Target capital structure of

supreme plastics company

Sources Current Weights Target weights Target Beta
Long term debt 30% 50% 1.5
Preference share capital 20%
Equity share capital 50% 50%

Debentures Values
Par value 1000
Annual coupon interest rate 105
Company tax rate 30%
Average discount per debenture 45 Therefore PV is 955
Maturity Years 20

Preference shares Values

Dividend Per share 9
Par value per share 100

Common stock Values

Risk free rate 6%
Market expected return 14%
Beta 1.3

Calculation for cost of debt

YTM 11%
Cost of debt YTM * (1-tax rate)
Cost of debt 0.08
Calculation for cost of preffered stock
Kps Dividend per share / Price
Kps 0.09
Calculation of cost of equity
Using CAPM
Ke = Rf+(Rm -Rf)* Beta
Ke 16.40%
Caculation of weighted average cost of capital
WACC = Wd* Kd + Wp*KP + We*Ke
WACC ( Current) 12.3%
WACC (Proposed ) 12.073656520623900%

From the above calculation it

can be seen that WACC for the
proposed capital structure is
less than the current.
Therefore it is preferable to
use the proposed capital
structure
 2(a)
Loan Amount 1000000
PVAF 2.913712304499
Interest Rate 14%
PV of Annuity installment 1000000
Annuity Installment 343204.783278

Loan amortization sechedule

Years Beginning loan amount

1 1000000
2 796795
3 565142
4 301057
2(b)
Economic state Probability

Boom 40%
Recession 60%
Expected return

economic scenario Probability

Boom 40%
Recession 60%
expected return

economic scenario Probability

Boom 40%
Recession 60%
expected return

consideration both the scenarios, I would be investing in the Stock B as the S.D of stock B is less than stock A
Higher the S.D,Higher will be the risk
Investment will be made in stock A
unt Installment paid Interest paid part of principle repaid ending loan amount
343204.78 140000 203205 796795
343204.78 111551 231653 565142
343204.78 79120 264085 301057
343204.78 42148 301057 0

Returns Returns
A share Share B
38% 6%
-4% 12%
12.8% 9.6%

Returns deviation Square of deviation square of dev*prob

A share
38% 25.20% 0.063504 0.0254016
-4% -16.80% 0.028224 0.0169344
12.8% Variance 0.042336
S.D 0.205757138393787

Returns B deviation Square of deviation square of dev*prob

share
6% -3.60% 0.001296 0.0005184
12% 2.40% 0.000576 0.0003456
9.6% Variance 0.000864
S.D 0.029393876913398
Cost of cap 0.09
Cashflows C0 C1 C2 C3
Project p -840 700 350 70
Project q -840 70 420 760
a)
NPV IRR
Project p ₹ 138.39 23%
Project q ₹ 151.00 17%

b)

It is recommended to take project q as the net present value is higher. The NPV is positive for both the projects
therefore both the projects are profitable. However NPV is a direct measure of the expected increase in the value of
firm. Because NPV measures the expected increase in wealth from undertaking projects, NPV is the only becomes a
good criteria to undertake any project. Hence we go with project q.
r both the projects
crease in the value of
s the only becomes a
In the books of Sun Trader

Inventory Turnover Ratio

Days in a year
Inventory Days
Average Collection Days
Payable Days

Operating Cycle =

Cash Conversion Cycle =

Sales (Annual)
Inventory Investment
Investment Receivable
Daily Cash Operating Expenses
Resource obtained on account of Payable
Amount of resources needed to support Cash Conversion Cycle
 6
365
60.8333333333333 or 61 Days
45
30

105.833333333333 or 106 Days Operating Cycle = Average Age of Inventories + Average collection Period

75.8333333333333 or 76 Days Cash Conversion Cycle = Operating Cycle - Average Payment Period

(figures in $)
3000000
500000 Inventory Investment = (Annual Sales*Inventory Days)/ Days in a year
369863.01369863 Investment Receivable = (Annual Sales*Collection Days)/Days in a Year
8219.17808219178 Daily Cash Operating Expenses = Annual Sales/Days in a Year
246575.342465753 Obtained = (Annual Sales*Payable Days)/ Days in A year
623287.671232877 Amount Needed =Inventory Investment + Investment Receivable - Resource obtained
 age collection Period

Payment Period

ys)/ Days in a year

ays)/Days in a Year

nt Receivable - Resource obtained on account of payable

1) Low Payout Ratio:
If a high-income group of people owns the stock of the company, they will always prefer either
bonus shares or capital appreciation to dividends since they are already in a high tax band and
their marginal earnings are taxable at a high rate.

2) Low Payout Ratio:

In this case, the company will like to maintain a low payout ratio as it will reinvest the majority
of the earnings into new growing opportunities to take advantage of such chances.

3) Medium/ High Payout Ratio

Since the company has high liquidity and unused debt, it can have a medium or high payout
ratio so that its shareholders are able to invest elsewhere if they come across a better
investment opportunity to get a higher rate of return.

4) Medium/ High Payout Ratio

A major proportion of earnings will be paid as dividends in order to increase the price of the
share as more investors will start buying the shares of the company when they see that the
company is paying out higher dividends, which will in turn, increase the share prices of the
company.

5) Low Payout Ratio

A high business risk refers to high fixed operating cost burden for the company and due to
uncertain earnings, the compay will like to reserve majority of the earnings with itself and
hence it is bound to pay low dividends.