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1
Balance Sheet of Horizon Limited as at March 31, 20x1
Rs in million
20 x 1 20x0
EQUITY AND LIABILITIES
Shareholders’ Funds 500 450
Long-term provisions 50 45
Short-term borrowings 40 30
Short-term provisions 10 10
1,000 900
ASSETS
Non-current Assets 600 550
Non-current investments 50 40
Current investments 20 20
1000 900
Exhibit 3.2
Statement of Profit and Loss for Horizon Limited for Year Ending March 31, 20x1
Rs. in million
20X1 20X0
Other Income 10 8
Expenses
Finance costs 30 25
Profit before exceptional and extraordinary Items and tax 180 160
Exceptional Items
Extraordinary Items
Tax Expense 50 40
Basic ( in Rs.) 13
Diluted ( in Rs.) 13
Exhibit 3.5
Cash Flow Statement
(Rs. in million)
Formula
A. CASH FLOW FROM OPERATING ACTIVITES
Adjustments for :
∙ Depreciation and amortisation 50 =B45
∙ Finance costs 30 =B44
∙ Interest income* 10 =-B39
=(B15-C15)
∙ Trade payables, shortterm provisions, and other current liabilities
10
Depreciation and amortisation =B45 50
Increase in longterm borrowings =B10-C10 20
Increase in deferredtax liabilit=B11-C11 5
Increase in longterm provisions =B12-C12 5
Increase in shortterm borrowings=B14-C14 10
Increase in trade payables =B15-C15 10
Decrease in longterm loans and a=-(B23-C23) 10
Dividend payment =G6-(B8-C8) 80
Increase in noncurrent in =B22-C22 10
Increase in inventories =B26-C26 20
Increase in trade receivab =B27-C27 20
Net addition to cash =G14-J14 10
Exhibit 4.1 Balance Sheet of Horizon Limited as on March 31, 20X1
(Rs.in million)
EQUITY AND LIABILITIES 20X1 20X0
∙ Shortterm provisions 10 10
1,000 900
ASSETS
· Non-current Assets 600 550
∙ Fixed assets 500 450
∙ Noncurrent investments 50 40
∙ Longterm loans and advances 50 60
· Current Assets 400 350
∙ Current investments 20 20
∙ Inventories 160 140
∙ Trade receivables 140 120
∙ Cash and cash equivalents 60 50
∙ Shortterm loans and advances 20 20
1000 900
Exhibit 4.2
Statement of Profit and Loss for Horizon Limited for Year Ending March 31, 20X1
(Rs.in million)
20X1 20X0
∙ Other Income 10 8
∙ Total Revenues 1300 1180
∙ Expenses
∙ Material expenses 600 560
∙ Employee benefit expenses 200 180
∙ Finance costs 30 25
∙ Depreciation and amortisation expenses 50
50 45
∙ Other expenses 240 210
∙ Total Expenses 1120 1020
Profit before Exceptional and
Extraordinary Items and Tax 180 160
∙ Exceptional Items
∙ Profit before Extraordinary Items and Tax
180 160
∙ Extraordinary Items
∙ Profit Before Tax 180 160
∙ Tax Expense 50 40
∙ Profit (Loss) for the period 130 120
∙ Earning Per Equity Share
∙ Basic
13
∙ Diluted 13
13
. Dividend 80
ss
Common Base (%)
20X1
110
110
114
120
113
125
108
Historical data Average
per cent of
20X1 20X2 sales
Revenues from Operations 1200 1280 100
Other income 8 10 0.72
Total revenues 1208 1290 100.72
Expenses
Material expenses 547 590 45.84
Employee benefit expenses 274 295 22.94
Finance costs 60 65 5.04
Depreciation and 75 80 6.25
amortisation expenses
Other expenses 98 103 8.11
Total expenses 1054 1133 88.17
Profit before exceptional items and other 154 157 12.55
Exceptional Items 30 32 2.50
Profit before Extraordinary Items and Ta 184 189 15.05
Extraordinary Items
Profit Before Tax 184 189 15.05
Tax Expense 82 90 6.93
Profit (Loss) for the period 102 99 8.12
Dividends 60 63
Retained earnings 42 36
Exhibit 5.3 Pro Forma Statement of Profit and Loss for Spaceage Electronics for 20X3
Combination Method
Historical data Average
per cent of
sales
20X1 20X2
Revenues from Operations 1200 1280 100
Other income 8 10 0.72
Total revenues 1208 1290 @
Expenses
Material expenses 547 590 45.84
Employee benefit expenses 274 295 22.94
Finance costs 60 65 5.04
Depreciation and 75 80 Budgeted
amortisation expenses
Other expenses 98 103 Budgeted
Total expenses 1054 1133 @
Profit before exceptional items and
other income 154 157 @
Exceptional Items 30 32 2.50
Profit before Extraordinary Items and
Tax 184 189 @
Extraordinary Items
Profit Before Tax 184 189 @
Tax Expense 82 90 Budgeted
Profit (Loss) for the period 102 99 @
Dividends 60 63 Budgeted
Retained earnings 42 36 @
@ These items are obtained using accounting identities.
Exhibit 5.4 Pro Forma Balance Sheet of Spaceage Electronics for December 31, 20X3
Historical data Average
per cent of
sales
20X1 20X2
Revenues from operations 1200 1280 100
EQUITY AND LIABILITIES
Shareholders’ Funds
Share capital (Par value Rs.10) 300 300 No change
Pro
forma
statemen
Reserves and surplus 250 286 t of P&L
Noncurrent Liabilities
Longterm borrowings 500 505 40.56
Deferred tax liabilities (net) 45 50 3.83
Longterm provisions 55 50 4.24
Current Liabilities
Shortterm borrowings 200 200 16.15
Trade payables 100 112 8.54
Other current liabilities 20 30 2.01
Shortterm provisions 30 17 1.91
External funds requirement
ASSETS
Noncurrent Assets
Fixed assets 750 775 61.52
Noncurrent investments 40 40 Budgeted
Longterm loans and advances 60 60 Budgeted
Current Assets
Current investments 30 33 2.54
Inventories 375 380 30.47
Trade receivables 200 212 16.61
Cash and cash equivalents 25 28 2.14
Shortterm loans and advances 20 22 1.69
Electronics for 20X3
642
321
71
88
113
1234
176
35
211
211
97
114
642
321
71
85
107
1225
185
35
220
220
90
130
70
60
300
346
568
54
59
226
120
28
27
13
1740
861
60
70
36
427
233
30
24
1740
Exhibit 5.5 A Spreadsheet Template for Financial Statements
Before
Historical data iteration
Pro forma
Balance Sheet balance
sheet of
20X3
EQUITY AND LIABILITIES
Shareholders’ Funds
Share capital (Par valu 300 300 No change =C28 300.0
Pro forma
statement of
Reserves and surplus 250 286 P&L =C29+F24 350.1
Non-current Liabilities
Long-term borrowings
=F41-F28-F29-
F33-F34-F35-
F37-F38-F39-
-----Debentures 400 400 F40 460.2
------Others 100 105 8.27 =$F$5*D33/100 115.8
Deferred tax liabilities 45 50 3.83 =$F$5*D34/100 53.6
Long-term provisions 55 50 4.24 =$F$5*D35/100 59.4
Current Liabilities
Short-term borrowings 200 200 16.15 =$F$5*D37/100 226.0
Trade payables 100 112 8.54 =$F$5*D38/100 119.6
Other current liabilities 20 30 2.01 =$F$5*D39/100 28.1
Short-term provisions 30 17 1.91 =$F$5*D40/100 26.8
Total =F53 1739.6
ASSETS
Non-current Assets
Fixed assets 750 775 61.52 =$F$5*D44/100 861.3
Non-current investmen 40 40 Budgeted 60.0
Long-term loans and a 60 60 Budgeted 70.0
Current Assets
Current investments 30 33 2.54 =$F$5*D48/100 35.5
Inventories 375 380 30.47 =$F$5*D49/100 426.6
Trade receivables 200 212 16.61 =$F$5*D50/100 232.6
Cash and cash equivale 25 28 2.14 =$F$5*D51/100 29.9
Short-term loans and a 20 22 1.69 =$F$5*D52/100 23.7
Total =SUM(F44:F52) 1739.6
ements
After iteration
Pro forma
statement of profit
and loss of 20X3
20X3
1400.0
10.1
1410.1
641.7
321.2
61.0
14.1
85.0
107.0
1230.0
180.1
35.0
215.1
0.0
215.1
90.0
125.1
70.0
55.1
300.0
341.1
469.2
115.8
53.6
59.4
226.0
119.6
28.1
26.8
1739.6
861.3
60.0
70.0
35.5
426.6
232.6
29.9
23.7
1739.6
Amount of deposit per period(PMT) Rs. 30,000
No.of periods (NPER) years 30
Interest rate (RATE) p.a. 8%
Accumulated amount (FV) Rs. 3,398,496
Formula used =FV(B3,B2,B1)
Future value(Fv) 8,000
Periods in years (Nper) 6 Rate 11.43%
Periodic payment(Pmt) 1,000 =RATE(B2,-B3,,B1)
Year 1 2 3 4 5 6 7 8
Cash flow 1,000 2,000 2,000 3,000 3,000 4,000 4,000 5,000
Discount rate 12% =NPV(B3,B2:I2) 13,375
Monthly payment(Pmt) Rs. 12,000
Period in months(Nper) 36 Present value 331,928
Rate of interest per month(Rate) 1.50% =PV(B3,B2,-B1)
No. of Annual
instalments instalment
Present value Interest rate (in years) amount
1,000,000 15% 5 (298,316)
Beginning Annual Principal Remaining
Year amount instalment Interest repayment balance
1 1,000,000 298,316 150000 148,316 851,684
2 851,684 298,316 127753 170,563 681,121
3 681,121 298,316 102168 196,148 484,973
4 484,973 298,316 72746 225,570 259,403
5 259,403 298,316 38910 259,406 (3)
Initial deposit 300,000
Interest rate 10% Annual withdrawal 48,824
Period in years 10 =PMT(B2,B3,-B1)
Settlement 1/1/2015 This is the date of purchase. If not certain, fill in any date.
Maturity ### The formula in this case is = B3+365*8 , as the maturity period is 8 years.
Rate 12% The annual coupon rate
Yield 14% The required return per annum
Redemption 100 Fill in the redemption value as a percentage of the par value
Frequency 2 This represents the number of times interest is paid in an year
Basis 3 3 represents the day count convention: actual no. of days/365 in int.calculatio
Price 90.57 To get the result in B8, use the function =PRICE(B1,B2,B3,B4,B5,B6,B7)
Bond price is obtained per Rs.100 of the face value of the bond. Thus,had the redemption value bee
Rs. 1000, the price would have been Rs.90.55 x 10
Formula used
Price of the bond at present(PV) Rs. 800
Par value/Maturity value of the bond(FV) Rs. 1,000
Coupon rate per period 9%
Coupon amount payabole per period(PMT) R =C3*C4 90
No. of periods(NPER) 8
Yield to Maturity(RATE) =RATE(C6,C5,-C2,C3,0) 13.20%
Yield to maturity of a bond can also be obtained using the Yield formula in Excel, as shown below
Formula used
Settlement As the date is not given, use any date 1/1/2015
Maturity =C11+365*8 12/30/2022
Rate 9%
Redemption 100
Frequency 1
Basis 3
Price =800/10 80
Yield to maturity =YIELD(C11,C12,C13,C17,C14,C15,C16) 13.20%
Note: The parameters are the same as that used in the spreadsheet illustration for 'PRICE'
g1 g2 n(years)
20% 10% 6
P0(Rs) Formula used=E2*(1+A2)*(1-((1+A2)/(1+D2))^C2)/(D2-A2)+E2*(1+A2)*(1+A2)^(C2-1)*(1+B2)/(D2-B2)/(1+D2)^C2
r D0(Rs)
15% 2
+A2)/(1+D2))^C2)/(D2-A2)+E2*(1+A2)*(1+A2)^(C2-1)*(1+B2)/(D2-B2)/(1+D2)^C2 70.76
ga gn H(years) r D0(Rs)
50% 12% 5 16% 3
P0(Rs) Formula used =E2*((1+B2)+C2*(A2-B2))/(D2-B2) 226.50
Exhibit 8.1
Data on the Nifty Index
YEAR NIFTY ANNUAL DATE NIFTY ANNUAL
ENDING RETURN(%) RETURN(%)
Calculation of the Means
YEAR NIFTY ANNUAL 1+ANNUAL
ENDING RETURN(%) RETURN
1990 331 -
1991 559 68.84 1.6884
1992 761 36.28 1.3628
1993 1043 36.95 1.3695
1994 1182 13.40 1.1340
1995 909 -23.15 0.7685
1996 899 -1.04 0.9896
1997 1079 20.05 1.2005
1998 884 -18.08 0.8192
1999 1480 67.42 1.6742
2000 1264 -14.65 0.8535
2001 1059 -16.18 0.8382
2002 1094 3.25 1.0325
2003 1880 71.90 1.7190
2004 2081 10.68 1.1068
2005 2837 36.34 1.3634
2006 3966 39.83 1.3983
2007 6139 54.77 1.5477
2008 2959 -51.79 0.4821
2009 5201 75.76 1.7576
2010 6135 17.95 1.1795
2011 4624 -24.62 0.7538
2012 5905 27.70 1.2770
2013 6304 6.76 1.0676
2014 8284 31.41 1.3141
Arithmetic mean= 19.57
Product= 25.04
Geometric
Mean= 14.36%
Period 1 2 3 4 5 6
Return (Ri) 15 12 20 10 14 9
Mean =AVERAGE(B2:G2) 10
Standard deviation =STDEV(B2:G2) 10.45
Exhibit 8.2 & 8.3
ILLUSTRATIONS OF THE CALCULATION OF STANDARD DEVIATION
BHARAT FOODS
i=State of (Ri Pi(Ri
the Economy Pi Ri% pi*Ri RiRbar Rbar)^2 Rbar)^2
1. Boom 0.30 16 4.8 4.50 20.25 6.075
2. Normal 0.50 11 5.5 0.50 0.25 0.125
3. Recession 0.20 6 1.2 5.50 30.25 6.050
CALCULATIONS
Sum of (Pi)
(Ri)= 11.50
Sum of Pi(RiRbar)^ 12.25
Standard
Deviation= [Sum{Pi(RiRbar)^2}]^0.5= 3.50%
Sum of (Pi)
(Ri)= 13.00
Sum of Pi(RiRbar)^ 441
Standard
Deviation= [Sum{Pi(RiRbar)^2}]^0.5= 21.00%
Deviation of
Deviation of
the return
Return on the return on Return on
State of on security
Probability security 1 security 1 security 2
nature 1 from its
(2) ( %) from its (%)
(1) expected
(3) expected (5)
value
value (4)
(6)
1 0.1 10 26.0 5 (8.5)
2 0.3 15 1.0 12 (1.5)
3 0.3 18 2.0 19 5.5
4 0.2 22 6.0 15 1.5
5 0.1 27 11.0 12 (1.5)
Expected return on security 1= 16.0 Covariance =
Expected return on security 2= 13.5
Efficient frontier for a twosecurity case
Coefficient
Expected Standard of
Return Deviation Correlation
Security A 12% 20% 0.2
Security B 20% 40%
Proportion of Proportion Expected Standard
Portfolio A of B Return Deviation
1(A) 1 0 12.00% 20.00%
2 0.9 0.1 12.80% 17.64%
3 0.759 0.241 13.93% 16.27%
4 0.5 0.5 16.00% 20.49%
5 0.25 0.75 18.00% 29.41%
6(B) 0 1 20.00% 40.00%
Product
of the
deviatio
ns times
probabil
ity
(2) x(4)
x(6)
22.1
0.45
3.3
1.8
1.65
26
Price of stock now S0
Exercise price E 60
Standard deviation of continuously 56
compounded annual return σ
Years to maturity t 0.3
=IRR(B2:F2) 15.37%
120.00
80.00
6.33
33.67
10.10
23.57
30.00
20.00
29.90
50.00
79.90
0.3
30.00%
Exhibit 12.3
CASH FLOWS FOR THE KCIN PROJECT
YEARS (Rs. Million)
0 1 2 3 4
1. Capital Investment (100.00)
2. Level of Working Capital 20 30 40 30 20
3. Revenues 100 150 200 150
4. Raw Material Cost 30 45 60 45
5. Labour Cost 20 30 40 30
6. Operating and Maintenance Cost 5 5 5 5
7. Loss of Contribution 15 15 15 15
8. Depreciaiton 25.00 18.75 14.06 10.55
9. Bad Debt Loss
10. Profit Before Tax 5.00 36.25 65.94 44.45
11. Tax 2.00 14.50 26.38 17.78
12. Profit After Tax 3.00 21.75 39.56 26.67
13. Net Salvage Value of Equipment
14. Recovery of Working Capital
15. Initial Investment (100.00)
16. Operating Cash Inflow (12+8+9) 28.00 40.50 53.63 37.22
17. Change in Working Capital 20.00 10.00 10.00 10.00 10.00
18. Terminal Cash Flow (13+14)
19. Net Cash Flow (15+1617+18) 120.00 18.00 30.50 63.63 47.22
ASSUMPTIONS
Raw Material Cost = 30.00% of sales
Labour Cost = 20.00% of sales
Operating & Maintenance Cost = 1 million
Overhead Allocation = 10.00% of sales
Depreciation Rate = 25.00%
Working Capital = 0.2 of sales
Short Term Borrowing for W/C = 0.5 of W/C
Interest on Short Term Borrow= 0.18
Debentures = 0.5 of Capital Investment
Interest on Debentures = 0.15
Tax Rate = 0.4
Net Salvage Value of Equipment 4 lakhs
(Rs. Million)
5
0
100
30
20
5
15
7.91
5
17.09
6.84
10.25
20
15
23.16
35
58.16
Exhibit 12.4
Cash Flows for the Replacement Project
Year 1 2 3 4
I. Investment Outlay
1. Cost of New Asset 1600.00
2. Salvage Value of Old Asset 500.00
3. Increase in Net Working Capital 100.00
4. Total Net Investment(12+3) 1200.00
II. Operating Inflows Over the
Project Life Cycle
5. After Savings in Manufacturing
Costs 180.00 180.00 180.00 180.00
6. Depreciaiton on New Machine 400.00 300.00 225.00 168.75
7. Depreciation on Old Machine 100.00 75.00 56.25 42.19
8. Incremental Depreciation(67) 300.00 225.00 168.75 126.56
9. Tax savings in Incremental
Depreciaiton 120.00 90.00 67.50 50.63
10. Net Operating Cash Flow (5+9) 300.00 270.00 247.50 230.63
III. Terminal Cash Flow
11. Net Terminal Value of New
Machine
12. Net Terminal Value of Old
Machine
13. Recovery of Incremental Working
Capital
14. Total Yerminal Cash Flow (11
12+13)
IV. Net Cash Flow (4+10+14) 1200.00 300.00 270.00 247.50 230.63
Depreciation Rate 25%
Tax Rate 40%
5
180.00
126.56
31.64
94.92
37.97
217.97
800.00
160.00
100.00
740.00
957.97
Exhibits 13.2 & 3 on Sensitivity AnalysisIllustration
( All amounts in Rupees thousands)
Factors Expected values Calculation of expected net present value
Initial investment 20,000 Investment
Cost of capital 12% Sales
Sales 18,000 Variable costs
Variable cost per
unit as a fraction
of sales 2/3 Fixed costs
Fixed costs 1,000 Depreciation
Depreciation as a
percentage of the
investment 10% Pretax profit
Tax rate 1/3 Taxes
Life of the project
in years 10 Profit after taxes
Cash flow from
Net salvage value 0 operations
Salvage value
Net present value
For sensitivity analysis proceed as follows.In cell
B18 copy the formula for NPV from cell E14. .Leave
the adjcacent cell to the left(A18) blank and then
fill the various values of investment, one below
the other from cell A19 onwards( in this case
24,000 and 18,000). Highlight(select) A18 to B20
and then from the dropdown menu for Data, select
table. In the dialogue box that appears, type
against column input cell ,the cell reference B4
and click OK. The NPV values corresponding to the
various investment figures will be automatically
filled in. Next give headings Investment and NPV
in cells A18 and B18 respectively as separately
shown.To change the numerical value into text in
cell B18 go to Format>Cells>Custom and against
Type, type out " Net present value"
Investment 2,601 Sales
24,000 (646) 15000
18,000 4,224 21,000
The following analysis is done using the above technique
Variable costs as a
percentage of sales Net present value Fixed Costs
70% 340.80 1,300
65% 3730.94 800
llustration
mounts in Rupees thousands)
ion of expected net present value
20,000
18,000
12,000
1,000
2,000
3,000
1,000
2,000
4,000
0
2,601
Net Present Value
(1,166)
6,368
Net present value
1,471
3,354
Discount rate Project life Tax rate
12% 10 33.33%
Expected values
Investment in year 0 (20,000)
Variable costs as a percentage of sales 66.67%
For years 1 to 10
Sales 18,000
Variable costs =C7*C5 12,001
Fixed costs 1,000
Depreciation =-C4/B2 2,000
Pre-tax profit 2,999
Taxes =C11*C2 1,000
Profit after taxes =C11-C12 2,000
Cash flow from operation =C13+C10 4,000
Present value of the cash flow stream =PV(A2,B2,-C14) 22,599
Net present value of the project =C15+C4 2,599
24000
0.7
15000
1300
Page 62
Expected
20000
0.6667
18000
1000
Page 63
Optimistic
18000
0.65
21000
800
Page 64
Scenario Summary
Current Values: Pessimistic Expected Optimistic
Changing Cells:
$C$4 (20,000) (24,000) (20,000) (18,000)
$C$7 18,000 15,000 18,000 21,000
$C$5 66.67% 70.00% 66.67% 65.00%
$C$9 1,000 1,300 1,000 800
Result Cells:
$C$16 2,599 -7,426 2,599 10,064
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
Calculation of Financial Breakeven using the data
in Exhibit 13.7
('000)
Year 0 1 to 10
Investment 20,000
Variable costs as a
fraction of sales 2/3
Tax rate 33.33%
Sales per year 18,000
Variable costs per year 12,000
Fixed costs per year 1,000
Depreciation per year 2,000
Pretax profit per year 3,000
Taxes per year 1,000
Profit after taxes per
year 2,000
Cash flow from operation
per year 4,000
Accounting breakeven
level of sales 9,000
Calculation of the
financial breakeven
level of sales
Discount rate 12%
Project life in years 10
Total of the present
values of the cash
inflows 22,601
Initial investment 20,000
Financial breakeven
level of sales 15,928
Section 14.2 : Calculation of average cost of debt for Multiplex Limited
Multiplex Limited: Debenture details
Face value Rs. 1,000
Coupon rate 12%
Remaining period to Yield to maturity using the
maturity(in years) 4 approximate formula 10.7%
Current market price 1,040 =(B3*B4+(B3-B6)/B5)/(0.4*B3+0.6*B6)
Post-tax cost
of debt
Tax rate = 35% = 7.15%
Exhibit 14.1
Calculation of the WACC for Bharat Nigam Limited
Cost of equity 16%
Cost of preference 14%
Cost of debt 12%
Tax rate = 30%
Weighted
Cost [(1) x
Source of Capital Proportion (1) Cost (2) (2)]
Range of New
Source of Financing (Rs. In Breaking Point ( Rs. In
Capital Cost million) million)
Exhibit 14.3 Weighted Average Cost of Capital for Various Ranges of Total Financing for Shi
Range of Total New
Source of Capital Proportion
Financing (Rs. Mill)
(1) (2)
0 to 75.00 Equity 40%
Debt 60%
Weighted Average Cost of Capital
75 to 83.33 Equity 40%
Debt 60%
Weighted Average Cost of Capital
Above 83.33 Equity 40%
Debt 60%
Weighted Average Cost of Capital
Exhibit 14.4 The Weighted Marginal Cost of Capital
Weighted Marginal
Cost of Capital
Range of Total Financing (%)
0 to 75 13.20%
75 to 83.33 14.00%
Above 83.33 14.60%
ulting Range of Total
Range of Total New Financing
0 to 75.00
Above 75.00
0 to 83.33
Above 83.33
Total Financing for Shiva Electronics
Cost % weighted cost %
(3) (2)x(3)
18.00% 7.20%
10.00% 6.00%
13.20%
20.00% 8.00%
10.00% 6.00%
14.00%
20.00% 8.00%
11.00% 6.60%
14.60%
Exhibit 15.1
(Rs.in '000)
Debt repayable in
Interest
equal amounts over Tax rate
rate
years
14% 8 60%
Calculation of the Present Value of Tax Shield
Present value of tax
Debt outstanding Tax
Year Interest shield using a
at the beginning shield
discount rate of 14 %
1 2400 336 202 177
2 2100 294 176 136
3 1800 252 151 102
4 1500 210 126 75
5 1200 168 101 52
6 900 126 76 34
7 600 84 50 20
8 300 42 25 9
Section 19.2: Illustration of Net Income Approach
(Rs.in million)
Firm A Firm B
Net operating income 10,000 10,000
Interest on debt 0 3,000
Cost of debt 6% 6%
Cost of equity 10% 10%
Market value of debt 0 50,000
Market value of equity 100,000 70,000
Average cost of capital 10% 8.3%
NOTE: To start with, enter only the formula for EPS in cells D9 and D12 and their difference
fornula form) in cell B13 keeping the cell no.D13 blank. Next use the feature Goal Seek in t
drop down menu of Data> WhatifAnalysis, by setting B13 to the value 0 and holding D13 as t
variable cell. This feature, after some iterations, will post the correct value in the desired
cell.
DSCR
Year 1 2
Profit after tax -2 10
Depreciation 12 10.8
Interest on long term loan 17.6 17.6
Loan repayment instalment
DSCR= 1.89
20.7
(Rs.in million)
Depreciation 3
PBIT 15
Interest on debt 4
Tax rate 50%
Loan repayment instalme 2.5
(a) Interest coverage r 3.75
(b) Cash flow coverage 2
20.8
Year 1 Year 2
Profit after tax 4 22
Depreciation 12 10.8
Interest on term loan 21.1 21.2
Term loan repayment
instalment
DSCR 1.66
20.9
(a) ( Amounts in Rs.million)
Amount of debt finance 300
Interest rate on debt 15%
Annual interest on debt 45
Expected value of the
net cash flows,
without taking the
interest on debt into
account 80
Expected value of the
net cash flows, taking
the interest on debt
into account(A) 35
Standard deviation of
the above net cash
flows 40
Specified value of the
net cash flow(which
signifies cash
inadequecy) (B) 0
Standardised
difference between B
and A(the z value) 0.875
Probability of cash
inadequecy 19.08%
(b)
We can use Goal Seek feature in Data>Whatif
Analysis, to get the z value ( in cell B128 )
corresponding to a cumulative porbabiliy of
5 percent as shown below.
z value 1.640
Probability of cash
inadequecy 0.051
Again, use the Goal Seek feature as shown
below to get the cash flow ( in cell B42
below) corresponding to a z value of 1.15
Cash flow that would
give a z value of
1.64 14.4
z value 1.64
The debt that can be
serviced with an
interest of Rs.14.4
million is 96
BIT Level
(Amounts in Rupees)
50%
0.7
2,800,000
and D12 and their difference (in
se the feature Goal Seek in the
value 0 and holding D13 as the
correct value in the desired
9
3 4 5 6 7 8 9
20 25 30 40 40 50 55
9.72 8.75 7.87 7.09 6.38 5.74 5.17
17.05 14.85 12.65 10.45 8.25 6.05 3.85
20 20 20 20 20 20 20
(Rs.in million)
Year 3 Year 4 Year 5 Total
25 40 50 133
9.72 8.75 7.87 49.14
20.5 17.8 15.2 95.8
24 24 24 72
10 Sum
55 323
4.65 78.17
1.65 110
20 160
Exhibit 21.1: Numerical Examples of Walter Model
Earning per share 4
Dividend payment 4 2
Rate of return required by investors 15%
Price per share
as per Walter
Rate of return on investments model
20% 26.67 31.11
15% 26.67 26.67
10% 26.67 22.22
Using the data in Exhibit 21.3 to see how dividend policy affects the curre
Firm A Firm B
Next year's price(Rs) 120 105
Dividend )Rs) 0 15
Total pre-tax payoff 120 120
Note: As we wish to use the Goal Seek featur
Current price 102.86 101.43 blank to start with. The required values wou
Capital gain 17.14 4 automatically at the end.
Dividend tax rate 20%
Tax rate on capital gains 10% 10%
Post-tax dividend 0 12
Post-tax capital gains 15.43 3.21
Total post-tax return 15.43 15.21 ifAnalysis , to get the corresponding share
1/Post-tax rate of return 6.67 6.67 respectively
The Steps
1. On the Data menu > WhatifAnalysis select Goal Seek.
2. In the Set cell box, enter the reference for the cell that contains the formula Here, this
3. In the To value box, type the result you want. Here it is 6.666667 i.e.1/0.15see the Note
4 In the By changing cell box, enter the reference for the cell that contains the value you wa
for Firm A and C22 for Firm B
5 Click OK.
Similarly you can find the current price of B
nd policy affects the current price
o use the Goal Seek feature in Data ,keep B22 and C22
h. The required values would get filled up
he end.
et the corresponding share price in B22 and C22
ins the formula Here, this is cell B29
667 i.e.1/0.15see the Note above
t contains the value you want to adjust viz. cell B22
Section 22.4 : Example of Lintner Model
EPS for year t (EPSt) 4
DPS for year t-1 (Dt-1) 1.5
Target payout ratio( r) 0.6
Adjustment rate( c) 0.5
DPS for year t according to the Lintner model(D t) 1.95
Exhibit 23.7 Financial Information for Horizon Limited
Section 23.6: Example of Cash Requirement for Working Capital (Rs.in million)
Credit period granted
Sales 240 on sales(months) 2
Credit period extended
Material cost 72 by suppliers(months) 3
Period of arrear in
payment of
Wages paid 48 wages(months) 1
Period of arrear in
Manufacturing expenses outstanding payment of cash
at the end of the year 4 expenses(months) 1
Period of arrear in
payment of total
administraive
Administrative and sales expenses 30 expenses(months) 0
Gross profit 25%
Stocking period of raw
materials(months) 2
Stocking period of finished
goods(months) 1
Cash balance maintained 5
Safety margin on working capital
requirement 10%
Total manufacturing cost 180
Manufacturing expenses 60
Cash manufacturing expenses 48
Depreciation 12
Cash manufacturing cost 168
Add:Administrative and sales expenses 30
Total cash cost 198 ( Rs.in million)
Current assets Current Liabilities
Debtors 33 Sundry creditors 18
Manufacturing expeses
Raw material stock 12 outstanding 4
Finished goods stock 14 Wages outstanding 4
Cash balance 5
Total current assets 64 Total current liabilities 26
Working capital 38
Safety margin on working capital 3.8
Working capital required 41.8
Exhibit 24.2
Forecast of Cash Receipts
January February March April May June
1. Sales 100000 100000 100000 120000 120000 120000
3. Collection of Accounts
Receivables 80000 80000 80000 80000 88000 96000
4. Cash Sales
5. Receipt from Sale of 20000 20000 20000 24000 24000 24000
Equipment 5000
6. Interest 2000
Total Cash receipts 100000 100000 105000 104000 112000 122000
Exhibit 24.3
Forecast of Cash Payments
January February March April May June
1. Material Purchases 40000 40000 48000 48000 48000 48000
2. Credit Material
Purchases 40000 40000 48000 48000 48000 48000
3. Payment of Accounts
Payable 40000 40000 40000 48000 48000 48000
4. Miscellaneous Cash
Purchases 2000 2000 2000 2000 2000 2000
5. Wages 15000 15000 15000 15000 15000 15000
6. Manufacturing Expenses 20000 20000 20000 20000 20000 20000
7. General Admin. and
Selling Expenses 10000 10000 10000 10000 10000 10000
8. Dividend 20000
9. Tax 20000
10. Capital Expenditure 50000
Total 87000 87000 137000 95000 95000 135000
Exhibit 24.4
Summary of Cash Forecast
January February March April May June
1. Opening Cash Balance 22000
2. Receipts 100000 100000 105000 104000 112000 122000
3. Payments 87000 87000 137000 95000 95000 135000
4. Net Cash Flow 13000 13000 32000 9000 17000 13000
5. Cumulative Net Cash Flow 13000 26000 6000 3000 20000 7000
6. Opening Cash Balance 35000 48000 16000 25000 42000 29000
7. Minimum Cash Balance
Required 20000 20000 20000 20000 20000 20000
8. Surplus or Deficit in
Relation to the Minimum
Cash Balancd Required 15000 28000 4000 5000 22000 9000
Exhibit 24.7
Establishing the Optimal Cash Conversion Size
(Amou
Cash conversion size (the amount of
1 marketable securities that will be
converted into cash) 100,000 200,000
Number of conversions during the
2 planning period of three months
(1,500,000 / line1) 15 7.5
3 Average cash balance (line 1 / 2) 50,000 100,000
4 Interest income foregone 2,000 4,000
(line 3 x .04)
5 Cost of cash conversion 7500 3750
(Rs.500 x line 2)
Total cost of ordering and holding
6 cash (line 4 + line 5) 9,500 7,750
Amount required for meeting its transaction needs 1,500,000
Annual yield on its marketable securities 16%
Fixed cost per conversion transaction 500
Conversion Size
(Amounts in Rs.)
5 3.75 3
150,000 200,000 250,000
6,000 8,000 10,000
Illustration of Days Sales Outstanding
Sales(Rs.in No.of days in
Month million) Receivables the month
January 150 400 31
February 156 360 28
March 158 320 31
April 150 310 30
May 170 300 31
June 180 320 30
July 190 340 31
August 200 350 31
September 210 360 30
October 220 380 31
November 230 400 30
December 240 420 31
Days Sales Outstanding
End of quarter 1 62
End of quarter 2 58
End of quarter 3 55
End of quarter 4 56
Rating Factor
3 2 1 score
1.20
0.80
* 0.60
0.40
1.00
ing index 4.00
Safety stock and calculations in Exhibit 26.2
Daily usage
rate in Lead time in
tons Probability days Probability
10 0.2 20 0.25
20 0.6 30 0.50
30 0.2 40 0.25
Stockout cost estimated per ton (Rs.) 10,000
Carrying cost per ton per year (Rs.) 1,400
(a)
Normal usage in tons 600
=SUMPRODUCT(A43:A45,B43:B45)*SUMPRODUCT(C43:C45,D43:D45)
Possible
Daily usage Lead time levels of Safety
rate in days usage stock
10 20 200
10 30 300
10 40 400
20 20 400
20 30 600
20 40 800 200
30 20 600
30 30 900 300
30 40 1200 600
Expected
stockout Carrying
Safety stock Stockout Stockout cost Probability cost cost Total cost
600 0 0 0.00 0 840,000 840,000
300 300 3,000,000 0.05 150,000 420,000 570,000
200 100 1,000,000 0.10 100,000 280,000 580,000
400 4,000,000 0.05 200,000
300,000
0 200 2,000,000 0.15 300,000
300 3,000,000 0.10 300,000
600 6,000,000 0.05 300,000 0 900,000
900,000
The optimal level of safety stock is 27 tons because at that level the cost is
minimised.
Exhibit 28.2 Good Accounts Bad Acounts
Xi Yi Xi Yi
Account Current Return on Account Current Return on
Number Ratio Investment Number Ratio Investment
1 1.10 13 11 0.70 11
2 1.50 15 12 0.90 4
3 1.20 17 13 0.80 6
4 0.90 21 14 1.30 2
5 1.60 7 15 1.10 6
6 2.20 8 16 0.50 8
7 0.90 16 17 0.30 8
8 1.00 13 18 1.40 6
9 1.30 8 19 0.90 3
10 1.30 2 20 1.10 14
(X-X_bar)*
No. (X-X_bar)^2 (Y-Y_bar)^2 (Y-Y_bar) No. (X-X_bar)^2 (Y-Y_bar)^2
1 0.00 16 0.00 11 0.16 4
2 0.16 36 2.40 12 0.04 169
3 0.01 64 0.80 13 0.09 9
4 0.04 144 -2.40 14 0.04 49
5 0.25 4 -1.00 15 0.00 9
6 1.21 1 -1.10 16 0.36 1
7 0.04 49 -1.40 17 0.64 1
8 0.01 16 -0.40 18 0.09 9
9 0.04 1 -0.20 19 0.04 36
10 0.04 49 -1.40 20 0.00 25
SUM 1.80 380 -4.70 1.46 312.00
Averages
x^2 3.26
y^2 692.00 σ2 of X 0.172
xy 1.70 σ2 of Y 36.421
dx 0.40 σ of XY 0.089
dy 6.00
Coefficients of the Discriminant Function
a 2.4203
b 0.1707
Exhibit 28.3
Z Scores for various accounts
Acount No. Z Score
1 4.8812
2 6.1907
3 5.8060
4 5.7627
5 5.0673
6 6.6901
7 4.9092
8 4.6392
9 4.5119
10 3.4878
11 3.5718
12 1.4955
13 2.9604
14 3.4878
15 3.6864
16 2.5756
17 2.0916
18 4.4125
19 2.6903
20 5.0519
(X-X_bar)*
(Y-Y_bar)
-0.80
2.60
0.90
-1.40
0.00
0.60
0.80
-0.90
1.20
0.00
3.00
Exhibit 29.4
Calculation of Duration Bond A
Present Proportion of the Col 4 X
Year Cash Flow Value at Bond's Value Time Year
18%
1 2 3 4 5 1
Face Value of the Bond 100
Current Value of the Bond 71.98
Coupon (interest rate) 10%
Face value 100
=RATE(C3,C1*C2,-C5,C4) 18%
=DURATION(C6,C7,C2,F3,C8,C9) 4.26
Marginal tax rate of Centaur 35%
Cost of capital of Centaur 11%
Exhibit 30.1
Posttax Cash Flows Associated with the Ownership and Operation of the Car
Year
0 1 2 3 4
Initial cost 1.200
Operating and other costs 0.200 0.216 0.233 0.252
Depreciation rate WDV 0.480 0.288 0.173 0.104
Tax shield operating costs
and depreciation 0.238 0.176 0.142 0.124
Net salvage value
Posttax cash flow 1.200 0.038 0.040 0.091 0.127
Discount factor 1.000 0.901 0.812 0.731 0.659
Present value 1.200 0.034 0.032 0.067 0.084
Present value of the costs 1.203
PVIFA 3.696
Posttax EAC 0.326
Lease rental 0.501
Exhibit 30.2 Cash Flow of the Lease Contract
Year
0 1 2 3 4
1. Cost of fork lift 10
2. Depreciation 4.00 2.40 1.44 0.86
3. Loss of depreciation tax
shield (2 * 0.35) 1.40 0.84 0.50 0.30
4. Lease payment 2.4 2.4 2.4 2.4
5. Tax shield on lease
payment (4 * 0.35) 0.84 0.84 0.84 0.84
6. Loss of salvage value
7. Cash flow of lease
(1+3+4+5+6) 10.00 2.96 2.40 2.06 1.86
Comparing lease and Hire purchase options
(Amounts in Rs.)
Given:
Cost of the equipment 1,000,000
Years of use of the
equipment 10
Net salvage value after 10
years of use 100,000
Posttax cost of debt to
Synthetic Chemicals 8%
Tax rate for Synthetic
Chemicals 50%
Depreciation rate for the
equipment as per WDV method 33.33%
HirePurchase option:
Flat interest rate 0
Lease rent per year during
primary lease period as a
fraction of the lease amount 0.3
Secondary lease period in
years 10
Lease rent per year during
secondary lease period 12,000
Exhibit 30.3
Cash Flows of Leasing and HirePurchase Options
Year Leasing HirePurchase
Depn.tax
Rent Interest Principal shield NSV
1 150,000 115,405 242,523 166,667
2 150,000 70,000 333,333 111,111
3 150,000 24,595 424,144 74,074
4 150,000 49,383
5 150,000 32,922
6 6,000 21,948
7 6,000 14,632
8 6,000 9,755
9 6,000 6,503
10 6,000 4,335 100,000
PV of the lease cash flows 615,211
PV of the HP cash flows 587,125 Choose the lesser cost HP option
(Rs.in million)
0.272
0.062
0.117
0.400
0.245
0.593
0.145
5 6
0.52 0.31
0.18 0.11
2.4 2.4
0.84 0.84
1.00
1.74 2.67
e
Net HP
cash
flow
191,261
292,222
374,665
49,383
32,922
21,948
14,632
9,755
6,503
104,335
Exhibit 32.3 Exhibit
Projected Profit and Loss account 32
for Ma
Financial Statements of Matrix for the Preceding Three Years( Years 1-3) through 8- The Explicit
(Rs.in million)
Profit and Loss Account
1 2 3
Net sales 180 200 229
Balance Sheet
1 2 3
Equity capital 60 90 90
Reserves and surplus 40 49 61
Debt 100 119 134
Total 200 258 285
Fixed assets 150 175 190
Investments 20 25
Net current assets 50 63 70
Total 200 258 285
Net investment
[=(Net fixed assets at the end of the year +
net current assets at the end of the year)
- (Net fixed assets at the beginning of the
year + net current assets at the beginning
of the year)] 38 22 7
8
Exhibit 32.4 : Free Cash Flow B
Gross cash flow
(=NOPLAT +depreciation) 45 45 C
Gross investment
(= increase/(decrease in net current
assets + capital expenditure) 53 40 D
Free cash flow -8 5 E
Year 2 Year 3
Free cash flow -8 5
Add: After-tax non-operating cash flow 0 4.8
Cash flow available to investors -8 9.8
Exhibit 32.8
Free Cash Flow Forecast for Matrix Limited for Five Years- Years 4 through 8
- The Explicit Forecast Period
( Rs.in million)
4 5 6 7 8
Profit before tax 42 44 50 57 58
Interest expense 18 20 21 23 25
Interest income 3 2 0 0 0
Non-operating income 0 0 0 0 0
EBIT:[(1)+(2)-(3)-(4)] 57 62 71 80 83
Tax provision on income
statement 13 16 18 19 18
Tax shield on interest expense 7.2 8 8.4 9.2 10
NET INVESTMENT[ 35 33 28 38 39
FREE CASH FLOW:[(C)-(D)] 3 5.8 16.6 13.8 16
ROIC=NOPLAT/INVESTED
CAPITAL 12.9% 11.8% 12.5% 13.1% 12.7%
Note that the invested capital for year 4 after adjustment is Rs.295 million
Terminal steady growth rate, g 10%
Target capital structure, i.e. D:E 2 : 3
Cost of debt 12.67%
Cost of equity 18%
WACC = 14.0%
,
Two Stage Growth Model
Base Year( Year 0) Information Inputs for High Growth rate period
( Amounts in Rs.million) Length of the period(in years) 5
Revenues 4,000 Growth rate in revenues & EBIT 10%
as a
percentage of
EBIT revenues 12.5% Growth rate in capital expenditure 10%
Capital expenditure 300 Growth rate in depreciation 10%
Net working capital as a
Depreciation 200 percentage of revenue 30%
as a
percentage of
Net working capital revenues 30% Cost of debt ( pre-tax) 15%
Coroporate tax rate for all time 40% Debt equity ratio 1 :
Paid up equity capital Rs.10 par 300 Risk-free rate 13%
Market value of debt 1,250 Market risk premium 6%
Equity beta 1.333
Exhibit 32.9
Forecasted FCF: Exotica Corporation
(Rs.in million)
1 2 3 4
1 Revenues 4400 4840 5324 5856.40
2 EBIT 550 605 665.5 732.05
3 EBIT(1-t) 330 363 399.3 439.23
Capital
expenditure-
4 depreciation 110 121 133.1 146.41
∆ Net working
5 capital 120 132 145.2 159.72
6 FCF (3-4-5) 100 110 121 133.10
Stable
growth
High growth period period
Cost of equity 21.0% 19.00%
WACC 15.0% 15.00%
Present value of the FCF during the explicit forecast period =NPV(D27,C23:G23)
Present value of terminal value =H23/(E27-H4)/(1+D27)^G17
The value of the firm =H29+H30
=I35/(I35+K35)*E39*(1- =I36/(I36+K36)*F39*(1-
WACC B41)+K35/(I35+K35)*C45 B41)+K36/(I36+K36)*E45 =I37/(I37+K37)*G39*(1-B41)+K
14.00% 13.00% 16.00%
Exhibit 32.10
Forecasted FCF: Multiform Limited (amounts in Rupees million)
Profit after tax 24 29 28 32 38
Preference
dividend
Fixed assets
(net) 190 220 240 266 294
Investments 25 10
Net current
assets 70 75 88 90 100
Debt 134 140 150 161 177
Preference
( Capital expenditure
Depreciation ) 30 20 26 28
(Change in net current
assets) 5 13 2 10
+ ( New debt issue debt
repayment ) 6 10 11 16
( Change in investment in
marketable securities) 15 10 0 0
FCFE 15 15 15 16
Cost of equity 18.27%
The constant
FCFE growth rate
after the
explicit growth
period 10%
Equity value (at
the end of year
3) Formula used Rs. 139.53
=NPV(B86,C85:G85)+G85*(1+B87)/(B86B87)/(1+B86)^(G79B69)
Growth rate period Stable Growth Period
6%
is equal to
growth rate
in
depreciation
30%
15%
1 2 : 3
12%
7%
1.0
(Rs.in million)
5 Terminal year
6442.04 6828.56
805.26 853.57
483.15 512.14
161.05
175.69 115.96
146.41 396.19
Transition
10% Period 1 : 1
Stable
Growth
Period 0 : 1
20%
12%
10%
6%
1.00
=I37/(I37+K37)*G39*(1-B41)+K37/(I37+K37)*H45
16.00%
million rupees
million rupees
( Rs.in crore)
8
40
324
109
192
40
30
15
0
16
crores
^(G79B69)
Exhibit 33.2
Determination of Value Created by a New Strategy
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
Current Income Statement Projections
Value 1 2 3
(Year 0)
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
Sales 1000 1100 1210 1331
Gross Margin 250 275 303 333
S & G.a. 100 110 121 133
Profit Before Tax 150 165 182 200
Tax 60 66 73 80
-------------- ------------------------ ---------------- ----------------------------------
Net Profit 90 99 109 120
-------------- ------------------------ ---------------- ----------------------------------
Balance Sheet Projections
Fixed Assets 300 330 363 399
Current Assets 200 220 242 266
-------------- ------------------------ ---------------- ----------------------------------
Total Assets 500 550 605 666
Equity 500 550 605 666
-------------- ------------------------ ---------------- ----------------------------------
Cash Flow Projections
Profit After Tax 99 109 120
Depreciation 30 33 36
Capital Expenditure 60 66 73
Increase in Current Assets 20 22 24
-------------- - - -
Operating Cash Flow 49 54 59
-------------- - - -
Present Value Factor 0.862 0.743 0.641
PV of Operating Cash Flow 42 40 38
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
PV of Operating Cash Flow Stream 190
Residual value 906
PV of Residual Value 431
Total Share Holder Value 622
Pre-Strategy VAlue 563
Value of Strategy 59
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
ASSUMPTIONS
300
258
42
12
30
9
21
5
20,000
20,000
3,000
23,000
25,940
25,940
3,891
29,832
Exhibit 34.3
Balance Sheet of Alpha Company and Beta Company
Part A: Before Merger Part B: After Merger
Alfa Beta Pooling Purchase
Liabilities Company Company Method Method
Share capital (10 par 4000 1000 4600 4600
Capital reserve - - 400 1900
Share premium 2000 500 2500 2000
General reserve 5000 1000 6000 5000
P&L account 1000 500 1500 1000
Loan funds 4000 2500 6500 6400
Current liabilities 2000 1500
and provisions 3500 3600
18000 7000 25000 24500
Assets
Net fixed assets 7000 3000 10000 10200
Investments 3000 500 3500 3400
Current assets 7000 3000 10000 9900
Miscellaneous 1000 500
expenditure 1500 1000
18000 7000 25000 24500
Maximum exchange ratio acceptable to the shareholders of firm 1 for some illustrative va
PE12 9 10 11
Maximum ER1 0 0.17 0.33
Minimum exchange ratio acceptable to the shareholders of firm 2 for some illustrative va
PE12 3 9 10
Minimum ER2 3.00 0.43 0.38
Exhibit 34.6 Free Cash Flow
Year 1 2 3
Invested Capital ( Beg.) 50.00 60.00 72.00
NOPAT 6.00 7.20 8.64
Net investment 10.00 12.00 14.40
Free cash flow (4.00) (4.80) (5.76)
Growth rate (%) 20.00 20.00 20.00
Return on invested capital 12%
WACC 11%
PV of the FCF during the planning period (9.39)
Horizon value at the end of the 6th year 156.1
PV of the horizon value 83.4
Enterprise DCF value 74.0
of firm 1 for some illustrative values of PE 12
12 15 20
0.50 1.00 1.83