss) for the period 130 120
∙        Earning Per Equity Share
∙  Basic                                                                                     
13
∙  Diluted                                                                                 13
13
. Dividend 80

Exhibit 4.7 Common Size Statements

Part A : Statement of Profit and Loss
Regular( in million) Common Size
20X0 20X1 20X0
Total revenues 1180 1300 100
Total expenses other than finance cost 995 1090 84
PBIT 185 210 16
Finance costs 25 30 2
PBT 160 180 14
Tax 40 50 3
PAT 120 130 10

Part B : Balance Sheet

Regular( in million) Common Size
20X0 20X1 20X0
Shareholders’ funds 450 500 50
Non – current liabilities 270 300 30
Current liabilities 180 200 20
Total 900 1000 100
Non – current assets 550 600 61
Current assets 350 400 39
Total 900 1000 100

Exhibit 4.8 Common Base Year Financial Statements

Part A : Statement of Profit and Loss

Regular( in million) Common Bas
20X0 20X1 20X0
Total revenues 1180 1300 100
Total expenses other than finance cost 995 1090 100
PBIT 185 210 100
Finance costs 25 30 100
PBT 160 180 100
Tax 40 50 100
PAT 120 130 100

Part B : Balance Sheet

Regular( in million) Common Bas
20X0 20X1 20X0
Shareholders’ funds 450 500 100
Non – current liabilities 270 300 100
Current liabilities 180 200 100
Total 900 1000 100
Non – current assets 550 600 100
Current assets 350 400 100
Total 900 1000 100
 Exhibit 4.3 Comparison of Ratios of Horizon Limited with Industry Average
Industry 
Ratio Foumula Average
Current ratio 2.00 =B24/B13 1.8
Acid-test ratio 1.20 =(B24-B26)/B13 1.05
Debt-equity ratio 1.00 =(B9+B13)/B6 1.1
Debt ratio 0.50 =(B9+B13)/B18
Interest coverage ratio 7.00 =(B49+B44)/B44 5
Inventory turnover 8.60 =B38/((B26+C26)/2 8.4
Debtors turnover 9.92 =B38/((B27+C27)/2) 10.1
Fixed assets turnover 2.72 =B38/((B21+C21)/2) 2.75
Average collection period in days 36.78 =365/F24
Total assets turnover 1.37 =B40/((B30+C30)/2) 1.4
Gross profit margin 36.43% =(B38-F39)/B38 34%
Net profit margin 10.0% =B55/B40 8.50%
Return on assets 13.68% =B55/((B30+C30)/2) 12.50%
Earning power 22.1% =(B53+B44)/((B30+C30)/2) 19.30%
Return on capital employed 15.5% =(B53+B44)*(1-F40)/((B30+C30)/2 13.80%
Return on equity 27.4% =B55/((B6+C6)/2) 23.20%
Price-earning ratio 15.38 =F38/(B55/F41 12.00%
Yield 15.56% =F38/(B6/F41) 14.10%
Market value to book value ratio 4 =F38/(B6/F41) 3.20%
Given:
--The market price per share of Horizon as as on 31st March 
on 31st March 20X1 is Rs. 200 20X0 is Rs. 180
-The estimated cost of goods sold in Rs.
million 820
--Income tax rate 30%
-Par value of equity share-in Rs. 10
ss
Common Size (%)
20X1
100
84
16
2
14
4
10

Common Size (%)

20X1
50
30
20
100
60
40
100

ss
Common Base (%)
20X1
110
110
 114
120
113
125
108

Common Base (%)

20X1
111
111
111
111
109
114
111
Exhibit 5.2 Pro Forma Statement of Profit and Loss for Spaceage Electronics for 20X3
Based on Per cent of Sales Method

Historical data Average
per cent of
20X1     20X2 sales
Revenues from Operations 1200 1280 100
Other income 8 10 0.72
Total revenues 1208 1290 100.72
 Expenses
                   Material expenses 547 590 45.84
                  Employee benefit expenses 274 295 22.94
                  Finance costs 60 65 5.04
                   Depreciation and    75 80 6.25
                  amortisation expenses         
                   Other expenses 98 103 8.11
                Total expenses 1054 1133 88.17
Profit before exceptional items and other 154 157 12.55
 Exceptional Items  30 32 2.50
 Profit before Extraordinary Items and Ta 184 189 15.05
  Extraordinary Items 
  Profit Before Tax 184 189 15.05
  Tax Expense 82 90 6.93
  Profit (Loss) for the period 102 99 8.12
  Dividends 60 63
  Retained earnings   42 36

Exhibit 5.3 Pro Forma Statement of Profit and Loss for Spaceage Electronics for 20X3
Combination Method

Historical data Average
per cent of
sales
20X1 20X2
Revenues from Operations 1200 1280 100
Other income 8 10 0.72
Total revenues 1208 1290 @
 Expenses
                   Material expenses 547 590 45.84
                  Employee benefit expenses 274 295 22.94
                  Finance costs 60 65 5.04
                   Depreciation and    75 80 Budgeted
                  amortisation expenses         
                   Other expenses 98 103 Budgeted
                Total expenses 1054 1133 @
Profit before exceptional items and 
other income 154 157 @
 Exceptional Items  30 32 2.50
 Profit before Extraordinary Items and 
Tax 184 189 @
  Extraordinary Items 
  Profit Before Tax 184 189 @
  Tax Expense 82 90 Budgeted
  Profit (Loss) for the period 102 99 @
  Dividends 60 63 Budgeted
  Retained earnings   42 36 @
@ These items are obtained using accounting identities.

Exhibit 5.4 Pro Forma Balance Sheet of Spaceage Electronics for December 31, 20X3
Historical data Average
per cent of
sales
20X1 20X2
Revenues from operations 1200 1280 100
EQUITY AND LIABILITIES
     Shareholders’ Funds                                       
       Share capital (Par value Rs.10) 300 300 No change
Pro 
forma 
statemen
     Reserves and surplus 250 286 t of P&L
     Non­current Liabilities
      Long­term borrowings 500 505 40.56
       Deferred tax liabilities (net) 45 50 3.83
       Long­term provisions  55 50 4.24
       Current Liabilities 
       Short­term borrowings  200 200 16.15
       Trade payables 100 112 8.54
       Other current liabilities  20 30 2.01
        Short­term provisions 30 17 1.91
          External funds requirement

ASSETS
        Non­current Assets
        Fixed assets 750 775 61.52
       Non­current investments 40 40 Budgeted
       Long­term loans and advances 60 60 Budgeted
        Current Assets
        Current investments  30 33 2.54
       Inventories  375 380 30.47
       Trade receivables 200 212 16.61
       Cash and cash equivalents  25 28 2.14
       Short­term loans and advances  20 22 1.69
Electronics for 20X3

Pro forma statement of

profit and loss of 20X3
assuming revenues from
operations of 1400
1400
10
1410

642
321
71
88

113
1234
176
35
211

211
97
114

Electronics for 20X3

Pro forma statement of

profit and loss of 20X3
assuming revenues from
operations of 1400
1400
10
1410

642
321
71
85

107
1225

185
35

220

220
 90
130
70
60

onics for December 31, 20X3

Pro forma balance sheet of

20X3 assuming revenues
from operations of 1400
1400

                                          
300

346

568
54
59

226
120
28
27
13
1740

861
60
70

36
427
233
30
24
1740
 Exhibit 5.5 A Spreadsheet Template for Financial Statements
Before
Historical data iteration

Average per Formulae

cent of sales Pro forma
statement of
profit and
loss
20X1 20X2 20X3
Revenues from
operations 1200 1280 100 1400.0
Other income 8 10 0.72 =$F$5*D6/100 10.1
Accounting
Total revenues 1208 1290 identity [@] =F5+F6 1410.1
Expenses
Material expenses 547 590 45.84 =$F$5*D9/100 641.7
Employee benefit exp 274 295 22.94 =$F$5*D10/100 321.2
Interest on debentures 48 52 =C32*0.13 52.0
Depreciation and
Other finance costs
amortisation 12 13 1.01 =$F$5*D12/100 14.1
expenses 75 80 Budgeted 85.0
Other expenses 98 103 Budgeted 107.0
Profit before
Total expenses 1054 1133 @ =SUM(F9:F14) 1221.0
exceptional and
extraordinary items
and tax 154 157 @ =F7-F15 189.1
Exceptional Items 30 32 2.50 =$F$5*D17/100 35.0
Profit before
Extraordinary Items
and Tax 184 189 @ =F16+F17 224.1
Extraordinary Items 0.00 =$F$5*D19/100 0.0
Profit Before Tax 184 189 @ =F18+F19 224.1
Tax Expense 82 90 Budgeted 90.0
Profit (Loss) for the period 102 99 @ =F20-F21 134.1
Dividends 60 63 Budgeted 70.0
Retained earnings 42 36 @ =F22-F23 64.1

Pro forma
Balance Sheet balance
sheet of
20X3
EQUITY AND LIABILITIES
Shareholders’ Funds
Share capital (Par valu 300 300 No change =C28 300.0

Pro forma
statement of
Reserves and surplus 250 286 P&L =C29+F24 350.1
Non-current Liabilities
Long-term borrowings
 =F41-F28-F29-
F33-F34-F35-
F37-F38-F39-
-----Debentures 400 400 F40 460.2
------Others 100 105 8.27 =$F$5*D33/100 115.8
Deferred tax liabilities 45 50 3.83 =$F$5*D34/100 53.6
Long-term provisions 55 50 4.24 =$F$5*D35/100 59.4
Current Liabilities
Short-term borrowings 200 200 16.15 =$F$5*D37/100 226.0
Trade payables 100 112 8.54 =$F$5*D38/100 119.6
Other current liabilities 20 30 2.01 =$F$5*D39/100 28.1
Short-term provisions 30 17 1.91 =$F$5*D40/100 26.8
Total =F53 1739.6
ASSETS
Non-current Assets
Fixed assets 750 775 61.52 =$F$5*D44/100 861.3
Non-current investmen 40 40 Budgeted 60.0
Long-term loans and a 60 60 Budgeted 70.0
Current Assets
Current investments 30 33 2.54 =$F$5*D48/100 35.5
Inventories 375 380 30.47 =$F$5*D49/100 426.6
Trade receivables 200 212 16.61 =$F$5*D50/100 232.6
Cash and cash equivale 25 28 2.14 =$F$5*D51/100 29.9
Short-term loans and a 20 22 1.69 =$F$5*D52/100 23.7
Total =SUM(F44:F52) 1739.6
ements
After iteration

Pro forma
statement of profit
and loss of 20X3
20X3

1400.0
10.1

1410.1

641.7
321.2
61.0
14.1
85.0
107.0
1230.0

180.1
35.0

215.1
0.0
215.1
90.0
125.1
70.0
55.1

Pro forma balance

sheet of 20X3

300.0

341.1
469.2
115.8
53.6
59.4

226.0
119.6
28.1
26.8
1739.6

861.3
60.0
70.0

35.5
426.6
232.6
29.9
23.7
1739.6
Amount of deposit per period(PMT) Rs. 30,000
No.of periods (NPER)           years 30
Interest rate (RATE)            p.a. 8%
Accumulated amount (FV)          Rs. 3,398,496 
Formula used =FV(B3,B2,­B1)
Future value(Fv) 8,000
Periods in years (Nper) 6 Rate 11.43%
Periodic payment(Pmt) 1,000 =RATE(B2,-B3,,B1)
Year 1 2 3 4 5 6 7 8
Cash flow 1,000 2,000 2,000 3,000 3,000 4,000 4,000 5,000
Discount rate 12% =NPV(B3,B2:I2) 13,375
Monthly payment(Pmt) Rs. 12,000
Period in months(Nper) 36 Present value 331,928
Rate of interest per month(Rate) 1.50% =PV(B3,B2,-B1)
 No. of Annual
instalments instalment
Present value Interest rate (in years) amount
1,000,000 15% 5 (298,316)
Beginning Annual Principal Remaining
Year amount instalment Interest repayment balance
1 1,000,000 298,316 150000 148,316 851,684
2 851,684 298,316 127753 170,563 681,121
3 681,121 298,316 102168 196,148 484,973
4 484,973 298,316 72746 225,570 259,403
5 259,403 298,316 38910 259,406 (3)
Initial deposit 300,000
Interest rate 10% Annual withdrawal 48,824
Period in years 10 =PMT(B2,B3,-B1)
Settlement 1/1/2015 This is the date of purchase. If not certain, fill in any date.
Maturity ### The formula in this case is = B3+365*8 , as the maturity period is 8 years.
Rate 12% The annual coupon rate
Yield 14% The required return per annum
Redemption 100 Fill in the redemption value as a percentage of the par value
Frequency 2 This represents the number of times interest is paid in an year
Basis 3 3 represents the day count convention: actual no. of days/365 in int.calculatio
Price 90.57 To get the result in B8, use the function =PRICE(B1,B2,B3,B4,B5,B6,B7)
Bond price is obtained per Rs.100 of the face value of the bond. Thus,had the redemption value bee
Rs. 1000, the price would have been Rs.90.55 x 10
 Formula used
Price of the bond at present(PV) Rs. 800
Par value/Maturity value of the bond(FV) Rs. 1,000
Coupon rate per period 9%
Coupon amount payabole per period(PMT) R =C3*C4 90
No. of periods(NPER) 8
Yield to Maturity(RATE) =RATE(C6,C5,-C2,C3,0) 13.20%

Yield to maturity of a bond can also be obtained using the Yield formula in Excel, as shown below
Formula used
Settlement As the date is not given, use any date 1/1/2015
Maturity =C11+365*8 12/30/2022
Rate 9%
Redemption 100
Frequency 1
Basis 3
Price =800/10 80
Yield to maturity =YIELD(C11,C12,C13,C17,C14,C15,C16) 13.20%
Note: The parameters are the same as that used in the spreadsheet illustration for 'PRICE'
 g1 g2 n(years)
20% 10% 6
P0(Rs) Formula used=E2*(1+A2)*(1-((1+A2)/(1+D2))^C2)/(D2-A2)+E2*(1+A2)*(1+A2)^(C2-1)*(1+B2)/(D2-B2)/(1+D2)^C2
 r D0(Rs)
15% 2
+A2)/(1+D2))^C2)/(D2-A2)+E2*(1+A2)*(1+A2)^(C2-1)*(1+B2)/(D2-B2)/(1+D2)^C2 70.76
 ga gn H(years) r D0(Rs)
50% 12% 5 16% 3
P0(Rs) Formula used =E2*((1+B2)+C2*(A2-B2))/(D2-B2) 226.50
 Exhibit 8.1
Data on the Nifty Index
YEAR NIFTY ANNUAL DATE NIFTY ANNUAL
ENDING RETURN(%) RETURN(%)

1990 331 - 2002 1094 3.25

1991 559 68.84 2003 1880 71.90
1992 761 36.28 2004 2081 10.68
1993 1043 36.95 2005 2837 36.34
1994 1182 13.40 2006 3966 39.83
1995 909 -23.15 2007 6139 54.77
1996 899 -1.04 2008 2959 -51.79
1997 1079 20.05 2009 5201 75.76
1998 884 -18.08 2010 6135 17.95
1999 1480 67.42 2011 4624 -24.62
2000 1264 -14.65 2012 5905 27.70
2001 1059 -16.18 2013 6304 6.76
2014 8284 31.41

Calculation of the  Means
YEAR NIFTY ANNUAL 1+ANNUAL
ENDING RETURN(%) RETURN
1990 331 -
1991 559 68.84 1.6884
1992 761 36.28 1.3628
1993 1043 36.95 1.3695
1994 1182 13.40 1.1340
1995 909 -23.15 0.7685
1996 899 -1.04 0.9896
1997 1079 20.05 1.2005
1998 884 -18.08 0.8192
1999 1480 67.42 1.6742
2000 1264 -14.65 0.8535
2001 1059 -16.18 0.8382
2002 1094 3.25 1.0325
2003 1880 71.90 1.7190
2004 2081 10.68 1.1068
2005 2837 36.34 1.3634
2006 3966 39.83 1.3983
2007 6139 54.77 1.5477
2008 2959 -51.79 0.4821
2009 5201 75.76 1.7576
2010 6135 17.95 1.1795
2011 4624 -24.62 0.7538
2012 5905 27.70 1.2770
2013 6304 6.76 1.0676
2014 8284 31.41 1.3141
Arithmetic mean= 19.57
Product= 25.04
Geometric 
Mean= 14.36%
Period 1 2 3 4 5 6
Return (Ri) 15 12 20 ­10 14 9
Mean =AVERAGE(B2:G2) 10
Standard deviation =STDEV(B2:G2) 10.45
 Exhibit 8.2 & 8.3 
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­
    ILLUSTRATIONS OF THE CALCULATION OF STANDARD DEVIATION
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­
BHARAT FOODS
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i=State of  (Ri­ Pi(Ri­
the Economy Pi Ri% pi*Ri Ri­Rbar Rbar)^2 Rbar)^2
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­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­ 
1. Boom 0.30  16 4.8 4.50 20.25 6.075 
2. Normal 0.50  11 5.5 ­0.50 0.25 0.125 
3. Recession 0.20  6 1.2 ­5.50 30.25 6.050 
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­ ­­­­­­­­­­
CALCULATIONS

Sum of (Pi)
(Ri)= 11.50

Sum of Pi(Ri­Rbar)^ 12.25

Standard 
Deviation= [Sum{Pi(Ri­Rbar)^2}]^0.5= 3.50%
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­ ­­­­­­­­­­­

­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­ ­­­­­­­­­­­

ORIENTAL SHIPPING
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­­­­­­­­­­
i=State of  (Ri­ Pi(Ri­
the Economy Pi Ri% pi*Ri Ri­Rbar Rbar)^2 Rbar)^2
­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­­­­­­­­­­
­­­­­­­­­­­
1. Boom 0.30  40 12 27.00 729 218.700 
2. Normal 0.50  10 5 ­3.00 9 4.500 
3. Recession 0.20  ­20 ­4 ­33.00 1089 217.800 
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­ ­­­­­­­­­­
CALCULATIONS

Sum of (Pi)
(Ri)= 13.00

Sum of Pi(Ri­Rbar)^ 441

Standard 
Deviation= [Sum{Pi(Ri­Rbar)^2}]^0.5= 21.00%

­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­ ­­­­­­­­­­­

­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­

Exhibit 8.10
 CALCULATION OF BETA
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­ ­­­­­­­­­­­
YEAR Rjt Rmt Rjt­   Rmt­   (Rjt­R#j)x (Rmt­  
 R#j   R#m   (Rmt­R#m)  R#m)^2
­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­ ­­­­­­­­­­­
1 10 12 ­2 ­1 2 1
2 6 5 ­6 ­8 48 64
3 13 18 1 5 5 25
4 ­4 ­8 ­16 ­21 336 441
5 13 10 1 ­3 ­3 9
6 14 16 2 3 6 9
7 4 7 ­8 ­6 48 36
8 18 15 6 2 12 4
9 24 30 12 17 204 289
10 22 25 10 12 120 144
­­­­ ­­­­ ­­­­ ­­­­ ­­­­ ­­­­
Total= 120 130 778 1022
­­­­ ­­­­ ­­­­ ­­­­
Mean Rj=R#j= 12
Mean Rm=R#m= 13

­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­

86.4 
Beta=Bj=Cov(Rj,Rm)/Var(Rm)= ­­­­­­= 0.76 
113.6 

Alpha=R#j­Bj*R#m= 12­(0.76) 2.12%

­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­­­­

0.00
Year
Return on security 1 2 3 4 5 6 7 8 9
j(%)
Return on market 10 6 13 (4) 13 14 4 18 24
portfolio (%) 12 5 18 (8) 10 16 7 15 30
=SLOPE(B2:K2,B3:K3) 0.76 =INTERCEPT(B2:K2,B3:K3)
 10
22
25
2.10
 Example on covariance

Deviation of 
Deviation of 
the return 
Return on  the return on  Return on 
State of  on security 
Probability     security 1  security 1  security 2  
nature    1 from its 
           (2)   ( %)      from its  (%)          
(1) expected 
    (3) expected  (5)
value       
value (4)
(6)
1 0.1 ­10 ­26.0 5  (8.5)
2 0.3 15  ­1.0 12  (1.5)
3 0.3 18  2.0 19  5.5 
4 0.2 22  6.0 15  1.5 
5 0.1 27  11.0 12  (1.5)
Expected return on security 1= 16.0 Covariance =
Expected return on security 2= 13.5

Efficient frontier for a two­security case
Coefficient 
Expected  Standard  of 
Return Deviation Correlation
Security A 12% 20% ­0.2
Security B 20% 40%
Proportion of  Proportion  Expected  Standard 
Portfolio A of B Return Deviation
1(A) 1 0 12.00% 20.00%
2 0.9 0.1 12.80% 17.64%
3 0.759 0.241 13.93% 16.27%
4 0.5 0.5 16.00% 20.49%
5 0.25 0.75 18.00% 29.41%
6(B) 0 1 20.00% 40.00%
Product 
of the 
deviatio
ns times 
probabil
ity      
(2) x(4) 
x(6)
22.1
0.45
3.3  
1.8
­1.65
26
Price of stock now S0
Exercise price E 60
Standard deviation of continuously 56
compounded annual return σ
Years to maturity t 0.3

Interest rate per annum r 0.5

d1 0.14
d2 =(LN(C1/C2)+(C5+(C3^2)/2)*C4)/(C3*(C4^0.5)) 0.7613
Equilibrium value of call option now, C0 =C6-C3*(C4^0.5) 0.5492
= C1*NORMSDIST(C6)-(C2/EXP(C5*C4))*NORMSDIST(C 9.61
 Year 0 1 2 3 4 5
Cash flow (1,000,000) 200,000 200,000 300,000 300,000 350,000
Cost of capital 10% NPV =NPV(B3,C2:G2)+B2 (5,272)

SECTION 11.5: Example: Benefit Cost Ratio

Year 0 1 2 3 4
Cash flow ­100,000 25,000 40,000 40,000 50,000
Cost of capital 12%
Present value of benefits =114,456 
Benefit Cost Ratio       = 1.145 NBCR       = 0.145
Year 0 1 2 3 4

Cash flow (100,000) 30,000 30,000 40,000 45,000

=IRR(B2:F2) 15.37%

SECTION 11.8: Calculation of payback period

Year 0 1 2 3 4 5 6
Cash flow of A (100,000) 50,000 30,000 20,000 10,000 10,000
Unrecovered
investment
balance 100,000 50,000 20,000 0
Payback period
in years 3 years
Cash flow of B (100,000) 20,000 20,000 20,000 40,000 50,000 60,000
Unrecovered
investment
balance 100,000 80,000 60,000 40,000 0
Payback period
in years 4 years
 Exhibit 11.5
Calculation of Discounted Payback Period
Cumulative net 
Discounting  Present  cash flow after 
Year Cash flow factor @10% value discounting
0 ­10000 1.000 ­10000 ­10000
1 3000 0.909 2727 ­7273
2 3000 0.826 2479 ­4793
3 4000 0.751 3005 ­1788
4 4000 0.683 2732 944
5 5000 0.621 3105
6 2000 0.564 1129
7 3000 0.513 1539

Section 11.9: Accounting Rate of Return

Book value 
of fixed  Profit after 
Year investment tax
1 90,000 20,000
2 80,000 22,000
3 70,000 24,000
4 60,000 26,000
5 50,000 28,000
Accounting Rate of Return= 0.34
 Exhibit 12.2
Project Cash Flows
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
YEAR ­­­­> 0 1 2 3 4
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
1. Fixed Assets (80.00)
2. Net working capital margin (20.00)
3. Revenues 120.00  120.00  120.00  120.00 
4. Costs (Other than D&I) 80.00  80.00  80.00  80.00 
5. Depreciation 20.00  15.00  11.25  8.44 
6. Profit before Tax 20.00  25.00  28.75  31.56 
7. Tax 6.00  7.50  8.63  9.47 
8. Profit after tax 14.00  17.50  20.13  22.09 
9. Net salvage value
10. Net recovery of WC margin
11. Initail Flow (100.00)
12. Operating Flow 34.00  32.50  31.38  30.53 
13. Terminal Flow
14. Net Cash Flow (100.00) 34.00  32.50  31.38  30.53 

Book Value of Investment 100.00  80.00  65.00  53.75  45.31 

Tax Rate 0.3 0.3 0.3 0.3

Irr = 26.18%   DR = 25.00% C.o.C.=

­­­­­­­­
5
­­­­­­­­

120.00 
80.00 
6.33 
33.67 
10.10 
23.57 
30.00 
20.00 

29.90 
50.00 
79.90 

0.3

30.00%
     Exhibit 12.3
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
 CASH FLOWS FOR THE K­CIN PROJECT
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
YEARS (Rs. Million)
0 1 2 3 4
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
1. Capital Investment (100.00)
2. Level of Working Capital 20 30 40 30 20
3. Revenues 100 150 200 150
4. Raw Material Cost 30 45 60 45
5. Labour Cost 20 30 40 30
6. Operating and Maintenance Cost 5 5 5 5
7. Loss of Contribution 15 15 15 15
8. Depreciaiton 25.00 18.75 14.06 10.55
9. Bad Debt Loss
10. Profit Before Tax 5.00 36.25 65.94 44.45
11. Tax 2.00 14.50 26.38 17.78
12. Profit After Tax 3.00 21.75 39.56 26.67
13. Net Salvage Value of Equipment
14. Recovery of Working Capital
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
15. Initial Investment (100.00)
16. Operating Cash Inflow (12+8+9) 28.00 40.50 53.63 37.22
17. Change in Working Capital 20.00 10.00 10.00 ­10.00 ­10.00
18. Terminal Cash Flow (13+14)
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
19. Net Cash Flow (15+16­17+18) ­120.00 18.00 30.50 63.63 47.22
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­

ASSUMPTIONS
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
Raw Material Cost = 30.00%  of sales
Labour Cost = 20.00%  of sales
Operating & Maintenance Cost = 1  million
Overhead Allocation = 10.00%  of sales
Depreciation Rate = 25.00%
Working Capital = 0.2  of sales
Short Term Borrowing for W/C = 0.5  of W/C
Interest on Short Term Borrow= 0.18
Debentures = 0.5  of Capital Investment
Interest on Debentures = 0.15
Tax Rate = 0.4
Net Salvage Value of Equipment 4  lakhs
­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­ ­­­­­­­­
 ­­­­­­­­

­­­­­­­­
(Rs. Million)
5
­­­­­­­­

0
100
30
20
5
15
7.91
5
17.09
6.84
10.25
20
15
­­­­­­­­

23.16

35
­­­­­­­­
58.16
­­­­­­­­

­­­­­­­­

­­­­­­­­
 Exhibit 12.4
Cash Flows for the Replacement Project
Year 1 2 3 4
I. Investment Outlay
1. Cost of New Asset ­1600.00
2. Salvage Value of Old Asset 500.00
3. Increase in Net Working Capital ­100.00
4. Total Net Investment(1­2+3) ­1200.00
II. Operating Inflows Over the 
Project Life Cycle
5. After Savings in Manufacturing 
Costs 180.00 180.00 180.00 180.00
6. Depreciaiton on New Machine 400.00 300.00 225.00 168.75
7. Depreciation on Old Machine 100.00 75.00 56.25 42.19
8. Incremental Depreciation(6­7) 300.00 225.00 168.75 126.56
9. Tax savings in Incremental 
Depreciaiton 120.00 90.00 67.50 50.63
10. Net Operating Cash Flow (5+9) 300.00 270.00 247.50 230.63
III. Terminal Cash Flow
11. Net Terminal Value of New 
Machine
12. Net Terminal Value of Old 
Machine
13. Recovery of Incremental Working 
Capital
14. Total Yerminal Cash Flow (11­
12+13)
IV. Net Cash Flow (4+10+14) ­1200.00 300.00 270.00 247.50 230.63

Depreciation Rate 25%
Tax Rate 40%
 5

180.00
126.56
31.64
94.92

37.97
217.97

800.00

160.00

100.00

740.00
957.97
 Exhibits 13.2 & 3 on Sensitivity Analysis­Illustration
( All amounts in Rupees thousands)
Factors Expected values Calculation of expected net present value
Initial investment 20,000  Investment
Cost of capital 12% Sales 
Sales 18,000  Variable costs
Variable cost per 
unit as a fraction 
of sales  2/3 Fixed costs
Fixed costs 1,000  Depreciation
Depreciation as a 
percentage of the 
investment 10% Pre­tax profit
Tax rate  1/3 Taxes
Life of the project 
in years 10  Profit after taxes
Cash flow from 
Net salvage value 0  operations
Salvage value
Net present value

For sensitivity analysis proceed as follows.In cell 
B18  copy the formula for NPV from cell E14. .Leave 
the adjcacent cell to the left(A18) blank and then 
fill the various values of investment, one below 
the other from cell A19  onwards( in this case 
24,000 and 18,000). Highlight(select)  A18  to B20  
and then from the drop­down menu for Data, select 
table. In the dialogue box that appears, type 
against column input cell ,the cell reference B4 
and click OK. The NPV values corresponding to the 
various investment  figures will be automatically 
filled in. Next give headings Investment  and NPV 
in cells A18  and B18 respectively as separately 
shown.To change the numerical value into text in 
cell B18   go to Format>Cells>Custom and against 
Type, type out " Net present value"
Investment 2,601  Sales
24,000 (646) 15000
18,000 4,224  21,000
The following analysis is done using the above technique
Variable costs as a 
percentage of sales Net present value Fixed Costs
70% 340.80 1,300
65% 3730.94 800
llustration
mounts in Rupees thousands)
ion of expected net present value
20,000 
18,000 
12,000 

1,000 
2,000 

3,000 
1,000 

2,000 

4,000 
0 
2,601 

Net Present Value
(1,166)
6,368 

Net present value
1,471 
3,354 
 Discount rate Project life Tax rate
12% 10 33.33%
Expected values
Investment in year 0 (20,000)
Variable costs as a percentage of sales 66.67%
For years 1 to 10
Sales 18,000
Variable costs =C7*C5 12,001
Fixed costs 1,000
Depreciation =-C4/B2 2,000
Pre-tax profit 2,999
Taxes =C11*C2 1,000
Profit after taxes =C11-C12 2,000
Cash flow from operation =C13+C10 4,000
Present value of the cash flow stream =PV(A2,B2,-C14) 22,599
Net present value of the project =C15+C4 2,599

Key variables Pessimistic Expected Optimistic

Investment -24,000 -20,000 -18,000
Sales 15,000 18,000 21,000
Variable costs as a percent of sales 70 66.67 65
Fixed costs 1,300 1,000 800
 Pessimistic

­24000
0.7

15000

1300

Page 62
 Expected

­20000
0.6667

18000

1000

Page 63
 Optimistic

­18000
0.65

21000

800

Page 64
Scenario Summary
Current Values: Pessimistic Expected Optimistic
Changing Cells:
$C$4 (20,000) (24,000) (20,000) (18,000)
$C$7 18,000 15,000 18,000 21,000
$C$5 66.67% 70.00% 66.67% 65.00%
$C$9 1,000 1,300 1,000 800
Result Cells:
$C$16 2,599 -7,426 2,599 10,064
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
Calculation of Financial Break­even using the data 
in Exhibit 13.7
('000)
Year 0 1 to 10
Investment 20,000
Variable costs as a 
fraction  of sales  2/3
Tax rate 33.33%
Sales per year 18,000
Variable costs per year 12,000
Fixed costs per year 1,000
Depreciation per year 2,000
Pre­tax profit per year 3,000
Taxes per year 1,000
Profit after taxes per 
year 2,000
Cash flow from operation 
per year 4,000
Accounting break­even 
level of sales 9,000
Calculation of the 
financial break­even 
level of sales
Discount rate 12%
Project life in years 10
Total of the present 
values of the cash 
inflows 22,601
Initial investment 20,000
Financial break­even 
level of sales 15,928
 Section 14.2 : Calculation of average cost of debt for Multiplex Limited
Multiplex Limited: Debenture details
Face value Rs. 1,000
Coupon rate 12%
Remaining period to Yield to maturity using the
maturity(in years) 4 approximate formula 10.7%
Current market price 1,040 =(B3*B4+(B3-B6)/B5)/(0.4*B3+0.6*B6)

Illustration of Commercial paper cost calculation

Face value 1,000,000 The implicit interest rate for the remai 3.63%
Remaining period(in years) 0.5 =B9/B11-1
Current market price 965,000 The implicit interest rate/discount ra 7.39%
Formula used =(1+F9)^(1/B10)-1
Calculation of the average cost of debt
(Amounts in million)
YTM or
Current
Debt Instrument Face Value Market ValueCoupon RateRate
Non-convertible debentures 100 104 12% 10.7%
Bank loan 200 200 13% 12%
Commercial paper 50 48.25 NA 7.39%
Total = 352.25
Average cost of debt using market value proportions and yields 11.00%
Formula used=E16*(C16/C19)+E17*(C17/C19)+E18*(C18/C19)

Post-tax cost
of debt
Tax rate = 35% = 7.15%

Exhibit 14.1
Calculation of the WACC for Bharat Nigam Limited
Cost of equity 16%
Cost of preference 14%
Cost of debt 12%
Tax rate = 30%
Weighted
Cost [(1) x
Source of Capital Proportion (1) Cost (2) (2)]

Equity 0.60 16.00% 9.60%

Preference 0.05 14.00% 0.70%

Debt 0.35 8.40% 2.94%
WACC = 13.24%
 Exhibit 14.2 Determination of Breaking Points and the Resulting Range of Total
New Financing for Shiva Electronics

Range of New
Source of Financing (Rs. In Breaking Point ( Rs. In
Capital Cost million) million)

Equity 18% 0 to 30 75

20% Above 30

Debt 10% 0 to 50 83.33

11% Above 50 ­

Proportion: Equity 40%

Debt 60%

Exhibit 14.3  Weighted Average Cost of Capital for Various Ranges of Total Financing for Shi

Range of Total New 
Source of Capital Proportion
Financing (Rs. Mill)

(1) (2)
0 to 75.00 Equity 40%
Debt 60%
Weighted Average Cost of Capital
75 to 83.33 Equity 40%
Debt 60%
Weighted Average Cost of Capital
Above 83.33 Equity 40%
Debt 60%
Weighted Average Cost of Capital

Exhibit 14.4  The Weighted Marginal Cost of Capital
Weighted Marginal 
Cost of Capital 
Range of Total Financing (%)
0 to 75 13.20%
75 to 83.33 14.00%
Above 83.33 14.60%
ulting Range of Total

Range of Total New Financing

0 to 75.00
Above 75.00

0 to 83.33
Above 83.33

 Total Financing for Shiva Electronics

Cost  % weighted cost %

(3) (2)x(3)
18.00% 7.20%
10.00% 6.00%
13.20%
20.00% 8.00%
10.00% 6.00%
14.00%
20.00% 8.00%
11.00% 6.60%
14.60%
 Exhibit  15.1
(Rs.in '000)
Debt repayable in 
Interest 
equal amounts over  Tax rate
 rate
years
14% 8 60%
Calculation of the Present Value of Tax Shield

Present value of tax 
Debt outstanding  Tax 
Year Interest shield using a 
at the beginning shield
discount rate of 14 %
1 2400 336 202 177
2 2100 294 176 136
3 1800 252 151 102
4 1500 210 126 75
5 1200 168 101 52
6 900 126 76 34
7 600 84 50 20
8 300 42 25 9
 Section 19.2: Illustration of Net Income Approach
(Rs.in million)
Firm A Firm B
Net operating income 10,000 10,000
Interest on debt 0 3,000
Cost of debt 6% 6%
Cost of equity 10% 10%
Market value of debt 0 50,000
Market value of equity 100,000 70,000
Average cost of capital 10% 8.3%

Illustration of tax advantage of a rupee

tc 50%
tps 5%
tpd 30%
Tax advantage of a rupee of debt( in rupees) 0.32
 Illustration ­­Calculating the Break­Even PBIT Level
(Amounts in Rup
Present capital structure:
No.of equity shares 1,000,000 Tax rate
Face value of equity share 10
External financing 
planned 10,000,000
Plan (i)
No.of equity shares to 
be issued 1,000,000
Issue price 10 EPS under Plan (i)
Plan (ii)
Amount of debentures  
to be issued 10,000,000
Interest rate on 
debenture 14% EPS under Plan (ii)
EPS under Plan(i)­ EPS 
under plan (ii) 0 Break­even PBIT level

NOTE: To start with,  enter only the formula for EPS in cells D9 and D12 and their difference 
fornula form) in cell B13  keeping the cell no.D13 blank.  Next use the feature Goal Seek in t
drop down menu of Data> What­if­Analysis, by setting  B13 to  the value 0 and holding D13 as t
variable cell. This feature, after some iterations, will post the correct value in the desired
cell.

Cash Flow Coverage Ratio: Illustration

(Rs.in million)
Depreciation 20
EBIT 120
Interest on debt 20
Tax rate 50%
Loan repayment instalment 20

Cash Flow Coverage Ratio: 2.33

DSCR
Year 1 2
Profit after tax -2 10
Depreciation 12 10.8
Interest on long term loan 17.6 17.6
Loan repayment instalment
DSCR= 1.89
 20.7
(Rs.in million)
Depreciation 3
PBIT 15
Interest on debt 4
Tax rate 50%
Loan repayment instalme 2.5
(a) Interest coverage r 3.75
(b) Cash flow coverage  2

20.8

Year 1 Year 2
Profit after tax ­4 22
Depreciation 12 10.8
Interest on term loan 21.1 21.2
Term loan repayment 
instalment
DSCR 1.66

20.9
(a) ( Amounts in Rs.million)
Amount of debt finance 300
Interest rate on debt 15%
Annual interest on debt 45
Expected value of the  
net cash flows, 
without taking the 
interest on debt into 
account 80

Expected value of the  
net cash flows, taking 
the interest on debt 
into account(A) 35
Standard deviation of 
the above net cash 
flows 40
Specified value of the 
net cash flow(which 
signifies cash 
inadequecy)  (B) 0
Standardised 
difference between B 
and A(the z value) ­0.875
Probability of cash 
inadequecy 19.08%
(b)

We can use Goal Seek feature in Data>What­if­
Analysis, to get the z value ( in cell B128 )
corresponding to a cumulative porbabiliy of  
5 percent as shown below.
z value ­1.640
Probability of cash 
inadequecy 0.051

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 
­1.64 14.4
z value ­1.64
The debt that can be 
serviced with an 
interest of Rs.14.4 
million is 96
BIT Level
(Amounts in Rupees)

50%

0.7

2,800,000

and D12 and their difference (in 
se the feature Goal Seek in the 
 value 0 and holding D13 as the 
 correct value in the desired 
9

3 4 5 6 7 8 9
20 25 30 40 40 50 55
9.72 8.75 7.87 7.09 6.38 5.74 5.17
17.05 14.85 12.65 10.45 8.25 6.05 3.85
20 20 20 20 20 20 20
 (Rs.in million)
Year 3 Year 4 Year 5 Total
25 40 50 133
9.72 8.75 7.87 49.14
20.5 17.8 15.2 95.8

24 24 24 72
 10 Sum
55 323
4.65 78.17
1.65 110
20 160
Exhibit 21.1: Numerical Examples of Walter Model
Earning per share 4
Dividend payment 4 2
Rate of return required by investors 15%
Price per share
as per Walter
Rate of return on investments model
20% 26.67 31.11
15% 26.67 26.67
10% 26.67 22.22

Exhibit 21.2 : Numerical Examples of Gorden Model

Fraction of earnings the firm
ploughs back 0.25 0.5
Price per share
as per Gorden
Rate of return on investments model
20% 30.00 40.00
15% 26.67 26.67
10% 24.00 20.00

Using the data in Exhibit 21.3 to see how dividend policy affects the curre
Firm A Firm B
Next year's price(Rs) 120 105
Dividend )Rs) 0 15
Total pre-tax payoff 120 120
Note: As we wish to use the Goal Seek featur
Current price 102.86 101.43 blank to start with. The required values wou
Capital gain 17.14 4 automatically at the end.
Dividend tax rate 20%
Tax rate on capital gains 10% 10%
Post-tax dividend 0 12
Post-tax capital gains 15.43 3.21
Total post-tax return 15.43 15.21 if­Analysis , to get the corresponding share
1/Post-tax rate of return 6.67 6.67 respectively
The Steps
1. On the Data menu > What­if­Analysis select  Goal Seek.
2. In the Set cell box, enter the reference for the cell that contains the formula  Here, this
3. In the To value box, type the result you want. Here it  is 6.666667 i.e.1/0.15­see the Note
4 In the By changing cell box, enter the reference for the cell that contains the value you wa
for Firm A and C22 for Firm B
5  Click OK.
Similarly you can find the current price of B
nd policy affects the current price

o use the Goal Seek feature in Data ,keep B22 and C22 
h. The required values would get filled up 
he end.

et the corresponding share price in B22 and C22 

ins the formula  Here, this is cell B29 
667 i.e.1/0.15­see the Note above
t contains the value you want to adjust viz. cell B22  
 Section 22.4 : Example of Lintner Model
EPS for year t (EPSt) 4
DPS for year t-1 (Dt-1) 1.5
Target payout ratio( r) 0.6
Adjustment rate( c) 0.5
DPS for year t according to the Lintner model(D t) 1.95
 Exhibit 23.7 Financial Information for Horizon Limited

Balance sheet data

Profit and Loss account data Beginning End of
of 20X0 20X0
Sales 800 Inventory 96 102
Cost of goods sold 720 Accounts receivable 86 90
Accounts payable 56 60
Inventory period in days 50.2
Accounts receivable period in days 40.2
Accounts payable period in days 29.4
Operating cycle in days 90.3
Cash operating cycle in days 60.9

Section 23.6: Example of Cash Requirement for Working Capital (Rs.in million)
Credit period granted
Sales 240 on sales(months) 2
Credit period extended
Material cost 72 by suppliers(months) 3
Period of arrear in
payment of
Wages paid 48 wages(months) 1
Period of arrear in
Manufacturing expenses outstanding payment of cash
at the end of the year 4 expenses(months) 1
Period of arrear in
payment of total
administraive
Administrative and sales expenses 30 expenses(months) 0
Gross profit 25%
Stocking period of raw
materials(months) 2
Stocking period of finished
goods(months) 1
Cash balance maintained 5
Safety margin on working capital
requirement 10%
Total manufacturing cost 180
Manufacturing expenses 60
Cash manufacturing expenses 48
Depreciation 12
Cash manufacturing cost 168
Add:Administrative and sales expenses 30
Total cash cost 198 ( Rs.in million)
Current assets Current Liabilities
Debtors 33 Sundry creditors 18
Manufacturing expeses
Raw material stock 12 outstanding 4
Finished goods stock 14 Wages outstanding 4
Cash balance 5
Total current assets 64 Total current liabilities 26
Working capital 38
Safety margin on working capital 3.8
Working capital required 41.8
 Exhibit 24.2
Forecast of Cash Receipts
January February March April May June
1. Sales 100000 100000 100000 120000 120000 120000

2. Credit Sales 80000 80000 80000 96000 96000 96000

3. Collection of Accounts 
Receivables 80000 80000 80000 80000 88000 96000
4. Cash Sales
5. Receipt from Sale of  20000 20000 20000 24000 24000 24000
Equipment 5000
6. Interest 2000
Total Cash receipts 100000 100000 105000 104000 112000 122000

Exhibit 24.3
Forecast of Cash Payments
January February March April May June
1. Material Purchases 40000 40000 48000 48000 48000 48000
2. Credit Material 
Purchases 40000 40000 48000 48000 48000 48000
3. Payment of Accounts 
Payable 40000 40000 40000 48000 48000 48000
4. Miscellaneous Cash 
Purchases 2000 2000 2000 2000 2000 2000
5. Wages 15000 15000 15000 15000 15000 15000
6. Manufacturing Expenses 20000 20000 20000 20000 20000 20000
7. General Admin. and 
Selling Expenses 10000 10000 10000 10000 10000 10000
8. Dividend 20000
9. Tax 20000
10. Capital Expenditure 50000
Total 87000 87000 137000 95000 95000 135000

Exhibit 24.4
Summary of Cash Forecast 
January February March April May June
1. Opening Cash Balance 22000
2. Receipts 100000 100000 105000 104000 112000 122000
3. Payments 87000 87000 137000 95000 95000 135000
4. Net Cash Flow 13000 13000 ­32000 9000 17000 ­13000
5. Cumulative Net Cash Flow 13000 26000 ­6000 3000 20000 7000
6. Opening Cash Balance 35000 48000 16000 25000 42000 29000
7. Minimum Cash Balance 
Required 20000 20000 20000 20000 20000 20000
8. Surplus or Deficit in 
Relation to the Minimum 
Cash Balancd Required 15000 28000 ­4000 5000 22000 9000
 Exhibit 24.7
       Establishing the Optimal Cash Conversion Size
(Amou
Cash conversion size (the amount of 
1 marketable securities that will be 
converted into cash)   100,000 200,000
Number of conversions during the 
2 planning period of three months 
(1,500,000 / line1) 15 7.5
3 Average cash balance (line 1 / 2) 50,000 100,000
4 Interest income foregone  2,000 4,000
(line 3 x .04)
5 Cost of cash conversion  7500 3750
(Rs.500 x line 2)
Total cost of ordering and holding 
6 cash (line 4 + line 5) 9,500 7,750
Amount required for meeting its transaction needs 1,500,000
Annual yield on its marketable securities 16%
Fixed cost per conversion transaction 500
 Conversion Size
(Amounts in Rs.)

300,000 400,000 500,000

5 3.75 3
150,000 200,000 250,000
6,000 8,000 10,000

2500 1875 1500

8,500 9,875 11,500

in the next(months) 3
 Exhibit 25.2
Construction of a Credit Rating Index (based on a 5-point rating scale)
Rating
Factor Factor weight 5 4
Past payment 0.30 *
Net profit margin 0.20 *
Current ratio 0.20
Debt­equity ratio 0.10 *
Return on equity 0.20 *
Rating index

Illustration of Days Sales Outstanding

Sales(Rs.in  No.of days in 
Month million) Receivables the month
January 150 400 31
February 156 360 28
March 158 320 31
April 150 310 30
May 170 300 31
June 180 320 30
July 190 340 31
August 200 350 31
September 210 360 30
October 220 380 31
November 230 400 30
December 240 420 31
Days Sales Outstanding
End of quarter 1 62
End of quarter 2 58
End of quarter 3 55
End of quarter 4 56
 Rating Factor 
3 2 1 score
1.20
0.80
* 0.60
0.40
1.00
ing index 4.00
 Safety stock and calculations in Exhibit 26.2
Daily usage 
rate in  Lead time in 
tons Probability days Probability
10 0.2 20 0.25
20 0.6 30 0.50
30 0.2 40 0.25
Stockout cost estimated per ton (Rs.) 10,000
Carrying cost per ton per year (Rs.) 1,400
(a)
Normal usage in tons 600
=SUMPRODUCT(A43:A45,B43:B45)*SUMPRODUCT(C43:C45,D43:D45)
Possible 
Daily usage  Lead time  levels of  Safety 
rate in days usage stock
10 20 200
10 30 300
10 40 400
20 20 400
20 30 600
20 40 800 200
30 20 600
30 30 900 300
30 40 1200 600

Expected 
stockout  Carrying 
Safety stock Stockout Stockout cost Probability cost cost Total cost
600 0 0 0.00 0 840,000 840,000
300 300 3,000,000 0.05 150,000 420,000 570,000
200 100 1,000,000 0.10 100,000 280,000 580,000
400 4,000,000 0.05 200,000
300,000
0 200 2,000,000 0.15 300,000
300 3,000,000 0.10 300,000
600 6,000,000 0.05 300,000 0 900,000
900,000
The optimal level of safety stock is 27 tons because at that level the cost is 
minimised.
Exhibit 28.2 Good Accounts Bad Acounts
Xi Yi Xi Yi
Account  Current  Return on  Account  Current  Return on 
Number Ratio Investment Number Ratio Investment
1 1.10 13 11 0.70 11
2 1.50 15 12 0.90 ­4
3 1.20 17 13 0.80 6
4 0.90 21 14 1.30 2
5 1.60 7 15 1.10 6
6 2.20 8 16 0.50 8
7 0.90 16 17 0.30 8
8 1.00 13 18 1.40 6
9 1.30 8 19 0.90 3
10 1.30 2 20 1.10 14

Sums 13.00 120.00 9.00 60.00

Averages 1.30 12.00 0.90 6.00
Average for both groups
X 1.1
Y 9

(X-X_bar)*
No. (X-X_bar)^2 (Y-Y_bar)^2 (Y-Y_bar) No. (X-X_bar)^2 (Y-Y_bar)^2
1 0.00 16 0.00 11 0.16 4
2 0.16 36 2.40 12 0.04 169
3 0.01 64 0.80 13 0.09 9
4 0.04 144 -2.40 14 0.04 49
5 0.25 4 -1.00 15 0.00 9
6 1.21 1 -1.10 16 0.36 1
7 0.04 49 -1.40 17 0.64 1
8 0.01 16 -0.40 18 0.09 9
9 0.04 1 -0.20 19 0.04 36
10 0.04 49 -1.40 20 0.00 25
SUM 1.80 380 -4.70 1.46 312.00
Averages
x^2 3.26
y^2 692.00 σ2 of X 0.172
xy ­1.70 σ2 of Y 36.421
dx 0.40 σ of XY ­0.089
dy 6.00
Coefficients of the Discriminant Function
a 2.4203
b 0.1707

Exhibit 28.3
Z Scores for various accounts
Acount No. Z Score
 1 4.8812
2 6.1907
3 5.8060
4 5.7627
5 5.0673
6 6.6901
7 4.9092
8 4.6392
9 4.5119
10 3.4878
11 3.5718
12 1.4955
13 2.9604
14 3.4878
15 3.6864
16 2.5756
17 2.0916
18 4.4125
19 2.6903
20 5.0519
(X-X_bar)*
(Y-Y_bar)
-0.80
2.60
0.90
-1.40
0.00
0.60
0.80
-0.90
1.20
0.00
3.00
 Exhibit 29.4
Calculation of Duration      Bond A
Present  Proportion of the  Col 4 X 
Year Cash Flow Value at  Bond's Value Time Year
18%
1 2 3 4 5 1

1 15.00 12.71 0.142 0.142 1

2 15.00 10.77 0.120 0.241 2
3 15.00 9.13 0.102 0.306 3
4 15.00 7.74 0.086 0.346 4
5 15.00 6.56 0.073 0.366 5
6 115.00 42.60 0.476 2.856 6
Duration  4.257 years Dura

Face Value of the Bond 100 Face Value of the B

Current Value of the Bond 89.5 Current Value of the 

Coupon (interest rate) 15% Coupon (interest ra

 Bond B
Present  Proportion of the  Col 4 X 
Cash Flow Value at  Bond's Value Time
18%
2 3 4 5

10.00 8.47 0.118 0.118

10.00 7.18 0.100 0.200
10.00 6.09 0.085 0.254
10.00 5.16 0.072 0.287
10.00 4.37 0.061 0.304
110.00 40.75 0.566 3.397
Duration  4.558 years

Face Value of the Bond 100

Current Value of the Bond 71.98

Coupon (interest rate) 10%
Face value 100

Coupon payable per annum 15%

Years to maturity in years 6

Redemption value 100

Current market price 89.5

Any date, if the
date of purchase is
Settlement not certain) 1/1/2006
Maturity =C6+365*C3 12/31/2011
No. of times
interest paid in a
Frequency year 1
3 represents the
day count
convention: actual
no. of days/365 , in
Basis interest calculation 3

Example : Forward rates calculation

Year 1 2
Spot Rate 7.50% 8%
Forward rate 7.50% 8.50%

Bond refunding illustration

Old bonds New bonds
Amount 100,000,000 ###
Balance maturity in years 10 10
Coupon rate 18% 16%
Call premium on old bonds 5%
Issue cost on new bonds 5,000,000
Unamortised portion of the issue cost on
old bonds 3,000,000
Marginal tax rate 40%
Cost of calling the old bonds 105,000,000
Net proceeds of the new issue 95,000,000
Tax savings on tax-deductible expenses 3,200,000
Initial outlay 6,800,000
Annual interest outflow on old bonds 18,000,000
Tax savings on interest expenses and
amortisation of issue costs of old bonds 7,320,000
Annual interest ouflow on new bonds 16,000,000
Tax savings on interest expenses and
amortisation of issue costs of new bonds 6,600,000
Annual net cash savings 1,280,000
After-tax cost on new bonds 0.096
Present value of the annual cash savings 8,002,032 
Net present value of refunding the bond 1,202,032 
 Excel based on Exhibit 29.4

=RATE(C3,C1*C2,-C5,C4) 18%

=DURATION(C6,C7,C2,F3,C8,C9) 4.26

mple : Forward rates calculation

3 4
0 9%
9.51% 10.51%
Given: (Rs.in million)
Cost of the vehicle 1.2
Operating, 
maintenance,insurance and 
other costs in year 1 0.2
Increase in the above cost 
per annum 8%
Useful life of the car­ in 
years 5
Net salvage value of the car 
at the end of 5 years 0.4
Depreciation rate ­WDV  40%

Marginal tax rate of Centaur 35%
Cost of capital of Centaur 11%
Exhibit 30.1

Post­tax Cash Flows Associated with the Ownership and Operation of the Car
Year
0 1 2 3 4
Initial cost ­1.200
Operating and other costs ­0.200 ­0.216 ­0.233 ­0.252
Depreciation rate ­WDV  0.480 0.288 0.173 0.104
Tax shield operating costs 
and depreciation  0.238 0.176 0.142 0.124
Net salvage value
Post­tax cash flow ­1.200 0.038 ­0.040 ­0.091 ­0.127
Discount factor 1.000 0.901 0.812 0.731 0.659
Present value  ­1.200 0.034 ­0.032 ­0.067 ­0.084

Present value of the costs 1.203
PVIFA 3.696
Post­tax EAC 0.326
Lease rental 0.501
Exhibit 30.2 Cash Flow of the Lease Contract
Year
0 1 2 3 4
1.  Cost of fork lift 10
2.  Depreciation  4.00 2.40 1.44 0.86
3.  Loss of depreciation tax 
shield (2 * 0.35) ­1.40 ­0.84 ­0.50 ­0.30
4.  Lease payment ­2.4 ­2.4 ­2.4 ­2.4
5.  Tax shield on lease 
payment (4 * 0.35) 0.84 0.84 0.84 0.84
6.  Loss of salvage value
7.  Cash flow of lease 
(1+3+4+5+6) 10.00 ­2.96 ­2.40 ­2.06 ­1.86

Comparing lease and Hire purchase options
(Amounts in  Rs.)
 
Given:
Cost of the equipment 1,000,000
Years of use of the 
equipment 10
Net salvage value after 10 
years of use 100,000
Post­tax cost of debt to 
Synthetic Chemicals 8%
Tax rate for Synthetic 
Chemicals 50%
Depreciation rate for the 
equipment as per WDV method 33.33%
Hire­Purchase option:
Flat interest rate 0

Hire­Purchase period in  HP  Principal 

months 36 Year instalment Interest repayment
Total interest burden 420,000 1 473,333 230,811 242,523
Annual HP instalment 473,333 2 473,333 140,000 333,333
Monthly HP instalment 39,444 3 473,333 49,189 424,144
Lease option:
Primary lease period in 
years 5

Lease rent per year during 
primary lease period as a 
fraction of the lease amount 0.3
Secondary lease period in 
years 10
Lease rent per year during 
secondary lease period 12,000
Exhibit 30.3
Cash Flows of Leasing and Hire­Purchase Options
Year Leasing Hire­Purchase

Depn.tax 
Rent Interest Principal shield NSV
1 ­150,000 ­115,405 ­242,523 166,667
2 ­150,000 ­70,000 ­333,333 111,111
3 ­150,000 ­24,595 ­424,144 74,074
4 ­150,000 49,383
5 ­150,000 32,922
6 ­6,000 21,948
7 ­6,000 14,632
8 ­6,000 9,755
9 ­6,000 6,503
10 ­6,000 4,335 100,000

PV of the lease cash flows ­615,211
PV of the HP cash flows ­587,125 Choose the lesser cost HP option
 (Rs.in million)

­0.272
0.062

0.117
0.400
0.245
0.593
0.145

5 6

0.52 0.31

­0.18 ­0.11
­2.4 ­2.4

0.84 0.84
­1.00

­1.74 ­2.67
e
Net HP 
cash 
flow
­191,261
­292,222
­374,665
49,383
32,922
21,948
14,632
9,755
6,503
104,335
 Exhibit 32.3 Exhibit
Projected Profit and Loss account 32
for Ma
Financial Statements of Matrix for the Preceding Three Years( Years 1-3) through 8- The Explicit
(Rs.in million)
Profit and Loss Account
1 2 3
Net sales 180 200 229

Income from marketable securities 3

Non-operating income 8
Total income 180 200 240
Cost of goods sold 100 105 125

Selling and general administration expense 30 35 45

Depreciation 12 15 18
Interest expenses 12 15 16
Total costs and expenses 154 170 204
PBT 26 30 36
Taxes 8 9 12
PAT 18 21 24
Dividend 11 12 12
Retained earnings 7 9 12

Balance Sheet
1 2 3
Equity capital 60 90 90
Reserves and surplus 40 49 61
Debt 100 119 134
Total 200 258 285
Fixed assets 150 175 190
Investments 20 25
Net current assets 50 63 70
Total 200 258 285

The calculation of NOPLAT for Matrix Limited: Exhibit 32

Free Cash Flow Forecast for Matrix Limited
Tax rate for Matrix Limited 40% - The Explici
Year 1 Year 2 Year 3
EBIT
(= PBT+interest expense-interest income
-non-operating income) 38 45 41
Tax provision from income statement 8 9 12 1
Add: Tax shield on interest expenses 4.8 6 6.4 2
Less: Tax on interest income 0 0 1.2 3
Less: Tax on non-operating income 0 0 3.2 4
=Taxes on EBIT 12.8 15 14 A
NOPLAT
(=EBIT-taxes on EBIT) 25.2 30 27 5
ROIC
(=NOPLAT/INVESTED CAPITAL) 15.0% 11.3% 6

Net investment
[=(Net fixed assets at the end of the year +
net current assets at the end of the year)
- (Net fixed assets at the beginning of the
year + net current assets at the beginning
of the year)] 38 22 7
8
Exhibit 32.4 : Free Cash Flow B
Gross cash flow
(=NOPLAT +depreciation) 45 45 C
Gross investment
(= increase/(decrease in net current
assets + capital expenditure) 53 40 D
Free cash flow -8 5 E

Exhibit 32.5- Cash Flow Available to Investors F

Year 2 Year 3
Free cash flow -8 5
Add: After-tax non-operating cash flow 0 4.8
Cash flow available to investors -8 9.8

After-tax interest expenses 9 9.6

Add: Cash dividend on equity and
preference capital 12 12
Add: Redemption of debt 0 0

Less: New borrowing 19 15

Add: Share buybacks 0 0
Less: Share issues 30 0
Add: ∆ Excess marketable securities 20 5
Less: After-tax income on marketable
securities 0 1.8
Financing flow -8 9.8
 Projected Profit and Loss account Exhibit 32.7 Limited for five Years- Years 4
for Matrix
through 8- The Explicit Forecast Period
Profit and Loss account
(Rs.in million)
4 5 6 7 8
Net sales 270 320 360 400 440
Income from excess
marketable securities 3 2
Non-operating income
Total income 273 322 360 400 440
Cost of goods sold 144 173 193 218 245
Selling and general
administration 47 59 67 70 77
Depreciation 22 26 29 32 35
Interest expense 18 20 21 23 25
Total costs and expenses 231 278 310 343 382
Profit before tax 42 44 50 57 58
Tax provision 13 16 18 19 18
Profit after tax 29 28 32 38 40
Dividend 15 15 15 16 16
Retained earnings 14 13 17 22 24

Projected Balance Sheet

Equity capital 90 90 90 90 90
Reserves& surplus 75 88 105 127 151
Debt 140 150 161 177 192
Total 305 328 356 394 433
Fixed assets 220 240 266 294 324
Investments 10
Net current assets 75 88 90 100 109
Total 305 328 356 394 433

Exhibit 32.8
Free Cash Flow Forecast for Matrix Limited for Five Years- Years 4 through 8
- The Explicit Forecast Period
( Rs.in million)

4 5 6 7 8
Profit before tax 42 44 50 57 58
Interest expense 18 20 21 23 25
Interest income 3 2 0 0 0
Non-operating income 0 0 0 0 0
EBIT:[(1)+(2)-(3)-(4)] 57 62 71 80 83
Tax provision on income
statement 13 16 18 19 18
Tax shield on interest expense 7.2 8 8.4 9.2 10

Tax on interest income 1.2 0.8 0 0 0

Tax on non-operating income 0 0 0 0 0
TAXES ON EBIT:[(5)+(6)-(7)-(8) 19 23.2 26.4 28.2 28

NOPLAT:[(A)-(B)] 38 38.8 44.6 51.8 55

NET INVESTMENT[ 35 33 28 38 39
FREE CASH FLOW:[(C)-(D)] 3 5.8 16.6 13.8 16
ROIC=NOPLAT/INVESTED
CAPITAL 12.9% 11.8% 12.5% 13.1% 12.7%

Note that the invested capital for year 4 after adjustment is Rs.295 million
Terminal steady growth rate, g 10%
Target capital structure, i.e. D:E 2 : 3
Cost of debt 12.67%
Cost of equity 18%
WACC = 14.0%

Value of operations, PV(FCF) =NPV(I56,H49:L49) Rs.in million 34.78

Continuing value,=FCF8(1+g)/
(WACC-g) =L49*(1+I52)/(I56-I52) Rs.in million 439.69
PV(CV) =L59/(1+I56)^L36 Rs.in million 228.33
Value of operations =L58+L60 Rs.in million 263.11
Value of non-operating assets =D29 Rs.in million 25.00

VALUE OF MATRIX LIMITED =L61+L62 Rs.in million 288.11

,
 Two Stage Growth Model

Base Year( Year 0) Information Inputs for High Growth rate period
( Amounts in Rs.million) Length of the period(in years) 5
Revenues 4,000 Growth rate in revenues & EBIT 10%

as a
percentage of
EBIT revenues 12.5% Growth rate in capital expenditure 10%
Capital expenditure 300 Growth rate in depreciation 10%
Net working capital as a
Depreciation 200 percentage of revenue 30%
as a
percentage of
Net working capital revenues 30% Cost of debt ( pre-tax) 15%
Coroporate tax rate for all time 40% Debt equity ratio 1 :
Paid up equity capital Rs.10 par 300 Risk-free rate 13%
Market value of debt 1,250 Market risk premium 6%
Equity beta 1.333

Exhibit 32.9
Forecasted FCF: Exotica Corporation
(Rs.in million)
1 2 3 4
1 Revenues 4400 4840 5324 5856.40
2 EBIT 550 605 665.5 732.05
3 EBIT(1-t) 330 363 399.3 439.23
Capital
expenditure-
4 depreciation 110 121 133.1 146.41
∆ Net working
5 capital 120 132 145.2 159.72
6 FCF (3-4-5) 100 110 121 133.10

Stable
growth
High growth period period
Cost of equity 21.0% 19.00%
WACC 15.0% 15.00%

Present value of the FCF during the explicit forecast period =NPV(D27,C23:G23)
Present value of terminal value =H23/(E27-H4)/(1+D27)^G17
The value of the firm =H29+H30

Three Stage Growth Model

 High
Growth Transition
Base Year (Year 0 ) Information Inputs for the period period

(amounts in Rs.million) Length of the period in years 5 5

Growth rate in revenues,EBIT,
depreciation and capital
Revenues 1,000 expenditure 25%
Decrease per year in the growth
rate of
revenues,EBIT,depreciation and
EBIT 250 capital expenditure 3%
Net working capital as a
Capital expenditure 295 percentage of revenues 20% 20%
Depreciation and
amortisation 240 Cost of debt( pre-tax) 15% 14%
Net working capital
as a percentage of
revenues 20% Risk free rate 12% 11%
Tax rate for all time to
come 40% Market risk premium 6% 6%
Equity beta 1.583 1.1

During High growth period Transition period Stable growth

Cost of equity =E40+E42*E4 21.50% =F40+F42*F41 17.60% =G40+G42*G41

=I35/(I35+K35)*E39*(1- =I36/(I36+K36)*F39*(1-
WACC B41)+K35/(I35+K35)*C45 B41)+K36/(I36+K36)*E45 =I37/(I37+K37)*G39*(1-B41)+K
14.00% 13.00% 16.00%

Exhibit 32.10
Forecasted FCF: Multiform Limited (amounts in Rupees million)

Period Growth rate EBIT(1-t) Capital expenditure Depn. NWC

1 25% 187.5 368.8 300 250
2 25% 234.4 460.9 375.00 312.5
3 25% 293.0 576.2 468.75 390.6
4 25% 366.2 720.2 585.94 488.3
5 25% 457.8 900.3 732.42 610.4
6 22% 558.5 1098.3 893.55 744.6
7 19% 664.6 1307.0 1063.33 886.1
8 16% 770.9 1516.1 1233.46 1027.9
9 13% 871.1 1713.2 1393.81 1161.5
10 10% 958.2 1884.6 1533.19 1277.7

Terminal value at the end of year 10 =H61*(1+G36)/(F47-G36) 8996.87

=F63/(1+B47)^A56/
Present value of the terminal value (1+D47)^(A61-A56) 2536.24
Value of the firm =J62+F64 3512.61
 Free Cash Flow to Equity (FCFE) Model ( see para 32.11)
( Rs.in crore)
3 4 5 6 7

Profit after tax 24 29 28 32 38
Preference 
dividend
Fixed assets 
(net) 190 220 240 266 294
Investments 25 10
Net current 
assets 70 75 88 90 100
Debt 134 140 150 161 177
Preference 

The FCFE forecast for the explicit period, years 4 through 8:

4 5 6 7
(Profit after tax ­ 
Preference dividend ) 29 28 32 38

 ­ ( Capital expenditure 
­Depreciation ) 30 20 26 28

 ­ (Change in net current 
assets) 5 13 2 10
  + ( New debt issue ­ debt 
repayment ) 6 10 11 16
 ­( Change in investment in 
marketable securities) ­15 ­10 0 0
 FCFE 15 15 15 16
Cost of equity 18.27%
The constant 
FCFE growth rate 
after the 
explicit growth 
period 10%
Equity value (at 
the end of year 
3) Formula used Rs. 139.53
=NPV(B86,C85:G85)+G85*(1+B87)/(B86­B87)/(1+B86)^(G79­B69)
Growth rate period Stable Growth Period

6%

is equal to
growth rate
in
depreciation

30%

15%
1 2 : 3
12%
7%
1.0

(Rs.in million)
5 Terminal year
6442.04 6828.56
805.26 853.57
483.15 512.14

161.05

175.69 115.96
146.41 396.19

398.59 million rupees

27-H4)/(1+D27)^G17 2,188.70 million rupees
2,587.29 million rupees
 Stable
Growth
period High Debt : Equity
Growth
Period 1.5 : 1

Transition
10% Period 1 : 1

Stable
Growth
Period 0 : 1

20%

12%

10%

6%
1.00

Stable growth period

=G40+G42*G41 16.00%

=I37/(I37+K37)*G39*(1-B41)+K37/(I37+K37)*H45
16.00%

ounts in Rupees million)

Presen
∆NWC FCF WACC t value
50 68.8 14.00% 60.31
62.5 85.9 14.00% 66.13
78.1 107.4 14.00% 72.51
97.7 134.3 14.00% 79.51
122.1 167.8 14.00% 87.18
134.3 219.4 13.00% 100.85
141.5 279.4 13.00% 113.66
141.8 346.5 13.00% 124.72
133.6 418.1 13.00% 133.18
116.2 490.7 13.00% 138.34
Sum= 976.37
million rupees

million rupees
million rupees
 ( Rs.in crore)
8

40

324

109
192

40

30

15

0
16

crores
^(G79­B69)
 Exhibit 33.2
Determination of Value Created by a New Strategy
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
Current Income Statement Projections
Value 1 2 3
(Year 0)
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
Sales 1000 1100 1210 1331
Gross Margin 250 275 303 333
S & G.a. 100 110 121 133
Profit Before Tax 150 165 182 200
Tax 60 66 73 80
-------------- ------------------------ ---------------- ----------------------------------
Net Profit 90 99 109 120
-------------- ------------------------ ---------------- ----------------------------------
Balance Sheet Projections
Fixed Assets 300 330 363 399
Current Assets 200 220 242 266
-------------- ------------------------ ---------------- ----------------------------------
Total Assets 500 550 605 666
Equity 500 550 605 666
-------------- ------------------------ ---------------- ----------------------------------
Cash Flow Projections
Profit After Tax 99 109 120
Depreciation 30 33 36
Capital Expenditure 60 66 73
Increase in Current Assets 20 22 24
-------------- - - -
Operating Cash Flow 49 54 59
-------------- - - -
Present Value Factor 0.862 0.743 0.641
PV of Operating Cash Flow 42 40 38
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
PV of Operating Cash Flow Stream 190
Residual value 906
PV of Residual Value 431
Total Share Holder Value 622
Pre-Strategy VAlue 563
Value of Strategy 59
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------

ASSUMPTIONS

Annual rate of increase in Sales 10.00%

Gross Margin 25.00%
S and G.A: 10.00%
Fixed Assets 10.00%
Current Assets 10.00%
Discount rate for Present Value 16.00%
Tax rate 40.00%
 Exhibit 33.4 Balance Sheet and Profit and Loss Account of Melvin Corporation
(in million)
Cost of equity 18%
Interest rate on debt 12%
Tax rate 30%
Profit and Loss Statement for the
Balance Sheet as on 31-3-20X0 Year Ending on 31-3-20X0
Liabilities Assets
Equity 100 Fixed assets 140 Net Sales

Debt 100 Net current assets 60 Cost of goods sold

200 200 PBIT
Interest
PBT
Tax
PAT
Post-tax cost of debt 8.40%
WACC 13.20%
NOPAT 29.4
Return on capital 14.7%
Formula used
EVA 3 =B68-B67*B61
EVA 3 =B61*(B69-B67)
EVA 3 =(F65+F62*(1-B56))-B67*B61
EVA 3 =F65-B54*B59
Exhibit 33.5
Depreciation Charge and Capital Charge under Alternative Methods
Cost of the equipment 100,000
Economic life(in years) 5
Cost of capital 15%
Salvage value 0
Part A: Straight Line Method
1 2 3 4
Capital 100,000 80,000 60,000 40,000
Depreciation 20,000 20,000 20,000 20,000
Capital charge 15,000 12,000 9,000 6,000
Sum 35,000 32,000 29,000 26,000
Part B: Sinking Fund Method
Capital 100,000 85,168 68,112 48,497
Depreciation 14,832 17,056 19,615 22,557
Capital charge 15,000 12,775 10,217 7,275
Sum(Annuity) 29,832 29,832 29,832 29,832
=PMT($B$79,$B$78,-($B$77-$B$80))

Exhibit 33.6 Capital Budgeting : DCF Method and EVA Method

Part A: Project Details
Investment 100 Equity financing 100
Project life ( in years) 4 Depreciation Straight line
Salvage value 0 Tax rate 50%
Annual revenues 200 Annual costs 135
(excluding depreciation,
Cost of equity 15% interest and taxes)
Part B: Cash Flow and EVA Projections
Year 1 2 3 4
Revenues 200 200 200 200
Costs (excluding dep, interest & taxes 135 135 135 135
PBDIT 65 65 65 65
Depreciation 25 25 25 25
PBIT 40 40 40 40
NOPAT 20 20 20 20
cash flow 45 45 45 45
Capital at charge 100 75 50 25
Capital charge 15 11.25 7.5 3.75
EVA (NOPAT - Capital charge) 5 8.75 12.5 16.25

Part C: NPV Calculation

PV of cash inflows 39.13 34.03 29.59 25.73
NPV under DCF method
28.47 =SUM(B115:E115)-B96
PV of EVA 4.35 6.62 8.22 9.29
NPV using EVA
28.47 =SUM(B118:E118)

Exhibit 33.8 Bonus Bank System

Normal
year Good year Bad year
Bonus earned 50 200 -100
Beginning bank 100 100 200
Cumulative balance 150 300 100
Payout ratio 1/3 1/3 1/3
Bonus paid 50 100 33 1/3
Bonus forward 100 200 66 2/3

Exhibit 33.11 Annual Measurement of the Project in Three Sample Years

Initial investment 300,000
Investment in fixed assets 250,000
Net working capital 50,000
Economic life of the plant (in years) 14
Salvage value of the fixed assets at
the end of 14 years 0
Salvage value of the net working
capital at the end of 14 years 100%
Annual depreciation charge on fixed
assets 17,857
NOPAT each year 21,080
Cost of capital 10%
Cost of replacement of fixed assets 250,000
Year 1 6 12
NOPAT 21,080 21,080 21,080
Depreciation 17,857 17,857 17,857
Cash flow(1+2) 38,937 38,937 38,937
Economic depreciation 8,937 8,937 8,937
Sustainable cash flow 30,001 30,001 30,001
Book capital 300,000 210,714 103,571
CFROI (%) 10.00% 10.00% 10.00%
ROCE(%) 7.03% 10.00% 20.35%
ROGI (%) 12.98% 12.98% 12.98%

Exhibit 33.12 EVA and CVA Calculations

Panel A: EVA
Year 1 6 12
NOPAT 21,080 21,080 21,080
Book capital 300,000 210,714 103,571
Cost of capital 10% 10% 10%
Capital charge 30,000 21,071 10,357
EVA -8,920 9 10,723
Panel B: CVA
NOPAT 21,080 21,080 21,080
Depreciation 17,857 17,857 17,857
Cash flow 38,937 38,937 38,937
Economic depreciation 8,937 8,937 8,937
Cash invested 300,000 300,000 300,000
Cost of capital 10% 10% 10%
Capital charge on gross investment 30,000 30,000 30,000
CVA 1 1 1

Note: CVA is 1 owing to rounding off errors. It should be 0

y
---------- --------------- ---------------
ojections Residual
4 5 value
5+
---------- --------------- ---------------
1464 1611 1611
366 403 403
146 161 161
220 242 242
88 97 97
---------- --------------- ---------------
132 145 145
---------- --------------- ---------------
ections
439 483 483
293 322 322
---------- --------------- ---------------
732 805 805
732 805 805
---------- --------------- ---------------
tions
132 145 145
40 44 44
80 88 44
27 29 0
- - -
65 72 145
- - -
0.552 0.476
36 34
---------- --------------- ---------------

---------- --------------- ---------------

tion
(in million)

ss Statement for the

ng on 31-3-20X0

300

258
42
12
30
9
21

5
20,000
20,000
3,000
23,000

25,940
25,940
3,891
29,832
 Exhibit 34.3
Balance Sheet of Alpha Company and Beta Company
Part A: Before Merger Part B: After Merger
Alfa  Beta  Pooling  Purchase 
Liabilities Company Company Method Method
Share capital (10 par 4000 1000 4600 4600
Capital reserve - - 400 1900
Share premium 2000 500 2500 2000
General reserve 5000 1000 6000 5000
P&L account 1000 500 1500 1000
Loan funds 4000 2500 6500 6400
Current liabilities 2000 1500
and provisions 3500 3600
18000 7000 25000 24500
Assets
Net fixed assets 7000 3000 10000 10200
Investments 3000 500 3500 3400
Current assets 7000 3000 10000 9900
Miscellaneous 1000 500
expenditure 1500 1000
18000 7000 25000 24500

Share swap ratio

No.of Alfa shares 3
for Beta shares 5
Par value of shares 10 After the merger 
of each company the capital of 
Alfa will 
increase by 600
On revaluation under the
'purchase method', the revised
values are:
Net fixed assets 3200
Investments 400
Current assets 2900
Current liabilities 1600
Loan funds 2400
Exhibit 34.4 Relevant Information for Firms 1 and 2
Firm 1 Firm 2
Total earnings, E 18,000,000 6,000,000
No.of outstanding shares, S 9,000,000 6,000,000
Earnings per share, EPS 2 1
Market price per share, P 24 8
Price/earnings ratio, PE 12 8

Maximum exchange ratio acceptable to the shareholders of firm 1 for some illustrative va
PE12 9 10 11
Maximum ER1 0 0.17 0.33

Minimum exchange ratio acceptable to the shareholders of firm 2 for some illustrative va
PE12 3 9 10
Minimum ER2 3.00 0.43 0.38
Exhibit 34.6 Free Cash Flow

Year 1 2 3
Invested Capital ( Beg.) 50.00 60.00 72.00
NOPAT 6.00 7.20 8.64
Net investment 10.00 12.00 14.40
Free cash flow (4.00) (4.80) (5.76)
Growth rate (%) 20.00 20.00 20.00
Return on invested capital 12%
WACC 11%
PV of the FCF during the planning period (9.39)
Horizon value at the end of the 6th year 156.1
PV of the horizon value 83.4
Enterprise DCF value 74.0
of firm 1 for some illustrative values of PE 12
12 15 20
0.50 1.00 1.83

of firm 2 for some illustrative values of PE 12

11 12 15 20
0.33 0.30 0.23 0.17
ee Cash Flow
( in million )
4 5 6 7
86.40 96.77 108.38 117.05
10.37 11.61 13.01 14.05
10.37 11.61 8.67 9.36
0.00 0.00 4.34 4.68
12.00 12.00 8.00 8.00
 International Capital Budgeting: Para 37.5 Illustration

Current spot exchange rate of USD in

Rupees 65
Risk-free rate of interest in India 8%
Risk-free rate of interest in the US 2%
Required rupee return 15%
Expected Cash
exchange flow in
Cash flow in rate(Rs per rupees(
Year USD(million) USD) million)
0 -100 65.00 -6500
1 30 68.82 2064.7
2 40 72.87 2914.9
3 50 77.16 3857.9
4 60 81.70 4901.8
Home Currency Approach:
NPV in rupees(million) 2,838.76 =NPV(B6,D9:D12)+D8

Foreign Currency Approach

Risk premium implicit in the risk-
adjusted rupee return 0.065 =(1+B6)/(1+B4)-1
Risk -adjusted dollar rate 0.0861 =(1+B5)*(1+B16)-1
NPV in million dollars 43.673 =B8+NPV(B17,B9:B12)
Rupee NPV of the project(Rs.million) 2838.8 =B18*B3