# Description

1 Future Value of a one-time cash flow, lumpsum

2 Present Value of a one-time cash flow, lumpsum
3 Future Value interest factor (FVIF)
4 Present Value Interest Factor (PVIF)
5 CAGR (rate), given PV, FV, n
6 Time period, given PV, FV, r
7 Annuity Factor for Future Value (FVIFA)
8 Annuity Factor for Present Value (PVIFA)
9 Value of Coupon Paying, fixed-rate Bond
10 Value of a Zero Coupon Bond
11 PV of a perpetuity
12 Value of an equity share with constant dividends
13 PV of a growing perpetuity
14 Value of an equity share with a constant growth
15 PV of Growing Annuity (g,r)
16 Payback Period
17 NPV
18 IRR
19 Profitability Index
Formula
FV = PV (1+r)^n
PV = FV/(1+r)^n
(1+r)^n
1/(1+r)^n = 1/FVIF
(FV/PV)^(1/n) - 1
[ln(FV/PV)] / ln(1+r)
[ (1+r)^n - 1 ] / r
[ 1 - 1/(1+r)^n ] / r
Coupon x PVIFA + Face Value x PVIF
Face Value x PVIF
CF/r
D/ke
CF0(1+g)/(r-g)
D0(1+g)/(ke-g)
[CF0(1+g) (1 - {(1+g)/(1+r)}^n] / (r-g)
Session 1 20th Dec 2020

Corporations

Sole Propretorship
Partnership
Limited Liability Partnership
Joint Stock Company (Corporaation)
a) Pvt Ltd. Company
b) Public Ltd. Company Corporatio

The corporation is listed on a recognized stock exchange

Public Sector Company: Owned by the Government: State Owned Enterprsed : Central or Stat
100% ormore than 50% of the Equity Shares are held by the Government
Public Ltd. Company: Any entitty that has issued that shares to the public and listed on the stoc
The shares are avaialble for trading. Investors can buy and sell through the stock market

To become a public limited company:

The firm has to go for IPO
Initial Public Offering
The firm is issuing its equity shares or common stock to public for subscription (investment)

You wnat to become a shareholder in TCS

Have a Demat account with any DP
You are given access to a trading terminal
Demant account is linked to your bank acccount
When you buy shares, the demat account is credited with shares purchased
When you sell shares, the demat account is debited with shares sold

Features of a corporation/joint stock company/public limited company

a) There is no limit on the number of shares to be issued

b) There is no limit on the maxmum number of shareholders
c) The shareholders are granted voting rights
d) The shareholders have to elect the Board of Dierctors exercising their voting power
e) The firm has perpetual existence
f) The firm is governed by the Board of Directors
g) The BoD's decisions are impleted by the ToT
h) The way a corporation is governed: Corporate Governance
i) Every corporation comes with a limited liabilitiy concept ( the liabilities of the corporation are n
Strategic Decisions
a) Appointment of seniror executives
b) Appointment or replacement of auditors
c) Decisions related to dividends
d) Decisions related to fund raising
e) Decisions related to long-term investments
f) Decisions related to M&A

Session 2: 21st Dec

Important/key terms related to financial statements

Total Assets = Current Assets
Non-Current Assets

Current Assets All those assets which are converted into cash
as a part of business operations within one year

Cah & Cash Equivalents

Inventory Raw Materials, Work in Progress, Finished
Accounts Receivable
Operating Current Assets
Prepaid expenses
Marketable Securities
Total Current Assets

Current Liabilities
Accounts Payable
Accrued Expenses
Short-term loans and ODs
Total Current Liabilities

NETWORKING CAPITAL CA-CL

POSITIVE VALUE OF NWC IS A SIGN OF LIQUDITY

1
NWC 200
CURRENT ASSETS 450
CURRENT LIABILITIES 250

1
NWC 100
CURRENT ASSETS 250
CURRENT LIABILITIES 150

1
NWC -100 IN ORDINARY COURSE OF BUSINES
CURRENT ASSETS 250 A FIRM SHOULD AVOID NEGATIVE N
CURRENT LIABILITIES 350 OR QUICKLY OVERCOME THE SITUA

QUESTIONS TO BE PRACTICED
WHAT IS LIQUDITY CRUNCH?
WHAT ARE CURRENT ASSETS?
WHAT ARE CURRENT LIABILITIES?
WHAT IS THE RELEAVANCE OF NWC?
WHAT ARE THE CONSEQUENCES OF NEGATIVE NWC?

NON-CURRENT ASSETS
PROPERTY, NET 70
PLANT, NET 30
EQUIPMENT. NET 10
INVESTMENTS IN STOCKS 20
INVESTMENTS IN BONDS 10
INTANGIBLE ASSETS
TOTAL NON-CURRENT ASSETS 140
TOTAL CURRENT ASSETS 75
TOTAL ASSETS 215

Current Liabilities
Accounts Payable
Accrued Expenses
Short-term loans and ODs
Total Current Liabilities
NON-CURRENT LIABILITIES
STOCKHOLDER'S EQUITY
TOTAL ASSETS 215
TOTAL LIABILTIES 125
STOCKHOLDER'S EQUITY 90
a) Common Stock 30
b) Retained Earnings 60

Session 3: 21st December

12 13
Revenue 2 4.8
Delta Revenue (millions) 2.8
% growth 140%

Session 4: 23rd Dec

FINANCIAL STATEMENTS OF AMC

PERIOD OF DATA 3
STATEMENTS IS,BS
OBJECTIVE EVALUATE THE LOAN APPLICATION OF AMC
TOOLS FOR ANALYSIS HORIZONTAL, VERTICAL, RATIOS
AREAS OF PRIORITY FOR THE BANKER
A) INTEREST PAYMENT CAPABILITY (LIQUDITY)
B) LOAN REPAYMENT
CREDIT RATING ANALYSIS

HORIZONTAL ANALYSIS
TO DETERMINE THE YoY GROWTH AND INTERPRET THE TRENDS

VERTICAL ANALYSIS
TO DO A SEGMENTAL ANALYSIS

students absent for Poll questions

 1. Shachi
2. Rajeev
3. Sowmya
4. Vanshika
5. Raghav
6. Twinkle
7. Ayush Agarwal
IF the revenue grows at the average growth rate from year 3 to year 4
what is the expected revenue for Year 4

Revenue for year 3 8000

Average growth rate 103%
Revenue for year 4 16266.4

Vertical Analysis

For income statement: Use Revenue as a base (100)

Convert all the values of Income Statement as a % to sales
This is a % based income statement

For Balance Sheet: Use Total assets as a base (100)

Convert all the values of assets, liabilities, and equity as
a % to Total Assets. This is a % based balance Sheet

Session 5 28th December

Two Companies under study
HUL
APPLE

ANALYSIS OF FINANCIAL STATEMENTS

HORIZONTAL, VERTICAL ANALYSIS
Slide No.57 LIQUDITY ANALYSIS
from the notes a) Current Ratio
b) Quick Ratio
c) Cash Ratio
d) Inventory Turnover Ratio high
e) AR Turnover Ratio high
f) AP Turnover Ratio low
g) Days Sales Outstanding (DSO) low
h) Days Inventory Outstanding (DIO) low
 i) Days Payable Outstanding (DPO) high

DIO (DAYS) 20
DSO (DAYS) 20
DPO (DAYS) 30
CASH CONVERSION CYCLE 10 AS LESS AS POSSIBLE TO MAINTAIN
CCC = DIO + DSO - DPO LIQUIDITY

A) AMC
B) HUL
C) APPLE

CCC FOR THE ABOVE THREE COMPANIES FOR LAST 3 YEARS

Chapters 4,5 Time Value of Money, and Discounted Cash Flow Analysis

All the decisions in the area of finance require the projections for future
the inputs for decision making will be in the form cash flows
Projected ed Cash Flows
A proposal is under consideration
Accept the proposal quantitative analysis
Reject the proposal quantative analysis

To conduct the quantitative analysis, we require certain basic concepts

Time Value of Money TVM
All calculations require application of spreadsheets

Typical questions you can answer using time value of money

1. If you have deposited 25,000 in the bank today, at the rate of 10% p.a.
what is the value of the deposit after 10 years?
2. What is the value above if the rate of interest is offered on a simple interest basis
3. If you have opened a savings account depsoiting 10,000 every year
for 10 years and the rate of interest is 10% p.a.
What is the value of the savings scheme 10 years later
4. You require 1 million to finance the kid's eduction 10 years later.
how much you should save now if the rate of interest is 10%
5. You have received a home loan of 2.5 million
with a tenure of 240 months. If the rate of interest is 10% p.a.
what is the EMI?
 Standard convetions
a) interest rate is quoted on a per annum basisb
b) All cash flows happen at the end of the year, unless otherwise stated\

Practice 1
You are planning to invest 50,000 after 5 years for a period of 20 years.
If the rate of interest is 8% p.a. what will be the value of your investment
at the end of the investment period?

Practice 2
What will be the value in the above case, if you deposit after 10 years?

Practice 3
If you require 5 million at the end of 10 years,
how much you should invest now. The rate of interest is 12% p.a.

FV 5000000
r 12%
n 10
PV 1609866
PVIF (12%, 10) = 1/(1+R)^N 0.32197 PV of Rupee 1
PV = FV x PVIF 1609866

in the above case, what should be your savings now

if your require 8 million, instead of 5 million

PV 40000
FV 48000
n 1
48000 = 40000 (1+r)^1
1+r = 48000/4000 = 1.2
r = 1.2 - 1 = 0.2 = 20%

29th December
Types of Cash Flows that happen in a decision making process
1. One-Time Cash Flow
2. Series of Cash Flows, Uneven
3
 Cost of the Property 70
Down payment 15%
Eigible amount for loan 85%
Loan Value 59.5
rate of interest 9%
Tenure 15
PVIF (9%,15) 0.27454
PVIFA (9%,15) 8.06069 (1-PVIF)/r
PVIFA [1 - 1/(1+r)^n ] / r
Annual instalment 7.3815
Total payment to the bank 110.723
Interest paid for 15 years 51.2226

SBR1
Use the Financial Data of HUL, and Apple
Conduct Horizontal and Vertical Analysis
Write a two-page note with observations.
Use graphs and other visuals to emphasise your observations
Present your analysis using a PPT in not more than 10 slides
Submission: Note in word doc, and PPT

30th December 2020

Bond Markets
Stock Market (Equity Markets)

Important CF decisions for a firm

Slides of Ch1 a) Investing for Long-term growth - Investment in Fixed Assets - Capital Expenditure decision
b) Financing the operations & growth of the business - Fund Raising - Capital Structure
c) Liaqudity Management - Working Capital Management

Fund Raising decision - Sources of Long-term Finance

a) Equity
b) Debt

How does a corporate raise capital through debt markets

a) Bank Loan
b) From the market (investors)

Funding required 100 crores

mode of funding Debt

The firm has decided to issue

Bonds to the public

Similar terms for Bonds: Debentures, Notes

Basic features of a bond

Face Value or Par Value 1000 to be reapid at maturity
Coupon (interest) rate 10%
Maturity 10
Yield (current rate of interest in the market) 8% Discount rate to calculate the PV

Yield
is a function of market forces of demand and supply, credit rating,
central bank's monetary policy, and other local and global macro economic variables

How to determine the value of a bond

Value of a bond is the PV (at the given yield) of all the future cash flows

FACE VALUE 1000

COUPON RATE 10%
MATURITY 10
YIELD 8%
VALUE OF THE BOND ?

VALUE OF THE BOND = PV OF (INTEREST FOR 1-10 YEARS) + PV OF REDEMPTION (IN

INTEREST IS AN ANNUAL CASH FLOW FOR 10 YEARS, THEREFORE IT IS AN ANNUITY

REDEMPTION IS A ONE-TIME CASH FLOW, IN THE YEAR 10

TO DETERMINE THE PV OF INTEREST, WE REQUIRE PVIFA

TO DETERMINE THE PV OF REDMEPTION, WE REQUIRE PVIF
SCENARIO 1
Face Value or Par Value 1000
Coupon (interest) rate 10%
Maturity 10
Yield (current rate of interest in the market) 8%

ANNUAL INTEREST 100

PVIF (8%, 10) 0.46319
PVIFA (8%,10) 6.71008
PV OF INTEREST 671.008
PV OF REDEMPTION 463.193
VALUE OF THE BOND 1134.2
PREIMIUM ON THE BOND 134.202
USING THE ABOVE COMPUATION, WE CAN ANSWER THE FOLLOWING QUESTIONS

1. AT WHAT PRICE THE FIRM CAN OFFER EACH BOND TO T

2. WHAT IS THE ISSUE PRICE OF THE GIVEN BOND?
3. IF THE FIRM REQUIRES A FUNDING OF 50 CRORES, HO
IT HAS TO ISSUE?
4. YOU HAVE RS.200000 TO INVEST IN THE BONDS. HOW
MANY BONDS YOU CAN PURCAHSE?

EXPLANATION FOR PREMIUM OF 134 OVER THE FACE VALUE

THE COMPARABLE INTEREST RATES IN THE MARKET ARE 8%
WHEREAS THE FIRM IS OFFERING 10% INTEREST RATE.
SINCE THE FIRM IS OFFERING MORE INTEREST THAN THE MARKET
IT CHARGES A PREMIUM.

Face Value or Par Value 1000

Coupon (interest) rate 10%
Maturity 10
Yield (current rate of interest in the market) 8%

SCENARIO 2
Face Value or Par Value 1000
Coupon (interest) rate 10%
Maturity 10
Yield (current rate of interest in the market) 12%
 SCENARIO 3
Face Value or Par Value 1000
Coupon (interest) rate 10%
Maturity 10
Yield (current rate of interest in the market) 10%

1. AT WHAT PRICE THE FIRM CAN OFFER EACH BOND TO THE INVESTOR?
2. WHAT IS THE ISSUE PRICE OF THE GIVEN BOND?
3. IF THE FIRM REQUIRES A FUNDING OF 50 CRORES, HOW MANY BONDS
IT HAS TO ISSUE?
4. YOU HAVE RS.200000 TO INVEST IN THE BONDS. HOW
MANY BONDS YOU CAN PURCAHSE?

31st December 2020

TYPES OF BONDS
COUPON PAYING, FIXED-RATE BONDS
CUOUPON PAYING, FLOATING RATE BONDS
ZERO COUPON BONDS
CONVERTIBLE BONDS
TREASURY BONDS
MUNICIPAL BONDS
FCCB

CH7 EQUITY MARKETS

EQUITY IS A LONG-TERM SOURCE OF FINANCING

PERPETUAL SOURCE OF FINANCING FOR THE FIRM

THE FIRM ISSUES EQUITY SHARES TO THE INVESTORS

AT A PRICE ABOVE THE FACE VALUE
ALL THE BUYERS OF EQUITY GET THE OWNERSHIP STATUS IN THE BUSINESS
FRACTIONAL OWERNSHIP IS GRANTED BASED ON THE % EQUITY OF THE INVESTOR

COMMON STOCK REPRESENTS THE EQUITY OWNERSHIP IN THE BUSINESS

IN A SOLE PRORIETORSHIP THE EQUITY IS CONTRIBUTED BY THE PROPREITORS
IN A PARTNERHSIP THE EQUITY IS CONTRUBUTED BY THE PARTENRS
IN A CORPORATION THE EQUITY IS CONTRUBUTED BY A) PROMOTERS B) PUBLIC
 THE INVEST IN THE EQUITY SHARES OF A BUSINESS, THE INVESTOR HAS
TO PARTICIPATE IN THE
A) PRIMARY MARKET NEW ISSUE MARKET/IPO/FPO
B) SECONDARY MARKET EXCHANGE OF SHARES BETWEEN INVESTO

Issue Price
Sr. No. Name of the issue () LTP
1 Antony Waste Handling Cell Limited - -
12 Route Mobile Limited 350 1102
3 Burger King India Limited 60 175.95
15 Rossari Biotech Limited 425 939.9
13 Happiest Minds Technologies Limited 166 344.9
2 Mrs. Bectors Food Specialities Limited 288 517
4 Gland Pharma Limited 1500 2337
6 Mazagon Dock Shipbuilders Limited 145 218.6
11 Computer Age Management Services Limited 1240 1801
10 Chemcon Speciality Chemicals Limited 340 493
7 Likhitha Infrastructure Limited 120 165
5 Equitas Small Finance Bank Limited 33 37.75
17 SBI Cards and Payment Services Limited 755 851.3
9 Angel Broking Limited 306 338.05
8 UTI Asset Management Company Limited 554 555
14 Yes Bank Limited - FPO - 17.9
Antony16
Waste Handling Cell Limited - Issue Withdrawn - -
18 ITI Limited FPO - Issue Withdrawn - 126.55

Terminology related to equity shares

a) Face Value or Par Value 1/2/5/10
b) Book Value Shareholder's Equity/No of Shares

AMC Apple
EQuity Share Capital (10Rs. each) 2000000
Face value per share 10
No of shares outstanding 200000
Reserves & Surplus (Retained Earnings) 1876000
Shareholder's equity 3876000
Book Value per share 19.38

Terminology related to equity shares

a) Face Value or Par Value 1/2/5/10
 b) Book Value Shareholder's Equity/No of Shares
c) Market Price
CMP>BV>FV

Dividends
Stock Dividend (Bonus shares)
Stock Splits
Buyback
Delisting

Yield function
Price function

2nd January 2021

Ch3 Liquidity Analysis for Anandam Manufacturing Company
Working Capital Management
Management of Current Assets

a) Liqiduity is the cash position of the compnay

b) All the current assets eventually get converted into cash in a short span of time
c) The time to convert non-cash current assets into cash operating cycle
d) Liquidity can be measured using liquidity rations
e) Liqudity can be measured using Cash Conversion Cycle
f) The firm should maintain higher liqudity ratios
g) The firm should aim for a qukcker and shorter cash conversion cycle

Liquidity Analysis for AMC

Liqudity Ratios
measure the ability of the firm to meet the payment obligations
a) accounts payable Outflow AP Turnover and DPO
b) Short-term borrowings Outflow
c) interest payments Outflow
d) taxes Outflow
e) operating expenses Outflow

sources of cash inflow

a) Cash Sales / Inventory sold Focus ar Inventory turnover and DIO
b) Collection of AR Focus ar AR Turnover & DSO
c) Interest received on investments
d) Dividend on Investments

Management of Liquidty or Management of Working capital can be

efficiently done through
a) Inventory Management Inventory Turnover
b) Recbles Managment AR Turnover
c) Payables Management AP Turnover

LIQUIDITY RATIOS
1) CURRENT RATIO
2) QUICK RATIO
3) CASH RATIO
4) INVENTORY TURNOVER
5) AR TURNOVER
6) AP TURNOVER
7) DIO
8) DSO
9) DPO
10) CASH CONVERSION CYCLE
11) TIMES INTERST EARNED

1 2
2012 2013
Cash 40 100
Accounts Receivable 300 1500
Marketable Securities 0 0
Inventory 320 1500
Total Current Assets 660 3100
Quick Assets 340 1600
Current Liabilities 260 1728
Current Ratio 2.54 1.79
Quick Ratio 1.308 0.926
Cost of Goods Sold 1240 2832
Average Inventory 910
Inventory Turnover Ratio = COGS/Avg Inventory 3.112088
DIO = (365/Inventory Turnover Ratio) 117.2846
Total Sales 2000 4800
 Average Receievables 900
AR Turnover (Sales/Avg AR) 5.33
DSO (365/AR turnover) 68.4375
AR Cost of Goods Sold 1240 2832
TRADE RECBLES Average AP 994
AP AP Turnover (Cost of Goods Sold/Avg AP) 2.849095
TRADE PAYABLES Days Payable Outstanding (DPO) = 365/AP Turnover 128.1109
Cash Conversion Cyce = DIO + DSO - DPO 57.61123

CCC : THE LESS THE CCC, THE QUICKER THE CASH INFLOW INTO THE BUSINESS
CCC: THE HIGHER THE CCC, THE SLOWER THE CASH INFLOW INTO THE BUSINESS

SBR 2: LIQUIDYT ANALYSIS FOR HUL, APPLE

COMPUTATIONS
INTERPRETATION

4th January 2021

1. Valuation of Common Stock (Equity Shares)
2. Risk & Return : working with stock market data
3. Capital Budgeting analysis: DCF
4. Cost of Capital: WACC
5. Working Capital Management: Simulation
6. Guest lectures on Stock Markets

Ch3, Ch7 Valuation of Equity Shares

Def of Value: Present Value of Future Cash Flows

Value of a Bond = PV of (interest cash flows) + PV (principal repayment)
Intrinsic Value = PV of cash flows

Differentiate between the cash flows from a bond investment and a stock investment

How to value the stock:

a) Dividend discounting model
c) Ratio based valuation
c) FCFF model : Free Cash Flow for the firm

DDM (Dividend Discounting Model)

asumptions to be made:
 i) the firm pays regular dividends
ii) Dividends remain constant for ever g=0
iii) Dividends grow at a constant rate g>0
iv) Dividends grow at a higher rate for a finite period and grow at a normal rate afterwards

Value of equity share with constant dividends D/ke

5th Jan 2021

D0 10
g1 (upto 5 years) 15%
g2 (beyond 5 years) 10%
Ke 13%

YEAR CF PVIF
D1 1 11.5 0.884956
D2 2 13.2 0.783147
D3 3 15.2 0.69305
D4 4 17.5 0.613319
D5 5 20.1 0.54276
V5 5 737.5 0.54276

6th January 2021

Investment in common stock

a) return
b) risk

Requirements to trade in stocks

a) Bank account
b) Demat account : DP
c) PAN/Aadhar
d) Transfer some funds to the demat account
e) A trading portal is accessed by the investor
f) Place Buy / Sell order
g) The order goes to order book
h) If the terminal is able to find a counterparty matching needs of the buyer
the order gets executed. The shares are transferred to the buyer and the cash is transferred to
T+2 settlement process
The whole mechanizm is known as Clearing & Settlement mechanism
 RTGS
Demat account is credited when the shares are bought
Demat account is debited when the sahres are sold

Portfolio Value
Stock No of shares
Tata motors 100
Godrej 50
SBI 30
Infosys 100

The stock prices fluctuate on a tick by tick basis

Open High
Frequency of Prices
Daily
Weekly
Monthly
Yearly

Return % change
4th Jan 5th Jan
HUL 2250 2460
Return 9.33%

4th Jan 24th Jan 2021

HUL 1400 2250
Dividends 15

Return throguh Dividends 1.07%

Retrun through capital gains 60.71%
Total Return 61.79%

For all our analysis, we use only the price data. Dividend need not be incorporated

7th Jan 2021

Return
% change in stock price during a given period

Daily stock price data Daily return

 Weekly stock price data Weekly return

The returns to be annualized

Annualized returns

Daily return for a stock 0.25%

Annual return 91.25%
Annual return 63.00%
Effective annual return 148.77%

Risk
Volatility in stock price
Measures of Volitility / Risk
a) Variance of returns
b) Standard Deviation
other related measures
a) Correlation between stock and index
b) Beta value of the stock
c) Covariance between stock and index

Risk-free asset: Government Securities: T-bills/T-bonds/T-notes

Risk-free return: Yields on T-bills/T-bonds

Asset Classes
a) Equity & Equity Derivatives
b) Bonds Soveregin Gold Bonds
c) Cash
d) Property
e) Gold inflation hedge
f) Crypto
g) Movie production
h) Racing & Casinos

8th Jan 2021

Capital Expenditure Analysis
Capital Expenditure Capex

Purchase of Fixed Assets

M&A : Buying other businesses
Investment that has an impact for the future of the business
Purchase of machinery Capex 10
Installation of Machinery 2
transportation 0.25
import duties & taxes 0.25
consulting fee 1

Office Stationery opex

annual maintenance of mach opex
Building improvements capex
annualince license for SW Opex
Paper weights

How to evaluate a capital expenditure decision

Decision to be taken now

Decision Accept the proposal
Decision Reject the proposal

Techniques to be used to evaluate the capital expenditure proposal

1. Payaback period for the project PB

2. Net Present Value for the project NPV
3. Profitability Index PI
4. Interenal Rate of Return IRR
5. Discounted Payback DPB
6. Accounting Rate of Return ARR

Salient features of a Capex proposal

1. Initial cash outflow
2. A finite life for the project (except M&A)
3. Annual cash inflows from the project
4. Salvage value for the project
5. Project has a cost of capital (WACC)

Payback period for the project

Initial Investment 100

Annual Cash inflow 30
Payabck period Initial Investment/Annual Cash inflow
PB, calculated 3.33
PB, cut-off 4
Decision Accept

Types of projects for analysis

a. Mutually exclusive projects Complete Automation or Semi-Automation
Should expand in Canada or USA
b.Independent projects Introduce product A in Country X
Introduce product B in Country Y

c.Contingent Projects If you accept project A, also accept prject B

d. Capital Rationing Ration the capital among various proposals

Tata Motors is planning to expand in South Korea

a. Construact a new plant that can produce 50 000 units a year

b. A korean automobile company running in losses is avialble for purchase,
Its capacity is 50,000 units a year

A river is dividing the city into two parts

a) Construct a bridge
b) Start a ferry service

Practice:
Cost of the project 50
Life of the project 5
slavage 5
annual cash flows 20, 10, 15, 20, 15
WACC 10%

The less the payback, the better the viability of the project
 the earlier, the better principle

11th Jan 2021

1. Initial cash outflow
2. A finite life for the project
3. Annual cash inflows from the project
4. Salvage value for the project
5. Project has a cost of capital (WACC)

DCF techniques
a) NPV
b) IRR
c) Profitability Index
d) Discounted Payabeck

Year CF
1 30
2 30
3 30
4 30
5 30

PV of annual cash inflows 113.724 Inflow

Initial investment 100 Outflow
Net Present Value (NPV) 13.724 Positive
Decision Accept

Year CF
0 -100
1 30
2 30
3 30
4 30
5 30
 Year CF
1 30
2 30
3 30
4 30
5 30

NPV profile
WACC NPV
8% 19.78
9% 16.69
10% 13.72
11% 10.88
12% 8.14
13% 5.52
14% 2.99
15% 0.56
16% -1.77
17% -4.02
18% -6.18
19% -8.27
20% -10.28

Initial Investment
Life of the project
Salvage
Annual Cash Flows
WACC

PV of annual cash inflows

Initial Investment
Net Present Value
Decision
NPV using Function
Internal Rate of Return (IRR)
IRR is a measure that determines the stregth of the project by estimating the annual return the
project would deliver. The higher the IRR, the better the project is.
Accept/Reject decision: IRR > WACC
IRR<WACC
IRR is the discount rate where PV of cash inflows equals the investment, leading to zero NPV
Method to determine IRR
1) Use various discounts rates and determine the NPV. The discount rate where the NPV is Ze
2) Prepare the NPV profiel, and present a graph with NPV as Y-axis. The point of interesection
3) Using the IRR function in Excel

Year
0
1
2
3
4
5

IRR 19.98% expected return

WACC 10% required return
Decision Accept

Profitability Index PI
NPV in a ratio format is Profitability Index

PV of Cash inflows/Initial Investment

Initial Investment
Life of the project
Salvage
Annual Cash Flows
WACC

Determine the PI for the project

 PV of Cash inflows 63.79
Inital Investment 50
PI 1.2758
Accept the project PI>1
Reject the project PI<1

Discounted Payabck
Use the PV of cash flows to calculate the discounted payabck

12th Jan 2020

Capital Budgeting : Estimation of Cash Flows

1. Forecast Revenue Current Revenue, Growth Rate

2. Forecast expenses, including COGS % to revenue
3. Forecast Depreication Capital expenditure, rate of depreciation, life of th
% to revenue
4. Forecast EBIT Revenue - COGS - Opex - D&A
5. Forecast NOPAT NOPAT = EBIT (1-Tax rate)
6. Forecast NWC % to Revenue
7. Forecast change in NWC (Delta NWC) NWC,t - NWC, t-1
8. Capital Expenditure Given

Cash flow for the project or Cash Flow for the Firm or FCFF
FCFF = NOPAT + D&A - CAPITAL EXPENDITURE - DELTA NWC

In a capital budgeting process, the capital expendtiure takes place only during zero period.
For all other years, there is no additional capital expenditure

Practice

Current Revenue 400

Revenue growth 20%
COGS 50% of revenue
Opex 10% of Revenue
Cost of the project 100
economic life 5
Depreciation SLM
Salvage 0
Tax rate 20%
NWC, beginning 70
 NWC, end 80
FCFF ?

Revenue 480 400 x 1.2

COGS 240 50%
Gross Profit 240
Opex 48 10%
EBITDA 192
D&A 20 100/5
EBIT 172
TAX RATE 20%
NOPAT 137.6 172(1-20%)
DEPRECIATION 20
CAPITAL EXPENDITURE 100
INCREASE (DECREASE) IN NWC 10
FCFF 47.6

In the above analysis, during the zero period there are no revenue and costs.
Therefore only capital expendtirue and Delta NWC will be there. Hence it is an outflow

For the rest of the period of projection, there will not be capital expenditure
Zero period FCFF = - Capital Expenditure - Delta NWC
For years 1-n FCFF = NOPAT + D&A - Delta NWC

Costs to be considered for the project analysis

1. Include all incremental costs.These costs will be incurred only if the project is launched
and can be avoided if the project is called-off (with project and without project)

In the given case, the 1 million spent on test marketing is a sunk cost. Therefore ignore it
for this analysis

Incremental, post-tax, operating cash flows

COS to Sales 60%

SGA to Sales 23.50%
Capital Expendiutre 2 $million
Tax Rate 40%
NWC to Sales 27%
 0 1
Revenue 0 15
Cost of Sales 0 9
Gross Profit 0 6
SGA 0 3.525
Introductory Expenses 0 0.75
EBIDTA 0 1.725
D&A 0.4
EBIT 1.325
NOPAT 0 0.795
NWC 4.05 4.86
Delta NWC 4.05 0.81
Capital Expenditure 2 0
FCFF = NOPAT + D&A - Capex - Delta NWC -6.05 0.385
Cumulative FCFF 0.385
WACC 10%
PVIF (10%) 1.00 0.91
Present Value -6.05 0.35
Cumulative Present Value 0.35
NPV ($million) 2.61
IRR 21.62%
PI 1.4308
Payback 3.15
Discounted Payabck 4.04
How to use data table for sensitivity analysis
13th Jan 2021
Objective of a corporation
to maximize shareholder value
representatives of Value
a) NPV
b) Stock Price

Firms that are having positive NPV projects also experience a stock price gain

The stockprice reacts to information

positive
negative

Historical information
Current information
future expected infomration
 Efficient Market Hypothesis
The financial markets relect all information
No one can take advantage of the information

Capital Structure and Cost of Capital (WACC)

Capital structure is the mix of various sources of funds in the balance sheet
Financing mix
Amount Weight
Equity 300 50.00%
Debt, 10% interest 200 33.33%
Pref stock, 12% 100 16.67%
Total Funds 600 100.00%

Net Income 200

used very less Pref shares, 10% 150
20
Equity Shares, 2 million, 10 each

The firm decided to pay dividends to pref stock and common stock

Net Income 200

Preference Dividend 15
Earnings to equity 185
Equity dividend, 200% 40
Retained Earnings 145

Revenue 500
COGS 65%
Opex 10%
D&A 30
Borrowings 100
Rate of interest 8%
 Pref Shares, 9% 50
Equity Shares, 10 each, 1 million 10
tax rate 20%

1) Determine the EPS

2) Determine the reteained earnings
if the BOD decides to pay a 30% equity dividend

Weight
Equity 225 45%
Debt 100 20%
Pref share capital 175 35%

Tax rate

Cost of debt, post-tax = cost of debt, pre-tax (1-Tax rate)

WACC = We x Ke + Wd x Kd(1-Tax rate) + Wp x Kp

1. Increase the shareholder value

2. Reduce the WACC

CAPM
Capital Asset Pricing Model
Ke = Rf + Beta (Index return - Risk free rate)

Net Income 40 40
Pref Dividend 5 0
Earnings to Equity 35 40
No of shares outstanding 7 8
EPS 5 5

14th January

The relevance of beta in the stock analysis

Beta is a slope coefficient of a regression line

X : index return
Y: the stock

Every stock in the market is influenced by the index, but not by the same degree

How to derive the beta

B
1) Covariance (x,y) / Variance X
2) Plot the XY cooridinates on a chart, draw a regression, derive the equation for regression, and ge
3 ) Use linest function in excel
4) Use Slope function in excel

Beta is a representative of volatility

Measure of systematic risk or market risk

APPLICATION AREAS OF FINANCE / SPECIALIZATION

1) Stock Market Analysis: Valuation of Stocks/Predicting the stock price/ Buy & Sell Recommendat
2) Financial Risk Management: Derivatives Market: Futures, Options, Swaps,
3) International Finance : Foreign Exchange Markets and Risk Management: currency markets
4) Fixed Income Markets: Bond Markets
5) M&A
6) Behavioural Finance: Psychology and Markets : Cognitive Errors and biases

Books recommended

1.A random walk down wall street

2.Thinking fast and slow
3. Who gets what and how
4. Nudge
5. Intelligent Investor
 Listed entity

State Owned Enterprsed : Central or State Governments

by the Government
shares to the public and listed on the stock exchange
y and sell through the stock market

to public for subscription (investment)

with shares purchased

ith shares sold

mited company

ors exercising their voting power

Going Concern
Highest Decision making body
 Top Management Team

ept ( the liabilities of the corporation are not the liabilities of the shareholders)

rrent Assets

e assets which are converted into cash

t of business operations within one year or less

10
terials, Work in Progress, Finished 30
20
60
5
10
75

30
10
10
50

25
IN ORDINARY COURSE OF BUSINESS
A FIRM SHOULD AVOID NEGATIVE NWC
OR QUICKLY OVERCOME THE SITUATION

30
10
10
50
75
 14
8
3.2
67%

1000 THOUSANDS 1 MILLION

1000 MILLION I BILLION
1000 BILLION 1 TRILLION

ATE THE LOAN APPLICATION OF AMC

ONTAL, VERTICAL, RATIOS

ET THE TRENDS
year 3 to year 4
 AS LESS AS POSSIBLE TO MAINTAIN HIGHER
LIQUIDITY

LAST 3 YEARS

ections for future

tive analysis
ve analysis

n basic concepts

he rate of 10% p.a.

red on a simple interest basis

0,000 every year

0 years later.
s otherwise stated\

eriod of 20 years.
of your investment

it after 10 years?

is 12% p.a.

PV of Rupee 1
 (1-PVIF)/r

d Assets - Capital Expenditure decision

- Fund Raising - Capital Structure
 to be reapid at maturity

Discount rate to calculate the PV

credit rating,
obal macro economic variables

future cash flows

10 YEARS) + PV OF REDEMPTION (IN YEAR 10)

ARS, THEREFORE IT IS AN ANNUITY

QUIRE PVIF
WER THE FOLLOWING QUESTIONS

1134.201628
1134.201628
440838.7254

176.3354902

FACE VALUE
RKET ARE 8%

THAN THE MARKET

BOND TO THE INVESTOR?

RES, HOW MANY BONDS

HIP STATUS IN THE BUSINESS

N THE % EQUITY OF THE INVESTOR

NERSHIP IN THE BUSINESS

TRIBUTED BY THE PROPREITORS
ED BY THE PARTENRS
ED BY A) PROMOTERS B) PUBLIC
ESS, THE INVESTOR HAS

SUE MARKET/IPO/FPO
NGE OF SHARES BETWEEN INVESTORS

Issue Start Date Issue End

Price
DateRange
21-Dec-2020 ###Rs.315 RTD
09-SEP-2020 11-SEP-2020Rs.350 ###
02-Dec-2020 ###o Rs.60 ###
13-Jul-2020 ###Rs.425 ###
07-SEP-2020 09-SEP-2020Rs.166 ###
15-Dec-2020 ###Rs.288 ###
09-Nov-2020 ###
Rs.1500 ###
29-SEP-2020 ###Rs.145 ###
21-SEP-2020 23-SEP-2020Rs.1230 ###
21-SEP-2020 23-SEP-2020Rs.340 ###
29-SEP-2020 ###Rs.120 ###
20-Oct-2020 ###o Rs.33 ###
02-Mar-2020 ###Rs.755 ###
22-SEP-2020 24-SEP-2020Rs.306 ###
29-SEP-2020 ###Rs.554 0.18%
15-Jul-2020 ###o Rs.13
04-Mar-2020 ###Rs.300
24-Jan-2020 ###o Rs.77

older's Equity/No of Shares

HUL
older's Equity/No of Shares

cash in a short span of time

sh operating cycle

conversion cycle

AP Turnover and DPO

Inventory turnover and DIO

AR Turnover & DSO
apital can be

DIO
DSO
DPO

3
2014
106
2100
0
2250
4456
2206
2780
1.60
0.794
4800
1875
2.56 times
142.578125 days
8000
 1800
4.44
82.125
4800
2254
2.1295474711624
171.39791666667
53.305208333333

SH INFLOW INTO THE BUSINESS

CASH INFLOW INTO THE BUSINESS

incipal repayment)

stment and a stock investment

nd grow at a normal rate afterwards g1>g2

PV
10.176991150443
10.357114887619
10.540426655541
10.726982879533
10.916840983595
400.28416938945
453.002526

pay-in
pay-out

g needs of the buyer

o the buyer and the cash is transferred to the sller

ment mechanism
 Low Close Adj CloVolume

4th Jan 2021

15/1400

nd need not be incorporated

365-day year
252-day trading period

var function
stdev function

correl function
slope function
covar function

Vs Opex
he proposal
he proposal

ture proposal
Output
Years
$
Ratio
%
years
%

100
5
30
0
10%
vestment/Annual Cash inflow

te Automation or Semi-Automation
expand in Canada or USA
e product A in Country X
e product B in Country Y

ccept project A, also accept prject B

he capital among various proposals

avialble for purchase,

 100
5
30
10
10%

PV of $1
PVIF PV
0.90909 ###
0.82645 ###
0.75131 ###
0.68301 ###
0.62092 ###
###

PV of $1
PVIF PV
1.00000 ###
0.90909 ###
0.82645 ###
0.75131 ###
0.68301 ###
0.62092 ###
###
PV of $1
PVIF PV
0.90909 ###
0.82645 ###
0.75131 ###
0.68301 ###
0.62092 ###
###
13.72

50
5
5
20,10,15,20,15
10%

Year CF PVIF PV(10%)

1 20 0.909 18.182
2 10 0.826 8.2645
3 15 0.751 11.27
4 20 0.683 13.66
5 20 0.621 12.418
63.795

63.7947
50
13.7947
Accept the project
£13.79
 oject by estimating the annual return the
he project is.
Accept
Reject
als the investment, leading to zero NPV

V. The discount rate where the NPV is Zero is the IRR for the project
NPV as Y-axis. The point of interesection of NPV line with X axis, is the IRR

CF PVIF PV(10%)
-50 1.0000 -50
20 0.9091 18.182
10 0.8264 8.2645
15 0.7513 11.27
20 0.6830 13.66
20 0.6209 12.418
NPV 13.795
19.977%

expected return
required return

50
5
5
20,10,15,20,15
10%
Revenue, Growth Rate

expenditure, rate of depreciation, life of the project

e - COGS - Opex - D&A

= EBIT (1-Tax rate)

DELTA NWC

takes place only during zero period.

of revenue
of Revenue
 172(1-20%)

e no revenue and costs.

l be there. Hence it is an outflow

e capital expenditure

urred only if the project is launched

ject and without project)

g is a sunk cost. Therefore ignore it

 2 3 4 5
18 20 15.00 12.00
10.8 12 9 7.2
7.2 8 6.00 4.80
4.23 4.7 3.525 2.82
0 0 0 0
2.97 3.3 2.48 1.98
0.4 0.4 0.4 0.4
2.57 2.9 2.08 1.58
1.542 1.74 1.245 0.948
5.4 4.05 3.24 0
0.54 -1.35 -0.81 -3.24
0 0 0 0
1.402 3.49 2.455 4.588
1.787 5.277 7.732 12.32

0.83 0.75 0.68 0.62

1.16 2.62 1.68 2.85
1.51 4.13 5.81 8.66

rience a stock price gain

s in the balance sheet

ommon stock
Cost of Capital
15% 6.75% Implicit cost or implied cost CAPM
9% 1.26% Bond Yield
11% 3.85% Pref Dividend
###
30%

Y = MX + C
Y = bX + C
 not by the same degree

, derive the equation for regression, and get the slope of the straight line

g the stock price/ Buy & Sell Recommendations

ures, Options, Swaps, F&O
d Risk Management: currency markets

tive Errors and biases

22nd Dec
1. Building a Balance Sheet Grey Wolf, Inc., has current assets of $2,090,
net fixed assets of $9,830, current liabilities of $1,710, and long-term debt of
$4,520. What is the value of the shareholders’ equity account for this firm?
How much is net working capital?

Assets
Current Assets 2090
Non-Current Assets, Net 9830
Total Assets 11920

Current Liabilities 1710

Long-term liabilities 4520
Shareholders' Equity 5690
Liabilities & EQuity 11920

Net Working Capital 380

Current Assets 2090
Cuyrrent Liabilities 1710

Building an Income Statement Sidewinder, Inc., has sales of $634,00

costs of $328,000, depreciation expense of $73,000, interest expens
$38,000, and a tax rate of 21 percent. What is the net income for this

Sales (Revenue) 634000

Costs (COGS, Opex) 328000
EBITDA 306000
D&A 73000
EBIT 233000
Interest Expense 38000
EBT 195000
Taxes on EBT (21%) 40950
Net Income 154050
Dividends 68000
Retained Earnings 86050
No. of Shares outstanding 35000
Earnings per share 4.401428571
Dividends per share (DPS) 1.942857143
Retaiend Earnings per share 2.458571429
3. Dividends and Retained Earnings Suppose the firm in Problem 2 p
$68,000 in cash dividends. What is the addition to retained earnings?
4. Per-Share Earnings and Dividends Suppose the firm in Problem 3
35,000 shares of common stock outstanding. What is the earnings p
or EPS, figure? What is the dividends per share figure?

Practice:

Revenue 500
COGS 60%
Opex 10%
D&A 10
Bank Loan 100
rate of interest 5%
tax rate 20%
No of Shares outstanding 2
Dividend paid 20%
Prepare the income statement
Determine the EPS
Determine the DPS
Determine the Retained Eearnings
Determine the Retained earnings per share

Market Values and Book Values Klingon Widgets, Inc., purchased ne

cloaking machinery three years ago for $6 million. The machinery ca
sold to the Romulans today for $4.6 million. Klingon’s current balanc
shows net fixed assets of $3.15 million, current liabilities of $830,000
net working capital of $210,000. If all the current accounts were liquid
today, the company would receive $950,000 in cash. What is the boo
of Klingon’s total assets today? What is the sum of the market value
and the market value of fixed assets?

Book Value
 Machinery 3.15
Current Liabilties 0.83
Current Assets 1.04
Net Working Capital 0.21
Total Assets 4.19

2 24th Dec

Use the given data for Wildhack Corp

and Determine the following

a) NWC for year 1

b) NWC for year 2
2018
Current Assets 768
Quick Assets 344
Current Liabilities 1536
Networking Capital (NWC) -768

Liqudity position of the firm is better than last year. But still the firm has to further improv

Current Ratio Current Assets/Current Liabilties 0.5

Quick Ratio Qucik Assets/Current Liabilties 0.224

The higher the two ratios, the better the liquidity

Using The vertical analysis, prepare the projected income statement if the sales growth
assume all other % remain the same as the previous year
2019
Sales 3756
COGS 2453
Deprecaition 490
EBIT 813
interest 613
EBT 200
TAxes (21%) 42
Net Income 158

3 29th December
Compound Interest Simple Interest
PV 8100 8100
r 6% 6%
n 10 10
FVIF 1.790847697 60.00%
FV = PV x FV IF 14505.86634 12960
CAGR Componded annual growth rate

Present Value Years Rate (CAGR)

195 17 9%
2105 8 7%
47800 17 12%
38650 10 19%

Calculating Present Values. Imprudential, Inc., has an unfunded pension

liability of $730 million that must be paid in 25 years. To assess the value of the
firm’s stock, financial analysts want to discount this liability back to the present. If
the relevant discount rate is 5.5 percent, what is the present value of this liability?

Future Value 730

Discount rate 5.50%
time 25
PVIF (5.5%,25) 0.2622337039
Present Value 191.4306038

Year CF
1 680
2 490
3 975
4 1160

Cash Flows (1-5)

5,8,12, 9, 10
discount rate is 9%

PV of cash flows =
 Year CF
1 5
2 8
3 12
4 9
5 10

PV of Multiple Cash Flows

30th December 2020

Loan Value 100000

rate of interest 12%
Tenure 3
rate of interest (monthly) 1.00%
Tenure (months) 36
PVIF (1%,36) 0.69892494963
PVIFA (1%,36) 30.1075050373

EMI 3321.43098129
Total payment to the bank 119571.515326
Interest paid for 3 years 19571.5153263

Loan Amortization Schedule

Month Loan (beg)

1 100000
2 97679
3 95334
4 92966
5 90574
6 88158
7 85719
8 83254
9 80765
10 78252
11 75713
12 73148
 13 70558
14 67943
15 65301
16 62632
17 59937
18 57215
19 54466
20 51689
21 48884
22 46052
23 43191
24 40301
25 37383
26 34435
27 31458
28 28451
29 25415
30 22347
31 19249
32 16120
33 12960
34 9768
35 6545
36 3289

Loan Value 1000000

Rate 12%
Tenure 10

Prepare amortization schedule under the following options

a) Annual Payment
b) Semi annual Payment
c) Quarterly Payment
d) Monthly Payment
 Show the savings in interest when we increase the payment frequen

Annual
Frequency 1
Loan Value 1000000
Rate of Interest 12%
Tenure 10
Relevant Rate 12.00%
Releant Tenure 10
PVIF 0.3220
PVIFA 5.6502
Instalment 176984.1642
Total Payment 1769841.6416
Total Interest 769841.6416
Savings in Interest

31st Dec 2020 Bond Valuation

1 Value of a coupon paying, fixed-rate bond

Value (Price) PV of Coupon Cash Flows +

2 Zero Coupon Bonds

FV 1000
Coupon rate 0%
Maturity 10
Yield (YTM) 8%
Value ?
PVIF 0.46319348808
PVIFA NA
Value of the Bond 463.193488085

Bond price and bond yield are invesersely related

Bond Price PV
Bond Yield Discount rate
PV and Discount rate are inversely related
Future Value and interest rate are directly related
 Bond Prices. Lycan, Inc., has 7 percent coupon bonds on the market
have 9 years left to maturity. The bonds make annual payments and
par value of $1,000. If the YTM on these bonds is 8.4 percent, what
current bond price?

FV 1000
Coupon 7%
Maturity 9
Yield 8.40%
PVIF (8.4%,9) 0.48387864985
PVIFA (8.4%,9) 6.14430178753
Annual Coupon 70
PV of coupon CFs 430.101125127
PV of Face Value 483.878649848
Value of the Bond 913.979774975
At Discount

Bond Yields. The Timberlake-Jackson Wardrobe Co. has 7 percent c

bonds on the market with 9 years left to maturity. The bonds make a
payments and have a par value of $1,000. If the bonds currently sell
$961.50, what is the YTM

FV 1000
The issuer offered interest rate Coupon 7%
Maturity 9
Current market interest rate Yield 8.40%
PVIF (8.4%,9) 0.48387864985
PVIFA (8.4%,9) 6.14430178753
Annual Coupon 70
PV of coupon CFs 430.101125127
PV of Face Value 483.878649848
Value of the Bond 913.979774975
At Discount

Bond Price Movements. Bond X is a premium bond making semiann

 payments. The bond has a coupon rate of 8.5 percent, a YTM of 7 p
and has 13 years to maturity. Bond Y is a discount bond making sem
payments. This bond has a coupon rate of 7 percent, a YTM of 8.5 p
and also has 13 years to maturity. What are the prices of these bond
assuming both bonds have a $1,000 par value? If interest rates rema
unchanged, what do you expect the prices of these bonds to be in on
three years? In eight years? In 12 years? In 13 years? What’s going
Illustrate your answers by graphing bond prices versus time to matur

X
FV 1000
Coupon (annual) 8.50%
Maturity (years) 13
Frequency (semi-annual) 2
Yield (Annual) 7%
Coupon (Semi-annual) 4.25%
Maturity (Semi-annual) 26
Yield (Semi-annual) 3.50%
PVIF 0.40883767079
PVIFA 16.8903522631
Coupon (Semi-annual) 42.5
PV of Coupon 717.839971181
PV of FV 408.837670792
Value of the Bonds 1126.67764197

2nd January 2020

Book Value per share
Shareholder's Equity / No of equtiy shares outstanding

Net Asset Value (NAV)

Total Assets = Total Liabilities + Equity
Equity = Total Assets - Liabilities
Net Assets = Total Assets - Total Liabilities
NAV per share = (A-L)/no of shares = Shareholder's Equity/No of Sh
NAV = Shareholder's Funds/No of Shares
Shareholders' Equity Information available in the
No of shares
Paid-up Share Capital 2000000
Face Value per share 10
No of Shares 200000
For AMC
Paid-up Capital 2000000
Face Value per share 10
No of Shares 200000
2012
Shareholders Equity 1564000
No of Shares 120000
Book Value per share 13.0333333333

Increase in book value is a good indicator for the performance analys

Increase in boo value due to increase in retaeined earnings is a desi
indictor (not due to increase in paid-up shares)
The purpose of stating face value
a) to recognize shares of different face values
b) to determine the dividend payments
c) for any stock split/stock dividend

An increase in EPS is sign of performance

a) Book Value per share

b) EPS

Revenue 500
COGS 250
R&D 50
SGA 30
Interst income 70
interest expense 40
tax rate 30%
No of shares 10
EPS ?

Revenue 500
Cost of Goods Sold 250
Gross Profit 250
R&D expense 50
SGA 30
EBIT (Operating Income) 170
Interest Income 70
 Interest expense 40
EBT 200
tax rate 30%
Net Income 140
No of shares 10
EPS 14

5th January

D0 4.5
g 0%
Ke 11%
P0 40.9090909091
Additional Value
PVGO Present Value of Growth Opportunities

D0 4.5
g1 (upto 5 years) 10%
g2 (beyond 5 years) 6%
Ke 11%

Step 1: Determine the dividends 1 to 5 using g1

Step 2: Determine the P5 using g2, ke
Step 3: Determine the PV of CF from Step 1 and Step 2

Year
4.5 x 1.1 1
4.5 x 1.1^2 2
4.5.x 1.1^3 3
4.5.x 1.1^4 4
4.5.x 1.1^5 5
7.25 x 1.06/(11%-6%) 5

Two important assumptions

a) The firm is a dividend paying firm
b) The Ke > g
 Total Assets 300
Total liabilities 250
Equity 50
Max (0,50)
Value of equity Max (0, TA-TL)

EPS 45
P/E multiple of Comparable firms 20
Implied value per share 900
for every $ of EPS, the comparable companies are valued at 15$
The firm also should be given a value of 15 times to its EPS
MPS
Company 1 250
Company 2 450
Company 3 600
Company 4 430
Company 5 270
Company 6 NA

Average P/E multiple (5 comparables)

EPS of the target company
Implied Value of the target company

EBITDA 450
EV/EBITDA 5
ENTERPRISE VALUE OF TARGET 2250
EV BELONGS TO BOTH EQUITY AND DEBT
VALUE OF EQUITY + VALUE OF DEBT 2250
VALUE OF DEBT 120
VALUE OF EQUITY 2130
NO OF SHARES OUTSTANDING 10
VALUE PER SHARE 213

BORROWINGS 200
CASH 50
 NET BORROWINGS 150

9. A firm has reported a revenue of $800 million and similar compara

Revenue of the target 800

Enterprise Value/Sales 3
Enterprise Value of the target 2400
Net Debt 120
Implied Value of Equity 2280
No of shares outstanding 10
Value per share 228

10. A firm is currently trading at a price of $150 and it has paid a divi
D0 = 3.5; Price = 150; growth rate = 8%; Ke = ?
P0 = D0(1+g)/(ke-g) ; Ke = D0(1+g)/Po + g = 3.5 (1+8%)/150 + 8% =

7th Jan 2021

Current Dividend 8
g1 18% 1-5 years
g2 14% 6-10
g3 8% 11 and beyond
ke 12%

Year
1
2
3
4
5
6
7
8
9
10
10

9.44
 1.18
1.12
1.053571429
1.298135191
-0.2981351906
-0.06
4.968919843
46.90660332

D0
g1
g2
g3
g4
ke
V0
V15

D0
g1
g2
g3
g4
ke

D0
D5
D10
D15
1+g1
1+ke
8th Jan 2021

Returns
1) Arithmetic Mean Return
2) Geometric Mean Return
3) Effective annual return
4) Nominal Return and Real Return

The return we compute the data of stock prices

Adjust this return for inflation to derive

Beginning r Interest earned

10000 10% 1000
4%

Nominal Return 10%

Inflation 4%
Real Return 6%

1+nominal return 110%

1+ inflation 104%
Real Return 5.77%

Stock price at the beginning 400

Stock price at the end 440
Dividend 4
Dividend Yield 1.00%
CG Yield 10.00%
Nominal Return 11.00%
Price index beginning 165
Price index end 174
Inflation 5.45%
Real Return 5.55%
Real Return 5.259%
Variance of Returns
Standard Deviation of Return

Stock Market Index

A represenative measure of the growth in the market

Index is increasing, the overall market is in a positive mood
Index is decreasing, the overall market is in a negative mood

Index is computed using select representative stocks, representing all major sectors

Major Index Values

Sensex BSE 30 30 representative stocks
Nifty NSE 50 50 representative stocks
DJIA Dow Jones Industrial Average 30 representative stocks
NASDAQ 100
NASDAQ Composite
Nikkie
FTSE
Stright Times Index
Hangseng
Dax
S&P 500

Index value: is not a dollar value. It is the ratio between current value of select stocks vs

Sensex
Nifty
DJIA

Component Stocks for these index values

Index Return is the change in index between two dates

You have 10,000 shares of each on 31st Dec 2018
28th Dec 2018 3rd Jan 2019
Amazon 1478 1874
WMT 92 117
Google 1046 1361
Microsoft 100 158
Netflix 256 325
 a) Total Investment made to purchase the five stocks
b) No of shares of each stock purchased
c) Value of your investment at the end of the year
d) Total return from this investment

Value of the portfolio at the beginning 29720000

Value of the portfolio at the end 38350000
Portfolio Return 29.04%
Portfolio Return = W1 x R1 + W2 x R2 +.........+ W5 x R5

11th January 2021

Project X
Initial Investment 60
Life of the project 5
Annual Cashflows 15, 20, 30, 20, 15
WACC 12%

Year CF Cumulative CF PVIF

1 15 15 0.89285714286
2 20 35 0.79719387755
3 30 65 0.71178024781
4 20 85 0.6355180784
5 15 100 0.56742685572

Payback 2.833333333 years

Discounted Payback 3.692307692 years

WACC 11%

Year CF Cumulative CF
0 -168500
1 86000 86000
2 91000 177000
3 53000 230000
 IRR is between 18% to 19%
WACC 11%

Year CF Cumulative CF
0 -168500
1 86000
2 91000
3 53000

18.79%

WACC the cost of funds which are invested in the p

IRR the return generated by the project

The IRR is the cut-off rate at which the NPV line crosses the X-axis (
All the discount rates to the left of IRR will give positive NPV
All the discount rates to the right of IRR will give negative NPV

IRR>WACC Accept
8%-24%

Investment 8,450 8,450

Annual Cash Flow 2,145 2,145
WACC 8% 19.10%
Life of the project 8 8
PVIF (8%,8 years) 0.5402688845 0.24700509304
PVIFA (8%,8 years) 5.74663894373 3.94238171185
PV of annual cash flows 12326.5405343 8456.40877192
NPV 3,877 6

Mutually exclusive projects: A,B

Select A or B
A B
NPV Rule 14426 15012 Highest $ value
IRR Rule 21% 19%
13th January
Decison making
3 phases

Any option selected

Total Value Enterprise Value = PV of FCFF
Equity Value

Option
Working Capital impact
NWC Increase
Decrease

FCFF = EBIT (1-TAX RATE) + D&A - CAPEX - DELTA NWC

INCREASE IN REVENUE

INCREASE IN EBIT 50
INCREASEIN NWC 60

Managing the working capital to create and enhance shareholder value

erm debt of

Legal obligation
Legal obligation
Residula Clalim

c., has sales of $634,000,

73,000, interest expense of
s the net income for this firm?

Inputs: Loan amount, rate of interest

Also known as PAT (profit after taxes)

to common stock shareholders
Net Income - Dividends
 the firm in Problem 2 paid out
on to retained earnings?
e the firm in Problem 3 had
What is the earnings per share,

to revenue
to revenue

of Net Income

gets, Inc., purchased new

lion. The machinery can be
lingon’s current balance sheet
nt liabilities of $830,000, and
ent accounts were liquidated
n cash. What is the book value
um of the market value of NWC

Market Value
 4.6
0.83
0.95
0.12

2019
648
280
1183
-535

m has to further improve its liqudity, becuase CL are greater than Current Assets

0.548 Liqudity Postiion is improving

0.237

ent if the sales growth expected for 2020 is 20%

Proforma Income Statement
2019 2020
100.00% 4507.2
65.31% 2943.6 60%
13.05% 588 13.05%
21.65% 975.6 21.65%
16.32% 735.6
5.32% 240
1.12% 50.4
4.21% 189.6
 486
10
4860
12960

Futuve Value
873 ln(873/195)/ln(1+9%)
3500
326500
213380

he value of the
o the present. If
e of this liability?

1/(1+r)^n
PVIF (10%) PV
0.90909090909 618.181818181818
0.82644628099 404.95867768595
0.7513148009 732.531930879038
0.68301345537 792.295608223482
2547.968035
 PVIF (10%) PV
0.91743119266 4.58715596330275
0.84167999327 6.73343994613248
0.77218348006 9.26620176073277
0.70842521107 6.37582689958677
0.6499313863 6.49931386298345
3346.19%

(Interest + Principal)

EMI Interest Principal Loan (end)

3321.43098129 1000 2321 97679
3321.43098129 977 2345 95334
3321.43098129 953 2368 92966
3321.43098129 930 2392 90574
3321.43098129 906 2416 88158
3321.43098129 882 2440 85719
3321.43098129 857 2464 83254
3321.43098129 833 2489 80765
3321.43098129 808 2514 78252
3321.43098129 783 2539 75713
3321.43098129 757 2564 73148
3321.43098129 731 2590 70558
 3321.43098129 706 2616 67943
3321.43098129 679 2642 65301
3321.43098129 653 2668 62632
3321.43098129 626 2695 59937
3321.43098129 599 2722 57215
3321.43098129 572 2749 54466
3321.43098129 545 2777 51689
3321.43098129 517 2805 48884
3321.43098129 489 2833 46052
3321.43098129 461 2861 43191
3321.43098129 432 2890 40301
3321.43098129 403 2918 37383
3321.43098129 374 2948 34435
3321.43098129 344 2977 31458
3321.43098129 315 3007 28451
3321.43098129 285 3037 25415
3321.43098129 254 3067 22347
3321.43098129 223 3098 19249
3321.43098129 192 3129 16120
3321.43098129 161 3160 12960
3321.43098129 130 3192 9768
3321.43098129 98 3224 6545
3321.43098129 65 3256 3289
3321.43098129 33 3289 0

wing options
e the payment frequency

Semi-Annual Quarterly Monthly

2 4 12
1000000 1000000 1000000
12% 12% 12%
10 10 10
6.00% 3.00% 1.00%
20 40 120
0.3118 0.3066 0.3030
11.4699 23.1148 69.7005
87184.5570 43262.3779 14347.0948
1743691.1395 1730495.1156 1721651.3808
743691.1395 730495.1156 721651.3808
26150.5021 39346.5260 48190.2608

f Coupon Cash Flows + PV of FV

Buy at a dsccount to the face value, and redeem at par

1000
0%
10
10%

0.38554328943
NA
385.54328943
on bonds on the market that
e annual payments and have a
ds is 8.4 percent, what is the

1000 1000 1000

7% 7% 7%
9 9 9
10.00% 6.00% 7.00%
0.42409761837 0.59189846353003 0.54393374258
5.75902381628 6.80169227449958 6.5152322488
70 70 70
403.131667139 476.118459214971 456.066257416
424.097618372 591.898463530025 543.933742584
827.229285512 1068.016922745 1000
At Discount At Premium At par

obe Co. has 7 percent coupon

rity. The bonds make annual
he bonds currently sell for

1000
7% Fixed-coupon
9
7.60% Dynamic Yield
0.51723696893
6.35214514566
70
444.650160196
517.23696893
961.887129126

bond making semiannual

 percent, a YTM of 7 percent,
count bond making semiannual
percent, a YTM of 8.5 percent,
he prices of these bonds today
e? If interest rates remain
these bonds to be in one year? In
3 years? What’s going on here?
es versus time to maturity.

Y X Y
1000 1000 1000
7% 8.50% 7%
13 13 13
2 1 1
8.50% 7% 8.50%
3.50% 8.50% 7.00%
26 13 13
4.25% 7.00% 8.50%
0.33886159071 0.41496444788854 0.34626883325
15.5561978656 8.35765074444947 7.69095490294
35 85 70
544.466925297 710.400313278205 538.366843206
338.861590711 414.964447888537 346.26883325
883.328516008 1125.36476116674 884.635676456

older's Equity/No of Shares

mation available in the balance sheet

Rs.
Rs. per share
 2013 2014
2636000 3876000
160000 200000
16.475 19.38

the performance analysis

ined earnings is a desirable performance

million
 4.5 4.5
6% 10%
11% 11%
95.4 495
54.49090909 454.0909091
54.49090909 454.0909091

Dividend PVIF PV
4.95 0.90090 4.45945945946
5.45 0.81162 4.41928414901
5.99 0.73119 4.3794707783
6.59 0.65873 4.34001608661
7.25 0.59345 4.30091684258
153.64 0.59345 91.1794370627
113.0785844
 300 300 300
280 300 320
20 0 0
Max (0,20) Max (0,0) Max (0,-20)

15x

s are valued at 15$

mes to its EPS
EPS P/E
12 20.8333333333333
15 30
25 24
25 17.2
15 18
13 22.00666667

22 x
13
286

MILLION
X
MILLION

$ PER SHARE
on and similar comparable firms are trading at sales multiple of 3. The firm has a net debt of $120 million and outstanding share

x
includes value of equity and value of debt

0 and it has paid a dividend of $3.5 for the most recent financial year. The dividend is expected to grow at a rate of 8% forever.

3.5 (1+8%)/150 + 8% = 10.52%

Growing Annuity 1
Growing Annuity 2
Growting Perpetuity

CF PVIF PV
9.4 0.8929 8.42857142857
11.1 0.7972 8.88010204082
13.1 0.7118 9.355821793
15.5 0.6355 9.85702653191
18.3 0.5674 10.3850815247 46.90660332
20.9 0.5066 10.5705294091
23.8 0.4523 10.7592888628
27.1 0.4039 10.9514190211
30.9 0.3606 11.146980075
35.2 0.3220 11.3460332906 54.77425066
951.45 0.3220 306.34289884 306.3428988
408.0237528 408.0237528
 12
20% 5 years
15% 5 years
12% 5 years
6% perpetuity
13%
500 500
257

12
20%
15%
12%
6%
13%

12
29.85984
60.0588038016
105.844133383
1.20 115% 112%
1.13 1.13 1.13
1.35056040395 1.09168409835953 0.95652845918
-0.3505604039 -0.0916840983595 0.04347154082
5.008005771 4.584204918 4.347154082
14.4 34.338816 67.26586026
72.1152831024 157.416169185497 292.415059009 1602.782591
72.1152831 85.43918991 86.14206919 256.2701154 499.9666576

nominal return
real return
ng all major sectors

presentative stocks
presentative stocks
presentative stocks

alue of select stocks vs base value of select stocks

Return Investment (beg) Weight Value (end) Weights (end)

26.79% 14780000 0.49730820996 18740000 0.48865710561
27.17% 920000 0.03095558546 1170000 0.03050847458
30.11% 10460000 0.35195154778 13610000 0.35488917862
58.00% 1000000 0.0336473755 1580000 0.04119947849
26.95% 2560000 0.08613728129 3250000 0.08474576271
29720000 1 38350000 1
 PV Cumulative PV
13.3928571429 13.39285714
15.943877551 29.3367346910204
21.3534074344 50.6901421254227
12.7103615681 63.4005036935194
8.51140283578 71.9119065292983

PVIF, PV
1 -168500
0.9009009009 77477.4774774775
0.81162243324 73857.641425209
0.7311913813 38753.1432089504
21588.26211
 PVIF, PV 19%
1 -168500
0.9009009009 77477.4774774775
0.81162243324 73857.641425209
0.7311913813 38753.1432089504
21588.2621 0

ch are invested in the project

by the project

ne crosses the X-axis (discount rate)

e positive NPV
ve negative NPV
 of $120 million and outstanding shares of 10 million What is the value of this stock based on comparable firms’ data? EV/Sale

pected to grow at a rate of 8% forever. Determine the cost of equity.

 Wt x Return
0.133243607
0.00841184388
0.10598923284
0.01951547779
0.0232166891
29.04%
arable firms’ data? EV/Sales