28.03.10 BMS . S.S.F.

FINANCIAL MGT. OBJECTIVES ROI = Net PAT Total Assets ROI = ROI = Net Profit Margin X PAT Net Sales X

CHAPTER 2 CAPITAL EXPENDITURE PROJECTS

II 1

CAPITAL EXPENDITURE PROJECTS EVALUATION METHODS PAYBACK PERIOD METHOD A --( when every year same amount of cash inflow ) PAYBACK PERIOD= Initial Investment Annual Cash Inflow

B ---( when every year same 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 )

PAYBACK PERIOD=

Initial Investment Annual Cost Savings

PAYBACK PROFITABILITY = PAYBACK PROFITABILITY =

[Avg. Annual Cash Inflow X( Expected life [Total Earnings from the Project - Cost

Payback Profitability = Surplus Life Profitability Payback Profitability Index = Total Cash Inflows + Scrap Value Cost of asset Surplus Life Profitability + Cost of Asset Cost of asset

Payback Profitability Index =

-----------------------------------------------------------------------------------------------------------ARR -- Average Rate of Return Method OR Accounting Rate of Retu ARR = Avg. PAT Original Investment ARR = Avg. PAT Avg. Investment X 100

X 100

Avg. Investment =

( Initial cost of machine - Salvage value

ARR =

( When existing Profits and Profits after investment given ) Incremental Earnings or Profit X 100 Incremental Investment Incremental Earnings or Profit = Incremental Investment += Profit after Investment Investment in Project

ARR =

( When Profits from existing machine and new machine ( PAT from new machine - PAT from old machine )

given )

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

ARR =

( When Profits from machine 'A ' and machine 'B" given ) ( 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 d) IRR---- Internal Rate of Return e) DISCOUNTED PAYBACK PERIOD

RATIO (B/C RATIO)

a) PRESENT VALUE METHOD Year Profit before Dep. & Tax Dep PBT Tax

Dep as per SLM

Cost of Asset -Scrap value Estimated life of Asset Dep % X Opg. Bal. Of Asset Post Tax Cutoff Rate

Dep as per WDV method = PV Factor /% also called as

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

b) NET

PRESENT VALUE METHOD

Year

Profit before Dep Dep. & Tax 0 Cost of machine 0 Working Capital 1 2 3 4 5 5 Release of WCap. 5 Sale of Scrap

PBT

Tax

If NPV > Zero ----- Accept Project If NPV < Zero ----- Reject Project If NPV = Zero ----- Indifferent

c) PROFITABILITY INDEX ( PI ) PI = PV of cash inflows PV of cash inflows Benefits Cost

or

BENEFIT - COST =

RATIO (B/C RATIO)

Discounted cash inflows Discounted cash inflows

PI =

PI > 1 accept project ---- (NPV + ve ) PI < 1 reject project --- (NPV - ve) PI = 1 indifferent --- (NPV zero )

d) IRR---- Internal Rate of Return IRR is the rate at which Total Cash Inflow = Cost

of Project

eg. If discounting factors are given for 10 % and 14% IRR = 10% + (Total PV at 10% - Cost of Asset ) X (Total PV at 10% -Total PV at 14% )

( 14 - 10 )

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e) Discounted Payback Period

Use discounted cash inflows ie. Present values of cash inflows , then calculate cumu to calculate Payback Period .

CHAPTER 3
RATIOS 1 INTEREST COVERAGE RATIO = EBIT Annual Interest on loan PAT Annual Interest on loan

INTEREST COVERAGE RATIO =

2 INTEREST & LOAN REPAYMENT COVERAGE RATIO = Annual Loan Instalments = EMI X 12 mths. EMI means Equated Monthly Instalment 3 DEBT EQUITY RATIO = Long Term Debt Shareholders Funds

Long Term Debt = long Term Loans, Debentures etc. Shareholders Funds = Eq. Sh. Cap. + Pref. Sh. Cap. + Res. - losses 4 SOLVENCY RATIO = Long Term Debt + Current Liab. Shareholders Funds

5 DSCR ie. Debt Service Coverage Ratio =

PAT + Dep + Interest Annual Loan Instalments

6 SECURITY COVERAGE RATIO =

Value of Securities given by borrower Term Loan bal. + DPG Liability

Value of Securities given by borrower =

DPG Liability =

Drawing Power for W. Cap.

7 Project Profitability =

EBIT Total Capital Employed Share holder's Funds + Borrowed Funds 2007 2008

Total Capital Employed =

EBIT Less : Interest EBT Less: Tax PAT Add back : Dep. Add back : Interest Amt available for repayment (A) Principal Add: Interest Total repayment ( B ) DSCR = A B

Interest Coverage Ratio = EBIT Interest Int & Loan repayment coverage Ratio = EBIT Interest + principal repayment

CHAPTER 7
COST OF RETAINED EARNINGS X= [ D - C ( 1 - BTR) ] ( 1 - STR) X [ ( 1 - STR ) X R ]

X = Cost of retaining earnings D = Gross amount of dividend C = Cost of replacing funds paid out as dividends BTR = Business Tax Rate STR = Shareholder Tax Rate R = Rate at which shareholder can earn by investing dividend amt. In market

INVESTIBILITY RATIOS 1 EPS = PAT - Pref. Div. No. Of Eq. Shares ---------

Earning Per Share

2 P/E

Price Earning Ratio MPS EPS 150 = 3 times 50 -----------

P/E =

3 DP

Ratio --- Payout DPS EPS

Ratio ------

DPR =

4 Dividend Yield =

DPS MPS

------

5 Value per share =

Equity Share Cap. + Res. - Losses No. Of Equity Shares

6 DPS =

Total Equity Dividend No. Of Equity shares

CHAPTER 8
BONUS SHARES Balancesheet before Bonus Issue Liabilities 10000 Shares of Rs 100 each Reserves Other Liabilities 1,000,000.00 500000 1000000 2,500,000.00 Value of Eq. Share= 1,400,000.00 = 10,000.00

Therefore if Amit holds 25 shares , Value of his shareholding = -------------------------------------------------------------------------------------------------------------------------------If Bonus shares are issued at 1 share for every 5 shares held Bonus shares to be issued = 10000Eq Shares X Reserves to be utilized for bonus issue = 2000 sh. X Rs 100each =

Balancesheet Liabilities

after

Bonus Issue

10000 Shares of Rs 100 each Reserves Other Liabilities

1,200,000.00 300000 1000000 2,500,000.00

Value of Eq. Share=

1,400,000.00 =

12,000.00 Therefore if Amit holds 25 shares , he will get (25 X 1/5 ) ie 5 bonus shares.

Value of his shareholding = ( 25 + 5 ) shares X 116.67 Thus though no of shares held increase , total value of holding remains same.

CHAPTER 8
EQUITY CAPITAL BUYBACK OF Balancesheet Liabilities 10000 Shares of Rs 100 each ( Rs. 75 paidup) Reserves Other Liabilities 750,000.00 500,000.00 1,000,000.00 2,250,000.00
10,000.00

SHARES before BUY BACK

Condition no 1

Buyback can be made of fully paid up Eq. Shares only Therefore Rs25/- should be collected from 10000 shares . Ie Eq Sh And Cash bal in Other Assets shall also increase by Rs 250000.

Condition no 2

Buyback not to exceed 25% of paidup capital + Res - losses Amt Available for BUYBACK = (Eq Cap + Res - loss ) X 25 % If company wants to buyback shares of Rs 100, at Rs 15 prem ie 287500 / 115 = 2500 shares can be bought back. After buyback debt Equity Ratio not to exceed 2 : 1 . Debt Equity Ratio = Debt Eq Shareholder's Fund 1,000,000.00

Condition no 3

Debt Eq Ratio after buyback =

(750000 +500000-100000 ) - 250

Since all conditions are fulfilled company can buyback 2500 shares

CHAPTER 9
RIGHTS ISSUE OF EQUITY SHARES

No. Of new shares

to be issued as

rights =

Desired Funds Rights Subscription Price

No. Of rights required to acquire one new share = Existing Shares New Shares

Value of one right----Cum - rights ( when shareholder possesses right to purchase rights shares )

Value of one right----Ex - rights ( when right to purchase rights shares

has ended )

Ex- Rights ( Theoretical ) Market Price per Share ( when right to purchase rights shares has ended )

Mo Me N S Rc Rx

= = = = = =

Cum Rights MPS Ex - Rights MPS No. Of rights required to acquire one new rights share Rights subscription price Cum - Rights Ex - Rights

CHAPTER 14
BASIC A ) VALUATION CONCEPT / Net Assets Method / Balancesheet Method

Intrinsic Value Method

/ Assets

STEP 1 Calculation of Capital Employed Fixed Assets

( at real values )

Trade Investments ( compulsory / statutory invt) Current Assets Unrecorded Assets Less : Long term loans Debentures Current Liabilities Unrecorded Liabilities(eg. Workers claim) Capital Employed STEP 2 Calculation of Future Maintainable Profit

( FMP )

Average PBT of past given years Add : Expenses no longer to be incurred Less : Income from non trade/ Personal Investment Increase in Exp. / new exp. Dep. On increase in value of assets

PBT Less : Tax PAT Less : Pref. Div. Less : Trf. To Reserves PAES/ FMP

STEP 3 Valuation of Goodwill Future Maintainable Profit ( FMP ) Capital Employed ( Step 1) Rate of Return / NRR Normal Profit = Capital employed X NRR Super Profit = FMP - Normal Profit Goodwill = Super Profit X No. Of years of purchase

STEP 4 Calculation of Net Assets for Equity Shareholders Goodwill ( Step 2 ) Market Value of Personal / Non Trade Investments Capital Employed

Less : Preference Share Capital Arrears of Preference Dividend Net Assets Value per Equity Share = Net Assets for Equity Shareholders No. Of Equity Shares

-------------------------------------------------------------------------------------------------------------------------------ADJUSTMENTS 1 For Calculating value of shares before & After Bonus Issue eg. Net Assets are Rs 500000 and EQ. Shares are 5000 . Bonus shares are issued 1 share for every 5 shares held . Value of Eq. Sh before Bonus Issue = Net Assets = No. of Equity Shares Value of Eq. Sh after Bonus Issue = Net Assets = Changed Equity Shares

If Eq Shares of different paidup value given eg. Net Assets are Rs 500000 . And 1000 EQ. Shares are Rs.100 paid up , 3000 s While calculating Intrinsic value , Unpaid Amt (Rs 25 X 3000 sh. ) Rs75000 should be a Net Assets = 500000 + 75000 = 575000 Intrinsic Value of Fully paidup Share ( Rs 100/-) = 575000 4000 Intrinsic Value of partly paidup Share ( Rs 75/-) = 143.75 - 25

-------------------------------------------------------------------------------------------------------------------------------Yield Value STEP 1 Calculation of Profit Available to Equity Shareholders ( PAES ) Average PBT of past given years Add : Expenses no longer to be incurred Less : Income from non trade/ Personal Investment Increase in Exp. / new exp. Dep. On increase in value of assets Tax Pref. Div. Trf. To Reserves FMP

PBT Less : PAT Less : Less : PAES/

STEP 2 Actual Rate of Return ( ARR ) ARR = PAES Total Paidup Equity Capital X 100

STEP 3 Value per Equity Share =

ARR NRR

X Paid -up Value per Equity Share

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FAIR

VALUE Intrinsic Value + Yield Value 2

Fair Value per share =

If Fully paid up and partly paid shares are given Calculate seperately Fair Value of fully paid share =

Fair Value of partly paid share =

ADJUSTMENTS 1 If Controlling Interest in a Company is to be purchased -- Calculate Value of share If only a few shares are to be purchased , use Yield method taking average of past

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CHAPTER 15
CORPORATE STEP 1 TAXATION

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY ( UNDER NORMAL PR Profit as per P&L A/c. Add : 1) Depreciation as per A/cs. (normal ) 2) Depreciation on revaluation of assets 3) Provision for unascertained ( not specific) liabilties 4) Proposed / paid Dividends 5) Income Tax Provn./ paid 6) Provision for losses of subsidiary companies 7) Transfer to Reserves 8) Expenses relating to incomes u/s 10(38),10A,10B,11,12(Charitable activities) 9) Interim Dividend paid 10) Bad Debts 11) Provision for Contingencies

12) Fringe Benefit Tax 13) Unpaid / outstanding customs duty, excise duty, sales tax

Less :

1) Transfer from / withdrawn from Reserves 2) Incomes to which Sec 10(38),10A,10B,11,12 of Income Tax Act apply(Charit 3) Profits of Sick Industrial company

4) Depreciation as per Income Tax Rules 5) Transfer from Revaluation Reserve 6) Brought forward Business Loss or unabsorped Dep. Carried forward , Taxable Income

Tax @ 30% Add : Surcharge @10% ( If Taxable Income is more than 1 crore) Tax + Surcharge Add : Education Cess @ 2% of (Tax +Surcharge ) Add : Higher & Secondary Education Cess @ 1% of (Tax +Surcharge ) Total Tax Liability

COMPUTATION OF BOOK PROFITS MAT u/s115JB Profit as per P&L A/c. Add : 1) Depreciation as per A/cs. 2) Depreciation on revaluation of assets 3) Provision for unascertained ( not specific) liabilties 4) Proposed / paid Dividends 5) Income Tax Provn./ paid 6) Provision for losses of subsidiary companies 7) Transfer to Reserves 8) Expenses relating to incomes u/s 10(38),10A,10B,11,12(Charitable activities) 9) Interim Dividend paid 10) Bad Debts 11) Provision for Contingencies 1) Transfer from / withdrawn from Reserves

Less :

2) Incomes to which Sec 10(38),10A,10B,11,12 of Income Tax Act apply(Charit 3) Profits of Sick Industrial company

4) Depreciation as per A/cs. 5) Transfer from Revaluation Reserve( to the extent it does not exceed ex Taxable Income Tax @ 30% Add : Surcharge @10% ( If Taxable Income is more than 1 crore) Tax + Surcharge Add : Education Cess @ 2% of (Tax +Surcharge ) Add : Higher & Secondary Education Cess @ 1% of (Tax +Surcharge ) Total Tax Liability

Higher of the tax liabilities between the two ie. as per normal provns. And MAT shou

Total Assets Turnover Net Sales Total assets

TURE PROJECTS METHODS

ON

ow is not same ) ( Balance Amt. X2 mths. ) 1 ( next year's annual cash inflow )

h Inflow X( Expected life of project

- Payback Period) ] + sale of scrap

om the Project - Cost of Project ] + sale of scrap

s + Scrap Value of asset

ability + Cost of Asset of asset

-------------------------------------------------------------counting Rate of Return Method

chine - Salvage value

2

+ Addnl. W. Cap. + Salvage Value

ment given )

after Investment

ment in Project

ew machine machine )

given ) X 100

s of old machine )

ne 'B" given ) achine 'B' ) machine 'B' )

X 100

RATIO (B/C RATIO)

PAT

Cash Inflow (PAT+Dep)

Present value Factor @ --- %

PV (Present Value)

--- Every year same amount

ofit nor loss from Project

PAT

Cash Inflow (PAT+Dep)

Present value Factor @ --- %

PV (Present Value)

RATIO (B/C RATIO)

unted cash inflows unted cash inflows

( 14 - 10 )

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

nflows , then calculate cumulative PV of Cash inflows

Lending Bank gets to know how much earnings are available for payment of their interest .

EBIT Annual Loan Instalments

h. Cap. + Res. - losses

+ Dep + Interest al Loan Instalments

given by borrower DPG Liability Primary Sec .+ Collateral Sec.

+ Borrowed Funds 2009 2010

end amt. In market

Shows howmuch the Co. Is earning on its Share Capital How much against each Share

How many EPS are required to cover Market Price per share Within how many years Market price will be recovered eg. 3 years

Shows what proportion of earnings are distributed as dividends .

Shows how much dividend the shareholder receives against amt.invested in shares .

--------

Shows book Value per share. Ie. Net Assets available per share.

Assets Fixed Assets Other Assets Misc. Expenses 1,750,000.00 650000 100000 2,500,000.00 Rs. 140 per Eq. Sh.

25 shares X Rs140 = 3500 ---------------------------------------------------------------------------1 = 2000 shares 5 sh. X Rs 100each =

200000

Assets Fixed Assets Other Assets Misc. Expenses 1,750,000.00 650000 100000 2,500,000.00 Rs. 116.67 per Eq. Sh.

) ie 5 bonus shares. 3500

= lding remains same.

Assets Fixed Assets Other Assets Misc. Expenses 1,500,000.00 650,000.00 100,000.00 2,250,000.00

Eq. Shares only om 10000 shares . Ie Eq Sh Cap shall increase by Rs 250000 o increase by Rs 250000.

capital + Res - losses ap + Res - loss ) X 25 % = f Rs 100, at Rs 15 premium, then ought back. exceed 2 : 1 .

287,500.00

hareholder's Fund = 1.11 : 1

000 +500000-100000 ) - 250000

y can buyback 2500 shares @ Rs115 each.

ed Funds s Subscription Price

ng Shares

Rc =

Mo - S N+1

Rx =

Mo - S N

Me =

( Mo X N ) + S N + 1 Mo - Rc ( Cum rights price per share ) - ( Cum Rights Value )

Me = Me =

esheet Method

/ Assets Back -up Method / Net Worth Method

NOTES : 1) All assets to be taken at current values / market values , if given .Apprecia 2) Fixed Assets should be taken after deducting depreciation. 3) Asset is overvalued by 15000 means take that asset less by 15000 4) Trade Invt= Invt. In Subsidiary , Deposits in MIDC, MSEDC, Shares of Society 5) Deduct Bad debts & PBD if given from Debtors. But RDD is reserve the 6) Stock-- from stock deduct obsolete , redundant, slow moving stock.

1) Consider Interest payable on Loan / Deb. Also as liability

2) Current Liab= Creditors , O/s. Expenses, Provn for tax, Proposed Div., Bank o 3) Contingent Liabilities are uncertain liabilities and not to be considered .

NOTES : 1) If past profits show increasing/ decreasing trend use weighted average usin 2) 7% Govt. Security of RS 400000/- means interest received @ 6% on Rs 4 EXAMPLE -- If adjustments are for specific past years. a) Goodwill w/off in 2006 is Rs.4000. b) Asset Rs 10000 purchased debited to P&L A/c in 2005. Dep 10% SLM c) Closing Stock was overvalued in 2006 by Rs 6500. 2005 2006 2007 PBT 30000 40000 50000 Add: Goodwill w/off + 4000 Add :Asset debited P& L A/c. + 10000 Less : Dep on above asset - 1000 - 1000 - 1000 Closing Stock Adjt. - 6500 + 6500 Changed PBT 39000 36500 55500 Less : Tax PAT Less : Pref Div. Less : Trf. To Res. PAES / FMP

NRR= Normal Rate of Return= Dividend rate declared by similar companies

Personal / Non Trade Invt = Govt. Securities, Deposits in Banks , Shares of Co

Pref. Div. To be deducted if stated that it is unpaid and the Pref. Shares a

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Rs500000 4000 Rs500000 4000+800 104.17

= Rs.125 per share

= Rs.104.17 per share

are Rs.100 paid up , 3000 shares are Rs 75 paid up . 00 sh. ) Rs75000 should be added to the Net assets. = = 143.75 118.75

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1)The Co. Pays 20% Dividend means ARR is 20% .

per Equity Share

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

Intrinsic Value of fully paid sh + Yield Value of fully paid sh. 2 Intrinsic Value of partly paid sh + Yield Value of partly 2 paid sh.

Calculate Value of shares as per Fair Value Method. od taking average of past dividend rates as ARR.

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ITY ( UNDER NORMAL PROVISIONS )

B,11,12(Charitable activities)

uty, sales tax

Income Tax Act apply(Charitable activities)

ped Dep. Carried forward , whichever is less.

B,11,12(Charitable activities)

Income Tax Act apply(Charitable activities)

tent it does not exceed extra dep. On revaluation )

mal provns. And MAT should be paid.

ge Value

s , if given .Appreciation means value to be increased .

ess by 15000 C, Shares of Society in which Co has office/Factory. RDD is reserve therefore donot consider. moving stock.

roposed Div., Bank overdraft, o be considered .

eighted average using given weights or 1,2,3 etc as weights. eived @ 6% on Rs 400000/-= 24000

Dep 10% SLM 2008 60000

- 1000 --If Dep is WDV then Dep would be 1000 , 900, 810& 729. -- Closing stock of 2006 becomes Opg. Stock of 2007. 59000

similar companies

Banks , Shares of Co.

d the Pref. Shares are cumulative in nature.

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