Financial Management

Case Study on
Divya Electronics Ltd.

Presented by:
Sandeep & Group
Sneha & Group
Khushbu Sheth & Group
 Case facts…..
Executive chairman Mr. Dipankar Mitra
Current equity to debt ratio 21:29
Reserve and Surplus………….…..2500 million
total shares in market……………..140 million
Mr. Dipankar Mitra’s holding…..…45 million.
current market price of share……Rs 115/share.
 DIVYA ELECTRONICS LTD.
• Has an expansion project on hand, which
require an outlay of Rs 2000 million.
• The project will earn revenue of 2400 millions.
• Of which variable cost would account for 60%
of revenue i.e. Rs 1440 millions.
• Fixed operating cost would account for Rs 500
million.
 Financing Options
100% Equity
Issue price Rs 106
Issue expenses Rs 6
Net realization per share: Rs 106- 6 = Rs 100.
So no. of new equity share required to be issued:
= 2000 million/100
= 20 million.
Total no of share holders = 160 (140+20)million.
 Financing options continued……
100% debt
Debentures could be issued at 8% interest rate.
Interest amount = 160 million.
Old interest = 200 million.
Total interest amount = 360 million.

Tax rate applicable = 30 %

(derived from given balance sheet.)
 EPS-PBIT Indifference Point
(PBIT-I-PD)(1-t) = (PBIT-I-PD)(1-t)
No. of equity shares No. of equity shares

(PBIT- 200)(1-0.30) (PBIT-360)(1-0.30)

=
160 140

40320-19600 = 112PBIT- 98PBIT

PBIT = 1480 million

 EPS INDIFFRENCE POINT
Whole Equity Whole Debt
EPS= (PBIT-I)(1-t) = (PBIT- I)(1 –t)
No. of Equity Shares No. of Equity Shares
= (1480- 200) (1-0.30) = (1480-360)(1-0.30)
160 140

= Rs 5.6 = Rs 5.6
 EPS When Expansion Project is Fully
Operational
Option A
Sales…………………….……….10400
V.C…………………………………..6240
Contribution…………………..4160
F.C…………………………………..2300
PBIT………………………………..1860
Interest…………………………….200
PBT…………………………………1660
Tax……………………………………498
PAT…………..…………………….1162
No of equity share…….160 million
EPS…………………….Rs 7.26/-
Option B
Sales………………………………………10400
V.C…………………………………………..6240
Contribution……………………………4160
F.C…………………………………………..2300
PBIT………………………………………...1860
Interest ……………………………………..360
PBT…………………………………………..1500
Tax……………………………………………..450
PAT ………………………………………….1050
No of equity shares………...140million
EPS………………………………..Rs 7.50/-
 Degree of capital leverage
Option A Option B
DTL = contribution/PBT DTL = contribution/PBT

= (960+3200)/1660 = (960+3200)/1500

DTL = 2.51 DTL = 2.77

 Other Important Issue For Decision Making

• P.E. Ratio of company before expansion is 19.17%

• After expansion for equity option would be
14.60%
• After expansion for debt option would be 15.33%.
• Dilution of control.
THANK YOU
HAVE A GREAT DAY