CHAPTER 3 :

Financial Statement Analysis

① Rank Loan Capital → long
debt
term
-

1. Debenture

2. Unsecured loan stock

g 2. Euro sterling
MMMM
ammo
3 Subordinated
. loan stock '

amarmhnppMMH.HN
'

for asset cover just take this value

for interest cover ×

1. INTEREST COVER
< 3 or 4 times '
high risk .

profit on ordinary activities before interest and taxation .

interest cover =
annual interest payments due on that issue of loan stock t all prior loan stock .

Step 2 :

}
interest on debenture = 9.751 .
✗ 16000 = 1560
→

101 25000 = 2500

→ interest on unsecured loan = . ✗

3800 total interest 9950 (same value as finance cost )

9.51
=

→ interest on Euro sterling = . ✗ 40000 =

→ interest on subordinated loan =

111 .
✗ 19000=2090

step 3 :

→ interest cover on debenture :

→ profit bfr tax 4 interest

35000 = 22.4 ✗
1560

→ interest cover on unsecured loan :

35000 =
4.5 ×
25001-1560+3800
←
↑ Euro sterling has the same
must add rank , so must add as well .

the interest bfr

→ interest cover on Euro Sterling :

35000 =
4. b- ✗
38001-15601-2500

→ interest cover on subordinated loan :

35000
=
3.52 ✗
2090 -138001-15601-2500
 2. INTEREST PRIORITY PERCENTAGES -

I
interest priority percentages =

interest cover

Calculation :

Long Term Debt Interest Cover Interest Priority Percentages -

① Debenture 22.44 ✗ 0 to
21.4¢ =
01 . to 4.51 .

1
② Unsecured loan stock 4- 4511 1
to =
4 -5% to 22.471
22.44 4.45 .

③ Euro sterling 4.4511 1

to
I
=
4.51 .
to 22.47%
22.44 q.gg

④ Subordinated
£2
3. b- 2X I
Loan to = 22.47% to 28 .

4.45 3.

ASSET COVER < 2 or 2^5 →

high risk
3.
.

total asset -

current liabilities -

intangible asset
asset cover =

loan capital + prior ranking debt

calculation :

→ Asset cover on debenture :

211,000 -
41,000 -
20/000
= 9.4 ✗
161000 ←
value of debenture at financial
statement

→ Asset cover on unsecured loan stock :

211,000 -
41,000 -
20,000
= 19 ✗
25000 1-16,000+40000
←
add
bfr and euro
sterling together
(value at financial
statement )
→ Asset cover on Euro Sterling :

211,000 -
411000 -

20,000 = 1.9 ✗
25,000 -1 16,000-140,000

→ Asset cover on subordinated loan :

211,000 -

41,000 20,000 / ↳ ✗
-

= '

25,0001-16,000-140,000+19,000
4. ASSET PRIORITY PERCENTAGES

1
asset
priority percentages = -

asset cover

Calculation :

Loan capital asset cover asset priority percentages .

Debenture 9. 8811 0 to
g. Igg = 0 to 10.12%

unsecured loan I
1.85 ✗
9.88
to
1. g-{ =
10.12% to 54.051 .

Euro sterling 1.85 ✗ 1 I 54.05%

to = 10.12% to
9. 88 t.gg
Subordinated loan 1.5 ✗ I

1. 85
to
1 !s =
54.051 .
to 66.67%

7401 risk more debt

5. ASSET GEARING high
-

.
→ ,

borrowings borrowings → total non -

current liabilities .

asset gearing =

borrowings +
( total equity
-

intangible asset )

calculation :
total non -
current liabilities .

→
no, ooo 66.671
✗ 1001 .
= .

100,0001-(70,000-20,000)

6. INCOME GEARING

finance cost finance cost → total interest on loan .

income gearing
=

profit before interest and tax

calculation :

9950
✗
100% =
28.43%
35000

=) RATIO :

1. Current Ratio :

> For every RMI of current liabilities there will be RM of current assets .

=
current asset
Current liabilities > Since the ratio is more than 1 , the company should not face any liquidity problem
.

2. Quick Ratio :

For RMI of current liabilities there will be RM of current assets

>
every
.

=
Current Assets
-
Inventory
> Since the ratios are more than 1 the company has quick assets to pay for debts
current liabilities
,
.
 CHAPTER 4 : Note : Ari , > it → ans in %

for 2 → in point
.

> benchmark for every company

WACC to make investment decision

.

1. cost of equity @ Expected return from share -

rf = risk free rat -

ri =
rf t Bi ( rm -

rf ) rm -
rf =
equity risk premium / market risk premium
B- -

geared beta .

NOTE : → B can be un geared beta if the 9s mention

'
'

repaid all its debt

from
'
→ For 9s mention about Expected return
"
the market Use :
ri rf t ( rm )
.

=
-

Vf

2. Geared Beta

Bg =
geared beta

] repaid its all debt

[ geared beta @
¥ ) Bu
.

un
Bu It ( l t
=

Bg
-

= ✗

f- =
tax

D= debt ratio

E- -

equity ratio -

3. Cost of Debt

t =
tax
net cost of debt =
gross cost of debt × ( l -
t )
gross cost of debt →
given in qs .

4. Weighted Average Cost Of Capital ( Waco )

( net debt capital )

equity capital ) of debt
( cost + cost ×
of equity ×

WACC =

total capital

D: E = 3 : I
E
equity capital e
-9
¥
→ = :

equity capital = = 0-25

total ratio

☐
→ debt capital =

total ratio

→ total capital =
I
 Example Question :

D: E 5: 2 Debt capital %
= =

WACC : 101 .
= 0.1
rm 4- =
91 0.09 equity capital =

2--1
-
. =

tf : 3 % =
0.03

cost of debt 3.5 / = 0.035

gross
= .

tax =
30 / .
= 0 -
3

= ?

net cost of debt = 0.035×(1-0.3)

=
0.0245

( cost of equity ✗ equity capital ) + ( net cost of debt ✗ debt capital )

WACC =

total capital

0.1
:( cost of equity × }) 1- (0.0245×5-7)
I

cost of
0.1 0.0175 = equity ×
3g
-

0.0825 Cost of
×
Ig =
equity

cost of equity = 0.28875

lost of
equity Vf = + B ( Vm -
Vf )

0.28875=0.03 + B ( 0.09 )

0.25875 =
B (0-09)
B = 2- 875

formula return from

expected
:
expected return from share . market :

→
cost of ri =
rf -1 ( rm -

Vf )
equity =
rf -1 BC rm -

rf )

net cost of debt :

gross cost of debt ✗ (l -
t )

WACC =
( cost of equity ✗ equity capital ) + ( net cost of debt ✗ debt capital )
total capital

Bg =
Bu ✗
[ ¥(I + l -
t)
]
geared
¥
↑
uncleared @
beta beta repaid.
its all debt '
 =
Capital Project Appraisal
1. Net Present Value ( NPV )

NPV > 0 i. the project will improve shareholder return .

NPV = Return -
Contribution

→ Pn is probability -

ENPV = Pi NPV , 1- Pz Npvst - - - - t

intevpo

2. Internal Rate of Return ( IRR )

let NPV =
°
,
find IRR ( may use linear interpolation )
CFI +
( Fa
Npv = -
/ (°
CHIRR) ( 1+1121212

Example Question :

ii. 0.07

ENPV =P, NPV , + PzNPVzt . . _ .

"

100011,07 )-2+100011.0753
-

C, = 1000 t 100011-07 ) t

=
3624.316044
'
NPV , = C, V
-
t
=
3624 .
316044 ( 1.07 )
=
3387 . 211256

'
C2 = 1500 -1150011.07J t 150011.0752
= 4212-027251

NPV , = C2 V2
= 4212.027251 (1-07)-2
=
3678.947726

'
(3 20001-2000 ( 1.07 )
-

=
3869.158879
NPV } = ↳ V3
=
3869.158879 (1-07)-3
=
3158-386178
( 4=1000
4
NPV 4=1000 ( 1.07 )
-

= 762.895212

ENPV :( 3- ✗ 3387.211256 ) +
(2×3678.947726)+(14×3158.386178) (1-4×762-895212) -1
=
3948-864629
 CHAPTER 5 :

Financing lost

Interest costs + fees

Financing cost =

usable fund

Example :
1.

amount of interest payable on 3- month loan = 4000000 ( 0.075 ) ( Eg )

= 75000

amount of financing cost = 75000 12

4000000 -
75000 3

= 7. 64 %

2.

☆
interest =
400,000 (0.072571%2)
= 7250

commitment fees = 500000 ( 0.005 ) (3/12)

= 625

=/ 4%4%5 ) / %)
'
annual financing
cost

=
7.88%

* Kalan commitment fees

tuk mention draws down
ambik values 500,000 .

* it unused amount :

interest :
400,000 10.0725 ) (3/12) 500,000-400/000

=
7250

commitment fees
-_
(500,000-400,000) ( 0.005/(3/12)
=
125

7250 -1 125
financing
})
annual cost =
I
400,000

=
7.381 .
3.
→ 3 months

↓
,
1001 0.00125
g- ÷
=
.

interest -_
4,000,000 ( 0.07 )( 31,2 )
=
70,000

dealer's commission =
4,000,000 (0.00125×3112)
= 1250

;-)
annual 70000 -11250
financing cost = I

4,000,000 -70000 -
1250

=
7.251 .
 Working Capital Cycle

Working Capital Cycle Inventory = turnover period + trade receivable turnover period trade payable turnover period

Shorter company to generate faster and reduce the need for asset and external
>
operating cycle enable the cash
liquid
financing .

Cost of Trade credit

365

discount
Payment day -
discount period
cost of trade credit =
, -1 I p . a.
1- discount

Managing Inventory
s Total annual costs of
ordering = number of orders per year × 0

Do 0
=
✗
,

> Total annual wits of holding inventory =

average amount of inventory ✗ C

=
Q
✗ C
2

Q in order to minimise D Q
1 So the company chooses
, c =
✗ Ot ✗ C
Q 2

with respect to Q and to 0 to find minimum value

> Differentiating equating :

dc
= 0 , find Q
DQ

find number order D

> To of per year
=

D= annual demand

0 =
cost of each order
placing
C- annual costs of holding a unit of inventory
-
.
Example Question :

D= 5000

C = 2

0=70

Total annual of ordering cost

¥
=
✗ 0

= 5000 350000
✗ 70 =

Q Q

Q
Total annual of holding cost =

✗ C
2

Q
=

✗ 2 =

Q to minimise C , C 350000
So the company
,
choose =

+ Q
Q

Differentiate to find minimum value :

do
=
-
350000
dQ + I = 0
Q2

350000
= -
l
Q2

Q2 =
350000

Q =
591.6079 ≈ 592 tables .

Ig
number of order per year =

= 5000

592

=
8.4459 ≈ 8
total cost of ordering

✗ 0 =
10000-4 50

Q
=
500000

Q
total cost of holding

✗ C =
1-5
✗

=
0.75

to minimize

C =
500000 0.75 Q
+
Q

differentiate

dc

¥
= -

+ 0.75
do,

50¥00
0 = -

1- 0.75

0-750,2 = 500 000

Q =
816.495 ≈ 816 ✓