bms fm sdf 2012-13

7.10.11

I FINANCIAL MGT. OBJECTIVES

ROI = Net PAT X 100 ROI =Total Assets

ROI =

Assets Turnover =

Total Capital Employed

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

CHAPTER 2

CAPITAL EXPENDITURE PROJECTS

II CAPITAL EXPENDITURE PROJECTS EVALUATION METHODS1 PAYBACK PERIOD METHOD

A --( when every year same amount of cash inflow )

PAYBACK PERIOD= Initial Investment (ie. Cost of mach)Average Annual Cash Inflow

B ---( when every year amount of cash inflow is not same ) cumulative cash inflows should be found

PAYBACK PERIOD = completed years X

C ---( when annual cost savings are given )

ROI means Return on Investment = EBIT X 100

PAYBACK PERIOD= Initial InvestmentAnnual Cost Savings

The project with the lowest payback period should be chosen.--------------------------------- -------------------------------------------------------------------------------------------------------------------------Payback Profitability = [Avg. Annual Cash Inflow X( Expected life of project - Payback Period) ] + sale of scrap

Payback Profitability = [Total Earnings from the Project - Cost of Project ] + sale of scrap

Payback Profitability = Surplus Life Profitability

Conclusion : The project with the highest payback profitability should be chosen.Better indicator than Payback Period because it considers total net cash inflows remaining after recovering original cost.

-------------------------------------------------------------------------------------------------------------------------Payback Profitability Index = ( Also called Benefit Cost Index )

Payback Profitability Index =

Conclusion : The project with the highest payback profitability index should be chosen.----------------------------------------------------------------------------------------------------------------------------------------

2 ARR -- Average Rate of Return Method OR Accounting Rate of Return Method

ARR = Avg. PATOriginal Investment

ARR = Avg. PATAvg. Investment

Avg. Investment =

Conclusion : Within ____ Payback period , the cost of project will be exactly recovered.

( When existing Profits and Profits after investment given )

ARR = Incremental Earnings or Profit

Incremental Investment

Incremental Earnings or Profit =

Incremental Investment +

( When Profits from existing machine and new machine given )

ARR = ( PAT from new machine - PAT from old machine )

( Investment in new machine - sale proceeds of old machine )

( When Profits from machine 'A ' and machine 'B" given )

ARR = ( PAT from machine 'A' - PAT from new machine 'B' )

( Investment in machine 'A' - Investment in machine 'B' )

III DISCOUNTED CASH FLOW METHODS

a) PRESENT VALUE METHOD

b) NET PRESENT VALUE METHOD

c) PROFITABILITY INDEX ( PI ) or BENEFIT - COST RATIO (B/C RATIO)

d) IRR---- Internal Rate of Return

e) DISCOUNTED PAYBACK PERIOD

a) PRESENT VALUE METHOD

Info : Cost 500000, W Cap. 60000, Scrap 40000, PV factor 12% , Life 4 years.

Year Profit before Dep

Dep. & Tax

1 100000 115000

2 200000 115000

3 250000 115000

4 300000 115000

850000 460000

Dep as per SLM = Cost of Asset -Scrap value =

Estimated life of Asset

Dep as per WDV method = Dep % X Opg. Bal. Of Asset

PV Factor / % also called as Post Tax Cutoff Rate

If Total PV > Cost of Project ----- Accept Project

If Total PV < Cost of Project ----- Reject Project

If Total PV = Cost of Project ----- Indifferent ie Neither profit nor loss from Project

Conclusion : Since Total Present Values of Cash Inflows Rs 533043/- is more than Cost Rs500000/- the project should be accepted.

b) NET PRESENT VALUE METHOD


Year Profit before Dep

Dep. & Tax

0 Cost of machine

0 Working Capital

1 100000 115000

2 200000 115000

3 250000 115000

4 300000 115000

4 Release of WCap.

4 Sale of Scrap

850000 460000

If NPV > Zero ----- Accept Project

If NPV < Zero ----- Reject Project

If NPV = Zero ----- Indifferent

Conclusion : Since Net Present Values of Cash Inflows Rs. 36642.50 is more than zero ( positive) the project should be accepted.


PI = PV of cash inflows

PV of cash outflows

PI = Benefits

Cost

PI > 1 accept project ---- (NPV + ve )

PI < 1 reject project --- (NPV - ve)

PI = 1 indifferent --- (NPV zero )

Conclusion : Since Profitability Index 1.07 is more than one, the project should be accepted.

d) IRR---- Internal Rate of Return

Internal Rate of Return is that rate of profit expected from the investment in the project which covers the cost of capital invested in the project.

IRR is the rate at which Total Cash Inflow = Cost of Project

IRR is that rate at which Profitability Index is 1 . ( because Total PV of Cash Inflows = Total PV of Cash Outflows )

eg. If discounting factors are given for 10 % and 14%

IRR = 10% + (Total PV at 10% - Cost of Asset ) X ( 14 - 10 )

(Total PV at 10% -Total PV at 14% )

Conclusion : IRR of the given project is x % . It means at x% of cost of capital ( int rate or Div rate ) the income of the project will just exactly cover the cost of project.

At this rate of cost there will be neither profit nor loss .

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

e) Discounted Payback Period

Use discounted cash inflows ie. Present values of cash inflows , then calculate cumulative PV of Cash inflows

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

NOTES : Cost for conducting study / research for project is a sunk cost ( ie already incurred ) and hence not to be considered while evaluating the different projects.

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

CHAPTER 4

CASH BUDGET

RECEIPTS JULY AUG. SEPT.

Calculate Payback Period on Cumulative Present Values.

Opg. Balance 12000 12000 12000

Cash Sales 57000 60800 38000

Receipts from Debtors

1st month 53544 69840 74496

2nd month 112000 128800 168000

Dividend on Investment 14500 - -

TOTAL RECEIPTS 249044 271440 292496

Less : PAYMENTS

Cash Purchases 52000 60000 40000

Paid Creditors 66000 78000 90000

Wages 24000 32000 32000

Expenses in advance 6667 3333 0

Cash Expenses 13333 13333 6667

Furniture purchased - 90000 -

Machine purchased 20000 10000 10000

TOTAL PAYMENTS 182000 286667 178667

Purchase of Investments 55044 101829

( If Receipts are more than payments + Bal required)

Sale of Investments 27227

(If Payments + Bal required are more than Receipts )

Clg. Bal 12000 12000 12000

Calculations July --

Cash Sales 60000 less Discount 60000 X 5% =

Receipt from Debtors 1mth 240000 -- 30% in Aug =

Receipt from Debtors 2mth --70% in Sept =

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

Cash bal not to exceed 20000. Excess to be deposited in SB A/c.on which int @ 3% is received monthly.

JULY AUG. SEPT.

Opg Cash Bal

Receipts

Int on SB deposit 75

Total Receipts 150000

Payments

Total Payments 100000

Clg Bal ( to be adjusted) 50000

Deposited in SB A/c. 30000

Clg Bal 20000

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

Receipt cycle ( Systems of Collection from Debtors )

QuestionAverage daily receipts =Rs.

Collection period reduced due to concentration banking =

Annual Cost of concentration banking =Rs.

Income from investment =

Collection period reduced due to lock box system =

Cash released by concentration banking =Rs.

Should the Co. Adopt Concentration banking or Lock Box System ?

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

Co. Has annual turnover (Sales) of 100 lakh. 50 working weeks. Receipts on Mondays , Tuesdays and Wednesdays are twice on other 2 days o the week.

Cost of banking is 1400 per day. Int rate of bank overdraft is 15% pa.

Advise whether daily , twice a week on Wednesdays and Fridays or only on Fridays.

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

Defn. : Cost of Capital is the minimum required rate of earnings or the cut-off rate of Capital Expenditure.

Cost of Capital is the cost that is incurred in retaining the funds obtained from various sources and employed in business.

Utility : Designing a firm's capital structure.

Evaluation of investment alternatives.

Assessment of Financial Performance.

Components of Cost Of Capital

1) Cost of Debt ( Kd)--- Rate of Interest Less Tax benefit

2) Cost of Equity Share Capital ( Ke )-- Expected rate of dividend --Highest cost of capital

3) Cost of Retained Earnings -- Opportunity cost of dividends foregone

4) Cost of Preference Share Capital -- Fixed rate of dividend

Two Approaches of Calculating Cost of Capital

A) Overall Cost of Capital = Weighted Average Cost of Capital ( WACC ). Considers Cost of all types of Long Term Sources of Capital.

In case of New Company Overall Cost of Capital is equal to Marginal Cost of Capital.

B) Marginal Cost of Capital = Increase in Cost of Capital due to increase in Capital Structure.


It helps to know what rate of return/profit the new project should earn to cover Cost of Capital.

Calculation of Weighted Average Cost of Capital ( WACC )

Source of Capital Amount Proportion Cost of

Capital

Equity Sh. Capital(10/-) 100000 0.10 14%

10% Pref. Sh. Capital 200000 0.20 10%

11% Debentures 300000 0.30 11%

12% Loan 400000 0.40 12%

TOTAL 1000000 1.00

1 ) WACC = 9.07%

2 ) Cost of Equity

If DPS =Rs.14/-. MPS = Rs. 120/- . Expected growth in Dividend = 4%.

Cost of Equity ( Ke ) = DPS X 100 + G

MPS

Cost of Equity ( Ke ) = ( 14 X 100 )+ 4% = 11.67 % + 4% =

120

Cost of Equity ( Ke ) = EPS X 100 + G

MPS

Cost of Preference Share Capital

Kp = Preference dividend >> if addnl info not given

If redeemable preference shares

>> FV = face value(par value) of one pref share

[FV + NP]/2 NP = Net Proceeds= Face value + premium - dicount - issue expenses per share

Cost of Debt

Cost of Debt ( Kd ) = Int. Rate ( 1 - tax rate)

Cost of redeemable Debt


[FV + NP]/2 NP = Net Proceeds= Face value + premium - dicount - issue expenses per share

[FV - PP]/2

Cost of retained Earnings

Kre = Ke

3 ) Rate of Return on Equity Share Capital

If ROI = 25%

EBIT 250000

Less : Int. on Deb. 33000

Int. on Loan 48000

EBT 169000

Less : Tax 50700

PAT 118300

Less: Pref. Div. 20000

Profit Available to 98300

Equity Shareholders

Therefore , Rate of Return on Equity = 98300

100000

EPS = 9.83

Kp = [ Pref Div.amt + (FV - NP)/ N ] x 100

Kp = [ Interest + (FV - NP)/ N ] x (1 - tax rate )

Yield to maturity = [ Interest amt p.a. + (FV - PP)/ N ] x 100

4 ) Market Value of the Firm

Market Value of Equity = PAES =

= Cost of Eq. Capital

Market Value of Debt = Debenture + loan =

Market Value of Pref. Sh. = Pref. S. Cap. =

Market Value of the Firm >>>>>>

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

CHAPTER 6

CAPITAL STRUCTURE PLANNING

a) Minimum Cost of Capital

b) Minimum Risk \

c) Maximum Market Value of Equity ;

d) Maximises EPS

Essentials of Optimum Capital Structure :

1 Flexibility-- increase/decrease and change in composition of Capital should be possible.

2 Economy--Minimum Cost of Capital

3 Solvency--No excessive debt requiring mortgaging of assets.

4 Efficiency-- Just adequate capital ensuring intensive utilization of funds.

5 Control-- Controlling position of Equity Shareholders should be maintained.

6 Liquidity -- Adequate cash and liquid resources should be maintained for smooth functioning of business.

INDIFFERENCE POINT

EPS as per Plan 1 = EPS as per Plan 2

[(EBIT - I1)(1 - t )] - PD1 = [(EBIT - I2)(1 - t )] - PD2

Capital Structure Planning means having such a combination of capital resources which gives Highest EPS.

Capital Structure Planning means determining the Composition of Owned Capital & Borrowed Capital, having following features :.

It is the EBIT which would keep the Equity Shareholders indifferent to the alternative capital plans.

Two alternative Capital Plans which give the same EPS

E1 E2

I1= Interest as per plan 1 I2= Interest as per plan 2

t = Tax Rate

PD1 = Pref. Dividend as per plan 1 PD2 = Pref. Dividend as per plan 2

E1 = No. of Eq. Sh. As per plan 1 E2 = No. of Eq. Sh. As per plan 2

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

Financial Breakeven

Financial charges ie. Interest on loans /debt capital is just exactly covered by EBIT and PAT = Pref. Dividend. Leaving neithe

It is the minimum level of EBIT which is just adequate to pay interest on debt capital and preference dividend .

At financial Breakeven level of EBIT -- the firm's EPS is Zero.

-- PAT = Pref. Dividend

-- EBIT = Interest

-- EPS = 0

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

Theories of Capital Structure

Theories to explain relationship between capital structure , cost of capital and value of firm.

1 Net Income Approach -->> Firm can minimize WACC and increase value of firm and MPS, by increasing debt capital to maximum.

because Int rate < Div. rate PLUS due to Tax benefit net interest cost is reduced still further.

2 Net Operating Income Approach-- No corelation between cost of capital and market value of firm.

3 Traditional Approach --

WACC is minimized if Debt Equity Ratio is increased .

Weakness-- As debt increases financial risk increases leading to higher expectation of dividend.

leading to increase in cost of capital.

4 Modigliani Miller Approach -- Average cost of capital is equal to capitalization rate of pure equity stream .

No corelation between cost of capital and market value of firm.

Using the above equation Indifference Level of EBIT should be found.

Financial Breakeven is that level of EBIT where EPS is exactly equal to zero .

Change in Capital Structure affects market value of firm

Debt -Equity Mix influences WACC

The optimal Capital Structure is one which uses maximum debt capital.

Change in Capital Structure does not affect market value of firm

Debt -Equity Mix does not influence WACC

There is no optimal Capital Structure

Change in Capital Structure does affect market value of firm

There is optimal Capital Structure

Problem 1400000

1) Value of Firm under Net Income Approach = Market Value of Equity + Market Value of Debt

Market Value of Equity = PAT less Pref. Dividend ( ie. PAES )

Capitalization rate of Equity

Market Value of Debt = Borrrowed Capital

2) Value of Firm under Net Operating Income Approach =

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

CHAPTER 9

BUSINESS RESTRUCTURING

Definition : Process by which business orgn. Alters its present structure , either asset structure or liability structure or both.

BR. is done through Merger, Amalgamation, Demerger , Joint Venture , Takeover .

ImportanceBR gains importance due to--Changes in laws, competitive world , cost cutting

Financial implications

Financial Implications means the valuation of the business from the point of view of buyer and seller.

Value is dependent on bargaining powers of buyer and seller of business and their expectations of income from the business being takenover.

Valuation is dynamic and not static since it changes with the time .

Valuations

Types of Bus. Restructuring

Mergers-- combination of two/more companies into one large company.


a) Horizontal Merger-- combination of companies producing similar products> >anticompetitive , advantage over other competitors.

b) Vertical Merger-- combination of companies at different stages in production of same product. Noncompetiting firms

bachward integration moving towards sources of rawmaterial, forward integration --moving towards consumers by eliminating distributors.

c) Congeneric Merger - Firms in Same general industry but are not buyer- supplier of eachother, but are co-related--eg. Bank and insurance

d) Conglomerate merger--firms in different industry >> for diversifying business risk.

PROBLEM ON AMALGAMATION

a) Book Values ( Given)

A Co B Co

Fixed Assets 300000 200000

Current Assets 100000 29000

Total 400000 229000

Eq Capital ( of Rs 10 each) 250000 192000

Res. & Surplus 14000

12% Pref Cap 80000 10000

13% Deb 36000 15000

Current Liab 20000 12000

Total 400000 229000

b) Revalued figures

A Co B Co

Fixed Assets 350000 20000


Total 440000 50000

c) New Co. formed from the amalgamation of A Co and B Co is AB Co.

d) 15% Deb to be issued to existing Deb holders so that they get same amount of int as they are now getting.

e) Eq shares of new AB Co. shall be issued 30000 shares to existing shareholders of A Co. anf B Co. in proportion to their existing share values .

f) 11% Pref shares to be issued to current Pref. share holders.

Calculate Debentures , Pref shares and Equity shares to be issued .

Prepare Balancesheet of new Co. after amalgamation.

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

ANSWER

A ) Calculation of Net Assets taken over

Revalued figures if given

A Co B Co Total

Fixed Assets 350000 20000 370000

Current Assets 90000 30000 120000

Total 440000 50000 490000

Current Liab 20000 12000 32000

Total 20000 12000 32000

Net Assets taken over 420000 38000 458000

Purchase consideration Paid by New Co.

a ) To Pref Shareholders A Co B Co Total

11% Pref Shares of AB Co 80000 10000 90000

b) To Deb. Holders

15% Deb of AB Co. 31200 13000 44200

c ) To Equity Shareholders

Equity Shares of AB Co. 275109 24891 300000

Total ( B ) 386309.2 47891 434200

Goodwill 9891

(If Purch Con more than Net Assets )

Capital Reserve 33691

(If Purch Con less than Net Assets )

BALANCE SHEET OF AB Co.

Liabilities Amount

Equity Share Capital 300000 Fixed Assets

11% Pref. Share Cap. 90000 Current Assets

15% Deb. 44200

Capital Reserve 33691 Goodwill

Current Liab. 32000

TOTAL 499891 TOTAL

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

MERGER / TAKEOVER

From the following Balance Sheets + info Calculate Purchase Consideration and prepare revised Balance sheet of company AAA Ltd.

AAA Ltd. shall purchase BBB Ltd.

Liabilities AAALtd BBB Ltd

Equity Shares (Rs 100/-) 400000 100000

Pref. Shares (Rs.100/-) 50000

Reserve & Surplus 100000 20000

9% Debentures 130000


Bank Loans 50000 40000

Current Liabilities 55000 20000

785000 280000

BBB Ltd. Is seller / vendor company .

a) BBB Ltd's Assets & liabilities are valued as under :

Land & Bldg. 140000

Machinery 110000

Furniture 5000

Investments book value

Current Assets provide for bad debts 1000

Current Liabilities consider unrecorded liab. 2000

b ) Purchase consideration is paid

9% Debentures 100000 To Debentureholders of BBB Ltd.

1000 Shares of AAA Ltd. at premium of Rs.10/ -

Balance in cash

ANSWER

Calculation of Purchase Consideration of BBB Ltd.

Assets of BBB Ltd. Revalued figures

Land & Bldg. 140000

Machinery 110000

Furniture 5000

Investments 10000

Current Assets 9000

274000

Less : Liabilities of BBB Ltd.

Bank Loans 40000

Current Liabilities 22000

62000

Net Assets takenover 212000

Purchase Consideration Paid as


Shares of AAA Ltd. 100000

Share Premium 10000

Balance in cash 2000

212000

REVISED Balance Sheet of AAA Ltd. ( after merger )

Liabilities Amount

Equity Shares (Rs 100/-) 500000

Pref. Shares (Rs.100/-) 50000

Reserve & Surplus 110000


Bank Loans 90000

Current Liabilities 77000

TOTAL 1057000

P Co S Co

MPS 25 15

No. of Equity shares 200000 100000

Earnings after Tax 400000 120000

P Co is merging with S Co that is , P Co is purchasing S Co

Merger will be effected by Stock Swap ( exchange of shares)

a ) Find pre-merger EPS and P/E Ratios of both Cos.

b ) What is the exchange ratio based on current MPS?

b ) What will be post -merger EPS?

c ) What must be the exchange ratio so that pre-merger and post-merger EPS to be same ?

What is exchange ratio based on current MPS?

ANSWER Purchasing Co Sold Co.

a ) EPS and P/E P Co S Co

400000 120000

No of Eq Sh 200000 100000

= Rs. 2 1.2

25 15

EPS 2 1.2

= 12.5 12.5

b ) Exchange ratio based on current MPS

Current MPS 25 15

MPS of P Co

Exchange Ratio = 100000 X 15

25

= 60000 shares

Shareholders of S Co will exchange their 100000 shares for 60000 shares of P Co.

c ) Post merger EPS

EPS = PAT

P/E = MPS

Exchange ratio=Eq Sh of S Co X MPS of S Co

Total PAT = PAT of P. Co. + PAT of S Co.

= 400000+ 120000 =520000

Total shares = 200000 +60000 =260000 shares

Total shares

2

260000

d ) Exchange Ratio to earn same EPS

Pre merger EPS of P Co

= 520000 =

2

No of new shares required to be issued = Total no. of shares in post merger Co - No of shares in pre merger P Co

= 260000 - 200000 =

Exchange Ratio = 60000 X 1.2 = 0.6

120000

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

LEVERAGES

Income Structure

Contribution 260

Less : Fixed Costs 100

EBIT 160

Less : Interest 60 60 = 12% of 500 loans

EBT 100

Debt Equity Ratio = Borrowed Capital =Owned Capital

Post merger EPS = Total PAT

= 520000 =

Total No of Shares in post merger Co = Post merger Earnings

Interest Coverage Ratio = EBIT =

Interest on loan & debenture

Operating Leverage = Contribution =EBIT

Financial Leverage = EBIT =EBT

Combined Leverage = Contribution =EBT

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

2011 PRELIM PAPER SOLUTION

PRELIM MORF Co. EVALUATION OF ALTERNATIVE CAPITAL PLANS

Q3

Source of Capital Existing Option 1 Option 2

Equity Sh. Capital(10/-) 4000000 8166667 4000000

13% Pref. Sh. Capital 1000000 1000000 3500000

15% Debentures 3000000 3000000 3000000


Share Premium 833333

TOTAL 8000000 13000000 13000000

ROI = 3307143/8000000 = 41.34 %

EBIT 3307143 5374107 5374107

Less : Int. on 15% Deb. 450000 450000 450000

Less : Int. on 14% Deb. 350000

EBT 2857143 4924107 4574107

Less : Tax @30% 857142.9 1477232 1372232

PAT (given) 2000000 3446875 3201875

Less: Pref. Div. 130000 130000 455000

Profit Available to 1870000 3316875 2746875

Equity Shareholders

No.of Eq Shares 400000 816667 400000

EPS 4.675 4.06 6.87

Grading >>> II III I

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

Not given in PRELIM Problem

If P/E given 6 7 4

MPS = P/E X EPS 28.05 28.43 27.47

Grading >>> II I III

It is the prime function of Finance Manager to maximise wealth of shareholders

Hence Option maximising MPS should be chosen.

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

PRELIMQ2 Year PBDT Dep. PBT

1 1000000 500000 5000002 1075000 375000 7000003 1081250 281250 8000004 1743750 843750 9000004 Release of W. Cap4 Sale of Scrap Mach.

4900000 2000000 2900000Total Present Values of Cash Inflows

Less : Present Values of Cash Outflows Investment in Machine

Investment in Working CapitalTotal Present Values of Cash Outflows

NET PRESENT VALUE

NOTE : If Research Cost, Project preparation cost is incurred it is a sunk cost and does not affect the ranking of the projects hence and to be considered for above calculations.

NOTE : Dep Mach -WDV Method Opg. Bal Dep @25%Year 1 2000000 500000Year 2 1500000 375000Year 3 1125000 281250Year 4 843750 843750 bal fig.

2000000 2000000

Discounted PAYBACK PERIOD = 2 +

ARR ( Accounting Rate of Return ) = Average PAT XAverage Investment

Average Investment = (Cost - Scrap value) + W Cap + Scrap Value2

= (2000000 - 200000) +400000+2000002

= 900000 + 400000+200000 =

ARR = 507500 X 100 =1500000

Payback Profitability = Total Cash Inflows - Total Cash Outflows --->>> If Annual Cashinflow not same every year. = 4630000 -2400000 =

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

PRELIM Maximum Permissible Bank Finance

QI B i

Category 1 -- Minimum Risk Borrowers

MPBF = 0.75 ( CA - CL )

MPBF = 0.75 ( 230000 - 120000)

MPBF = 0.75(110000) MPBF = 82500

Category 2 -- Medium Risk Borrowers MPBF = (0.75 X CA) - CL MPBF = ( 0.75 X 230000) - 120000 MPBF = 172500 - 120000 MPBF = 52500

Category 3 -- High Risk Borrowers MPBF = 0.75 ( CA - CCA ) - CL MPBF = 0.75( 230000 - 69000 ) - 120000 MPBF = 0.75 (161000 ) - 120000 MPBF = 120750 - 120000 MPBF = 750

As risk magnitude increases MPBF decreases.--------------------------------------------------------------------------------------------------------------

PRELIMQI B ii Calculation of Working Capital ( Normal )

Payback Profitability = Annual Cash Inflow X ( Life of project - Payback Period ) --->>> If Annual Cashinflow same every year.

Current AssetsFinished Goods 134000Debtors 150000Other Current Assets( bal. fig.) 166000 Total Current Assets 450000

Less : Current LiabilitiesCurrent Liabilities 200000 Total Current Liabs. 200000

W. Cap. 250000

--------------------------------------------------------------------------------------------PRELIMQI B iii Weighted Average cost of Capital ( WACC )

Tax rate is 30%. Dividend expected by Eq Shareholders is 15%

Capital Item Amount Proportion CostEq. Sh. Capital 350000 0.45 15%Retained Earnings 120000 0.16 15%10% Pref. Share Capital 100000 0.13 10%12% Borrowed Capital 200000 0.26 12%

TOTAL 770000 1.00 0.52

WACC is 12.64 %

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PRELIM SERA SERA Co.Q5 EVALUATION OF CREDIT POLICIES

Existing Option I Option IIPolicy

CreditSales 2200000 2500000 3000000Less :Variable Cost 65% 1430000 1625000 1950000Contribution 770000 875000 1050000Less : Fixed cost 200000 200000 200000PROFIT 570000 675000 850000

Less : COSTSTotal Costs =FC+VC 1630000 1825000 2150000Debtors' Turnover Ratio 7 6 5

Investment in debtors 232857.1 304167 430000

1 Opportunity Cost @25%pa 58214 76042 1075002 Bad Debts 20000 30000 400003 Recovery Cost 0 0 0

Total Costs 78214 106042 147500

NET BENEFIT 491786 568958 702500RANKING 3 2 1

Option II should be selected since it gives highest Net Benefit

Debtors = Sales /Debtors Turnover Ratio-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PRELIMQ4 Calculation of Working Capital

10000 unitsCost Structure per unit TOTALRaw Material 54.00 540000+ Wages 12.00 120000+Overheads 9.90 99000Cost 75.90 759000+ Profit 44.10 441000SALES 120.00 1200000

CURRENT ASSETS1 Stock of Raw Material ( 1 mth. ) = =540000 X 1/12mth =

2 Stock of WIP ( Prodn. Period 0.5 mth.)-- Material = 540000 X 0.5/12mth=--Wages = 120000 X 0.5/12mthX1/2=--Overheads = 99000 X 0.5/12mthX1/2=

3 Stock of Finished goods ( 2 mth of Prodn. Cost)=759000 X 2/12mth =

4 Debtors ( 1mth of Cost of sales )=1200000 X 1/12mth ==759000 X 1/12 mth =

5 Overheads in advance (1/2 mth)=99000 X 0.5 /12mth =

6 Cash Balance

TOTAL CURRENT ASSETS

Less : CURRENT LIABILITIES1 Creditors ( 1 mth) = 540000 X 1 mth/12 mth=2 O/s. Wages ( 1/2 mth ) =120000 X 0.5/12 mth =3 Bank overdraft

TOTAL CURRENT LIABILITIES

WORKING CAPITAL

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

BMS .

FINANCIAL MANAGEMENT.

Net Profit Margin X Total Assets Turnover

PAT X Net Sales X 100Net Sales Total assets

Assets Turnover = SalesTotal Assets

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

CAPITAL EXPENDITURE PROJECTS

CAPITAL EXPENDITURE PROJECTS EVALUATION METHODS

A --( when every year same amount of cash inflow )

Initial Investment (ie. Cost of mach)Average Annual Cash Inflow

B ---( when every year amount of cash inflow is not same ) cumulative cash inflows should be found

completed years X ( Balance Amt. X 12 mths. )( next year's annual cash inflow )

Initial InvestmentAnnual Cost Savings

The project with the lowest payback period should be chosen.-------------------------------------------------------------------------------------------------------------------------[Avg. Annual Cash Inflow X( Expected life of project - Payback Period) ] + sale of scrap

[Total Earnings from the Project - Cost of Project ] + sale of scrap

The project with the highest payback profitability should be chosen.Better indicator than Payback Period because it considers total net cash inflows remaining after recovering original cost.

-------------------------------------------------------------------------------------------------------------------------Total Cash Inflows + Scrap Value

Cost of asset

Surplus Life Profitability + Cost of AssetCost of asset

The project with the highest payback profitability index should be chosen.----------------------------------------------------------------------------------------------------------------------------------------ARR -- Average Rate of Return Method OR Accounting Rate of Return Method

X 100

X 100

( Initial cost of machine - Salvage value )2

Within ____ Payback period , the cost of project will be exactly recovered.

( When existing Profits and Profits after investment given )

X 100

Increase in Profit after Investment

= Investment in Project

( When Profits from existing machine and new machine given )

( PAT from new machine - PAT from old machine ) X 100 ( Investment in new machine - sale proceeds of old machine )

( When Profits from machine 'A ' and machine 'B" given )

( PAT from machine 'A' - PAT from new machine 'B' ) X 100 ( Investment in machine 'A' - Investment in machine 'B' )



PBT Tax PAT Cash Inflow

30% (PAT+Dep)

-15000 0 -15000 100000

85000 25500 59500 174500

135000 40500 94500 209500

185000 55500 129500 244500

390000 121500 268500 728500

500000-40000

4 years

= 115000

Dep % X Opg. Bal. Of Asset

If Total PV = Cost of Project ----- Indifferent ie Neither profit nor loss from Project

Since Total Present Values of Cash Inflows Rs 533043/- is more than Cost Rs500000/- the project should be accepted.


PBT Tax PAT Cash Inflow

(PAT+Dep)

-500000

-60000

-15000 0 -15000 100000

85000 25500 59500 174500

135000 40500 94500 209500

185000 55500 129500 244500

60000

40000

390000 121500 268500 268500

Since Net Present Values of Cash Inflows Rs. 36642.50 is more than zero ( positive) the project should be accepted.


= Discounted cash inflows

Discounted cash outflows

= 596642.5 = 1.07

560000

Since Profitability Index 1.07 is more than one, the project should be accepted.


IRR is the rate at which Total Cash Inflow = Cost of Project

IRR is that rate at which Profitability Index is 1 . ( because Total PV of Cash Inflows = Total PV of Cash Outflows )

(Total PV at 10% - Cost of Asset ) X ( 14 - 10 )

(Total PV at 10% -Total PV at 14% )


At this rate of cost there will be neither profit nor loss .

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

Use discounted cash inflows ie. Present values of cash inflows , then calculate cumulative PV of Cash inflows

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

Cost for conducting study / research for project is a sunk cost ( ie already incurred ) and hence not to be considered while evaluating the different projects.

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

May June

Sales 200000 230000

Purchases 100000 110000

Wages 20000 24000

Expenses 15000 16000

1 SALES 20% are cash sales. 5% discount is given on cash sales.

Out of the credit sales 30% pay in the next month with3% discount and balance in the second month with no discount.

2 PURCHASECash purchases are 40%

3 WAGES Wages are paid in the next month = lag in payment is 1 mth = wages payable one mth in arrear.

4 CASH Cash balance on 1.07.11 is Rs 12000

Cash bal. to be maintained at 12000 every month.

5 EXPENSES1/3 Expenses are paid 1 month in advance.

6 ASSET Machine of 50000 to be purchased in July . Down payment is 20000 and balance in 3 equal instalments.

Furniture purchased in Aug. Rs 90000

INCOME Dividend on Investment is received in July Rs 14500

less Discount 60000 X 5% = 57000

72000 less 3% discount = 69840

168000

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

Cash bal not to exceed 20000. Excess to be deposited in SB A/c.on which int @ 3% is received monthly.

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

4000000 ANSWER >>> a) Cash released by concentration banking =

2 days Savings in concentration banking =

75000 Net benefit from concentration banking =

8%

4 days b) Cash released by Lock box system =

120000 Savings in Lock box system =

Should the Co. Adopt Concentration banking or Lock Box System ? Net benefit from Lock box system =

Since the net benefit from Lock Box System is more than from Concentration banking, Lock box system should be adopted.

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


Cost of banking is 1400 per day. Int rate of bank overdraft is 15% pa.

Advise whether daily , twice a week on Wednesdays and Fridays or only on Fridays.

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

CHAPTER 5

COST OF CAPITAL

Cost of Capital is the minimum required rate of earnings or the cut-off rate of Capital Expenditure.


Assessment of Financial Performance.

1) Cost of Debt ( Kd)--- Rate of Interest Less Tax benefit

2) Cost of Equity Share Capital ( Ke )-- Expected rate of dividend --Highest cost of capital

3) Cost of Retained Earnings -- Opportunity cost of dividends foregone

4) Cost of Preference Share Capital -- Fixed rate of dividend



B) Marginal Cost of Capital = Increase in Cost of Capital due to increase in Capital Structure.


It helps to know what rate of return/profit the new project should earn to cover Cost of Capital.

Calculation of Weighted Average Cost of Capital ( WACC )

Tax Shield After Tax Weighted Cost

Tax Rate30% Cost of Capital

NIL 14% 1.40%

NIL 10% 2.00%

3.30% 7.70% 2.31%

3.60% 8.40% 3.36%

9.07%

If DPS =Rs.14/-. MPS = Rs. 120/- . Expected growth in Dividend = 4%.

G= growth rate in dividend

= 11.67 % + 4% = 15.67%


NP = Net Proceeds= Face value + premium - dicount - issue expenses per share

Cost of loan = 12 ( 1 - 0.30) = 8.40

Cost of Debentures = 11 ( 1 - 0.30) = 7.70




PP = Purchase Price

N= No of years to maturity

X 100 = 98.3 %

98300 = 627,313

15.67%

700,000

200,000

1,527,313

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

Flexibility-- increase/decrease and change in composition of Capital should be possible.

Efficiency-- Just adequate capital ensuring intensive utilization of funds.

Control-- Controlling position of Equity Shareholders should be maintained.

Liquidity -- Adequate cash and liquid resources should be maintained for smooth functioning of business.

EPS as per Plan 2

[(EBIT - I2)(1 - t )] - PD2

Capital Structure Planning means having such a combination of capital resources which gives Highest EPS.

determining the Composition of Owned Capital & Borrowed Capital, having following features :.

which would keep the Equity Shareholders indifferent to the alternative capital plans.

E2

I2= Interest as per plan 2

PD2 = Pref. Dividend as per plan 2

E2 = No. of Eq. Sh. As per plan 2

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

Financial charges ie. Interest on loans /debt capital is just exactly covered by EBIT and PAT = Pref. Dividend. Leaving neithe

It is the minimum level of EBIT which is just adequate to pay interest on debt capital and preference dividend .

the firm's EPS is Zero.

PAT = Pref. Dividend

EBIT = Interest

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

Theories to explain relationship between capital structure , cost of capital and value of firm.

Firm can minimize WACC and increase value of firm and MPS, by increasing debt capital to maximum.



WACC is minimized if Debt Equity Ratio is increased .


leading to increase in cost of capital.

Average cost of capital is equal to capitalization rate of pure equity stream .


should be found.

EPS is exactly equal to zero .

Change in Capital Structure affects market value of firm

Debt -Equity Mix influences WACC

optimal Capital Structure is one which uses maximum debt capital.

Change in Capital Structure does not affect market value of firm


no optimal Capital Structure

Change in Capital Structure does affect market value of firm

optimal Capital Structure

Market Value of Equity + Market Value of Debt

PAT less Pref. Dividend ( ie. PAES )


EBIT (1 - T ) T = Tax rate


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

CHAPTER 9

BUSINESS RESTRUCTURING

Definition : Process by which business orgn. Alters its present structure , either asset structure or liability structure or both.

BR. is done through Merger, Amalgamation, Demerger , Joint Venture , Takeover .

BR gains importance due to--Changes in laws, competitive world , cost cutting

Financial Implications means the valuation of the business from the point of view of buyer and seller.


Valuation is dynamic and not static since it changes with the time .

Mergers-- combination of two/more companies into one large company.



b) Vertical Merger-- combination of companies at different stages in production of same product. Noncompetiting firms



d) Conglomerate merger--firms in different industry >> for diversifying business risk.

New Co. formed from the amalgamation of A Co and B Co is AB Co.

15% Deb to be issued to existing Deb holders so that they get same amount of int as they are now getting.

Eq shares of new AB Co. shall be issued 30000 shares to existing shareholders of A Co. anf B Co. in proportion to their existing share values .

Calculate Debentures , Pref shares and Equity shares to be issued .

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

Calculation A Co


Currently the Deb holders are getting int @13% 4680

15% Deb of AB Co to be issued 31200

( 4680/15 X 100)

A Co

No. of Equity Shares of AB Co. to be issued 27511

Equity Share Capital @ Rs10/-. 275109

Assets Amount

Fixed Assets 370000

Current Assets 120000

9891

TOTAL 499891

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


Assets AAALtd BBB Ltd

Land & Bldg. 340000 100000

Machinery 319000 150000

Furniture 45000 10000

Investments 56000 10000


785000 280000

To Debentureholders of BBB Ltd.

REVISED Balance Sheet of AAA Ltd. ( after merger )

Assets Amount

Land & Bldg. 480000

Machinery 429000

Furniture 50000

Investments 66000

Current Assets 32000

TOTAL 1057000

What must be the exchange ratio so that pre-merger and post-merger EPS to be same ?

What is exchange ratio based on current MPS?

times

Shareholders of S Co will exchange their 100000 shares for 60000 shares of P Co.

260000 shares

No of new shares required to be issued = Total no. of shares in post merger Co - No of shares in pre merger P Co

60000 shares

: 1

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

60 = 12% of 500 loans

500 = 2.04245

160 = 2.6760

260 = 1.63160

160 = 1.6100

260 = 2.6100 s

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

EVALUATION OF ALTERNATIVE CAPITAL PLANS

NOTE: Option 1 Equity shares at 20% premium

Eq. Share Capital= 5000000 X 100 =

120

Share Premium= 5000000-4166667 =

=PAT + Tax

=PAT / 70 X 30

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

It is the prime function of Finance Manager to maximise wealth of shareholders

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

Tax @ 30% PAT Cash Inflow PV Factor150000 350000 850000 0.909210000 490000 865000 0.826240000 560000 841250 0.751270000 630000 1473750 0.683

400000 0.683200000 0.683

870000 2030000 4630000

2000000 1

400000 12400000

If Research Cost, Project preparation cost is incurred it is a sunk cost and does not affect the ranking of the projects hence and to be considered for above calculations.

(2000000-1487140) years = 2 + 0.81631779 =2.81 years

Average PAT X 100Average Investment+ W Cap + Scrap Value

+400000+200000

1500000

34 %

Payback Profitability = Total Cash Inflows - Total Cash Outflows --->>> If Annual Cashinflow not same every year.2230000

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

CA = Current Assets =230000

CL = Current Liabilities= 120000

CCA = Core Current Assets = CA X 30%=230000 X 30%=69000If core CA not given , assume all current assets other than Marketable Securities are Core Current Assets

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

Calculation of Working Capital ( at Cost )

= Annual Cash Inflow X ( Life of project - Payback Period ) --->>> If Annual Cashinflow same every year.

Current AssetsFinished Goods 134000Debtors(Sales - Profit) 117000Other Current Assets( bal. fig 166000 Total Current Assets 417000


W. Cap. 217000( Only Debtors change)------------------------------------------------------------------------------------

Tax rate is 30%. Dividend expected by Eq Shareholders is 15%

After Tax Cost WACC %15% 6.8215% 2.3410% 1.30

8.40% 2.18 (12 less 35% of 12)(13 less 35% of 13)

0.48 12.64

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

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

W Cap W Cap Normal at Cost

45000 45000

2250025002063 27063 27063

126500 126500

10000063250

4125 4125

10000 10000

312688 275938

45000 450005000 5000 fortnight = 15 days = 1/2 mth.

14000 1400064000 64000

248688 211938

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

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

Example 1. Sales in 1st. Year 50 Lakh shall double every year . Salvage 1 crore.Net Profit margin( PAT ) is 50%. Initial Outlay 5 crore . W. Cap. 1 crore, Dep SLM. Year 1

17% 0.855518% 0.847

Calculate A) Payback Period . B) Payback Profitability.NPV @ 17 % & @18% . M51

A) Payback Period .12 mths. ) Dep. =

-------------------------------------------------------------------------------------------------------------------------[Avg. Annual Cash Inflow X( Expected life of project - Payback Period) ] + sale of scrap

B) Payback Profitability.

C) Payback Profitability Index = ( Also called Benefit Cost Index )

Payback Profitability Index = ( when PV available )

Better indicator than Payback Period because it considers total net cash inflows D) NPV @17%.

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

The project with the highest payback profitability index should be chosen.

Conclusion :----------------------------------------------------------------------------------------------------------------------------

E ) IRR ( Internal Rate of Return )+ Addnl. W. Cap. + Salvage Value

=

=

==

F ) ARR =

Present value PV Factor @ 12 % (Present Value)

0.893 89300

0.797 139076.5

0.712 149164

0.636 155502

533042.5

Since Total Present Values of Cash Inflows Rs 533043/- is more than Cost Rs500000/- the project should be accepted.

Present value N PV Factor @ 12 % (Net Present Value)

1 -500000

1 -60000

0.893 89300

0.797 139076.5

0.712 149164

0.636 155502

0.636 38160

0.636 25440

36642.5

Since Net Present Values of Cash Inflows Rs. 36642.50 is more than zero ( positive) the project should be accepted.



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

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

Cost for conducting study / research for project is a sunk cost ( ie already incurred ) and hence not to be considered while evaluating the different projects.

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

July August Sept

300000 320000 200000

130000 150000 100000

32000 32000 22000

20000 20000 10000

20% are cash sales. 5% discount is given on cash sales.


Wages are paid in the next month = lag in payment is 1 mth = wages payable one mth in arrear.

Cash balance on 1.07.11 is Rs 12000

Cash bal. to be maintained at 12000 every month.

1/3 Expenses are paid 1 month in advance.

Machine of 50000 to be purchased in July . Down payment is 20000 and balance in 3 equal instalments.

Furniture purchased in Aug. Rs 90000

Dividend on Investment is received in July Rs 14500

Cash released by concentration banking = 4000000 X 2Savings in concentration banking = 8000000 X 8%Net benefit from concentration banking = 640000 - 75000

Cash released by Lock box system = 4000000 X 4Savings in Lock box system = 16000000 X 8%Net benefit from Lock box system = 1280000 - 120000Since the net benefit from Lock Box System is more than from Concentration banking, Lock box system should be adopted.

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



%

%


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

, having following features :.

EBIT = Interest

EPS = 0 PAT = Pref. Dividend

Firm can minimize WACC and increase value of firm and MPS, by increasing debt capital to maximum.



T = Tax rate

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





Eq shares of new AB Co. shall be issued 30000 shares to existing shareholders of A Co. anf B Co. in proportion to their existing share values .

B Co

15000

1950

13000

( 1950/15 X 100)

B Co

2489

24891

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

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

Option 1 Equity shares at 20% premium

5000000 X 100 = 4166667

5000000-4166667 = 833333.3

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Present Value Cumulative Present Value772650 772650714490 1487140631779 2118919

1006571 3125490273200 3398690136600 3535290

35352903535290

2000000

4000002400000

1135290

If Research Cost, Project preparation cost is incurred it is a sunk cost and does not affect the ranking of the projects hence and to be considered for above calculations.

years

Payback Profitability = Total Cash Inflows - Total Cash Outflows --->>> If Annual Cashinflow not same every year.

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

CCA = Core Current Assets = CA X 30%=230000 X 30%=69000If core CA not given , assume all current assets other than Marketable Securities are Core Current Assets

Calculation of Working Capital ( at Cash Cost ) Note:

= Annual Cash Inflow X ( Life of project - Payback Period ) --->>> If Annual Cashinflow same every year.

Current Assets Cash (other) Cost Finished Goods(Cost - Dep) 115240 DepDebtors(Sales -Profit-Dep) 100620 Total CostOther Current Assets( bal. fig.) 166000 Add : Profit Total Current Assets 381860 Sales


W. Cap. 181860( Finished Goods, WIP stock and Debtors change)------------------------------------------------------------------------------------------------ --------------------------------

(12 less 35% of 12)(13 less 35% of 13)

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

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

fortnight = 15 days = 1/2 mth.

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

Sales in 1st. Year 50 Lakh shall double every year . Salvage 1 crore.Net Profit margin( PAT ) is 50%. Initial Outlay 5 crore . W. Cap. 1 crore, Dep SLM.

2 3 40.731 0.624 0.5340.718 0.609 0.516


A) Payback Period .Cost of Asset - Salvage = 5,00,00,000 - 1,00,00,000 =

Estimated Life

Year Sales Net Profit Dep1 5,000,000 2,500,000 10,000,000 2 10,000,000 5,000,000 10,000,000

3 20,000,000 10,000,000 10,000,000 4 40,000,000 20,000,000 10,000,000

75,000,000.00 37,500,000.00 40,000,000.00 Payback Period = 3 years + (50000000- 47500000) X 12mths.

30,000,000.00

B) Payback Profitability. = (Total Cash Inflow + Salvage) - Cost = 7,75,00,000 + 1,00,00,000 - 5,00,00,000 = 37,50,00,000

C) Payback Profitability Index = Total Cash Inflows + Scrap Value = 7,75,00,000+ 100,00,000 =( Also called Benefit Cost Index ) Cost of asset

Payback Profitability Index = PV of cash inflows = ( when PV available ) PV of cash outflows

Year Cash Inflow PV Factor @17% PV of C.inflow

1 12,500,000 0.855 10,687,500 2 15,000,000 0.731 10,965,000 3 20,000,000 0.624 12,480,000 4 30,000,000 0.534 16,020,000 4 10,000,000 0.534 5,340,000

( Salvage ) 4 10,000,000 0.534 5,340,000

( W. Cap. )Total PV of Cash Inflows 60,832,500

Less : Initial Outlay 50,000,000 Less : Initial W Cap. 10,000,000 Net Present Value 832,500

Conclusion : Project with negative NPV should be avoided . Between projects with positive NPV , project with highest NPV should be chosen.----------------------------------------------------------------------------------------------------------------------------

E ) IRR ( Internal Rate of Return )

17 + 60832500-60000000 X (18-17) 60832500-59337500

17 + 832,500 X 1 1,495,000

17 + 0.56 X 117.56%

Avg. PAT X 100 = 9,375,000.00 X 100 =Avg. Investment 40000000

Avg. Investment = ( Initial cost of machine - Salvage value )2

= (50000000 - 10000000 ) + 10000000+ 10000000 2

= 40000000

= 8000000= 640000= 565000

= 16000000= 1280000= 1160000

Since the net benefit from Lock Box System is more than from Concentration banking, Lock box system should be adopted.

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

% for finished goods for debtors

Cash (other) Cost 86% 115240 100620

14% 18760 16380

Total Cost 100% 134000 117000

Add : Profit 33000

150000

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

Net Profit margin( PAT ) is 50%. Initial Outlay 5 crore . W. Cap. 1 crore, Dep SLM.


5,00,00,000 - 1,00,00,000 = 1,00,00,0004 years

Cash Inflow Cum. Cash Inflow 12,500,000 12,500,000 15,000,000 27,500,000

20,000,000 47,500,000 30,000,000 77,500,000 77,500,000.00 165,000,000.00

(50000000- 47500000) X 12mths. = 3 years and 10 mths.

= (Total Cash Inflow + Salvage) - Cost = 7,75,00,000 + 1,00,00,000 - 5,00,00,000 = 37,50,00,000

Total Cash Inflows + Scrap Value = 7,75,00,000+ 100,00,000 = 1.75 5,00,00,000

60,832,500 1.0139 60,000,000

Year Cash Inflow

1 12,500,000 0.8472 15,000,000 0.7183 20,000,000 0.6094 30,000,000 0.5164 10,000,000 0.516

( Salvage ) 4 10000000 0.516

( W. Cap. )Total PV of Cash Inflows

Less : Initial OutlayLess : Initial W Cap.Net Present Value

Project with negative NPV should be avoided . Between projects with positive NPV , project with highest NPV should be chosen.----------------------------------------------------------------------------------------------------------------------------

PVF@18%

mailto:PVF@18%25

23.44 %

( Initial cost of machine - Salvage value ) + Addnl. W. Cap. + Salvage Value

(50000000 - 10000000 ) + 10000000+ 10000000

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

PV of C.inflow

10,587,500 10,770,000 12,180,000 15,480,000 5,160,000

5,160,000

59,337,500

50,000,000 10,000,000 (662,500)

Project with negative NPV should be avoided . Between projects with positive NPV , project with highest NPV should be chosen.

bms fm sdf 2012-13

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