Fm Project Epdib 2010-11

8/8/2019 Fm Project Epdib 2010-11

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FM Project EPGDIB 2010-11

Submitted By : SatishKumar Deshpande

Roll No. 85


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Problem 1 Share Purchase decision Pg 66

Problem 5

a) Value of Bond at

market rate of 9%

Interest 60

Required Rate of Return 0.09

Terminal value of Bond 1000

Current Bond Value 924.1

Texo

Interest 90



Current Bond Value 1000

Maxco

Current value of Taco will be Rs. 924 and that of Maco will be Rs.

1000 per bond.


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Problem 5

b) Value of Bond at

market rate of

12%

Texo

Maxco

Current value of Taco will be Rs.855.89 and that of Maco will be

Rs. 927.94 per bond.

Interest 60




Interest 90





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Problem 5c) Which Bond declins more with Inc in Intrest rate ?

The reduction is high in Maxo as the coupon interest rate is higher

in Taxo than compared to Taxo.

Value of Bond V/s Int rate

0

200

400

600

800

1000

1200

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

Int Rate

Va

lueo

fBon

d Texo

Maxco

Sl. NoInte re st

ra te T e x o M a x c o

Diffo ve r

pre vio usT e x o

Diffo ve r

pre vio usM a x c o

1 4 % 1055.5 1138.8 NA NA

2 5 % 1027.2 1108.9 28.3 29.8

3 6% 1000.0 1080.2 27.2 28.7

4 7% 973.8 1052.5 26.2 27.7

5 8% 948.5 1025.8 25.3 26.7

6 9% 924.1 1000.0 24.4 25.8

7 10% 900.5 975.1 23.5 24.9

8 11% 877.8 951.1 22.7 24.0

9 12% 855.9 927.9 21.9 23.2

10 13% 834.7 905.6 21.2 22.4

11 14% 814.3 883.9 20.4 21.6

12 15% 794.5 863.0 19.8 20.9


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Problem 5

d) Value of Bond at

market rate of 6%

Texo

Maxco

Current value of Taco will be Rs.1000 and that of Maco will be Rs.

1080 per bond.

Interest 60




Interest 90





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Problem 5

E-a) Value of Bond at

market rate of 6%

and maturity 8years

Texo

Maxco


1080 per bond.

Interest 60

Required Rate of Return 9%



Interest 90





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Problem 5

E-b) Value of Bond at

market rate of 6%

and maturity 8years

Texo

Maxco


1186 per bond.

Interest 60




Interest 90





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Problem 5

E-b) Value of Bond at

market rate of

12% and maturity8 years

Texo

Maxco


851 per bond.

Interest 60




Interest 90





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Problem No 2 Page 67 -19

Value of Share


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Problem 2 Share Value Pg 67 Problem 19

Please Ref the excel sheet for detail calculation.

Sl. No Assumption NPV Decision

1 Dividend Payout constant 30 Since NPV is < 80 Do Not Purchase

2 Dividend Growth at 6% per year perpetuity 81 Buy The share as NPV>80

3 Different Growth Rate Varied 68.81 Since NPV is < 80 Do Not Purchase


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Which security to select for Investment


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Problem 3Which Share to select (

Expected rate of return & Variance)

Return

Probabili

ty Expected Rate of Return Variance

30% 0.1 3% 0.06%

20% 0.2 4% 0.10%

10% 0.4 4% 0.20%

5% 0.2 1% 0.20%

-10% 0.1 -1% 0.14%

Total 1 11% 0.70%

Since the standard Deviation is low in company Y and Expected

rate of return is high in Y choose company Y

Security X

Std Dev 8%

Return

Probabilit

y Expected Rate of Return

Varianc

e

-20% 0.05 -1% 0.07%

10% 0.25 3% 0.18%

20% 0.3 6% 0.08%

30% 0.3 9% 0.01%

40% 0.1 4% 0.05%

Total 1 21% 0.39%

Std Dev 6%

Security Y


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Beta and risk of the project


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Problem 5Beta & risk of Project

Since the expected rate of return of the company and the new

project is same we can accept the project.

More over the risk of project is similar to firms current risk

Beta 1.21

Risk free rate of return 8.50%

Market premium 9.50%

Expected rate of return on New project 20%


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IRR from NPV Graph


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Problem 6 IRR from NPV Graph

Discount rate Project A Project B

0% INR 7,784.00 INR 5,830.00

5% INR 5,712.34 INR 4,689.56

10% INR 3,977.46 INR 3,696.47

20% INR 1,263.89 INR 2,054.40

30% (INR 731.00) INR 755.58

40% (INR 2,236.15) (INR 295.19)

Based on the Higher IRR and also based on the fact that NPV will

turn negative only after37% risk of capital

I would recommend project B

IRR through NPV Graph

(INR4,000.00)

(INR2,000.00)

INR0.00

INR2,000.00

INR4,000.00

INR6,000.00

INR8,000.00

INR10,000.00

0% 5% 10% 20% 30% 40%

Discount Rate

NPV

Project A

Project B

37%

26%


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WACC


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WACC

Source of capital BV BV Weight MV MV Weights

Cost of

Capit

al W eighted avg BV Weighted Avg MV

Ordinary Shares 30 0.3 60 0.5 15.57% 5% 8%

Reservs 10 0.1 0 15.57% 2% 0%

Preference Shares 20 0.2 24 0.2 10% 2% 2%

Debt 40 0.4 36 0.3 11% 4% 3%

Total 100 1 120 1 12% 13%

Weighted Avg cost of Capital on book value is 12% and on

Market value it is 13%


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New Machine Proposal


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New Machine ProposalCost of new machine 40000

Installation cost 8000

Cash salvage of old

machine -20000

Total Investment 28000

Dep per year on St

line method 7000

1. Initial Investment

Cash flow due to investment 28000

Increase in working Capital 10000

Total 38000

2. Cash Flow Initial Year


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Annual Saving before tax 16000

Tax -6400

Saving in cash due to Dep effect 2800

Net cash inflow 12400

3. Cash Flow in Subsequent Years Initial

Investment

Salvage Value of new machine 14000

Opportunity lot due to diaposal of old machine inyear Zero

-4000

Working capital returned back 10000

Diff tax paid on sale of Machine -4000

Toatl cash flow 16000

4. Cash flow Final Year


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Time Period Cash flow

0 -38000

1 12400

2 12400

3 12400

4 28400

NPV 12235

Calculations of NPV

Since NPV is positive accept the project

Since IRR > 10% accept the project

Profitability > 1 accept the project.


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Indopax Should the machine be bought


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Profitablity statemnt of the company

Year 1 Year 2 Year 3 Year 4 Year 5

Quantity 10000 12000 14400 17280 20736

Sleeling price 20 22 24.2 26.62 29.282

Total Sales 200000 264000 348480 459993.6 607191.6

Cost / Unit 10 11.5 13.225 15.20875 17.49006

COGS 100000 138000 190440 262807.2 362673.9

EBDIT 100000 126000 158040 197186.4 244517.6

Depriciation 100000 100000 100000 100000 100000

EBIT 0 26000 58040 97186.4 144517.6

Tax @ 35% 0 9100 20314 34015.24 50581.17

PAT 0 16900 37726 63171.16 93936.45

Cash flow 100000 116900 137726 163171.2 193936.5


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Year I cash flow 500000

Cash Flow pattern

Year Cash Flow

0 -500000

1 100000

2 116900

3 137726

4 163171.16

5 193936.45

Nominal Disciunt rate 0.2

inflation 0.1

Real discount rate 0.09091

NPV Using Real discount rate $36,710.03

Since NPV is positive the machine should be bought


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Damodar Company


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Damodar Company

Project C0 C1 C2 C3 C4 NPV 10% PVAFA AEV

X 150 30 30 30 30 222.81 3.17 70.29

Y 75 40 40 131.29 1.736 75.63

Since the annual equivalent cost of Y is grater than X accept project Y


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DOL, DFL and combined leverage


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DOL, DFL and combined leverage

This ratio can be very useful, as it summarizes theeffects of combining both financial and operatingleverage, and what effect this combination, or

variations of this combination, has on thecorporation's earnings. Not all corporations useboth operating and financial leverage, but if they do,then this formula can be used.

It is worth noting that a firm with a relatively highlevel of combined leverage is seen as riskier than afirm with less combined leverage, as the highleverage means more fixed costs to the firm.

What is the effect of combined leverage ?


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Problem No.12

Assuming the existence of the corporate

income taxes describe M-M position

on the issue of an optimum capitalstructure


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Problem No.12

Please open the Below link in EDIT

mode. ( In case you are not able to

view it please ref the attached files inthe zip folder.

Microsoft Word

Document


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Problem No.13

Define capital Structure. What are the

elements of capital structure?

What do you mean by appropriate capital

Structure?

Whar are the features of Appropriate

Capital Structure


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Problem No.13




Microsoft Word

Document


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Problem No.14

The primary purpose for which a firm

exists is the payment of dividend.

Therefore, irrespective of the firmsneeds and the desires of shareholders,

a firm should follow a policy of very

high dividend payout. Do you agree?Why and Why not?


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Problem No.14




Microsoft Word

Document


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Brown & Crown


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Brown & Crown

Conclusion It seems that Brown is paying a uniform Dividend irrespective of the performance of

the company.

We cannot tell from the figures which company is more profitable unless we knowthe capital structure of the company.

Since brown is giving consistent Dividend it is perceived as a more stable company

compared to Crown.

Due to the above reason Brown has

higher market price.


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Fm Project Epdib 2010-11