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Solved problem 3.

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

Solved problem 4.2


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

Solved problem 4.3


Net profit margin ratio 4%
Current ratio 1.25
Return on net worth 15.23%
Total debt to total assets ratio 0.4
Inventory turnover ratio 25
Solution are the figures in italics in the following statements
Profit and Loss account
Sales 2535.8
Cost of goods sold 1587.9
Operating expenses 700
Profit before interest and tax 247.9
Interest 45
Profit before tax 202.9
Tax provision at 101.4
50%
Profit after tax 101.4
Balance sheet
Net worth 666 Fixed assets 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

Solved problem 4.4


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

Solved Problem 5.2


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

Solved Problem 5.3


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

Solved problem 6.2


Interest rate in percentage 12
Doubling period as per rule of
72 6
69 6.1

Solved problem 6.3


Nominal rate of interest 16%
No. of compoundings in a year 4
Effective rate of interest 17%

Solved problem 6.4


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

Solved problem 6.5


Period of deposit in years 5
Amount of annual deposit 6,000
Lumpsum payment at the end 44,650
Implicit interest rate 20%

Solved problem 6.6


Future value 1,000,000
Period 60
Discount rate 10%
Present value 3,284

Solved problem 6.7


No. of annuity payments 12
Amount of annuity payment 10,000

No. of years at the end of which


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

Solved problem 6.8


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

Solved problem 6.9


Amount of deposit 200,000
Interest rate 10%
No.of annual withdrawals 15
Amount of each withdrawal 26,295

Solved problem 6.10


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

Solved problem 6.11


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

Solved problem 7.2


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%

Solved problem 7.3


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

Solved problem 7.4


Current selling price per share 30
Dividend expected next year 2
Required rate of return 15%
Expected growth rate 8.3%

Solved problem 7.5


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

Solved problem 7.6


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

Solved problem 7.7


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

Solved problem 8.2


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

Square of the Square of the


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

Solved Problem 9.2


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

Solved Problem 9.3


Stock A Stock B

Expected return (%) 16 12


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

Solved Problem 9.3


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

Solved problem 10.3


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

Solved problem 10.4


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

Solved problem 12.2


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

Calculation of expected net


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

Price per unit 30 Sales 42,000


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)

(5,360) Net present value


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)

Solved problem 13.4

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)

Range of total new financing( Rs. Target


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%

Solved problem 14.2


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

Solved problem 15.2 ( Amounts in rupees)


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

Solved problem 18.2


( figures in million)

Underwriting Shares Excess or


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%

Solved problem 19.4


(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

Solved problem 19.5


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%

Price per share as


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?

Price per share as


Payout ratio per Gorden model
40% 38.10
50% 33.33
60% 30.77

Solved problem 21.2


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

Solved problem 23.2


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

Solved problem 23.3


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

Solved problem 24.2


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

Solved problem 26.2


(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

Solved problem 28.2


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

Solved problem 28.4


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

Solved problem 28.6(a)


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

Solved problem 29.3


No. of units required per year(U) 2,000
Purchase price per unit(P) 30
Percent carrying cost( C) 25%
Fixed costs per order(F) 1,000
EOQ 730
No. of orders placed 4.0
No. of units for each order(Q) 500.0
Total cost of carrying and ordering
inventories when 4 orders of equal size
are placed 5,875.0
Solved problem 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%

Solved problem 30.2


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

Number Xi Yi (Xi - X) 2 (Yi - Y)2 (Xi - X)*(Yi -Y)


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

Solved Problem 32.3

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

Current Assets, Fixed Assets and Depreciation (Rs. million)


-------------------------- --------- --------- --------- --------- ---------
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 Equity 0.95


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%

Solved problem 33.2


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

Solved problem 33.3


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

Solved problem 33.4


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)

Solved problem 33.5


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

Solved problem 33.6


(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

Videsh Limitrd Swadesh Limited


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

Solved problem 34.2


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

Solved problem 34.3


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%

Maximum exchange ratio


acceptable to Alpha shareholders 0.8

Minimum exchange ratio from the


point of view Beta shareholders 0.657
(c)
Synergy gain 0

Level of P/E multiple at which


lines ER1 and ER2 will intersect 11.43
Solved problem 37.1

Forward period Rate( Rupee


in months s per USD)
Spot 50
Forward time in months 3 50.8
Annualised premium 6.40%

Solved problem 37.2


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

Required forward rate in USD per GBP 1.5074

Solved problem 37.3


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

Solved problem 37.4


One - year US nominal interest rate 5%

One - year Indian nominal interest rate 10%


Current spot rate for USD in Rupees 49.5
Expected spot rate of USD in Rupees in
one year 51.86

Solved problem 37.5


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

Solved problem 40.2


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%

Solved problem 40.3


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