In Case of Bonus Shares
2021 mien 100% Bonus ki wajah se shares barh gaye isliye purane dvds ko adjust krenge
adjust krne k liye dvd ko devide krenge latest Year k no of shares se aur multiply krenge usk
apne year k shares se
***
1. PE ratio price/Earning Market Value per rupee of Earning
2. Dividend Yield Dividend/Price
Percentage return sh holder get in form of dvd
3. Dividend Cover Profit after Tax/Dividend times same dvd can be paid form PAT
IRR
aesa rate jo in Cashflows ki present value ko Initial Outlay k barabar kr de ya
C/fs aur I/O ki pv k sum ko 0 krde
Kd (Market rate)
1. Post Tax ----->> C/Fs----- Mv
2. Pre Tax
a. shortcut Method
b. Correct Method
a. shortcut Method
Pre-tax kd*(1-t)
= Post tax kd
b. Correct Method
Pre tax C/fs ki PV @ pre tax kd aur phir Pv k zariye hum Post tax cashflows lekr Irr nikalenge
Jo hoga Hmara Post tax kd
Irredeemable
1. Equity 2. Debt 3. Preference shares
a. with taxes a. with taxes
Mv = Int(1-t)/kd (post tax) Mv =
b. without taxes b. without taxes
Mv = Int / Kd Mv =
***Pref shares are not adjusted for tax
Marginal WACC
Additional return required by Equity investor due to change in:
Financial Risk = change in debt equity ratio
When WACC can be used at as a discount rate instead of Marginal Wacc
**Debt to equity ratio before project =
New finance should be raised in such a way that debt to equity ratio remains same even after
considering the NPV as a part of equity
** Business Risk i.e. Bs sector is not changed
Traditional Theory
Assumptions:
1. 100% Earning payout as dvd WACC = PBIT/Mv Of Company
2. Total Assets and Bs risk remains constant
3. No Corporate Taxes
4. Ke increase with increase in gearing
How question will be in paper…?
Co. ki Ke kitne percent se barh gai agar sawal mien ye btaya mtlb taditional theory ka sawal
MM Theory W/O Taxes
Propositions
1.00 Mv of Ungeared Co = Mv of geared Co. if PBIT is same --->>
2.00 WACCun = WACCg if both operate in same industry
3.00 Kd = Universally same
4.00 Ke ↑ for further gearing in such a way that WACC remains constant
5.00 Co. operating in same sector, WACC A = WACC B
6.00 WACC is not affected by financial financial risk
7.00 Keg = Keu + (Keu - Kd) x D/E
Lec 11p02: MM Theory with taxes
(Assumption)
PBITg = PBITu
M theory
w/o tax w tax
Dist of UG = G Dist of G > UG
So, So,
Mvg = Mvu Mvg = Mvu + D x t
Keg = Keu + (Keu - Kd) x D/E Keg = Keu + (Keu - Kd) x D(1-t) / E
* WACCun = WACCg WACCg = WACCun x (1 -( D x t / E + D))
PV of Perpetual tax saving '= D x t
Lec 13P1: Portfolio Theory Introduction and Practice Q's
Risk and return Theory
1. Individual securities
Ra = Σprob*exp return
Prob diff returns Exp return
20% 12% 2.40%
30% 15% 4.50%
50% 18% 9.00%
Avg Exp Return Ra 15.90%
Risk Std deviation
Prob (x-x^) (x-x^)^2
20% 0.12-0.159 0.12-0.159^2
30% 0.15-0.159 0.15-0.159^2
50% 0.18-0.159 0.18-0.159^2
Upr wale ka sq rt hmara std dev h mtlb risk factor
2. 2 Asset Portfolio
Return of portfolio Rp = R^a*Wa + R^b*Wb
Risk of 2 assets portfolio √σa^2*wa^2+σb^2*wb^2+2*correlation *σawa*σbwb
Covariance and Correlation
Covariance,
Probability (x-x^) (y-y^) P(x-x^)(y-y^)
correlation = covar/(sa*sm)
Required Return formula for Portfolio |Theory
Rf + {Rbm - Rf} x (SdA/SdBm)}
Beta formula by Covariance
Beta = sa*correlation/sm
Beta*sm/sa correlation
Beta*sm/sa covar/(sa*sm)
Beta = covar/(sa*sm)*sa/sm
Beta = Covar/sm^2
1. Systematic Risk----------Jo sbko effect kre e.g. zilzila sunami
2. Un systematic Risk-----> can be diversified by making the portfolio
CAPM:
The model to calculate the price of shares
CAPM says that Investor should get return for Unsystematic risk
Req return( Ke) = Rf+(Rm-Rf)/σbm*Only systematic risk of Security
Req return = Rf+(Rm-Rf)/σbm*σa&am
since (σa*&am/σbm) = Beta So,
Req return = Rf+(Rm-Rf)*Beta
σa*&am represents the exact portion of risk that moves with mkt risk(i.e. systematic risk)
When we devide σa*&am with σm we convert the raw percentage into risk per unit of mkt risk
Sharpe ratio (poore risk k against return milna chahiye)
(exp return - Rf)/σa)
Trynar's Ratio
T. ratio = (Expected rate - Rf)/B Bs Risk
Per Unit of Beta extra return Ke responds
WACC reponds
Beta
Beta Asset Beta Equity
Represents Represents
Bs Risk
Bs risk Financial Risk
CAPM Thoery
Ba = Be*E/(E+D)+Bd*D/(E+D)
Ba = Be*E/(E+D(1-t))+Bd*D(1-t)/(E+D(1-t))
1. Sector
2. Ref Co. or Benchmark Co.
3. Relevant Beta Risk Adjusted WACC
4. Ungear krenge takay us mien sirf bs risk reh jaaye
5. Phir regear krenge
*** Aesa Kd Jo 1st time launch ho raha mtlb Co. apna first debt le rahi tb Post tax kd = CR*(1-t)
Solution:
Sources Market Value Rate Cost of Cap
Sh Cap 56,000.00 14.50% 8,120.00
TFCs 28,700.00 7.43% 2,133.32
84,700.00 10,253.32
Current WACC 12.11%
Current TFC's Kd
- 1.00 2.00 3.00
MV (102.50)
Cashflows - Net of Tax 8.05 8.05 8.05
Total Cashflows (102.50) 8.05 8.05 8.05
IRR 7.43%
Director B Beta
Sources Market Value Rate Cost of Cap
Sh Cap 57,620.00 19.82% 11,418.00
New TFC's 1,980.00 8.40% 166.32
TFCs 28,700.00 7.43% 2,133.32
88,300.00 13,717.64
Equity Debt
1,620.00 1,980.00
Beta Asset of Steel Industry
Ba = Be*E/(E+d(1-t))
Ba = 1.27
Be of Our Co.
2.36
Ke of Our Company 19.82%
Theoretical Ex right price = Right issue k baad wali price of Share
1. Right Issue
Shares Price Market Value
Ordinary sh 5,000.00 40.00 200,000.00
Right sh 1,000.00 30.00 30,000.00
6,000.00 38.33 230,000.00
Thoeretical ex right Price(TERP) 38.33
Share MP MV
Ordinary sh 5,000.00 40.00 200,000.00
Righ sh 2,000.00 32.00 64,000.00 <--Co. ne liye project mien invest krne k
liye aesa project jiski NPV 32000 h
NPV Given 32,000.00
7,000.00 296,000.00
YTERP 42.29
Value of One Right
TERP 4.80
Cost of Right (4.00)
Value of a Right 0.80 0.2 Value of Right per share
4 shares k liye ek right mil raha toh right ki value 4 pr devide ho jayegi
Solution:
Dvd/share =750000/4000000 0.1875
Market Price/ share
P/E ratio 8.00
Price (p) = P/E*E =8*0.1875 1.50
Right Shares
Finance Required 2,025,000.00
Right Issue 1.5*75% 1.13
New Shares to Be Issued 1,800,000.00
Yield Adjusted Theoretical Ex Right Price
No of Shares Price/share Market Value
Old shares 4,000,000.00 1.50 6,000,000.00
New Shares 1,800,000.00 1.13 2,025,000.00
Npv w-1 405,000.00 Market accepts
Yield Adjusted TERP 5,800,000.00 1.45 8,430,000.00 forecast
NPV/share (0.07)
TERP 1.38
w-1: NPV
Earnings/ Annum 2025*.15 303,750.00
Perpetual Earnings (Earnings/Ke) 2,430,000.00
Initial Investment (2,025,000.00)
NPV 405,000.00
Lec 24p1: New Shares at discounted price
Right shares sirf apne current sh holders k liye hota h jbk ye wala public h
Co. will decide issue price
Invest-----> NPV= 30000
Share MP Mv
10,000.00 25.00 250,000.00
3,584.91 22.32 80,000.00
30,000.00
13,584.91 26.50 360,000.00
w-1
Old Share holders
shareholders after Investment 265,000.00
total shares 10,000.00
265000/10000 26.50
Dividend Policy
Price today = sum of all dvds /Ke Dvd/Ke
Price after One Year = Sum of all dvds except D1/Ke Dvd/Ke
So for getting price of Year 0 from Price after One year(p1) we can use the following
P0 = (P1+D1)/(1+Ke)
APV
Project appraisal tool
Advance version of NPV
Project NPV is dependent on:Cashflows and discount rate
NPV is logical but APV is genuine
Apv ignores financing impact and discounts on Keu
to ignore reduced rate of debt ka benefit and tax savings.
This NPV is called base case NPV
If we ad tax savings on debt then It becomes equal to NPV normal
WACC 13.9
NPV
I/O (100,000.00)
PV of Inflows 104,317
4,316.55
APV
Keu= Waccug
wACCg=Waccug*(1-(d*t)/(E+d)
Keu = =+B372/(1-((50*0.3)/100))
Keu = 16.35
APV
I/O (100,000.00)
PV of Inflows 88,669.06
(11,330.94) -------->> Base Case NPV
Tax savings on interest
50000*30% 15,000.00
Adj PV 3,669.06
Spare debt tax 647.48 ye exam mien krna nhn h
4,316.55 debt li h
spare debt capacity
D/E '1:1 104,317
Debt Equity
52,158.27 52,158.27
(50,000.00)
2,158.27
In Case of Issue Cost
dddd
Yield Curve
Yield Curve is gross Cost of Capital generated by Co.
1. Yield Curve using Single or Multiple Disc Rate
- 1.00 2.00 3.00
Interest 10.00 10.00 10.00
100.00
10.00 10.00 110.00
Yield Curve/ Spot rates 6% 7.50% 8.11%
PV 9.43 8.65 87.07
Mv of Bond 105.15
- 1.00 2.00 3.00
Interest 10.00 10.00 10.00
100.00
10.00 10.00 110.00
Disc rate 8% 8.00% 8.00%
PV 9.26 8.57 87.32
Mv of Bond 105.15
Yield curve = rate over time mtlb sood ka rate kitna brhta jaayega over the time
Yield to Maturity
Woh rate jinse In Cashflows ki PV market k barabar aa jaye i.e IRR
Spot rate Calculate krna
Har year ka rate calculate krne k liye us Year ka IRR calculate kr lo hr saal ka mil jaayega
Arbitage Gain
In case of MM Theory without Taxes
IF PBIT and WACC of 2 Co. in same industry is same then,
Mvug = Mvg,
but if it is not equal then difference is Arbitrage gain
Similarly In case of Taxes
Mvug = Mvg+D*t
but if it is not equal then difference is Arbitrage gain
How to decide which company is should move to maintain the equilibrium
case 01: of geared to Ungeared
Through the WACC or Ke
geared co h phir bhi Ke km h ungeared k muqable mien toh gear move kregi ungear ki taraf
Lekin move aese krna h k risk profile disturb na ho mtlb jo bhi hum equity mien invest
krenge woh loaned Money ho
case 01: of ungeared to geared
Kyunk Ke of G> UG phir bhi UG ki zyada h MV
hrs
foreign inv 8.05
indirrect futures 3.42 205.00
11.47
per rupee of Earning
e return sh holder get in form of dvd
vd can be paid form PAT
3. Preference shares
a. with taxes
Dvd/kp
b. without taxes
Dvd/kp
ead of Marginal Wacc
after Project
PBIT/Mv Of Company
mtlb gearing ka jo bhi impact
aayega woh Ke pr aayega iska
mtlb no effect of Debt to
Equity ratio
Dxt
eu - Kd) x D(1-t) / E
Cun x (1 -( D x t / E + D))
al tax saving '= D x t
P*(x-x^)^2
…..........
sum()
relation *σawa*σbwb
d
Financial Risk
responds
no response
Risk Adjusted WACC
4.00 5.00
8.05 8.05
100.00
8.05 108.05