ASSIGNMENT – CORPORATE FINANCE

ANS. 1

INTRODUCTION

It's not simple to run a business in today's fast-paced environment. Every business needs money to
run and carry out various tasks, and without money, no organization can survive. As a result, money
is often referred to as a business's lifeblood. There is always a start-up capital investment made by
the entrepreneur, but it may not always be enough to expand the business. Therefore, a variety of
funding sources are needed to run a business. There are numerous ways to generate money, but
choosing the right one requires accurate knowledge of all available options because each source of
funding has costs that must be compared and calculated before choosing which is best for the
organization. As a result, every funding source needs to be carefully examined.

CONCEPT AND ANALYSIS

The entity's debts and equity capital serve as the funding sources for the assets and liabilities on the
balance sheet. Analysis of the structure rates of the funding sources enables evaluations of the
funding policy, highlighting the financial independence and resource distribution methods.
The balance sheet is a moment in time snapshot of the company's financial situation. The balance
sheet displays the company's assets and liabilities as well as its financial situation (liabilities and net
worth). A balance sheet's "bottom line" (i.e., assets = liabilities + net worth) must always be in
balance.

The stability of a bank's funding structure, the risk factors on its balance sheet, and the effectiveness
of its program for measuring liquidity risk all play a role in how much liquid assets it keeps on hand.

Sources of fund found in the Balance sheet

EQUITY CAPITAL

The company uses cash from operations, cash and cash equivalents, debt, and equity to pay for its
capital investments and R&D investments. The company also sells investments, including carefully
chosen divestitures of stakes in subsidiaries, to raise money.

In paid-up capital, Tata Motors Limited is permitted to raise up to 638.07 crores. The company's
equity share capital was 353 crores in 2003-04. The company increased its value to 361.79 crores in
2004-05 and to 382.87 crores in 2006-2007 by issuing additional equity shares. Equity capital
remained constant between 2007–2008 and 2008–2009. From that point on, the company has
boosted equity yearly until the end of the time period. The company's net worth has grown over the
years as well. This demonstrates that the company is gaining from the increase in equity share
capital. At March 31, 2016 and 2015, the shareholders' fund was Rs. 80,782.67 crores and Rs.
56,261.92 crores, respectively, an increase of 43.5%.

 From Rs. 55,618.18 crores as of March 31, 2015, to Rs. 80,103.49 crores as of March 31, 2016,
reserves increased by 44.0%. In addition to the profit of Rs. 11,023.75 crores for the fiscal year
2016, the increase in reserves of Rs. 24,485.35 crores was primarily caused by the following
reasons:
 The issuance of shares at a premium in the Company's Rights offering in Fiscal 2016 resulted in
an increase in the securities premium of Rs. 7,400.66 crores.
 As a result of an increase in interest rates for Jaguar Land Rover pension funds, accumulated
actuarial losses in the Pension Reserve decreased by 35.7% to Rs. 6,659.25 crores as of March
31, 2016, from Rs. 10,361.85 crores as of March 31, 2015.
 The Foreign Currency Monetary Item Translation Difference Account recorded exchange losses
on foreign currency borrowings of Rs. 2,847.84 crores as of March 31, 2016, compared to Rs.
4,227.07 crores as of March 31, 2015 (net of amortization of past losses).

DEBT CAPITAL

The company's debt capital is made up of both secured and unsecured loans. There are more loans
obtained from secured sources than from unsecured ones. This is as a result of the company's
significant 2009–2010 development investment. For the business, obtaining unsecured loans was
not an option. These secured loans are more expensive than unsecured loans because they are older
loans. Until 2009, the interest rates on secured loans and unsecured loans are respectively 9.5% and
9.75–10.25%. Until 2009, the interest rate on unsecured loans was 9.5%, and the rate on secured
loans was 9.75-10.25%. However, beginning in 2010-11, the company used debt swapping to reduce
interest rates on secured loans to 15% and unsecured loans to 10-11%. The majority of secured
loans are obtained from banks, which charge higher interest rates than the market rate.

The following are the company's debt sources:

• Bank borrowings for working capital.

• Bank/Financial Institution Term Loan
• International Loans
• Deposits made publicly (also includes loans from retired employees)

BORROWINGS

The Tata Motors Group uses operating cash flow, bank overdraft services, and short- and medium-
term borrowing from lending institutions, banks, and commercial paper to meet its short-term
working capital needs. These debentures and short- and medium-term borrowings have maturities
that are typically matched to specific cash flow needs. As of March 31, 2016, the working capital
limits from various Indian banks were Rs. 14,000 crores. The Company's current assets that are
currently in existence are hypothecated in order to secure the working capital limits. The working
capital ceilings are increased each year.
The amount of loan repayable within one year is represented by the current maturities of long-term
borrowings.

The company TML Holdings Pte. Ltd., a division of the business, has

• Replaced an existing US$600,000,000 unsecured multi-currency loan (US$250,000,000 and

SG$62.8,000,000 maturing in November 2017 and US$210,000,000 and SG$114,000,000
maturing in November 2019) with a new US$600,000,000 unsecured loan (US$300,000,000
maturing in October 2020 and US$300,000,000 maturing in October 2022); and
• Replaced the existing SG$350 million 4.25% Senior Notes with a new US$250 million syndicated
loan maturing in March 2020.Further, the Company has paid certain of its borrowings from the
Rights issue.

INVESTEMENT PORTFOLIO
Regular cash flows, maturing securities, cash sales of securities, or the use of securities as collateral
for loans, repurchase agreements, or other transactions can all contribute to the liquidity of an
institution's investment portfolio. Institutions can gain from routinely evaluating the portfolio's
quality and marketability. To satisfy consumer and governmental demands, the company plans to
keep investing in new goods and technologies. With the help of these investments, the company will
be able to pursue additional growth prospects and strengthen its position in the market. The
majority of the company's investments will be funded by operating cash flows and available cash
liquidity. In order to meet the remaining funding requirements, the Company may need to raise
funds through additional loans and occasional capital market access. Investment increased by 10.2%
to Rs. 18,711.46 crores as of March 31, 2016 compared to Rs. 16,987.17 crores as of March 31, 2015.
This was due to investments in mutual funds totaling Rs. 1,736.00 crores.

CONCLUSION

The company's debt ratio and debt equity ratio are both favorable, which indicates that there is little
debt in the capital structure. As the risk to the equity holders increased with an increase in loans, it
had decreased the owner's fund and confidence.

ANS. 2

INTRODUCTION

Investment is a process that calls for in-depth research as well as original thinking. Large
corporations either purchase other businesses or reinvest their profits in stock. This enables them to
produce compounded revenue, which enables them to produce additional revenue from a variety of
other sources. Investment basis selection is a challenging problem. The company must evaluate all
available options and select the best one.

There are numerous methods for choosing the best investment choice.

Payback period, IRR, and NPV are a few examples.

CONCEPT AND ANALYSIS

FOR PROJECT A

Year PVF@5% A PV of A
0 1 -40000 -40000
1 0.95238 5000 4761.9
2 0.90703 12000 10884
3 0.86384 10000 8638.4
4 0.8227 12500 10284
5 0.78353 10500 8227

NPV 2795.4
IRR 7%

4 years cumulative 39,500

Balance -500
balance / 5th year cf 0.05
 Payback period 4.05years

Calculation for PVF

PVF(5%,0) = 1/(1+k)0 = 1(1+0.5)0 = 1

PVF(5%,1) = 1/(1+k)1 = 1(1+0.5)1 = 0.95238

PVF(5%,2) = 1/(1+k)2 = 1(1+0.5)2 = 0.90703

PVF(5%,3) = 1/(1+k)3 = 1(1+0.5)3 = 0.86384

PVF(5%,4) = 1/(1+k)4 = 1(1+0.5)4 = 0.8227

PVF(5%,5) = 1/(1+k)5 = 1(1+0.5)5 = 0.78353

Calculation for NPV for project A

NPV = PV of Cash inflows – PV of cash outflows

NPV = (4761.9 +10884+8638.4+10284+8227) – 40000

NPV = 42795.3-40000

NPV = 2795.3

Calculation for IRR

Consider the annuity of cash flows and the payback period. For the above case, the payback period is
4.05.
So in order to find out IRR, we have to look into PVAF table that indicates for project A, the PV factor
closest to 4.05 against 5 years is 4.100 at 7% and 8% at 3.993. This means that the IRR of the
proposal is expected to lie between 7% and 8%.

Year Cash inflow PVF @ 7% PVF @ 8% PVF(7%,5) PVF(8%,5)

(CF)
1 5000 0.935 0.926 4675.00 4630.00
2 12000 0.873 0.857 10476.00 10284.00
3 10000 0.816 0.794 8160.00 7940.00
4 12500 0.763 0.735 9537.50 9187.50
5 10500 0.713 0.681 7486.50 7150.50
Total 40335.00 39192.00

At 8% NPV = (39192-40000) = -808

At 7% NPV = (40335-40000) = 335

The exact IRR by interpolating between 7% and 8%. At 7% the NPV is 335 and the 8% the NPV is -
880. Therefore, the rate at which NPV is zero will be more than 7% but less than 8%. By interpolating
the difference of 1% (i.e.8%- 7%) over the NPV difference of 1134 (i.e. 335-(-808))

IRR = 7% + 335/ (1134) X (8-7)

= 7.29%

FOR PROJECT B

Year PVF@5% B PV of B
0 1 -50000 -50000
1 0.95238 8500 8,095
2 0.90703 15000 13,605
3 0.86384 12000 10,366
4 0.8227 12300 10,119
5 0.78353 10500 8,227

NPV 413
IRR 5%

4 years cumulative 47,800

Balance -2200
balance / 5th year cf 0.21

Payback period 4.21 years

Calculation for NPV for project A

NPV = PV of Cash inflows – PV of cash outflows

NPV = (8,095+13,605+10,366+10,119+8,227) – 50000

NPV = 50413-50000

NPV = 413

Calculation for IRR

Consider the annuity of cash flows and the payback period. For the above case, the payback period is
4.21.

So in order to find out IRR, we have to look into PVAF table that indicates for project B, the PV factor
closest to 4.21 against 5 years is 4.329 at 5% and 6% at 4.212. This means that the IRR of the
proposal is expected to lie between 5% and 6%.

Year Cash inflow PVF @ 5% PVF @ 6% PVF(5%,5) PVF(6%,5)

(CF)
1 8500 0.952 0.943 8092.00 8015.50
 2 15000 0.907 0.890 13605.00 13350.00
3 12000 0.864 0.840 10368.00 10080.00
4 12300 0.823 0.792 10122.90 9741.60
5 10500 0.784 0.747 8232.00 7843.50
Total 50419.90 49030.60

At 5% NPV = (50419.90-50000) = 419.90

At 6% NPV = (49030.60-50000) = -969.40

The exact IRR by interpolating between 5% and 6%. At 5% the NPV is 419.90 and the 6% the NPV is -
969.4. Therefore, the rate at which NPV is zero will be more than 5% but less than 6%. By
interpolating the difference of 1% (i.e.6%- 5%) over the NPV difference of 1389.3 (i.e. 419.9-(-969.4))

IRR = 5% + 419.9/ (1389.3) X (6-5)

= 5.29%

CONCLUSION
As we can see from the foregoing estimates, project A may be chosen since it provides the highest
returns.

A B
i) Pay-back period 4.05years 4.21 years

ii) NPV 2,795 413

iii) IRR 7.29% 5.29%

ANS. 3 (a)

INTRODUCTION

The act of investing involves purchasing a predetermined sum of cash or money with the goal of
generating additional long-term returns on the capital invested. A person looks to increase his
wealth when he buys an investment. Over time, making regular monthly or annual investments in a
mutual fund, real estate, or hedge fund could produce enormous profits. The simplest way for a
person from the middle class to become wealthy is through investing.

CONCEPT AND ANALYSIS

INVESTEMNT A B
INTEREST RATE =8%/4 = 2% =10%/4 = 2.5%
EFFECTIVE RATE =(1+2%)^4-1 = 8.24% =(1+2.5%)^4-1 = 10.38%
PERIOD 5 5
ANNUITY 0 -20000
PRESENT VALUE -300000 0
 INVESTEMNT A B
INTEREST RATE 2.00% 2.50%
EFFECTIVE RATE 8.24% 10.38%
PERIOD 5 5
ANNUITY 0 -20000
PRESENT VALUE -300000 0

FUTURE VALUE ₹ 4,45,784.22 ₹ 1,23,032.20

For investment A

Future Value (FV) = PV × (1 + r) ^ n

Future Value (FV) = 300000 x (1+8.2432%)^5

Future Value (FV) = 4,45,784.22

For investment B

Future Value (FV) = Annuity amount × (1 + r) ^ n

Future Value (FV) = 20000 x ((1+10.3813%)^5-1)/10.3813%

Future Value (FV) = 123032.20

Present Value (PV) = FV/ (1+r) ^ n

Present Value (PV) = 123032.2/ (1+10.3813%)^5

Present Value (PV) = 75082.98

INVESTMENT PRESENT VALUE FUTURE VALUE %

INCREASE
A ₹ 3,00,000.00 ₹ 4,45,784.22 49%
B ₹ 75,082.98 ₹ 1,23,032.20 64%

As seen in the above table, investment B yields a higher return than investment A. Every investor
who wants to invest their own money is looking for a higher rate of return on their investment
within a shorter time frame. In the aforementioned examples, Sunil, the investor, receives a greater
return price on his second financial investment, or 0.64% percent. He must choose the second
option in order to invest his money. The second option has a higher chance of providing him with a
higher rate of capital returns in the same amount of time than option "A." As rupees, 1 lakh was
invested for five years at an 8 percent interest rate compounded quarterly yields , about a 0.48
percent return. On the second choice, he is investing a total amount of rupees 1 lakh at the price of
10 percent for five years, on which he is getting is 0.63 percent returns.

Sunil should choose B. Since the second option has more potential rewards.

CONCLUSION
A wide variety of assets are available for individual investment, including stocks, mutual funds,
bonds, fixed deposits, money, money market funds, and real estate. Depending on their risk
appetite, a person may purchase any of these assets. The best option for someone who dislikes
taking risks is down payment; the best choice for someone who is willing to take some risks is
mutual funds; and the best choice for someone who is willing to accept risks and is financially savvy
is stocks.

Ans. 3 (b)

INTRODUCTION

A debenture, a type of bond, is also an asset. It is a financial obligation instrument with collateral
that is financially risky. Debentures are issued in exchange for the provider's good standing and
reputation. One of the ongoing financial obligations that can be used to pay for services.

CONCEPTS AND ANALYSIS

The answer provided below has been developed in a clear step by step manner.

Step: 1

i). Calculation of current yield;

Formula;

Current yield = Annual coupon amount / Market price

100 × 0.06
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑 = = 0.0611
98.20

Current yield = 0.0611 or 6.11%

ii). Calculation of current yield;

Formula;

Current yield = Annual coupon amount / Market price

100 × 0.06
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑 = = 0.0588
102
Current yield = 0.0588 or 5.88%

The term "return" refers to the entire increase in value of a bond or debenture over time. In the first
of the examples above, the par value is 100, the interest rate is 6%, and the current market value is
98.20, resulting in a calculated current yield of 6.11%.

We can generate 5.88% current returns with a second market value of 102 and a 6-percent interest
rate.

To get the current yield, divide the annual interest rate by the market price. Bond cost and yield are
indissociably connected. The present return, the debenture rate, and the current yield all increase in
proportion to the cost of the bond or debenture.

The market price in the first instance is less than the market price in the second. The current return
is 6.11% in the first example's market price of 98.20, but it is 5.88% in the second example's market
price of 102. This shows that the higher the market price, the lower the current yield, and the higher
the market price, the greater the current return.
CONCLUSION

The preceding examples allow us to draw the conclusion that the existing return is higher when a
bond's market cost is lower and the present yield is lower when a bond's market cost is higher.
According to the aforementioned examples, higher market prices result in lower profits and lower
market prices produce greater profits.