Financial Analysis AFTERSCHOOOL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’ Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL
Financial Analysis Dr. T.K. Jain. AFTERSCHOOOL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] www.afterschool.tk www.afterschoool.tk
There are three companies A,B,C. You want to invest in only one of these, Tax rate 50%. Minimum dividend is 20% (all these). Expected rate of return is 25%. Where will you invest? (each share is of Rs. 10) 25 10 Loan from F.I. at18% 15 20 14% debentures C 10 B 20 A 50 Shares capital
Equity 10 lakh, 10% preference shares 4 Lakh, 12% debentures 6 Lakh. Market price of share 110, dividend 10/ Tax 50%. We want to borrow 10 Lakhs at 14%, it will reduce market price from 110 to 105 but dividend will increase from 10 to 12. should we go for it? Growth rate 6%
Let us take 3 criteria 1. Debt Equity ratio, 2. WCC, 3. EPS.
Thus this option is better as per new option as WCC is very low and cost of equity is also low - not very high. EPS is also increasing. Cost of equity is less than 20%.
Operating income of my company is 1.86 lakhs. We pay 35% tax. Our capital structure consists of 14% debenture of 4 lakh and 15% preference shares of Rs. 5 lakh and equality shares of Rs. 4 lakh (100 each), what is my EPS?
Step 1. (deduct interest and tax) Income (minus interest) – tax = 1.86 ( - .56) – (.35 of 1.3) = 1.3-.455 = .845
Operating income of my company is 1.86 lakhs. We pay 35% tax. Our capital structure consists of 14% debenture of 4 lakh and 15% preference shares of Rs. 5 lakh and equality shares of Rs. 4 lakh (100 each), what is my DFL?
=12.5 / 5 = 2.5 (my business risk is not very high – if DOL had been more, my business risk would have been higher).
EBIT = Earning before interest and taxes
I want to buy a new business, the sales in that is 20 lakhs, fixed expenses are 15 lakhs and variable expenses are 12% of sales. Is the decision to buy the business appropriate on the business risk criteria? (I don’t want to take high risk)
DOL = (sales – Variable exp) / EBIT
= (20-2.4) / (20-(15+2.4))
=17.6 / 2.6
=6.76 (which is high risk)
EBIT is 1200 lakhs, EBT is 320 lakhs and Fixed costs are 700 lakhs. What is DCL? What is interest coverage?
If Market rate is 14%, risk free rate is 8.25% and my cost of capital is 18%. What is my BETA?
CAPM fomulae cost of capital = : Risk free rate + Beta * (Market rate – risk free rate)
18 = 8.25 + Beta (14-8.25)
18-8.25= beta (5.75)
Beta = 9.75 / 5.75 = 1.7 answer.
You have invested your money in four sectors. The average returns are 18, 18, 24 and 16 respectively. Your beta of these sectors are .9, 1.12, 1.5, .95. which is best sector? Risk free return = 10 and market return = 18%
Expected returns = RF + Beta(RM-RF)
=10+.9(18-10) = 10+7.2 = 17.2 so on.
Thus we get expected returns for these four sectors which are 17.2, 19, 22 and 17.6. Thus third sector has outperformed in comparison to expectations (24-22 = 2)
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