Mathur Sir Classes | 7003165955, 8777249775

Leverages

DOL = Degree of operating leverage

DFL = Degree of financial leverage
DCL = Degree of combined leverage
Formula:
C % change in PBIT
1. DOL= PBIT = % change in sales
PBIT PBIT % Change in EPS
2. DFL=PBIT−I = = % change in PBIT
PBT
𝐶 𝑃𝐵𝐼𝑇 𝐶
3. DCL= DOL x DFL=𝑃𝐵𝐼𝑇 × = 𝑃𝐵𝑇
𝑃𝐵𝑇

Format _
Operating and Financial Statement of Profits _
Rs.
Sales (S) x
Less: Variable cost (V) x
Contribution (C) x
Less: Operating fixed cost
(i.e., Depreciation, rent, salaries) x
Profit before interest & tax (PBIT) x
Less: Financial fixed cost
(i.e., interest on loan/ borrowed capital) x
Profit before tax (PBT) x
Less: tax (% given) x
Profit after tax (PAT) x
Less: Dividend on preference shares x
Profit available to equity share holder (PAES) x

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Cost of Capital

Ex. 10,00,000, 12%, Debenture @ 100

100 x 12% = 12 1,20,000 (1 – 0.50)
12 (1 – 0.50) 10,00,000
100 = 0.06 or, 6%
= 0.06 or, 6%

1. Cost of debt (Debenture & Loan)

Interest (1−tax rate)
(a) If Redemption Condition is not given = Net proceeds of Debt/Loan
A+B
(b) If Redemption Condition is given = C
Interest = Face value of debt x rate of interest
Tax rate = Income tax rate
Net proceeds= Sale value of Debt (including Premium or Discount) – Expenses or
Commission (Floatation Cost)
A = Interest (1 – tax)
B = Discount on Issue + Premium on Redemption + Issue Expense – Premium on Issue
No. of years
C = Net issued Price (IP) + Redeemed Price (RP)
2

2. Cost of Preference Shares

(a) If Redemption Condition is not given
Dividend(I+tax rate)
Cost of Preference Shares = Net proceeds of Pref. Shares
(b) If Redemption Condition is given
A+B
Cost of Preference Shares = C
A = Dividend (I + tax)
B = Discount on Issue +Premium on Redemption + Issue Expense – Premium on Issue
No. of years
C = Net issued Price (IP) + Redeemed Price (RP)
2
[Note: In case of Preference Share, Dividend Tax will be taken for calculation, but in other
case Income Tax / Corporate Tax rate should be considered]

3. Equity Share / Retained Earning = Reserve and Surplus

Dividend Per Sahres
(a) 𝐂𝐨𝐬𝐭 𝐨𝐟 𝐄𝐪𝐮𝐢𝐭𝐲 𝐒𝐡𝐚𝐫𝐞𝐬 = 〈Current Market Price of Equity Shares 〉 + Growth Rate
Dividend Per Shares = DPS; Current Market Price = MPS; Growth Rate = G/ g
(b) 𝐑𝐢𝐬𝐤 𝐅𝐫𝐞𝐞 𝐑𝐞𝐭𝐮𝐫𝐧 + 𝐁𝐞𝐭𝐚 〈Market Rate of Return − Risk Free Return〉
Dividend
∴ 𝐏𝐫𝐢𝐜𝐞 𝐏𝐞𝐫 𝐒𝐡𝐚𝐫𝐞𝐬 =
Cost of Equity Shares − Growth Rate (Anticipated)

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Capital Structure

❖ Introduction

Liabilities Amt. 1st Op 2nd Op

Equity Share Capital 10.00 20.00 15.00
Preference Shares Capital 5.00 5.00 5.00
“ Debentures 7.00 7.00 12.00
“ Loan 3.00 3.00 3.00
Total 25.00 35.00 35.00
st
1 Option. Increase Rs. 10.00 lakh by way of issued of Equity Shares.
2nd Option. Increase Rs. 10.00 lakh by issue of 5.00 lakh by Equity Shares and another
Rs. 5.00 lakh by issue of Debenture.

❖ Net Income Approach (NI):

PBIT x
Less: Interest on Debenture x
PBT xx
Less: % Tax x
PAT xxx

a) Capitalization Rate (Ke) (Given)

𝑃𝐴𝑇
b) Market Value of Equity ( 𝐾𝑒 ) xx
c) Value of Debenture (Given)
d) Value of firm (Value of Equity + Value of Debenture) xx
Total
❖ Net Operating Income Approach (NOI):

PBIT x
Less: % Tax x
PAT xxx

a) Capitalization Rate (Ke) (Given)

𝑃𝐴𝑇
b) Market Value of Equity ( 𝐾𝑒 ) xx
c) Value of Debenture (Amount of Debenture x Tax rate) (Given)
d) Value of firm (Value of Equity + Value of Debenture) xx

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Working Capital Requirement

Working Capital Management: Working capital management is the most important area of
finance. It covers all the current accounts of the firm. It is concerned with the management
of current assets, current liabilities and total working capital.
[∴ Working Capital = CA + F/A – CL]

1st Type
Working capital: Material + Labour + Overhead = Working Capital
Ex: Month: 2,00,000 + 1,00,000 + 1,00,000 = 4,00,000
Store: 2,00,000 + x + x
W. I. P: 1,00,000 + 50,000 + 50,000
Finished Goods: 2,00,000 + 1,00,000 + 1,00,000
Debtors: 4,00,000 + 2,00,000 + 2,00,000
9,00,000 + 3,50,000 + 3,50,000

2nd Type
Working Capital = Current Assets – Current Liabilities
Current Assets = Inventory + Debtors (at Cost) + Cash or Bank
Current Liabilities = Creditors

3rd Type
Operating Cycle/ Working Capital Cycle
Working capital cycle denotes the length of time between the firm’s paying cash for materials.
Entering into W.I.P, making finished goods, selling finished goods to the debtors and the
inflow of cash from debtors.
Working capital cycle which is also known as operating cycle or cash cycle indicates the length
of time or time gap between outflows of cash and inflows of cash.

Operating Cycle/ Working Capital Cycle

Methods Month/week
1) Raw material storage period x
2) W.I.P period x
3) Finished goods storage period x
4) Debtors collection period x
xx
Less: Creditors payment period x
Net Operating Cycle x

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4th Type (Format):

Money Block Period.
(A) Raw Material Shortage Period
Raw Material Stock
(Consumption/Purchase x360) x
(B) Work-in-Progress Period
Average Stock of W.I.P.
(Cost ofProduction/Cost of Goods sold x360) x

(C) Finished Goods Shortage Period

Average Stock of Finished Goods
( x360) x
Cost of Goods Sold

(D) Debtors Payment Period

Average Debtors
( x360) x
Creditor Sales
Gross Operating Cycle x

Less: Creditors Payment

Average Creditors
( x360) x
Credit Purchase
Net Operating Cycle x

The Tandon Committee had suggested three methods for determining the maximum
permissible bank finance (MPBF)
Method I: MPBF = 75% of (CA - CL)
Method II: MPBF = (75% of CA) – CL
Method III: MPBF = 75% of (CA – CCA) – CL
Here, CA = Current Assets; CL = Current Liabilities; CCA= Core Current Assets.

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Capital Expenditure

Methods for Evaluating Capital Expenditure

(1) Pay-back Period / Method (PBP)
(i) When the CFAT p.a. are Constant
(ii) When the CFAT p.a. are Variable
(2) Average Rate of Return (ARR) Method
(3) Discounted Pay-back Period Method
(4) Net Present Value Method (NPV)
(5) Profitability Index Method (PI)
(6) Internal Rate of Return (IRR) Method

(1) Pay-back Period / Method (PBP)

When CFAT is fixed
Initial investment
(i) PBP = Constant+ CFAT p.a (When CFAT is Fixed/Lower Time Period)
Pay Back Profitability = (Expected Life of the Project – PBP) x CFAT p. a., (On Profit Basis)

Calculation of CFAT (Cash Inflow After Tax Before Depreciation)

Rs.
Sales x
Less: Variable cost x
Contribution xx
Less: Operating fixed cost (including depreciation x
PBIT xx
Less: Interest on debt x
PBT xx
Less: % tax x
PAT xx
Add: Depreciation x
CFAT xx

When CFAT is not fixed

Step I: Calculate CFAT of each year
Step II: Compute cumulative CFAT

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(2) Average Rate of Return (ARR)

Average PAT
Average Rate of Return (ARR) = Average Investment x 100

Average PAT
Average Rate of Return (ARR) = Average Investment x 100
Total PAT
Average PAT = Total no.of Years

Initial Investment−Scrap Value

Average Investment = + Scrap Value + Additional Working
2
Capital (Further Investment)

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Dividend Policies

Dividend refers to the return on capital invested in shares. Dividend is payable to the
shareholder. Fixed rate of dividend is payable to preference shareholders and variable rate
of dividend is payable to equity shareholders.

Various Dividend Policy Models

Walter’s model Gordon’s model Modigliani and Miller’s
model
D r/k(E−D) E (l−b) P1+D1
P=K+ P= P0 =
K K−b.r I+Ke
Here, Here, Here,
P=MPS P=MPS P0= current market price per
D= Dividend per share E=EPS share
E=EPS B= Retention ratio (D.P Ke=cost of capital
R= rate of return on ratio=100%) D1=expected dividend at
investment K= Cost of capital the end of one year
K= cost of capital or market R= rate of P1=MPS at the end of one
capitalisation rate return/profitability rate year.

How many Equity Shares to be issued for New Ventures?

MP1 = I – (E – n. D.)
Here, I = New Investment.
E = Total Earnings.
No. = No. of Equity Share at the beginning.
m = No. of New Share to be issued.
D1 = Dividend per Share at the end.
P1 = MPS at the end of the one year.

Value of Firm (V):

(𝐧+𝐦)𝐏𝟏−𝐈+𝐄
V=
(𝟏+𝐤)
Here, V = Value of Firm.
K = Cost of Capital.
I = New Investment.
E = Total Earning.
P = MPS at the end of the one year.
M = No. of New Share to be issued.
N = No. of Equity Share at the beginning.

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Source of Finance / Time Value of Money

Important Formula (Based on Compound Interest and Annuities)

A.
𝐫 𝐧 𝐫
1. 𝐀 (𝐅𝐯) = (𝐏𝐯) (𝟏 + 𝟏𝟎𝟎) 𝐘𝐞𝐚𝐫𝐥𝐲 (𝐢 = 𝟏𝟎𝟎)
𝐫 𝟐𝐧
𝟐 𝐘𝐞𝐚𝐫𝐥𝐲
2. 𝐀 (𝐅𝐯) = (𝐏𝐯) (𝟏 + ) 𝐇𝐚𝐥𝐟 𝐁𝐢𝐚𝐧𝐧𝐮𝐚𝐥𝐲
𝟏𝟎𝟎
𝐫 𝟒𝐧
𝟒
3. 𝐀 (𝐅𝐯) = (𝐏𝐯) (𝟏 + ) 𝐐𝐮𝐚𝐫𝐭𝐞𝐫𝐥𝐲 𝐘𝐞𝐚𝐫𝐥𝐲
𝟏𝟎𝟎
(𝐅𝐯) = 𝐅𝐚𝐜𝐞 𝐕𝐚𝐥𝐮𝐞
(𝐏𝐯) = 𝐏𝐫𝐞𝐬𝐞𝐧𝐭 𝐕𝐚𝐥𝐮𝐞

B. If FVIF (Future Value of Investment) is given then,

∴ Future Value of Investment = Amount Invested x FIVF (Given) Present Value.

Based on Annuities
C. To find out Instalments (in Annuities)
(𝟏+𝒓)𝒏 −𝟏
𝑭𝑽𝑨 = 𝑨 ( )
𝒓
𝐋𝐨𝐚𝐧 𝐀𝐦𝐨𝐮𝐧𝐭
∗ Future Value of Instalments = 𝐏𝐕𝐈𝐅𝐀 (𝐆𝐢𝐯𝐞𝐧)
𝐅𝐕
∗ Present Value of Instalments = (𝟏+𝐫)𝐧
D. If PVIFA is not given, but “Equal instalments” to be find out then,
𝑨 𝟏
𝑷𝑽𝑨 = = (𝟏 − (𝟏+𝒊)𝒏 ) to find out Equal instalment (in any Loan Amount)
𝒊

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