Course: Corporate Finance

Internal Assignment Applicable for December 2022

Examination

1. Refer the published Balance Sheet of any listed Company. Identify its
sources of funds.
Explain any 4 in brief. (Balance Sheet need not to be copied or pasted in
the answer)
Compare and rank the sources identified with respect to their cost to the
company (high, low). Discuss your observation.

Ans.
WIPRO LTD. (WIPRO)

SOURCES 2022 2021 2020

OF FUNDS

Share Capital 1096.40 1095.80 1142.70

Reserves 53254.30 44145.80 45311.00

Total 54350.70 45241.60 46453.70

Shareholders
Funds

Secured 0 0 0
Loans

Unsecured 10962.90 8435.00 7742.10

Loans

Total Debt 10962.90 8435.00 7742.10

Total 65313.60 53676.60 54195.80

Liabilities
SOURCES OF FUNDS

There are four major sources of funds:

1. Share Capital:-

The term “share capital” refers to the amount of money the owners of
a company have invested in the business as represented by common
and/or preferred shares.

Share capital is different from shareholders’ equity because it does

not include retained earnings: It is made up only of the equity owners
have put into the company by purchasing shares.

Shareholders of Wipro Ltd as on 31-3-2022

Shareholders (as on March 31, 2022) Shareholding

Promoter group led by Azim Premji 73%

Foreign Institutional Investors 9%

Domestic Institutional Investors 3%

Non-Institutions (Retail) 6%

Overseas Depositories 3%

Other Public Shareholding 6%

Employee trust 0.29%

 2. Bonds and debentures (debt)

Bonds are debt financial instruments issued by large corporations, financial

institutions and government agencies that are backed up by collaterals or
physical assets. There are no bonds or debentures in Wipro ltd.

Debentures are debt financial instruments issued by private companies, but

any collaterals or physical assets do not back them up. debentures may pay
periodic interest payments called coupon payments. Like other types of
bonds, debentures are documented in an indenture. An indenture is a legal
and binding contract between bond issuers and bondholders. The contract
specifies features of a debt offering, such as the maturity date, the timing of
interest or coupon payments, the method of interest calculation, and other
features. Corporations and governments can issue debentures.

3. Retained earnings (profit the company makes, but does not give to the
shareholders in the form of dividends)

Retained earnings are the amount of profit a company has left over after
paying all its direct costs, indirect costs, income taxes and its dividends to
shareholders. This represents the portion of the company's equity that can be
used, for instance, to invest in new equipment, R&D, and marketing.

Retained Earnings of Wipro limited is 53254.30 Cr

Companies can also tap new innovative and hybrid sources of funds
depending upon their availability and feasibility like external commercial
borrowing (ECB), foreign equity like American depository receipt (ADR) and
options.

Each of these funding sources comes at a price. The price of each capital
item is knowable. For all firms, knowing the cost of a certain source of capital
is crucial since it indicates whether it is high or cheap. cost financing sources
Each money source has a unique risk over a unique time frame, hence each
fund source will incur a unique cost. On the company's assets and profits,
creditors or dele lenders have priority over equity holders. Priority
shareholders are paid before debt holders, followed by preference
shareholders, and last equity holders. The business is required by law to pay
its creditors before distributing dividends to investors. Once more, preference
shareholders are entitled to compensation after creditors but before equity
shareholders.

After every dollar that the business has as a liability is paid out, equity
owners are entitled to the remaining assets and earnings. They get dividend
payments from the cash that is left over after paying interest, taxes, and
preference dividends. Once more, the corporation is not required to pay
dividends to stock investors on an annual basis. Dividends may or may not
be paid by the corporation. Occasionally, the corporations do not have
enough cash on hand to pay them, and other times, bonuses are given in
place of cash dividends. However, only bonus issues are prohibited in India.
The regular cash dividends are given in addition to bonus shares. Equity
capital is therefore riskier than both debt and preference capital.

Since the different sources of funds have different risks, investors require
different rates of return on various securities, thereby causing different.

2.M/s Priya Industries Ltd. is evaluating 2 options of investments. Each one

has the
following mentioned Cash Flows. Rate of Interest is 5%.
Evaluate the projects using:
i) Pay-back period
ii) NPV
iii) IRR
(Show the calculations for each method.)
Which option you as the Chief Finance Officer of the Company would you
select? Give reasons.
Year A B
0 40000 50000
1 5000 8500
2 12000 15000
 3 10000 12000
4 12500 12300
5 10500 10500

Ans.

i) Payback Period Method is the simplest and most widely used method.
Payback period is the time required to recover the initial investment. A firm
is always interested in knowing the amount of time required to recover its
investment.

It is based on the concept of cash flow and is a non-discounting technique.

Formula for Payback period :-

Plan A
Year Annual Cash Inflows (Rs) Cumulative Cash Inflows (Rs)

1 5000 5000

2 12000 17000

3 10000 27000

4 12500 39500

5 10500 50000

Payback period shall lie between 4 to 5 years.

Since up to 4 years, a sum of ` 39,500 shall be recovered and balance of ` 500 shall be
recovered in the part (fraction) of 5th year, computation is as follows:

Part of 5th year = Balance Cash outlay = 500 = 0.0476year

th
Cummulative Cash Inflow at 5 year 10500

Thus, total cash outlay of ` 40,000 shall be recovered in 4.0476 years time.
Plan B

Year Annual Cash Inflows (Rs) Cumulative Cash Inflows

(Rs)

1 8500 8500

2 15000 23500

3 12000 35500

4 12300 47800

5 10500 58300

Payback period shall lie between 4 to 5 years.

Since up to 4 years, a sum of ` 47,800 shall be recovered and balance of ` 2,200 shall be
recovered in the part (fraction) of 5th year, computation is as follows:

Part of 5th year = Balance Cash outlay = 2200 = 0.2095year

Cummulative Cash Inflow at 5th year 10500

Thus, total cash outlay of ` 50,000 shall be recovered in 4.2095 years time

ii) NPV

The net present value technique is a discounted cash flow method that
considers the time value of money in evaluating capital investments. An
investment has cash flows throughout its life, and it is assumed that an
amount of cash flow in the early years of an investment is worth more than
an amount of cash flow in a later year. The net present value method uses a
specified discount rate to bring all subsequent cash inflows after the initial
investment to their present values (the time of the initial investment is year
0).
Net present value= Present value of net cash inflow-Total initial investment

Plan A

Year Annual Cash Inflows (Rs) PVIF @ 5% Cumulative Cash Inflows

(Rs)

0 (40000) 1 (40000)

1 5000 0.9524 4762

2 12000 0.9070 10884

3 10000 0.8638 8638

4 12500 0.8227 10284

5 10500 0.7835 8227

Net Present Value 42795

Net present value = Present value of net cash inflow - Total net initial investment

= 42795 – 40000

= 2795 rs

Plan B
Year Annual Cash Inflows (Rs) PVIF @ 5% Cumulative Cash Inflows
(Rs)

0 (50000) 1 (50000)

1 8500 0.9524 8095

2 15000 0.9070 13605

3 12000 0.8638 10366

4 12300 0.8227 10119

5 10500 0.7835 8227

Net Present Value 50412

Net present value = Present value of net cash inflow - Total net initial investment

= 50412 – 50000

= 412 rs

iii) Internal Rate of Return Method (IRR):-

The internal rate of return method considers the time value of money, the initial
cash investment, and all cash flows from the investment. But unlike the net present
value method, the internal rate of return method does not use the desired rate of return
but estimates the discount rate that makes the present value of subsequent cash
inflows equal to the initial investment.

This discount rate is called IRR. IRR Definition: Internal rate of return for an investment
proposal is the discount rate that equates the present value of the expected cash
inflows with the initial cash outflow. This IRR is then compared to a criterion rate of
return that can be the organization’s desired rate of return for evaluating capital
investments

Plan A

At Rate 5%
Year Annual Cash Inflows (Rs) PVIF @ 5% Cumulative Cash Inflows
(Rs)

0 (40000) 1 (40000)

1 5000 0.9524 4762

2 12000 0.9070 10884

3 10000 0.8638 8638

4 12500 0.8227 10284

5 10500 0.7835 8227

Net Present Value 42795

Less: Initial Investment 40000

NPV 2795

At Rate of 8%

Year Annual Cash Inflows (Rs) PVIF @ 8% Cumulative Cash Inflows

(Rs)

0 (40000) 1 (40000)

1 5000 0.9259 4630

2 12000 0.8573 10288

3 10000 0.7938 7938

4 12500 0.7350 9187

5 10500 0.6806 7146

Net Present Value 39189

 Less: Initial Investment 40000

NPV (811)

IRR = LR+ NPV at LR ×(HR -LR)

NPV at LR - NPV at HR

=5+ 2795 x (8-5)

2795 – (811)

= 5 + 2795 x 3
3606

= 5 + 2.325

= 7.325 %

Plan B

Year Annual Cash Inflows (Rs) PVIF @ 5% Cumulative Cash Inflows

(Rs)

0 (50000) 1 (50000)

1 8500 0.9524 8095

2 15000 0.9070 13605

3 12000 0.8638 10366

4 12300 0.8227 10119

5 10500 0.7835 8227

Net Present Value 50412

Less: Initial Investment 50000

NPV 412

Year Annual Cash Inflows (Rs) PVIF @ 8% Cumulative Cash Inflows

(Rs)

0 (50000) 1 (40000)

1 8500 0.9259 7870

2 15000 0.8573 12860

3 12000 0.7938 9526

4 12300 0.7350 9041

5 10500 0.6806 7146

Net Present Value 46443

Less: Initial Investment 50000

NPV (3557)

IRR = LR+ NPV at LR ×(HR -LR)

NPV at LR - NPV at HR

=5+ 412 x (8-5)

412 – (3557)

= 5 + 412 x 3
3969
= 5 + 0.3114

= 5.3114 %
Thus ,

M/s Priya Industries Ltd should accept plan A of investment due to,

i) In case of payback period , payback period for Plan A is less as

compared to Plan B
ii) In case of NPV method , NPV of Plan A is greater than that of Plan
B
iii) In case of IRR method , IRR of Plan A is greater than that of Plan B.

3. a. Sunil is valuating 2 investment proposals:

i) Invest Rs. 3 lacs for 5 years earn an interest of 8% compounded
quarterly.
ii) Investment of Rs. 20,000 per year for 5 years @ 10% compounded
quarterly.
Which option should he go for and why?

Ans.

i)

P = 3 lakhs

t = 5 years

interest 8% compounded quarterly

n=4

r=8%

FV =P(1+r)txn
n

FV =300000( 1 + 8 ) 5*4
4
 FV =300000( 1 + 2% ) 20

FV =300000( 1.02 )20

=300000 ( 1.4859 )

FV =445770 rs

By investing lumpsum 3 lakhs Sunil received 445770rs in return.

ii)

R = 20000

FVIFAr%,n = 14.97889

FV = R X FVIFAr%,n

= 20000 X 14.97889

= 299578 rs

Investment of Rs. 20,000 per year for 5 years @ 10% compounded quarterly
gives a return of 299578rs

Thus Sunil should go for 2nd proposal.

3.b. Sanjana has a debenture of Par-value Rs. 100/- @ 6%. Calculate its
current yield if:
i) Market Price is Rs. 98.20
ii) Market Price is Rs. 102.00
What inference can you draw from this about the relation between Market
price and
yield?

Ans.
CURRENT YIELD OF BONDS

The current yield of a bond calculates the rate of return on a bond by using the
market price of the bond instead of its face value. It is calculated as the annual
coupon payment divided by the current market price. The current yield is an
accurate measure of bond yield as it reflects the market sentiment and investor
expectations from the bond in terms of return.

The current yield of a discount bond is greater than the annual coupon rate
because of the inverse relationship that exists between the yield of a bond and its
market price. Similarly, the yield on a premium bond is lower than its annual
coupon rate and equal for a par bond. The reason why current yield fluctuates
and deviates from the annual coupon rate is because of the changes in interest
rate market dynamics based on Inflation expectations of the investors. he current
yield is the bond's coupon rate divided by its market price. Price and yield
are inversely related and as the price of a bond goes up, its yield goes down.

Current yield is the return received by an investor on maturity of a bond

The current yield determines the annual percentage return on the bonds
debentures held by the investor. In other words, current yield determines
the percentage of the actual rupee interest payment to the market price of
the bond. current yield is an investment annual income divided by the
current price of the security .

The current yield is calculated as follow

1. When market price is 98.2 if market price is 98.2 current yield is

{6/98.20} x 100
= 6.10 %

2. When market price is 102 if market price is 102 the yield is

{6/102} x 100
= 5.88
= 5.9 %
The yield and bond price have an important but inverse relationship. When the
bond price is lower than the face value, the bond yield is higher than the
coupon rate. When the bond price is higher than the face value, the bond yield
is lower than the coupon rate. So, the bond yield calculation depends on the
price of the bond and the coupon rate of the bond. If the bond price falls, the
yield rises, and if the bond price rises, the yield falls.

Let us understand why this is the case:1. When interest rates fall, it causes a
fall in the value of the related investments. However, bonds that have been
issued will not be affected in such a way. They will keep paying the same
coupon rate as issued from the beginning, which will now be at a higher rate
than the prevailing interest rate. This higher coupon rate makes these bonds
attractive to investors willing to buy these bonds at a premium.

2. Conversely, when interest rates rise, newer bonds will pay investors better
interest rates than existing bonds. Here, the older bonds are less attractive
and will drop their prices as compensation and sell at a discounted price