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1

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

(i) 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 (22)

Loans and advances 10

Current liabilities and provisions 12

Cash generated from operations 215

Tax paid (50)

Net cash flow from operating activities 165

B. Cash Flow from Investing Activities

Purchases of fixed assets (105)

Net investment in marketable securities (5)

Net cash flow from investing activities (110)

C. Cash Flow from Financing Activities

Proceeds from loans 20

Interest paid (35)

Dividend paid (35)

Net cash flow from financing activities (50)

D. Net Increase in cash and cash Equivalents 5

Cash and cash equivalents as on 1-4-20X1 25

Cash and cash equivalents as on 1-4-20X0 20

(ii) Cash Flow Identity

Operating cash flow 170

Net capital spending 105

Net investment in marketable securities 5

Change in net working capital 10

Cash flow from assets 50

Cash flow to lenders 15

Cash flow to shareholders 35

Cash flow

to

Cash flow sharehold

Cash flow from assets = to lenders + ers

50 = 15 + 35

Solved problem 4.1

Current assets 1,600

Current liabilities 1,000

Minimum current ratio 1.25

Maximum borrowing 1400

Current ratio 1.4

Acid-test ratio 1.2

Current liabilities 1,600

Inventory turnover ratio 8

Current assets 2,240

Inventories 320

Sales 2,560

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 930

Long-term debt: interest at Current assets 180

15% 300 Cash 18.6

Accounts payable 144 Receivables 60

Inventory 101.4

Total 1110 Total 1110

Rs.in million

Profit & Loss Account for year ending 31st

20X1March20X0

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

Current ratio 1.52

Acid-test ratio 0.85

Cash ratio 0.15

Debt-equity ratio 0.55

Interest coverage ratio 4.86

Fixed charges coverage ratio 1.24

Inventory turnover 5.40

Debtors turnover 9.06

Average collection period in days 40.27

Fixed assets turnover 2.04

Total assets turnover 1.42

Gross profit margin 24.4%

Net profit margin 7.98%

Return on assets 11.3%

Earning power 22.7%

Return on equity 17.7%

Solved Problem 5.1

Proforma

profit and

Average loss

percent of account

Year 1 Year 2 sales for year 3

Net sales 600 720 100.0 Budgeted 850.0

Cost of goods sold 450 500 72.0 611.7

Gross profit 150 220 @ 238.3

Selling expenses 50 60 8.3 70.8

General and administration expenses 36 40 5.8 48.9

Depreciation 30 40 Budgeted 45.0

Operating profit 34 80 @ 73.5

Non-operating surplus deficit 10 -8 0.2 1.3

Profit before interest and tax 44 72 @ 74.8

Interest 10 12 1.7 14.2

Profit before tax 34 60 @ 60.6

Tax 14 26 Budgeted 35.3

Profit after tax 20 34 @ 25.3

Dividends(given) 12 15 Budgeted 21.0

Retained earnings 8 19 @ 4.3

Balance Sheets Year 1 Year2

Fixed assets (net 240 270 Budgeted 300.0

Investments 10 10 No change 10.0

Current assets, loans and

advances

· Cash and bank 5 6 0.8 7.1

· Receivables 80 90 12.9 109.5

· Inventories 125 144 20.4 173.2

. Loans and advances 25 30 4.2 35.4

Miscellaneous expenditures &

losses 15 10 Budgeted 5.0

Total 500 560 640.2

Liabilities

Share capital

Equity 100 100 Nochange 100.0

Preference 20 20 No change 20.0

Proforma

P&L

Reserves and surplus 1540 169 account 173.3

Secured loans

Bank borrowings 60 80 10.6 90.2

Unsecured loans

Public deposits 11 No change 11.0

Current liabilities and

provision

Trade creditors 125 130 19.3 164.2

Provisions 45 50 7.2 61.2

Balancing

External funds requirement item 20.4

Total 1890 560 640.2

A/S 0.8

S(in Rs. Million) 80

L/S 0.4

m 0.06

S1 (in Rs. Million) 100

d 0.4

EFR(in Rs. Million) 4.4

m 0.05

d 0.3

A/E 2.4

A/S0 1

g 9.17%

Solved problem 6.1

Investment today 5,000

Interest rate 9%

No. of years of investment 75

Future value 3,205,954.47

Interest rate in percentage 12

Doubling period as per rule of

72 6

69 6.1

Nominal rate of interest 16%

No. of compoundings in a year 4

Effective rate of interest 17%

No. of annual deposits 15

Amount of each deposit 5,000

Rate of interest per annum 14%

Total period of deposit in years 15

Future value of the annuity 219,212

Period of deposit in years 5

Amount of annual deposit 6,000

Lumpsum payment at the end 44,650

Implicit interest rate 20%

Future value 1,000,000

Period 60

Discount rate 10%

Present value 3,284

No. of annuity payments 12

Amount of annuity payment 10,000

the first annuity payment occurs 8

Discount rate 14%

Value of the annuity at the end

of the year

7 56,603

Present value of the annuity 22,621

Discount rate 14%

Year 0 1 2 3 4

Cash flow 5,000 6,000 8,000 9,000 8,000

Present value 27,230

Amount of deposit 200,000

Interest rate 10%

No.of annual withdrawals 15

Amount of each withdrawal 26,295

Cost of the tour 1,000,000

Amount of annual savings 80,000

Rate of interest per annum on

savings 14%

No. of years of waiting 7.72

Amount of borrowal 80,000

Monthly interest rate 1.25%

No. of monthly instalments 12

Monthly instalment amount 7,221

Loan amortisation schedule

Beginning Monthly Principal Remaining

Month amount instalment Interest repayment balance

1 80,000 7,221 1000 6,221 73,779

2 73,779 7,221 922.2 6,298 67,481

3 67,481 7,221 843.5 6,377 61,104

4 61,104 7,221 763.8 6,457 54,647

5 54,647 7,221 683.1 6,538 48,109

6 48,109 7,221 601.4 6,619 41,490

7 41,490 7,221 518.6 6,702 34,788

8 34,788 7,221 434.8 6,786 28,002

9 28,002 7,221 350.0 6,871 21,132

10 21,132 7,221 264.1 6,957 14,175

11 14,175 7,221 177.2 7,043 7,132

12 7,132 7,221 89.1 7,132 0

Solved problem 7.1

Par value of the bond 100

Coupon rate 12%

Maturity period in years 5

Discount rate 15%

Settlement date(say) 1/1/2007

Maturity date 12/31/2011

Value of the bond(Price) 89.95

Par value of the bond 1,000

Market price of the bond 1,050

Coupon rate 14%

Maturity period in years 5

Settlement date(say) 1/1/2007

Maturity date 12/31/2011

Yield to maturity 12.59%

Reinvestment rate 12%

Future value of investment 1,889.40

Realised yield to maturity 12.47%

Par value of the bond 100

Coupon rate 14%

Maturity period in years 5

No.of interest payments in a year 2

Required rate of return 16%

Settlement date(say) 1/1/2007

Maturity date 12/31/2011

Value of the bond 93.35

Current selling price per share 30

Dividend expected next year 2

Required rate of return 15%

Expected growth rate 8.3%

Growth rate in dividends 18%

Period of 18% growth rate in years 4

Subsequent growth rate 12%

Period of 12% growth rate in years 4

Growth rate after 8 years, forever 6%

Last dividend per share 2

Required rate of return on equity 15%

Year Dividend PV of dividend

1 2.36 2.05

2 2.78 2.11

3 3.29 2.16

4 3.88 2.22

5 4.34 2.16

6 4.86 2.10

7 5.45 2.05

8 6.10 1.99

Price of the share at the end of 8 years 71.86

Present value of the price of the share

at the end of 8 years 23.49

Intrinsic value per share 40.33

Current dividend 3

Initial Supergrowth rate 40%

Period in years for the supergrowth rate 5

Consequent stable growth rate 12%

Required return 15%

Intrinsic value of the share 327.60

Current dividend 5

Present growth rate 50%

Linearly declining period in years 8

Stable rate after 8 years 10%

Required rate of return 18%

Intrinsic value per share 168.75

Solved problem 8.1

Return on a

portfolio of half

Return on Return on Cox's share each of

Probability Box's stock stock Box and Cox

High growth 0.3 100 150 125

Low growth 0.4 110 130 120

Stagnation 0.2 120 90 105

Recession 0.1 140 60 100

Current selling price of

both the shares 100

Portfolio where

a unit consists

of half share

each of Box and

Box Limited Cox Limited Cox

Amount invested 1,000 1,000 1,000

No.of shares/units that

can be purchased 10 10 10

Expected return 1120 1210 1165

Standard deviation 116.62 291.38 89.58

Risk-free rate of return 9%

Expected rate of return

on the market 13%

Expected dividend

growth rate 7%

Dividend per share last

paid 2

Beta of the stock 1.20

(a)

Required rate of return

on the stock 13.80%

Equilibrium price of the

stock 31.47

(b)(i)

Increase in inflation

premium 2%

New equilibrium price of

the stock 24.32

(b)(ii)

increase in expected

dividend growth rate 3%

New equilibrium price of

the stock 57.89

(b)(iii)

Increased beta of the

stock 1.3

New equilibrium price of

the stock 29.72

Solved problem 8.3

Return on

Return on market

Period stock A (%) portfolio(%)

1 10 12

2 15 14

3 18 13

4 14 10

5 16 9

6 16 13

7 18 14

8 4 7

9 (9) 1

10 14 12

11 15 (11)

12 14 16

13 6 8

14 7 7

15 (8) 10

Beta 0.354

Alpha 6.81

The characteristic line is R A=

6.81+0.354RM

Solved Problem 9.1

deviation of the deviation of the

return on asset 1 return on asset 2

Return on from its from its

State of nature Probability Return on asset 1(%) asset 2(%) expected value expected value.

1 0.1 5 0 64 196

2 0.3 10 8 9 36

3 0.5 15 18 4 16

4 0.1 20 26 49 144

Expected value of the return on asset 1 = 13

Expected value of the return on asset 2 = 14

(a)Standard deviation of the return on asset 1 = 4.00

(b)Standard deviation of the return on asset 2 = 7.27

(c )Covariance between the returns on assets 1 and 2 = 29.00

( d) Coefficient of correlation between the returns on

assets 1 and 2 = 1.00

Security no. 1 2 3

Proportion of the

security in the

portfolio 0.3 0.5 0.2

Standard deviation

of the security 6.0 9.0 10.0

Correlation

coefficient between

securities 1 and 2 1 and 3 2 and 3

Correlation

coefficient 0.4 0.6 0.7

Standard deviation

of portfolio return 7.13

Stock A Stock B

Standard deviation 15 8

Coefficient of correlation between

the two stocks 0.6

(a) Covariance between the two

stocks 72

(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 (%) 15.34

Aggressive

Market return(%) Stock(%) Defensive Stock(%)

6 2 8

20 30 16

(a) Beta of the aggressive stock 2

Beta of the defensive stock 0.571

(b)

Market Defensive

Probability return(%) Aggressive Stock(%) Stock(%)

0.5 6 2 8

0.5 20 30 16

Expected return on the aggressive stock(%) 16

Expected return on the defensive stock(%) 12

( c)

Expected return on the market portfolio(%) 13

Market risk premium (5) 6

The SML is = 7%+βix 6%

(d)

Required return of the aggressive stock (%) 19

Alpha of the aggressive stock(%) -3

Required return of the defensive stock (%) 10.429

Alpha of fhe defensive stock (%) 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

mean

112

18

8

84

Chapter 10

Solved problem 10.2

S E u r d R

60 50 1.4 0.12 0.8 1.12

Cu 34 ∆ 0.94

Cd 0 B 40.48

C 16.19

S0 E rf σ 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 22.42

V0(Current

value) B1 rf σ t(in years)

10,000 8,000 0.13 0.5 1

d1 d2 N(d1) N(d2)

0.9503 0.4503 0.8290 0.6737

S0 3,543

B0 6,457

Chapter 11

Solved problem 11.1

Year 0 1 2 3 4 5

Cash flow (100,000.00) 20,000.00 30,000.00 40,000.00 50,000.00 30,000.00

Cost of capital 0.12

NPV 19,042.88 BCR 1.19

IRR 18.69% MIRR 15.97%

Calculation of payback period

Year 0 1 2 3 4 5

Unrecovered

investment

balance 100,000.00 80,000.00 50,000.00 10,000.00 (40,000.00)

Payback period

in years 3.20

Calculation of discounted payback period

Year 0 1 2 3 4 5

PV of cash flows (100,000.00) 17,857.14 23,915.82 28,471.21 31,775.90 17,022.81

Unrecovered

balance 100,000.00 82,142.86 58,227.04 29,755.83 (2,020.07)

Discounted

payback period

in years 3.94

Solved problem 12.1

Economic life of computer(years) 5

Depreciation rate(WDV) 33.33%

Tax rate 50.00%

Cash flow for the computer installation

Year 0 1 2 3 4 5

Cost of computer (1,500,000)

Savings in clerical cost 600,000 600,000 600,000 600,000 600,000

Savings in space cost 100,000 100,000 100,000 100,000 100,000

Operation and maintenance cost 250,000 250,000 250,000 250,000 250,000

Depreciation 500,000 333,333 222,222 148,148 98,765

Profit before tax (50,000) 116,667 227,778 301,852 351,235

Tax (25,000) 58,333 113,889 150,926 175,617

Profit after tax (25,000) 58,333 113,889 150,926 175,617

Net salvage value 197,531

Initial flow (1,500,000)

Operating flow 475,000 391,667 336,111 299,074 274,383

Terminal flow 197,531

Net cash flow (1,500,000) 475,000 391,667 336,111 299,074 471,914

Old hammer New hammer

Original cost 1,000,000 1,600,000

No. of years ago bought 2 0

Depreciation rate 33.33% 33.33%

Remaining life in years 5 5

Tax rate 50% 50%

Present book value 444,444

Cash flow of the replacement project

Year 0 1 2 3 4 5

Net investment in new hammer (1,155,556)

Increase in revenues 200,000 200,000 200,000 200,000 200,000

Saving in operating cost 150,000 150,000 150,000 150,000 150,000

Depreciation on new hammer 533,333 355,556 237,037 158,025 105,350

Depreciation on old hammer 148,148 98,765 65,844 43,896 29,264

Incremental depreciation on new

hammer 385,185 256,790 171,193 114,129 76,086

Incremental taxable profit (35,185) 93,210 178,807 235,871 273,914

Incremental tax (17,593) 46,605 89,403 117,936 136,957

Incremental profit after tax (17,593) 46,605 89,403 117,936 136,957

Net incremental salvage value 152,172

Initial flow (1,155,556)

Operating flow 367,593 303,395 260,597 232,064 213,043

Terminal flow 152,172

Net cash flow (1,155,556) 367,593 303,395 260,597 232,064 365,215

Solved problem 13.2

Factors Expected values present value

Initial investment 30,000 Investment 30,000

Cost of capital 10% Sales quantity 1,400

Quantity manufactured and

sold annually 1,400 Price per unit 30

Variable cost

Variable cost per unit 20 per unit 20

Fixed costs 3,000 Variable costs 28,000

Depreciation 2,000 Fixed costs 3,000

Tax rate 50% Depreciation 2,000

Life of the project in years 5 Pre-tax profit 9,000

Net salvage value 0 Taxes 4,500

Profit after

taxes 4,500

For sensitivity analysis proceed as follows.In cell B18 copy Cash flow from

the formula for NPV from cell E16.Leave the adjcacent cell operations 6,500

to the left(A18) blank and then fill the values of the various Salvage value 0

values of quantity manufactured, one below the other from

cell A19 onwards( in this case 800 and 1800).

Highlight(select) A18 to B20 and then from the drop-down

menu for Data, select table. In the dialogue box that

appears, type against column input cell ,thecell reference

E4 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 A17 and B17

respectively as seperately shown.To change the numerical

value into text in cell B17 go to Format>Cells>Custom and Net present

against Type, type out " Net present value" value (5,360)

800 (16,732) 800 (16,732)

1,800 2,222 1,800 2,222

The following analysis is done using the above technique

Variable cost

Price per unit Net present value per unit Net present value

20 (31,895) 15 7,908

50 47,711 40 (58,431)

NOTE:

For a set of changing factors ,sensitive analysis can be done using Scenario Manager as shown below ..

Scenario Summary

Current Values: Pessimistic Expected Optimistic

Changing values

Quantity 1,400 800 1,400 1,800

Price per unit 30 20 30 50

Variable cost per

unit 20 40 20 15

Result

Net present value (5,360) (62,222) (5,360) 87,514

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.

Solved problem 13.3

('000)

Year 0 1 to 10

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)

Certainty PV of certainty

equivalent equivalent

Year Expected cash flow value value

0 (100,000) (100,000) (100,000)

1 40,000 38,000 34,545

2 38,000 34,200 28,264

3 36,000 30,600 22,990

4 34,000 27,200 18,578

5 32,000 24,000 14,902

6 30,000 21,000 11,854

Net present value 31,134

Pessimistic

800

20

40

Page 24

Expected

1400

30

20

Page 25

Optimistic

1800

50

15

Page 26

Chapter 13

Break - even analysis-using the data in Exhibit 13.5

('000)

Year 0 1 to 10

Investment (20,000)

Variable costs as a percentage of sales 66.67%

Tax rate 33.30%

Sales per year 18,000

Variable costs per year 12,001

Fixed costs per year 1,000

Depreciation per year 2,000

Pre-tax profit per year 2,999

Taxes per year 999

Profit after taxes per year 2,001

Cash flow from operation per year 4,001

Accounting break-even level of sales 9,001

Calculation of the financial break-even level of sales

Discount rate 12%

Project life in years 10

Total of the present values of the cash inflows 22,604

Initial investment 20,000

Financial break-even level of sales 15,926

Sensitivity analysis in Chapter 13

Sensitivity analysis ('000)

Project life in years 10 Net present values for various values of Sales

Discount rate 12% Investments etc. ( ' 000)

Investment (20,000) Sales 2604 Investment 2,604

Variable costs as a

percentage of sales 66.67% 12,000 (4,932) (12,000) 10,604

Tax rate 33.30% 16,000 92 (14,000) 8,604

Sales per year 18,000 20,000 5,116 (16,000) 6,604

Variable costs per year 12,001 24,000 10,141 (18,000) 4,604

Fixed costs per year 1,000 28,000 15,165 (20,000) 2,604

Depreciation per year 2,000 32,000 20,190 (22,000) 604

Pre-tax profit per year 2,999 36,000 25,214 (24,000) (1,396)

Taxes per year 999 40,000 30,239 (26,000) (3,396)

Profit after taxes per year 2,001 44,000 35,263 (28,000) (5,396)

Cash flow from operation

per year 4,001

Net present value 2,604

Once we get the value of net present value in B 16, to get the values of net present

values for various values of sales, investments etc. by proceeding as follows.

In column E5, copy the formula from B16 and press enter-the numerical value of

net present value will appear. Next fill in cells D6 to D14 with the various values of sales

for which you wish to have the correspondig net present values. Care should be taken

to leave the cell D5 (the cell adjacent to E5 to the left) . Then select all the cells from

D5 to E14. Go to menu item Data, click on Table. In the dialogue box that will appear

fill in the slot against Coumn input cell the reference number of the cell whose values

we require- in this case B16 and then click OK. All the cells from E6 to E14 will

automatically get filled with the required values. Now you can give a heading to the

sales column by typing Sales in D5.

Solved problem 14.1

Determination of breaking points and the resulting ranges of total new

financing for Shiva Chemicals Limited Range of total

Range of new new

financing( Rs.in financing( Rs.

million) Breaking in million)

point(Rs.in

Source of capital Target proportion From To Cost million) From To

Equity 45% 0 10 15% 22.22 0 22.22

45% 10 30 16.50% 66.67 22.22 66.67

45% 30 100 18.00% 222.22 66.67 222.22

Preference 5% 0 1 14.50% 20.00 0.00 20.00

5% 1 100 15.00% 2000.00 20.00 2000.00

Debt 50% 0 15 7.50% 30.00 0.00 30.00

50% 15 40 8.00% 80.00 30.00 80.00

50% 40 100 8.40% 200.00 80.00 200.00

( Range of maximum new financing assumed to be say Rs.100 million for calculation purposes)

in million) Source of proport Weighted

From To capital ion Cost cost

0 20 Equity 45% 15% 6.750%

Preference 5% 14.50% 0.725%

Debt 50% 7.50% 3.750%

WACC 11.225%

20 22.22 Equity 45% 15% 6.750%

Preference 5% 15.00% 0.750%

Debt 50% 7.50% 3.750%

WACC 11.250%

22.22 30.00 Equity 45% 16.50% 7.425%

Preference 5% 15.00% 0.750%

Debt 50% 7.50% 3.750%

WACC 11.925%

30.00 66.67 Equity 45% 16.50% 7.425%

Preference 5% 15.00% 0.750%

Debt 50% 8.00% 4.000%

WACC 12.175%

66.67 80.00 Equity 45% 18.00% 8.100%

Preference 5% 15.00% 0.750%

Debt 50% 8.00% 4.000%

WACC 12.850%

80.00 200.00 Equity 45% 18.00% 8.100%

Preference 5% 15.00% 0.750%

Debt 50% 8.40% 4.200%

WACC 13.050%

Weighted marginal cost of capital schedule

Weighted

Range of total financing( Rs. in marginal

million) cost of

From To capital

0 20 11.225%

20 22.22 11.250%

22.22 30 11.925%

30 66.67 12.175%

66.67 80 12.850%

80 200 13.050%

Project cost 20,000,000

Period in years 10

After-tax annual

cash flow 4,000,000

Tax rate 35%

Target debt-

equity ratio 1

Cost of equity 16.90%

Pre-tax cost of

debt 14%

Floatation cost of

equity 12%

Floaion cost of

debt 2%

WACC 13%

Average

floatation cost 7%

NPV of the

expansion

project 199,598

es)

Chapter 15

Solved problem 15.1

(Amounts in Rs.million)

Discount rate 13%

System A B

Initial outlay 4 3

Annual operating costs 1.2 1

Life in years 6 4

Present value of costs 8.7971 5.9745

UAE 2.2006 2.0086

As the present value of costs associated with

System B is less than that for A, the firm is

advised to choose system B

Initial outlay 15,000,000

Project life in years 6

Net annual cash inflow 3,750,000

Opportunity cost of capital 18%

Term loan that can be raised for the project 10,000,000

Interest rate for the term loan 16%

Debt

No. of annual instalments in which the term loan is outstanding at

repayable 5 Year the beginiing

The first insalment falling due at the end of year 2 1 10,000,000

Amount that can be raised by issuing equity 5,000,000 2 10,000,000

Issue cost of equity 8% 3 8,000,000

Tax rate for the company 50% 4 6,000,000

Base case NPV (1,883,990) 5 4,000,000

The adjusted NPV after adjustment for issue cost (2,318,773) 6 2,000,000

Present value of tax shield associated with debt 2,177,333

Adjusted NPV (141,440)

Present value

of interest tax

shield

689,655

594,530

410,021

265,100

152,356

65,671

Chapter 18

Solved problem 18.1

( Amount in rupees)

Present stock price 120

Price of a rights share 80

No.of rights required to subscribe to one share 2

Theoretical value per share of the ex-rights stock 106.7

Theoretical value of a right 13.3

( figures in million)

Name of the underwriter commitment procured Shorfall Net shorfall

P 105 80 (25) (13)

Q 70 50 (20) (12)

R 50 70 20

Chapter 19

Solved problem 19.1

(a) (Rs.in million)

Net operating income 40

Interest on debt 10

Cost of debt 12%

Cost of equity 18%

Market value of debt 83.33

Market value of equity 166.67

Average cost of capital 16%

(b)

Debt employed to finance a project 100

Operating income earned by the project 20

Net operating income 60

Interest on debt 22

Equity earnings 38

Marketn value of equity 211.11

Market value of debt 183.33

Market value of the firm 394.44

Average cost of capital 15.21%

(Rs.in million)

Net operating income 210

Corporate tax rate 30%

Market(as well as book) value 300

Capitalisaion rate applicable to a debt free firm

in the risk class to which Optima belongs 16%

Value of Optima according to MM approach 1008.75

tc 30%

tpe 10%

tpd 15%

Tax advantage of a rupee of debt( in rupees) 0.26

Solved problem 20.4

Corporate tax rate 50%

Alternative i ii iii

No. of equity shares to be issued 50,000 25,000 25,000

Issue price of an equity share 10 10 10

No.of debentures to be issued 0 2,500 0

Issue price of a debenture 0 100 0

Interest rate on debenture 0 8% 0

No.of preference shares to be issued 0 0 2,500

Issue price of a preferece share 0 0 100

Interest rate on preference share 0 0 8%

EBIT EPS for (i) EPS for (ii) EPS for (iii)

10,000 0.1 -0.2 -0.6

20,000 0.2 0 -0.4

40,000 0.4 0.4 0

60,000 0.6 0.8 0.4

100,000 1 1.6 1.2

-0.2

Solved problem 21.1

Earning per share 4

Rate of return on investments 18%

Rate of return required by investors 15%

Payout ratio per Walter model

40% 29.87

50% 29.33

60% 28.80

For the data in 21.1 what would be the price per share as per Gorden model?

Payout ratio per Gorden model

40% 38.10

50% 33.33

60% 30.77

Earning per share 5

Rate of return on investments 0.16

Dividend payout ratio 0.4

Market price as per Gordon model 50

Rate of return on investment 20%

Solved problem 22.1

EPS for 20X1(EPSt) 3

DPS for 20X0(Dt-1) 1.2

Target payout ratio( r) 0.6

Adjustment rate( c) 0.7

DPS for 20X1 according to the Lintner model(Dt) 1.62

Solved problem 23.1

Old bonds New bonds

Amount 300,000,000 300,000,000

Balance maturity in years 5 5

Coupon rate 16% 14%

Call premium on old bonds 5%

Issue cost on new bonds 6,000,000

Unamortised portion of the issue cost on

old bonds 5,000,000

Marginal tax rate 35%

Cost of calling the old bonds 315,000,000

Net proceeds of the new issue 294,000,000

Tax savings on tax-deductible expenses 7,000,000

Initial outlay 14,000,000

Annual interest outflow on old bonds 48,000,000

Tax savings on interest expenses and

amortisation of issue costs of old bonds 17,150,000

Annual interest ouflow on new bonds 42,000,000

Tax savings on interest expenses and

amortisation of issue costs of new bonds 15,120,000

Annual net cash savings 3,970,000

After-tax cost on new bonds 0.09

Present value of the annual cash savings 15,401,932

Net present value of refunding the bond 1,401,932

Face value of the bond 1000

Coupon payable annually 16%

Years to maturity 6

Redemption value 1,000

Current market price 964.5

Settlement date(Date of purchase,say) 1/1/2007

Redemption date 12/30/2012

Yield to maturiry 17%

Duration 4.24

Volatility 3.63

Face value Interest rate Maturity( years) Current price

100,000 0 1 91,000

100,000 10.50% 2 99,000

100,000 11.00% 3 99,500

100,000 11.50% 4 99,900

Forward rate for year1 0.099

For the two year government security

PV of interest for the first year 9,555

Second year cash flow 110,500

(1+0.009)*(1+r2)= 1.2354

r2= 0.124

For the three year government security

PV of interest for the first two years 18914.027

Third year cash flow 111000

(1+0.009)*(1+0.124)*(1+r3)= 1.37741

r3= 0.115

For the four year government security

PV of the interest for the first three years 28122.753

Fourth year cash flow 111500

(1+0.009)*(1+0.124)*(1+0.115)*(1+r4) = 1.553

r4 = 0.128

Solved problem 24.1

Cost of capital 10%

Marginal tax rate 35%

Depreciation rate (WDV) 40%

Calculation of post-tax cash flows Rs.in million

Year 0 1 2 3 4 5 6

Initial cost -1.5

Operating and other costs -0.250 -0.265 -0.281 -0.298 -0.316 -0.335

Depreciation 0.6 0.36 0.22 0.13 0.08 0.05

Tax shield on operating costs

and depreciation 0.3 0.22 0.17 0.15 0.14 0.13

Net salvage value 0.6

Post-tax cash flow -1.5 0.05 -0.046 -0.11 -0.15 -0.178 0.4

Present value of post-tax cash

flow -1.562

Post-tax EAC 0.359

Lease rental 0.55

Post-tax cost of debt 8%

Depreciation rate(WDV) 25%

Marginal rate of tax 35%

Lease contract cash flows

Rs. In million

Year 0 1 2 3 4 5

Cost of the plant 50

Depreciation 12.5 9.38 7.03 5.27 3.96

Loss of depreciation tax shield -4.38 -3.28 -2.46 -1.85 -1.384

Lease payment -14 -14 -14 -14 -14

Tax shield on lease payment 4.900 4.900 4.900 4.900 4.900

Loss of salvage value -10

Cash flow of lease 50 -13.48 -12.38 -11.56 -10.95 -20.48

NAL of lease -4.256

Solved Problem25.1

No. of shares outstanding 80,000,000

Current stock price(So) 80

Ratio of the warrants issued to the no. of outstanding shares 0.05

Exercise price(E) 84

Standard deviation of continuosly compounded annual returns(σ) 0.3

Time to expiration of warrants in years (t) 0.25

Risk-free interest rate per year 8%

d1 = -0.1169

d2 = -0.2669

N(d1) = 0.4535

N(d2) = 0.3948

Value of a warrant(C0) 3.77

Solved problem 26.1

Credit period granted on

Sales 3,600,000 sales(months) 2

Credit period extended

Materials consumed 900,000 by suppliers(months) 2

Period of arrear in

payment of

Wages paid 720,000 wages(months) 1

Period of arrear in

Manufacturing expenses outstanding payment of cash

at the end of the year 80,000 expenses(months) 1

Period of arrear in

payment of total

administraive

Total administrative expenses 240,000 expenses(months) 1

Period of advance

payment of sales

promotion

Sales promotion expenses 120,000 expenses(months) 3

Gross profit 25%

Stocking period of raw materials and

finished goods(months) 1

Cash balance maintained 100,000

Safety margin on working capital

requirement 20%

Total manufacturing cost 2700000

Manufacturing expenses 1,080,000

Cash manufacturing expenses 960000

Depreciation 120,000

Cash manufacturing cost 2,580,000

Total cash cost 2,940,000

Current assets Current Liabilities

Debtors 490000 Sundry creditors 150000

Manufacturing expeses

Raw material stock 75000 outstanding 80,000

Finished goods stock 215000 Wages outstanding 60,000

Total administrative

Pre-paid sales promotional expenses 30000 expenses outstanding 20000

Cash balance 100,000

Total current assets 910000 Total current liabilities 310000

Working capital 600000

Safety margin on working capital 120000

Working capital required 720000

(Rs. million)

Profit and Loss account data Balance sheet data

Beginning End of

of 20X1 20X1

Sales 80 Inventory 9 12

Cost of goods sold 56 Accounts receivable 12 16

Accounts payable 7 10

Inventory period in days 68.4

Accounts receivable period in days 63.9

Accounts payable period in days 55.4

Operating cycle in days 132.3

Cash operating cycle in days 76.9

Solved problem 27.2

Annual yield on marketable securities( Ix360) 10%

Fixed cost of effecting a marketable securities transaction(b) 2,500

Standard deviation of the change in daily cash balance(σ) 10,000

Minimum cash balance to be maintained 200,000

Return point(RP) 287720.53

Upper control limit(UL) 463161.6

Solved problem 28.1

Expected increase in sales(ΔS) 9,000,000

Expected bad debt losses on increental in sales(bn) 10%

Contribution margin ratio(1-V) 20%

Average collection period in days(ACP)) 50

Post tax cost of funds(k) 12%

Tax rate(t) 40%

Increase in residual income 420,000

Average credit period in days currently allowed(ACP0) 45

Present sales(S0) 80,000,000

Cost of capital(k) 13%

Variable costs to sales ratio(V) 0.75

Extended credit period in days considered(ACPN) 60

Increase in sales expected(ΔS) 20,000,000

Bad debt proportion on the additional sales(bn) 10%

Tax rate 35%

Increase in residual income 1,191,667

Present sales(S0) 100,000,000

Average collection period(ACP0) in days 30

Ratio of variable costs to sales(V) 0.75

Cost of capital(k) 14%

Bad debt ratio(b0) 0.04

Tax rate(t) 30%

Expected increase in sales(ΔS) 10,000,000

New average collection period(ACPN) in days 40

New bad debt ratio(bn) 0.05

Increase in residual income 194,444

End of quarter

Month Sales(Rs.in million) receivables

January 40 3

February 50 20

March 60 40

April 60 5

May 50 18

June 40 25

July 50 4

August 50 20

September 50 30

(Amounts in Rs.million) End of quarter 1 End of quarter 2eceivables

End of quarter 3

Receivables 63 48 54

Daily sales( 30 days averaging) 2 1.333 1.667

DSO((30 days averaging) 31.5 36 32.4

Daily sales(60 days averaging) 1.833 1.500 1.667

DSO( 60 days averaging) 34.4 32.0 32.4

Solved problem 28.6 (b)

Age bracket Quarter I Quarter II Quarter III

0-30 63.5% 52.1% 55.6%

31-60 31.7% 37.5% 37.0%

61-90 4.8% 10.4% 7.4%

Solved problem 29.1

Carrying cost per unit of inventory 10

Fixed costs per order(F) 20

No. of units required per year(U) 30,000

Variable costs per unit ordered 2

Purchase cost price per unit 30

Price per unit(P) 32

Percent carrying cost( C) 0.31

EOQ in no. of units 346

Total no. of orders in a year 87

Time gap between two orders(in days) 4

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 30.1

Credit period(days) 50 40 30 30

Discount period(days) 20 15 15 10

Discount allowed 2% 2% 1% 1%

Interest cost 24.5% 29.4% 24.2% 18.2%

Rs.in million

Current assets

Inventories 70

Debtors 60

Cash 15

Total current assets 145

Current liabilities

Trade creditors 40

Provisions 20

Total current liabilities 60

Maximum permissible bank finance( MPBF) under

the second method of Tandon Committee 48.75

Solved problem 31.1

1 0.8 18 0.000 25.000 0.000

2 1 15 0.040 4.000 0.400

3 1.2 20 0.160 49.000 2.800

4 0.75 12 0.003 1.000 0.050

5 0.65 16 0.023 9.000 -0.450

6 1.1 9 0.090 16.000 -1.200

7 0.85 22 0.002 81.000 0.450

8 0.65 19 0.023 36.000 -0.900

9 0.95 15 0.023 4.000 0.300

10 1.05 24 0.063 121.000 2.750

11 0.6 8 0.040 25.000 1.000

12 0.75 11 0.003 4.000 0.100

13 0.7 19 0.010 36.000 -0.600

14 0.65 10 0.023 9.000 0.450

15 0.8 12 0.000 1.000 0.000

16 0.7 4 0.010 81.000 0.900

17 0.55 9 0.063 16.000 1.000

18 0.65 -9 0.023 484.000 3.300

Mean 0.80 13.00

Σ(Xi - X) 2 0.595 Σ(Xi - X)*(Yi -Y) 10.35

Σ(Yi - Y) 2

1002

X1 0.9 Y1 17

X2 0.675 Y2 8

σx2 0.035 σy2 58.941

σxy 0.609 dx 0.225 dy 9

a 4.599 b 0.105

The discriminant function is = 4.599 Xi + 0.105Yi

Solved Problem 32.2

Profit and Loss Account( Rs. In million)

Year 1 2

Net sales 5600 6440

Income from marketable securities 140 210

Non-operating income 70 140

Total income 5810 6790

Cost of goods sold 3220 3780

Selling and administrative expenses 700 770

Depreciation 350 420

Interest expenses 336 392

Total costs and expenses 4606 5362

PBT 1204 1428

Tax provision 364 448

PAT 840 980

Dividend 420 560

Retained earnings 420 420

Balance Sheet

Equity capital 2100 2100

Reserves and surplus 1680 2100

Debt 2520 2940

Total 6300 7140

Fixed assets 4200 4550

Investments 1260 1400

Net current assets 840 1190

Total 6300 7140

Tax rate 0.4

EBIT for year 2= 1470

Tax on EBIT for year 2= 464.8

NOPLAT for year 2 = 1005.2

FCFF for year 2 = 389.2

Growth Growth

rate during rate during

high Stable stable

High growth growth growth growth

( Amounts in rupees million) Base Year phase phase period period

No of years 4

Revenues 3,000 20% 10%

EBIT 500 20% 10%

Capital expenditure 350 20%

Depreciation 250 20%

Working capital as a percentage of

revenues 25% 25% 25%

Corporate tax rate ( for all time) 30%

Paid-up equity capital (Rs.10 par) 400

Market value of debt 1,200

Pre-tax cost of debt 13% 12.14%

Debt - equity ratio 1 is to 1 2 is to 3

Risk-free rate 11% 10%

Market risk premium 7% 6%

Equity beta 1.129 1

WACC 14.00% 13.00%

Calculation of forecasted FCF

Terminal

Year 0 1 2 3 4 year

Revenues 3000 3600 4320 5184 6220.8 6842.88

EBIT(1-t) 350 420 504 604.8 725.76 798.34

Capital expenditure - depreciation 100 120 144 172.8 207.36

Δworking capital 150 180 216 259.2 155.52

FCFF 150 180 216 259.2 642.82

PV of FCF during the explicit forecast

period 569.32

Terminal value of the cash flow 21,432.92

PV of the terminal cash flow 12,689.34

Value of the firm 13,258.66

Solved Problem 32.1

Financial Projections

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

Year 1 2 3 4 5

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

PANEL I

A. Rooms 2280 2410 2490 2620 2806

B. Occupancy Rate 0.60 0.61 0.62 0.63 0.64

C. Average room rent (in Rs.) 2500 2875 3306 3802 4373

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

PANEL II

D. Room rent from owned

properties 1248 1543 1863 2291 2867

E. Food & beverage revenues 811 1003 1211 1489 1864

F. Revenue from owned

properties 2059 2546 3074 3780 4731

G. Management fees from

managed properties 87 108 130 160 200

H. Total revenue 2146 2654 3204 3940 4931

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

PANEL III

I. Material Expenses 309 382 461 567 710

J. Personnel expenses 309 382 461 567 710

K. Upkeep & service expenses 371 458 553 680 851

L. Sales & Gen.Admin. expenses 371 458 553 680 851

M. Total operating expenses 1359 1680 2029 2495 3122

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

PANEL IV

N. EBDIT (H-M) 787 974 1175 1445 1808

O. Depreciation 120 132 140 165 210

P. EBIT 667 842 1035 1280 1598

Q. NOPLAT 534 673 828 1024 1279

R. Gross Cash Flow 654 805 968 1189 1489

S. Gross Investments 302 446 398 712 1085

T. Free cash flow from

operations (R-S) 352 359 570 477 404

U. Non-operating cash flow 0 300 0 0 600

V. FCFF(T+U) 352 659 570 477 1004

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

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

A. Net Current assets 516 618 764 922 1134

B. Net Current Assets

addition 102 146 158 212 285

C. Gross block 2110 2310 2610 2850 3350

D. Capital expenditure 200 300 240 500 800

E. Acc. depreciation 600 720 852 992 1157

F. Net block (C+D-E) 1710 1890 1998 2358 2993

G. Depreciation 120 132 140 165 210

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

Weight of Debt 0.05

Cost of equity of BHC 17.42%

Cost of capital of BHC 17.00%

Continuing value 44791

The value of equity 16625

Assumptions

Increase in Average Room Rent(Annual) 15.00%

Food and beverage revenues are 65.00% of room rent

Material expenses as a % of revenues 15.00% (exclude management fee)

Personnel expenses as a % of revenues 15.00% (exclude management fee)

Upkeep & service as a % of revenues 18.00% (exclude management fee)

Sales and General Admin. as % of revenues 18.00% (exclude management fee)

Rate of depreciation 7.00%

Effective tax rate 20.00%

MArket value of equity 17100 million

Market value of debt (imputed) 900 million

Cost of debt 9.00%

Risk free rate of return 12.00%

MArket risk premium 8.00%

BHC's BETA value 0.68

Growth rate of cash flow after 7th year 14.00%

========================== ========= ========= ========= ========= =========

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

6 7

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

3161 3311

0.65 0.66

5028 5783

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

3771 4613

2451 2998

6222 7611

264 323

6486 7934

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

933 1142

933 1142

1120 1370

1120 1370

4107 5024

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

2380 2911

293 328

2087 2583

1669 2066

1962 2394

1848 1216

114 1178

800 0

914 1178

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

s. million)

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

1419 1867

448 416

4150 5550

1400 800

1367 1660

4183 4690

293 328

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

========= =========

management fee)

management fee)

management fee)

management fee)

========= =========

Solved problem 33.1(a)

Return on equity( r) 25%

Dividend payout ratio(b) 0.4

Return required by the equity

shareholders( k) 18%

Book value per share(B) 50

Growth rate 0.15

Market price as per Marakon

model(P) 166.67

33.1(b)

If the market price per share remains unchanged and

the return on equity falls to 22%

then the growth rate will be 0.1629

and the corresponding

payout ratio 26%

Gross margin 20%

Ratio of selling , general and

administrative expenses to

sales 10%

Discount rate 15%

Tax rate 30%

Growth rate in sales if new

strategy adopted 20%

Period of growth in years

under new strategy 3

Ratio of depreciation to net

fixed assets at the beginning

of the year under the new

strategy 10%

Current values Income statement projections

Year 0 1 2 3 4

Sales 10000 12000 14400 17280 17280

Gross margin 2000 2400 2880 3456 3456

Selling and general

administration 1000 1200 1440 1728 1728

Profit before tax 1000 1200 1440 1728 1728

Tax 300 360 432 518.4 518.4

Profit after tax 700 840.00 1008.00 1209.60 1209.60

Balance sheet projections

Fixed assets 4000 4800 5760 6912 6912

Net current assets 2000 2400 2880 3456 3456

Total assets 6000 7200 8640 10368 10368

Equity 6000 7200 8640 10368 10368

Cash Flow projections

Profit after tax 840.00 1008.00 1209.60 1209.60

Depreciation 400 480 576 691.2

Capital expenditure 1200.00 1440.00 1728.00 691.20

Increase in net current assets 400.00 480.00 576.00 0.00

Operating cash flow (360.00) (432.00) (518.40) 1209.60

Present value of the

operating cash flow stream (980.55)

Residual value 8064

Present value of the residual

value 5302.21

Total shareholder value 4321.66

Pre-strategy value 4666.67

Value of the strategy -345.01

Projected new investment per

year(I) 100,000,000

Rate of return expected on

new investment( r) 30%

Period in years of new

investment(T) 6

Cost of capital(c*) 20%

Value of the forward plan 250,000,000

Annual

costs(exclu

ding depn.

Project life Salvage Annual Interest and

Investment outlay in years value revenues taxes)

5,000 4 0 6,000 4,000

Debt-

equity Cost of Post-tax

Depreciation Tax rate ratio equity cost of debt

Straight line 40% 4/5 18% 9%

Cost of capital 14.00%

Calculation of EVA over the project life

Year 1 2 3 4

Revenues 6,000 6,000 6,000 6,000

Costs 4,000 4,000 4,000 4,000

PBDIT 2,000 2,000 2,000 2,000

Depreciation 1250 1250 1250 1250

PBIT 750 750 750 750

NOPAT 450 450 450 450

Cash flow 1700 1700 1700 1700

Capital at charge 5000 3750 2500 1250

EVA -250 -75 100 275

NPV( using EVA) (46.7)

NPV(using cash flow) (46.7)

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 204848.61 165479.06 121385.17

Annuity amount 532,928 532,928 532,928 532,928

Depreciation 292,928 328,080 367,449 411,543

(Amounts in Rs.million)

NOPAT 21.09

Investment in fixed assets 250

Investment in current assets 50

Economic life in years 14

Salvage value of fixed assets 0

Cost of capital 10%

Annual depreciation 17.86

End of year 1 2 3 4 5

Net value of fixed assets 232.14 214.29 196.43 178.57 160.71

Investment in current assets 50 50 50 50 50

Total capital employed( book

value) 282.14 264.29 246.43 228.57 210.71

ROCE for year 5 9.22%

ROGI for year 5 12.98%

Economic depreciation 8.937

CVA for year 5 0

Solved problem 34.1

Earnings per share 5 5

Market price per share 60 50

No. of shares 1,000,000 800,000

Expected synergy gain 5%

Target post-merger EPS 6

Total earnings post-merger 9450000

Total no.of post-merger shares

for the EPS to be 6 1575000

Exchange ratio 0.72

Black&Co White&Co.

Market price per share 70 32

No. of outstanding shares 20,000,000 15,000,000

PV of gains to be generated 200,000,000

Exchange ratio agreed to 0.5

Share of Black&Co.that will be

owned by the shareholders of

White &Co. 0.27273

PV of Black&Co. post-merger 2,080,000,000

True cost of merger 87,272,727.27

Alfa Corporation Beta Corporation

Total current earnings(E) 50,000,000 20,000,000

No.of outstanding shares(S) 20,000,000 10,000,000

Market price per share(P) 30 20

(a) & (b)

P/E ratio of the combined entity 12 11

Synergy gain 0 5%

acceptable to Alpha shareholders 0.8

point of view Beta shareholders 0.657

(c)

Synergy gain 0

lines ER1 and ER2 will intersect 11.43

Solved problem 37.1

in months s per USD)

Spot 50

Forward time in months 3 50.8

Annualised premium 6.40%

Period in days Interest rate

US 90 1.75%

UK 90 1.25%

Current spot exchange rate in USD per

GBP 1.5

Period in days for which forward rate is

sought 90

Current spot rate for USD in Rupees 51

Expected inflation rate in India 6%

Expected inflation rate in the US 2.50%

Expected spot rate of USD in Rupees in

one year 52.74

One - year US nominal interest rate 5%

Current spot rate for USD in Rupees 49.5

Expected spot rate of USD in Rupees in

one year 51.86

Current spot exchange rate of GBP in

Rupees 70

Risk-free rate of interest in India 10%

Risk-free rate of interest in UK 6%

Required rupee return 20%

Expected Cash flow

exchange in

Cash flow in rate(Rs per rupees(mi

Year pounds(million) GBP llion)

0 -50 70.00 -3500

1 20 72.64 1452.8

2 30 75.38 2261.5

3 20 78.23 1564.5

4 10 81.18 811.8

NPV in rupees(million) 578.06

Solved problem 40.1

Amount of stock X owned(Rs. million) 2

Amount of Y that should be short sold to

minimise the risk(Rs. million) 2.5

Hedge ratio 0.8

Amount that should be deposited in a bank to

create a zero value hedge(Rs million) 0.5

Current stock index 1400

Period in months 6

Six-months stock index futures trading at 1500

Risk-free annual interest rate 11%

Average annual dividend yield on index stocks 3.86%

Spot price per ton 4500

Futures price per ton for a one year contract 5000

Risk-free interest rate 12%

PV of storage cost per ton 200

PV of convenience yield per ton 235.71

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