Corporate Finance

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 (10 Marks)

Ans 1.

Introduction

Bharti Airtel is one of the leading firms in the telecom industry, and it has been running its
operations in the country since 1995. Bharti airtel is also known as airtel and is a multi-national
company running its operations in 18 different nations, including South Africa and south Asia.

Bharti airtel was noted on the Indian stock exchange in 2002, and its shares were detailed at a 40
percent cost. Investors earned a great deal of cash back after that.

A firm requires raising funds at minimum interest rates to include revenues in its pockets.
Raising money at more excellent rates of interest can cause a decrease in profits, which disagrees
with the business's lasting expansion plans. Like all the other firms, Bharti Airtel has also raised
money from different sources: small business loans, investor engagement, and angel investing.
Its headquarters lie in New Delhi, and its primary operations are handled via that workplace.

Concepts and Applications

The sources of funds of a company are substantial as the firm is raising money for its operations.

In the case of Bharti Airtel, it has raised money from different sources.
1. In 2017, Bharti airtel raised a massive amount of 4600 crores rupees. The bargain was made at
0.20 percent of the company. This round was necessary for the firm as it was undergoing a crisis
as dependence on Jio interfered with the telecom industry back then with its very inexpensive
data plans, and various other businesses got hit. The financial investment was made by TIAA,
which is an investment company.

The evaluation of the business was made at around rupees 23000 crores. The business's
borrowings were an overall of rupees 107,288 crores. Generally, the more the variety of
loanings, the more likely the firm will undergo a situation, yet this investment round was crucial
for the company back then. The company must deal with Dependence on Jio and make its
strategies affordable.

2. In 2019, Bharti airtel raised another 300 crores rupees from Pimco. The company quit its 0.10
percent possession with this deal, examining the organization at 3 lakh crores. The company used
these funds for various sorts of assets, consisting of firm towers, land purchases, and so on. The
remainder of the funds was used for advertising. Working with the most incredible song
composer in the nation Mr. AR Rehman to recommend their brand is rather expensive. But it
ended up being profitable. Bharti Airtel acquired a lot of consumers via advertising, making it
the 2nd lead in the sector after Reliance Jio.

3. To survive in the market, large organizations raise a lot of funds via numerous rounds with
numerous investors. Bharti airtel also raised its third round by raising rupees 3500 crores by
surrendering its 1 percent possession at the rupees 350,000 crore appraisal.

4. Google is one of the leading tech companies worldwide and has bought loads of firms
worldwide. In 2021, Google purchased Bharti airtel and took over 6 percent of the company by
investing rupees 27,600 crores. The financial investment of Google in Bharti airtel valued the
company at 460,000 crores, making it one of the biggest firms in the nation. Google's financial
investment in Bharti airtel assisted the business in acquiring 5g rights sold by the government.
Bharti Airtel is one of the telecom companies with 5g rights and is ready to introduce its 5g
solutions in the nation with Reliance Jio.

It will aid the business in acquiring a more considerable consumer base and reclaiming its title as
the leading telecom company in the nation. Google invested its money in Bharti airtel using
commercial and equity techniques. It is the most considerable investment of any firm in these
years. The share cost was evaluated at 734 per share and was acceptable to both google and
Bharti Airtel, and the offer was made. The investment was created in 2020 during the corona
dilemma. After this financial investment, Google became one of the considerable stakeholders in
Bharti airtel, with a stake of 6 percent in the company. Google invested in Bharti airtel to make
Bharti airtel the leading telecommunications firm in the country.

Conclusion

To conclude, I would love to say that raising money requires a great deal of initiative and
knowledge. Bharti airtel has shown its capability throughout the years and shown its possibility.
There was a time in 2016 when it was on the verge of bankruptcy when Dependence Jio
launched its service plans making life miserable for various telecom firms like Bharti Airtel and
Vodafone Idea. Somehow, airtel handled to stand in front of Reliance Jio and is still running its
operations in 2022. A business must give go back to its investors if it is a public company, and
airtel has given handsome returns to its shareholders in the past few years.

Q2. M/s Priya Industries Ltd. is evaluating 2 options of investments. Each one has the
following mentioned Cash Flows. Rate of Interest 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 (10 Marks

Year A B
0 -40000 -50000
1 5000 8500
2 12000 15000
3 10000 12000
4 12500 12300
5 10500 10500

Ans 2.

Introduction

Investment is a procedure of comprehensive research and a creative eye. Huge organizations

invest their profits further in equities or by getting other companies. This helps them earn
compounded revenues, permitting them to create additional income via various other sources.
Selecting the basis for investment is a challenging task. Many choices have to be evaluated, and
the business has to select the best out of them all.

There are various methods to pick the most effective option for investing.

Some of them are the Payback duration, IRR and NPV.

Using the above methods, we can examine all the choices, research their pros and cons, and
select the most effective.=

Concepts and applications

Payback period-

Payback period formula- Years before full recovery+ Unrecovered amount at the start of a
period/cash flow during the period

Project A= 4+ 500/10500

= 4+0.0476
=4.0476 years

Project B= 4+2200/10500=4+ 0.209

= 4.209 years

Using the payback period method, our money is recovered earlier in project A than B.

NPV-

0- -40,000

1- 5000/1.05=4761.90

2- 12000/1.05*1.05=10884.35

3- 10000/1.05*1.05*1.05=8638.37

4- 12500/1.05*1.05*1.05*1.05=10283.78

5- 10500/1.05*1.05*1.05*1.05*1.05=8227.02

NPV= 8227.02+ 10283.78+8638.37+10884.35+4761.90- 40000

NPV Project A=2795

Project B

0- -50000

1-8500/1.05=8095.23

2-15000/1.05*1.05=13605.44

3-12000/1.05*1.05*1.05=10366.05

4-12300/1.05*1.05*1.05*1.05=10119.24

5-10500/1.05*1.05*1.05*1.05*1.05=8227.02

NPV= 8095.23+13605.44+10366.05+10119.24+8227.02- 50000

=412.08

IIR method-
For project A

NPV= FV0/(1+R)0 + FV1/(1+R)1 +FV2/(1+R)2 + FV3/(1+R)3 + FV4/(1+R)4 + FV5/(1+R)5

0= -40000/(1+R)0 + 5000/(1+R)1 + 12000/(1+R)2 + 10000/(1+R)3 + 12500/(1+R)4 +

10500/(1+R)5

IRR=7 %

For project B

NPV= FV0/(1+R)0 + FV1/(1+R)1 +FV2/(1+R)2 + FV3/(1+R)3 + FV4/(1+R)4 + FV5/(1+R)

0=50000/(1+R)0 + 85000/(1+R)1 + 15000/(1+R)2 + 12000/(1+R)3 + 12300/(1+R)4 +

10500/(1+R)5

IRR= 5%

If I were the firm's principal financing officer, I would pick project A as all the methods are
guided toward project A.

The very first one is the payback method. We computed and evaluated both projects using the
payback method, and the outcome is that project a is most likely to cover our initial amount
earlier than project b. For this reason project, a is extra successful and ideal.

The second method we used is the NPV method. NPV represents net present value. This method
is made use of by numerous financial analysts to evaluate several investment choices. By
applying the formula of NPV to the given figures in the question, we concluded that project a is
much more lucrative, and we can earn more returns on this project than project b.

This method is generally utilized in capital budgeting to compute which project or investment
option is more probable to offer higher returns than others. It determines the present value of all
future capital.

Previously, we have used two methods to create the concept of which project is better for greater
returns, and both have given us a regular result, I.e., project a. The higher opportunities are that
the third method we will use will also advise we introduce a.

Allow us to compute and review the 3rd method. i.e., IRR.

IRR- IRR is likewise referred to as the inner rate of return. The greater the price of project return,
the more possibilities for higher returns from the given project. We implemented this formula on
both projects, and the project is likely to supply us with 7 percent returns, and on the other hand,
project b is expected to give us 5 percent returns.

The above-presented methods are 99 percent precise and sometimes 1 percent not accurate.
There are mild opportunities for these methods can go wrong, and the company can sustain a
loss. Remote danger opportunities exist anywhere, and we occasionally have to take them. So, it
is clear that project a is giving us a higher rate of return, and we will buy project a.

As a chief financing policeman, I would choose the project for my firm. As my sole purpose is to
pick the best investment options for the company, project a is most likely to provide higher
returns as developed by all three methods above with steps and formulas.

Conclusion

We can conclude that spending is the most vital part of the organization as it is very easy to
generate income, but earning money from it is one of the essential tasks. It entails numerous
dangers and should be done by only experts and people who are experienced in the field. A firm
needs to experience all the available alternatives and examine them using various methods such
as NVP, IRR, payback period, etc. As the company can go into losses anytime, developing a
varied portfolio and attempting to make easy income choices with numerous sources by buying
them is far better.

3a. 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? (5 Marks)

Ans 3a.

Introduction

Investing is when a certain amount of cash or money is bought for some kind of asset to gain
added profits on the money invested in the long run. When a person purchases an investment, he
buys it to develop riches for him. Investing a certain amount of money every month or year in a
hedge fund, real estate, or mutual fund can give huge returns in the future. Investing is the most
convenient way to become rich if an individual middle-class desires to be rich and well-off.

Concepts and applications

Amount= 3 lakhs

Time= 5 years

Rate of interest= 8%

Formula for quarterly= Cq = P [ (1+r/4)4*n – 1 ]

= 300000[ (1+(8%/4))5*4-1]

=300000[(1.02)20-1

=445770

By this, at the end of the fifth year, Sunil got a total amount of 445770 rupees.

Amount= 20000 every year

Time= 5 years

Rate of interest= 10%

Cq = P [ (1+r)4*n – 1 ]

=100000[(1+r)4*n-1]

=100000[(1+10%/4)4*5-1]
=63826.55

In the first, the amount invested was 3 lakhs which got a return of 445,770, which is 48.59 per
cent returns.

In the second, the amount invested was rupees 1 lakh, which got a return of 63826.55 in 5 years,
a 63.83 per cent return on the total amount. Every investor who wants to invest his money in an
asset is looking for a higher rate of returns from his investment in a minimum period. In the
above-given examples, Sunil, who wants to invest his money, is getting a higher rate of return in
his second investment, I.e., 63.83 per cent. So, he should go for the second option to invest his
money. It is more likely that he will get a higher rate of returns on his capital on the second
option in the same amount period than option A. As rupees, 1 lakh invested for five years at 10
per cent interest rate yields rupees 63826.55 compounded quarterly approximately which is
63.82 per cent return, and on the first option, he is investing a total amount of rupees 3 lakh at
the rate of 8 per cent for five years on which he is getting 145770 amount of money which is
48.59 per cent returns.

The returns are higher in the second option, so Sunil should go for option B.

Conclusion

There are various kinds of assets in which an individual can invest, including shares, mutual
funds, property, cash, currency, bonds, fixed deposits, etc. An individual can buy any of these
assets according to take the chance of capacity. A person that is not a danger taker must go with
down payments, a person that can take some risks can choose mutual funds, and a person that is
a risk taker and is financially literate can go with equities as it is one of the most exciting
properties.
Q3b. Sanjana has a debenture of Par-value Rs. 100/- @ 6%. Calculate its current yield if:

(5 Marks)

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?

An 3b.

Introduction

A debenture is likewise an asset or a kind of bond additionally. It is a financial obligation

instrument that is collaterally unsafe. Debentures are issued on the backing of the reputation and
goodwill of the provider. It is one of the ongoing financial obligations an individual can use for
funding functions.

Concepts and applications

1. Current market price= 98.20

par value = 100

Interest rate = 6%

Current yield= annual interest payment/deb current price

= 106/98.20

=1.07

2. Current market price=102

Par value=100

Interest rate=6%

Current yield= annual interest payment/ deb current price

=106/102=1.039
The overall amount of return that a bond or debenture gains with time are referred to as its
return. In the above-given examples, the very first current market value is 98.20 and rate of
interest is 6 percent, and the par value is 100, which by computation gives a current yield of 1.07.

The second market value is 102, and the interest rate is 6 percent, which offers us 1.039 present
yields.

The current return is determined by splitting the annual interest rate by its market price. The
bond yield and its cost are vice versa associated. As the expense of the bond or debenture rises,
the present return declines, the debenture rate decreases, and the current yield rises.

The market rate in the first example is less than the marketplace cost in the second. The market
rate in the very first instance is 98.20, and its current return is 1.07, and the market cost in the
2nd example is 102, and its existing outcome is 1.039, which reveals us that the greater the
marketplace cost, the current yield will be reduced and the lower is the market rate the existing
return will be greater.

Conclusion

We can wrap up from the above instances that when the market cost of a bond or debenture is
higher, the current yield is lower, and if the marketplace cost of a bond is lower, then the existing
return is higher. It is shown in the above instances that a higher market price returns reduced, and
a reduced market price yields higher.