Example 1 Dividend policy P/E=13

Capital Structure Cost of Weight WACC

Equity Share Capita 100
Reserves 900 0.14 0.5 0.07
10% Debt 1000 0.065 0.5 0.0325
Capital Employed 2000 0.1025

50% pay out

New Capital Structure A Cost of Weight WACC
Equity Share Capita 100
Reserves 974.75 0.1439 0.46728 0.06724
10% Debt 1000.00 0.065 0.43478 0.02826
12.25% Debt 225.25 0.0796 0.09793 0.0078
Capital Employed 2300 0.1033

D/E 1.140
Unlevered beta 0.606061
New levered beta 1.06

40% pay out

New Capital Structure B Cost of Weight WACC
Equity Share Capita 100
Reserves 989.70 0.1428 0.47378 0.06767
10% Debt 1000.00 0.065 0.43478 0.02826
12.15% Debt 210.30 0.079 0.09143 0.00722
Capital Employed 2300 0.1032

D/E 1.11
Unlevered beta 0.606061
New levered beta 1.04

30% pay out

New Capital Structure C Cost of Weight WACC
Equity Share Capita 100
Reserves 1004.65 0.1421 0.48028 0.06825
10% Debt 1000.00 0.065 0.43478 0.02826
12% Debt 195.35 0.078 0.08493 0.00662
Capital Employed 2300 0.1031

D/E 1.08
Unlevered beta 0.606061
New levered beta 1.03

0% pay out
New Capital Structure D Cost of Weight WACC
Equity Share Capita 100
Reserves 1049.50 0.14 0.500 0.06998
10% Debt 1000.00 0.065 0.43478 0.02826
11% Debt 150.50 0.0715 0.06543 0.00468
Capital Employed 2300 0.1029

D/E 1.00
Unlevered beta 0.606061
New levered beta 1.00
Depreciation 100 Depreciation 100
PBIT 330 16.5% PBIT 330
INT 100 INT 100
PBT 230 PBT 230
Tax 80.5 Tax 80.5
PAT 149.50 1943.5 PAT 149.50
Payout 74.75 Payout 59.8
Free cash flow 174.75 Free cash flow 189.70
Project Investme 400 Project Invest 400
Debt 225.25 Debt 210.30
profit structure one year after project implementation assummig no ch
Expected PBIT fr 66.00 Expected PBIT 66.00
PBIT 396.00 PBIT 396.00
INT 123.09 INT 121.56
PBT 272.91 PBT 274.44
Tax 95.52 Tax 96.06
PAT 177.39 PAT 178.39
Market Price 2306.11 Market Price 2319.05
Depreciation 100 Depreciation 100
PBIT 330 PBIT 330
INT 100 INT 100
PBT 230 PBT 230
Tax 80.5 Tax 80.5
PAT 149.50 PAT 149.50
Payout 44.85 Payout 0
Free cash flow 204.65 Free cash flow 249.50
Project Invest 400 Project Invest 400
Debt 195.35 Debt 150.50
profit structure one year after p profit structure one year after project implementation ass
Expected PBIT 66.00 Expected PBIT 66.00
PBIT 396.00 PBIT 396.00
INT 119.83 INT 115.05
PBT 276.17 PBT 280.95
Tax 96.66 Tax 98.33
PAT 179.51 PAT 182.62
Market Price 2333.65 Market Price 2374.03
oject implementation assummig no change in old data
Common stock
(100000 shares ; 2
per share) 200000 Share price 14
Paid-in capital 800000
Retained earnings 1500000
Total equity 2500000

Balance sheet after stock dividend (15% stock dividend)

Par value 230000

Paid-in capital 980000 210000
Retained earnings 1290000
Total equity 2500000

Balance sheet after stock split (2 for 1)100% increase in no. of shares
Par value 200000
Paid-in capital 800000
Retained earnings 1500000
Total equity 2500000
d)

of shares