SRI BALAJI UNIVERSITY PUNE (SBUP)

BIMM
SEMESTER-I-BATCH -2020-22
FINANCIAL MANAGEMENT
ASSIGNMENT – 2

(a)  Name of Student: - Manish Chauhan

(b)  Reg. No: - 09-1128
(c)  Specialization: - Marketing
(d)  Batch: - 2020-2022
(e)  Institute: - Balaji Institute of Modern Management
(f)  Semester: - Semester 2
(g)  Subject Name: - Financial Management
(h)  Assignment No: - 2
(i)  Submission Date: -28/03/2021
(j)  Total no. of pages written: - 07

1
 ANSWER 1

From the following information construct the operating statement showing sales, variable
cost, Contribution, fixed cost, EBIT, interest, EBT:

Particulars A B C
Variable expenses as %of sales 66.66 75 50
Interest 220 330 100
Operating leverage 4 5 3

Financial leverage 3 4 2

Finding EBIT:
For A:
EBIT
Financial leverage=
EBT
EBT =EBIT −I =EBIT −220
EBIT EBIT
Financial leverage= = =3
EBT EBIT −220
EBIT =3 EBIT−660
∴ EBIT = 330.
∴ EBT = EBIT – 220 = 110

For B:
EBIT
Financial leverage=
EBT
EBT =EBIT −I =EBIT −330
EBIT EBIT
Financial leverage= = =4
EBT EBIT −330
EBIT =4 EBIT −1320
∴ EBIT = 440.
∴ EBT = EBIT – 330 = 110

For C:
EBIT
Financial leverage=
EBT
EBT =EBIT −I =EBIT −100
EBIT EBIT
Financial leverage= = =2
EBT EBIT −100
EBIT =2 EBIT −200
∴ EBIT = 200.
∴ EBT = EBIT – 100 = 100

2
Finding contribution:
For A:
contribution contribution
Operating leverage= = =4
EBIT 330
∴ Contribution = 1320
For B:
contribution contribution
Operating leverage= = =5
EBIT 440
∴ Contribution = 2200
For C:
contribution contribution
Operating leverage= = =3
EBIT 200
∴ Contribution = 600

Finding sales and variable cost:

For A:
Suppose sales = x
Variable cost = 66.66% of sales = 0.6666*x
Sales−Variable cost =Contribution
x−( 0.6666 x )=1320
∴ x = 3,959.2081 = sales
∴ Variable cost = 0.6666 * x = 2,639.2081

For B:
Suppose sales = x
Variable cost = 75% of sales = 0.75*x
Sales−Variable cost =Contribution
x−( 0.75 x )=2200
∴ x = 8,800 = sales
∴ Variable cost = 0.75 * x = 6,600

For C:
Suppose sales = x
Variable cost = 50% of sales = 0.5*x
Sales−Variable cost =Contribution
x−( 0.5 x )=600
∴ x = 1200 = sales
∴ Variable cost = 0.5 * x = 600

Finding fixed cost:

For A:
Contribution – Fixed cost = EBIT
Fixed cost = Contribution – EBIT = 1320 – 330 = 990
For B:
Contribution – Fixed cost = EBIT
Fixed cost = Contribution – EBIT = 2200 – 440 = 1780
For C:
Contribution – Fixed cost = EBIT
Fixed cost = Contribution – EBIT = 600 – 200 = 400

3
Computation of Financial leverage and Operating leverage.
A B C
Sales 3,959.2081 8,800 1200
Less: Variable cost 2,639.2081 6,600 600
Contribution 1320 2200 600
Less: Fixed cost 990 1780 400
EBIT 330 440 200
Less: Interest 220 330 100
EBT 110 110 100
Operating leverage 4 5 3
(Contribution / EBIT)
Financial leverage 3 4 2
(EBIT / EBT)

ANSWER 2

1. Issue at par and redeem at par.

Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 (as specification is given, to be at par)
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) = 1000 – 30 = 970
n = 7 years
{ RV −SV } {1000−970 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=8.96 %
RV + SV 1000+ 970
2 2
Cost of debt after tax = 8.96%

2. Issue at 10% discount, redemption at par.

Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 (as specification is given, to be at par)
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) – 10% of FV (as discount)
= 1000 – 30 – 100 = 870
n = 7 years
{ RV −SV } {1000−870 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=10.97 %
RV + SV 1000+ 870
2 2
Cost of debt after tax = 10.97%

3. Issue at par redemption at premium OF 10%

Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 + 10% of FV (as premium) = 1000 + 100 = 1100

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SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) = 1000 – 30 = 970
n = 7 years
{ RV −SV } {1100−970 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=9.91 %
RV + SV 1100 +970
2 2
Cost of debt after tax = 9.91%

4. Issue at 10% discount, redemption at 10% premium

Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 + 10% of FV (as premium) = 1000 + 100 = 1100
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) – 10% of FV (as discount)
= 1000 – 30 – 100 = 870
n = 7 years
{ RV −SV } {1100−870 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=11.86 %
RV + SV 1100 +870
2 2
Cost of debt after tax = 11.86%

ANSWER 3

14% Institutional terms loan 13% NCD

Capital to be raised (FV) Rs. 1,00,00,000 Rs. 1,00,00,000
Less: Discount Rs. 0 Rs. 2,50,000
Less: cost of issue Rs. 0 Rs. 1,00,000
Net fund received Rs. 1,00,00,000 Rs. 96,50,000

For 14% Institutional terms loan

I = 14% of FV = 14,00,000
t = 35% = 0.35
I ∗( 1−t ) 14,00,000∗(1−0.35 )
Kd= ∗100= ∗100=9.1 %
Net fundsreceived 1,00,00,000
Cost of capital = 9.1%

For 13% NCD

I = 13% of FV = 13,00,000
t = 35% = 0.35
I ∗( 1−t ) 13,00,000∗ (1−0.35 )
Kd= ∗100= ∗100=8.45 %
Net fundsreceived 1,00,00,000
Cost of capital = 8.45%

5
Since the effective cost of capital is less in case of Option II, i.e., by issuing 13% Non-
Convertible Debentures, the same should be considered for raising funds of Rs.
1,00,00,000.

ANSWER 4

Capital Issuing normal Issuing normal 13% term loan Issuing normal
Structure/ 10K equity 5K equity shares (III) 5K equity
Income shares @ 500 @ 500 Rs. Per shares @ 500
statement Rs. Per share. share + 12% Rs. Per share +
(I) term loan 10%
(II) preference
shares
(IV)
No. of Equity 20,000 15,000 10,000 15,000
Shares
EBIT 12,00,000 12,00,000 12,00,000 12,00,000
(-) Interest 0 3,00,000 6,50,000 0
EBT 12,00,000 9,00,000 5,50,000 12,00,000
(-) Tax @35%of 4,20,000 3,15,000 1,92,500 4,20,000
EBT
EAT 7,80,000 5,85,000 3,57,500 7,80,000
- Preference 0 0 0 2,50,000
Dividend
EAT and 5,30,000
Preference
Dividend 7,80,000 5,85,000 3,57,500
/ No. of Equity 20,000 equity 15,000 equity 10,000 equity 15,000 equity
Shares shares shares shares shares
EPS 39 per equity 39 per equity 35.75 per equity 35.33 per equity
share share share share
Preference I I II `III

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 ANSWER 5

Capital Issuing normal Issuing normal Issuing normal Issuing normal

Structure/ 20K equity 10K equity 5K equity 10K equity
Income shares @ 100 shares @ 100 shares @ Rs. shares @ 100
statement Rs. Per share. Rs. Per share + 100 each + 9 % Rs. Per share +
8% term loan term loan 5% preference
(Rs.10,00,000) (Rs.15,00,000) shares
(Rs.10,00,000)
(I) (II) (III) (IV)
No. of Equity 45,000 35,000 30,000 35,000
Shares
EBIT 8,00,000 8,00,000 8,00,000 8,00,000
(-) Interest 0 80,000 1,35,000 0
EBT 8,00,000 7,20,000 6,65,000 8,00,000
(-) Tax @35%of
EBT 2,80,000 2,52,000 2,32,750 280000
EAT 5,20,000 4,68,000 4,32,250 5,20,000
- Preference 0 0 0 50,000
Dividend
EAT and
Preference
Dividend 5,20,000 4,68,000 4,32,250 4,70,000
No. of Equity 45,000 equity 35,000 equity 30,000 equity 35,000 equity
Shares shares shares shares shares
EPS 11.56 per equity 13.37 per equity 14.41 per equity 13.43 per equity
share share share share
Preference IV III I `II