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# Corporate Valuation

Syllabus

## Chapter : Valuation Tools : An Overview

The Time Value of Money, Risk Measurement, Accounting
Data , Statistics, Looking for relationship in the Data,
Purposes for Valuation And Various Special Situations
Time Value of Money
Q.1) Mr. Parekh has invested 50,000 on Xerox Machine on 1st Jan 2012. He estimates net cash
income from Xerox Machine in next 5 years as under.
Year
Estimated Inflows
2012
12,000
2013
15,000
2014
18,000
2015
25,000
2016
30,000
At the end of fifth year, machine will be sold at scrap value of 5,000. In addition to investment,
working capital is 10,000. Advice him whether his project is viable, considering interest rate of
10% p.a.
Q.2) A finance company has offered a scheme of investment where a person investing 40,000,
presently is entitled to returns of 8,000, 9,000, 10,000, 11,000 and 12,000 in the next
five years. The indicated rate of interest is 10% p.a. Advise whether the investment is profitable.
Q.3) Mr. Yogesh is planning to retire this year. His company can pay him a lump sum retirement
payment of 2,00,000 or 25,000 lifetime annuity whichever he chooses. Mr. Yogesh is in
good health and estimates to live for at least 20 years. If the interest rate is 12%, which
alternative should he choose?
Q.4) Mittal enterprises purchases a machinery for 1,00,000 on 1st January 2002. The profit
expected from the machinery are as follows:
2002 7000
2003 9000
2004 19000
2005 23,000
2006 35,000
The depreciation on machinery is to be provided @10% p.a. WDV. At end of 2006, the
machinery is sold at loss of 7,500. The rate of interest being 9%. Comment on Decision.
Q.5) Four equal annual payments of 5,000 are to be made into a deposit account that pays 8%
per year. What is future value of this annuity at end of 4 years.
Q.6) Krishnamurthy has inherited 1,000 a year for next 20 years. First payment being made in
one years time. However he is need of money immediately and would like to sell his income to
any buyer who would pay him the right price. Assume that the current market rate of interest is
10%.
(a) What should be the right price he should accept?
(b) How much of his income should he sell if he wants only 2,500 at present.
(c) If you are interested in buying the income but if you had only 5,000 to invest, what would
Q.7) If the interest rate is 12 per cent, what are the doubling periods as per the rule of 72 and the
rule of 69 respectively?

Q.8) A borrower offers 16 per cent nominal rate of interest with quarterly compounding. What is
the effective rate of interest?
Q.9) Fifteen annual payments of 5,000 are made into a deposit account that pays 14 per cent
interest per year. What is the future value of this annuity at the end of 15 years?
Q.10) What is the present value of
is 10 per cent?

## 1,000,000 receivable 60 years from now, if the discount rate

Q.11) A 12 year payment annuity of 10,000 will begin 8 years hence. (The first payment
occurs at the end of 8 years). What is the present value of this annuity if the discount rate is 14
per cent?
a.
b.
c.
d.
e.

Q.12)As a winner of a competition, you can choose one of the following prizes:
5,00,000 now
10,00,000 at the end of 6 years
60,000 a year forever
1,00,000 per year for 10 years
35,000 next year and rising thereafter by 5 percent per year forever.
If the interest rate is 10 percent, which prize has the highest present value.
Q.13) XYZ Ltd. is planning to purchase a machinery Costing 2,80,000/- and Installation
charges at 50,000/-. It expects to generate the yearly cash flow for first five years at
90,000/-, 85,000/-, 70,000/-, 60,000/- and 50,000/- respectively. If the cost of capital is
12%.
Q.14) Himesh Ltd. is considering one of the two mutually exclusive Project X and Project Y
which require cash outlay of 50,000 and 70,000 respectively. The current yield on
Government Bonds is 5% and the risk premium is 3%. The expected cash flows are:
Year Project X
Project Y
1
20,000
30,000
2
30,000
40,000
3
40,000
50,000
Which project should be accepted?
Q.15) A Ltd. company is considering two mutually exclusive projects viz. Project X and Project
Y which require cash outflow of 50,000 and 70,000 respectively. The risk free return is 5%
and the risk premium is 3%. The expected cash flow and C.E. are as follows:
Year
Project X
Project Y
Cash Flow
C.E.
Cash Flow
C.E.
1
20,000
0.9
30,000
0.8
2
30,000
0.8
40,000
0.7
3
40,000
0.7
50,000
0.6
a) Which project should be accepted?
b) Which project is riskier and why?
c) If RADR is used, which project should be selected?
Q.16) M & M Ltd. is considering the purchase of a new machine for the immediate expansion
program. There are 3 types of machines in the market for this purpose as follows:
Particulars
Machine A
Machine B
Machine C
Cost of machine
17500
12500
9000
Estimate savings in scrap per year
400
750
250
Estimate savings in direct wages per year
2750
6000
2250
Additional Cost of Indirect Materials per year
400
Expected savings in Indirect Materials per annum
100
250
Additional cost of maintenance per year
750
550
500

800
Estimated Life of machine (Yrs)
10
6
5
Taxation at 40% profit
You are required to advise the management which type of machine should be purchase on
the basis of Payback Period. Risk free rate = 6%, Risk Premium = 3%, Calculate NPV.
Q.17) The global meltdown has shaken the confidence of the business community. Mr. Dipak is
a proprietor of a small manufacturing unit and is planning diversification for survival, but with so
much reservation & hesitation. He has short listed the following three projects, assuming that no
external borrowings will be required. Rf = 9%, Risk premium = 4%.
Project A:
Initial outlay 17 Lakhs, Project life 10years, annual cash flow 3.50 Lakhs
Project B:
Initial outlay 20 Lakhs, Project life 9years, annual cash flow 4.50 Lakhs
Project C:
Initial outlay 29 Lakhs, Project life 7years, annual cash flow 7.00 Lakhs
You are required to grade the above proposals on the basis of:a)
Net present Value.
b) Profitability Index.
c) Pay Back Period.
Q.18) Following are the data on a capital project evaluated by the management of EPG ltd:
Annual cost saving
40,000
Useful life
4 Years
IRR
15%
Profitability index
1.064
NPV
?
COST OF PROJECT
?
Payback
?
Salvage value
0
Cost of Capital
?
Find the missing value considering the following table of the discount factors only.
Discount factor
1st year
2nd Year
3rd Year
4th Year
Total

15%
0.869
0.756
0.658
0.572
2.855

14%
0.877
0.769
0.675
0.592
2.913

13%
0.885
0.783
0.693
0.613
2.974

12%
0.893
0.797
0.712
0.636
3.038

Q.19) Navnirman Ltd. is considering four capital projects for the year 2010 & 2011. The
company is financed by equity entirely and its cost of capital is 12%. The expected cash flows of
the projects are as below:
Year and Cash flows ( 000)
Project 2010 2011 2012 2013
A
(40)
(30)
45
55
B
(50)
(60)
70
80
C
(90)
55
65
D
(60)
20
40
50
Note: Figures in brackets present cash outflows.
All projects are indivisible i.e. size of investment cannot be reduced. None of the projects
can be delayed or undertaken more than once. Calculate which project(s) Navnirman Ltd., should
undertake if the capital available for investment is limited to 1,10,000 in 2010 and with no
limitation in subsequent years. For your analysis use the following present value factors.
Year
2010 2011 2012 2013
Factor
1.00
0.89
0.80
0.71

Q.20) The company Tendulkar Ltd. has to select any one of the following two projects, the
details of which are as under:
Project A: Initial outlay 22 Lakhs, project life 7 years, annual cash flow each year 6 Lakhs.
Project B: Initial outlay 27 Lakhs. Project life 7 years, annual cash flow each year 7 Lakhs.
Rf = 7%, Risk premium = 3%. The finance manager tries to evaluate the options by calculating
the following.
a.
Net Present Value.
b. Profitability Index.
c. Payback period.
Q.21) Semco Company is thinking of replacing a manually done process with a process handled
by computers. They conducted a research spending 50000 to find out how they could proceed
with this idea. They arrived at the following analysis: Risk rate = 8%, Risk premium = 2%.
Manual Process: It requires 4 clerk with salary of 3,000 p.m., one supervisor for 12 months
and another supervisor for 8 months at 5,000 p.m. for each of them. Electricity bill under this
process is 2,500 p.m.
Computerized Process: It can be managed with one computer professional earning 11,500
p.m. Electricity bill under this process will be 4,000 p.m. The computer system will require a
cash outflow of 2,00,000 and will be outdated in the next 5 years. Salvage value after 5 years
will be 5,000. Depreciation is to be charged @ 20% on SLM. Help the company in arriving at
the replacement decision based on NPV method. Ignore taxation.

A
B
C
D
E

Q.22) M/s Gulab & Co. has 2,00,000 to invest. The following proposals are under
consideration. The RADR for the company is estimated to be 15 per cent.
Initial Outlay ( )
Annual Cash Flow ( )
Life of Project (Years)
1,00,000
25,000
10
70,000
20,000
8
30,000
6,000
20
50,000
15,000
10
50,000
12,000
20
Rank the above project on the basis of:
(1) Pay back period;
(2) Net present value;
(3) Profitability index.
Q.23) S Ltd., has 10,00,000 allocated for capital budgeting purposes. The following proposals
& associated profitability index have been determined.
Project
Amount
Profitability Index
1
300000
1.22
2
150000
0.95
3
350000
1.20
4
450000
1.18
5
200000
1.20
6
400000
1.05
Which of the above investment should be undertaken? Assume that projects are indivisible and
there is no alternative use of the money allocated for capital budgeting.
Q.24) From the following project details calculate the sensitivity of the (a) Projec Cost, (b)
Annual Cash Flow and (c) Cost of Capital. Which variable is the most sensitive?
Project Cost
12,000
Life of the Project
4 years
Annual Cash Flow
4,500
Cost of Capital
14%
The annuity factor at 14% for 4 years is 2.9137 and at 18% for 4 years is 2.667.

Q.25) Spicer Company is considering two mutuaaly exclusive projects. Investment outlay of
both the projects is 5,00,000 and each is expected to have a life of 5 years. Under three possible
situations their annual cash flows and probabilities are as under:
Situation Probabilities Project A Project B
Good
0.3
6,00,000
5,00,000
Normal
0.4
4,00,000
4,00,000
Worse
0.3
2,00,000
3,00,000
The cost of capital is 7 per cent, which project should be accepted? Explain with workings.
Q.26) A company Warren Buffett Ltd. is considering two mutually exclusive Projects X and Y.
Project X costs 30,000 and Project Y 36,000. You are given below the net present
probability:
Project X
Project Y
NPV Estimate Probability NPV Estimate Probability
3,000
0.1
3,000
0.2
6,000
0.4
6,000
0.3
12,000
0.4
12,000
0.3
15,000
0.1
15,000
0.2
i) Compute the expected net present value of projects X and Y.
ii) Compute the risk attached to each project, i.e. standard deviation of each probability
distribution.
iii) Which project do you consider more risky and why?
iv) Compute the probability index of each project.
Q.27) Amazon Ltd. is considering accepting one out of two mutually exclusive projects M an N.
The cash flows and probabilities are as follows:
Project M
Project N
Probability
Cash Flow
Probability
Cash Flow
0.10
6,000
0.10
4,000
0.20
7,000
0.25
6,000
0.40
8,000
0.30
8,000
0.20
8,000
0.25
10,000
0.10
10,000
0.10
12,000

Valuation Enhancement
EVA
Q.1) The following data pertain to three division of Aura Incorporated. The company's required
rate of return on invested capital is 8%.
Particulars
Division A
Division B
Division C
Sales Value ( )
?
1 crore
?
Income ( )
8 lacs
20 lacs
?
Average Investment( )
?
25 lacs
?
Sales Margin (%)
20%
?
25%
Capital Turnover (Times)
1
?
?
ROI (%)
?
?
20%
Economic Value Added (EVA) ( )
?
?
1,20,000
Ans: Division A: Sales Revenue= 40,00,000, Capital Employed= 4000000, ROI(%)=20%,
EVA=480000,
Division B: Sales Margin=20%, Capital Turnover=4, ROI(%)=80%, EVA= 18,00,000,
Division C = Sales= 800000, Capital Turnover=0.8, Investment=20%, EVA= 120000,
Income= 20000
Q.2. The Income Statement and Balance Sheet of Tulip Ltd. is given below:
Income Statement
Particulars
(in Lakh)
(in Lakh)
Sales
500
Interest on Investments
10
Profit on sale of old assets
5
Total Income
515
Less:
Manufacturing cost
180
60
Selling and distribution cost
50
Depreciation
30
Loss on sale of an old M/C
5
325
EBIT
190
Less: Interest
20
EBT
170
Less: Tax (30%)
51
PAT
119
EPS(119 Lakh/ 5 Lakh)
23.8
P/E ratio
8
Balance Sheet
Liabilities
Assets
Equity Capital ( 10 share)
50 Building
80
Retained earnings
40 Machinery
70
Long term loan
60 Stock
10
Creditors
15 Debtors
12
Provisions
13 Bank
6
TOTAL
178 TOTAL
178
The cost of equity and cost of debt is 10% and 12% respectively. The company pays 30%
corporate tax.
From the information given you are required to calculate the EVA. Also, calculate MVA on
the basis of Market Value of equity capital.
Ans: EVA= 111.6 lakhs, NOPAT = 126, WACC =9.36%, MVA = 862 Lakhs.

Q.3) Assume that there are two firms, P and R, having total assets amounting to 500000 and
average net profits of 10% that is 50000 each. Firm P has sales of 500000 wheareas the
sales of firm R aggregate 5000000. Determine the earning power of firms P and R.
Q.4) Pizza Hut Ltd. has existing assets in which it has capital invested of 150 crores. The
After Tax Operating Income is 20 crores & Company has a Cost of Capital of 12%.
Estimate the Economic Value Added (EVA) of the firm.
Ans: WACC = 12%, EVA=2
crores.
Q.5) The Income Statement and Balance Sheet of Alpha Company Ltd. is given below:
INCOME STATEMENT
Particulars
Sales
Interest on investments
Profit on sale on old assets
Total Income
Less:
Manufacturing cost
Selling and distribution cost
Depreciation
Loss on sale of an old Building
EBIT
Less: Interest
EBT
Less: Tax (30%)
PAT
EPS [1, 190 Lakhs/ 50 Lakhs]
P/E ratio

(in Lakhs)

(in Lakhs)

5,000
100
50
5,150
1,800
600
500
300
202

3,402
1,748
48
1,700
510
1,190
23.8
2.5

BALANCE SHEET
LIABILITIES
ASSETS
Equity Capital ( 10 share)
500
Buildings
800
Retained profits
400
Machinery
700
Term loan
600
Stock
100
Payables
150
Debtors
120
Provisions
130
Bank
60
TOTAL
1,780
TOTAL
1,780
The cost of equity and cost of debt is 14% and 8% respectively. The company pays 30%
corporate tax.
From the information given you are required to calculate the EVA. Also, calculate MVA on
the basis of Market value of equity capital.
Ans: EVA= 1086 lakhs, NOPAT=1260, WACC=11.60%, MVA=2075, Market Capitalization=
2975, MPS=59.2
Q.6) Einstien Ltd. is considering a capital project for which the foll. information is available.
Investment Outlay
10,000 Depreciation
Straight line
Project Life
5 years Tax rate
40%
Salvage Value
0 Debt Equity ratio
3:2
Annual Revenues
8,000 Cost of equity
20%
Annual costs (excluding depreciation,
4,000 Cost of debt (post tax)
8%

## interest & taxes)

Calculate EVA of the project over its life.
(MU, BMS, Nov. 2012)
Ans: EVA= (80), NOPAT=1200, WACC=12.8
Q.7) For B Ltd. Market rate of return (Rm) = 15%, Interest Rate of Treasury Bonds(Rf)=6.5%,
Beta Factor()=1.20 . Calculate Equity Risk Premium & Cost of Equity (ke).
Ans: Cost of equity = 16.7%
Q.8)The following information is available of Docomo Ltd. Calculate EVA.
12% Debt Capital
2,000 crores
Equity Capital
500 crores
Reserves & Surplus
7,500 crores
Capital Employed
10,000 crores
Risk free rate
9%
Beta factor
1.05
Market rate of return
19%
Operating profit after tax 2,100 crores
Tax rate
30%
Ans: EVA = 371, WACC=17.29, Cost of Debt=8.4%, Cost of equity= 19.5%
Q.9) Compute EVA of BPCL Ltd. for 3 years from the information given (in
Year

Lakhs)
3

## Average Capital Employed

3,000.00 3,500.00 4,000.00
Operating Profit before Interest
850.00
1,250.00 1,600.00
Corporate Income Taxes
80.00
70.00
120.00
Average Debt / Total Capital Employed (in%)
40.00
35.00
13.00
Beta variant
1.10
1.20
1.30
Risk Free Rate (%)
12.50
12.50
12.50
10.00
10.00
10.00
Cost of Debt (Post Tax) (%)
19.00
19.00
20.00
Ans: Capital Employed = Y1=3,000, Y2=3,500, Y3=4000
Q.10) The capital structure of BHEL Ltd is as under:
80,00,000 Equity shares of 10 each = 800 lakhs
1,00,000 12% Preference Shares of 250 each = 250 Lakhs
1,00,000 10% debentures of 500 each = 500 Lakhs
10% term loan from bank = 450 lakhs
The Companys Profit and Loss Account for the year showed a balance PAT of 110
Lakhs, after appropriating Equity Dividend at 20%. The company is in the 40% tax bracket.
Treasury bonds carry 6.5% interest and beta factor for the company may be taken at 1.5. The
long run market rate of return may be taken at 16.5%. Calculate EVA.
Ans: EVA= 98, NOPAT= 357, WACC=12.95
Q.11) From the following information, compute EVA of TCS Ltd. (Assume 35% tax rate)
Equity Share Capital= 1,000 Lakhs
12%
Debenture= 500 Lakhs
Cost of Equity =20%
Financial Leverage= 1.5 times Ans: EVA= (121.95), NOPAT=117, EBIT=180,
WACC=15.93

Q.12) Following Details of Beckham Ltd. is given to you to calculate EVA and comment on the
performance of the company.
Amt in lacs
Particulars
Particulars
Equity Share Capital
13100 Fixed Assets
38900
Reserves
26000 Investments
1940
Long Term Debt 8.5%
2400 Current Assets 1320
Current Liabilities
660
42160
42160
Other Information:
Operating profit before interest & tax 13240;
Income Tax rate 33%
Beta of the Org 1.25;
Risk free rate 9%;
Market rate 13.5%
Q.13) Sneha & Company comprises of five divisions A, B, C, D and E and the present
performance metric is return on assets. However, the controller has suggested management to
switch over to economic value added (EVA) as the criterion rather than return on assets.
Compute and tabulate both return on assets and EVA on the basis of following information (
lakhs) and comment on divisional performance.
Division Profit Fixed Assets Current Assets
A
300
800
160
B
220
400
1,600
C
100
600
1,000
D
110
400
800
E
180
200
800
Controller feels corporate finance rates on current assets and fixed assets should be 5%
and 10% respectively is adequate. [T.B.Q.17, Pg.105]
Ans:
Division
Division
Division
Division
Division
A
B
C
D
E
EVA
212
100
-10
30
120
Q.14) Rupali Ltd. provides you the following information as on 31st March, 2016.
Balance Sheet as on 31-3-2016
Liabilities
( lakhs)
Assets
( Lakhs)
Share Capital
1,000
Fixed Assets
2,250
Reserve & Surplus
1,300
Current Assets
750
Long-Term Debt
200
Creditors
500
3,000
3,000
i) Profit before interest and taxes 2,000 lakhs, ii) Interest paid 30 lakhs, iii) Tax Rate 30%,
iv)Risk Free Rate 11%, v) Long-Term Market Rate = 12%, vi) Beta () = 1.62
You are required to calculate the Economic Value Added.
[T.B.Q.18, Pg.106]
Ans:
i) Calculation of cost of
12.62%
Equity
ii) Calculation of Cost of
15%
Debt
iii)WACC
12.45%
iv) NOPAT
1400 Lakhs
v) EVA
1088.75
Lakhs

2,500 Lakhs

## Extra Practise Problem

Q.15) The Income Statement and Balance Sheet of IHLS Company Ltd. is given below:
Income Statement
Particulars
(in Lakh)
(in Lakh)
Sales
3000
Interest on Investments
60
Profit on sale of old assets
30
Total Income
3090
Less:
Manufacturing cost
1080
360
Selling and distribution cost
300
Depreciation
180
Loss on sale of an old Machinery & Equipments
30
1950
EBIT
1140
Less: Interest
120
EBT
1020
Less: Tax (30%)
306
PAT
714
EPS [714 Lakh/30 Lakh]
23.8
P/E ratio
16
Balance Sheet
Liabilities
Assets
Equity Capital ( 10 share)
300 Building
480
Reserve & Surplus
240 Machinery & Equipments
420
Long term Debt
360 Inventories
60
Creditors
90 Debtors
72
Provisions
78 Bank
36
TOTAL
1068 TOTAL
1068
The cost of equity and cost of debt is 14% and 20% respectively. The company pays 30%
corporate tax. From the information given you are required to calculate the EVA. Also, calculate
MVA on the basis of Market Value of equity capital.
Q.16) Fill in the Blanks:
The following date pertains to three divisions of Prudential Company Ltd. The company's
required rate of return on invested capital is 10%.
Particulars
Division A Division B Division C
Sales Value ( )
?
22 Crore
?
Income ( )
48 lacs
240 Lacs
?
Average Investment ( )
?
300 Lacs
?
Sales Margin (%)
20%
?
15%
Capital Turnover (Times)
2
?
?
ROI (%)
?
?
20%
Residual Income (EVA) ( )
?
?
1440000
Q.17) From the following information, compute EVA of Infosys Ltd. (Assume 30% tax rate)
Equity Share Capital= 1,200 Lakhs
15% Debenture= 800 Lakhs
Cost of Equity =18%

## Q.18) Fill in the blanks

The following date pertains to three divisions of Adidas Company ltd. the companys required
rate of return on invested capital is 8%.
Particulars
Division A Division B Division C
Sales Value ( )
4 Crore
Income ( )
16 Lakhs
80 Lakhs
Average Investment ( )
100 Lakhs
Sales Margin (%)
20%
25%
Capital Turnover (Times)
2
ROI (%)
20%
Residual Income (EVA)( )
4,80,000
Q.19) Dominos & Co. has existing assets in which it has capital invested of 100 crores. The
After Tax Operating Income is 15 crores & Company has a Cost of Capital of 10%. Estimate
the Economic Value Added (EVA) of the firm.
Q.20) Multiplex Ltd. is considering a capital project for which the following information is
available.
Investment outlay
5,000
Depreciation
Straight line
Project life
4 years Tax rate
30%
Salvage value
0
Debt Equity ratio
4:5
Annual revenues
6,000
Cost of equity
18%
Annual costs (excluding depreciation,
3,000
Cost of debt (post tax)
9%
interest & taxes)
Calculate EVA of the project over its life
Q.21) The following information is available of Vodafone Ltd. Calculate EVA.
12% Debt Capital
1,200 lakhs
Equity Capital
300 lakhs
Reserves & Surplus
4,500 lakhs
Capital Employed
6,000 lakhs
Risk free rate
8%
Beta factor
2
Market rate of return
20%
Operating profit after tax
1,260 lakhs
Tax rate
30%
Q.22) Compute EVA of IOCL Ltd. for 3 years from the information given (in
Year
1
2
Average Capital Employed
1,800.00
2100.00
Operating Profit before Interest
510.00
750.00
Corporate Income Taxes
48.00
42.00
Average Debt / Total Capital Employed (in%)
60.00
40.00
Beta Variant
1.50
1.80
Risk Free Rate (%)
10.50
10.50
8.00
8.00
Cost of Debt (Post Tax) (%)
10.00
10.00
Q.23) The capital structure of L & T Ltd is as under:
56,00,000 Equity shares of 10 each =

560 lakhs

Lakhs)
3
2400.00
960.00
72.00
20.00
2.10
10.50
8.00
10.00

## 1,75,000 12% Preference Shares of 100 each = 175 Lakhs

3,50,000 10% debentures of 100 each = 350 Lakhs
10% term loan from bank = 315 lakhs
The Companys Profit and Loss Account for the year showed a balance PAT of 77 Lakhs, after
appropriating Equity Dividend at 20%. The company is in the 30% tax bracket. Treasury bonds
carry 7.5% interest and beta factor for the company may be taken at 1.8. The long run market
rate of return may be taken at 17.5%. Calculate EVA.
Q.24) Calculate EVA from the following data for the year ended 31st march 2016:
Average Debt
Average Equity
Cost of Debt
Cost of Equity
Profit after tax
Interest

25 crores
2,500 crores
8%
15%
12 crores
4 crores
(MU, BMS, Apr. 2012)

## Q.25) Calculate the missing figures for Chile Ltd.

Particulars
Sales Value
20,00,000
Income
4,00,000
Average Investment
5,00,000
Sales Margin (%)
?
Capital Turnover
?
ROI
?
EVA
?
WACC
8%
(MU, BMS, Nov. 2013)
Ans:
EVA
ROI
Capital Turnover
Sales Margin

3,60,00
0
80%
4 Times
20%

## Q.26) Calculate EVA for Sania Mirza Ltd.

(1) Financial average
1.40 times
(2) Cost of Equity
17.50%
(3) Income tax rate
30%
(4) Cost of Debenture after tax
7%
(5) Capital Structure:
(a) Equity Capital
170 lakhs
(b) Retained Earning
130 lakhs
(c) 10% Debenture
400 lakhs
EBIT
Note: Financial Average = EBT

## (MU, BMS, April 2014)

Ans:EVA = 17.5 lakhs

Q.27) Calculate EVA from the following information of HFC Ltd. (MU, BMS, Nov 2014)
Capital Employed
1000 crores

## Debt Equity Ratio

Cost of Equity
Cost of Debt (Pre Tax)
Tax Rate
EBIT

1:4
18%
15%
35%
300 crores
Ans:EVA = 31.5 crores

## Q.28) Calculate the missing figures of Kohli Ltd.

Particulars
Amount in ( )
Sales Value ( )
10,00,000
Income
2,00,000
Average Investment ( )
30,00,000
Sales Margin (%)
?
Capital Turnover (times)
?
R.O.I. (%)
?
EVA (Economic Value Added) ( )
?
(MU, BMS, April 2015)
Q.29) The abridged financial statement of Deportivo Ltd. for the years 2015 and 2016 are given
below:
( million)
Balance Sheet as at
31-3-2015 31-3-2016
Fixed Assets
370
480
Net Current Assets
400
500
770
980
Financed by
Shareholders Fund
595
720
Medium and Long-Term Bank Loans
175
260
770
980
( million)
Profit and Loss Account for the years
2015
2016
Turnover
995
1,180
Pre-tax Accounting Profit
210
265
Taxation
63
80
Profit After Tax
147
185
Dividend
50
60
Retained Earnings
97
125
Pre-tax accounting profit is taken after deducting the economic depreciation of the
companys fixed assets (also depreciation used for tax purpose).
Additionally, the following information are available:
a) Economic depreciation was 95 million in 2014-15 and 105 million in 2015-16.
b) Interest expenses were 13 million in 2014-15 and 18 million in 2015-16.
c) Other non-cash expenses were 31 million in 2014-15 and 36 million in 2015-16.
d) Corporate tax rate in 2014-15 and 2015-16 was 30%.
e) Depritivo Ltd. has non-capitalized leases valued at 35 million in each years 2014-15 to 201516.
f) The companys cost of equity was estimated as 14% in 2014-15 and 16% in 2015-16.
g) The companys pre-tax cost of debt was estimated as 7% in 2014-15 and 8% in 2015-16.
h) The target capital structure is 75% equity and 25% debt.
i) Balance sheet capital employed at the end of 2013-14 was 695 million.
Required : Estimate the Economic Value Added for Deportivo LTd. for the years 2014-15
and 2015-16.
Ans:EVA = 125.73 Lakhs

Q.30) The Accounts of Siteraze Ltd. (SL) engaged in manufacturing business are summarized
below: Income statement for the year ended March, 2016:
( million)
Sales Ravenue
95.00
Less: Cost of Goods Sold
59.10
General Expenses
6.80
7.80
Selling and Distribution Expenses
2.90
Interest on Loan
1.80
78.40
Earnings Before tax (EBT)
16.60
Less: Corporate Taxes (0.35)
5.81
Earnings After Taxes (EAT)
10.79
Balance Sheet as at March, 31, 2016
Liabilities
( million)
Assets
( million)
Equity Share Capital
10.00
Freehold Land and Builing (Net)
20.00
(10 Lakh Shares of 10 each)
Plant and Machinery (Net)
28.50
Reserves and Surplus
31.50
Current Assets :
10% Loan
18.00
Stock
10.00
Creditors and Other Liabilities
18.00
Debtors
15.00
Bank and Cash Balances
4.00
77.50
77.50
1. The risk free rate of return in the economy is 8% and the premium expected from business in
general is 5%. The beta of Siteraze Ltd. shares is currently 1.27.
2. The equity shares of this company (S.L.) quoted in the market as on 31-3-2016 are 50 per
share.
3. General expenses include R & D expenses of 0.50 million.
Note: For EVA computation R & D expenses are to be considered as an investment.
Requirement:
i) Determine the Economic Value Added (EVA) for the year ended 31, 2016 and
ii) Determine the amount of Market Value Added (MVA) of the year ended March 31, 2016.
Ans:WACC = 11.995%, EVA =5.26 million, MVA = 8 million
Q.31) Jayepee Cement Ltd. used the Economic Value Added method for measuring divisional
profit performance. The company charges each division a 5% return on its average current assets
and a 10% return on its average fixed assets. The data related to the year ended on 31st March,
2012 is given below:
Division ( lakhs)
Budgeted Data
Actual Data
X
Y
Z
X
Y
Z
Profit
100 50
85
80
60
100
Current Assets
100 200
300
90
190 350
Fixed Assets
400 400
500
400 450 550
You are required to :
a) Calculate ROI, budgeted as well as actual.
b) Calculate EVA, budgeted as well as actual.
c) Compare the performance of the units under the two methods.
Ans.
ROI
EVA
X
Y
Z
X
Y
Z
Budgete
20%
8.33% 10.625
55
0
20

d
Actual

16.33
%

9.375
%

%
11.11%

35.5

5.5

27.
5

Valuation of Acquisitions
Corporate Restructuring
Q.1) XYZ Ltd. is considering merger with PQR Ltd. XYZ Ltds. shares are currently traded at
25. It has 200000 shares outstanding and its EAT amount to 400000. PQR Ltd. has 100000
shares outstanding; its current MPS is 12.50 and its EAT are 100000. The merger will be
effected by means of a Stock Swap (exchange). PQR Ltd. has agreed to a plan under which XYZ
Ltd. will offer the current Market Value of PQR Ltds Shares:
(i) What is the pre-merger EPS and P/E ratios of both the companies?
(ii)
If PQR Ltds P/E Ratio is 8, What is its current MPS? What is the exchange ratio? What will
XYZ Ltds post-merger EPS be?
What must be the exchange ratio for XYZ Ltds so that the pre and post-merger EPS to be the
same?
(CS (Final), June 2001)
Ans: (i)
XYZ
PQR
Pre-merger EPS
2
1
P/E ratios
12.50 times
12.50 times
(ii) MPS = 8;
Exchange ratio = 0.32;
Post-merger EPS = 2.16
Q.2) Axis Ltd. is intending to acquire Dena Ltd. by merger and the following information is
available in respect of the companies.
Particulars
Axis Ltd. Dena Ltd.
Equity Share Capital of 10 each ( Lakhs)
450
90
Earnings after Tax ( Lakhs)
90
18
Market Price per share ( )
60
46
Required:
(i)
What is the present EPS of both the companies?
(ii)
What is the present Price Earning Ratios (P/E Ratios) of both the companies?
(iii)
If the proposed merger takes place, what would be the new EPS for Axis Ltd.
(assuming that the merger takes place by exchange of equity shares and the exchange
ratios is based on the current market prices)
What should be the exchange ratio if, Axis Ltd. wants to ensure the same EPS to
members as before the merger takes place?
Ans:
Axis
Dena
(i) Present EPS
2
2
(ii) Present P/E ratio
30 times
23 times
(iii) New EPS for Axis = 2.08
Q.3) East Company Ltd. is studying the possible acquisition of Fost Co. Ltd. by way of merger.
The following data are available in respect of the companies:
Particulars
East Co. Ltd. Fost Co. Ltd.
Earning after Tax ( )
200000
60000
No. of Equity Shares
40000
10000
Market value per share ( )
15
12
(i) If the merger goes through by exchange of equity share and the exchange ratio is based on
the current market price, What is the new EPS for East Co. Ltd.?
(ii) Fost Co. Ltd. wants to be sure that the earnings available to its shareholders will not be
diminished by the merger. What should be the exchange ratio in that case?
Ans: (i) New (EPS) = 5.42,
(ii) Exchange ratio based on EPS = 1.2
Q.4) AIM Ltd. is considering merger with MAX Ltd. There are no Synergy gains from the
merging. Complete the following table if Aim wishes an EPS of 2.80 after the merger.
Particulars
AIM Ltd.
MAX Ltd.
Merged Entity
Earnings After Tax
0.1 million
0.25 million
?

Outstanding Shares
50,000
1,00,000
?
EPS (`)
2
2.5
2.8
P / E Ratio
10
5
?
Market Price
20
12.5
?
Total Market Value
?
?
?
(a) Complete the above table
(b) Calculate the exchange ratio viz. no. of shares of AIM given to MAX shareholder.
What is the cost of merger to AIM Ltd.
Ans:
AIM Ltd.
MAX Ltd.
Merged Entity
(a) Total Market Value 10,00,000
12,50,000
22,50,000
(b) Exchange Ratio = 0.75;
(c) Cost of merger = 1,00,000
Q.5) Company X is contemplating to purchase Company Y. Company X has 3,00,000 shares
having a market price of 30 per share while Company Y has 2,00,000 shares selling at 20 per
share. The EPS are 4 and 2.25 for X and Y Respectively.
Management of both the companies are discussing proposal for exchange of share in
proportion to the relative earning per share of two companies. Calculate EPS after merger if
implemented.
Ans: EPS after merger = 4
Q.6) Star and Moon had been carrying on Corporate independently. They agreed to amalgamate
and form a new company Neptune Ltd., with an authorized share capital of \$ 2,00,000/- divided
into 40,000 equity shares of \$ 5 each. On 31 st December, 2009 the respective Balance Sheets of
Star and Moon were as follows :
Star \$
Moon \$
Fixed Assets
3,17,500
1,82,500
Current Assets
1,63,500
83,875
4,81,000
2,66,375
Less: Current Liabilities
2,98,500
90,125
Representing Capital
1,82,500
1,76,250
(a) Revalued figures of Fixed and Current Assets were as follows :
Star \$
Moon \$
Fixed Assets
3,55,000 1,95,000
Current Assets 1,49,750 78,875
(b) The purchase consideration is satisfied by issue of following shares and debentures :
(i) 30,000 equity shares of Neptune Ltd., to Star and Moon in proportion to the
profitability of their respective Corporate based on the average net profit during
the last three years which were as follows :
Star \$
Moon \$
2007 Profit
2,24,788 1,95,000
2008 (loss)/Profit (1,250)
1,71,050
2009 Profit
1,88,962 1,79,500
(ii) 15% debentures in Neptune Ltd. at par to provide an income equivalent to 8%
return on capital employed in their respective Corporate as on 31st December, 2009
after revaluation of assets.
You are requested to :
(1) Compute the amount of debentures and shares to be issued to Star and Moon.
(2) A Balance Sheet of Neptune Ltd., showing the position immediately after
amalgamation.
(MU, BMS, Mar.2011)
Ans: (i)
Star
Moon
Shares
13,750
16,250
15% debentures
1,10,000
98,000
(ii) Balance sheet Total = 7,78,625

Q.7) A Ltd. and B Ltd. carrying on similar Corporate decided to amalgamate and for this purpose
a new company AB Ltd. was formed to take over assets and liabilities of both the companies. It
is agreed that fully paid shares of 100 each shall be issued by the new Co. to the value of net
assets of each of the old companies.
Balance Sheet of A Ltd. as at 31st December 2011
Liabilities
Assets
Shares of 50 each
50,000 Goodwill
5,000
General Reserve
20,000 Land & Buildings
17,000
Profit & Loss A/c
3,000 Plant & Machinery
24,000
Sundry Creditors
4,000 Stock
10,000
Bills Payable
4,000 Debtors
12,000
Furniture & Fittings
5,000
Cash at Bank
8,000
81,000
81,000
Balance Sheet of B Ltd. as at 31st December 2011
Liabilities
Assets
Shares of 50 each
40,000 Goodwill
2,000
Bank Overdraft
8,000 Land & Buildings
10,000
Sundry Creditors
8,000 Plant & Machinery
16,000
Stock
7,500
Furniture & Fittings
7500
Debtors
7000
Cash
300
Profit & Loss A/c
5700
56,000
56,000
The following is the accepted scheme of valuation of Corporate of the two companies :
A Ltd.: (a) to provide for reserve for bad debts at the rate of 5% on debtors;
(b) to write off 400 from stock; and
(c) to write off 33-1/3% from plant & machinery
B Ltd.: (a) to eliminate its goodwill and profit & loss a/c balances;
(b) to write off bad debts 1,000 and to provide reserve of 5% on the balance of debtors;
(c) to write down plant & machinery by 10%; and
(d) to write off 1,400 from the value of stock.
You are required to calculate Purchase Consideration and Calculate NAV / share.
Ans: Purchase Consideration: A Ltd=64000, B Ltd =28000, C Ltd = 92000
Q.8) Company X wishes to takeover Company Y. The financial details of the two companies are
as under:
(MU, BMS, Nov. 2011)
Company X ( )
Company Y ( )
Equity Shares ( 10 per share)
1,00,000
50,000
-2,000
Profit & Loss Account
38,000
4,000
Preference Shares
20,000
10% Debentures
15,000
5,000
1,73,000
61,000
1,22,000
35,000
Fixed Assets
51,000
26,000
Net Current Assets
1,73,000
61,000
Maintainable Annual Profit (after tax)
for Equity Shareholders
Market Price per equity share

24,000
24

15,000
27

## Price Earning Ratio

10
9
What offer do you think Company X could make to Company Y in terms of exchange
ratio, based on (i) Net assets value; (ii) Earning per share; and (iii) Market price per share?
Which method would you prefer from Company Xs point of view?
Ans:
(i)
NAV: X =13.8,
Y=11.2;
Exchange ratio based on NAV = 0.81
(ii) EPS: X = 2.4,
Y = 3;
Exchange ratio based on EPS = 1.25
(iii) Exchange ratio based on MPS = 1.13;
Method to be preferred : Net Asset Value
Q.9) Mega Company is considering the acquisition of Mini Company in a stock-for-stock
transaction in which the target company would receive 85 for each of its common stock. The
acquiring company does not expect any change in P/E ratio multiple after the merger and choose
to value the target company conservatively by assuming no earning growth due to synergy.
Calculate:
(ii) The exchange ratio
(iii) The no. of new shares issued by the acquiring company.
(iv) Post merger EPS of the combined firms
(v) Pre merger EPS of the acquiring company
(vi) Pre merger P/E ratio of the acquiring company
(vii) Post merger share price
(viii) Post merger equity ownership distribution
The following additional information is available:
Particulars
Acquiring Mega Target Mini
Earning
2,50,000
72,500
No. of Shares
1,10,000
20,000
Market Price
52
64
Ans: (i) 32.81%,
(ii) 1.635, (iii) New shares issued = 32692, Total Shares post merger =
142692 (iv) 2.26,
(v) 2.27, (vi) 22.91 times
(vii) 51.78
Q.10) The following is the Balance Sheet if Vedanta Ltd. as at 31/03/2012.
Liabilities
Assets
20,00,000 Equity Shares of 10 each
2,00,00,000 Fixed Assets
2,56,00,000
10,00,000 Equity Shares of 10 each, 6 paid
60,00,000
Investments
40,00,000
12% 2,00,000 Preference Shares of 10 each
20,00,000
Current Assets
1,80,90,000
Reserve & Surplus
99,89, 230 Suspense Account 15,22,770
Secured Loans
44,23,000
Current Liabilities
68,00,540
Total
4,92,12,770
4,92,12,770
The fixed Assets of the company are to be appreciated by 20%, while Investments have a market
value of 48,00,000. The company has Cash & Bank Balance of 12,24,560 and apart from
this all current assets are to be revalued @ 10% less. The suspense Account represents advances
made for which no records are available and is estimated that 4,00,000 only can be recovered.
There is an unrecorded liability of 4,56,700 which is to be recorded now. The company has a
track record of paying Dividends @ 24% while the normal rate of dividend expected is 20%.
You are required to calculate value of each equity share (both fully and partly paid)
Under:
1) Net Worth Method; 2) Dividend Yield Method 3) Fair Value Method.
Ans: 1) Net worth / share:
Fully Paid = 14.21 Partly Paid = 10.21
2) Dividend Yield per Share: Fully Paid = 12
Partly Paid = 7.2
3) Fair Value Method:
Fully Paid = 13.11 Partly Paid = 8.71
Q.11) Satish Ltd. wants to take over Ashish Ltd. The balance sheet of Ashish Ltd. is as follows:

Liabilities
Equity Capital
(8 lakh shares of 100 each)
Reserves
10.5% Debentures
Creditors

800

Assets
Cash/Bank
Debtors
Stock
Machinery

20
130
270
1,300

200
400
320
1,720
1,720
Shareholders of Ashish Ltd. will get 1.5 share in Satish Ltd. for every 2 shares. The
shares of Satish Ltd. will be issued at its current market price of 180 per share.
Debentureholders will ge 11.5 Debentures of the same amount. The external liabilities
will be settled for 300 lakh. Liquidation expenses of 30 lakhs are to be met by Satish Ltd.
The FCFF expected from acqisition for 6 years will be :
Year
2010 2011 2012 2013 2014 2015
in lakhs
300
400
520
600
440
240
The Free Cash Flow is expected to grow at 3% p.a. after 6 years.
The Cost of Capital is 13%
There is an unrecorded liability of 40 lakhs.
Required:
1. Find out the value of the firm as per Free Cash Flow Method.
2. Evaluate the financial feasibility of acquisition.
Extra Practise Problems
Q.12) Following data is available for X and Y Ltd.
Particulars
X Ltd
Y Ltd.
Net Profit After Tax
1,50,000
2,50,000
Equity Share Capital
(Each Share of 10 Each)
1,00,000
90,000
If the proposal is that X will absorb Y Ltd. by issuing 1 share for every two held by the
shareholders of Y Ltd., than compute the following :
(1) Pre Merger EPS
(2) Post Merger EPS
Q.13) Om Ltd. is intending to acquire Alp Ltd. (by merger) and the following information is
available in respect of the companies.
Particulars
Om Ltd. Alp Ltd.
Number of Equity Shares
1000000 600000
Earning after Tax ( )
5000000 1800000
Market Value per Share ( )
42
28
Required :
(i) What is the present EPS of both the companies?
(ii) What is the present Price Earning Ratio. (P/E Ratio) of both the companies?
(iii) If the proposed merger take place, what would be the new EPS for Om Ltd. (assuming that
the merger takes place by exchange of equity shares and the exchange ratio is based on
the current market price.)
(iv) What should be the exchange ratio if, Alp Ltd. wants to ensure the same EPS to members as
before the merger take place?
Q.14) The following is the summarised Balance Sheet of Hrishi Ltd. As on 31st December, 2002.
Liabilities
Assets
50,000 Equity of Rs. 10 each 5,00,000
Plant & Machinery
2,40,000
1,00,000
Furniture
1,00,000
General Reserve
2,39,400
Stock
6,20,000
Profit & Loss Account
1,57,600
Debtors
2,06,000
Sundry Creditors
4,09,400
Cash in Hand
3,400

## Provision for Tax

1,97,000
Cash in Bank
16,03,400
The comapny transfers 20% of its profits (after tax) to General Reserve.
The Net Profits before tax for the last 3 years have been as follows:
Year ended
31-12-2000
2,75,000
3112-2001
3,94,000
31-12-2002
3,66,000

4,34,000
16,03,400

Machinery is valued at 3,20,000. Average yield in this type of Corporate is 20%. The rate of
tax is 50%. Calculate the value of one equity share on the basis of:
(i) Intrinsic Value Method
(ii) Yield Value Method
Q.15) Rat ltd is intending to acquire Cat Ltd. (by merger) and the following information is
available:
Particulars
Rat Ltd.
Cat Ltd.
Equity Share capital ( 10)
20000000
12000000
Profit for equity share holders
10000000
3600000
Market price per share
84
52
a) Assuming that the merger takes place (by exchange of equity shares), find the EPS of Rat
ltd. If the exchange ratio is based on the Market price of equity share.
b) What should be the exchange ratio if Cat Ltd. wants to ensure the same EPS to its
shareholders as in Rat ltd. Before merger.
Q.16) Following information is available in respect of Good Ltd., Better Ltd, and Best Ltd. In
order to diversify and expand the operations, Best ltd. is on a lookout for smaller companies. It
has shortlisted Good Ltd. and Better Ltd. Swap Ratio to be offered is to be determined on the
basis of PE ratio.
Particular
Best Ltd.
Better Ltd. Good Ltd.
No. of equity shares
90,000
36,000
18,000
Earnings per share
2
1
2
PE Ratio
30
37
23
Find out the EPS of Best Ltd. after merger of Better Ltd, Good Ltd, and both. Which one would
you suggest, Best Ltd. should go for?
Q.17) STREET Ltd. and ROAD Ltd. proposes to amalgamate .
Goodwill may be taken at 96,000 for STREET Ltd. and 38000 for ROAD Ltd.
The stock of STREET Ltd. and ROAD Ltd. to be taken at 2,04,000 and 1,42,000
Respectively.
You are required to find out PURCHASE CONSIDERATION receivable by both the
companies on the basis of NET ASSETS method.
Their financial position as on December 31, 2012 was:
LIABILITIES
STREET
ASSETS
STREET
LTD.
LTD.
LTD.
LTD.
Equity Share Capital ( 10)
5,00,000
2,00,000 Fixed Assets
4,00,000
1,00,000
General Reserves
2,00,000
20,000 Investments
1,00,000
--P & L A/c.
1,00,000
30,000 Stocks
2,00,000
1,30,000
Creditors
1,00,000
50,000 Debtors
1,70,000
60,000
Cash & Bank
30,000
10,000
9,00,000
3,00,000
9,00,000
3,00,000
What offer do you think the STREET Ltd. Company could make to ROAD Ltd. Company in
terms of exchange ratio based on NET ASSETS VALUE.
(MU, BMS, Nov. 2013)
Ans: Purchase Consideration: Street Ltd.= 9000000, Road Ltd.= 3000000

Q.18) You are required to calculate the fair value an equity share of faired ltd. from the following
information:50,000 Equity shares of 100 each.
12%, 20,000 Preference shares of 100 each
Reserve and Surplus 10,00,000.
Secured Loans 11,00,000.
Current Liabilities 15,00,000.
The Fixed assets are to be appreciated by 20% the present book value of 40,00,000/-,
whereas investment of 10,00,000/- are expected to reduce 10% less when sold. The company
has a record of paying a dividend of 12%, against the industry average of 10%.
Q.19) Y Ltd is planning to acquire MTed. Current EPS of Y is 5 but management is keen to get
EPS of at least 6 post merger. They seek your advice on the possible exchange ratio that would
give the merged entity and EPS of 6. It is also provided that the acquisition would result in
synergy of 200 Lakhs. The following details are available:
Particulars
Y Ltd.
MTed.
Equity shares outstanding
200 lakhs
80 lakhs
EPS
5
4
Market price per share
70
100

(i)
(ii)

Q.20) Mom Ltd. is intending to acquire Dad Ltd. by merger and the following information is
available in respect of the companies.
Particulars
Mom Ltd. (in ) Dad Ltd. (in )
Equity Share capital (10 per share)
900000
180000
Earnings after tax
180000
36000
Market price per share
120
92
You are required to calculate
EPS of both the companies
Price-Earnings Ratio (P.E) of both the companies
If the proposed merger takes place, what would be the new EPS for MOM Ltd. (assuming
the merger through exchange of equity shares and exchange ratio is based on the current market
price.)
Q.21) Creta Ltd. is intending to acquire Zeta ltd by way of merger. The intended Merger will
take place though exchange of Equity shares, valuation to be based on Market price per share
(MPS). Following information is extracted from the books of Creta Ltd. and Zeta Ltd.
Particulars
Creta Ltd. Zeta Ltd.
Earnings after Tax
1000 lakhs
200 lakhs
No of Shares
100 lakhs
50 lakhs
P/E Ratio
10
5
Required:
(i) Calculate MPS for both the companies.
(ii) What is present EPS of both the companies?
(iii) Calculate EPS of Creta Ltd. after the merger.
Q.22) Following information is extracted from the books of Chetan Ltd., acquiring firm and
Ketan Ltd., target firm.
Particulars
Chetan Ltd
Ketan Ltd
Earning after tax
2,000 lakhs
400 lakhs
No. of shares
200 lakhs
100 lakhs
10
5
P/E Ratio (times)
Required:
1. Calculate market price of shares of both the companies.

## 2. Find out swap ratio based on market price.

3. What is present EPS?
4. What is EPS of Chetan Ltd after acquisition?
5. Decide the market value of the merged firm.
Ans.
1. Market Price : Chetan
100
Ltd.
20
Ketan
Ltd.
2. Swap Ratio
0.2
3. Present EPS : Chetan
10
Ltd.

4
Ketan
Ltd.
4. EPS after acquisition
10.91
5. Market Value of the
240.02
Firm
crores
Q.23) A Ltd. wants to acquire T Ltd. and has offered swap ratio of 1 : 2 (0.5 shares for every one
share of T Ltd. Following information is supplied.
Particulars
A Ltd.
T Ltd.
Profit After Tax ( )
18,00,000 3,60,000
No. of Equity Shares
6,00,000
1,80,000
EPS
3
2
P/E Ratio
10
7
Market Price per Share ( )
30
14
Calculate :
i) No. of equity shares to be issued by A Ltd. for acquisition of T Ltd.
ii) EPS after acquistion.
iii) Equivalent EPS of T Ltd.
iv) Expected market price per share of A Ltd. after acquisition assuming P/E ratio remains
unchanged.
v) Market value of the merged firm.
Ans.
i)
90,000 Shares
ii)
3.13
iii)
1.57
iv)
31.30
v)
2,15,97,000

Relative Valuation
Ratio
Ratio Analysis is a meaningful comparison of two or more figures taken from the financial
statements with a view to arrive at some definite conclusion about:
(A) Financial position (safety aspect)
(B) Financial management
(C) Profitability of the company.
RATIOS
(A)
(B)
(C)
Ratios indicating
Ratios indicating
Ratios indicating
financial position
financial management
profitability
(A) Ratios indicating Financial position
I
II
III
Short-term
Immediate
Long-term
financial position
financial position
financial position
I. Short-term financial position:
1. Current ratio Or Working Capital ratio Or Quantity of Working Capital:

## Ideal Ratio is around 2:1

2. Quality of Working Capital:
a) Stock Working Capital ratio:

## Upper Limit for each of the above two ratios is 0.50

II. Immediate financial position:
1. Quick ratio Or Liquid ratio Or Immediate ratio Or Acid-test ratio:

## Ideal Ratio is around 1:1

2. Cash Ratio =
It should be minimum 0.5.
Ex. 1: Vertical Balance Sheet as on 31.3.2011
Particulars

Working Capital
a) Current Assets, Loans & Advances:
Debtors
Bills Receivable
Stock
Cash / Bank Bal.
Prepaid Expenses
Others

4,00,000
50,000
3,00,000
25,000
20,000
2,05,000
10,00,000

## b) Current Liabilities & Provisions:

Sundry creditors
Bank overdraft
Bills payable
Proposed dividend
Others

2,30,000
45,000
25,000
80,000
1,75,000
5,55,000

## Working capital (a-b)

Calculate the above mentioned 4 Ratios.
III.

4,45,000

## Long-term financial position:

1. Debt-Equity Ratio:
Debt = Borrowed
Funds

.
Debt + Equity = Total of vertical B/sheet
= Capital Employed
(upper limit =2)
2. Proprietory Ratio
Total Assets = FA + I +
CA

## 3. Debt-service ratio Or Interest coverage ratio:

4.
It should be minimum 1.5 times
Ex. 2: Vertical Balance-sheet as on 31.3.2011
Sources of Funds
1. Proprietors funds:
Equity share capital
9% Pref. share capital
General Reserve
P/L A/c
(-) Preliminary Expenses

5,00,000
2,00,000
3,00,000
80,000
2,10,000
12,90,000
40,000
50,000

90,000

12,00,000

2. Borrowed funds
11% Debentures
Bank loan
Public deposits

4,00,000
3,00,000
1,00,000

8,00,000
20,00,000

1.
2.
3.
4.

## (B) Ratios indicating Financial management:

I
II
Ratios indicating
Ratios indicating
Short-term
Long-term
Financial management
Financial management
Debtors Turnover Ratio
5. Capital (employed) T.O. Ratio
Creditors Turnover Ratio
Or Asset T.O. Ratio
Stock Turnover Ratio
6. Fixed Asset T.O. Ratio
W. cap. Turnover Ratio
7. Capital Gearing Ratio.

## Note: DTR indicates efficiency in Receivable Management.

Ex. 3: Cr. Sales
Avg. Receivables
Therefore: DTR
=

= 6,00,000 p.a. =
= 1,00,000
6,00,000
1,00,000

50,000 p.m.

=6
Times.

## 2. Creditors Turnover Ratio Or Creditors Velocity:

=
Payable = Creditors + Bills Payable
Note: CTR indicates efficiency in Payment Management.

## Note: WTR indicates efficiency in Working Capital Management.

5. Capital T/O Ratio or Assets T/O Ratio

Capital

= Capital Employed
= Total of Vertical B/Sheet
Note: CTR indicates efficiency in Capital Management or Asset Management.
6. Fixed Asset T.O. Ratio:

## Note: 1) FTR indicates efficiency in Fixed Asset management.

2) For all Turnover Ratios except Creditor Turnover Ratio, higher the better.
7. Capital Gearing Ratio:

(A) If rate of returns on capital employed is more than rate of interest on borrowed funds,
company should be highly geared company and hence capital gearing ratio should be more
than 1.
(B) If rate of returns on capital employed is less than rate of interest on borrowed funds,
company should be low geared company and hence capital gearing ratio should be less than
1.
(C) Ratios Indicating Profitability:
I
II
Profitability as
Profitability as
Compared to Sales
Compared to Funds
1. Gross Profit Ratio
7. Returns on capital employed
2. Cost of Sales Ratio
Or Return on Investments (ROI)
3. Net Profit Ratio
8. Returns on proprietors funds
4. Operating Ratio
9. Returns on Equity Shareholders funds.

5. Conversion Ratio
6. Any other
Revenue St. item Ratio
Calculate any 4 Profitability Ratio.
I.] Profitability as compared to Sales:

1.

2.
G.P. Ratio + Cost of Sales Ratio =
100%

3.

4.

5.

6.
II.]

## Profitability as compared to Funds:

Returns on any FUND

FUND
Profit Available for Such fund
1. Capital Employed
N.O.P. + Interest
2. Proprietors Fund
N.P.A.T.
3. Equity sh. holders (PF Pref. N.P.A.T. Pref. dividend
sh.cap)
1. Returns on capital employed/Investment:

## Ratios from Equity share-holders Point-of-view/Valuation ratios

(A) Earning per share (EPS):

## Note: Higher the EPS, the better is profitability.

(B) Dividend pay-out Ratio:

Note: Generally Low DPR indicates low dividend policy and vice versa.
(C) Price-Earning Ratio (P/E Ratio):

Note: Generally Low P/E ratio indicates under priced share and vice versa.
(D) Dividend Yield Ratio:

=
Note: High dividend yield ratio indicates under priced share.
(E) Book value per share

## Note: Higher the BV/Share, the better is performance.

(F) Price to BV ratio

## Note: Low price to BV ratio indicates underpriced share and vice-versa.

(G) Preference dividend Cover ratio

## (H) Equity dividend Cover ratio

=
(I) Preference & Equity dividend Cover ratio

=
Note: (g), (h) & (I), higher the better.
(J) Price to Sales ratio

(PS ratio)

=
(K) P/E to growth ratio (PEG ratio)

=
(L) PBV to ROE (Value ratio)

=
(M) PS to NPM (PSM ratio)

## (N) Du-Pont formula of Earning Power Ratio/ROTA.

= Net profit Margin Asset Turnover ratio

=
(O) Du-Pont formula of ROE/RONW
= Net Profit Margin Asset Turnover Ratio Equity Multiplier

=
Ratio Illustration
Illustration 1
The Capital of ABC Ltd. consists of 9% Preference Shares of 10 each, 3,00,000, Equity
Shares of 10 each, 8,00,000. The profit after tax is 2,70,000. Equity Dividend is 20% and
market price of Equity Shares 40. Growth rate 10% you are required to calculate following
ratios and comment on them, (a) Dividend Yield, (b) Preference & Equity Dividend Cover,
(c) Earnings per Share (d) Price-Earnings Ratio (e) PEG Ratio
Ans: (a) 5%, (b) 10 Times, 1.51 times (c) 3.04 per share & (d) 13.17 Times
Illustration 2
Following information is available relating to Beena Ltd. and Meena Ltd:

( in lacs)
Beena Ltd. Meena Ltd.
Equity share capital ( 10)
200
250
12% preference shares
80
100
Profit after tax
50
70
Proposed dividend
35
40
Market price per share
25
35
You are required to calculate: (i) Earning per share. (ii) P/E Ratio (iii) Dividend Payout
Ratio. (iv) Return on Equity Shares. As an analyst, advice the investor which of the two
companies is worth investing.
Ans:
Beena Ltd.
Meena Ltd.
(i) EPS
2.02
2.32
(ii) P/E Ratio
12.38 Times
15.09 Times
(iii) DPR
86.63%
68.97%
DPS
1.75
1.6
(iv) Return of Equity Share
20.2%
23.2%
Illustration 3:
M/s. Green a Blue Ltd. has presented its financial information for year 2016 as follows:
Balance Sheet on 31st March, 2016
Amount
Amount
Liabilities
Assets
Share Capital
Reserves and Surplus
Long-term Debt
Current Liabilities
Total

12,00,000
8,00,000
22,70,000
23,50,000
66,20,000

Fixed Assets
Stock in Hand
Sundry Debtors
Cash and Bank Balance
Total

28,60,000
19,80,000
16,50,000
1,30,000
66,20,000

## Income Statement for the ended 31st March, 2016

Amount
Net Sales
1,02,00,000
Cost of Goods Sold
79,20,000
15,45,600
Net Profit
7,34,400
(1) Tax Rate is 30%. Company's Capital is, divided in 1,20,000 shares of 10 each
(2) Company has declared dividend @ 25%
(3) Market Price of the share is 50
You are required to evaluate investment in company on the basis of:
(i) Dividend Yield.
(v) Current Ratio
(ii) EPS.
(vi) Quick Ratio
(iii)
P/E ratio.
(vii) Debt Equity Ratio
(iv)ROCE
Ans:
(i) Dividend Yield Ratio
5%
(ii) EPS
4.28 per share
(iii) P/E Ratio
11.68 times
(iv) ROCE
17.20%
Extra Pracise Problems
Illustration 4
Following information is available relating to A Ltd. and B Ltd.
Particulars
A Ltd.

B Ltd.

( in Lakhs)
( in Lakhs)
Equity Share Capital ( 10)
200
250
10% Preference Share Capital
80
100
15% Debentures
20
60
Profit before Interest and Taxes
60
80
Proposed Dividend
20
25
Provision for tax
17
21
Market Price per share
50
60
Growth Rate
10%
20%
You are required to calculate: (i) EPS, (ii) P/E Ratio, (iii) Dividend Payout Ratio, (iv) Dividend
yield (v) PEG Ratio and advise which company's share is worth investing.
Ans:
A Ltd.
B Ltd.
(i) EPS
1.6 per share 1.6 per share
(ii) P/E Ratio
31.25 Times
37.5 Times
(iii) DPR
62.5%
62.5%
DPS
1 per share
1 per share
(iv) Dividend Yield Ratio
2%
1.67%
Illustration 5
Veena Ltd. has presented its financial information for the year ended 31st March, 2016:
Earnings before interest and tax
8,00,000
1,00,000 Equity shares of 10 each
10,00,000
10% Debenture
15,00,000
Reserves and surplus
5,00,000
Provision for tax
30%
Proposed dividend
20%
Market price per share
32
Bond Yield
7%
Calculate: (1) EPS, (2) P/E ratio, (3) Book value per share (4) Dividend yield ratio (5) BEER.
Ans:
(i) EPS
4.55
(ii) P/E Ratio
7.03 Times
(iii) Book Value
15
per
share
(iv) Dividend Yield 6.25%
Ratio
Illustration 6
Determine the sales of a firm given the following information:
Current ratio = 1.4
Acid-test ratio = 1.2
Current liabilities = 1,600
Inventory turnover ratio = 8
Gross Profit ratio = 20%
Ans: Current Asset= 2,240, Inventories = 320.
Illustration 7
The following information is taken from the records of two companies in the same industry:
A Ltd.( lakh)
B Ltd.( lakh)
Cash
2
3
Debtors
3
7
Stock
12
10
Plant and Machinery
18
23

Total Assets
35
43
Sundry Creditors
9
10
12% Debentures
5
10
Equity Capital
11
18
Reserves and surplus
10
5
Total Liabilities
35
43
Sales
60
85
Cost of goods sold
40
65
Other operating expenses
8
10
Interest expenses
0.60
1.20
Income tax
3.40
3.80
Dividend
1.00
2.00
Answer each of the following questions by making a comparison of one or more relevant ratios.
(a) Which company is using the shareholders money more profitably?
(b) Which company is better able to meet its current debt?
(c) If you want to purchase the debentures of one company which companys debentures
(d) Which company collects its receivables faster assuming all sales are on credit basis?
(e) Which company retains the larger proportion of income in the business?
Illustration 8
Compute following ratios and comment briefly on each one of them:
(i) Dividend yield.
(ii) Preference and equity dividend cover.
(iii) EPS.
(iv) P/E Ratio.
(v) Earning Yield Ratio
The capital of SRK Ltd. Consists of:
10% Preference Shares ( 10/- each)
Equity shares ( 10/- each)
15% debentures
Net profit before tax (Tax rate is 40%)
Dividend Rate
MPS

30,00,000
10,00,000
10,00,000
8,00,000
15%
30

Ans:
(i) Dividend Yield Ratio
(ii) Preference and
dividend cover
(iii) EPS
(iv) P/E Ratio

equity

5%
1.07 times
1.8
per
share
16.67times

Illustration 9
The following information is available in respect of two listed companies namely Jay Ltd.
and Vijay Ltd.
Particulars
Jay Ltd.
Vijay Ltd.
Equity Share Capital ( 10 each)
800 Lacs
1,000 Lacs
12% Pref. Shares Capital
100 Lacs
200 Lacs
Profit before Tax
400 Lacs
600 Lacs
Rate of Taxation
30%
30%
Dividend per Share
3
2
Market Price per share
150
120
You are required to calculate:
(a) Earning Per Share
(c) Dividend Payout Ratio
(b) P/E Ratio
(d) Return on Total Capital
Also advice as to which company should be preferred for investing in. (MU, BMS, Apr. 2011)
Ans:

(i) EPS
(ii) P/E Ratio
(iii) DPR
(iv) ROTC

Jay Ltd.
3.35 per share
44.78 Times
89.55%
31.11%

Vijay Ltd.
3.96 per share
30.30 Times
50.51%
35%

Illustration 10
The following information is available in respect of two listed companies namely ABC Ltd.
and XYZ Ltd. :Particulars
ABC Ltd.
XYZ Ltd.
Equity Share Capital ( 10 each)
500 Lacs
800 Lacs
12% Preference Share Capital
100 Lacs
200 Lacs
Profit After Tax
400 Lacs
600 Lacs
Rate of Dividend
50%
40%
Market Price per Share
120
150
You are required to calculate:
(a)
Earning Per Share
(c) Dividend Payout Ratio
(b)
P/E Ratio
(d) Return on Entire Share Capital.
Also advice as to which company should be preferred for investing in.
Ans:
ABC Ltd.
XYZ Ltd.
(i) EPS
7.76
per 7.2
per
share
share
(ii)
P/E 15.46 Times 20.83
Ratio
Times
(iii) DPR
64.43%
50.56%
(iv)
66.67%
60%
ROESC
Illustration 11
Following the Balance Sheet of Flipkart Ltd. as on 31st March, 2016
Balance Sheet as on 31st March, 2016
Amount
Liabilities
Assets

Amount

Share Capital
10,00,000 Fixed Assets
15,00,000
Reserves and Surplus
6,00,000 Stock
4,30,000
Long Term Loans
5,00,000 Debtors
5,50,000
Sundry Creditors
4,00,000 Bank Balance
20,000
Total 25,00,000
Total 25,00,000
Following information is available from its income statement
Income Statement for the ended 31st March, 2016
Amount
Net Sales
80,00,000
Cost of Goods Sold
60,60,000
6,40,000
Other Expenses
3,00,000
Net Profit before Int. and Tax
10,00,000
(1) Tax Rate is 40%.
(2) The Company's Share Capital is, divided in 1,00,000 shares of 10 each
(3) Market Price of the share is 60
(4) The Company has declared dividend @ 20%

You are required to evaluate financial performance of the company with the help of following
ratios:a. Dividend Yield. b. EPS.
c. P/E ratio. d. ROCE e. Current Ratio (MU, BMS, Apr. 2012)
Ans:
ABC Ltd.
(a)
Dividend
3.33%
Yield
(b) EPS
5.70
(c) P/E ratio
10.53
times
(d) ROCE
35.62%
Illustration 12
Following the Balance Sheet of Tanmay Enterprise Ltd. as on 31st March, 2011
Balance Sheet as on 31st March, 2011
Liabilities

Assets

## 8% Preference share capital

56,000
Fixed Assets 3,38,000
Equity Share Capital
1,00,000
Investment
39,000
Reserves
1,04,000
Cash
13,000
Long Term Loans
1,82,000
Debtors
52,000
Creditors
44,200
Inventories
78,000
Provision for Tax
33,800
Total
5,20,000
Total
5,20,000
Its Income Statement for the year ended 31st March, 2011 is as follows:
Income Statement for the ended 31st March, 2011
Particulars
Amount
Net Sales
3,90,000
Less: Cost of Goods Sold
3,35,400
Gross Profit
54,600
Less: Operating Expenses
22,750
Operating Profit
31,850
Less: Interest
9,100
Net Profit before Tax
22,750
(a) The Company is in the 30% tax bracket.
(b) Preference dividend is paid regularly.
(c) Equity Shares are of the Face Value of 10 each.
(d) The Company has declared dividend of 5% on its equity shares for the year ended
31st March 2011.
(e) The Market Price of Equity Shares is 35 on 31st March 2011.
Calculate the following ratios and state whether investment in shares is recommended.
I.
Interest Coverage Ratio
II.
Debt-Equity Ratio
III.
Inventory Turnover Ratio
IV. Gross Profit Ratio
V. EPS
VI.
P/E Ratio
VII.
Pay Out Ratio
(MU, BMS, Oct. 2012)
Ans:
(I) Interest Coverage
3.5 times
Ratio

## (II) Debt-Equity Ratio

(III) Inventory Turnover
Ratio
(IV) Gross Profit Ratio
(V) EPS
(VI) P/E Ratio
(VII) Payout Ratio

0.7 times
4.3 times
14%
1.14
30.70
times
43.86%

Illustration 13
The standard ratios of the industry and ratios of company A are given below.
Give your comments on the performance of the company :- (MU, BMS, Apr. 2013)
Particulars
Industry Standard Company A
Net Profit Ratio
3.5%
2%
Current Ratio
2.5
3.00
Liquidity Ratio
1.5
2.4
Proprietary Ratio
0.70
0.97
Debtors Turnover Ratio
37 days
42 days
Illustration 14
The after tax profits of Prabhu Ltd. are expected to be
following capital structure:

## 7,30,000. The company has the

(MU, BMS, Apr. 2014)

## 10% Preference Share Capital

Equity Share Capital (in shares of 10 each)

= 13,00,000
= 30,00,000
43,00,000
The company is operating in an industry whose P/E Ratio is 10. Using P/E Ratio model,
determine the price at which the stock should be purchased.
Ans: EPS 2 & MPS 20
Illustration 15
The balance sheet of two companies are given below: ( In crores)
Liabilities
A Ltd. B Ltd.
Assets
A Ltd. B Ltd.
Share Capital
100
150
Machinery
150
200
13% Debentures
50
100
Debtors
30
70
Reserves & Surplus
90
50
Stock
100
100
Creditors
60
100
Cash at Bank
20
30
Additional Information for the two Companies are as follows
Particulars
Rs. In Crores A Ltd. Rs. In Crores B Ltd.
Sales
600
800
Cost of Goods Sold
400
550
Other Operating Expenses
50
80
Interest Expenses
5
10
Income Tax
5
10
Dividend
10
30
Compare the companies based on the following required ratios:
(i)
Return on Equity
(ii)
Current Ratio
(iii)
Debt Collection Period (Assume 360 days in a Year).
(iv)
Dividend Payout Ratio.
(v)
Earnings Per share.
Ans:
A Ltd.
B Ltd.
(i) Return on 73.68
75%
Equity
%
(ii) Current Ratio 2.5:1
2:1

(iii) DCP
(iv) DPR
(v) EPS

18
days
7.14%
14

31.5 / 32
days
20%
10

Illustration 16
Following information is available relating X and Y Ltd.
X Ltd.
Equity share capital ( 10)
300
12% preferene shares
80
Profit after tax
50
Proposed Dividend
35
Market price per share
25
Advice the investor which of the two companies worth investing.
You are required to calculate:
(1) Earnings Per Share (EPS)
(2) Price Earnings Ratio
(3) Dividend Payout Ratio
(4) Returns On Equity

Y Ltd.
350
100
70
40
35

Illustration 17
From the ratios and other data set forth below for the Mausam Ltd., indicate your interpretation
of the companys financial condition:
Particulars
Year 3
Year 2
Year 1
Current ratio
2.60 : 1 2.75 : 1 3.5 : 1
Acid-test ratio
1.20 : 1 0.95 : 1 0.75 : 1
Working capital turnover (times)
4.25
3.75
2.75
Inventory to working capital (per cent)
15
12
10
Receivable turnover (times)
52
75
89
Inventory to working capital (per cent)
8.99
7.25
6.25
Inventory turnover (times)
10
7.50
6.50
Income per equity share ( )
15
13
11
Net income to net worth (per cent)
18
20
22
Sales increase during the year (per cent)
27
18
13
Cost of goods sold to net sales (per cent)
70
73
75
Dividend per share ( )
2
2
2
Fixed assets to net worth (per cent)
24
21
19
Net profit on net sales (per cent)
12
7
4

Dividend Policy
Q.1) The earnings per share of B Ltd., is 4 and the rate of capitalisation applicable is 10%. The
company has before it an option of adopting (i) 50% (ii) 75%, and (iii) 100% Dividend payout
ratio, compute the market price of companys shares as per Walters model if it can earn a return
of 10% on its retained earnings.
Q.2) Following are the details regarding three companies X Ltd., Y Ltd., and Z Ltd.,
X Ltd.,
Y Ltd.,
Z Ltd.,
r = 15%
r = 15%
r = 10%
Ke = 10%
Ke = 10%
Ke = 10%
E = Rs.8
E = Rs.8
E = Rs.8
Calculate the value of equity share of each of the company applying Walters model; when
dividend payout ratio is (a) 50% (b) 75% and (c) 25%. You are required to offer your comments
on the result.
Ans:
D/P
X
Y
Z
Ratio
Ltd.
Ltd.
Ltd.
(1) 50%
100
60
80
(2) 75%
90
70
80
(3) 25%
110
50
80
Q.3) X Ltd., has an investment of 5,00,000 in assets and 50,000 shares outstanding at 10
each. It earns a rate of 15% on its investment and has a policy of retaining 50% of the earnings.
If the appropriate discount rate is 10%, determine the price of companys share using Gordons
Growth Model. What will be the share price if the company has a payout of 80% or 40%?
Ans: (1) Dividend payout is 50% = 30 ; (2) Dividend payout is 80% = 17.14 ; (3) Dividend
payout is 40% = 60
Q.4) Ruchi Soya Ltd., is an established company having its shares quoted in the stock market.
The company has distributed dividend at 20% p.a. The paid-up capital of the company was 50
lakh shares of 10 each. Annual growth rate in dividend expected is 3%. The expected rate of
return on its equity capital is 15%. Calculate the value of shares of Ruchi Soya Ltd., based on
Gordons dividend growth model.
Ans:Po = 17.17
Q.5) D Ltd., belongs to a riskclass for which the appropriate capitalisation rate is 10%. It has
25,000 shares outstanding. The current market price of the share is 100. The company is
contemplating the declaration of dividend of 5 per share at the end of the current year. The
company expects to have a net income of 2,50,000 and has a proposal for making new
investments of 5,00,000. You are required to calculate:
(a) Market price per share when dividend is declared.
(b) Market price per share when dividend is not declared.
(c) Number of new shares to be issued.
(d) Show that the payment of dividend does not affect the value of the firm.
Ans: (a) P1 = 105;
(b) P1 = 110;
(c)
Dividend Declared Dividend not declared
Number of new shares to be issued
3,571
2,273

Q.6) Bajaj Ltd., has 1,20,000 shares outstanding and selling at 20 each in the market. The
company hopes to make a net income of 3,50,000 during the year ended 31st March, 2009. The
company is considering to pay a dividend of 2 per share at the end of the current year. The
capitalisation rate for class of this company has been estimated to be 15% using MM Dividend
Valuation Model.
(a) What will be the price of a share at the end of the year: (i) if dividend is paid, and (ii) if
dividend is not paid?
(b) How many new shares must the company issue if the dividend is paid and the company needs
7,40,000 for an approved investment expenditure during the year?
Ans: (a)(i) P1 = 23; (ii) P1 = 23;
(b)
Dividend Declared Dividend not declared
Number of new shares to be issued
30,000
16,957
Q.7) The following information is available in respect of a company:
Capitalisation rate (Ke) = 0.12
EPS
= 15
Rate of return on investments (r):
(i) 0.15
(ii) 0.10
The company wants to know the effect on the market price of its shares under the two
possibilities of r (i.e., 0.15 and 0.10) under two options: (i) if it does not declare any dividend,
and (ii) if it declares Rs.15 as dividend. Using Walters Model explains the results obtained by
you. [T.B. Pg.15]
Ans:
D/P Ratio
100
0%
%
If r = 15%
125
156.25
If r = 10%
125
104
Q.8) A company expects to generate the following net income and incur the following capital
expenditure in the next five years as per the following details:
( in lakh)
Year
1
2
3
4
5
Net Profit
75 60 45 40 25
Capital Expenditure
40 45 55 47 50
The total number of outstanding shares are 18,00,000 and Current Dividend is 6.5 per share;
you are required to:
a. Determine the Dividend Per Share, if the company follows a residual dividend policy.
b. Determine the amount of external financing if the current dividend is maintained.
c. Determine the amounts of external financing if the company maintains a 50% Dividend
Pay-out Ratio.
d. Identify under which of the above three policies the aggregate dividends are maximized
and under which policy the amount of external financing is minimized.
Q.9) Pradeep Enterprises is a fast growing firm in a manufacturing sector. Following is the
balance sheet of the company for the year ending 2010-2011:
Particulars
in (000)
Equity Shares of Rs. 10 each
300
Accumulated Profits
170
Profits for the year
100
6% Debenture
80
Total:
650
Fixed Asset
400
Working Capital
250
Total:
650

The management of the company has been following a dividend payout of 40% constantly in the
past.
However, it is not sure as to whether it should continue the practice as it has enough investment
opportunities in store. It has therefore approached you for advice and needs you to answer the
following questions with reason if any:
a. If it continues the earlier dividend policy what is the rate of dividend it will be declaring and
how much is the cash outflow.
b. Can it give out bonus shares in lieu of dividend to avoid the cash outflow in the form of
dividend payment?
c. If it wants to give out dividends @ 40%, how much is the cash outflow then?
d. If the current market price of the share is 50. What would be the P/E ratio?
e. If in the future years it incurs a loss due to incorrect investments then can it still pay-out
dividends?
Ans: (a) Cash Outflow = 40,000 ; (c) Cash Outflow = 1,20,000
(d) P/E Ratio = 15times
Q.10) BPR Ltd., is a listed company set up by new entrepreneurs for the manufacture of
refractories. Refectory is a consumable which, if not made available to the still industry, would
render operations impossible because it is the refectory which confines the heat inside the
furnace. But unfortunately for the Greenfield promoters, the steel industry world-wide has hit a
trough. The domestic industry, in particular, is being buffered by falling demand growth and
large-scale imports at the same time. BPR which has been in existence for less than year has not
yet achieved the projected first year capacity of 60%.
For above company, state whether you would expect it to distribute high or low
proportion of earnings as dividend and whether you would expect them to have a relatively high
or low price earning ratio.
Q.11) IFL Ltd., is an acknowledged leader in the pump industry with over 60% of the market
share. The product range consists of a wide range of power driven pumps including submersible
pumps, special pumps for application in fertiliser, chemical and petrochemical industries. The
company paying steady dividends had a turnover growth at an annual Compound Annual Growth
Rate (CAGR) of 28% over the last five years and the company had been maintaining its market
share in spite of the intense competition. But unexpectedly for the current financial year, the
company reported a net loss of over 10 crore. This has mainly been attributed to the loss of a
major order as well as IFL extending credit period to customers.
For above company, state whether you would expect it to distribute high or low proportion of
earnings as dividend and whether you would expect them to have a relatively high or low price
earning ratio.
Q.12) The director of the following Indian company has approached you with their concern for
the current business scenario and future prospects.
Cadbury Products Limited is an established company in the field of dairy products,
chocolates and ice creams. It has a decent track record of dividend, which average @ 40% p.a.
the company has also a good record of bonus issue. The last bonus issue was made in September
2000.
The Company feels that due to the conspiracy hatched by its competition with the help of
widespread network of distributors, the companys product were shown to have been
contaminated and it was also widely shown on the media that under the wrappers of many of
their chocolates and ice cream, there was a layer of fungus and decayed dry fruits. The snaps and
live interview of the consumers complaining about the inferior quality and totally unsafe for
human consumption shouts, drastically brought down the sale in the last quarter of the financial
year 2003-2004.
The directors immediately undertook damage controlling steps and through wide scale
advertisement campaign tried to restore the public confidence. However, the current years

performance is very much lower than the earlier years and any prudent financial consultant
would not recommend dividend more than 20% this year.
The directors are of the opinion that the sale would again pick-up of from the 2nd quarter
of the next year and then will be normal thereafter.
Give your guidance in above case, with special reference to the issues related to
dividend/bonus policy and future share price behaviour on the stock exchange.
Q.13) The director of the following Indian company has approached you with their concern for
the current business scenario and future prospectus.
Infosys Software Ltd., is a well-established company in the field of software development,
e-service provider and man power consultancy service. Its clientele is mainly in the banking,
airways and transport sector. Almost 60% of the revenue comes from overseas clients. It has
shown a steady growth and progress for last five years and has paid dividend of 15%, 15%, 17%,
20% and 25%, and still a large amount of profits where ploughed back every year. Till December
2003 everything going was smoothly, but all of a sudden the overseas countries having
maximum business associates, saw the rise of anti-outsourcing agitations. The problem got
further aggravated by rupee becoming stronger day-by-day against the US dollar. The company
some how managed to complete the ongoing contract but is not so sure of the future prospectus.
The company is also in the process of finalizing new business ventures with non-affected
countries and also taking steps to expand its operations more in India. The company is hopeful
of getting the better results for all its efforts.
Give your guidance in above case, with special reference to the issues related to
dividend/bonus policy and future share price behaviour on the Stock Exchange.
Q.14) Emami Ltd., is a Stock Exchange listed company making good profits every year.
However, the Board of Directors are very conservative and has declared dividend at fixed rate of
4 per share, when EPS is always above 50 for the last five years. The last bonus issue was
made six years ago. The salary packages are also not attractive. As a result there is a high
turnover of employees and low volume of companys share on bourses. The young members of
the directors family wish to make the company more dynamic, employee friendly and darling of
shareholders so as to make it most valued one. What steps you would suggest to achieve these
objectives?
Q.15) Rupali & Co. earns 6 per share having capitalization rate of 10% and has a return on
investment @ 20%.
According to Walters Model, what should be the price per share at 30% dividend payout
ratio? Is this the optimum payment ratio as per Walter?
Ans: Market Price 102
Q.16) Details regarding three companies are given below:
A
B
C
R = 15%
R = 10%
R = 8%
Ke = 10% Ke = 10% Ke = 10%
E = 10
E = 10
E = 10
By using Walters Model, you are required to calculate the value of an equity share of
each of these companies when dividend payout ratio is:
(a) 20%,
(b) 50%,
(c) 0% and, (d) 100%.
Ans:
A Ltd. B Ltd. C Ltd.
D/P Ratio is 20%
140
100
84
D/P Ratio is 50%
125
100
90
D/P Ratio is 0%
150
100
8
D/P Ratio is 100%
100
100
180
Q.17) XYZ Ltd. was started a year back with a paid-up equity capital of
details are as under:

## Earnings of the company

: 4,00,000
Dividend Paid
: 3,20,000
Price-Earnings Ratio
: 12.5
Number of Shares
: 40,000
Your are required to find out whether the companys dividend pay out ratio is
optimal, using Walters Formula.
Ans:
1. Earning per share
2. Dividend per share
3. Internal Rate of Return
4. Cost of Capital
5. Market Price

10
8
10%
0.08 or 8%
131.25

Q.18) S Ltd. has 10 lakhs equity shares outstanding at the beginning of the year 2002. The
current market price of the shares is 150 each. The Board of Directors of the company has
recommended 8 per share as dividend. The rate of capitalization, appropriate to the risk class
to which the company belongs, is 12%.
i) Based on M.M. approach, calculate the market price of the share of the company when
the recommended dividend is:
a) declared and
b) not declared
ii) How many new shares are to be issued by the company at the end of the accounting
year on the assumption that the net income for the year is 2 crores and investment budget is 4
crores, when:
a) the above dividends are distributed and
b) dividends are not declared.
iii) Show the market value of the shares.
Ans:
(a)When dividend is declared (b)When dividend is not declared
(i) Market Price of share
160
168
(ii) No.of New shares
1,75,000
1,19,048
Q.19) PQR Auto Ltd. has outstanding 1,20,000 shares selling at 20 per share. The company
hopes to make a net income of 3,50,000 during the year ended 31st march, 2011. The company
is considering to pay a dividend of 2 per share at the end of current year. The capitalization rate
of risk class of this company has been estimated to be 15%.
Assuming no taxes, answer the questions listed below on the basis of the Modigliani and
Miller Dividend valuation model:
i) What will be the price of a share at the end of 31st March, 2010.
a) if the dividend is paid and
b) if the dividend is not paid?
ii) How many new shares must the company issue if the dividend is paid and company
needs 7,40,000 for an approved investment expenditure during the year?
Ans:
(a)If dividend is paid (b)If dividend is not paid
(i) Market Price of share
21
23
(ii) No.of New shares
30,000 Shares
Q.20) XYZ Ltd, has 50,000 outstanding shares. The current market price per shares is 100
each. It hopes to make a net income of 5,00,000 at the end of current year. The Companys
Board is considering a dividend of 5 per share at the end of current financial year. The company
needs to raise 10,00,000 for an approved investment expenditure. The company belongs to a
risk class for which the capitalization rate is 10%. Show now does the M.M. approach affect the
value of firm if the dividends are paid or not paid.
Ans:
(i)If dividend is Declared (ii)If dividend is not Declared

## (a) Market Price of share

(b) No.of New shares

105
7,143 Shares

110
4,545 Shares

Q.21) Vivek Ltd. had 1,00,000 equity shares of 10 each outstanding on 1st January, 2007. The
shares are currently being quoted at par in the market. In the wake of the removal of the dividend
restraint, the company now intends to pay a dividend of 2 per share for the current financial
year. It belongs to a risk class whose appropriate capitalization rate is 15%. Using Modigliani
Miller Model and assuming no taxes, ascertain the price of the companys shares as it is likely to
prevail at the end of the year (i) when dividend is declared and (ii) when no dividend is
declared.
Also find out the number of new equity shares that company must issue to meet its
investment needs of 4 lakh assuming that the dividend is paid and the earnings per share works
out @ 2.20.
Ans:
(i) Price of the share
(ii) No.of New shares

9.5
40,000 Shares

## (b)If dividend is not paid

11.5
-

Q.22) MN Ltd. has capital 10,00,000 in equity shares of 100 each. The shares are currently
quoted at par. The company proposes declaration of a dividend of 10 per share. The
capitalization rate for the risk class to which the company belongs is 12%.
What will be the market price of the share at the end of the year, if (i) no dividend is
declared and (ii) 10% dividend is declared?
Assuming that the company pays the dividend and has net profits of 5,00,000 and
makes new investments of 10,00,000 during the period, how many new shares must be issued?
Use the M.M. Model.
Ans:
(i)When dividend is not Declared (ii)When dividend is Declared
(a) Share Price
112
102
(b) No.of New shares
4,464 Shares
5,882 Shares
Extra Practice Problems
Q.23) Following is the EPS record PP Ltd., company over the past ten years.
Year ending March
EPS ( )
Year ending March
EPS ( )
2009
20
2004
12
2008
19
2003
6
2007
16
2002
9
2006
15
2001
3
2005
16
2000
2
Determined the annual dividend paid each year in the following cases.
(i) If the companys dividend policy is based on a constant dividend pay out policy of 50% for
all the years.
(ii) If the policy is to pay 8 per share dividend and increase it to 10 when earning exceed
14 per share for 2 consecutive years.
(iii)
If the policy is to pay 7 per share dividend each year except when EPS exceeds 14
per share, when an extra dividend equal to 80% of earnings beyond 14 would be paid?
Q.24) What is Capitalization of Reserves? What are the guidelines issued by SEBI with in this
regard? How does it affect the Balance Sheet of a company?

Q.25) The directors of M/s. Rich-e-Rich Ltd., are planning to declare interim dividend, as a
financial consultant of the company, the directors want you to send them a brief write-up on the
factors to be considered before declaring interim dividend. Kindly prepare a brief write-up.
Q.26) Royal Industries has for many years enjoyed a moderate stable growth in sales and
earnings. In recent years it is facing stiff competition in a plastic product-line and consequently
its sales have been declining. Apprehending further decline in its sales, its management is
planning to move eventually out of plastic business altogether and develop a new diversified
product-line in growth-oriented industries. To execute the proposed investment plan of this year
a capital outlay of 12 crore as in necessary to purchase new facility to start manufacturing a
new product. The estimated rate of return on fresh investment is 20 per cent per annum.
The company has been paying a dividend of 1.50 per share on 4 crore outstanding shares.
The dividend policy has been to maintain a stable dividend of rupee one raising it only when it
appears that earnings have reached a new permanently higher level. The directors may change
such a policy if there are compelling reasons to do so. Total earnings of the current year are 10
crore. The current price of the equity share is 15 and firms Debt / Assets ratio is 40%. Current
costs of various forms of financing are:
Debentures 13%, New equity shares sold at 15, Required rate of return is 10 per cent.
What would be an appropriate policy for the company?
What assumptions, if any, do you make in your investors preference for dividends vs capital
gains?
Q.27) The Asbestos Company belongs to risk class of which the appropriate capitalization rate is
10%. It has 1,00,000 shares selling at 100 each. The firm is contemplating the declaration of 6
dividend end of the current year, which has just begun.
Answer the following questions based on MM Model and the assumption of no taxes:
a) What will be the price of the share at the end of the year, if dividend is not declared? What
will it be if it is declared?
b) Assuming that the firm pays dividend, has net income of 10,00,000 and makes new
investments of 20,00,000 during the period, how many new shares must be issued?
c) Is MM Model realistic with respect to valuation?
Ans. (a) (i) 104, (ii) 110. (b) 15,385 shares. (c) MM Model is unrealistic.
Q.28) Determine the market value of equity shares of the company from the following
information as per Walters Model:
Earnings of the company
10,00,000
Dividend paid
6,00,000
Number of shares outstanding
2,00,000
8
P/E Ratio
15%
ROI
Do you think that the current dividend policy is optimal? If not, what should be the
optimal dividend payout ratio?
Ans. Market price 40; EPS 5; Dividend per share 3; Dividend payout ratio 60%; Market
price per share as per Walters formula 48, Optimal dividend payout for the firm is 0.
Q.29) X Ltd. has 8,00,000 equity shares outstanding at the beginning of the year 2015. The
current market price per share is 120. The Board is contemplating 6.4 per share as dividend.
The rate of capitalalisation is 9.6%.
i) Based on M.M. approach, calculate the market price of the share of the company when
dividend is (a) declared; (b) not declared.
ii) How many new shares are to be issued by the company if the company desires to find an
investment budget of 3.20 crores by the end of the year assuming net income for the year will
be
1.60 crores?
Ans. (i) (a) 125.12 ; (b) 131.52 (ii) (a) 1,68,798 ; (b)
1,21,655

Q.30) Mamta Ltd. has expected dividend of 10. Earning and dividend are expected to grow at
a rate of 20 per cent. The capitalisation rate and current market price are 25% and
280
respectively. Is the share fairly priced?
Ans: V =
200 per
share
Q.31) Sunrise Ltd. is currently paying dividend of 1.50 on its face value of 10. Earnings and
dividends are expected to grow at 5% annual rate indefinitely. Investors require 9% rate of return
on their investments. The company is considering several business strategies and wishes to
determine the effect to these strategies on the market price of its share.
(a)
Continuing the present strategy will result in the expected growth rate and required
rate of return as above.
(b)
Expanding sales will increase the expected dividend growth rate to 7% but will
increase the risk of the company. As a result, the investors required rate of return will
increase to 12%.
(c)
Integrating into retail stores will increase the dividend growth rate to 6 per cent and
You are required to find out the best strategy from the point of view of the market price.
Ans: (a) V = 39.375 per share, (b) D1 = 1.605, V = 32.1 per share, (c) D1 = 1.59, V =
39.75 per share
Q.32) MNO Ltd. share are quoted at 80 on BSE currently. The company pays Re.1 per share as
dividend and the investors expects a growth rate of 5% per year. Compute:
i)
Expected rate of return
ii)
If the required rate is 10% p.a., calculate the indicative market price
iii)
Advise on the basis of the indicative market price computed above whether it is
profitable to invest in the shares of MNO Ltd. at its current price on BSE.
Ans: (1) 6.31%, V = 21 per
share
Q.33) As per the financial accounts for the last year, the company has paid dividend @ 20% .
The paid up equity capital is 6,00,000 and 10% preference share capital 1,00,000. Operating
profit is 4,00,000. The tax rate is 32%. The company expects a growth rate of 5%. Compute
Value per Equity Share.
(a) Dividend Growth Approach,
(b) Dividend Approach.
(c) Earnings Growth Approach.
(d) Earning Approach.
Ans: (a) V = 42 per share, (b) V = 20 per share, (c) V= 91.8 per share & (d) V = 43.7
per share
Q.34) A mining companys iron reserves are being depleted, as result of which the company
earnings and dividend is declining at rate of 8%. If the previous year dividend was 10 and
required rate of return is 15%, what would be current price of equity share of the company?
Ans: V = 40 per
share
Q.35) The Chemical and Fertilizers Ltd. has been growing at the rate of 18% in the recent years.
This abnormal growth rate is expected to continue for another 4 years and then likely to grow at
normal rate of 6%. Dividend paid last year was 3 per share. Find out the intrinsic value of
share if the required rate of return is 12%.
Ans: V
= 79.09
Q.36) What will be the intrinsic value of equity shares of SE Ltd. based on the following data.
Last dividend
3 per share
Growth rate for 13 years
20% p.a.

## Growth rate for 46 years

Growth rate beyond 6 years
The investors required rate of return is 14%.
56.48

10% p.a.
5% p.a.
Ans: Value =

Q.37) P ltd., Q ltd and R ltd are three different companies, each of them paid dividend of
8/- per share. Find out the intrinsic value of the share of all the three companies if growth rate is
same for all of them at 7% and the required rate of return is 14%, 16% and 18% for P ltd., Q
ltd., and R ltd. respectively.