Illustration 1 page 341 (Text book)

ABC Limited makes an issue of 10,000 shares of rupees 10 each

at par aggregating to 1,00,000 rupees. The issue has been
underwritten fully by two underwriters X and Y to the extent of
50000 each. The issue has been closed and the following is the
information available on the subscription.

Valid subscription received – (In Rs.) 76500

Received through underwriter x - (In Rs.) 27500
Receive through underwriter Y - (In Rs.) 34800
Direct subscription - (In Rs.) 14200
Compute devolvement of UR’s
Description Amt
Total share on offer 100000
Less: Valid subscription received 76500
Under subscription (total devolvement) 23500

Description X Y
Total underwriting obligation (1:1) 50000 50000
Less: Valid subscription procured 27500 34800
Less: Direct subscription allocated 7100 7100
Devolvement 15400 8100
Illustration 2 page 342 (Text book)
ABC Limited makes an issue of 10,000 shares of rupees 10 each
at par aggregating to 1,00,000 rupees. The issue has been
underwritten fully by four underwriters P,Q,R and S to the extent
of 20000, 30000, 35000, and 15000 respectively. The issue has
been closed and the following is the information available on the
subscription.
Valid subscription received – (In Rs.) 76500
Received through underwriter P - (In Rs.) 11700
Receive through underwriter Q - (In Rs.) 22400
Received through underwriter R - (In Rs.) 8300
Receive through underwriter S - (In Rs.) 22600
Direct subscription - (In Rs.) 11500
UR commission – on subscribed securities 2.5%
UR commission – on devolvement 2%
Compute UR commission & devolvement devolvement
Description P Q R S
Total underwriting obligation (2:3:3.5:1.5) 20000 30000 35000 15000
Less: Valid subscription procured 11700 22400 8300 22600
Less: Direct subscription allocated 2300 3450 4025 1725
Gross Devolvement 6000 4150 22675 -9325
Less: Negative bal of S allocated 2194 3291 2743 9325
Net devolvement 3806 859 19932 0
UR Commission @2.5% 292.5 560 207.5 565
Devolvement Commission @ 2% 76.1 17.2 398.6 0.0
Total Commission 368.6 577.2 606.1 565.0
Overall UR Commission (%) 1.84% 1.92% 1.73% 3.77%

2+3+3.5+1.5 10
2+3+3.5 8.5
Illustration 3 page 344 (Text book)
Present Net worth of UR – 25 lakh 25
Devolvement probability – 0.25 0.25
Devolvement quantum – 50% 0.5
Cost of debt – 3% 0.03
UR commission – 2.5% 0.025
Tax rate – 30% 0.3
Capital loss on devolved securities– 15% 0.15
Average cycle time – 3 months 3
Based on the given assumptions the business projection can worked as follow:

Q1 Q2 Q3 Q4
Present Net worth 25 26.4 27.8784 29.4396
Maximum Underwriting (20 times) 500 528 557.568 588.792
Devolvement probability (0.25) 125 132 139.392 147.198
Devolvement quantum (50%) 62.5 66 69.696 73.599
Loan financing required (DQ-NW) 37.5 39.6 41.8176 44.1594
UR commission (2.5%) 12.5 13.2 13.9392 14.7198
Less: Cost of debt (3%) 1.125 1.188 1.254528 1.32478

Less: Capital loss on devolved securities (15%) 9.375 9.9 10.4544 11.0398

PBT 2 2.112 2.230272 2.35517

Tax (30%) 0.6 0.6336 0.669082 0.70655
PAT 1.4 1.4784 1.56119 1.64862
Illustration 2 page 315 (Text book)
EPS (in Rs) 7.5
CMP (in Rs) 75
BVPS (in Rs) 60
Face value per share (in Rs) 10
Industry average P/E ratio 14
Total quantum of fund proposed to raise (in Crore) 40
Present issued and paid up equity capital of Rs. 10 per share (in crore) 5
Present No of shares (in crore) 0.5
IPO issue price three years ago (per share) 60
Assumed right issue price is fixed (per share in Rs.) 40
Pre issue No of shares (in crore) 0.5
Total No of fresh issue (in crore) 1
Post issue No of shares (in crore) 1.5

Post issue net worth:

Pre Issue paid up capital (in crore) 5
Pre Issue premium (in crore) 25
Post Issue paid up capital (in crore) 10
Post Issue premium (in crore) 30
Total (in crore) 70

Required post issue profit to maintain same EPS (in crore) 11.25
Post issue required rate of return to maintain same EPS (in crore) 0.1607143
Illustration 5 page 470 (Text book)
Buy back limited has the following financials as per the recent audited balance sheet:
Particulars Amt
Paid up equity capital (No of sh: 20000 of 10 each) 200000
General reserve 500000
Security premium 1000000
Capital redemption reserve 250000
P&L Account 100000
Debenture Redemption reserve 150000
Total Debt 3000000

The current EPS is Rs.20 and MP is Rs. 40. The Co. earned a PAT of 4lakh for this
relevant year. On the basis of above information keeping in view the norms on
quantum of buyback and the principle of pricing, compute the quantum & price per
share of buyback

PAT 400000
PE Ratio 2
No of shares 20000
CMP 40
Total paid up equity capital and free reserves 1800000
25% of Total paid up equity capital and free reserves 450000
The maximum price per share that can be offered for buyback 90

Residual Equity 1350000

Total Debt 3000000
Debt Equity ratio after buyback 2.222222222222

To maintain the norm of post buyback DER i.e. 2:1, the minimum residual equity
should be 1500000
Thus, the maximum equity capital that can be utilized for buyback 300000
The maximum price per share that can be paid 60

Return on Net Worth (RONW) 0.16

P/E 2
Maximum premium that can be paid as per the suggested formula 2.125
Max price that company can offer as per the suggested formula 125
No of share that Co. can buy at max price that Co. can offer as per the suggested
formula 2400
Price range 60 to 125

No of share range 2400 - 5000

Illustration 4 page 466 (Text book)
Buyback price
Scenario 3 No. of shares bought back
Capital reduction Amount
Current PE 5 Reduced Capital employed
Current EPS 10 Reduced No. of Shares
Current RONW 10%
Capital employed 100,000,000
Paid-up share capital (face value) 10,000,000 Post buyback RONW %
No. of shares of Rs. 10 each 1,000,000 Post buyback Return to shareholders
Limit on buy back (% of paid up capital) 25% Post buyback EPS
Post Buyback PER
Maximum possible buyback price 100 Post buy back MP
RONW 9.00%
Scenario -I (Base) 10% Other requirement of the law have not been
Scenario -II (best) 11%
Scenario -III (worst) 9%
Post buyback P/E 4
Scenario -I (Base) 5 `
Scenario -II (best) 6
Scenario -III (worst) 4
 50 75 100
250,000 250,000 250,000
12,500,000 18,750,000 25,000,000
87,500,000 81,250,000 75,000,000
750,000 750,000 750,000

9.00% 9.00% 9.00%

7,875,000.00 7,312,500.00 6,750,000.00
10.500 9.750 9.000
4 4 4
42.00 39.00 36.00

ement of the law have not been considered

Illustration 1 page 434 (Text book)
From the following details, compute the stake to be offered to venture capitalist.
The current level of earnings (in million) 2
Expected annual growth rate of revenue 50%
The required capital at present round (in million) 2.5
Expected holding period (in years) 5
Expected profit after tax margin at liquidity event 11%
Expected P/E ratio 15
Expected rate of return for VC 40%
 0 1 2 3 4 5
Revenue at the end of 5 years 2 3 4.5 6.75 10.125 15.1875
PAT 1.670625
Valuation according to PE ratio 25.059375
Present value 4.6594007
The stake to be offered to VC 0.5365497
Illustration 2 page 434 (Text book)
Fund raising Round 1 Fund raising Fund raising Round 3
(t) Round 2 (t+1) (t+2)
Investor VC1 VC2 VC3
Capital Invested by VC (in cr) 5 10 20
Stake offer (% of post money
50% 33.33% 25%
valuation)

Pre Money Value (in cr) 5 (promoters capital) 20 (P+VC1) 60 (P+VC1+VC2)

Post Money Value (in cr) 10 30 80

P - 50% P-33.33% P-25%

Post Money Shareholding pattern

VC1 – 50% VC1 – 33.33% VC1 – 25%
VC2 – 33.33% VC2 – 25%
VC3 – 25%
Annual Return on exit 133% 75% 25%
 holding period Years
Offer for sale (t+3)
Promoters 3
IPO VC1 3
VC2 2

VC3 1

100

100

Post issue Shareholding

pattern –

P-25%,
Public-75%