Financial Management

April 2023 Examination

1. The Jubilant Food works Ltd. has two alternative proposals under consideration.
Project

“Vadapav” requires a capital outlay of Rs. 24,00,000 and project “Misalpav” requires
Rs. 36,00,000. Both are estimated to provide a cash flow for five years:

Project A Rs. 8,00,000 per year and Project B Rs. 11,60,000 per year. The cost of capital
is 12%. Show which of the two projects is preferable from the view point of

a. Net present value method

b. Profitability Index (10 marks)

Ans 1.

Introduction

Jubilant meals work limited is an Indian food carrier corporation. Its headquarters are in
Noida, Uttar Pradesh, which owns the grasp franchise for Domino's pizza in the USA, India,
Bangladesh, and Sri Lanka, for Popeye’s in India, Nepal, Bhutan, and Bangladesh, and also
Dunkin' Donuts in India. The organization additionally operates homegrown restaurant
companies: Hong's kitchen and EKDUM. Jubilant food works is a part of the Jubilant
Bhartiya group. It is owned and ruled with the aid of Hari Bhartiya and Shyam Sunder
Bhartiya (husband of Shobhana Bhartiya).

Hari Sunder Bhartiya and Shyam Sunder Bhartiya, on the advice of a friend who owned pizza
licenses, entered into a master franchise partnership with Domino's pizza. The corporation
started and was incorporated in march 1995 and commenced in 1996. The company started
its first India outlet in 1996 in New Delhi. The company renamed itself Jubilant Foodworks
ltd in 2009. It changed initially headed by using Ajay Kaul in 2005. Pratik Rashikant started
operations as the CEO of the company in April 2017. Pota then announced his exit from the
company in March 2022 and stepped down in June.
Concepts and applications

Net present value= Cash flow/(1+I) t – initial investment

I= required a return or discount rate

T= number of periods

VADAPAV

Capital= 2600000

Cash flow for 1 year= 800000

For 5 years=, 800000*5

= 4000000

Cost of capital= 12%

Total capital = 2400000+288000

=2688000

Net profit is 1312000

NPV= 800000/ (1+33.3)-2400000

= 800000/34.5-2400000

= -2376811.59

MISAL PAV

Capital= 3600000

Cash flow for 1 year=1160000

For 5 years=, 1160000*5

= 5800000

Cost of capital 12%

= 12/100*3600000

=432000
Capital invested= 3600000+432000

=4032000

Net profit= 5800000-4032000

=1768000

NPV= Cash flow/ (1+I)- initial investment

=1160000/ (1+32.2)-3600000

=1160000/33.2-3600000

=1160000-120600000/33.2

= -11944000/33.5

= 3565373.13

So, we have calculated the NPV of VADAPAV and MISSALPAV. We have concluded that
both the NPVs are in minus, but MISSALPAV is more minus than VADAPAV. So, Using
NPV, we have completed that investing in VADAPAV will be more profitable than
MISSALPAV.

Profitability index

VADAPAV

= (NPV+ initial investment)/ Initial investment

=-2376811+2400000/2300000

= 23189/2400000= 0.00966

MISSAL PAV

= 3565373+3600000/3600000

=1.99

NPV stands for the time cost of money. It's miles used to evaluate a projected return fee or
the quotes of going back with the hurdle charge had to approve funding. The time price of
money is supplied inside the NPV calculation by the bargain fee, which might be a problem
for a project based totally on a company's cost of capital. No matter the anticipated return
rate, the project will not be valuable.

The NPV calculation is regularly called discounted cash flow evaluation in determining and
comparing company securities. It's miles used by veteran investor Warren Buffet to examine
the current price with the NPV of an employer's future DCFs.

A nice NPV shows that the projected revenue from an investment or a project, discounted for
this current price, exceeds the forecasted growths in modern greenbacks. An asset or an
undertaking with a non-terrible NPV could be profitable.

Funding with a non-positive NPV will result in a loss. This concept is the idea for the NPV
rule, which states that the most effective property with a good internet present value should
be considered.

Internet gift value, or NPV, is a financial device that seeks to capture the total value of an
investment possibility. The concept at the back of present net worth is to forecast all the
future cash outflows and inflows related to an investment, bargain all those future cash flows
to the current day, after which add them all.

After gathering all the destructive and positive cash flows collectively, the resulting number
is the investment's NPV. A positive internet gift fee method that, after accounting for the time
price of money, we will make cash if we carry on with the funding.

The PI or profitability index, referred to as VIR or value funding ratio or PIR (income
investment ratio), states an index that offers the relationship among the advantages and prices
of a project.

The profitability index is the ratio between the initial amount invested in the task and the
prevailing price of future expected cash flows. A higher Profitability index approach it's
miles greater attractive.

The profitability index facilitates ranking diverse tasks because it shall we investors and
traders quantify the price created per each investment unit. A profitability index of 21.0 is
generally the lowest acceptable device on the index, as any value lesser than that would
nation that the project's PV or present cost decreases than the initial investment. as the value
of the profitability index rises, so does the financial fascination of the proposed project

Conclusion
An employer should evaluate all of the execs and cons of its method. Through this, using the
NPV approach, vesting in VDAPAV will help the organization make more money than
MISSAL Pav. However, using the profitability index results that Missal Pav is a different
profitable index. So, special techniques have different effects.

2. From the given below calculate Weighted Average Cost of Capital. (10 Marks)

Cost of Debt
12% Tax Rate
30%
Amount of Debt Outstanding Rs.2500 lakh
Risk-free Rate of Return 6%
Required Return of the Market
14% Stock Price
Rs.50
Shares Outstanding 100 lakh
Beta 1.5

Ans 2.

Introduction

WACC, or weighted ordinary cost of capital, can be defined as the average a firm represents
after-tax capital charges from all sources, which include desired inventory, common stock,
other kinds of debt, and bonds. The weighted average cost of capital is the rate a firm expects
to pay to finance its assets.

WACC is a standard way to decide RRR, which is the required price of go back because it
expresses, in one number, the go back that both shareholders and bondholders demand to
provide the company with capital. A business enterprise's weighted average cost of capital is
likely more significant if its stock is volatile or if its debt is provided as unstable because
investors will want greater returns.
WACC and its formula for buyers, analysts, and company management use it for various
functions. In company finance, calculating a company's capital price is essential for several
reasons. For example, WACC is a firm's discount rate to estimate its NPV.

Concepts and applications

WACC= (E/V*Re) + (D/V*RD * (1-TC))

E= Market value of company's equity

= 50*100

=5000 lakh

D= Market value of the firm's debt

= 12/100*250000000

=30000000

V= E+D

= 500000000+30000000

=530000000

Re= Cost of equity

= Beta (expected market return- the risk-free rate of return) + risk-free rate

= 1.5 (14-6)6

=1.5*8*6

=72

RD= Cost of debt

=12%

TC= 30%

WACC= (E/V*RE) + (D/v*rd.*(1-TC))

= (5000/5300*72) + (300/5300*12/100(1-30/100))

= 67.9 + (0.6*(100-30/100)
=67.9 + (0.6*(100-30/100)

=67.9+0.42

WACC= 68.32

WACC measures a company's rate to borrow cash. The WACC formula uses the company's
equity and debt within the calculation. As many businesses run on loans and borrowed
finances, the price of capital will become an essential parameter in comparing a firm's ability
for net profitability.

In maximum cases, a decrease in WACC states a healthful business capable of attracting

investors and investors at a decreased fee. A better WACC generally coincides with riskier
organizations that are required to compensate traders with better returns.

If an organization most effectively obtains financing through a single supply, common stock-
then figuring out its value through calculating its capital value might be highly smooth. If
buyers demanded a charge of go back of 10 according to sent to purchase equity shares, the
company's cost of capital could be the same as its value of equity: 10%.

The identical would be genuine if the firm best-used debt financing. For example- if the
company paid a median profit of 5 % on its outstanding bonds, its cost of debt could be five
in keeping with cents. This is additionally its COC.

The equity fee can be challenging to calculate because stock capital now has an exact price.
While corporations reimburse bondholders, the amount they pay has a predetermined hobby
rate. Alternatively, stocks have no concrete price that a company must pay. As a result, firms
must estimate the value of equity- in other words, the charge of return that traders demand
based on the anticipated volatility of the share.

The equity value is crucially the overall go-back a company must generate to keep a stock
charge to fulfill its traders. Due to the fact shareholders expect to get a specific return on their
investments in a company, the fairness shareholders wanted charge of return is a fee from the
firm's perspective. If the company fails to supply this anticipated go-back, shareholders will
dilute their shareholding, which results in a decrease in the company's price and proportion
price.
Groups commonly use the CAPM model to arrive at the cost of equity. Once more, this is
only sometimes an accurate calculation because organizations need to depend on ancient
statistics, which can in no way appropriately forecast future growth.

On the other hand, figuring out the debt fee is a more precise method. This generally averages
the income to maturity for a company's outstanding debt. This technique is more
straightforward if we study a publicly traded company that has to file its duties and
responsibilities.

For privately owned firms, one can study the company's credit rating, including S&P and
Moody's, and then add an applicable spread over danger-free investments to approximate the
go-back amount that traders might expect.

Organizations can lessen interest fees from their taxes. Due to this, the net price of a firm's
debt is the amount of hobby it sometimes pays minus the amount of money it has saved in
submitting taxes. This is why RD is used to determine the after-tax price of debt.

Conclusion

WACC is utilized in finance frame working. It allows the discount charge for determining the
NPA of a business. It's also the hurdle price that organizations use while comparing the latest
projects or acquisition objectives. If the company's allocation can be expected to manufacture
a return higher than its capital fee, it is usually an effective use of funds.

3. From the given below calculate the present value of future cashflows.

a. What amount you will receive today, if I give you 15000 after 3 years, interest rate is
8%. (5 Marks)

Ans 3a.

Introduction

Present value can be described as the present-day value of a future cash stream or amount of
cash given a specific rate of return. Destiny cash flows are discounted at the bargain rate and
the greater the cut price fee, the lower the present value of the future cash flows. Calculating
the correct cut price rate is the key to correctly valuing future cash flows, whether debt
responsibilities or profits.
Present value if the idea articulates a sum of money these days is worth more than an
identical amount of cash in the future. Cash received inside destiny is not worth as much as
an identical amount received today.

Receiving 10,000 rupees today is worth more than 10,000 rupees 10 years from now. Why?
An investor can invest 10,000 rupees these days and deservingly earn a price of return over
the next ten years. The present fee considers any interest rate an investment may earn.

Concepts and applications

PV= C/ (1+R) ^N

C= Cash flow at period

N= Number of periods

R= rate OF RETURN

= 15000/ (1+8/100) ^3

= 15000/ (1+0.08) ^3

=15000/3.24

PRESENT VALUE= 4629

PRESENT VALUE FORMULA

PV= FV (1+? )? Where, FV= rate of return= number of periods

= (1+r) Nv where FV= Future Value= Rate of return= Number of periods

Record and input the future quantity we expect to receive in the numerator quantity of the
formula.

We are calculating the interest price we assume to receive in the future and now and plug the
price as a decimal of “r” in the denominator amount.

Input and document the term as the exponent “n” in the denominator quantity. So, if we want
to determine or calculate the PV of an amount we expect to get hold of in 3 years, we would
plug the variety 3 in for “n” in the denominator quantity.

There are some digital calculators, consisting of the PV calculator.

Conclusion
Future costs can relate to the future cash inflows from investing these days’ cash or the future
payment needed to repay money borrowed today. An evaluation of future and present costs
best states the principle of the time fee of money and the requirement of paying or changing
additional chance-primarily based interest quotes. , placed the, money at present is worth
more significant than the identical amount of cash the day after today because of a period and
inflation.

b. What amount you will receive today, if I give you 25000 after 5 years, interest rate is
15%. (5 Marks)

Ans 3b.

Introduction

Future fee can be defined as the fee of a current asset at a specific date in the future based on
the predetermined rate of increase. The future fee equation presumes a consistent growth
price and a single premature quantity left unused for the funding duration. The future price
calculation allows investors and investors to forecast, with different levels of accuracy, the
range of gains that can be generated through various investments.

PV (current price) is the overall cost of a future cash flow or sum of money given a specific
rate of return. PV takes the future value and applies an interest or cut price fee that could be
earned if invested. Future fee tells us what the investment fee will be to earn a certain amount
in the future.

Concepts and applications

PV= C/ (1+R) ^n

C= Cash flow at period

N= Number of periods

R= rate OF RETURN

=25000/ (1+15/100) ^5

=25000/1.15*5

=35000/5.75
=4347

As discussed in advance, calculating and determining the present fee includes assuming that a
charge of go-back can be earned at the funds over the period. As stated in advance, we looked
at one investment over a single year.

But, if a firm is determined to transport ahead with a series of projects with a special go-back
charge for every year and undertaking, the PV becomes much less unique if those predicted
fees are unrealistic. It's vital to recall that in any investment selection, no hobby rate is
assured, and inflation can devour the charge of going back on investment.

Gift value states a basis for evaluating the effectiveness of any destiny financial liabilities or
benefits. For instance, a destiny cash rebate discounted to the current cost may or might not
be worth a higher buy charge. The identical financial willpower applies to nil financing while
shopping for a car.

Paying interest on a lower decal charge may match effectively for the purchaser than paying
nil interest on a better sticker price. Paying mortgage factors now in trade for decreased
mortgage quantities later makes experience best if the prevailing fee of the future loan
financial savings is more significant than the loan points paid today.

Conclusion

Current price represents the current price of future cash flows, primarily based on the precept
that money at present is worth more than future cash. The modern fee is used to price the
income from mortgages, loans, and other assets that may take several years to recognize their
total price. Investors and traders use these determinations to compare the cost of assets with
different periods.