The document summarizes financial analyses and calculations related to investing options. It provides examples of calculating EPS, WACC, DOL, DFL, and analyzing capital structure decisions. Key criteria discussed for evaluating investment options include debt-equity ratio, working capital, and EPS. The document also provides examples of calculating NPV and IRR using different discount rates.

1. 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

2. Financial Analysis Dr. T.K. Jain. AFTERSCHOOOL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] www.afterschool.tk www.afterschoool.tk

3. 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

4. SOLUTION . . . 29.5 19.75 12.5 ROE 2.95 1.975 1.25 EPS 2.95 3.95 6.25 EAT 5.9 7.9 12.5 EBT 4.5 1.8 Interest on debt 2.1 2.8 Interest on debenture 12.5 12.5 12.5 EBIT

5. Solution . . . C company is the best option.

6. 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. New Debt Equity ratio = (10+6) / (10+4) =16/14 ( OK – it is still less than 2:1.

7. Solution . . . . Weighted average cost of capital . . . It is weighted cost of all the sources of capital. Cost of equity = (dividend / Market price) + growth rate =12/105 + .06 = .114+.06 = .174 (earlier it was (.09+.06) = .15 (thus it has increased.

8. Solution . . . Cost of Debt. Debentures = .12 Cost of loan = .14 Preference shares = .10

9. Calculation of weighted cost of capital . . Let us take weights. . . Total equity is 10 lakh, preference is 4 lakhs, debentures is 6 lakhs and loans are 10 lakhs. = total = 30 weightes are 10/30 = .33 for equity, .13 for preference, .2 for debentures, .33 for debentures. Let us multiply these weights to the costs, and we will get the answer.

10. New wcc. 0.1406 0.013 0.13 0.1 0.0462 0.33 0.14 0.024 0.2 0.12 0.0574 0.33 0.174 wcc weight cost

11. Solution. . . 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%.

12. 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 Step 2 : deduct preference dividend) = .845 – (preference dividend .75) = .095 lakkhs Step 3 : divide by number of shares. 9500 / 4000 = 2.3 approx. Interest on debenure = .14*4 = .56 lakhs.

13. 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? DFL = Degree of Financial Leverage DFL = EBIT / (EBIT – Int. – (Dividend on preference / 1-tax) ) =1.86 / (1.86 - .56 – (.75/.65)) =1.86 / (1.3 – 1.15) =1.86 / .15 = 12.4 (it is very risky company). Ans.

14. My sales are Rs. 25 lakhs and my fixed costs are Rs. 7.5 lakhs. Variable expenses are 50% of sales. What is my DOL? DOL = Degree of Operating Leverage. DOL = (Sales – Variable expenses ) / EBIT EBIT = (sales – all expenses) = 25 – (7.5+12.5) = 5 lakhs = (25-12.5) / 5 =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

15. 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)

16. EBIT is 1200 lakhs, EBT is 320 lakhs and Fixed costs are 700 lakhs. What is DCL? What is interest coverage? DCL = degree of combined leverage It is calculated by any of two methods: DCL = DOL * DFL Or DCL = Contribution / EBT Contribution = Sales – variable cost (Sales – Variable cost ) = EBIT + Fixed cost. = 1200 + 700 = 1900. 1900 / 320 = 5.93 answer. Interest coverage = EBIT / Interest =1200 / (1200-320) = 1200 / 880 = 1.36 ans.

18. As an investor, I have 2 options, in which I get 6000 after 1 year in another, I get 9000 after 4 years. Discount rate is 10%. Which option is better? 6000 after one year mean 6000/ (1.1)^1 today, thus I have 5454 today. 9000 after 4 years mean 9000/ (1.1)^4 means 6147, thus second option is better.

19. As an investor, I have 2 options, in which I get 6000 after 1 year in another, I get 9000 after 4 years. Discount rate is 20%. Which option is better? 6000 after one year mean 6000/ (1.2)^1 today, thus I have 4999 today. 9000 after 4 years mean 9000/ (1.2)^4 means 4340, thus 1 st option is better.

20. As an investor, I have 2 options, in which I get 6000 after 2 year in another, I get 9000 after 5 years. Discount rate is 18%. Which option is better? 6000 after 2 year mean 6000/ (1.18)^2 today, thus I have 4316 today. 9000 after 5 years mean 9000/ (1.18)^5 means 3933 , thus 1 st option is better.

21. I will need 100 crores after 5 years from now. How much money should I deposit in my bank account every year? Rate : 10% Amt ((1+interest rate)^N – 1) / rate of interest) = future value of amount. Thus Amt ((1.1)^5 -1)/.1 = 100 Or amt (.61/.1) = 100 Or amount = 100/6.1 Or amount = 16.38 approximate every year.

22. My equity capital is 60 lakh, debt is 40 lakh. Beta of my stocks is 1.5, risk premium in the market = 10% and treasury bill is at 8%. What is my cost of capital ? Treasury bill (govt. bill) have risk free interest = so risk free rate of return is 8%. Market rate = risk free rate + risk premium CAPM = capital asset pricing model CAPM fomulae : Risk free rate + Beta * (Market rate – risk free rate) =8 + 1.5* (18-8) =8 + 15 = 23 %.

23. Risk free rate = 7.75%, Beta = 2, Market rate = 16%. Calculate cost of capital using CAPM? CAPM = capital asset pricing model CAPM fomulae : Risk free rate + Beta * (Market rate – risk free rate) =7.75 + 2 (16-7.75) =24.25 answer.

24. Risk free rate = 7.75%, Beta = 2, My cost of capital = 16%. Calculate market rate of returns using CAPM? CAPM fomulae : Risk free rate + Beta * (Market rate – risk free rate) =16= 7.75 +2 (Market rate – 7.75) =16-7.75 = 2M – 15.5 =8.25 +15.5 = 2M M = 11.78 answer.

25. 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.

26. 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)

27. Solution . . . . We get 18% in comparison to 17.2 in the first sector, thus it is very profitable (by .8) In second sector, we get 18% but expectation is 19%, so it is not upto the mark. Third sector is the best performing sector.

28. I shall get 100 crore after 5 years (from afterschooolians), what is the value of that today? Rate = 10% = 100 / (1+interest rate)^n =100/ (1.1)^5 =100/1.61 =62.11 approximate.

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