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  • Net Income Theory and Capital Structure Calculations/TITLE

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    Path Garg
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    The document presents different net income theories and calculations for companies Alpha, Beta, and Delta. It also includes calculations for a company's weighted average cost of capital (WACC), net present value (NPV) of projects, and equity valuation after a new capital issue. The information provided allows for comparisons of traditional net income theory versus Modigliani-Miller theory.

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    Original Title

    20020341_ARYAAN_VAHI_INTRODUCTION_2_FINANCIAL MANAGEMENT_END TERM EXAM (1)

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    The document presents different net income theories and calculations for companies Alpha, Beta, and Delta. It also includes calculations for a company's weighted average cost of capital (WACC), net present value (NPV) of projects, and equity valuation after a new capital issue. The information provided allows for comparisons of traditional net income theory versus Modigliani-Miller theory.

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    9 views8 pages

    Net Income Theory and Capital Structure Calculations/TITLE

    Uploaded by

    Path Garg
    The document presents different net income theories and calculations for companies Alpha, Beta, and Delta. It also includes calculations for a company's weighted average cost of capital (WACC), net present value (NPV) of projects, and equity valuation after a new capital issue. The information provided allows for comparisons of traditional net income theory versus Modigliani-Miller theory.

    Copyright:

    © All Rights Reserved
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    of 8

    3.

    i) Net Income Theory :


    ALPHA BETA DELTA

    Net Operating Income 100000 100000 100000

    Interest 0 12000 15000

    Net Income 100000 88000 85000

    Market Value of Equity (E) 1111111 977777.8 944444.4

    Market Value of the debt 0 200000 250000

    Market Value of the firm(V) 1111111 1177778 1194444

    Traditional Theory:

    Debt Ratio 0 0.4 0.5

    Ke 0% 6.90% 8.5%

    Market Value of Debt 0 200000 250000

    Int 0 13800 21250

    Net Income 100000 86200 78750

    Market value of equity 1111111 884102.6 715909.1

    Market value of firm 1111111 1084103 965909.1

    M-M Theory:

    Net Income 100000 88000 85000

    Market value of equity 1111111 902564.1 772727.3

    Market value of firm 1111111 1102564 1022727


    Ke Kd

    Alpha 0.09 0

    Beta 0.0975 0.069

    Delta 0.11 0.085


    Q2)1)

    Debt:Equity 1:3

    Debt 2500000

    Equity 7500000

    Total Capital 10000000

    Capital Debt Equity

    Cost of Capital 8% 10%

    % of capital 25% 75%

    Total 2.00% 7.500%

    WACC 9.500%

    Q2)3) Total market value 10100000

    Q2)5) Equity from new capit 75000


    No of Shares 500
    Share Price after taki 150
    Q2)2)
    Project X:

    Year Cash Flow PVF Cash Flow*PVF


    0 -100000 1
    1 50000 0.913242
    2 60000 0.834011
    3 50000 0.761654
    4 40000 0.695574
    5 50000 0.635228

    NPV

    Project Y

    Year Cash Flow PVF Cash Flow*PVF


    0 -150000 1
    1 30000 0.913242
    2 50000 0.834011
    3 60000 0.761654
    4 70000 0.695574
    5 80000 0.635228

    NPV

    Hence the CFO should choose project X.

    Q2)4) Shares outstanding 50000

    No of Equities at present 7500000

    No of Shares 150

    Initial investment in Project X 100000

    Equities 75000

    No of shares to be issued 500


    Cash Flow*PVF
    -100000
    45662.10046
    50040.65803
    38082.69257
    27822.97174
    31761.38326

    ₹ 85,269.23

    Cash Flow*PVF
    -150000
    27397.26027
    41700.54836
    45699.23108
    48690.20054
    50818.21322

    ₹ 58,726.44
    Q1)1)

    Q1)3) Investment 2000000

    Return 0.15

    Total return 300000

    New Investment 2500000

    Return on assets 0.135

    Return(total) 607500

    Incremental Revenue 307500

    Tenure 8 yrs

    Post Expansion Return 13.50%

    Post Expansion Annual return 607500

    Post Expansion Total revenue 4500000

    Hence he should go ahead with second factory.


    Q1)2) Investment 2000000 2000000
    Return 15% 12%
    Return(in Rs) 300000 240000
    Revenue 2500000 2400000 100000
    Income 300000 240000
    Cost 2200000 2160000 40000
    Varriable Cost 1000000 960000
    Fixed Cost 1200000 1200000

    was correct in being disheartened.Q1)5)


    As a part of BBA consultant I would advise him to reduce the cost of the new debt.

    Q1)4)
    Q1)6) The approach selected is DCF.

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