Ranjith George Shweta Kothare Pratamesh Kulkarni Abin Mathew Anand Lamani Khubir Lamani

Stock Split
A stock split or stock divide increases
the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.

Stock Split

 A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector.

The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.

A stock split can also result in a stock price increase following the decrease
immediately after the split. Since many small investors think the stock is now more affordable and buy the stock, they end up boosting demand and drive up prices.

Stock Split

 Although there are many ratios a stock could split, the most common splits are 2-for-1, 3-for-2, and 3-for-1.

The biggest advantages of a stock split is greater liquidity.

One of the disadvantages is that a split raises investor expectation about the company's performance

A stock split doesn't change the value or performance of a company.

Stock Split

Why Stock Split is Done

Many companies do stock split when the price of share has gone to a much higher level.

Due to high price share of a company becomes unaffordable for many investor.

Splitting the stock brings the share price down to a more attractive level.

A lower price change the mind of small investors, and they tend
to buy the stock thinking that it is cheap, which in reality is not the case as the value of the share remain same after the stock split

Stock Split

Why is Stock Split is done (contd..)

Splitting a stock increases a stocks liquidity, which increases with the increase in number of shares. Since after stock split there are many more number of shares it imparts greater liquidity to the stock, as there will that much more number of shares to trade. It also leads to better price discovery of the share of the company, because of more liquidity in the stock. Investors prefer stocks that keep splitting as some investors incorrectly conclude that the frequency of stock splits speaks to a company's future prospects.

Stock Split

How stock split is done? cont.

Stock A Pre- Split

No. of Shares Share Price(Rs.) Market Capitalization

1,00,000 100 1,00,00,000

Stock Split

Stock A 2- for-1

Pre- Split

Post Split

How stock split is done?(cont.) No. of Shares 1,00,000 2,00,000

Share Price(Rs.) Market Capitalization 100 1,00,00,000 50 1,00,00,000

3-for-1 No. of Shares Share Price(Rs.) 1,00,000 100 3,00,000 33.33

Market Capitalization

1,00,00,000

1,00,00,000

Stock Split

Who will get the additional shares?

All shareholders whose names appear on the company's records as on the record date will be eligible for the additional shares. A few weeks later, the shares will start trading ex-split on the stock exchanges.

Stock Split

Splits History of TATA MOTORS

Tata Power Company has fixed 27 September 2011 as the record date for the purpose of sub-division of equity shares of Rs. 10 each into equity shares of Re 1 each.
Announcement Date Old Face Value New Face Value Record Date Ex-Split Date

22/05/1995

100

10

22/05/1995

19/05/2011

10

27/09/2011

26/09/2011

Stock Split

Ex Date 24/03/2011 15/03/2011

Company Name Exelon Infrastructure National Aluminium Company

Face Value Before Split 10.00 10.00

Face Value After Split 5.00 5.00

07/03/2011
04/03/2011 23/02/2011 10/02/2011 08/02/2011 27/01/2011 20/01/2011 12/01/2011 30/12/2010 29/12/2010 23/12/2010 25/11/2010

Hindustan Zinc
Arvind Chemicals GCV Services Aurobindo Pharma Oil & Natural Gas Corporation Amrapali Industries Rossell Tea Shopper's Stop LIC Housing Finance SVC Resources Coromandel International Sun Pharmaceutical Industries

10.00
100.00 10.00 5.00 10.00 10.00 10.00 10.00 10.00 2.00 2.00 5.00

2.00
10.00 5.00 1.00 5.00 5.00 2.00 5.00 2.00 1.00 1.00 1.00

Effects of Stock Split

No change in Companys market share

Expensive shares can be now brought at lower prices

After initial drop down, company shares will go up

Stock Split

Bonus v/s Split

When reserves increase, companies may convert it into shares. Shares increase at no cost. Split is similar, but a bonus is a free additional share. A stock split is the same share split into two. In a stock split, the number of shares increases but the face value drops. The face value never changes for a bonus shares.

Stock Split

Reverse Stock Split

Is a process by a company of issuing to each shareholder in that company a smaller number of new shares They are in proportion to the shareholder's original shares that are subsequently cancelled

Stock Split

Why Reverse Stock Split?

The reduction in the number of issued shares is accompanied by a proportional increase in the share price Danger of being delisted from its stock exchange Used to reduce the number of shareholders

Stock Split

International Financial Reporting Standards (IFRS)

What is IFRS?
IFRS is a single set of
High quality Understandable Enforceable global accounting standards.

It is a "principles based" set of standards which are drafted lucidly and are easy to understand and apply.

Contd.. What is IFRS? International Financial Reporting Standards comprise of: (IFRS) - standards issued after 2001 (IAS) - standards issued before 2001 Interpretations originated from IFRIC-issued after 2001 (SIC) - issued before 2001

Framework
Basic principles for IFRS.

The IASB Frameworks.

The Joint Conceptual Framework project aims to update and refine the existing concepts.

Objective of financial statements

A financial statement should reflect true and fair view of the business affairs of the organization.

As these statements are used by various constituents of the society, they need to reflect true view of the financial position of the organization

It should help to check the financial position of the business for a specific period.

Assumptions in IFRS
Going concern

Stable measuring unit assumption

Need Of IFRS
Globalization A)Capital markets B)Production and trade C)Shares and securities Investors from all over the world rely upon financial statements Confusion among the users while interpreting the financial statements

Adoption of IFRS
Gaining momentum More than 100 countries throughout the world, including the 27 European Union member states, require or permit the use of International Financial Reporting Standards (IFRSs), developed by the IASB

Approved by the Securities Exchange Commission (SEC)

Full conversion would be done by 2016

Benefits Of Implementing IFRS

Streamline financial reporting reducing costs and ensures consistency Comparison and benchmarking of financial data with international competitors Cross border acquisitions and joint venture Early adoption which will in turn enhance the brand value Trade their shares and securities on stock exchanges worldwide Transparency in the financial statements The job of tax authorities made easier Comparability of financial statements of any two companies anywhere in the world

Major differences in Indian GAAP and IFRS

Subject
Components of Financial Statements

IFRS
Components of Financial Statements Comprises of Statement of Financial Position, *Statement of Comprehensive Income Statement of Cash flow Notes to Accounts Statement of Changes in Equity

INDIAN GAAP
Comprises of Balance sheet Profit and Loss A/c Cash flow statement and Notes to Accounts

Format of SOFP

No particular format prescribed.

According to the format prescribed in Schedule VI to the Companies Act 1956, Banking Regulation Act for Banks etc.

Subject

IFRS

INDIAN GAAP
According to the format prescribed in Schedule VI to the Companies Act 1956, Banking Regulation Act for Banks etc.

Format of Income Statement

IAS 1 prescribes the format of income statement.

Statement of Cash Flows

Mandatory for all entities

Exempted for Level 3 entities

Presentation of extraordinary items

IFRS prohibits the presentation of extraordinary items in the statement of

Indian GAAP requires extraordinary items to be presented in the profit

Subject
Dividends proposed after the end of the reporting period

IFRS
Dividends declared after the end of the reporting period but before the financial statements

INDIAN GAAP
Dividends declared after the end of the reporting period

Depreciation rates

Allocated on a systematic basis to each accounting period during the useful life of the asset.

Depreciation is based on the higher estimate of useful life of the asset

Change in the depreciation method

Treated as a change in the accounting estimate

Treated as a change in the accounting policy and is accounted for retrospectively

Subject

IFRS

INDIAN GAAP

Measurement of intangible Can be measured at cost or Are measured at cost only assets revalued amount.

Subject
Actuarial gain or loss

IFRS
IAS 19 gives three choices for the treatment of actuarial gains or losses arising on measurement of employee Benefits

INDIAN GAAP
Actuarial gains and losses should be recognized immediately in the statement of profit and loss as an income or expense.

Contingent asset disclosure Contingent assets are disclosed in the financial statements only if the inflow of economic benefit is probable.

Contingent assets are disclosed as part of the directors report (approving authority)and are not disclosed in the financial statement

Why adoption of IFRS is delaying

Unresolved taxation issues Lobbying by corporates

Changes in schedule VI
Aligning the financial statement presentation as per global expectations. Clarity in formats. Current v/s non-current classification.

Changes in Disclosure(Existing)
Proposed dividend Dr. balance of profit & loss a/c

Profit & loss appropriation a/c

New disclosure in financial statements

Shareholders fund. Borrowings long & short term. Fixed assets. Investments. Statement of profit & loss.

Dropped disclosures
Part IV of schedule VI Managerial Remuneration. Tax deducted on interest & royalty received. Information related to licensed capacity, installed capacity & actual production.

PHASES OF IFRS
Phase I (opening balance sheet as at 1 April, 2011)

Phase II (opening balance sheet as at 1 April, 2013)

Phase III (opening balance sheet as at 1 April, 2014)

TRANSITION TO IFRS
Reporting date-It is the end of the latest period covered by the financial statements. Transition date-It is the beginning of the earliest period for which an entity presents its first full IFRS compliant financial statements.

CHALLENGES IN IMPLEMENTATION
Awareness of International Financial Reporting Practices. Training.

Amendments to the Existing Laws.

Taxation. Use of Fair Value as Measurement Base. Financial Reporting System. Esop challenge

Conclusion

IFRSs are often referred to as being principles-based. US GAAP is said to be more rules-based. This has led to about 25,000 pages of US GAAP versus about 2,000 pages of IFRSs but still IFRSs address all major accounting issues, from financial statement presentation to business combinations. Since IFRSs are regarded as more principles-based as opposed to the more rules-based US GAAP, ethical character and professional judgment will be even more critical Implementation will still require time

40

41

WHAT IS EVATM ?
Most successful performance metric Popularity is a result of able marketing and deployment by STERN STEWART, owner of the trademark EVA is a measure of financial performance based on the context that all capital has a cost and that earning more than the cost of capital creates value for shareholders.

42

UNDERSTANDING EVA AND ITS COMPONENTS

43

COMPONENTS OF EVA:

NOPAT

CAPITAL

CAPITAL CHARGE

RONA

Calculation of EVA
EVA = Net operating profit after Taxes Cost Of Capital OR EVA = (ROI WACC) x Invested Capital Where, ROI= Rate Of Return, WACC= weighted avg. cost of capital

45

SCOPE OF THE STUDY:

VALUE CREATION
INVESTMENT AND DISINVESTMENT STRATEGIES MOTIVATION TO MANAGERS GENERATES POSITIVE SPREAD FOCUS ON SHARE HOLDERS

46

EVA: A FLOW CHART

47

MARKET VALUE ADDED(MVA):

Measure of wealth a company has created for its investors Cumulative measure of corporate performance Primary objective of co.- Maximizing MVA MVA = [(Shares outstanding x Stock price) + Market value of preferred stock + Market value of debt] Total capital

48

49

EVA V/S MVA

ECONOMIC VALUE ADDED MARKET VALUE ADDED
Attempts to measure the true economic profit produced by a company Diff between current market value of company & capital contributed by investors.

Performance metric

Wealth metric

Useful for investors-determine the company value

Improves the book value of the company shares

50

NET PRESENT VALUE(NPV):

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.
ECONOMIC VALUE ADDED NET PRESENT VALUE

Benett Stewart-to measure the value of the firm

Peccati - decomposition of the NPV of a financial project. Less immediateness and incisiveness Market values

More immediateness and incisiveness Accounting figures

51

AREAS OF APPLICATION
CHANGING ORGANISATIONAL BEHAVIOR GENERATES SUFFICIENT CASH TO REINVEST SUSTAINABLE GROWTH EVA LINKED COMPENASATION( TCS)

52

ACKNOWLEDGEMENT IN HUL REPORT

Traditional approach to measuring shareholders value creation have used parameters such as earnings capitalization, market capitalization and present value of estimated future cashflows Extensive new research has now established that it is not earnings per se, but VALUE that is important A new measure called Economic value Added(EVA) is increasingly being applied to understand and evaluate financial performance

53

APPLICATION IN HUL:

54

EVA AND HUL

55

CHRONOLOGY OF EVA GROWTH:HUL

56

ADVANTAGES
CALCULATED FOR DIVISIONS AND EVEN PROJECTS

GUAGES PERFORMACE OVER A PERIOD OF TIME

NOT BOUND BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP) MEASURE OF FIRMS ECONOMIC PROFIT

EVA in an organization will increase in the following situations:

If operating profits grow without employing additional capital i.e. through greater efficiency. If additional capital is invested in the projects that gives higher returns than the cost of procuring new capital Unproductive capital is liquidated, curtailing the unproductive uses of capital.

EVA and the market value of a company (summary)

The bigger expected EVA the company has, the bigger is the market value of the company and the stock price. Especially growth in EVA gears up stock prices. Therefor companies like Intel, Microsoft and Nokia trade many times above their book values. Stock prices reflect the future EVA expectations. Those expectations are very uncertain and continuously changing and thus also stock prices are volatile. Therefor it might be in short term difficult to see the underlying connection between EVA and stock prices. Long term perspective helps in this sense.

The summary of EVA theory

In the field of corporate finance, economic value added is a way to determine the value created, above the required return, for the shareholders of the company. EVA could be misleading as a wealth measure because it reflects momentary swings in the capital market rather than inherent company performance. EVA is also shareholder centric and hence of little relevance to the rest of the stakeholders.

60

CONCLUSION
we can definitely say that EVA has emerged as a powerful conceptual framework and is practically implemented in most of successful corporations across globe. Which incorporates balance sheet data into an adjusted income statement metric which works best for companies whose tangible assets correlate with the market value of assets - as is often the case with mature industrial companies.

DUE DILIGENCE
Rohan Vaidya Dharini Venkat Ankita Vichave Anamika Vispute Milind Wadkar Aakash Mahadik 11-755 11-756 11-757 11-758 11-759 11-761

Contents
Meaning of Due Diligence Review (DDR) Due Diligence What is it? Scope of DDR Who Conducts DDR Situations calling for DDR Types of DDR Introduction to Financial DDR Types of Financial DDR Process involved in Financial DDR

Areas covered in Financial DDR Practical Situations in DDR Findings and their Impact Limitations Risks Involved Steps to Mitigate Risks Reporting

Meaning of DDR
Dictionary Meaning of Due is Sufficient & Diligence is Persistent effort or work. It is an investigation into the affairs of an entity prior to its acquisition, floatation, restructuring or other similar transaction Due Diligence Review is a process whereby an individual or an organization seeks sufficient information about a business entity to reach an informed judgment as to its value for a specific purpose.

Due Diligence What is it?

The process by which information is gathered about: A target Company Its Business; and The Environment in which the target company operates Objective: To ensure that prospective investors make an informed investment decision

Due Diligence What is it?

It is a business oriented analysis not an accounting analysis A fact gathering exercise with focused analysis of information Understanding the industry of the target Reasonable level of enquiry on the affairs having material impact on the prospects of the business Evaluation of business model and key business practices

Scope of DDR
Scope is determined by the client. The degree of diligence required in any given review cannot be precisely defined. Purpose for review defines what is due or sufficient diligence. Extent of the review required is a judgment call.

Who conducts a DDR

Chartered Accountants Investment Bankers Attorneys Lead & Co-Investors Corporate Development Staff

Situations Calling for DDR

Firm considering a potential acquisition Investment banker considering underwriting a public security Banker considering the grant of a loan Venture Capitalist considering an Investment Seller of a business commissioning a DDR Lead Investment Banker in case of IPO as per SEBI Norms

69

Types of DDR
Business Due Diligence
Legal Due Diligence Tax Due Diligence

System Due Diligence

Environmental Due Diligence Human Resource Diligence Financial Due Diligence

70

Types of DDR
Business Due Diligence
A review of the market for the company's product Analysis of the Company's competition Existing Market Share Expansion plans Analysis of Comparative Profitability & reasons for deviation if material

71

Types of DDR
Legal Due Diligence
Looks at identifying issues related to contractual obligations which have not been fulfilled by the Company. Review of key contracts related to customers, suppliers, employees and services. Review of agreements/filings related to patents, copyrights, trademarks, intellectual property rights, etc

72

Types of DDR
Tax Due Diligence
Identifies and quantifies areas of tax risk to the extent possible and assesses future tax implications Deals not only with historical liabilities but also assesses future tax implications and finds opportunities to minimize tax Tax implications of the various possible structures

Tax DDR is a key ingredient in assessing whether to proceed with a deal

73

Types of DDR
System (IT) Due Diligence
Confidence that the IT assets supporting the business are up to the task Review the framework for hardware and software Advise on system integration with the acquirers information system

74

Types of DDR
Environmental Due Diligence
Provides the acquirer with a detailed assessment of the historic, current and potential future environmental risks associated with the target organisation's sites and operations. Review the environmental setting and history of the site Assess the site conditions, operations and management Confirm legal compliance and pollution incidents from regulatory authorities

75

Types of DDR
Human Resource Due Diligence
How do we continue to maximize the value of human resource capital?

What is the appropriate mix of pay and benefits for the new organization?
What incentive programs are needed to retain essential personnel after the acquisition is announced? How are employees rewarded and compensated by the Target Company? Review of comparative pay scales and designations between the acquirer and target company.

76

Introduction to Financial DDR

Financial due diligence has the highest significance the final decision, for an investor, would be in the form of financial terms and information. It is therefore imperative that the results of all kinds of due diligence should be translated in monetary terms.

77

Types of Financial DDR

Buy Side
Due Diligence commissioned by the acquirer Focused on areas of interest for potential acquirers (financial or strategic)

Reporting generally issue based

Independent due diligence commissioned by the vendor Key tool for maximising saleability of the business in a reduced timetable through maintaining competitive tension To identify potential issues and take corrective measures upfront

Sell Side (Vendor DD)

78

Types of Financial DDR

Limited
Focus on certain key areas based on the level of comfort desired by the Client Focus on all major aspects of financial statements Extent of detail is more as compared to limited due diligence

Full Scale

It is important to know whats driving value for your clients

Methodology
Quick Appraisal Terms of Reference Information Checklist

Field Work

Identifying Issues

Replies from Management

Preparation of Draft Report

Discussion of Draft Report

Issue of Final Report

Areas to probe in Financial DDR

Business Environment Company Organization Quality of earnings

Areas to probe in Financial DDR

Cash Flows Balance Sheet Other Areas

82

Practical Situations

Fixed Assets Underused/obsolete plant & machinery

Assets carried at much more than current market value due to capitalization of revenue expenditure Capitalization of interest in an expansion project subsequent to stoppage of the construction work Adjustments for capitalization of assets, software expenses, etc

83

Practical Situations
Investments Investments carried at cost though realizable value is much lower Investments carrying a very low rate of income/ return

84

Practical Situations
Working Capital Obsolete, slow & non-moving inventories or inventories valued above Net Realizable Value Group company balances under reconciliation, etc
Deferred Revenue Expenditure Deferred revenue expenditure included under advances or not normally deferrable

85

Practical Situations
Taxes Tax liabilities under Direct & Indirect taxes Pending final assessment of customs duty where provisional assessment only has been completed Non availability of TDS Certificates Adjustment for possible liability arising out of non-submission of Forms C & F Delays and non-payment of direct and indirect taxes

86

Practical Situations
Other Claims Environmental problems/claims, third party claims Huge labour claims under negotiation when the labour wage agreement has already expired Non-compliance with enactments such as the Income Tax Act, Customs Act, etc. that could result in litigation & levy of penalties Product warranties, defects & other liability claims, product returns & discounts, liquidated damages for late deliveries

87

Practical Situations
Off Balance Sheet Items

Commitments including long term contracts Agreement to buy back shares sold at a stated price Contingent liabilities
Letters of comfort

88

Findings and their Impact

The DDR findings are then quantified for impact on the final valuation Deal Breakers - Those issues which would impediment the consummation of the proposed transaction Negotiation points - Those issues which would be necessary to consider in the valuation of business / negotiation of bid price Issues for Agreements - Those issues which would warrant indemnities and identify conditions precedent for happening of the transaction
Commercial Override - Those

risks and issues which are knowingly taken over as a calculated commercial decision

89

Undertakings from Management

Undertakings should normally cover the following: Titles & ownership Various Government consents / licenses Correctness of all information supplied Product / service warranties, damages & other claims Contingent liabilities Recoverability of all current assets Registration of Intellectual properties

90

Limitations
For Service Providers Limited scope of review fixed by the client /acquirer Titles & ownership Too much to see in too little time
For Acquirers/Investors Inability to determine the scope Inability to ensure proper co-ordination between service providers

91

Risks Involved
For Service Providers Failing to meet the needs of the party commissioning a due diligence Financial indemnification of the consequential loss

92

Risks Involved
For Acquirer/Investor The investor may pay higher than the fair price for acquisition The investment performance may not be upto the expectation or may perform badly A bad strategic investment may result in losing a considerable market share or reputation

93

Steps to Mitigate Risks

By Service Provider Clearly understand the objectives & the complexities of the assignment based on which the scope should be finalized The DDR report should disclose all the limitations of the assignment A proper engagement review should be carried out before accepting the assignment and deciding the scope

94

Steps to Mitigate Risks

By Service Provider

Schedule meetings with other reviewers Collect from the client reports of all other due diligences The due diligence team should consist of at least one person who is familiar with the industry, the target is involved in

95

Steps to Mitigate Risks

By Acquirer/Investor

Should ensure that the scope is comprehensive Proper coordination amongst all service providers should be encouraged An integrated service provider may be hired To ensure that the target provides all necessary information

96

Reporting Aspects
Identifying Issues

Identified issues to be discussed with Mgmt & other advisors Replies from Management Resolve issues identified Preparation of Draft Report Draft report submitted Discussion on the Draft Report Issue of Final Report

97

To Conclude ..
Due Diligence plays an important role in identifying, quantifying and reducing the risks of an acquisition.
Although Due Diligence focuses on negative information, the aim is not to raise obstacles to transactions, but rather to facilitate transactions by identifying problems and risks by devising solutions to problems or devices to reduce or manage the risks involved in corporate acquisitions.

Group Member Vijay Ajinkya Tejas Nikhil Mayuri Pooja 11-719 11-720 11-721 11-722 11-723 11-724

FREE CASH FLOW 1

Free Cash Flow

Free cash flow is not "free" in the traditional sense of the word.
A company has left over at the end of the year or quarter after paying all its employees' salaries, its bills, its interest on debt and its taxes. Company can generate plenty of free cash flow, but it might not actually hand it out for free .

An organization include equity holders, debt holders, preferred stock holders, convertible security holders, and so on.

9/4/2012

Two types of cash flow

Free Cash Flow to Equity (FCFE)

9/4/2012

Free Cash Flow for the Firm (FCFF)

Free Cash Flow to Equity

This is a measure of how much cash can be paid to a company's equity shareholders. Used by analysts in an attempt to determine the value of a company.

9/4/2012

Free Cash Flow to Firm

Financial performance that expresses the net amount of cash that is generated for the firm Used by investors as part of fundamental analysis.

9/4/2012

9/4/2012

Calculating Free Cash Flow

9/4/2012

Free Cash Flow to Firm

9/4/2012

Free Cash Flow to Equity

9/4/2012

Example
Items EBIT Depreciation Other non-cash adjustment Change in working capital Capital expenditure Net debt financing Interest expense Tax rate Amount in millions 4,664 1,051 133 113 3,318 380 158 38.50%

3919 = 4464 (4464 * 0.385) + 1051

FCFE = 3,919 3,318 + 380 = 981 FCFF = 3,919 + 158 (1 0.385) 3,318 = 698

9/4/2012

Free Cash Flow Vs. Cash Flow Statement

Cash flow statement does not really reflect what is available for the company's stakeholders. Earnings can be easily manipulated. It is not as easy to manipulate the free cash flow.

9/4/2012

Interpreting free cash flow

Steady increase in FCF Operational efficiency. Steady decline in FCF decelerating growth and facing liquidity problems. In times of uncertainty, Cash Is King Using it in Ratio Analysis
Free Cash Flow To Sales Market Capitalization To Free Cash Flow.

9/4/2012

 Needed for expansion of business Flexibility in decision making Useful to do other things

Why Free Cash Flow Is so Important??

Companies can use their FCF To buy back stocks

9/4/2012

Some Flaws..
No regulatory standards . High free cash flow underreporting of CAPEX and R&D; stretching out the payments;tightening payment collection policies &depleting inventories. Poor free cash flow trouble sustaining earnings growth Insufficient cash flow- illiquidity

9/4/2012

Shrikant Pawar 11-739

Swapnil Rane 11-742

Pravinkumar Patra 11-738

Sagar Patil 11-737

Nikhilesh Pyati 11-740

What is Bonds
A bond is a debt security in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest(coupon) to use and to repay the principal at a later date, termed maturity.

Characteristics of Bonds
Bonds: Debt securities that pay a rate of interest based upon
the face amount or par value of the bond.
Price changes as market interest changes. Interest payments are commonly semiannual : Bond investors receive full face amount when bonds mature. Zero coupon bonds no periodic payment (no interest reinvestment rate).
Originally sold at a discount.

Bond Risk

Default Risk

Currency Risk

Interest Rate Risk

Terms Associated Bonds

Nominal, Principal, Par or Face Amount Issue Price Maturity Date Coupon Callability Convertibility

Types of Bonds
Fixed rate bonds

Floating rate notes Zero coupon bonds

Inflation linked bonds Municipal bonds

Categories of Bonds
Government bond is a bond issued by a national government. Government
bonds.

Corporate bonds.

A corporate bond is a bond issued by a corporation.

Corporate Bonds

Issued by Corporation. Listed Bonds. Call Option.

Types of Corporate Bonds

Government Bonds

Issued by National Government

Risk-Free Bonds

Bond Valuation
Bonds with Maturity :

Bond value = year

Present value of interest after n number of + Present value of maturity after n number of year

Bond Value = I ( PVIAF Kd, n) + F ( PVIF Kd, n)

Current Yield C Current yield =

P0

E.g. You buy ABC Company bond which matures in 1 year and has a 5% interest rate (coupon) and has a par value of $100. You pay $90 for the bond. The Current Yield is 5.56% ((5/90)*100).

Yield to Maturity
I + (m p) /n YTM = 0.4(m) + 0.6(p)

Where, I = Annual Interest m = Maturity Value p = Price of Bond n = Number of years to maturity

Yield to Maturity example

E.g. You buy ABC Company bond which matures in 1 year and has a 5% interest rate (coupon) and has a par value of $100. You pay $90 for the bond. The Current yield is 5.56% ((5/90)*100). If you hold the bond until maturity, ABC Company will pay you $5 as interest and $100 par value for the matured bond.

Now for your $90 investment, you get $105, so your yield to maturity is 16.67% [= (105/90)-1] or [=(105-90)/90].

BUYBACK OF SHARES

DEFINITION
Buyback is reverse of issue of shares by a company where it buys its shares owned by the investors at a specified price; this offer can be binding or optional to the investors. A corporation's repurchase of stock or bonds it has

issued. This reduces the number of shares outstanding

& gives each remaining shareholder a larger ownership of the company.

OBJECTIVE OF BUYBACK
Unused cash Tax gains Market perceptions Increase promoters stake Paint a pretty picture regarding finances

ADVANTAGES
Increase shareholders value Higher share price Reduce chances of takeover Increase ROE Psychological effect Financial re-engineering

DISADVANTAGES
Sending negative signals Backfire

CONDITIONS RELATING TO BUYBACK

Restrictions on the company Prohibition of buyback Register of securities Penalty

SEBI REGULATION
Offer size > Or equal to 1 crore > 1 crore but < Or equal to 5 crore > 5 crore but < Or equal to 10 crore > 10 crore but < Or equal to 1000 crore > 1000 crore but < Or equal to 5000 crore > 5000 crore Fee charged to the merchant 1 lakh 2 lakh

3 lakh

0.5 % of offer size

5 crore + 0.125 % of offer size in excess of 1000 crore 10 crore

WHY WAS BUYBACK INTRODUCED IN INDIA?

Prior to 1998 buybacks were not allowed in India. In the
1970s period, if MNCs wanted to continue doing their business in India, they could do so only by diluting their

shareholding and getting listed on the exchange. They were

thus forced to go public. Then came a phase when in late 1996-1999, Indian share market did not move. People

hesitated to buy or sell. They felt that share market might

go up. The buyback ordinance was passed to revive the capital

markets & protect the companies from hostile takeover bids

METHODS OF BUYBACK
Tender offer Open market Book building Employee share purchase Odd-lot purchase Selective buyback

VALUATION OF BUYBACK OF SHARES

1. Average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. Based on the trend and value a buyback price is decided

2. Shareholders are invited to sell some or all of their shares within a set price range. The low point of the range is at a discount to the market price, while the top of the price range is set at a premium to the market price. Investors are given more say in the buyback price than in the above arrangement.

EFFECTS OF BUYBACK
EFFECTS ON COMPANY EFFECTS ON SHAREHOLDERS

EFFECTS ON COMPANY
Shareholding pattern changes Improvement in financial ratios

EFFECTS ON SHAREHOLDERS
Higher proportion of share Higher share price

HINDUSTAN UNILEVER
CASE STUDY

ABOUT THE COMPANY

Hindustan Unilever Limited (HUL) is India's largest Fast

Moving Consumer Goods Company, touching the lives of two

out of three Indians.

HULs mission is to add vitality to life through its presence

in over 20 distinct categories in Home & Personal Care Products and Foods & Beverages. The company meets

everyday needs for nutrition, hygiene, and personal care,

with brands that help people feel good, look good and get more out of life.

INTRODUCTION
ORIGIN: By Lever brothers with sunlight soap in 1888

FORMATION OF HUL: 3 companies Hindustan Vanaspati Manufacturing Company, Lever Brothers India Limited, United Traders Limited merged to form Hindustan Lever Limited in 1956. it was later renamed Hindustan Unilever Limited in 2007

OFFER
Hindustan Unilever Limited had decided to go for buyback of shares at its meeting held on 29th July, 2007. The company proposes to buyback shares at a price not exceeding Rs 230 a share and up to an aggregate amount of Rs 630 crore that is less that 25% of the total paidup capital and free reserves of the company as per the audited balance sheet as on Dec. 31, 2006.

REASONS FOR THE BUYBACK

The Unilever management felt the stock is undervalued and they believed in the prospects of the Indian FMCG story. Therefore, they were be willing to buy-back some of their own stock to create wealth for shareholders. The buyback was proposed to effectively utilize the surplus cash and make the balance sheet leaner and more efficient to improve returns.

EFFECTS ON COMPANY PARAMETERS

PARTICULARS
CASH ASSETS EARNINGS SHARES EQUITY RESERVES SHAREHOLDERS EQUITY MARKET SHARE PRICE

PRE BUYBACK
1000 10000 1500 150 1500 200 1700

POST BUYBACK
625 9625 1500 125 1250 75 1325

10

15

Return on Assets: ROA = Net Income / Total Assets Return on Equity: ROE = Net Income / Shareholders Equity Earning per Share: EPS = profit after tax / number of shares Price Earning Ratio: P/E ratio = market value of share / EPS

CALCULATION OF RATIOS
RATIO ROA ROE EPS P/E PRE BUYBACK 0.15 0.88 10 1 POST BUYBACK 0.16 1.13 12 1.25

REASONS FOR
INCREASE IN ROA INCREASE IN ROE INCREASE IN EPS INCREASE IN P/E RATIO

EFFECTS ON SHAREHOLDERS
TAX BENEFITS: if a company provides dividend to its shareholders, it has to pay tax on this amount. But if it buys back its share, the shareholders get the entire money value, which is not taxable. INCREASE IN SHARE PROPORTION: When a company goes for buyback, number of shares outstanding reduces. That means proportion of an individual investor increases. INCREASE IN SHARE PRICE: if a company feels that its shares are undervalued, it buys the shares back at the price it feels is appropriate, higher than the market value. Thus the share price increases.

HISTORY OF RIL BUYBACK

In April 2000, RIL announced the largest buyback programme at a price of Rs 303 per share and set apart Rs 1,100 crore for the purpose. An open market buyback was opened by RIL twice between August 2, 2000 and May 18, 2001 and July 2001 and June 2002 aimed at picking up equity shares from the secondary market, whenever it fell below Rs 303. However, the company did not follow through when the prices fell. Thus, RIL management used the open market buyback only as a psychological prop to keep the shares pegged at a higher level, without any intention of offering a higher exit price to shareholders.

 Year 2004: In December, 2004 RIL announced the buyback at Rs 570. The size of the buyback programme was Rs 3000 crore. One should keep in mind that the buyback was announced in backdrop of RIL share plunging by 12% in November- December 2004. The buyback was not successful like earlier one. Only Rs 150 crore was utilized for the buyback.
Year 2012: Now again RIL has come up with buyback with much bigger size of Rs 10, 440 crore. And one thing in common at all these buyback is that stock underperformed the broader market.

RIL BUYBACK 2012-13

RIL Buy Back Key Takes: RIL announced Rs 10, 440 crore buy back. Buyback would be 12 crore equity shares from the open market at the maximum price of Rs 870. The buyback offer lasts from 1st of February, 2012 to 19th January, 2013. Effect on EPS: Q3FY12 EPS is at Rs 13.6. If Buyback goes through Q3FY12 EPS will look like Rs 14.07. EPS will jump by 3.5% taking into account no growth. Effect on Promoters Holding: At present promoters direct holding in the company is 44.71% & after, holding will increase to 46.4% i.e. will move up by 1.75%. Cash Position of the company: Company has cash and cash equivalent position of Rs 74, 539 crore. Also Q3FY12 PBDIT is Rs 9, 002 crore. Reserve and Surplus of the company is more than Rs 1.5 lakh crore.

FAILURE OF BUYBACK
REGULATORY INVESTOR REJECTION

US VS INDIAN GAAP
Abhijit Agawane Nisha Ahide Alan Alex Praveen Angari Insiya Barot 11-701 11-702 11-703 11-704 11-705

What is GAAP

Accounting Principles followed in preparation of Financial

Statements

Differs from Country to Country

Uniformity & Consistency

Why GAAP
Helpful for making Financial

Decisions.

To make Financial Statements presentable to Stakeholders To keep

records and to summarise transactions

FormatPrudencePrior period adjustments Underlying statements Benefits CashDepreciation of flow Assumptions Financial Statements Research and Development Costs Goodwill Share Dividends Issue Employee Expenses Vs Rules

RESEARCH AND DEVELOPMENT COSTS

R & D Costs can be Amortized as Intangible Assets Separate standard for treatment of cost of development of software R & D Costs can be deferred

No separate standard for treatment of cost of development of software

UNDERLYING ASSUMPTIONS
Does not follow Principle of Conservatism Follow Principle of Conservatism

i.e. Anticipate no Profit but Provide for all possible losses

e.g. Reserve for Doubtful Debts, Legal Suit

PRUDENCE VS RULES
Follows International Accounting Standards which are based on Prudence. Not Industry Specific but Generalized

Rule Oriented, Detailed and Complex Industry Specific GAAP e.g. Cable TV, Music and Motion Picture Industry.

EMPLOYEE BENEFITS
Leave encashment Accounted on Actual Basis Accounted on Actuarial Valuation

VRS
VRS charged in the year of acceptance VRS amortized over 60 months

PRIOR PERIOD ADJUSTMENTS

Correction of Error recognised Disclosed in the Current Year by restating previously Issued Profit and Loss Statement financial statements

DIVIDENDS

Dividends are charged to retain earnings at the time they are formally declared by board of directors

Proposed dividend reflected in the year to which they relate even though proposed or approved after the balance sheet date.

SHARE ISSUE EXPENSES

Expenses to be written off when incurred against proceeds of capital

Accounted as deferred expenses and amortized

CASH FLOW STATEMENTS

Mandatory for all the companies whether listed or not. Only for companies who are listed or in the process of listing, banks, financial institutions and insurance companies, preceding years turn over exceeds 50 Cr. Borrowings exceeds 10 Cr. Only current years cash flow

3 years including current years cash flow

DEPRECIATION

To be provided over the estimated useful life of the asset

To be provided based on the rates prescribed by Companies Act 1956

GOODWILL
Amortized over 40 years Not permissible to write off against reserves Amortized over 5 years To be written off against reserves

FORMAT OF FINANCIAL STATEMENT

No specific format Starts with most liquid asset i.e. Cash Requires disclosure of movement in stock Holders equity Investments classified as current or Non current Current portion of Long term debt classified as Current liability Balance sheets are presented as per the format mentioned in Schedule VI Starts with share capital Does not require such disclosure

Investments classified as Long term and current, quoted and unquoted, trade and Non trade

Not required under Indian GAAP

Thank you!!!!

Ajay Bhavsar 707 Tushar Bhuyar 708 Kshitij Birari Ketan Chaudhari Aalekh Datta

11

11

11-709 11-710 11

 Deferred Taxes are Income Tax which arise in one period but because of Timing Difference will have to be actually paid in later years The need for deferred tax accounting arises because companies often postpone or pre-pays taxes on profits pertaining to a particular period.

 Timing Differences (TD) - Differences between

Taxable Income and Accounting Income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Permanent Differences (PD)- Are the

differences between Taxable Income and Accounting Income for a period that originate in one period and do not reverse subsequently

 Differences exist between the accounting books and the tax books because of temporary differences like: Depreciation Inventory Restructuring charges Allowance for bad debts Ignore permanent differences Examples: Goodwill, tax-free income

As per tax laws

Revenues Depreciation Taxable income Tax @ 40% Net income

Year 1
5000 4500 500 200 300

Year 2
5000 4500 500 200 300

Year 3
5000 5000 2000 3000

TOTAL
15,000 9000 6000 2400 3600

As per P&L
Revenues Depreciation Accounting income Tax @ 40% Net income

Year 1
5000 3000 2000 800 1200

Year 2
5000 3000 2000 800 1200

Year 3
5000 3000 2000 800 1200

Total
15000 9000 6000 2400 3600

Deferred tax liability

(600)

(600)

1200

 Deferred taxes separated into Short-term and long-term components Assets and liabilities

Deferred tax liabilities Debt or equity? When is reversal expected? Continual growth: Maybe no reversal.

 What is the effect of changing tax rates? Rule: Establish deferred taxes at the rate expected to exist when the timing difference reverses Tax increase:Debit: Tax expense Credit: Deferred tax liability Tax decrease:Debit: Deferred tax liability Credit: Tax expense.

 Deferred tax liability Accounting books show more income than tax books

Deferred tax asset Tax books show more income than accounting books May have a partially/entire offsetting valuation allowance.

 Increase in deferred tax liability Expense more (or revenue less) on the tax books than on the accounting books Reverse the logic for a decrease in the deferred tax liability
Example: $100 depreciation on accounting books; $150 depreciation on tax books Deferred tax liability increases $50 * tax rate.

 Increase in deferred tax asset Expense less (or revenue more) on the tax books than on the accounting books Reverse the logic for a decrease in the deferred tax asset Example: $100 restructuring charge on accounting books; $0 restructuring on tax books until money spent Deferred tax asset increases $100 * tax rate Like a prepayment of taxes.

 TAX LIABILITY Income Tax Expense To Deferred Tax Liability To Taxes Payable TAX ASSET Income Tax Expense Def. Tax Asset To Tax Payable

xxx xxx xxx

xxx xxx xxx

Companies listed and in the process of listing in India - including Group companies.

01.04.200 1 01.04.200 2

In respect of other companies not covered above.

In respect of all other enterprises.

01.04.200 6

Level - I

Listed/Proposed to be listed Cos Banks, FIs, Insurance Cos Enterprises with > 50 crores Turnover in preceding year > 10 crores borrowings at any time during the year Holding & subsidiary Cos of above. Enterprises with > 40 Lacs but < 50 crores Turnover. > 1 crore but < 10 crores borrowings Holding & subsidiary companies of above. Other than Level - I & Level - II cases

Level - II

Level - III

 Taxes on income include all domestic and foreign taxes, which are based on taxable income Does not cover Dividend Distribution Tax.

THANK YOU!!!

VALUATION OF SHARES

GROUP MEMBERS
Pratik Liye Ganesh Mamidi Shubhangi Mane Kiran Anirudh Pai Abhishek Panjiyar

731 732 733 734 735 736

John Maynard Keynes says,

Stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories.

STOCK VALUATION is the method of calculating theoretical values of companies and their stock
To : Predict future market prices And more generally potential market prices

Thus to profit from price movement :

Stocks/shares that are judged undervalued are bought & Stocks/shares that are judged overvalued are sold

STOCK VALUATION IS DEPEND UPON :

Value created using some type of cash flow, sales or fundamental earnings analysis.
How much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for

Demand and supply of shares/stocks

VALUATION OF SHARES IS REQUIRED FOR FOLLOWING PURPOSES :

For statutory purposes, E.g. Wealth Tax, Gift Tax, Income Tax etc. For purchase and sale of controlling interest Formulating amalgamation and absorption schemes To raise the loans on security of shares If shares of one class are to be converted into shares of another class If company wants to place its shares on market If compensation is to be paid for acquisition of shares

METHODS FOR VALUATION OF SHARES ARE BASED ON :

Value of assets Earning power of the company Market value Yield or earning

There is no any standard method available for valuation of shares. The final selection of the method depend upon the purpose for which the valuation is being done & the person who is doing the valuation.

A. METHOD BASED ON VALUE OF ASSETS :

total value of all assets is divided by the number of shares.

Following proposition need to consider : Non trading assets should be included Outstanding value of preference shares should be deducted. Intangible assets should be excluded

CONCEPT OF VALUE OF ASSETS CAN BE SEEN THROUGH FOLLOWING EXAMPLES :

1. Book value : Book value of assets Book value of liability Number of Equity shares Limitations : Value of assets are directly influenced by accounting policies followed by the company No standard procedure for valuation of intangible assets Doesnt give importance to market value of assets

2. REALIZABLE OR LIQUIDATION VALUE

Value of asset is taken to be the value which can be had by selling them

Estimated Net Sales Value Of Assets Liability Number of Equity Shares

3. REPLACEMENT OR REPRODUCTION VALUE

Value of assets is taken to be on the basis of replacement cost rather than historical cost
Estimated Replacement Value of Assets Liability Number of Equity Shares Limitation :

Difficult to estimate value of some assets Problem of calculating depreciation on certain cost Difficult to estimate value of intangible goods Does not measure value of assets in use

B. VALUATION BASED ON EARNING POWER OF THE COMPANY :

Value of assets depend upon the further estimated income There are three steps for valuation of shares :
1. 2. 3.

Estimation of earnings Capitalization rate Capitalization of earnings

1. ESTIMATION OF EARNINGS :
Here, future estimated earnings need to determine with the help of : Past trends Necessary adjustments need to make for abnormal and non-recurring events

While estimating the future earnings following approaches may be considered :

1. 2.

Simple average of past earnings Weighted average of past earnings

2. CAPITALIZATION RATE :
Most subjective and difficult method of valuation, where capitalization rate depend upon : Prevailing interest rate Risk involved in the industry Time required for reaching capacity production in the company Nature, Extent and Potentiality of competition

More the certainty of estimated future earning, lesser will be the capitalization rate and vice versa

3. CAPITALIZATION OF EARNINGS :
Here future earnings are capitalized on the basis of, Estimated earning and Capitalization rate decided
Value of shares = Capitalized future Earnings Number of Equity Shares

C. METHOD BASED ON MARKET VALUE

Valuation of shares at which the shares are traded in the market This method has certain limitations : Market value of shares may not be available if shares of company are not listed in the stock market Listed shares in the stock market may not be traded MP of shares of closely held companies may not represent true and fair MP

D.

METHOD BASED ON YIELD OR EARNINGS

Valuation is depend upon the income and dividend which are investors are expected to earn In such a case, value of shares is :

Rate of Dividend Normal rate of return

Paid up value of shares

When entire earning is not distributed as dividend :

Rate of Earning Normal rate of Return

Paid up value of shares

Valuation from Investors Point of View

THE FUNDAMENTAL VALUATION IS THE VALUATION THAT PEOPLE USE TO JUSTIFY STOCK PRICES.
P/E (Price to Earning) Ratio : Most common valuation technique used by analyst Stock prices are divided by the, Annual Earning Price Ratio For example, if the stock is trading at $10 and the EPS is $0.50, the P/E is 20 times While calculating P/E ratio, need to look at the historical and forward ratio.

GROWTH RATE :

Valuations rely heavily on the expected growth rate of a company Historical growth rate of both sales and income must consider to get a feeling for the type of future growth expected Personal investment research is required for calculating future growth rate

Nonetheless, the growth rate method of valuations relies heavily on gut feel to make a forecast

PRICE EARNINGS TO GROWTH (PEG) RATIO :

This ratio takes three factors into account, the Price, Earning and the Earning growth rate
Forward Price to Earning is divided by the Expected Earning Growth Rate. The theory is based on a belief that P/E ratios should approximate the long-term growth rate of a company's earnings.