Time value of money:

Compunding concept FV=PV*(1+r)^n Effective int rate

Annually FV ₹ 125,971.20

Half year n 6
r 0.04 ₹ 126,531.90 0.0816

Quarterly n 12
r 0.02 ₹ 126,824.18 0.082432

Monthly n 36
r 0.006666667 ₹ 127,023.71 0.083

Fortnightly n 72 Assume 360 days in a year

r 0.003333333 ₹ 127,074.19 0.083143 24

Weekly n 21 Assume 52 weeks in a year

r 0.011428571 ₹ 127,101.47 0.082796

Daily n 1095 Assume 365 days in a year

r 0.000219178 ₹ 127,121.57 0.083278 Highest returns in daily

10000 evert year for five years at 8% int

FV ₹ 58,666.01 All investments are made at the end of each year.

FV ₹ 63,359.29 Investments are made at the beginning of the year.

Company-Surplus cash of 500000. Invest at 7.5% p.a.

In how many years the investment will double?

PV 500000
FV 1000000
r 0.075
n 10

Company has 500000, and wants 1500000 by the end of 15 years.

What should be the rate of return?
PV 500000
FV 1500000
n 15
r 8%

Sinking fund/Depreciation fund

Company invests 10000 p.a. each year for the next 10 years.
It would like to have 150000 at the end of 10th year.
What is the rate?
Pmt 10000
FV 150000
n 10
r 9%

10000 p.a. at 9%. Wants to have 90000

How many years will it be able to attain it?
Pmt 10000
FV 90000
n 7
r 9%

Rule of 72 800
Discounting concept
15000 by the end of the year at 8%
PV
10208.74796

10208.74796
₹ -10,208.75

₹ -9,313.82 PV of all expected future cash flows.

₹ -10,424.66

FV Value today PV of cash flow

1 2500 0.909 2272.727 If I invest today, I will get this much
2 2500 0.826 2066.116
3 2500 0.751 1878.287
4 2500 0.683 1707.534
5 2500 0.621 1552.303
9476.967 Total PV of all cash flows

Uneven cash flows:

FV PV Interest factor PVCF
1 1500 0.909 1363.636
2 2250 0.826 1859.504
3 3890 0.751 2922.615
4 4510 0.683 3080.391
5 4800 0.621 2980.422
12206.57 Total PV of all future cash flows
If you receive rs 1 at the end of the year the PV of it will be 0.909

Chapter 4 pg 125 CF session 5

Q1: Q11 Cash flow Rate
a) ₹ 82,282.37 A 7000 12%
b) ₹ 236,801.16 B 28000 8%
c) ₹ 164,281.60 C 10000 14%
d) ₹ 161,243.14 D 150000 11%
E 45000 20%
Q2
Half yearly Q12
a) n 20 a) ₹ 306,902.35
r 5.25%
PV ₹ -203,051.57 Q13
PV ₹ -408.15
b) n
r Q15
PV a) 6% ₹ -558,394.78
9% ₹ -422,410.81
 12% ₹ -321,973.24

Q16
FV Years
A 28500% 3
B 54000% 9
C 160000% 20

Q17
Price
Rate=10% A 18000
B 600
Q5: SBI C 3500
r .085/12 Type 1 D 1000
n 2*12
Pmt -2000 if the current rate is more than 10% then it is accepted
FV ₹ 52,490.06
Q18
Q6 Annuity of annuity Rate
FV (RD-1 yr) ₹ 24,957.43 A 2500 8
FV ₹ 27,203.60 B 500 12
C 30000 20
Q7 D 11500 9
PV ₹ -303,978.67 E 6000 14

Q8 Q19
PV ₹ 411,140.73 Annuity amt Rate
A 12000 7
Q9 B 5000 12
PV ₹ 398,032.61 C 700 20
Do not accept the offer. D 140000 5
E 22500 10
Q10
Quarter Q22
n 24 6*4 PV ₹ -117,870.96
r 11.5%/4
FV ₹ 338,923.66 Q23
a) PV 173876
Q12 b) PV 31024
Rate 7%

Q13 concept of perpetuity

No. of yrs 8 yrs Something that is forever
cf/r
Q14
a) ₹ 32,622.25 Annually
b) ₹ 66,747.96 Half-yearly
c) ₹ 135,067.59 Quaterly
d) ₹ 408,426.59 Monthly

Q15
FV ₹ 19,661.44
PMT ₹ -4,956.82

Q18
RATE
Yearly 16.16%
Half-yearly 7.78% 15.55% Equate it for annual
Quarterly 3.82% 15.26%
Monthly 1.26% 15.07%

Q27
PV ₹ -90,674.38

Q29
No. of yrs 12.4 yrs

Q30

Part A ₹ 414,657.60 Invest this for 5 years at 9.5%

FV ₹ 652,770
₹ 1,067,427.66 8 years
Part B ₹ 1,528,444.98

Total ₹ 2,595,872.63 End of 8 years

Years PV
4 ₹ -4,448.63
20 ₹ -6,007.35
12 ₹ -2,075.59
6 ₹ -80,196.13
8 ₹ -10,465.56

b) ₹ -417,265.06
₹ -274,538.04
 ₹ -182,696.26

PV
₹ -20,838.95 Accept
₹ -21,109.94 Accept
₹ -19,845.43 Reject, bcz less than 20000

Cash flow(FV) Years PV Rate

30000 5 ₹ -18,627.64 11% Accept
3000 20 ₹ -445.93 8%
10000 10 ₹ -3,855.43 11% Accept
15000 40 ₹ -331.42 7%

e than 10% then it is accepted

Years Ordinary annuity Annuity due

10 ₹ 36,216.41 ₹ 39,113.72
6 ₹ 4,057.59 ₹ 4,544.51
5 ₹ 223,248.00 ₹ 267,897.60
8 ₹ 126,827.45 ₹ 138,241.92
30 ₹ 2,140,721.08 ₹ 2,440,422.03

Years Ordinary Annuity Annuity due

3 ₹ 38,578.80 ₹ 41,279.32
15 ₹ 186,398.57 ₹ 208,766.40
9 ₹ 14,559.23 ₹ 17,471.08
7 ₹ 1,139,881.18 ₹ 1,196,875.24
5 ₹ 137,364.75 ₹ 151,101.23
Investment Decision
What Why and How?
Capital expenditure decision/capex/Projects/ investment in fixed assets

Q. What are the different forms of investment decision?

1. Starting a new business
2. Existing business houses- new segments- related/unrelated to existing business
3. Investing in fixed assets- land,building, software/hardware/AI tools.
4. Replacement of existing assets
5. Overhaul of existing assets.
6. Acquire/ Merger/ Takeover

Q. Why?
Initial investment is very huge
Irreversible
Funds belong to stakeholders
Availability if funds are limited.

Capex proposal
How much are you planning to invest
What are the expected future benefits from the project
Opportunity cost/ Cost of capital/ Discount rate

Accoounting profit V/S cash flows

Bad debts, depreciation= non cash expenses
Cash flows= Profit after tax+ cash charges

Q. How to evaluate capex proposals?

a. Does not consider time value of money
b. Considers time value of money

a Payback method- in how many years I will recover the investments??

A B mutually exclusive proposals
Payback 2 yrs 4yrs

Ques
Project A
0 -100000 CCF
1 2500 2500
2 25000 27500
3 30000 57500
4 40000 97500 Between 4th and 5th year
5 25000 122500
6 25000 147500
7 25000 172500
8 25000 197500
 PB 4.1 years
1.2
36
4 years and 36 days
Project B as it has llower payback period
Limitations:
1. Post payback cash flows are not considered
2. Time value of money is ignored

What is time value of money is considered by payback method- Discounted payback method

Project B PVIF PVCF CPVCF

0 -100000
1 2500 0.90909090909 2272.727272727 2272.7272727
2 25000 0.82644628099 20661.15702479 22933.884298
3 30000 0.7513148009 22539.44402705 45473.328325
4 40000 0.68301345537 27320.5382146 72793.866539
5 25000 0.62092132306 15523.03307648 88316.899616
6 25000 0.56447393005 14111.84825134 102428.74787
7 25000 0.51315811823 12828.95295577 115257.70082
8 25000 0.46650738021 11662.68450524 126920.38533
Payback Period 5.827893 yrs

Pg no. 222, Q: 1,2,3

Q1 If you are getting equal sum of money( annuity)
Initial investmen 560000
Each year CF 80000 annuity
PB Initial investment/Average annual cash flow
7 yrs

Q2 Interest rate is 8%, what is the discounted PB?

NPER 10.67 10 yrs, 240 days approx

Q3 Years Cashflow CCF

1 520000 520000
2 365000 885000
3 385000

No. of yrs 2.30 Yrs

Techniques considering TVoM

Net present value(NPV)
Initial investment
Expected benefits throughout the life of the project - cash flow
Cost of capital/opportunity cost/discount rate
 Investement with PV of all your expected cash flows

Independent projects - NPV should be positive - select a project

Mutually exclusive - project with higher NPV will be considered
Example
R=8% PVIF PVCF
0 -500000
1 150000 0.93 138888.88889
2 300000 0.86 257201.64609
3 125000 0.79 99229.030128
Total PV of cash flows 495319.56511
Initial investement 500000
Net present value -4680.434893

Reject the project

Q4
R=12%
NPV ₹ 1,029,296.87
₹ 29,296.87

Q5
a) r 9% n 8 yrs
Initial invs 450000
Cf 75000

PV ₹ -415,111.43
NPV -34888.57 Reject

b) r 10% n 7 yrs
Initial invs 675000
Cf 86000

PV ₹ -418,684.02
NPV -256315.98 Reject

c) r 12% n 8 yrs
Initial invs 2500000
Cf 500000

PV ₹ -2,483,819.88
NPV -16180.12 Reject

d) r 10.50% n 4 yrs
Initial invs 30000
Cf 10000

PV ₹ -31,358.58
 NPV 1358.58 Do not reject

Q6
Project A Project B
Initial invs 3000000 Initial invs 2400000
Cf 550000 Cf 600000
n 7 yrs n 5 yrs
r 12.50% r 12.50%

PV ₹ -2,470,765.50 PV ₹ -2,136,341.00
NPV -529.23 NPV -263.65
-529234.5 -263659

Internal Rate of Return (IRR) method

The rate of return a project has earned over its life.
This can be compared with the cost of capital.
Example
Years CF
0 -80000
1 30000
2 35000
3 40000
IRR 14%

NPV is the better tool. IRR has some inherent drawbacks.

Profitability Index Method (PI)
When you have multiple projects to choose from

Total PV of cashflow/Initial invs>1, accept the project

Solving with the excel function (NPV)
₹ 495,319.57 Deduct initial investment from this
₹ -4,680.43
Limitations of IRR:
Why NPV is a preferred tool ahead of IRR?

1) Scale differences
r=10%
A B C
0 -10000 -100000 -1000000
1 3000 30000 300000
2 3000 30000 300000
3 3000 30000 300000
4 3000 30000 300000
5 3000 30000 300000

Project A Project B Project C

NPV ₹ 1,372.36 NPV ₹ 13,723.60 NPV ₹ 137,236.03
IRR 15.24% IRR 15.24% IRR 15.24%

2) Multiple IRRs
Two types:
Normal cash flow
Non-normal cash flow
Non-normal
0 -15000 -15000
1 5000 -5000
2 4500 6500
3 7200 -4000

Polynominal of the second degree

ax^2-bx+c=0

Unequal lives- mutually exclusive projects

NPV is preferred bcz it considers the interest of the customers

Eg: pg; 201

r=10% Equivalent Annuity Flow Approach (EAF)
Project A Project B NPV
0 -150000 -175000 EAF (per yr NPV I will received over the useful life of an as
1 78000 66000
2 72000 66500
3 74475 66500
4 36500
5 34500
6 32500
NPV ₹ 36,367.39 ₹ 54,618.29

Project A Payback Select this

Project B Payback
PMT ₹ 14,623.71 ₹ 12,540.70 Select Project A

Pg. no. 223

Q10 r=12% Q11 r=13.75%
Project A Project B Project K Project L
0 -5000000 -4850000 0 -500000 -350000
1 1380000 1256000 1 150000 125000
2 1450000 1256000 2 175000 175000
3 1460000 1312000 3 200000 225000
4 1524000 1312000 NPV ₹ -96,996.17 ₹ 48,011.60
5 1400000 2060000 IRR 2% 21%
NPV ₹ 190,200.29 ₹ 209,258.81
IRR 14% 14%

Case study
r=10%
Project 7 Project 8
0 -2000 -2000
1 1200 -350
2 900 -60
3 300 60
4 90 350
5 70 700
6 1200
7 2250
NPV ₹ 165.04 ₹ 182.98
IRR 15% 11%
PB ₹ 33.01 ₹ 26.14
EAF
over the useful life of an asset)
Q12 r=12.25%
Project S Project T
0 -538000 -526000
1 126000 200000
2 376000 300000
3 206000 200000
NPV ₹ 18,309.88 ₹ 31,674.79
IRR 14% 16%
How?
1) Cost of individual sources of funds (long-term)- Debt and equity
2) Use weights and calculate cost of capital/Weighted Average Cost of Capital (WACC)
example: k1,k2-w1*k1+w2*k2
w1, w2 are weights/ proportion of individual sources to the total source of long term funds.

When?
Capex proposal, Valuation, Strategic descisions

1) Cost of individual sources of funds (long-term)- Debt and equity

Cost of debt (bank loans, issue of debentures and bonds)
r' is known, interest is paid regularly, 'n' is also known. Principle is repaid
Example: 1000000 @10%, 10yrs: 1000000 each yr int is paid for 10 yrs and principle repaid
Issue price and redemption price are the same.
The rate is known as: Coupon rate / YTM (Yeild to Maturity)

kd = YTM*(1-t)
t=tax rate
kd= cost of debt
1000000 , face value of each debenture 100, 10000 debentures of 100 each @10%
Non-convertible debentures

Zero coupon bonds

Example: A company's face value of a bond is 1000. Pay us 850 and we will return 1000 after 5 years
Issue price and redemption price are different.
RATE 3%

A company has a fv of 1000, agrees to repay the money at a premium of 50 after 10 yrs, the coupon rate is;
YTM 9%

cost of prefernce shares

kp= dividend per shre / market price per share / fv of the share

cost of equity
risky asset class-equity investors 'expected rate of return will be more than a debenture rate
debenture holder = 9%
equity holder = 9% + risk premi rp=3%
0.12

1). CAPM(capital asset price model)

y=a+bx+e linear relationship between risk and high returs

rf risk free rate ke=RF+b*(rm-rf)

beta value beta of a stock
Rm-Rf equity / market risk premium
rm=market return/ index return

tata powercost of equity calculation?

capital line
shareprice 1.0014 1.0099
beta analysis above 1 means bit risk
growth stocks beta value =1

beta 1.1
Rf 0.0717 rbi
Rm-rf 0.0781
ke 0.15761 if I invest in this stock my expected ror is minimum 15.76%

2) Prof. Gordon's Model

3) Bond YTM+risk premium

GoI long term borrowing rate
ke 0.1217

Gordon's model
ke=(D1/P0)+g

D1 Expected DPS in the future/one year hence

P0 Current market price per share
g Sustainable growth rate

Pg no. 288: Q1,2&6 Pg 289-90

Q1 Q17
Before floatation cost
kd 0.08
ke
Debt equity mix
a 50% D, 50% E
b 60% D, 40% E
c 40% D, 60% E

Q18
kd 0.08
ke 15%

Debt Equity mix

a 30% E, 70% D
b 40% E, 60% D
c 50% E, 50% D

Financial leverage/Trading on equity

1. Interest is tax deductible
2. More amount of debt, less of equity

Q19
 Q20
kd 0.084
ke 0.17

Total equity
Loans

Q22
Book weights or Market weights, bo
Book value-Book weights
Market value-Market weights

2016-17
Share capital 367500
Reserves 345690
Total equity 713190
Loans 568875
1282065
WACC
not diversiable diversifiable
ex: reliance communication

stock return-----index return

 beta value could be (+),(-)
if index is moving 1%
stock return falls by -0.9

Post Floatation cost

8.06% ytm*(1-t)
16.52% R+b*(Rm-Rf)
WACC
12.29%
11.45%
13.14%

Bond yield is 8% post tax

Bond yield+Risk premium

WACC
0.101
0.108
0.115

ess of equity

15.15%
 k w k*w
18581850 17% 0.60 0.101
12552750 8.44% 0.40 0.034
31134600 4218366.6 13.55%
WACC 13.55%

ts or Market weights, both is correct

Book weights
e-Market weights

2017-18
397500
k 540315 k
0.16 937815 0.16
0.081 671375 0.081
159975.9 1609190 204180
12.48% WACC 12.69%
Chapter: Valuation of securities
Valuation of assets:
Land immoveable
Building immoveable
Vehicle moveable

ex: 30*50=750000 inr

i.e. inr 500/sqft latest deal

Purpose:
1) To know value/return, fair value or intrinsic value
2) Sell/buy/hold

Factors
Demand/Supply
Infrastructural development
Macro-economic factors
Urbanization

Value of an asset = Past factors + Future benefits

Valuation of Securities Fair price Market price

Equity Debt/Borrowing Portfolio managers 20 10 Undervalued
Market value Market value 10 20

valuation of debt
debentures- interest rate is fixed, tenure is fixed , principal is fixed - borrow and return the dsame amount
let's say a company borrowed 100000 inr, 10 % for 5 years

time line 10% is also called as rate / yeild to maturity

-100000 10000 10000 10000 10000 10000 150000

return

learning n 10% our R is ytm

our ytm is IRR IRR MEANS RETURNS ONLY
irr 10%

YTM chnages when the issue price and redemption price are different

Let's say company borrowed 100000 inr, 10% for 5 years

FV of a debenture is 100, how many debentures would have been issued?

1000 debentures
12% is yeild

0 -100
1 10
 2 10
3 10
4 10
5 120
IRR 12%

Macro-economics perspective
In the market, int rate has risen to 11.5%

New deb issue comes up with an int rate of 11.5%

PV ₹ -94.53
There is an inverse relationship btwn yield and price

Pg. 267
Q1

YTM/IRR
A 8.44% Issued at a discount and redeemed at par
B 10.39%
C 9.25% Issued at par, redeemed at par
D 11%
E 9%

Q2
Bond X 1000, 9% and 3 yrs
Bond Y Zero coupon bond

Value of Bond Y
₹ -772.18

Q3
Bond X ZCB 14%
Bond Y

Q7, 8, 9, 10 and 11
Q7
Issue price 780
Future price 1000
Yield 0.075 At the time of issue
n
The next day, the yield changes to 0.0725
PV ₹ -810.60

Q8
If the yield changes to 0.0775
PV ₹ -799.37
Q9 PV
a 9.25% ₹ -70.20 Assume FV of a bond to be 100
b 9.50% ₹ -69.56
c 9.75% ₹ -68.93

Q10 PV Assume FV of a bond to be 1000

a 8.75% ₹ -1,008.14
b 8.50% ₹ -1,016.38
c 8.25% ₹ -1,024.70

Q11
Original ₹ -642.53
Current market 990
New yield 0.093 9.30%
to maturity
How do you value equity/equity share:
n, r and other aspects are unknown

Assumptions:
1) Investment has a holding time.
2) Dividends are paid regularly
3) Dividend payment is eternal and will grow at a constant growth rate

Single period holding model:

DPS and Price DPS1=
P0=D1/(1+ke)+P1/(1+ke)
D1=Expected DPS in year 1
P1=Expected MPS in year 1
ke=Cost of equity

An investor purchases a stock at INR100 today and holds for one year. During the period, he expects a DPS of INR 4 and MPS 1
The cost of equity is 10%. What is the intrinsic value of a share?
Ans:
Po 103.6364
The stock is undervalued by INR 3.

Prof. Gordon's Model/Dividend Constant growth model:

DPS/(ke-g)

DPS 1 Expected DPS in the future

ke Cost of equity
g Sustainable growth rate/constant growth rate

Q14
DPS 1 2
ke 9%
g 0.50%
P0 23.53

Q15
DPS 1 1.3169
ke 5%
P0 35.59

Corporate Actions:
Equity shares of INR100 each 3/31/2023
Decides to split the share in the ratio 1:10 1000000 950 95000

100000 shares of INR10 each 1000000 95 95000

Companies do this bcz they want more liquidity.

In simple words, the company wants more people to trade in its shares.
Equity share capital
10000 shares of INR 100 each 1000000
Reserves and surplus 1000000
Total shareholders funds 2000000

Let's issue free shares to the investors and the ratio 1:1 - Bonus share
Equity Share Capital
20000 shares of INR 100 each 2000000
Reserves and surplus 0
2000000
Bonus shares: Issued by capitalizing the reserves
cts a DPS of INR 4 and MPS 110.
PPT Slide:
Q1

Option 1 Option 2
All equity Debt equity
No. of shares 50000 25000

EBIT 120000 120000

Less: Interest @15% 0 37500 250000*15%
EBT 120000 82500
Less: Tax @50% 60000 41250 18750 Int tax shield
60000 41250
Less: Pref. Div 0 0
Earnings available to equity holder 60000 41250
No. of shares 50000 25000

EPS = Earnings available / No. of s 1.2 1.65 We will choose this option bcz EPS is high
Tax benefits, 18750 is saved for equity shareholders.

Q2
Option 1 Option 2
All equity Pref, Debt
No. of shares 60000 50000

EBIT 375000 375000

Less: Interest @12% 48000 36000
EBT 327000 339000
Less: Tax @50% 163500 169500
163500 169500
Less: Pref. Div @14% 0 28000
Earnings available to equity holder 163500 141500
No. of shares 60000 50000

EPS = Earnings available / No. of s 2.725 2.83 We chose this option

Indiference point is a point where there is no difference in both the options

It is the EBIT value at which both the options will give the same EPS value.
As there is indifference in EBIT.

Case Study
Problem 14.1 Option 1
1L D+ 9L E
EBIT 160000 160000 160000 Interest
Less: Interest 8000 44000 74000 100000*8% 8000
EBT 152000 116000 86000 100000*8%
Less: Tax @50% 76000 58000 43000 300000*12%
76000 58000 43000
Less: Pref. Div @14% 0 0 0 100000*8%
Earnings available to equity holder 76000 58000 43000 400000*12%
100000*18%
Equity capital 900000 600000 400000
Per share value 25 25 20
No. of shares 36000 24000 20000

EPS = Earnings available / No. of s 2.111111 2.41666667 2.15

Problem 14.2

Option A B C
All equity Equity, DebeEquity, Pref

EBIT 10000 10000 10000 EBIT 20000

Less: Interest 0 20000 0 Less: Interest 0
EBT 10000 -10000 10000 EBT 20000
Less: Tax @50% 5000 -5000 5000 Less: Tax @5 10000
5000 -5000 5000 10000
Less: Pref. Div @8% 0 0 20000 Less: Pref. D 0
Earnings available to equity holder 5000 -5000 -15000 Earnings avail 10000

Equity capital 0 0 20000 Equity capital 0

No. of shares 50000 25000 25000 No. of shares 50000

EPS = Earnings available / No. of s 0.1 -0.2 -0.6 EPS = Earnings 0.2

We will choose option B bcz it has more EPS consequitively

Q1
Option 1 Option 2 Option 3
Equity 1500000 1000000 1000000
Debt 500000
Preference 500000

EBIT 375000 375000 375000

Less: Interest @ 14% 0 70000 0
EBT 375000 305000 375000
Less: Tax @35% 131250 106750 131250
243750 198250 243750
Less: Pref. Div @14% 0 0 70000
Earnings available to equity holder 243750 198250 173750

Equity capital 1500000 1500000 70000

No. of shares 150000 100000 100000

EPS = Earnings available / No. of s 1.63 1.98 1.74 Second option is the best bcz it is debt, and hence it does carry a lot of benefit
Return on assets
Ernings available 243750 198250 173750
Total assets 1500000 1500000 1500000 ROA and EPS are two different metrics. Hence, ROA sugg
ROA (%) 16.25 13.22 11.58 This option is
Return on Equity
Ernings available 243750 198250 173750
Total Equity 1500000 1000000 1000000
ROE (%) 16.25 19.83 17.38 What euiqty holders get finally

Q3
1 2 3 4 5 6
All equity Equity, Debt Equity, PreEquity, Debt, Equity, Debt Equity, Debt, Pref
Equity 40000000 30000000 30000000 20000000 20000000 12000000
Preference 10000000 8000000 8000000
Debt 10000000 12000000 20000000 20000000

1 2 3 4 5 6
EBIT 8000000 8000000 8000000 8000000 8000000 8000000
Less : interest 6000000 4500000 4500000 3000000 3000000 1800000
2000000 3500000 3500000 5000000 5000000 6200000
Less : Tax @ 35% 700000 1225000 1225000 1750000 1750000 2170000
1300000 2275000 2275000 3250000 3250000 4030000
Less : pref .div 4400000 3300000 3300000 2200000 2200000 1320000
Earnings available to equity holder 5200000 4225000 4100000 3150000 3250000 2370000

Equity capital 40000000 30000000 30000000 20000000 20000000 12000000

Per share value 25 25 25 25 25 25
No of shares 1600000 1200000 1200000 800000 800000 480000

EPS= Earning available/no. of shar 3.25 3.52083333 3.416667 3.9375 4.0625 4.9375

(EBIT-INT) (1-T) - PDIV/N1 = (EBIT-INT) (1-T) - PDIV/N2

(EBIT-0) (1-0.35) - PDIV/1600000 (EBIT-1800000) (1-0.35) - 880000/880000
0.65 EBIT = 2(0.65 EBIT - 1170000-880000)
0.65 EBIT = 1.3 EBIT - 2 (2050000)
4100000 = 1.3 EBIT - 0.65 EBIT
EBIT = 410000/0.65
6307692 Indifference point

(EBIT-INT) (1-T) - PDIV/N4 = (EBIT-INT) (1-T) - PDIV/N6

(EBIT-1800000)(1-0.35)-880000/880000 = (EBIT-3000000)(1-T)-880000
3(0.65 EBIT-1170000-880000) = 5(0.65 EBIT-1950000-880000)
3(0.65 EBIT-2050000) = 5(0.65 EBIT-2830000)
1.95 EBIT-6150000 = 3.25 EBIT-14150000
3.25 EBIT-1.95 EBIT = 8000000
EBIT = 8000000/1.3
6153846 Indifference point
y shareholders.

Option 2 Option 3
4L D+ 6L E 6L D+ 4L E

8000
36000
44000
 8000
48000
18000
74000

20000 20000 EBIT 40000 40000 40000

20000 0 Less: Interest 0 20000 0
0 20000 EBT 40000 20000 40000
0 10000 Less: Tax @50% 20000 10000 20000
0 10000 20000 10000 20000
0 20000 Less: Pref. Div @8% 0 0 20000
0 -10000 Earnings available to equity holders 20000 10000 0

0 20000 Equity capital 0 0 20000

25000 25000 No. of shares 50000 25000 25000

0 -0.4 EPS = Earnings available / No. of shares 0.4 0.4 0

bt, and hence it does carry a lot of benefits along with it.
rent metrics. Hence, ROA suggests first option as the best

Equity, Debt, Pref

6th option is the best

EBIT 60000 60000 60000
Less: Interest 0 20000 0
EBT 60000 40000 60000
Less: Tax @50% 30000 20000 30000
30000 20000 30000
Less: Pref. Div @8% 0 0 20000
Earnings available to equity holders 30000 20000 10000

Equity capital 0 0 20000

No. of shares 50000 25000 25000

EPS = Earnings available / No. of shares 0.6 0.8 0.4

EBIT 100000 100000 100000
Less: Interest 0 20000 0
EBT 100000 80000 100000
Less: Tax @50% 50000 40000 50000
50000 40000 50000
Less: Pref. Div @8% 0 0 20000
Earnings available to equity holders 50000 40000 30000

Equity capital 0 0 20000

No. of shares 50000 25000 25000

EPS = Earnings available / No. of shares 1 1.6 1.2

working capital

inventory conversion

RMCP=RM inventory/(RM consumption/360) RM/RC*360

WIPCP= WIP Inventory/cost of production * 360
FGCP=Finished goods inventory/(costof goods sold)/360

debtors coversion period =debtors / (credit sales/360)

creditors deferral period = creditors/ (credit purchase/360)

ICP: RMCP+WIPCP+FGCP
Gross operating cyclICP+DCP
NetOC: GOC-CDP
ICP: RMCP+WIPCP+FGCP
RMCP: RM inv/RM cons360

90
30
Finished goods inventory/