Topic - Payback Period when inflows are constant.
QUESTION
Cost of Asset 300000 Year Inflows
Installation charges 0 1 120000
Scrap Value 0 2 120000
Life 5 3 120000
Working Capital 0 4 120000
5 120000
Soluiton
Initial Outflow = (Cost of asset + installation + working capital)
300000
Pay Back Period = Initial Cash Outflow/Expected Cash Inflows p.a.
2.5
Topic - Payback Period when inflows are Variable.
QUESTION
Cost of Asset 400000 Year Inflows
Installation charges 0 1 80000
Scrap Value 0 2 120000
Life 5 3 140000
Working Capital 0 4 120000
5 180000
Solution -
Initial Outflow = (Cost of asset + installation + working capital)
400000
Year Cinflows Ccinflows
1 80000 80000
2 120000 200000 I 400000
3 140000 340000 <- N N 3
4 120000 460000 <- N+1 CCn 340000
5 180000 640000 Cn+1 120000
Pay Back Period= PBP= N+(I-CCn)/Cn+1
PBP= 3.5
Internal Rate of Return Using EXCEL
QUESTION
Cost of Asset 400000 Year Inflows
Installation charges 0 1 80000
Scrap Value 0 2 120000
Life 5 3 130000
Working Capital 0 4 120000
5 160000
Initial Outflow = (Cost of asset + installation + working capital)
400000
Year Inflows
0 -400000
1 80000
2 120000
3 130000
4 120000
5 160000
IRR 14.42% = IR R(all inflws including outflow at 0 year
Profitability Index (PH)
QUESTION
Cost of Asset 400000 Year Inflows
Installation charges 0 1 80000
Scrap Value 0 2 120000
Life 5 3 130000
Working Capital 0 4 120000
5 160000
Discount Rate 15.00%
Initial Outflow = (Cost of asset + installation + working capital)
400000
Year Inflows
1 80000
2 120000
3 130000
4 120000
5 160000
PV of Inflows = $393,938.23 = N P V()
PV of Outflows = 400000 This amount is exactly equalt to present value of outflow.
PI= $0.98 PV of Inflows/PV of outflows
Net Present Value
QUESTION
Cost of Asset 400000 Year Inflows
Installation charges 0 1 80000
Scrap Value 0 2 120000
Life 5 3 130000
Working Capital 0 4 120000
5 160000
Discount Rate 14.00%
Initial Outflow = (Cost of asset + installation + working capital)
400000
Year Inflows
1 80000
2 120000
3 130000
4 120000
5 160000
NPV= Present value inflow - present value of outflow
4406.46 #here we have use NPV function I.e, =NPV(R,AM.)-Outflow
Earnings Per Share
Question
No. of Equity Shares 25000 12500
Rate of Equity Shares 100 100
Equity 2500000 1250000
Debt 1250000
Rate of Equity Shares 15%
Tax Rate 30%
Case1 Case2
EBIT 250000 250000
Calculate EPS in both cases.
Solution
Case1 Case2
EBIT 250000 250000
Interest 0 0
EBT 250000 250000
Tax 75000 75000
EAT 175000 175000
EPS 7 14 EPS = EAT / no. of shares
Indifference Level It is the level of EBIT at which EPS
under different alternatives are equal.
Question
No. of Equity Shares 50000 40000
Rate of Equity Share 100 100
Equity 5000000 4000000
Debt 1000000 2000000
Rate of Debts 12% 12%
Tax Rate 30% 30%
Case 1 Case 2
EBIT 600000 600000
Calculate EPS in both cases and indifference level.
Solution
Case 1 Case 2
EBIT 600000 600000
Interest 120000 240000
EBT 480000 360000
Tax 144000 108000
EAT 336000 252000
EPS 6.72 6.3
Indifference Level = Eq2 * int1 --- Eq1 * int2
Eq2-Eq1
IL= 720000
Indifference Level It is the level of EBIT at which EPS
PT.2 under different alternatives are equal.
Question
No. Of Equity Shares 50000 40000
Rate Of Equity Share 100 100
Equity 5000000 4000000
pre. Sh. Capital 2000000 1500000
pre. Dividend Rate 13% 13%
Debts 1000000 2500000
Rate of Debts 12% 12%
Tax rate 30%
Case 1 Case 2
EBIT 800000 800000
Calculate EPS in both cases and indifference Level.
Solution
Case1 Case2
EBIT 800000 800000 EATATESH earning after tax available to equity share hold
Interest 120000 300000
EBT 680000 500000
Tax 204000 150000
EAT 476000 350000
Pre. Dividend 260000 195000
EATATESH 216000 155000
EPS 4.32 3.875
Indifference Level = 927142.9 *taking double brackets
Leverage (Operating and Financial Leverage)
Question
A LTD. B LTD.
Sales 7500000 10000000
Variable Cost 3000000 3000000
Contribution 4500000 7000000
Fixed Costs 2250000 4000000
EBIT 2250000 3000000
Interest 750000 1000000
EBT 1500000 2000000
Find Operating and Financial Leverage
Solution
Operating Leverage = Contribution / EBIT
A LTD. B LTD.
OL= 2 2.333333
Financial Leverage = EBIT/EBT
A LTD. B LTD.
FL= 1.5 1.5
Where Ccinflows are more than initial outflow
e, =NPV(R,AM.)-Outflow
r tax available to equity share holders
Dividend Policy-Walter's Model
Question
In A Ltd.
iRR® 15%
Ke 10%
EPS€ 20
Using Walter model, calculate the effect of divident payment on the value of share of A ltd.
Dividend payout ratio 0% 20% 40% 60% 80%
Solution
Market price of the share as per
Dibdend Payout Ratio (DPR) 60%
Dividend Paid (D) 12
Prive per share (P) 240
Dividend Policy-Gordon's Model
Question
In A Ltd. 9%
EPS 15 12%
Ke 12% 15%
r 15%
Divident Payment Ratio 30% 40% 50% 70% 90% 100%
calculate price per share as per Gordon Model
Solution
DPR 30%
b 70% 1- DPR
b*r 11% p= E(l-b)
ke — br
Price per share as per Gordon Model
P= 300
Dividend Policy-Modigliani Miller Approach
Question
EPS 10
P/E Ratio 10
Ke 10%
No. of Outstanding shares (n) 50000
Expected Dividend (DI) 8
Expected Net Income (E) 500000
New Investment (l) 1000000
As per MM Approach, show that the payment of dividend does not affect the value of the firm.
Use the above data to prove the statement.
Solution
CASE When Dividend is Paid
D1 8
P0 100
Market Price (P1) 102
Amount to be raised b issue of new equity shares (A)
900000
Value of firm (V)
5000000
15%
10%
8%
100%
Cost of Equity
Question In Case of Equity(if do is given) Question In Case of Equity(if d1 is g
Ke= ? Ke= ?
Do= 4 D1= 11
g= 8% g= 10%
Po= 30 Po= 110
Soluiton Soluiton
Cost Of Equity Cost Of Equity
Ke = D1/po + g Ke = D1/po + g
Ke = Cost of Equity Ke = Cost of Equity
D1 = Expected Dividend D1 = Expected Dividend
Po = Current market Price Po = Current market Price
g = Growth Rate g = Growth Rate
D1=4*(1+0.08) Where D1=Do(1+g) Ke= (11/110)+0.1
D1= 4.32 Ke= 20.0%
Ke= (/30)+).08
Ke= 22.400%
Cost of Irredeemable Debt (kd)
Question In case of irredeemable debts(WHEN AMT. IS GIVEN)
Debenture 1000000
Rate of Interest 10%
Issued at par
Issued at discount 5%
Issued at premium 15%
Floatation Cost 2% I = Annual Interest Payme
Tax Rate 30% NP = Net Proceeds from i
t = Tax Rate
Solution
Cost of Debts
(i) When issued at par
Kd = (1000000*0.1)*(1-0.3)/(1000000-0.02*1000000)
Kd = 0.071429
(ii) When issued at Discount
Kd = (1000000*0.1)*(1-0.3)/(1000000*(1-0.05)-0.02*1000000
Kd = 0.075269
(iii) When issued at Premium
Kd = (1000000*0.1)*(1-0.3)/(1000000*(1-0.15)-0.02*1000000
Kd = 0.062112
Cost of Redeemable Debt (kd)
Question
Debtenture 1000000
Rate of Interest 10%
Redeemable at par
Issued at par Redeemable at premium 2%
Issued at discount 5% Redeemable at premium 5%
Issued at premium 10%
Floatation Cost 1%
Tax Rate 30%
Solution
Cost of Debts
I = Annual Interest Payme
NP = Net Proceeds from i
(i) When issued at par T = Tax Rate
RV =Reedemable Value
I= 100000
NP = 990000
t= 30%
RV = 1000000
N= 10
Kd = 0.071357
(i) When issued at Discount
I= 100000
NP = 940000
t= 30%
RV = 1020000
N= 10
Kd = 0.079592
(i) When issued at Premium
I= 100000
NP = 1089000
t= 30%
RV = 1050000
N= 10
Kd = 70000.22
Cost of PSC
Question
Preference Shares 1000000
Rate of dividend 10%
Issued at par
Issued at discount of 5%
Issued at remium of 15%
Floatation Cost 1%
Solution:
Cost of Preference Share Capital
Kp= Preference Dividend (PD) /Net Proceed(NP)
PD = Preference Dividend
NP= Net Proceeds from issue of Preference Share
(i) When issued at par
Kp = (1000000*0.1)/(1000000-0.01*1000000)
Kp = 0.1010
ii) When issued at Discount
Kp = (1000000*0.1)/(1000000(1-0.05)-0.01*1000000)
Kp = 0.105263
(iii) When issued at Premium
Kp = (1000000*0.1)/((1000000(1+0.15)-0.01*1000000*(1+0.15))
Kp = 8.78%
Cost of Redeemable Preference Share (kp)
In case of redeemable pre share capital when amt. is given
Question
Debtenture 1000000
Rate of Interest 10%
Redeemable at par
Issued at par Redeemable at Disc 10%
Issued at discount 8% Redeemable at premium 5%
Issued at premium 50%
Floatation Cost 1%
Tax Rate 30% Cost of Pre. Share Capita
Kp [PD+(rv-np)/N]/(rv+NP
Solution :
(i) When issued at par PD= 100000
NP= 1490000
t= 30%
RV= 1050000
N= 10
Kp= 10.15
Weighted Average Cost of Capital (ko)
Question
Capital Structure :
Sources Book Value Market value Specific Cost(%)
Equity Share Capital 4000000 5000000 17%
Pre. Share Capital 1000000 1500000 9%
Debenture 3000000 3500000 8%
Tax Rate 30%
Solution :
Calculation of Weighted Averare Cost of Capital (Book Value Weights Basis)
Sources Book Values Weight (WSpecific Cost (K) Weighted Cost(w*k)
Equity Share Capital 5000000 0.5 17% 8.50%
Pre. Share Capital 1500000 0.15 9% 1.35%
Debenture 3500000 0.35 5.60% 1.96%
WACC or K 11.81%
In Case of Equity(if d1 is given)
cted Dividend
ent market Price
(11/110)+0.1
I = Annual Interest Payment
NP = Net Proceeds from issue Of Debt
t = Tax Rate
00-0.02*1000000)
00*(1-0.05)-0.02*1000000)
00*(1-0.15)-0.02*1000000)*(1+0.15))
Years
after 10
after 10
after 10
I = Annual Interest Payment
NP = Net Proceeds from issue Of Debt
T = Tax Rate
RV =Reedemable Value
Years
after 10
after 10
after 10
Cost of Pre. Share Capital
Kp [PD+(rv-np)/N]/(rv+NP)/2
