Solved problem 3.

1
Balance Sheet of Zenith Ltd. as at March 31, 20X2
Rs in million
20X2 20X1
EQUITY AND LIABILITIES
Shareholders Funds 860 800
Share capital (Par value Rs.10) 300 300
Reserves and surplus 560 500
Non-current Liabilities 565 530
Long-term borrowings 420 400
Deferred tax liabilities (net) 75 70
Long-term provisions 70 60
Current Liabilities 318 310
Short-term borrowings 190 200
Trade payables 90 80
Other current liabilities 26 20
Short-term provisions 12 10
1743 1640
ASSETS
Non-current Assets 643 610
Fixed assets 520 500
Non-current investments 101 90
Long-term loans and advances 22 20
Current Assets 1100 1030
Current investments 50 80
Inventories 510 480
Trade receivables 480 420
Cash and cash equivalents 12 10
Short-term loans and advances 48 40
1743 1640

Statement of Profit and Loss for Zenith Ltd. for Year Ending March 31, 20x2
Rs. in million
20X1
Revenues from Operations 1000
Other Income 30
Total Revenues 1030
Expenses
Material expenses 420
Employee benefit expenses 300
Finance costs 70
Depreciation and amortisation expenses 50
Other expenses 28
Total expenses 868

Profit before exceptional and extraordinary Items and tax 162

Exceptional Items
Profit before Extraordinary Items and Tax 162
 Extraordinary Items
Profit Before Tax 162
Tax Expense 42
Profit (Loss) for the period 120
Dividends 60

Cash Flow Statement

(Rs. in million)

A. CASH FLOW FROM OPERATING ACTIVITES

PROFIT BEFORE TAX 162
Adjustments for :
Depreciation and amortisation 50
Finance costs 70
Interest income -30
OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 252
Adjustments for changes in working capital :
Trade receivables and short-term loan and advances -68
Inventories -30
Trade payables, short-term provisions, and other current liabilities 18
CASH GENERATED FROM OPERATIONS 172
Direct taxes paid -42
NET CASH FROM OPERATING ACTIVITIES 130
B. CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets -70
Increase of non-current investments -11
Increase in long-term loans and advances -2
Interest income 30
Decrease in current investments 30
NET CASH USED IN INVESTING ACTIVITIES -23
C. CASH FLOW FROM FINANCING ACTIVITIES
Increase in long term borrowings 20
Increase in short-term borrowings -10
Increase in deferred tax liabilities 5
Increase in long-term provisions 10
Dividend paid -60
Finance costs -70
NET CASH FROM FINANCING ACTIVITIES -105
NET CASH GENERATED(A +B+C) 2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 12
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 20X1 20X0
Revenues from operations/Total revenues 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
Equity and Liabilities
Shareholders Funds 505 455
Share capital (Par value Rs.10) 125 125
Reserves and surplus 380 330
Non-current Liabilities 190 205
Long-term borrowings 190 205
Deferred tax liabilities (net)
Long-term provisions
Current Liabilities 240 193
Short-term borrowings 90 55
Trade payables 100 90
Other current liabilities 20 18
Short-term provisions 30 30
935 853
Assets
Non-current Assets 570 515
Fixed assets 550 495
Non-current investments 20 20
Long-term loans and advances
Current Assets 365 338
Current investments 10 5
Inventories 160 138
Trade receivables 120 115
Cash and cash equivalents 25 20
Short-term loans and advances 50 60
935 853

Current ratio 1.52

Acid-test ratio 0.85
Cash ratio 0.15
Debt-equity ratio 0.85
Interest coverage ratio 4.86
Inventory turnover 7.15
Debtors turnover 9.06
Average collection period in days 40.27
Fixed assets turnover 2.04
Total assets turnover 1.19
Gross profit margin 24.4%
Net profit margin 7.98%
Return on assets 9.5%
Earning power 19.0%
Return on equity 17.7%
 Solved problem 5.1 Pro Forma Income Statement for year 3

Historical data

Average per
cent of sales
or some other
Year 1 Year 2 method
Revenues from Operations 600 720 100.0
Expenses
Material expenses 300 344 48.9
Employee benefit expenses 150 172 24.4
Finance costs 10 12 1.7
Depreciation and
amortisation expenses
30 40 budgeted
Other expenses 86 100 14.1
Total expenses 576 668 @
Profit before exceptional items and other income 24 52 @
Exceptional Items 10 8 1.4
Profit before Extraordinary Items and Tax 34 60 @
Extraordinary Items
Profit Before Tax 34 60 @
Tax Expense 14 26 @50% of PBT
Profit (Loss) for the period 20 34 @
Dividends 12 15 budgeted
Retained earnings 8 19 @

Pro Forma Balance Sheet for year 3

Historical data

Average per
cent of sales
or some other
Year 1 Year 2 method
Revenues from operations 600 720 100.0
Share capital (Par value Rs.10) 120 120 No change
Pro forma
Reserves and surplus 150 169 statement of
P&L
Non-current Liabilities
Long-term borrowings 35 58 6.9
Deferred tax liabilities (net)

Long-term provisions 5 11
1.2
 Current Liabilities
Short-term borrowings 20 22 3.2
Trade payables 125 130 19.4
Other current liabilities 5 5 0.8
Short-term provisions 40 45 6.5
External funds requirement
500 560
ASSETS
Non-current Assets
Fixed assets 240 270 budgeted
Non-current investments 7 8 No change
Long-term loans and advances 20 18 No change
Current Assets
Current investments 3 2 0.4
Inventories 125 144 20.4
Trade receivables 80 90 12.9
Cash and cash equivalents 5 6 0.8
Short-term loans and advances 20 22 3.2
500 560

Solved Problem 5.2 (Rs.in million)

Assets to sales ratio 0.8
Increase in sales in the coming year 20
Spontaneous liabilities to sales ratio 0.4
Profit margin 0.06
Sales in the coming year 100.00
Dividend payout ratio 0.4
External funds requirement 4.4
Solved Problem 5.3
Profit margin 0.05
Dividend payout ratio 0.3
Assets to equity ratio 2.4
Assets to sales ratio 1
Sustainable growth ratio 9.17%
year 3
Pro forma
statement of
profit and loss
for year 3
based on a
forecast sales
of 850
850

416
208
14

45
120
802
48
12
59

59
30
30
16
14

Pro forma
Balance Sheet
for year 3
based on a
forecast sales
of 850
850
120

183

59

10
 27
165
6
55
21
647

300
8
18

3
174
110
7
27
647
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
2aq
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
Box Limited Cox Limited and 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 RA = 6.81+0.354RM
 Solved Problem 9.1

Square of the Square of the

deviation of the deviation of the
return on asset return on asset
Return on 1 from its 2 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
Standard deviation of the return on asset 2 = 7.27
(b )Covariance between the returns on assets 1 and 2 = 29.00
( c) 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 9.4

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%+ix 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 10.1

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 10.2

S0 E rf t(in years)
120 110 0.12 0.4 0.5
d1 d2 N(d1) N(d2)
0.6612 0.3783 0.7458 0.6474
C0 22.42233
Chapter 11
Solved problem 11.1

Year 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 13.1

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
Cash flow
For sensitivity analysis proceed as follows.In cell B34 copy from
the formula for NPV from cell E32. .Leave the adjcacent operations 6,500
cell to the left(A34) blank and then fill the various values of Salvage value 0
quantity manufactured, one below the other from cell A35
onwards( in this case 800 and 1800). Highlight(select) A34
to B36 and then from the drop-down menu for Data,
select table. In the dialogue box that appears, type against
column input cell ,thecell reference E32 and click OK. The
NPV values corresponding to the various quantity figures
will be automatically filled in. Next give headings Quantity
and NPV in cells A34 and B34 respectively as separately
shown.To change the numerical value into text in cell B34
go to Format>Cells>Custom and against Type, type out " Net present
Net present value" value (5,360)

(5,360) Quantity 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)
Solved problem 13.2
('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 13.3

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 26
Expected

1400
30

20

Page 27
Optimistic

1800
50

15

Page 28
 Solved Problem 14.1
Capital structure of Adamus Ltd in book value terms (Amounts in Rupees)

Face vallue
Market price
Source of financing No.of insruments per Interest rare Book value
per
instrument
instrument
Equity shares 20,000,000 10 50 200,000,000
Preference shares 500,000 100 12% 85 50,000,000
Retained earnings : 350,000
Debentures 1,200,000 100 14% 90 120,000,000

Term loans 13% 80,000,000

Total 450,350,000
Next expected dividend per share 2 Cost of equity and retained earnings 16.00%
Dividend growth rate expected 12% Cost of preference (approx.formula) 14.84%
( years) 10 Post-tax cost of debentures (approx.formula) 11.91%

Debentures redeemable after ( years) 5 Post-tax cost of term loans 9.10%

Tax rate 30%

Solved problem 14.3

Tax rate 35%

Pre-tax cost of debt 10%

Debt equity ratio 0.6 : 1
Risk-free rate 8%
Market risk
premium 7%
Beta of the equity 0.81
WACC 0.11 Formula used =B71/(B71+D71)*B70*(1-B69)+D71/(B71+D71)*(B7
The above is obtained using the following steps
1. Enter the various given values leaving the value for beta blank. In the WACC value cell type the formula for that as shown
2.On the Tools menu, click Goal Seek.
3.In the Set cell box, enter the reference for the cell that contains the formula Here, this is cell B75.
4.In the To value box, type the result you want. Here it is 11%.
5 In the By changing cell box, enter the reference for the cell that contains the value you want to adjust viz. cell B74.
6 Click OK.
m 14.1

Market
Component Market value value Product of
cost(1) (2) proportion(3 (1) & (3)
Source of capital )
retained earnings 16.00% 1,000,000,000 0.81 13.00%
Preference shares 14.84% 42,500,000 0.03 0.51%
Debentures 11.91% 108,000,000 0.09 1.05%
Term loans 9.10% 80,000,000 0.07 0.59%
Average
cost of
Total 1,230,500,000 capital 15.15%

(1-B69)+D71/(B71+D71)*(B72+B74*B73)

e formula for that as shown

75.

adjust viz. cell B74.

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 : 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
1,704,974
ignoring floatation cost
Floatation cost 21,505,376
NPV of the expansion project with
floatation cost 199,598
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
( Amount in rupees)

Present stock price Rs. 120

No.of shares required to subscribe to one rights share 2
Subscription price Rs. 80
a) Theoretical value per share of the ex-rights stock Rs. 106.67
b) Theoretical value of a right Rs. 26.67
Chapter 19
Solved problem 19.1
(a) (Rs.in million) Solved problem 19.2
Net operating income 40 Cost of debt 9%
Interest on debt 10 Cost of capital 12%
Cost of debt 12% Debt equity ratio 0.8 : 1
Cost of equity 18% Cost of equity 14.40%
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

Net operating income 210,000,000
Corporate tax rate 30%
Market (as well as book) value 300,000,000
Capitalisation rate applicable to a debt free
firm in the risk class to which Optima belongs 16%
Value of Optima Limited according to the
Modigliani and Miller approach 1,008,750,000
Solved problem 19.5
tc 30%
tpe 10%
tpd 15%
Tax advantage of a rupee of debt( in rupees) 0.26
Solved Problem 20.1
No. of equity shares of the
company at present
Amount of external financing
required (Rs.)
Tax rate for the company
Alternatives for external
financing A B
No.of equity shares to be
issued of face value Rs.10 5,000,000 3,000,000
Issue price of an equity
share(Rs.) 20 20
No.of preference shares to be
issued of Rs.10 par 4,000,000
Dividend to be paid on
preference shares @ 11%
Amount to be raised through
debentures(Rs.)
Interest to be paid on
debentures @
Amount of dividend to be paid 440000
Amount of interest to be paid

PBIT 9166666.66666667 PBIT

=(B14-B13)*(1-D4)/(D2+B6) =((C14-C13)*(1-D4)-C12)/(D2+C6)

To obtain the EPS-PBIT

indifferent point for alternatives
A and B, first have the
formula(see comments) 0

Solved Problem 20.2

Debt equity ratio 1.2 Note
Pre-tax cost of debt 12%
Tax 30% To start with, keep the cell B22
ROI 19.53% blank. Then use the Goal Seek
feature in Data > What-if-analysis
Target ROE 0.2
and equate the formula to the
given value of 20 percent, and
show the changing cell to be B22.
The correct ROI value that satisfies
the target ROE value will appear in
Formula used =(B22+(B22-B20)*B19)*(1-B21) B22

Solved Problem 20.3

(a) ( Amounts in Rs.million)
Amount of debt finance 500
Interest rate on debt 14%
Annual interest on debt 70
Expected value of the net cash
flows, without taking the
interest on debt into account 160
Expected value of the net cash
flows, taking the interest on
debt into account(A) 90
Stanard deviation of the above
net cash flows 90
Specified value of the net cash
flow(which signifies cash
inadequecy) (B) 0
Standardised difference
between B and A(the z value) -1

Probability of cash inadequecy 15.87%

(b)

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

Probability of cash inadequecy 0.125

Again, use the Goal Seek feature as shown below to get the
cash flow ( in cell B42 below) corresponding to a z value of -1.15
Cash flow that would give a z
value of -1.15 56.5
z value -1.15
 20,000,000 N OTE
100,000,000
40%

1,000,000

20

80,000,000

14%

11200000
This value would be obtained at the end only. You may leave
PBIT this cell B14 blank while filling up the values

=(D14-D13)*(1-D4)/(D2+D6)
In the cell B16 type out the formula (B14-
B13)*(1-D4)/(D2+B6)-((B14-C13)*(1-D4)-C12)/(D2+C6). You may
use the Goal Seek feature in Data > What-if-analysis and
equate this formula to 0 to get the PBIT value in cell B14,
which would then be the indifferent point
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

Solved problem 20.5

(Amounts in Rupees)

Profit (earnings before interest and taxes) 300,000 Interest rate on debentures 12%
Less: Interest on debentures 60,000 Income tax rate 50%
240,000 No.of equity shares 40,000
Income tax 120000 Face value of equity shares 10
Profit after tax 120,000 Ruling price of share in market 30
EPS 3 Undistributed reserves 600,000
PE ratio 10 Additional funds to be raised 200,000
P/E ratio if debt-equity ratio is
Existing debt 500000 >35% 8
Interest rate on additional
amount borrowed, if debt-
Existing equity 1000000 equity ratio is >35% 14%
Funds currently employed 1500000
Debt-equity ratio under Plan 1-issuing
additional debt 0.41
Debt-equity ratio under Plan 2-issuing
additional equity 0.29
Rate of return earned 20.00%

Alternative-1 Debt issue Debt

Alternative
issue -2 Equity issue
Earnings before interest and taxes 340000 340000
Interest on existing debentures 60000 60000
Interest on additional debt 28000
Profit before tax 252000 280000
Income tax 126000 140000
Profit after tax 126000 140000
No.of equity shares(assuming that
additional share can be issued at the
prevailing marke price of Rs.30) 40,000 46667
Earning per share 3.15 3
PE ratio 8
Price of share 25.2 30
-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 21.3

Firm X Firm Y
Next year's price(Rs) 180 165
Dividend )Rs) 15
Total pre-tax payoff 180 180

Note: As we wish to use the Goal Seek set up in Data > W

Current price 154.28 152.86 C28 blank to start with. The required values would get fille
Capital gain 26 12
Dividend tax rate 20%
Tax rate on capital gains 10% 10%
Post-tax dividend 12
Post-tax capital gains 23.15 10.93
Total post-tax return 23.15 22.93
Note: As we have not filled in the current price value, post
zero in the denominator and thus causing. a problem. So
of the post-tax return and equate it to 1/0.15, i.e. 6.66666
1/Post-tax rate of return 6.67 6.67 Tools, to get the corresponding share price in B28 and C2
The Steps
1. On the Tools menu, click Goal Seek.
2. In the Set cell box, enter the reference for the cell that contains the formula Here, this is cell B35.
3. In the To value box, type the result you want. Here it is 6.66667( i.e.1/0.15-see the Note above)
4 In the By changing cell box, enter the reference for the cell that contains the value you want to adjust viz. cell B28 for Firm X a
5 Click OK.
 Seek set up in Data > What-if-analysis , keep B28 and
red values would get filled up automatically at the end.

current price value, post-tax return formula will have a

causing. a problem. So we will consider the reciprocal
it to 1/0.15, i.e. 6.666667 in the Goal Seek feature in
hare price in B28 and C28 respectively

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

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
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 24.1
Given:
Sales estimated : From January 20X1 through March 20X1 150,000
From April 20X1 to June 20X1 200,000
Sales for each of the months of November and December 20X0 120,000
Percentage of cash sales 0.30
Percentage of credit sales 0.70
Credit collection in percentage after one month 0.40
Credit collection in percentage after two months 0.60
Bad debt losses 0.00
Cash receipt in April 2011 from sale of a machine 70,000
Cash receipt in June 2011 by way of interest on securities 3,000

Estimated purchases of material per month from January to March 60,000

from April to June 80,000
Approximate time taken to make payment for the purchases, after the
date of purchase- in months 1
The purchases for the month of December 20X0, for which payment is
due in January 20X1 is 60,000
Miscellaneous cash purchases per month planned from January
through June 3,000
Wage payments per month from January through June 25,000
Manufacturing expenses per month from January through June 32,000
General administration and selling expenses per month 15,000
Dividend payment scheduled in June 20X1 30,000
tax payment scheduled in June 20X1 35,000

Payment in cash planned for purchase of machine in March 20X1 80,000

Cash balance as on 1st January 20X1 is 28,000
Minimum cash balance required by the firm 30,000
Solution:
Forecast of Cash Receipts
Forecast of Cash Receipts
November December January
20X0 20X0 20X1
Sales 120,000 120,000 150,000
Credit sales 84,000 84,000 105,000
Cash sales 36,000 36,000 45,000
Collection of receivables
(a) Previous month 33,600 33,600
(b) Two months earlier 50,400
Sale of machine
Interest on securities
Total receipts 129,000

Forecast of Cash Payments (Rs. in 00

December January February
Purchases 60,000 60,000 60,000
Payment of accounts payable 60,000 60,000
Cash purchases 3,000 3,000
Wage payments 25,000 25,000
Manufacturing expenses 32,000 32,000
General, administrative and selling expenses 15,000 15,000
Dividends
Taxes
Acquisition of machinery
Total payments (2to9) 135,000 135,000

Summary of Cash Payments (Rs. in 000s)

January February March
Opening balance 28,000
Receipts 129,000 137,400 150,000
Payments 135,000 135,000 215,000
Net cash flow (2-3) -6,000 2,400 -65,000
Cumulative net cash flow -6,000 -3,600 -68,600
Opening balance + cumulative net cash flow 22,000 24,400 -40,600
Minimum cash balance required 30,000 30,000 30,000
Surplus / (Deficit) -8,000 -5,600 -70,600
Solved problem 24.2
Annual yield on marketable securities( Ix360) 0.10
Fixed cost of effecting a marketable securities transaction(b) 2,500.00
Standard deviation of the change in daily cash balance() 10,000.00
Minimum cash balance to be maintained 200,000.00
Return point(RP) 287,720.53
Upper control limit(UL) 463,161.60
 (Rs. in 000s)
February March April May June

150,000 150,000 200,000 200,000 200,000

105,000 105,000 140,000 140,000 140,000
45,000 45,000 60,000 60,000 60,000

42,000 42,000 42,000 56,000 56,000

50,400 63,000 63,000 63,000 84,000
70,000
3,000
137,400 150,000 235,000 179,000 203,000

(Rs. in 000s)
March April May June
60,000 80,000 80,000 80,000
60,000 60,000 80,000 80,000
3,000 3,000 3,000 3,000
25,000 25,000 25,000 25,000
32,000 32,000 32,000 32,000
15,000 15,000 15,000 15,000
 30,000
35,000
80,000
215,000 135,000 155,000 220,000

(Rs. in 000s)
April May June

235,000 179,000 203,000

135,000 155,000 220,000
100,000 24,000 -17,000
31,400 55,400 38,400
59,400 83,400 66,400
30,000 30,000 30,000
29,400 53,400 36,400
Solved problem 25.1
Expected increase in sales(S) 9,000,000
Expected bad debt losses on increental in sales(b n) 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 25.2

Average credit period in days currently allowed(ACP 0) 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(ACP N) 60
Increase in sales expected(S) 20,000,000
Bad debt proportion on the additional sales(b n) 10%
Tax rate 35%
Increase in residual income 1,191,667
Solved problem 25.3
At present Proposed
Credit terms discount period in days 15 15
Discount allowed during the discount period 2% 3%
Credit period allowed- in days 45 45
Present sales(S) 200,000,000 210,000,000
Average credit period in days currently allowed(ACP) 30 27
Variable costs to sales ratio(V) 0.8 0.8
Cost of capital(k) 12% 12%
Proportion of sales on which discount is taken(p) 0.5 0.6
Tax rate 40% 40%
Increase in sales expected(S) 10,000,000
DIS 1,780,000
I 1,066,667
Increase in residual income 260,000

Solved problem 25.4

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(S) 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 25.6(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 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 25.6 (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 25.4 (Amounts in Rupees)
Terms of trade credit 1 / 10 net 45
Annual sales 90,000,000
Percentage of customers who pay on the 10 th
day 30%
Average account receivable 12,000,000
ACP on non-discount sales(in days) 64.05

Note: Here we have used the Goal Seek feature in the menu item DATA > What-if_Analysis
by keeping the cell J41 blank to start with and typing in only the formula for average
account receivable in J 40 using the cell reference numbers . After invoking the Goal Seek
feature set the value for J40 to 12,000,000 in the dialog box and enter OK. The desired
solution will automatically be filled in the cell J41
of quarter 3
Solved problem 26.1
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) 0.3125
EOQ in no. of units 346
87
Time gap between two orders(in days) 4

Solved problem 26.2

Annual requirement of the item 90,000
Cost of the item per unit(Rs.) 3
Cost per purchase order (Rs.) 300
Inventory carrying cost per year 20%
(a)
EOQ if there is no quantity discount 9,487
(b)
(Amts in Rs.)
Order quantity 3,000 4,500 6,000
Discount allowed 0 2% 3%
Price per unit 3 2.94 2.91
Annual quantity requirement 90,000 90,000 90,000
Purchase cost 270,000 264,600 261,900
Carrying cost 900 1,323 1,746
No.of orders 30 20 15
Total ordering cost 9,000 6,000 4,500
Total cost 279,900 271,923 268,146

Since the total cost is minimised when the order quantity is 6000, Modern Enterprises
is advised to order 6000 units and avail of 3 percent discount.
Solved problem 26.3
No. of units required per year(U) 2,000
Purchase price per unit(P) 30
Percent carrying cost( C) 25%
Fixed costs per order(F) 1,000
EOQ 730
No. of orders placed 4.0
No. of units for each order(Q) 500.0
Total cost of carrying and ordering
inventories when 4 orders of equal
size are placed 5,875.0
Solved problem 26.4
Lead time
Daily usage rate in tonnes Probability in days Probability
2 0.2 25 0.2
3 0.6 35 0.5
4 0.2 45 0.3
Stockout cost estimated per ton (Rs.) 8,000
Carrying cost per ton (Rs.) 2,000
(a) 2,000
Normal usage in tons 108
=SUMPRODUCT(A43:A45,B43:B45)*SUMPRODUCT(C43:C45,D43:D45)
Possible
Lead time levels of
Daily usage rate in days usage Safety stock
2 25 50
2 35 70
2 45 90
3 25 75
3 35 105
3 45 135 27
4 25 100
4 35 140 32
4 45 180 72

Expected
Stockout stockout Carrying
Safety stock (tonnes) Stockout cost(Rs.) Probability cost cost Total cost
72 0 0 0.00 0 144,000 144,000
32 40 320,000 0.06 19,200 64,000 83,200
27 45 360,000 0.06 21,600 54,000 79,600
5.0 40,000 0.10 4,000
25,600
0 72.0 576,000 0.06 34,560
32.0 256,000 0.10 25,600
27.0 216,000 0.18 38,880 0 99,040
99,040
The optimal level of safety stock is 27 tons because at that level the cost is minimised.
(a) The probability of stockout when the safety stock is 27 tons is: (0.06 + 0.10) = 0.16
Solved problem 27.1
Credit period(days) 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 27.2

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 28.1

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
(Xi - X) 2 0.595 (Xi - X)*(Yi -Y) 10.35
(Yi - Y) 2 1002
X1 0.9 Y1 17
X2 0.675 Y2 8
x2 0.035 y2 58.941
xy 0.609 dx 0.225 dy 9
a 4.599 b 0.105
The discriminant function is = 4.599 Xi + 0.105Yi
Solved problem 29.1
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 0.091
Present value of the annual cash savings 15,401,932
Net present value of refunding the bond 1,401,932

Solved problem 29.2

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
a) Yield to maturiry 17%
b) Duration 4.24
c) Volatility 3.63

Solved problem 29.3

Year 1 2
Spot Rate 7.00% 7.50%
Forward rate 7.00% 8.00%
 3 4 5
8.00% 8.30% 8.40%
9.01% 9.21% 8.80%
Solved problem 30.1
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 0.216 0.1296 0.07776 0.0467
Tax shield on operating costs
and depreciation 0.2975 0.21875 0.1739 0.14957 0.13768 0.1334
Net salvage value 0.6
Post-tax cash flow -1.5 0.0475 -0.046 -0.107 -0.1482 -0.178 0.3989
Present value of post-tax cash
flow -1.562
Post-tax EAC 0.359
Lease rental 0.5518

Solved problem 30.2

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 9.375 7.03125 5.27344 3.95508
Loss of depreciation tax shield -4.375 -3.28125 -2.4609 -1.8457 -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 -13.475 -12.3813 -11.561 -10.946 -20.484
NAL of lease -4.256
Solved Problem 31.1
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() 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 32.1
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 32.2

Growth Growth
rate rate
during 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
working 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 33.1
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 33.2

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 33.3

Cost of the equipment 2,000,000
Economic life in years 4
Expected salvage value 600,000
Cost of capital 12%
PV of salvage value 381,311
PV of annuity 1,618,689
Annuity amount 532,928
Depreciation charge under sinking fund method
Capital 2,000,000 1,707,072 1,378,992 1,011,543
Capital charge 240000 204848.61 165479.1 121385.165
Annuity amount 532,928 532,928 532,928 532,928
Depreciation 292,928 328,080 367,449 411,543

Solved problem 33.4

(Amounts in Rs.million)
NOPAT 21.085
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 10.01%
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 0.71875

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 64
Forward time in months 3 64.8
Annualised premium 5.00%

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 63
Expected inflation rate in India 4%
Expected inflation rate in the US 1.50%
Expected spot rate of USD in Rupees in
one year 64.55

Solved problem 37.4

One - year US nominal interest rate 3%

One - year Indian nominal interest rate 8%

Current spot rate for USD in Rupees 64.5
Expected spot rate of USD in Rupees in
one year 67.63

Solved problem 37.5

Current spot exchange rate of GBP in
Rupees 98
Risk-free rate of interest in India 7%
Risk-free rate of interest in UK 3%
Required rupee return 20%
Expected Cash flow
exchange in
Cash flow in rate(Rs per rupees(m
Year pounds(million) GBP illion)
0 -50 98.00 -4900
1 20 101.81 2036.1
2 30 105.76 3172.8
3 20 109.87 2197.3
4 10 114.13 1141.3
NPV in rupees(million) 822.10

Solved problem 37.6

Spot rate INR 0.154 per 1 USD
Spot rate USD 0.6564 per 1 GBP
Spot rate INR 0.1011 per 1 GBP

Solved problem 37.7

Spot rate USD/INR 65.5015 / 65.502
1 month swap : 10 / 14
Outright spot rate USD/INR 65.5025 / 65.5034
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