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Balanace Sheet as of Dec,31,2006

Liabilities& Equity Assets


A/C Payable 400 Currnet Assets 500
Bank Loan 500 A/C Receiveabl 1000
Accurals 200 Inventories 3300
Current Liabilities 1100 Net Fixed Asset 4700
Long Term Debt 2650 Depriciation -500 4200
Common Stock Earnings 3750
Total Liabilities 7500 Total Assets 7500

Income Statement
Credit Sales 8000
Cost of Goods Sold 5400
Gross Profit 2600
Selling & Admin Expenses 1200
Interest Expenses 400 1600
Profit Before Taxes 1000
Taxes (44%) 40
Profit After Texes 560

Working #1
Calculation of Total Liabilities and Current Liabilities
We Know that Total Liabilities/Equity=1/1=1
TL/3750=1
TL=3750
CL+LTL=TL
CL+2650=3750
CL=3750-2650
CL=1100
Working #2
Calculation of Current Assets and Fixed Assets
Current Ratio=CA/CL=3/1
CA/1100=3
CA=3X1100=3300
CA+FA=TA
3300+FA=7500
FA=7500-3300
4200
Working#3
We know that average collection period= (Receiveable/Credit Sales)x360
Receiveable/8000x360=45
Receiveable=45x8000/360=1000
Working#4
Calculation of Cost of Goods Sold
Inverntory Turnover Ratio=Cost of Goods Sold/Inventory
CGS/Inventory=3
CGS/1800=3
CGS=3X1800=5400
Working#5
Net Profit Margin=NPAT/Sales
NPAT/8000=7%
NPAT=7%X8000
560
Working#6
Net Profit before Tax=X
Then Tax=44%of X is=.44X
and NPAT=x-.44x=.56X
X(1-.44)=.56X
.56X=560
X=560/.56=1000
Q.2 Sian Bodla Corporation
Cashflow Statement for the year ended Dec 31,2002
1- Cashfow from Operating Activity
Profit from Operations(PBIT) 13
Add Back- Depriciation 5
18
Working Capital Items
Increase in A/C Receiveable -7
Increase in Inventory -3
Decrease in Note Payable -20
Increase in A/C Payable 3 -9
Interest Paid -2
Tax Paid -2 -13
2- Cashflows from investing activities
Acquisition of Fixed Asset -10
Disposal of Assets 3 -7
3- Cashflows from Financing Activities
Issuance of Longterm debt 15
Issuance of Common Stock 6
Cash Dividend -3 18
Net Decrease in Cash -2
Cash and Cash equvelent at the begning of year 5 5
Cash and Cash Equvelent at the end of year 3

1-TA Accont Accured Taxes


Cash 2 Begning Balance 3
Ending Balance 5 Tax Expense 4
2-TA Fixed Assets Net
Begning Balance 50 Depriciation Expense 5
Cash 10 Ending Balance 55
3-TA Retained Earning
Ending Balance 44 Begning Balance 40
Cash Dividend 3 Net Income 7
ACE Manufacturing
Cash Budget for the month of May, June, July

May June July


Begning Cash Balance 20000 26000 7800
Cash Receipts
Cash Sales 35000 40000 50000
Credit Sales
March 15000 - -
April 15000 15000 -
May - 17500 17500
June - - 20000
65000 72500 87500
Cash Payments
Payment Against CGM Month Sales CGM (70%)
March 4200 - - March 60000 42000
April 37800 4200 - April 60000 42000
May - 44100 4900 May 70000 49000
June - - 50400 June 80000 56000
July 100000 70000
Selling, General and Administrator Expense
17000 18000 20000
Interest Payment - - 9000
Sinking fund Payment - - 50000
Dividend - - 10000
CAPEX - 40000 -
Income Tax - - 1000
Total 59000 106300 145300
Ending Cash Without Borrowing 26000 -7800 -65600
Cumulative Borrowing - 27800 85600
Ending Cash Balance with Borrowing 26000 20000 20000
ch-7
Schedule of Cash collection against Credit sales
Month Sales Cash Credit Jan Feb March April May June July
Oct-01 30000 75000 225000 22500 - - - - - -
Nov-01 35000 875000 262500 78750 26250 - - - - -
Dec-01 400000 10000 300000 180000 90000 30000 - - - -
Jan-02 150000 37500 112500 - 67500 33750 11250 - - -
Feb-02 20000 50000 150000 - - 90000 45000 15000 - -
Mar-02 300000 50000 150000 - - - 90000 45000 15000 30-6-2002
Apr-02 250000 75000 225000 - - - - 135000 67500 Account Receivable
May-02 200000 62500 187500 - - - - - 112500 22500
Jun-02 200000 50000 150000 - - - - - - 75000
Jul-02 - - - - - - 300000 150000
281250 183750 153750 146250 195000 195000 300000 247500
Begning Cash Balance 100000 226750 258500 162750 82000 137500
Cash Receipts
Cash Sales 37500 50000 50000 75000 62500 50000
Collection against Credit sales 281250 183750 153750 146250 195000 195000
Cash Payments 318750 233750 203750 221250 257500 245000
Payments against Marchantise 160000 160000 240000 200000 160000 240000
Wages and Salaries 30000 40000 50000 50000 40000 35000
Rent 2000 2000 2000 2000 2000 2000
Interest Expense - - 7500 - - 7500
Prepaid Tax - - - 50000 - -
CAPEX - - - - - 30000
Total 192000 202000 299500 302000 202000 314500
Ending cash balance without Borrowing 226750 258500 162750 82000 137500 68000
Cumulative Borrowing - - - 20000 - 35000
Ending Cash balance with Borrowing 226750 258500 162750 102000 137500 103000
c12-1,2
a- 1 2 3 4 5 6 7
C.OFlo Income After Tax
D.F@
Year w/Inflo Depr Taxable Income Tax Cash
15%
ws @38% Flow PV
0 -60000 0 0 0 -60000 1 -60000
1 20000 19998 2 1 19999 0.87 17391
2 20000 26670 -6670 -2535 22535 0.756 17038
3 20000 8886 11114 4223 15777 0.658 10373
4 20000 4446 15554 5911 14089 0.572 8055
5 20000 0 20000 7600 12400 0.497 6165
NPV= -977
b- -70000 -70000 1 -70000
1 20000 19998 2 1 19999 0.87 17391
2 21200 26670 -5470 -2079 23279 0.756 17601
3 22472 8886 13586 5163 17309 0.658 11381
4 23820 4446 19374 7362 16458 0.572 9409
5 25250 - 25250 9595 15655 0.497 7784
5 10000 - - - 10000 0.497 4972
NPV= -1462
NPV= -5949
c12-3
Cash Out Cash Out
rockbuilt
End of Year Flow/Inflo Flow/Inflo D.F @ 8% PV1 D.F @ 8% PV2
savings
ws ws
0 -74000 -59000 -15000 1 -74000 1 -59000
1 -2000 -3000 1000 0.9259 -1852 0.9259 -2778
2 -2000 -4500 2500 0.8573 -1715 0.8573 -3858
3 -2000 -6000 4000 0.7938 -1588 0.7938 -4763
4 -2000 -22500 20500 0.735 -1470 0.735 -16538
5 -13000 -9000 -4000 0.6805 -8847 0.6805 -6125
6 -4000 -10500 6500 0.6301 -2520 0.6301 -6616
7 -4000 -12000 8000 0.5834 -2334 0.5834 -7001
8 5000 -8500 13500 0.5402 2701 0.5402 -4592
37000 -91624 -111269

Salvage value=9000-4000=5000
Salvage value=5000-(-13500)=-8500
c12-4
Remaining life of the machine=4years Annual Saving=12000
Present Salvage Value=$8000 Income Tax rate=40%
Salvage Value after 4 years=$2000 After Tax Cash Flows from sales of Old Machine
Tax Book Value=$4520 Gross Procedes=8000
Depriciation this year Gain Sales (8000-4500)3480
Cost of new machine=60000 Income Tax rate 40%=1392
Salvage Value after 4 years=15000 Net Procedes=6608
3 years property class for depriciation 15000-2000=13000

Depriciation

Cash Out Incremen Taxable Income tax After Tax


End of Year New Old
Flow/Inflows tal Income @40% Cashflow

0 -53392 - - - - -53392 -53392


1 12000 19998 4520 15478 -3478 -1391 13391
2 12000 26670 - 26670 -14670 -5868 17868
3 12000 8886 - 8886 3114 1246 10754
4 12000 4446 - 4446 7554 3022 8978
4 13000 - - - 13000 5200 7800

Gross procedes=3000
Lasson sale(3000-4520)=-1520
Income tax@40%on gain
62000*33.33%
c-13-5
Project A

Cash Out Taxable Income Tax After Tax


End of Year % age Depriciation D.F@14% D.F@17%
Flow/Inflows Income @34% Cash Flow
PV PV
0 -28000 -28000 1 -28000 1 -28000
1 8000 20 5600 2400 816 7184 0.8772 6302 0.8547 6140.165
2 8000 32 8960 -960 -326 8326 0.7695 6407 0.7305 6082.435
3 8000 19.2 5376 2624 892 7108 0.675 4798 0.6243 4437.425
4 8000 11.52 3226 4774 1623 6377 0.592 3775 0.5336 3402.682
5 8000 11.52 3226 4774 1623 6377 0.5194 3312 0.4561 2908.477
6 8000 5.76 1612 6388 2172 5828 0.4556 2655 0.3898 2271.786
7 8000 - - 8000 2720 5280 0.3996 2110 0.3331 1758.768
NPV= 1359 NPV= -998
PI= 29359
= 1.05
IRR= LDR+{DBDR(NPV@LDR/Sum of Absolute value of NPV at two DR)}
IRR= 15.73
Calculation of Payback period

Cash
flow
generat
Cash flow ed
needed at the during Outstanding Payback
Year begning of year the year Investment period
0
0 28000
1 28000 7184 20816 1year
2 20816 8326 12490 1year
3 12490 7108 5382 1year
4 5382 6377 0 10months
Payback period in year=Cash outflow/Equal Annual cash Inflows
= (5372/6377)x12 3year10months
= 10
Project B

Cash Out Taxable Income Tax After Tax


End of Year % age Depriciation D.F@14% D.F@17%
Flow/Inflows Income @34% Cash Flow
PV PV
0 -20000 -20000 1 -20000 1 -20000
1 5000 20 4000 1000 340 4660 0.8772 4088 0.8547 3983
2 5000 32 6400 -1400 -476 5476 0.7695 4214 0.7305 4000
3 6000 19.2 3840 2160 734 5266 0.675 3554 0.6243 3287
4 6000 11.52 2304 3696 1257 4743 0.592 2808 0.5336 2531
5 7000 11.52 2304 4696 1597 5403 0.5194 2807 0.4561 2464
6 7000 5.76 1152 5848 1988 5012 0.4556 2283 0.3898 1954
7 7000 - - 7000 2380 4620 0.3996 1846 0.3331 1539
NPV= 1600 NPV= -242

PI= 21600/20000
Cash = 1.08
Calculation of Payback period flow IRR= LDR+{DBDR(NPV@LDR/Sum of Absolute value of NPV at two DR)}
generat
Cash flow ed
needed at the during Outstanding Payback
Year begning of year the year Investment period IRR= 16.61
0 20000
1 20000 4660 15340 1year
2 15340 5476 9864 1year
3 9864 5266 4598 1year
4 4598 4743 0 10months
Payback period in year=Cash outflow/Equal Annual cash Inflows
(4598/4743)x12= 11.6331 3 year 11.63 months
13-8
Project Cash outflow Profitibility Index PV of Cash Inflows NPV
1 500,000 1.22 610,000 110,000
2 150000 0.95 142,500 (7,500)
3 350,000 1.2 420,000 70,000
4 450,000 1.18 531,000 81,000
5 200,000 1.19 238,000 38,000
6 400,000 1.05 420,000 20,000
PI= PV of Cash Inflows / PV of Cash Outflows
PV of Cash Inflows = PI X PV of Cash Outflows
100,000
a-Selecting project highest PI
Project Cash outflow Profitibility Index PV of Cash Inflows NPV
1 500000 1.22 610000 110000
3 350000 1.2 420000 70000
850000 1030000 180000

Selecting project highest Investment


Project Cash outflow Profitibility Index PV of Cash Inflows NPV
1 500000 1.22 610000 110000
4 450000 1.18 531000 81000
950000 1141000 191000

b- No this is not Optional Stratigy, the Optinal stratigy would have been to pick up all
those projects that have a positive NPV
14-1
Project B
Cash Flows (Ax) Probability (Px) AxPx (Ax-) Px AxPx (Ax-) Px
2,000 0.2 400 18,000,000 200 900,000
4,000 0.3 1,200 300,000 1,600 400,000
6,000 0.3 1,800 300,000 2,400 400,000
8,000 0.2 1,600 1,800,000 800 900,000
=AxPx 5,000 4,200,000 5,000 2,600,000
=(Ax-)Px = 2600000= 1612
= 4,200,000 =2049
CVa=/=2049/500=.41 CVb =/=1612/5000=.32
CH-14 Q-3
NPV= 20,000
= 10,000
NPV*= (i) 0 (ii) 30,000 (iii) 5,000
Zscore= NPV*-NPV/ = 0-20,000/10,000 = - 2.28%
= 30,000-20,000\10,000 = 1 15.77%
= 5,000-20,000/10,000 = -1.5 6.68%
14-2a
Project cost ENPV SD CV Zscore Probability NPV<0
A 100000 10000 20000 2 -0.5 30.85%
B 50000 10000 30000 3 -0.33 37%
C 200000 25000 10000 0.4 -2.5 0.62%
D 10000 5000 10000 2 -0.5 30.85%
E 500000 75000 75000 1 -1 15.77%
a-i
Domination on the basis of ENPV and SD
C Dominates A,B&D
A Dominates B & D
E neither dominates nor is dominated
a-ii- Domination on the Basis of ENPV and CV(graph)
C Dominates A,B&D
A Dominates B & D
E Dominates A,B &D
b
Zscore = NPV*-NPV/ NPV*=0
15-6
Cost of Equipment = $ 600,000 Annual cash saving forever = $ 90,000
Flotation cost of Debt = 4000 (200,000x 2%) WACC = .145
Flotation cost of Common stock = 30,000 (200, 000 x15%) P= A/2 = 90,000 / .145
Total cash outflow = 634,000 = 620,690

NPV = 620,690 - 634,000


= -13,310
Project Rejected No

15-8
RM = 15 %
Rf = 10 %
B = 1.1

a Ke = Rf ( RM - Rf) B = .10+ ( .15 - .10) 1.1 = .10 + .55 = 15.5 %

b Ke (max) = .10 (.15 - .10) 1.4 = .10 + .07 + 1.7 or (17 %)


Ke )min) = .10(1.5 - .10) 1 = .10 + .05 = .15 or (15%)

C RM Rf B Ke=Rf+(RM-Rf)B Px KexPrx
0.15 0.10 1 0.15 0.2 0.0300
0.15 0.10 1.1 0.155 0.3 0.0465
0.15 0.10 1.2 0.16 0.2 0.0320
0.15 0.10 1.3 0.165 0.2 0.0330
0.15 0.10 1.4 0.17 0.1 0.0170

Ke = KexPx 0.1585
15-5
Source of Financing Cash Flow wx kx wxkx
Debentures 6000000 0.375 0.078 0.02925
Prefered Stock 2000000 0.125 0.12 0.015
Common Stock 8000000 0.5 0.17 0.085
320000 shares 16000000 1 WACC= 0.12925
12.93%
Ke=13% Tax rate=40%
Kp=12% i=13%
ki=i(1-t)
ki=.13(1-40)
.13x.60
78%
16 - 4
1 2 3 4
16% Dbt - 30% 50% 50%
15% Pref Stock - - - 20%
Common Stock @ 20/m share 100% 70% 50% 30%
Interest expense - 240,000 4,000,000 400,000
Prefered stock provided - - - 150,000

New common shares to be issued 250,000 175,000 125,000 75,000


EBIT 1,000,000 1,000,000 1,000,000 1,000,000
(-) Interest expense - 240,000 400,000 400,000
EBT 1,000,000 760,000 600,000 600,000
(-)Tax @ 50 % 500,000 380,000 300,000 300,000
(-) Pf stock Dividend - - - 150,000
EACS 500,000 380,000 300,000 150,000
NS (No of Shares) 250,000 175,000 125,000 75,000
EPS = (EACS/NS) 2 2.17 2.40 2

b- (EBIT*-1)(1-t)-PD1/NS1 = (EBIT-2)(1+t)-PD2/NS2
(EBIT-0)(1-.5)-0/250,000=(EBIT-400,000)(1-5)-0/125,000
EBITx.5/2 = (EBIT-400,000)(.5)
EBIT=2EBIT-800,000
EBIT=800,000
(EBIT-1)(1-t)-PD1=0

EBIT* if EBIT is grater than 800,00 plan III will give higher earning per share, if EBIT is less than 800,000
Plan 1 will give higher earning.
16 - 5
NS=100000 MPS=60
6% Bonds=2000000
Interest Expense=2000000x6%=120000
Financing required=3000000 1 2 3 4
8% Bond - 100% - 50%
7% Prefered Stock - - 100% -
C.S @ 60/M/Share 10% - - 50%
Interest Expense - 240000 - 120000
Prefered Dividend - - 210000 -
New common stock to issued 50000 - - 25000
EBIT 100000 100000 100000 100000
(-) Interest Expense 120000 360000 120000 240000
EBT 880000 640000 880000 760000
(-) Tax@50% 440000 320000 440000 380000
(-) PD - - 210000 -
EACS 440000 320000 230000 380000
NS 150000 100000 100000 125000
EPS=(EACS/NS) 2.93 3.2 2.3 3.04

b- (EBIT*-1)(1-t)-PD1/NS1 = (EBIT-2)(1+t)-PD2/NS2
(EBIT*-120000).5/150000=(EBIT-360000).5/100000
3EBIT*-2EBIT=1080000-240000
EBIT*=840000
16-7
1.1 Million shares C.S MPS=20
8 Million in debt at 10%=800000
Financing required=5m
EBIT=6m Tax rate=35% 1 2 3
eareebayan 250000 - -
Debt @11% - 550000 -
Prefered Stock@10% - - -500000
EBIT 6000000 6000000 6000000
Interest (Old+New) 800000 1350000 800000
PBT 5200000 4650000 5200000
Tax(-)35% 1820000 1627500 1829000
EAT 3380000 3022500 3380000
(-)Dividend - - 500000
EACS 3380000 3022500 2880000
NS 1350000 1100000 1100000
EPS=(EACS/NS) 2.50 2.75 2.62
17-2
You own $22500 worth of GH Co stock
Your % ownership in GHCO=2250/2250000=1%
1- Sell your share in GH for $22500 in one Market.
2- Raise personal borrowing equal to 1% of GH Debt@12%
3- You now have $42500
4- Buy 1% of WB shares for $40000
5-You save $2500
a- Your Return Before After
Retun on Equity (22500x16%)= 3600 40000x15% 6000
(-) Interest Expense - -2400
Net Return $3,600 $3,600

b- when too many share holders will sell their share in hope of greater profit, the share will go down and the they will go
to buy WB share, the WB share will go up and stage will come when both the share prices will become equal. At that
point the arbitrage process will seize

17-4a

if Equity
Financed If Recaptilized
EBIT 1000000 1000000
(-)I 0 450000
EBT 1000000 550000
(-) Tax@40% 400000 220000
EAT 600000 330000
Income to Debt Holders - 450000
Income to Security H 600000 780000
b-
PV of Debt tax shiel=TcB= .40x3000000=1200000
c-i- Value of Unleaverd Firm=600000/.2=$3000000
ii-Value of leavered=Value of Unleaverd firm+Pv of Debt tax sheild
3000000+1200000
4200000
17-5
Amount of PV of Debt tax PV of bank Value of Leaverd
Value of Unleaverd Firm Debt (B) sheild (TcB) ruptcy cost firm
10000000 1000000 220000 0 10220000
10000000 2000000 440000 50000 10390000
10000000 3000000 660000 100000 10560000
10000000 4000000 880000 200000 10680000
10000000 5000000 1100000 400000 10700000
10000000 6000000 1320000 700000 10620000
10000000 7000000 1540000 1100000 10440000
10000000 8000000 1760000 1600000 10160000
Since the value of leavered firm is maximum, the family should chose$5000000