Share capital:

10000 equity shares of Rs 100 each fully paid up 10, 00,000

25000,11% cumulative preference shares of Rs 10 each fully paid up 2,50,000 Rs 12,50,000

Reserves and surplus……………………………………………………………………………………………………………….25, 00,000

Secured loans…………………………………………………………………………………………………………………………..20, 00,000

Unsecured loans………………………………………………………………………………………………………………………12, 00,000

Trade creditors…………………………………………………………………………………………………………………………18, 00,000

Outstanding expenses………………………………………………………………………………………………………………7, 50,000

95, 00,000

Represented BY

Fixed assets………………………………………………………………………………………..55, 00,000

Current assets……………………………………………………………………………………37, 00,000

Advances and deposits………………………………………………………………………3, 00,000 95, 00,000

The company plans to manufacture a new product in line with its current production, the capitol cost of
which is estimated to be Rs 25 Lakh.the Company desires to finance the new project to the extent of Rs
16 lakh by issue of equity shares at a premium of Rs 100 per share and the balance to be raised from
internal sources.

Additional information made available to you are:

(a) Rate of dividends declared in the past five years (including 2007) i.e. year ended 31 st march ,
2007, 31st march,2006,31st march,2005,31st march,2004 and 31st march 2003 were 24 percent ,
24 percent,20 percent, 20 percent,18 percent respectively.
(b) Normal earning capacity (net of tax) of the business is 10%.
(c) Turnover in the last three years was Rs 80 lakh (31.3.2007), Rs 60 lakh (31.3.2006) and Rs 50
lakh (31.3.2005).
(d) Anticipated additional sales from the new project Rs 30 lakh annually.
(e) Net profit before tax from the existing business which was 10% in the last three years(2005-07)
is expected to increase to 12 percent on account of new product sales.
(f) Income-tax rate is 35%.
(g) The trend of market price of the equity share of the company, quoted on the stock exchange
was:

Year High Low

2006-2007 Rs 300 Rs 190
2005-2006 Rs 250 Rs 180
2004-2005 Rs 240 Rs 180

You are required to examine whether the company’s proposal is justified. Do you have any
suggestions to offer in this regard? All workings must form part of your answer.
S.NO TOPIC PAGE NO
1 INTRODUCTION 4
2 FINANCIAL ANALYSIS 5
3 EBIT AND EPS ANALYSIS 8
4 CAPITAL STRUCTURE 9
5 NET INCOME 10
APPROACH
6 NET OPERATING 11
INCOME APPROACH
7 TRADITIONAL 12
APPROACH
8 MM APPROACH 13

9
DIVIDEND 15

DECISIONS
10
FINANCIAL 18

FORECASTING
11
Pro forma Balance 19

Sheet: