Download - Fm Project Epdib 2010-11
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FM Project EPGDIB 2010-11
Submitted By : SatishKumar Deshpande
Roll No. 85
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Problem 1 Share Purchase decision Pg 66
Problem 5
a) Value of Bond at
market rate of 9%
Interest 60
Required Rate of Return 0.09
Terminal value of Bond 1000
Current Bond Value 924.1
Texo
Interest 90
Required Rate of Return 0.09
Terminal value of Bond 1000
Current Bond Value 1000
Maxco
Current value of Taco will be Rs. 924 and that of Maco will be Rs.
1000 per bond.
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Problem 1 Share Purchase decision Pg 66
Problem 5
b) Value of Bond at
market rate of
12%
Texo
Maxco
Current value of Taco will be Rs.855.89 and that of Maco will be
Rs. 927.94 per bond.
Interest 60
Required Rate of Return 0.12
Terminal value of Bond 1000
Current Bond Value 856
Interest 90
Required Rate of Return 0.12
Terminal value of Bond 1000
Current Bond Value 927.95
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Problem 1 Share Purchase decision Pg 66
Problem 5c) Which Bond declins more with Inc in Intrest rate ?
The reduction is high in Maxo as the coupon interest rate is higher
in Taxo than compared to Taxo.
Value of Bond V/s Int rate
0
200
400
600
800
1000
1200
4% 5% 6% 7% 8% 9% 10% 11% 1 2% 13% 14% 15%
Int Rate
Va
lueo
fBon
d Texo
Maxco
Sl. NoInte re st
ra te T e x o M a x c o
Diffo ve r
pre vio usT e x o
Diffo ve r
pre vio usM a x c o
1 4 % 1055.5 1138.8 NA NA
2 5 % 1027.2 1108.9 28.3 29.8
3 6% 1000.0 1080.2 27.2 28.7
4 7% 973.8 1052.5 26.2 27.7
5 8% 948.5 1025.8 25.3 26.7
6 9% 924.1 1000.0 24.4 25.8
7 10% 900.5 975.1 23.5 24.9
8 11% 877.8 951.1 22.7 24.0
9 12% 855.9 927.9 21.9 23.2
10 13% 834.7 905.6 21.2 22.4
11 14% 814.3 883.9 20.4 21.6
12 15% 794.5 863.0 19.8 20.9
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Problem 1 Share Purchase decision Pg 66
Problem 5
d) Value of Bond at
market rate of 6%
Texo
Maxco
Current value of Taco will be Rs.1000 and that of Maco will be Rs.
1080 per bond.
Interest 60
Required Rate of Return 0.06
Terminal value of Bond 1000
Current Bond Value 1000.0
Interest 90
Required Rate of Return 0.06
Terminal value of Bond 1000
Current Bond Value 1080.2
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Problem 1 Share Purchase decision Pg 66
Problem 5
E-a) Value of Bond at
market rate of 6%
and maturity 8years
Texo
Maxco
Current value of Taco will be Rs.834 and that of Maco will be Rs.
1080 per bond.
Interest 60
Required Rate of Return 9%
Terminal value of Bond 1000
Current Bond Value 834
Interest 90
Required Rate of Return 9%
Terminal value of Bond 1000
Current Bond Value 1000.0
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Problem 1 Share Purchase decision Pg 66
Problem 5
E-b) Value of Bond at
market rate of 6%
and maturity 8years
Texo
Maxco
Current value of Taco will be Rs.1000 and that of Maco will be Rs.
1186 per bond.
Interest 60
Required Rate of Return 6%
Terminal value of Bond 1000
Current Bond Value 1000
Interest 90
Required Rate of Return 6%
Terminal value of Bond 1000
Current Bond Value 1186.3
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Problem 1 Share Purchase decision Pg 66
Problem 5
E-b) Value of Bond at
market rate of
12% and maturity8 years
Texo
Maxco
Current value of Taco will be Rs.702 and that of Maco will be Rs.
851 per bond.
Interest 60
Required Rate of Return 12%
Terminal value of Bond 1000
Current Bond Value 702
Interest 90
Required Rate of Return 12%
Terminal value of Bond 1000
Current Bond Value 851.0
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Problem No 2 Page 67 -19
Value of Share
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Problem 2 Share Value Pg 67 Problem 19
Please Ref the excel sheet for detail calculation.
Sl. No Assumption NPV Decision
1 Dividend Payout constant 30 Since NPV is < 80 Do Not Purchase
2 Dividend Growth at 6% per year perpetuity 81 Buy The share as NPV>80
3 Different Growth Rate Varied 68.81 Since NPV is < 80 Do Not Purchase
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Problem No 3 Page 81 -11
Which security to select for Investment
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Problem 3Which Share to select (
Expected rate of return & Variance)
Return
Probabili
ty Expected Rate of Return Variance
30% 0.1 3% 0.06%
20% 0.2 4% 0.10%
10% 0.4 4% 0.20%
5% 0.2 1% 0.20%
-10% 0.1 -1% 0.14%
Total 1 11% 0.70%
Since the standard Deviation is low in company Y and Expected
rate of return is high in Y choose company Y
Security X
Std Dev 8%
Return
Probabilit
y Expected Rate of Return
Varianc
e
-20% 0.05 -1% 0.07%
10% 0.25 3% 0.18%
20% 0.3 6% 0.08%
30% 0.3 9% 0.01%
40% 0.1 4% 0.05%
Total 1 21% 0.39%
Std Dev 6%
Security Y
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Problem No 5 Page 115 -02
Beta and risk of the project
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Problem 5Beta & risk of Project
Since the expected rate of return of the company and the new
project is same we can accept the project.
More over the risk of project is similar to firms current risk
Beta 1.21
Risk free rate of return 8.50%
Market premium 9.50%
Expected rate of return on New project 20%
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Problem No 6 Page 164 -11
IRR from NPV Graph
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Problem 6 IRR from NPV Graph
Discount rate Project A Project B
0% INR 7,784.00 INR 5,830.00
5% INR 5,712.34 INR 4,689.56
10% INR 3,977.46 INR 3,696.47
20% INR 1,263.89 INR 2,054.40
30% (INR 731.00) INR 755.58
40% (INR 2,236.15) (INR 295.19)
Based on the Higher IRR and also based on the fact that NPV will
turn negative only after37% risk of capital
I would recommend project B
IRR through NPV Graph
(INR4,000.00)
(INR2,000.00)
INR0.00
INR2,000.00
INR4,000.00
INR6,000.00
INR8,000.00
INR10,000.00
0% 5% 10% 20% 30% 40%
Discount Rate
NPV
Project A
Project B
37%
26%
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Problem No 7 Page 190 -08
WACC
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Problem No 7 Page 190 -08
WACC
Source of capital BV BV Weight MV MV Weights
Cost of
Capit
al W eighted avg BV Weighted Avg MV
Ordinary Shares 30 0.3 60 0.5 15.57% 5% 8%
Reservs 10 0.1 0 15.57% 2% 0%
Preference Shares 20 0.2 24 0.2 10% 2% 2%
Debt 40 0.4 36 0.3 11% 4% 3%
Total 100 1 120 1 12% 13%
Weighted Avg cost of Capital on book value is 12% and on
Market value it is 13%
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Problem No 8 Page 224 -07
New Machine Proposal
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Problem No 8 Page 224 -07
New Machine ProposalCost of new machine 40000
Installation cost 8000
Cash salvage of old
machine -20000
Total Investment 28000
Dep per year on St
line method 7000
1. Initial Investment
Cash flow due to investment 28000
Increase in working Capital 10000
Total 38000
2. Cash Flow Initial Year
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Problem No 8 Page 224 -07
New Machine Proposal
Annual Saving before tax 16000
Tax -6400
Saving in cash due to Dep effect 2800
Net cash inflow 12400
3. Cash Flow in Subsequent Years Initial
Investment
Salvage Value of new machine 14000
Opportunity lot due to diaposal of old machine inyear Zero
-4000
Working capital returned back 10000
Diff tax paid on sale of Machine -4000
Toatl cash flow 16000
4. Cash flow Final Year
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Problem No 8 Page 224 -07
New Machine Proposal
Time Period Cash flow
0 -38000
1 12400
2 12400
3 12400
4 28400
NPV 12235
Calculations of NPV
Since NPV is positive accept the project
Since IRR > 10% accept the project
Profitability > 1 accept the project.
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Problem No 9 Page 224 -07
Indopax Should the machine be bought
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Problem No 9 Page 224 -07
Indopax Should the machine be bought
Profitablity statemnt of the company
Year 1 Year 2 Year 3 Year 4 Year 5
Quantity 10000 12000 14400 17280 20736
Sleeling price 20 22 24.2 26.62 29.282
Total Sales 200000 264000 348480 459993.6 607191.6
Cost / Unit 10 11.5 13.225 15.20875 17.49006
COGS 100000 138000 190440 262807.2 362673.9
EBDIT 100000 126000 158040 197186.4 244517.6
Depriciation 100000 100000 100000 100000 100000
EBIT 0 26000 58040 97186.4 144517.6
Tax @ 35% 0 9100 20314 34015.24 50581.17
PAT 0 16900 37726 63171.16 93936.45
Cash flow 100000 116900 137726 163171.2 193936.5
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Problem No 9 Page 224 -07
Indopax Should the machine be bought
Year I cash flow 500000
Cash Flow pattern
Year Cash Flow
0 -500000
1 100000
2 116900
3 137726
4 163171.16
5 193936.45
Nominal Disciunt rate 0.2
inflation 0.1
Real discount rate 0.09091
NPV Using Real discount rate $36,710.03
Since NPV is positive the machine should be bought
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Problem No 10 Page 241 -01
Damodar Company
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Problem No 10 Page 241 -01
Damodar Company
Project C0 C1 C2 C3 C4 NPV 10% PVAFA AEV
X 150 30 30 30 30 222.81 3.17 70.29
Y 75 40 40 131.29 1.736 75.63
Since the annual equivalent cost of Y is grater than X accept project Y
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Problem No 11 Page 309 -10
DOL, DFL and combined leverage
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Problem No 11 Page 309 -10
DOL, DFL and combined leverage
This ratio can be very useful, as it summarizes theeffects of combining both financial and operatingleverage, and what effect this combination, or
variations of this combination, has on thecorporation's earnings. Not all corporations useboth operating and financial leverage, but if they do,then this formula can be used.
It is worth noting that a firm with a relatively highlevel of combined leverage is seen as riskier than afirm with less combined leverage, as the highleverage means more fixed costs to the firm.
What is the effect of combined leverage ?
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Problem No.12
Assuming the existence of the corporate
income taxes describe M-M position
on the issue of an optimum capitalstructure
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Problem No.12
Please open the Below link in EDIT
mode. ( In case you are not able to
view it please ref the attached files inthe zip folder.
Microsoft Word
Document
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Problem No.13
Define capital Structure. What are the
elements of capital structure?
What do you mean by appropriate capital
Structure?
Whar are the features of Appropriate
Capital Structure
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Problem No.13
Please open the Below link in EDIT
mode. ( In case you are not able to
view it please ref the attached files inthe zip folder.
Microsoft Word
Document
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Problem No.14
The primary purpose for which a firm
exists is the payment of dividend.
Therefore, irrespective of the firmsneeds and the desires of shareholders,
a firm should follow a policy of very
high dividend payout. Do you agree?Why and Why not?
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Problem No.14
Please open the Below link in EDIT
mode. ( In case you are not able to
view it please ref the attached files inthe zip folder.
Microsoft Word
Document
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Problem No 15 Page 412 -03
Brown & Crown
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Problem No 15 Page 412 -03
Brown & Crown
Conclusion It seems that Brown is paying a uniform Dividend irrespective of the performance of
the company.
We cannot tell from the figures which company is more profitable unless we knowthe capital structure of the company.
Since brown is giving consistent Dividend it is perceived as a more stable company
compared to Crown.
Due to the above reason Brown has
higher market price.
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