questions

1p
n
r
pv

1000
5
5.00%
Rs. 783.53

2n
p
annual amount paid
amount per installment
coupon
r
value

20 paid semi annually

1000
80
40
8.00%
0.03
0.04
924.59
791.71
306.56
208.29
1231.15
1000.00

Total Value
Other method

a)

10%
Rs. 620.92

Rs. 1,231.15

Rs. 1,000.00

3 market int rate

coupon

12%
8% paid quaterly
Rs. 697.99

80

market int rate

coupon

12%
10% semi annually
Rs. 862.35

100

5 present value
n
coupon rate of interest
1
2
3
4
5
6
7
8
9
10

OR

9.98% n
coupon

1135
10
0.10
Rs. -1,135.00
100
100
100
100
100
100
100
100
100
100
1100.00
8%
8% using rate function

5years
8%

selling value
9n
par value
present value
redemption amount
YTM (without premium)
TAX
COST OF DEBT

925
12
1000
850
1000 with premium
12.48% YTM (with premium)
35.00%
8.11

13 Bond A
Par Value
n

40000
20 years
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

-40000
0
0
0
0
0
0
0
0
0
0
0
0
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2500
2500
2500
2500
2500
2500

0.943396
0.889996
0.839619
0.792094
0.747258
0.704961
0.665057
0.627412
0.591898
0.558395
0.526788
0.496969
0.468839
0.442301
0.417265
0.393646
0.371364
0.350344
0.330513
0.311805
0.294155
0.277505
0.261797
0.246979
0.232999
0.219810
0.207368
0.195630
0.184557
0.174110
0.164255
0.154957
0.146186
0.137912
0.130105

36
37
38
39
40

2500
2500
2500
2500
42500

0.122741
0.115793
0.109239
0.103056
0.097222

Cash Flows
14

1
2
3
4
5
6
7
8

225.00
212.50
200.00
187.50
175.00
162.50
150.00
137.50
1450.00

15 par value
n

1000
875
750
625
500
375
250
125
Present Value of Bond

100
9
Cash Flows

1
2
3
4
5
6
7
8
9
yield to the investor

18 Principle
n
rate

-75
9
9
9
10
10
10
11
11
116
15.32%

100
100
100
100
100
100
100
100
100

50 crs
10 years
9%

1
2
3
4
5
6
7
8
9

-400
45.00
45.00
45.00
45.00
45.00
45.00
170.00
158.75
147.50

500
500
500
500
500
500
375
250
125

10

136.25
13.05%
30%
9.14%

YTM
TAX
Cost of Debt

21

Years

10% @ 5 years
1000
-140
-140
-140
-140
-1240
15.47%

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR (YTM)
TAX
Cost of Debt

12% @ 10 years
1000
-140
-140
-140
-140
-140
-140
-140
-140
-140
-1260
14.60%

15.47%
40%
9.28%

14.60%
40%
8.76%

Preferred Stock
1

43.5
2.5
5.75%

Dividend Yield
2 IRR
Coupon

50

6% Par Value
7%

Value
Amount willing to be paid
(PV)

7
116.67

Equity Shares
dividend
Makret price after 3 yrs
Expected rate

Rs 3 for 3 yrs
Rs 60
15%
3

0.870

3
63
Present Value

0.756
0.658

Price you will be willing to pay this year for the equity share

Year 1
equity base at starting
profit
retaied earning
dividend payout
Growth rate of dividend

Year 2
1000
100
60
40

1060
106
63.6
42.4
6.00%

Can also be calculated as

Growth = ROE x (1 - dividend payout ratio)
= 10% (1- 40%)
= 6%

3 Current market price

Book Value
EPS
DPS
ROE
Dividend Payout ratio
Growth Rate
Cost of equity

25
18
3.6
1.44
0.20
0.40
12.00%
17.76%

4 Market price
D1
G
Ke

120
12
8%
18.00%

5 Market price
D1
Payout ratio
ROE
Growth Rate
Ke

200
18
30%
5%
3.50%
12.50%

6 Market Price
D1
G
Ke

140
12
7%
15.571%

full pay out

Profit
No of Shares
EPS
D1
Market Price
Payout Ratio
ROE
Growth Rate
Ke

1250
100
12.5
12.5
180
100%
0
6.9%

16 Part 1
No Growth Rate
Po

30
With Growth Rate

Po

63

Po

Present value of dividend for 3 years + PV of marke

end of 3 years
Dividend Paid including
growth rate
1
3.15
2
3.31
3
3.47

Part 2

P3

60.20

Present Value

53.43

15%
Rs. 497.18
40 NPER

0.05
686.36 interest component for 40 months
142.05 principal repayment at the end of 40 months
828.41
Rs. 828.41

20 par value
20 years

1000
80

50 par value
15 years

1000
30

to find out YTM

1050
12.70%
8.25%

Bond B
Par Value
n
expected rate
0 Present Value
0
0
0
0
0
0
0
0
0
0
0
937.6780445
884.6019288
834.5301215
787.2925674
742.7288372
700.6875823
661.026021
623.6094538
588.3108054
555.0101938
523.5945225
493.9570967
465.997261
439.6200576
414.7359034
391.2602862
369.1134775
435.2753273
410.6371012
387.3934917
365.4655582
344.7788285
325.2630458

Zero Coupon Bond

40000
20 years
12%
Rs. 3,888.89

306.85193
289.4829528
273.0971253
257.6387974
4131.942978
17941.5813

0.925925926
0.85733882
0.793832241
0.735029853
0.680583197
0.630169627
0.583490395
0.540268885
Present Value of Bond

208.33
182.18
158.77
137.82
119.10
102.40
87.52
74.29
1070.42

125

125

14% @ 15 years
1000
-140
-140
-140
-140
-140
-140
-140
-140
-140
-140
-140
-140
-140
-140
-1280
14.31%
14.31%
40%
8.59%

rred Stock

100

y Shares

2.609

2.268
41.424
46.301

Year 3
1123.6
112.36
67.416
44.944
6.00%

(dps/market price + growth rate)

12.50%

75% payout

1250
100
12.5
9.375
180
75%
16%
4%
9.21%

Price in current year = D1 (1+ g)

Ke - g
here Ke - 10% , g - 5%, D1 - 3

nt value of dividend for 3 years + PV of market price at the

end of 3 years

TOTAL

10% Present Value

0.91
2.86
0.83
2.73
0.75
2.61
8.21

P3 = 3 x (1.05)^3 x (1.04)
0.10 - 0.04
since fourth year growth rate is constant i.e. 1.04
= 60.19/(1.10)^3 + 8.21

Question No.
1

share
curent mp
warrant

25
20
0

b)

current mp
warrant

30
5

c)

current mp
each oppourtunity
warrant

a)

30
Rs 25 for 3 shares

warrant value

37.5

straight bond
@
selling price

8%
1000

par value
n
current mp
warrants
oppoutunity
firms staright bond yield

1000
20 years
20
50 shares
1 share @ Rs 20
12%

oppourtunity value
warrant

3
150

par value

1000

pmt amount
Rate to be charged
5

bond + warrant
n
pmt
warrant ( 5 rights)
ordinary share yield
bond component
total value of warrants

Rs. 99.92

1000
30 years
100
15
14%
Rs. 719.89
Rs. 280.11

value of one warrant

9a
b

11

bond component
bond component

Rs. 28.01
Rs. 648.76
Rs. 863.78

n
conversion price
or
straight bond with warrants
warrants ( 5 shares)
current mp
tax
EBIT

Current Capital Employed

no of equity shares
Equity (FV Rs 5)
Share Premium
R&S
Convertible Bond
Bond + Warrant
EBIT
Interest
EBT
TAX
PAT
EPS

20
50
10%
50
40
50%
20% of Capital Employed
Current Scenario

1000000
5000000
25000000

30000000
6000000
0
6000000
3000000
3000000
3.00

10% Debenture with warrants

on issue
Current Capital Employed
no of equity shares
Equity (FV Rs 10)
Share Premium
R&S
Debt
Debenture
EBIT
Interest

10000
100000
200000
250000
250000
800000
144000
25000

EBT
TAX
PAT
EPS
P/E ratio
Market Price of shares

10

par value
Conversion ratio
Conversion value
straight bond component

119000
47600
71400
7.14
12
85.68

1000
38.83
no of shares x market value of shares
699
Rs. 877.11

As long as the market price of equity share is less than convettible bonds it will act as a straight bond. The
value. In future when the current market price is more and equity shares will have value. Then the conve
higher than the striaght bond value.

Option to convert will be usefull to investor only when market value of shares is less than the right being
First Year
Second year
Third Year

12

Number of shares per bond

current share price
share premium
rate of interest
conversion value

Rs. 877.11
Rs. 884.82

20
36
14
12%
720

a)

covnersion value at the end of 5 years

b)

Dividend at the end of 5th year

73.47

If not covnerting into shares, interest would

have been
Callable bond value @ premium of 5%
Loss on bond being called for the investor

120
1050
-7.92

c)

14
HOMEWORK

n
12% coupon bond
Shares per bond

1057.92

20
80

13

1
2
3
4
5
6
7
8
9
10

551
606
667
734
807
888
977
1074
1182
1300

rs
rs
rs
rs
rs
90
75
15

bond + warrant
@
Present Value of bond
warrant value
Par Value

6%
Rs. 803.64
price you are charging investors for giving the oppourtunity to buy the equity
Rs. 196.36 shares in the future (premium one pays for getting the right to buy the right to
1000
buy in the future)

150 warrant
850 bond component present value
10

10%
per share

convertible bond

8%

each

Convertible Bond
Warrants
before conversion
after raising
warrant is
( on issue)
exercised
after conversion money
1000000
1200000
1000000
1040000
5000000
6000000
5000000
5200000
9000000
1800000
25000000
25000000
25000000
25000000
10000000
10000000
10000000
40000000
40000000
40000000
42000000
8000000
8000000
8000000
8400000
800000
0
1000000
1000000
7200000
8000000
7000000
7400000
3600000
4000000
3500000
3700000
3600000
4000000
3500000
3700000
3.60
3.33
3.50
3.56

Debenture with warrants

Convertible debentures
on exercising the right
of warrants
on issue
on conversion
15000
150000
200000
200000
250000
250000
1050000
189000
25000

10000
100000
200000
250000
250000
800000
144000
20000

22500
225000
125000
200000
250000
800000
144000
0

164000
65600
98400
6.56
12
78.72

share price

market value of shares

124000
49600
74400
7.44
12
89.28

144000
57600
86400
3.84
12
46.08

25.75

market value

18

ettible bonds it will act as a straight bond. The right to covnert holds no
equity shares will have value. Then the convertible bond value will be
he striaght bond value.

ket value of shares is less than the right being offered by the warrant

I will not convert because I am getting a

return of 120 over 74 on conversion

Ramsay Corp Perspective

nity to buy the equity

ght to buy the right to

1 Plan A Capital
No of eq. shares
Tax
Sales
EBIT
Interest
EBT
Tax
PAT
EPS

10000
500
40% Par value of equity
1:01
800
3000
600
2400
960
1440
2.88

1:03
800
3000
300
2700
1080
1620
2.16

sales
EBIT
Interest
EBT
Tax
PAT
EPS

808
3040
600
2440
976
1464
2.928

808
3040
300
2740
1096
1644
2.192

Per change in EBIT

Per Change in Sales

1.33%
1.00%

1.33%
1.00%

Operating Risk

133.33%

133.33%

Per change in EPS

Financial Risk

1.67%
125.00%

1.48%
111.11%

Total Risk

258.33%

244.44%

Plan B Capital
No of eq. shares
Tax
Sales
EBIT
Interest
EBT
Tax
PAT
EPS
sales
EBIT
Interest
EBT

10000
500
40% Par value of equity
1:01
800
2800
600
2200
880
1320
2.64
808
2848
600
2248

750

750
1:03
800
2800
300
2500
1000
1500
2
808
2848
300
2548

Tax
PAT
EPS

899.2
1348.8
2.6976

1019.2
1528.8
2.0384

1.71%
1.00%

1.71%
1.00%

Operating Risk

171.43%

171.43%

Per change in EPS

Financial Risk

2.18%
127.27%

1.92%
112.00%

Total Risk

298.70%

283.43%

Per change in EBIT

Per Change in Sales

Plan C Capital
No of eq. shares
Tax
Sales
EBIT
Interest
EBT
Tax
PAT
EPS

10000
500
40% Par value of equity
1:01
800
2600
600
2000
800
1200
2.4

sales
EBIT
Interest
EBT
Tax
PAT
EPS

808
2656
600
2056
822.4
1233.6
2.4672

808
2656
300
2356
942.4
1413.6
1.8848

2.15%
1.00%

2.15%
1.00%

215.38%

215.38%

2.80%
129.99999999999900%

2.43%
113.04%

345.38%

328.43%

1:01

1:03

Per change in EBIT

Per Change in Sales
Operating Risk
Per change in EPS
Financial Risk
Total Risk
SUMMARY

750
1:03
800
2600
300
2300
920
1380
1.84

TOTAL RISK

PLAN A
PLAN B
PLAN C

258.33%
298.70%
345.38%

244.44%
283.43%
328.43%

1:01
133.33%
171.43%
215.38%

1:03
133.33%
171.43%
215.38%

1:01
125.00%
127.27%
130.00%

1:03
111.11%
112.00%
113.04%

OPERATING RISK
PLAN A
PLAN B
PLAN C
FINANCIAL RISK
PLAN A
PLAN B
PLAN C
2

Capital Employed after raising finance

PLANS

EBIT
INTEREST
EBT
TAX
PAT
PREF DIVIDEND
EAT
No OF EQUITY SHARES
EPS

7500000

A
ISSUANCE OF EQUITY SHARES
900000
56000
844000
295400
548600
108000
440600
40000
11.015

900000
56000
844000
295400
548600
358000
190600
20000
9.53

15

12

MARKET PRICE OF SHARES

165.225

114.36

Face value
Capital Amount

10 Tax rate
1000000

P/E

B
10% PREFERENCE SHARES

a
ISSUANCE OF EQUITY SHARES
EBIT
INTEREST
EBT
TAX
PAT
PREF DIVIDEND
EAT

900000
56000
844000
295400
548600
108000
440600

No OF EQUITY SHARES
EPS
3

40000
11.015

sales
sp/unit
vc
total fixed cost
total cost
asset t/o
Assets

5
3
1500000
4.5E+12
5 times
10
debts

equity shares
30%
300000
8%
600000
9%
40%

BASE
COST OF DEBT
CASE 1
COST OF DEBT
tax
BASE
SALES
COSTS
EBIT
INTEREST
EBT
TAX
PAT
No OF EQUITY SHARES
EPS
mps

70%
700000
400000

CASE 1
5000000
4500000
500000
24000
476000
190400
285600
70000
4.08
48.96

CHANGE IN EBIT
CHANGE IN SALES
CHANGE IN EPS

6300000
5925000
375000
54000
321000
128400
192600
40000
4.815
57.78
(case 1 to 1% inc in case 1)
0.04
0.056
0.01
0.01
0.042016807
-0.065420561

OPERATING RISK
FINANCIAL RISK
TOTAL RISK

4
1.050420168
4.201680672

(base to 1% inc)

5.6
1.168224299
6.542056075

1% INCREASE TO BASE

BASE

SALES
VC
FC

5000000
2500000
1500000

5050000
2525000
1500000

EBIT
INTEREST
EBT
TAX
PAT
NO OF EQUITY SHARES
EPS

1000000
125000
875000
350000
525000
100000
5.25

1025000
125000
900000
360000
540000
100000
5.4

CHANGE IN EBIT
CHANGE IN SALES
CHANGE IN EPS

0.025
0.01
0.028571429

OPERATING RISK
FINANCIAL RISK
TOTAL RISK

2.5
1.142857143
2.857142857

Inference: Given that we expect the sales to increase to 70 lacs, we would prefer to go debt option ( highe
for debt financing. Thus, we decide what option to choose depending upon the expected change in sales a

FOR EBIT LEVEL

40000
OPTION 1
EQUITY SHARES
(50000 @ Rs 10)

OPTION 2
EQUITY SHARES
(25000 @ Rs 10)
8% 2500 DEBENTURES
@ RS 100

EBIT
INTEREST
EBT
TAX
PAT
PREFERENCE DIVIDEND
PROFIT
NO OF EQUITY SHARES
EPS
P/E
MPS

40000
0
40000
16000
24000
0
24000
50000
0.48
10
4.8

FOR EBIT LEVEL

80000
OPTION 1
EQUITY SHARES

40000
20000
20000
8000
12000
0
12000
25000
0.48
9
4.32

OPTION 2
EQUITY SHARES

(50000 @ Rs 10)

EBIT
INTEREST
EBT
TAX
PAT
PREFERENCE DIVIDEND
PROFIT
NO OF EQUITY SHARES
EPS
P/E
MPS

(25000 @ Rs 10)
8% 2500 DEBENTURES
@ RS 100
80000
0
80000
32000
48000
0
48000
50000
0.96
10
9.6

FOR EBIT LEVEL

120000
OPTION 1
EQUITY SHARES
(50000 @ Rs 10)

EBIT
INTEREST
EBT
TAX
PAT
PREFERENCE DIVIDEND
PROFIT
NO OF EQUITY SHARES
EPS
P/E
MPS

80000
20000
60000
24000
36000
0
36000
25000
1.44
9
12.96

120000
0
120000
48000
72000
0
72000
50000
1.44
10
14.4

RISK FREE
MARKET RISK PREMIUM
TAX
UNLEVERED BETA

OPTION 2
EQUITY SHARES
(25000 @ Rs 10)
8% 2500 DEBENTURES
@ RS 100
120000
20000
100000
40000
60000
0
60000
25000
2.4
9
21.6

5%
6%
40%
1.2

PLANS

D/E
1
2
3
4

b= b UNL/ [1+ D/E(1

Wd
0
0.25
0.67
1.5

0
1/5
2/5
3/5

4/5

Cost of equity

7
1990
1991
1992
1993
1994

amount of debt
12%
12%
13%
15%
18%

0
125000
225000
300000
350000

INFERENCE:
WACC LEAST - HIGHEST MARKET PRICE PER SHARE - HIGHEST VALUE OF FI

OBJECTIVE - MAXIMISE THE MARKET PRICE NOT EPS, EPS IS AN ACCOUNTI

TAX
RISK FREE RATE
MARKET RISK PREMIUM

40%
6%
4%
BASE
NO OF EQUITY SHARES

1000000

MARKET PRICE OF SHARES (Po)

FACE VALUE
EPS = DPS (D0)
Ke
D/E
Beta levered
Beta unlevered
Kd
Value of Firm

40
10
4.040
10.10%
2
1.025
0.466
4.80%
60000000

EXISTING DEBT (8%)

NEW DEBT
NEW DEBT COST

20000000

EBIT
INTEREST
EBT
TAX
PAT
NO OF EQUITY SHARES
EPS

8%
8333000
1600000
6733000
2693200
4039800
1000000
4.04

250
Rs 10
3:01
800
3000
900
2100
840
1260
5.04
808
3040
900
2140
856
1284
5.136
1.33%
1.00%
133.33%
1.90%
142.86%
276.19%

250
Rs 10
3:01
800
2800
900
1900
760
1140
4.56
808
2848
900
1948

779.2
1168.8
4.6752
1.71%
1.00%
171.43%
2.53%
147.37%
318.80%

250
Rs 10
3:01
800
2600
900
1700
680
1020
4.08
808
2656
900
1756
702.4
1053.6
4.2144
2.15%
1.00%
215.38%
3.29%
152.94%
368.33%

3:01

276.19%
318.80%
368.33%

3:01
133.33%
171.43%
215.38%

3:01
142.86%
147.37%
152.94%

C
8% DEBENTURES
900000
256000
644000
225400
418600
108000
310600
20000
15.53
10
155.3
40%

ASSETS

1000000

fv
TOTAL
1000000
1000000

INCREASE IN SALES BY 1%
FOR BASE CASE
5050000
4530000
520000
24000
496000
198400
297600
70000
4.251428571
51.01714286

INCREASE IN SALES BY 1%
CASE 1
6363000
5967000
396000
54000
342000
136800
205200
40000
5.13
61.56

1% INCREASE TO EQUITY

CASE 1
EQUITY
7000000
2800000
2000000

7070000
2828000
2000000

1% INCREASE TO DEBT

CASE 2
DEBT
7000000
2800000
2000000

7070000
2828000
2000000

2200000
125000
2075000
830000
1245000
130000
9.576923077

2242000
125000
2117000
846800
1270200
130000
9.770769231

2200000
275000
1925000
770000
1155000
100000
11.55

0.019090909
0.01
0.020240964

0.019090909
0.01
0.021818182

1.909090909
1.060240964
2.024096386

1.909090909
1.142857143
2.181818182

d prefer to go debt option ( highest eps). But if the sales lowers down, the risk will become very high if i go
n the expected change in sales and its effect on the risk the firm may bear.

OPTION 3
EQUITY SHARES
(25000 @ Rs 10)
10% 2500 PREFERENCE SHARES
@ RS 100
40000
40000
16000
24000
25000
0
25000
0
9
0

OPTION 3
EQUITY SHARES

2242000
275000
1967000
786800
1180200
100000
11.802

(25000 @ Rs 10)
10% 2500 PREFERENCE SHARES
@ RS 100
80000
80000
32000
48000
25000
23000
25000
0.92
9
8.28

OPTION 3
EQUITY SHARES
(25000 @ Rs 10)
10% 2500 PREFERENCE SHARES
@ RS 100
120000
120000
48000
72000
25000
47000
25000
1.88
9
16.92

b= b UNL/ [1+ D/E(1-T)]

Kd Post tax

B levered
4.2
4.8
6
7.2

Ke
1.200
1.380
1.682
2.280

We
12.20
13.28
15.09
18.68

1
4/5
3/5
2/5

4.080

Interest

KD
0
8%
10%
11%
14%

29.48
EBIT

0.00%
4.80%
6.00%
6.60%
8.40%

100000
100000
100000
100000
100000

- HIGHEST VALUE OF FIRM [ALWAYS TRUE - IS THE OPTIMAL CAPITAL STRUCTURE ]

CE NOT EPS, EPS IS AN ACCOUNTING FIGURE ONLY

PLAN 1 (30 MN)

PLAN 2 (40 MN)

750000

PLAN 3 (50 MN)

500000
250000

37.50
10
4.626
12.34%
4
1.5839
0.466
5.10%
58128365

32.36
10
5.440
16.81%
8
2.7019
0.466
5.70%
56181799

21.70
10
6.559
30.22%
20
6.0561
0.466
6.72%
55425433

20000000
30000000
8.50%

20000000
40000000
9.50%

20000000
50000000
11.20%

8333000
2550000
5783000
2313200
3469800
750000
4.63

8333000
3800000
4533000
1813200
2719800
500000
5.44

8333000
5600000
2733000
1093200
1639800
250000
6.5592

4/5
INTEREST
0
10000
22500
33000
49000

WACC
12.20
11.58
11.45
11.79

30.78
EBT
100000
90000
77500
67000
51000

TAX (40%)
40000
36000
31000
26800
20400

PAT
60000
54000
46500
40200
30600

NO OF EQUITY
SHARES
100000.00
75000.00
58333.33
46102.15
37501.00

EPS MPS
0.60
0.72
0.80
0.87
0.82

5.00
6.00
6.13
5.81
4.53

MVe
500000.00
450000.00
357692.31
268000.00
170000.00

MVd
0.00
125000.00
225000.00
300000.00
350000.00

MVf
500000.00
575000.00
582692.31
568000.00
520000.00

WACC
12.00%
10.43%
10.30%
10.56%
11.54%

cost

52125

1
2
3
4
5
6

-52125
12000
12000
12000
12000
12000
12000
10.09%
Net Present Value (outflow - inflow)

Initial Outflow

200
-200
235
-65
300

1
2
3
NPV

3
gas powered
intial outflow

17500

1
2
3
4
5
6

5000
5000
5000
5000
5000
5000

NPV

S
INITIAL OUTFLOW
1
2
3

10000
-10000
3000
3000
3000

4
5
IRR
NPV

3000
3000
15.24%
Rs. 814.33

PI

1.081

If looked as stand alone project, both have positive NPV and IRR is greater cost of capital. But wh
IRR. The scale of project differes, the IRR and npv tend to differ. We normally look at NPV as a b
ALWAYS CHOOSE TO GO BY

Since, it is a case of outflows only, take the lowe

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000

32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60

2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000

A
6

cost

10000000
1

12000000

Years

Value

7
1
2
3

50000
37500.00
28125.00
21093.75

4
5

15820.31
11865.23

Years

1
2
3
4
5

20692
33461
46923
67308

INFLOW

10000
10692
12769
13462
20385

Cost
additional investment

3500000
5000000

operating costs (excluding dep)

700000

Initial Investment
Years

8500000

Annual Savings
1
2
3
4
5
6

Operating Costs
1200000
1200000
1200000
1200000
1200000
1200000

PRINCIPAL

700000
700000
700000
700000
700000
700000

DEP

done in class

1000000
750000
562500
421875
316406.25
237304.6875

1
2
3
4
5

250000
187500
140625
105468.75
79101.5625
59326.17188

17
done in class

18
done in class

16
done in class

Present Values
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Rs. -2,071.16
Rs. 2,229.22
Rs. 7,715.36
Rs. 5,486.15
Rs. -12,142.32
Rs. -7,541.56
Rs. -569.27
Rs. 6,972.29
Rs. -17,624.53
Rs. -17,098.87
Rs. -14,498.11
Rs. 2,600.75
Rs. -6,517.79
Rs. -8,442.70
Rs. -10,071.16
Rs. -1,628.46
Rs. -73,202.16

Rs. 2,229.22
Rs. 7,715.36
Rs. 5,486.15

Rs. 6,972.29

Rs. 2,600.75

25003.77259

Income at the end of 2nd yr

Cash Out flow
104910.7143
inflow at present value
outflow
at 12%

Node A
Node B
Node C
Initial Outlay
NPV
Post Abandonment

100000

0.3
0.1
0.6
100000
11115.70248

Node A
Node B
Node C

0.3
0.1
0.6

Initial Outlay
NPV

100000
13595.04132

we will abandone the project in 2nd year after node B is comp

than Abandonment value of rs 50000, thus it sh

Value of option to abandone

2479.34

10
Old Machinery
Value

1
2
3
4
5
6
7
8

1000000
750000
562500
421875
316406
237305
177979
133484
100113

Capital Gain / Loss

Book Value
Salvage
Cap gain
Tax Paid
Operating Income
4
5
6
7
8

100000
100000
100000
100000
100000

11

Manufacturing

1
2
3
4
5

Book Value at the end

1000000
750000
562500
421875
316406
237305
Fixed Costs

1
2
3
4
5

100000
200000
300000
400000
500000

1
2
3
4
5

937,500.00
937,500.00
937,500.00
937,500.00
937,500.00

1
2
3
4
5

500000
75000
500000
400000
300000
200000
100000
0

Buying

Machine Value
Slavage Value

Saving
1
2
3

200000
200000
200000

4
5

12

Value of Machinery
Years

200000
200000

300000
Old Machine
-300000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Years

Labor Cost Saving

4
5
6
7
8
9
10
11
12
13
14
15

15

160000
160000
160000
160000
160000
160000
160000
160000
160000
160000
160000
160000

Machine A
Initial Expense

10000000

1
2
3
4
5
6
7
8

NPV

4000000
4000000
4000000
-6000000
4000000
4000000
4000000
4000000
Rs. 14,509,570.24
Rs. 4,509,570.24

12

5000000
4000000
3000000
2000000
1000000
0

1
2
3
4
5
Additional Working capital
Total Investment

1000000
6000000

1
2
3
4
5

13

Operating Income
2000000
2000000
2000000
2000000
2000000

Machinery A
1
2
3
4
5
6
7
8

14
1

-10000000
4000000
4000000
4000000
4000000
-6000000
4000000
4000000
4000000
Rs. 15,130,491.56
Rs. 5,130,491.56
-25
5

2
3
4

10
15
20
27%
Rs. 37.74

IRR
NPV

Since, NPV is a better jugde of two projects, We would on the basis of NPV choose the first opt
of the other option

18

INITIAL OUTLAY
WORKING CAPITAL

10000000
4000000
14000000
100000
120
60
1500000
40%
12%

No of units sold
SP
VC
FC
TAX RATE
COST OF CAPITAL
ORIGNAL SCENARIO

REVENUE
1
2
3
4
5

12000000
12000000
12000000
12000000
12000000

SENSITIVITY ANALYSIS
SP
VC

114
66

REVENUE
1
2
3
4
5

11400000
11400000
11400000
11400000
11400000

19

Annual Inflow
Prob

Amt
0.15
0.3
0.15
0.15
0.25

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Rs. -299,738.68
Rs. -749,269.74
Rs. -899,039.71
Rs. -599,308.92
Rs. -449,446.99
Rs. -599,608.03
Rs. -1,498,904.61
Rs. -1,798,559.57
Rs. -1,198,963.38
Rs. -899,170.48
Rs. -299,836.68
Rs. -749,543.59

4,000
3,000
2,500
1,000
3,500

Rs. 10,714.29
Rs. 9,566.33
Rs. 8,541.36
Rs. 7,626.22
Rs. 6,809.12
Rs. 6,079.57
Rs. 49,336.89

CUMMULATIVE INCOME
Rs. 12,000.00
Rs. 24,000.00
Rs. 36,000.00
Rs. 48,000.00
Rs. 60,000.00 PAYBACK PERIOD
Rs. 72,000.00

alue (outflow - inflow)

Rs. -2,788.11

ALTERNATIVE METHOD
Rs. 210.76
Rs. -52.28
Rs. 216.42
Rs. 374.90
Rs. 174.90

Rs. 174.90

electric forklift
22000

6290
6290
6290
6290
6290
6290

3057.036618

Rs. 20,557.04
Rs. 3,057.04

T
outflow
1
2
3

25000
-25000
7400
7400
7400

4
5
Rs. 10,814.33 inflow

7400
7400
14.67%
Rs. 1,675.34
1.067

sitive NPV and IRR is greater cost of capital. But when we look at both them, there is a problem. Both of them together have positve NPV
d npv tend to differ. We normally look at NPV as a better criteria. Our objective is to maximise the value of wealth of the shareholder. HE
ALWAYS CHOOSE TO GO BY NPV AND CHOOSE THE PROJECT T

Since, it is a case of outflows only, take the lower of the present value. Hence, orignal option of Rs 2000 is better
Rs. 89,910.08

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

0
0
0
0
0
0
0
0
0
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600

32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60

2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600
2600

B
10000000
Rs. 10,714,285.71

1
2
3
4
5
6
7
8
9
10
11
12

1750000
1750000
1750000
1750000
1750000
1750000
1750000
1750000
1750000
1750000
1750000
1750000

13
14
15
16
17
18
19
20

1750000
1750000
1750000
1750000
1750000
1750000
1750000
1750000

Depreciation
12500.00
9375.00
7031.25

50000.00
37500.00
28125.00

5273.44
3955.08
Retained Earnings post tax
Depreciation

21093.75
15820.31

12500.00
9375.00
7031.25
5273.44
3955.08

10875.00
10231.05
10760.79
10596.00
21007.57
7.64%

-50000

Assumption - Depreciation by SLM

salvage value at the end of 6
years

Depreciation

Revenue
566667
566667
566667
566667
566667
566667

EBIT

100000

523333 Total of Present value of Revenue

523333 NPV
523333
523333
523333
5623333

DEFLATION

378000
443000
504000
442000
367000

333200
353575
376818.75
324214.0625
414292.1875

308518.5185
303133.5734
299130.8728
238307.0146
281960.3015

0.06
0.08
0.02

0.04

0.035

23.50%

Present Value
4307.64411
inflow - outflow - at present valuereturns
at 14%

-7846.177945

Present Values for 2nd year

Present value including first year
63636.36364
80578.5124
123636.3636
294214.876
45454.54545
95867.7686

Present Values for 2nd year

Present value including first year

24173.55372
29421.4876
57520.66116
111115.7025

63636.36364
123636.3636
50000

80578.5124
294214.876
100000

24173.55372
29421.4876
60000
113595.0413

done the project in 2nd year after node B is completed. Node C gives a value less
than Abandonment value of rs 50000, thus it should be stopped

the value a firm derives by having an option of abandonment

Old Machinery
Depreciation

New Machinery
Value

250000
187500
140625
105469
79102
59326
44495
33371

1
2
3
4
5

At the end of 3rd year for old

mach - pay in the 4th year
421875
600000
178125
62343.75
Increased revenue

At the end of 8th yr for the new mach

355957
900000
544043
190415.0391
Tax Sheild on IC

150000
150000
150000
150000
150000

1500000
1125000
843750
632813
474609
355957

Main Saved
94336
70752
53064
39798
29848

50000
50000
50000

NPV

Salvage - 5 yr
Dep

200000
Capital Gain/ Loss
Book Value
Salvage
Capital Loss
Tax Sheild

250000
187500
140625
105469
79102
Depreciation

Variable
250000
187500
140625
105469
79102

Tax Sheild
225000
225000
225000
225000
225000

201250
214375
232969
255664
494492

Total Cost Incurred

Post Tax Cost Paid

PV
609,375.00
609,375.00
609,375.00
609,375.00
609,375.00

Rs. 529,891.30
Rs. 460,775.05
Rs. 400,673.95
Rs. 348,412.13
Rs. 302,967.07
Rs. 2,042,719.51

Book Value
Salvage
Capital gain
Tax Shield

Depreciation
100000
100000
100000
100000
100000
Depreciation

Tax Shield
100000
100000
100000

165000
165000
165000

100000
100000

165000
210000
Rs. 689,423.40

NPV

Rs. 189,423.40

480000
Incremental Cash Flow

New Machine

-480000
40000
40000
40000
40000
40000
40000
40000
40000
40000
40000
40000
40000

20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000

Electicity and Maintenance Cost Incremental Cash Flows

30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000

20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000
20000

NPV
Machine B
15000000

Revenue
91500
91500
91500
91500
91500
91500
91500
91500
91500
91500
91500
91500
Rs. 726,755.80
Rs. 246,755.80

3500000
3500000
3500000
3500000
3500000
3500000
3500000
3500000
Rs. 18,672,241.69
Rs. 3,672,241.69

1000000
1000000
1000000
1000000
1000000

Depreciation

Total Revenue
1000000
1000000
1000000
1000000
1000000

Deflation
1650000
1650000
1650000
1650000
2650000

Machinery B
1
2
3
4
5
6
7
8

-15000000
3500000
3500000
3500000
3500000
3500000
3500000
3500000
3500000
Rs. 18,672,241.69
Rs. 3,672,241.69
-25
20

1556604
1468494
1385372
1306955
1980234
NPV

2
3
4

10
8
6
36%
Rs. 36.55

We would on the basis of NPV choose the first option even though the IRR of first option is less than that
of the other option

10000000
7500000
5625000
4218750
3164063
2373047

1
2
3
4
5

FIXED COST

VARIABLE COST
1500000
1500000
1500000
1500000
1500000

6000000
6000000
6000000
6000000
6000000

1
2
3
4
5

11000000
8250000
6187500
4640625
3480469
2610352

FIXED COST

VARIABLE COST
1500000
1500000
1500000
1500000
1500000

6600000
6600000
6600000
6600000
6600000

2500000
1875000
1406250
1054688
791016

DEPRECIATION
2500000
1875000
1406250
1054688
791016
PRESENT VALUE
NPV

2750000
2062500
1546875
1160156
870117
DEPRECIATION
2750000
2062500
1546875
1160156
870117
PRESENT VALUE
NPV

Project Life
Prob

INITIAL OUTLAY
RATE

Years
0.1
0.25
0.3
0.2
0.15

6
7
8
9
10

Rs. 1,000.00 4 YEARS 4 MONTHS

Since, your NPV is negative , u do not invest

since irr is lower than the cost of capital, you do not invest in the project

3860.752065

Rs. 25,860.75
Rs. 3,860.75

Rs. 26,675.34

Both of them together have positve NPV and have higher

e value of wealth of the shareholder. HERE AND ABOVE

n of Rs 2000 is better
########

Rs. 13,071,526.34 option B will be choosen, becase it has a higher NPV

Rs. 13,071,526.34

Loss on Sale of Mach

Value at the end of 5 yrs
11865.23
Salvage
5000
Loss on Sale of Mach 6865.23
tax sheild on loss of
mach @ 20%
1373.047

Present Value of
Inflows / retained
earnings
NPV
PI

########
########
Rs. 0.93

Payback Period

Rs. 4,735,455.22
Rs. -3,764,544.78

PRESENT VALUE

between 4th and 5th year

280471.3805
250523.6144
224741.4521
162766.8975
175075.1634
1093578.508

Year 1
Prob
0.3

CF
25,000

0.1

200,000

0.6

60,000

Node

Year 2
Con Prob
CF
0.1
25,000
0.9
75000
0.2 200,000
0.8
120000
0.5
60,000
0.5
40,000

New Machinery
Depreciation

375000
281250
210938
158203
118652

of 8th yr for the new mach

900000
194492
233252
248064
234798
934433

Increment
al Cash
Tax Sheild on IC

269531
202148
151611
113708
85281

94336
70752
53064
39798
29848

Rs. 1,296,535.24
Rs. 396,535.24

237305
200000
37305
13056.64063

Cost
123750
210625
292031
369336
230508
Rs. 784,658.89
Rs. 1,784,658.89

Capital Gain/ Loss

0
75000
75000
30000

Present Value

Rs. 5,791,813.35
Rs. -208,186.65

CASH INFLOW
3700000
3450000
3262500
3121875
9389453
Rs. 15,687,909.23
Rs. 1,687,909.23

CASH INFLOW
3080000
2805000
2598750
2444063
8938398
Rs. 19,866,210.94
Rs. 5,866,210.94

248%

20000000
10%

1 a)

cost of asset
260000
tax rate
30%
int rate
13%
time
5 yrs
salvage value
0
pv of tax sheilds on depreciation + pv of post tax sheild rentals = 260000
pmt
post tax lease rental

b)

Rs. 73,921.78
Rs. 83,316.83

cost of asset
128000
tax rate
30%
int rate
6%
time
9
salvage value
20000
pv of tax sheilds on depreciation + pv of post tax sheild rentals = 128000
pmt
post tax lease rental

Rs. 17,078.40
Rs. 19,254.86
by using pmt - we get a value which is per
to get post tax lease rental = [17078

2 a)

purchase price
int rate
time
residual value
dep amount

46000
11%
6 yrs
3000
7167

annual value

b)

IRR (rate)

c)

cost of asset

asset value
life
salvage
depreciation
post tax returns
tax rate

Rs. 9,454.23
8.26%
Rs. 95,800.98

50000
3 yrs
5000
15000
9%
40%

pmt
post tax lease rental

Rs. 18,227.46
Rs. 20,379.11

payment is made at the start of the year

13.52%
3.38%

Dep
-75600
4400
4400
4400
2440
4400
4400
4400
2440
4400
4400
4400
2440
4400
4400
4400
2440
4400
4400
4400
18040
1.89%
7.55%

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
quaterly rate
annual rate

12000

5
BUY
COST
LIFE (YRS)
SCRAP VALUE
Depreciation rate (WDV)

100000
8
20000
18.25%

DEPRECIATION SCHEDULE
YEARS
1
2
3
4
5

Asset value
DEPRECIATION
100000.00
81750.00
66830.63
54634.04
44663.32

18250.00
14919.38
12196.59
9970.71
8151.06

6
7
8

YEARS
1
2
3
4
5
6
7
8

36512.27
29848.78
24401.38

PRINCIPAL
INTEREST
Rs. 8,744
Rs. 9,619
Rs. 10,581
Rs. 11,639
Rs. 12,803
Rs. 14,083
Rs. 15,491
Rs. 17,040

YEARS LEASE RENTAL

TAX SHEILD
1
14000
2
14000
3
14000
4
14000
5
14000
6
14000
7
14000
8
14000

6663.49
5447.40
4453.25

Rs. 10,000
Rs. 9,126
Rs. 8,164
Rs. 7,106
Rs. 5,942
Rs. 4,661
Rs. 3,253
Rs. 1,704

2800
2800
2800
2800
2800
2800
2800
2800

DEPRECIATION SCHEDULE
YEARS
1
2
3
4
5

PRINCIPAL
DEPRECIATION
80000.00
66000.00
52000.00
38000.00
24000.00

14000.00
14000.00
14000.00
14000.00
14000.00

0
1
2
3

PRINCIPAL
INTEREST
Rs. 19,185
Rs. 13,104
Rs. 14,414
Rs. 15,856

Rs. 0
Rs. 6,081
Rs. 4,771
Rs. 3,330

YEARS

4
5

Rs. 17,441

Rs. 1,744

YEARS LEASE RENTAL

TAX SHEILD
0
19000
1
19000
2
19000
3
19000
4
19000
5

5700
5700
5700
5700
5700

DEPRECIATION SCHEDULE
YEARS
1
2
3
4
5

PRINCIPAL
DEPRECIATION
1000000.00
180000.00
820000.00
180000.00
640000.00
180000.00
460000.00
180000.00
280000.00
180000.00

260000

104000

0
1
2
3
4
5

-200000
50000
50000
50000
50000
50000
7.93%

7.93%

part 2 remaining
9 a)

b)
c)

Rs. 66,875.94
Depreciation per year
Depreciation on tax sheild
Maintenance post tax

40000
14000
13000

200000 = PV [(Lease rental

{1-5 year @ 20%}

{1-5 year @ 20%}

FOR A PROBLEM LIKE THIS, FIST CALCULATE THE PMT FUNCTION. THAT GIVES YOU THE OPTIMUM
VALUE OF LEASE RENTALS AS "X" WE SOLVE THE EQUATION TO

D)

7 a)

Rs. 61,500.75

depreciation
cost of capital
tax rate

4500
9%
40%

pmt
equilbrium elase rental
b)

depreciation

Rs. 7,011.90
8687

Loan
1
2
3
4
5
6
7
8
9
10

45000 pmt
PRINCIPAL
INTEREST
Rs. 2,216.34
Rs. 2,548.79
Rs. 2,931.11
Rs. 3,370.78
Rs. 3,876.40
Rs. 4,457.86
Rs. 5,126.54
Rs. 5,895.52
Rs. 6,779.84
Rs. 7,796.82

Rs. 6,750.00
Rs. 6,417.55
Rs. 6,035.23
Rs. 5,595.56
Rs. 5,089.95
Rs. 4,508.49
Rs. 3,839.81
Rs. 3,070.83
Rs. 2,186.50
Rs. 1,169.52

1
2
3
4
5
6
7
8
9
10

LEASE
TAX SHIELD
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50
Rs. 8,686.50

Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60
Rs. 3,474.60

YEARS

LEASING
YEARS

FOR LOAN : TAX BENEFIT FOR DEPRECIATION AND INTEREST. BE

MACHINE IS "LEASED", BUT TAX B
WE WILL BE INDIFFERENT

PC'S COST OF CAPITAL = POST TAX COST

WHERE THE LESSEE'S POST TAX COST OF BORRIWING IS LESS THAN

DEPRECIATION

300000

Loan

2000000 pmt
PRINCIPAL
INTEREST

YEARS
0
1
2
3
4
5
6

Rs. 234,314.99
Rs. 267,119.09
Rs. 304,515.76
Rs. 347,147.97
Rs. 395,748.69
Rs. 451,153.50

Rs. 280,000.00
Rs. 247,195.90
Rs. 209,799.23
Rs. 167,167.02
Rs. 118,566.31
Rs. 63,161.49

LEASING
YEARS
0
1
2
3
4
5
6

LEASE
TAX SHIELD
Rs. 450,000.00
Rs. 450,000.00
Rs. 450,000.00
Rs. 450,000.00
Rs. 450,000.00
Rs. 450,000.00

Rs. 157,500.00
Rs. 157,500.00
Rs. 157,500.00
Rs. 157,500.00
Rs. 157,500.00
Rs. 157,500.00

depreciation amount

by using pmt - we get a value which is per year payment (which is 30% of 52000 and 70% of x)
to get post tax lease rental = [73921 - (30% of 52000)]/.70

depreciation amount
PV of tax sheid on Dep
Salvage Value PV
Pv of 70% for 8 yrs
Pv of 70% for 8 yrs + 1 yr
Pv of 30% for 9 yrs
Diff

12000
Rs. 24,486.09
11837.96927
4.35
5.35
0.177569539
5.17

we get a value which is per year payment (which is 30% of 52000 and 70% of x)
t tax lease rental = [17078 - (30% of (128000-20000)]/.70

OPTION 1

AMORTISATION SCHEDULE
TOTAL AMOUNT
PRINCIPAL
Rs. 18,744.40
Rs. 18,744.40
Rs. 18,744.40
Rs. 18,744.40
Rs. 18,744.40

Rs. 8,744.40
Rs. 9,618.84
Rs. 10,580.73
Rs. 11,638.80
Rs. 12,802.68

Rs. 18,744.40
Rs. 18,744.40
Rs. 18,744.40

DEPRECIATION

TAX SHIELD
Rs. 18,250
Rs. 14,919
Rs. 12,197
Rs. 9,971
Rs. 8,151
Rs. 6,663
Rs. 5,447
Rs. 4,453

Rs. 5,650
Rs. 4,809
Rs. 4,072
Rs. 3,415
Rs. 2,819
Rs. 2,265
Rs. 1,740
Rs. 1,231

Rs. 14,082.95
Rs. 15,491.24
Rs. 17,040.37

NET CASH OUTFLOW

Rs. 13,094
Rs. 13,935
Rs. 14,672
Rs. 15,329
Rs. 15,926
Rs. 16,479
Rs. 17,004
Rs. -2,487

OPTION 2
CASH OUT FLOW
11200
11200
11200
11200
11200
11200
11200
11200

PRESENT VALUE
Rs. 10,370.37
Rs. 9,602.19
Rs. 8,890.92
Rs. 8,232.33
Rs. 7,622.53
Rs. 7,057.90
Rs. 6,535.09
Rs. 6,051.01
Rs. 64,362.36 WE SHOULD CHOOSE OPTION 2 AS IT IS THE LOWER OF THE TWO
VALUES

OPTION 1
AMORTISATION SCHEDULE
TOTAL AMOUNT
PRINCIPAL
Rs. 19,185.27
Rs. 19,185.27
Rs. 19,185.27
Rs. 19,185.27
Rs. 19,185.27

DEPRECIATION

TAX SHIELD
Rs. 14,000
Rs. 14,000
Rs. 14,000

Rs. 19,185.27
Rs. 13,103.80
Rs. 14,414.18
Rs. 15,855.60
Rs. 17,441.16

NET CASH OUTFLOW

Rs. 19,185
Rs. 4,200
Rs. 14,985
Rs. 6,024
Rs. 13,161
Rs. 5,631
Rs. 13,554

Rs. 14,000
Rs. 14,000

Rs. 5,199
Rs. 4,723

Rs. 13,986
Rs. -14,723
Rs. 60,148

OPTION 2
CASH OUT FLOW
19000
13300
13300
13300
13300
-5700
66500

PRESENT VALUE
Rs. 19,000.00
Rs. 12,429.91
Rs. 11,616.74
Rs. 10,856.76
Rs. 10,146.51
Rs. -4,064.02
Rs. 59,985.89

OPTION 1
AMORTISATION SCHEDULE
TOTAL AMOUNT
PRINCIPAL
Rs. 221,927.79
Rs. 125,927.79
Rs. 221,927.79
Rs. 141,039.12
Rs. 221,927.79
Rs. 157,963.81
Rs. 221,927.79
Rs. 176,919.47
Rs. 221,927.79
Rs. 198,149.81

156000

100000

[(Lease rental - Maintenance)(1- tax rate)+ (Depreciation x tax rate)]

5 year @ 20%}

Rs. 48,100.02

Rs. 574,127.95

5 year @ 20%}

THAT GIVES YOU THE OPTIMUM VALUE FOR THE GIVEN DETAILS. THEN KEEPING THE
X" WE SOLVE THE EQUATION TO GET THE VALUE.

32000

pv company

Rs. 8,966.34
DEPRECIATION
TAX SHIELD
NET CASH OUTFLOW
4500
Rs. 4,500.00
Rs. 4,466.34
4500
Rs. 4,367.02
Rs. 4,599.32
4500
Rs. 4,214.09
Rs. 4,752.25
4500
Rs. 4,038.22
Rs. 4,928.12
4500
Rs. 3,835.98
Rs. 5,130.36
4500
Rs. 3,603.39
Rs. 5,362.95
4500
Rs. 3,335.92
Rs. 5,630.42
4500
Rs. 3,028.33
Rs. 5,938.01
4500
Rs. 2,674.60
Rs. 6,291.74
4500
Rs. 2,267.81
Rs. 6,698.53

NET CASH OUTFLOW

PRESENT VALUE
Rs. 5,211.90
Rs. 4,781.56
Rs. 5,211.90
Rs. 4,386.75
Rs. 5,211.90
Rs. 4,024.54
Rs. 5,211.90
Rs. 3,692.24
Rs. 5,211.90
Rs. 3,387.38
Rs. 5,211.90
Rs. 3,107.69
Rs. 5,211.90
Rs. 2,851.09
Rs. 5,211.90
Rs. 2,615.68
Rs. 5,211.90
Rs. 2,399.70
Rs. 5,211.90
Rs. 2,201.56
Rs. 33,448.19

9.00%

DEPRECIATION AND INTEREST. BENEFIT OF 18000 TO BE IGNORED.

FOR LEASING: NO DEPRECIATION AS THE
MACHINE IS "LEASED", BUT TAX BENEFIT ON THE EXPENSE INCURRED i.e. LEASE RENTALS PAID
WE WILL BE INDIFFERENT WITH BOTH THE OPTION AS THE VALUES ARE SAME

OST OF CAPITAL = POST TAX COST OF BORROWING FOR HVP'S THAT IS WHY THE VALUES ARE SAME

OST OF BORRIWING IS LESS THAN COST OF CAPITAL OF LESSOR , LESSEE WOULD CHOOSE TO GO FOR LEASING OPTION

Rs. 514,314.99
DEPRECIATION
MAINTENANCE
TAX SHIELD
50000
300000
50000
300000
50000
300000
50000
300000
50000
300000
50000
300000

Rs. 220,500.00
Rs. 209,018.57
Rs. 195,929.73
Rs. 181,008.46
Rs. 163,998.21
Rs. 144,606.52

NET CASH OUTFLOW

PRESENT VALUE
9.10%
Rs. 450,000.00
Rs. 450,000.00
Rs. 292,500.00
Rs. 268,102.66
Rs. 292,500.00
Rs. 245,740.29
Rs. 292,500.00
Rs. 225,243.16
Rs. 292,500.00
Rs. 206,455.70
Rs. 292,500.00
Rs. 189,235.28
Rs. -157,500.00
Rs. -93,396.81
Rs. 1,491,380.28 AS THE VALUE IS LOWER, WE WILL CHOOSE THIS OPTION

which is 30% of 52000 and 70% of x)

52000

SATION SCHEDULE

Rs. 18,744.40

INTEREST
Rs. 10,000.00
Rs. 9,125.56
Rs. 8,163.68
Rs. 7,105.60
Rs. 5,941.72

Rs. 4,661.46
Rs. 3,253.16
Rs. 1,704.04

PRESENT VALUE
Rs. 12,124.45
Rs. 11,947.37
Rs. 11,647.38
Rs. 11,267.37
Rs. 10,838.86
Rs. 10,384.83
Rs. 9,921.84
Rs. -1,343.68
Rs. 76,788.43

OOSE OPTION 2 AS IT IS THE LOWER OF THE TWO

VALUES

SATION SCHEDULE

Rs. 19,185.27

INTEREST
Rs. 0.00
Rs. 6,081.47
Rs. 4,771.09
Rs. 3,329.68
Rs. 1,744.12

PRESENT VALUE

7%
Rs. 19,185
Rs. 14,004.93
Rs. 11,495.18
Rs. 11,064.06

Rs. 10,670.13
Rs. -10,497.46 WE SHOULD CHOOSE OPTION 1 AS IT IS
THE LOWER OF THE TWO VALUES
Rs. 55,922.10

SATION SCHEDULE

Rs. 221,927.79

INTEREST
Rs. 96,000.00
Rs. 80,888.67
Rs. 63,963.97
Rs. 45,008.31
Rs. 23,777.98

WE SHOULD CHOOSE OPTION 2 AS IT

IS THE LOWER OF THE TWO VALUES

IMPORTANT FORMULA

101347.601

97385.77312

PRESENT VALUE

9.00%
Rs. 4,097.56
Rs. 3,871.16
Rs. 3,669.61
Rs. 3,491.20
Rs. 3,334.39
Rs. 3,197.75
Rs. 3,080.03
Rs. 2,980.09
Rs. 2,896.89
Rs. 2,829.53
Rs. 33,448.22

FOR LEASING: NO DEPRECIATION AS THE

E RENTALS PAID
RE SAME

HE VALUES ARE SAME

IMPORTANT
NOTE

ULD CHOOSE TO GO FOR LEASING OPTION

NET CASH OUTFLOW

PRESENT VALUE
50000
Rs. 343,814.99
Rs. 355,296.43
Rs. 368,385.26
Rs. 383,306.53
Rs. 400,316.78
Rs. 169,708.47

LOWER, WE WILL CHOOSE THIS OPTION

50000
Rs. 315,137.48
Rs. 298,497.94
Rs. 283,679.53
Rs. 270,549.80
Rs. 258,988.24
Rs. 100,636.38
Rs. 1,577,489.37

9.10%

depr
cost of asset
int rate
salvage
tax
pmt

time
ASSET
i
t
salvage
depr
pmt

st

17,078.40
13,478.40
19,254.86

46,000.00
0.11
6.00
3,000.00
7,166.67
9,454.23

210,000.00
0.08
5.00
25,000.00
37,000.00
45,000.00

asset
p
salvage
t
i

asset
t
salva
depr
tax

12,000.00
128,000.00
0.06
20,000.00
0.30
26,838.81
23,238.81
33,198.30
9.00

100,000.00
8.00
20,000.00
18.25%
20%

total amount

after tax

50,000.00
3.00
5,000.00
40%
9%
$18,227.46
20,379.11

asset
pmt
t
tax
salvage
depr

80,000.00
4,400.00
5.00
35%
20,000.00
12,000.00

1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00

$95,800.98
8%
7.00
10,000.00
16,000.00

15,000.00

100,000.00
81,750.00
66,830.63
54,634.04
44,663.32
36,512.27
29,848.78
24,401.38

18.25%
18,250.00
14,919.38
12,196.59
9,970.71
8,151.06
6,663.49
5,447.40
4,453.25

amount
principal
$18,440.40 #NAME?
$18,440.40
$18,440.40
$18,440.40
$18,440.40
$18,440.40
$18,440.40
$18,440.40

interest

Given
debt

equity
70

30
debt
equity

Income remaining
Dividend Payout
2

Capital
debt
equity

10000000
6000000
4000000

dividends
net income
growth rate

3600000
10800000
10%

1)

Dividend for 2002

2)

DPR of 2001

3)

Residual Dividend
Debt to fund investments
Equity
Dividend

4)

Regular Dividend plus extra policy

Regular Dividend
Extra Dividend

DPS
Debt
Equity
No of Equity Shares
Net Income
Dividend paid
1)

3
40
60
1000000
8000000
3000000
Residual Dividend Policy
Debt

Equity
Dividend
DPS
one before Last)
Debt
Equity
Dividend
Equity Remaining to fund the project
Equity to be brought in

3)

DPS
Dividend
Equity Remaining
Debt (for the remaining amount required)

Last)

Debt
Equity
Dividend

capital budget
Debt
equity

5000000
2000000
3000000

Income
DPR
Equity Remaining
Equity to be brought in

2000000
500000
1500000
1500000

Income
Debt
Equity

1000000
1
1

CAPEX
debt
equity

2000000
1000000
1000000

Dividend
7

EPS
Ke
Retention Ratio
ROE
DPS

0
10
10%
50%
12%
5

G
P

6.00%
125

Interpretation : 1. roe - 12% which is more than Ke - high growth firm - h

should retain more funds to maximise shareholders funds.

2. Low growth firm should paypout high dividends, roe - 8%, m

capital budget income

3000000
2100000
900000

2000000

1100000
5/9
debt
asset

60
40

1250000
DPR
Income
Dividend
Amount Remaining
1/3

45%
5000000
2250000
2750000

Earnings Capital
2002 14400000

8400000

3.96
4800000

3.36
5.04
9.36

3.96
5.40

better than giving the whole amount as dividend, then the shareholders would
expect the company to keep giving the same or yet better amount even in the
coming years

constant
Capital Required

4000000

10000000

6000000
2000000
2
4000000
6000000
3000000
5000000
1000000
3
3000000
5000000 Debt
5000000 Equity
3333333
5000000
3000000

50
50
40%
60%

Changed Capital Budget

8333333

40%
60%

25%

100% debt equity ratio

No dividend to be paid

10%

8%

30%
12%

10%

8%

70%
12%

5.00%
100

4.00%
83

3.60%
109

3.00%
100

2.40%
92

8.40%
188

is more than Ke - high growth firm - high market price - as is lowers the payout ration or increases the retention ration. High growth firm
ds to maximise shareholders funds. (market expected rate - 10%, and if we ratin the funds, we give them a return of 12% )

paypout high dividends, roe - 8%, market return in 10%, shareholders will like if we payout more and have low retention ratio

10%

8%

7.00%
100

5.60%
68

etention ration. High growth firm

em a return of 12% )

ave low retention ratio