Name of Student: - Bhakti Auradkar

Roll no.: - TM2019224

Reg. No: - 13-1461

Specialization: - Marketing

Batch: - 2020-2022

Institute: - BITM

Semester: -2nd

Subject Name: - Financial Management

Assignment No: - 2nd

Submission Date: - 28st March 2021

Total no. of pages written: - 10

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Answer 1
From the following information construct the operating statement showing sales, variable
cost, Contribution, fixed cost, EBIT, interest, EBT
Particulars A B C
Variable expenses 66.66 75 50
as %of sales
Interest 220 330 100
Operating leverage 4 5 3
Financial leverage 3 4 2
A.
Finding EBIT:
For A:
EBIT
Financial leverage=
EBT
EBT =EBIT −I =EBIT −220
EBIT EBIT
Financial leverage= = =3
EBT EBIT −220
EBIT =3 EBIT−660
∴ EBIT = 330.
∴ EBT = EBIT – 220 = 110
For B:
EBIT
Financial leverage=
EBT
EBT =EBIT −I =EBIT −330
EBIT EBIT
Financial leverage= = =4
EBT EBIT −330
EBIT =4 EBIT −1320
∴ EBIT = 440.
∴ EBT = EBIT – 330 = 110
For C:
EBIT
Financial leverage=
EBT
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EBT =EBIT −I =EBIT −100

 EBIT EBIT
Financial leverage= = =2
EBT EBIT −100
EBIT =2 EBIT −200
∴ EBIT = 200.
∴ EBT = EBIT – 100 = 100
Finding contribution:
For A:
contribution contribution
Operating leverage= = =4
EBIT 330
∴ Contribution = 1320
For B:
contribution contribution
Operating leverage= = =5
EBIT 440
∴ Contribution = 2200
For C:
contribution contribution
Operating leverage= = =3
EBIT 200
∴ Contribution = 600
Finding sales and variable cost:
For A:
Suppose sales = x
Variable cost = 66.66% of sales = 0.6666*x
Sales−Variable cost =Contribution
x−( 0.6666 x )=1320

∴ x = 3,959.2081 = sales
∴ Variable cost = 0.6666 * x = 2,639.2081
For B:
Suppose sales = x
Variable cost = 75% of sales = 0.75*x
Sales−Variable cost =Contribution
x−( 0.75 x )=2200
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∴ x = 8,800 = sales
∴ Variable cost = 0.75 * x = 6,600
For C:
Suppose sales = x
Variable cost = 50% of sales = 0.5*x
Sales−Variable cost =Contribution
x−( 0.5 x )=600

∴ x = 1200 = sales
∴ Variable cost = 0.5 * x = 600
Finding fixed cost:
For A:
Contribution – Fixed cost = EBIT
Fixed cost = Contribution – EBIT = 1320 – 330 = 990
For B:
Contribution – Fixed cost = EBIT
Fixed cost = Contribution – EBIT = 2200 – 440 = 1780
For C:
Contribution – Fixed cost = EBIT
Fixed cost = Contribution – EBIT = 600 – 200 = 400
Computation of Financial leverage and Operating leverage.
A B C
Sales 3,959.2081 8,800 1200
Less: Variable cost 2,639.2081 6,600 600
Contribution 1320 2200 600
Less: Fixed cost 990 1780 400
EBIT 330 440 200
Less: Interest 220 330 100
EBT 110 110 100
Operating leverage 4 5 3
(Contribution /
4

EBIT)
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Financial leverage 3 4 2
(EBIT / EBT)

Answer 2
Company wants to issue debentures of the face value Rs.1000 each. The coupon rate being
12%. The floatation cost is 3%. The tax rate is 30%. Debentures are redeemable after 7 years.
Calculate effective cost of debentures at following options –
a. Issue at par redemption at par
b. Issue at 10% discount, redemption at par
c. Issue at par redemption at premium OF 10%
d. Issue at 10% discount, redemption at 10% premium
A.
1. Issue at par and redeem at par.
Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 (as specification is given, to be at par)
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) = 1000 – 30 = 970
n = 7 years
{ RV −SV } {1000−970 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=8.96 %
RV + SV 1000+ 970
2 2
Cost of debt after tax = 8.96%
2. Issue at 10% discount, redemption at par.
Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 (as specification is given, to be at par)
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) – 10% of FV (as discount)
= 1000 – 30 – 100 = 870
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n = 7 years
 { RV −SV } {1000−870 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=10.97 %
RV + SV 1000+ 870
2 2
Cost of debt after tax = 10.97%
3. Issue at par redemption at premium OF 10%
Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 + 10% of FV (as premium) = 1000 + 100 = 1100
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) = 1000 – 30 = 970
n = 7 years
{ RV −SV } {1100−970 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=9.91%
RV + SV 1100+ 970
2 2
Cost of debt after tax = 9.91%
4. Issue at 10% discount, redemption at 10% premium
Interest (I) = 12% of FV = 12% of 1000 = 120
Corporate tax rate = 30% = 0.3
RV = 1000 + 10% of FV (as premium) = 1000 + 100 = 1100
SV = sale value = net proceeds = 1000 – 3% of FV (as floatation) – 10% of FV (as discount)
= 1000 – 30 – 100 = 870

n = 7 years
{ RV −SV } {1100−870 }
I ( 1−t )+ 120 ( 1−0.3 ) +
n 7
Kd= ∗100= ∗100=11.86 %
RV + SV 1100+ 870
2 2
Cost of debt after tax = 11.86%
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Answer 3
Company is considering raising of funds of 100 lacs by one of the two alternative methods.
14% institutional term loans or 13% NCD. Debentures would have to be issued at 2.5%
discount and would involve cost of issue of 1,00,000. Assume tax rate of35% and advice
which option is better
14% Institutional terms 13% NCD
loan
Capital to be raised (FV) Rs. 1,00,00,000 Rs. 1,00,00,000
Less: Discount Rs. 0 Rs. 2,50,000
Less: cost of issue Rs. 0 Rs. 1,00,000
Net fund received Rs. 1,00,00,000 Rs. 96,50,000

For 14% Institutional terms loan

I = 14% of FV = 14,00,000
t = 35% = 0.35
I ∗( 1−t ) 14,00,000∗ (1−0.35 )
Kd= ∗100= ∗100=9.1 %
Net fundsreceived 1,00,00,000
Cost of capital = 9.1%
For 13% NCD
I = 13% of FV = 13,00,000
t = 35% = 0.35
I ∗( 1−t ) 13,00,000∗(1−0.35 )
Kd= ∗100= ∗100=8.45 %
Net fundsreceived 1,00,00,000
Cost of capital = 8.45%
Since the effective cost of capital is less in case of Option II, i.e., by issuing 13% Non-
Convertible Debentures, the same should be considered for raising funds of Rs.
1,00,00,000.
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Answer 4
X limited is now capitalized with 50,00,000 consisting of 10,000 ordinary shares of 500 each.
Additional finance of 50,00,000 is required for major expansion. Four possible plans are
under consideration –
a. Entire through additional shares of 500 each.
b. 25 lacs through shares and balance at 12% term loan.
c. Entire through term loan at 13%.
d. 25 lacs through equity shares, 25 lacs through 10% preference shares of 500 each.
Company has its present EBIT of 6 lacs which is expected to be double after
expansion. Assume 35% tax rate. Evaluate the proposal under EPS
A.
Capital Issuing normal Issuing normal 13% term loan Issuing normal
Structure/ 10K equity 5K equity 5K equity
(III)
Income shares @ 500 shares @ 500 shares @ 500
statement Rs. Per share. Rs. Per share + Rs. Per share +
12% term loan 10%
(I)
preference
(II)
shares
(IV)
No. of Equity 20,000 15,000 10,000 15,000
Shares
EBIT 12,00,000 12,00,000 12,00,000 12,00,000
(-) Interest 0 3,00,000 6,50,000 0
EBT 12,00,000 9,00,000 5,50,000 12,00,000
(-) Tax @35%of 4,20,000 3,15,000 1,92,500 4,20,000
EBT
EAT 7,80,000 5,85,000 3,57,500 7,80,000
- Preference 0 0 0 2,50,000
Dividend
EAT and 5,30,000
Preference
Dividend 7,80,000 5,85,000 3,57,500
/ No. of Equity 20,000 equity 15,000 equity 10,000 equity 15,000 equity
Shares shares shares shares shares
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EPS 39 per equity 39 per equity 35.75 per equity 35.33 per equity
 share share share share
Preference I I II `III

Answer 5
Good Years Company has current ordinary share capital of 25 lacs of 100 each. Management
plans to raise another 20 lacs for expansion through one of the following alternatives.
a. Entirely through ordinary shares of 100 each
b. 50% through shares of100 each and balance by 8% TL.
c. 5 lacs by shares of 100 each, 15 lacs by 9% borrowing.
d. 10 lacs through equity shares of 100 each and balance by 5% preference shares.
Company expects EBIT of 8 lacs, assuming 35% tax rate suggest best alternative.
Capital Issuing normal Issuing normal Issuing normal Issuing normal
Structure/ 20K equity 10K equity 5K equity 10K equity
Income shares @ 100 shares @ 100 shares @ Rs. shares @ 100
statement Rs. Per share. Rs. Per share + 100 each + 9 % Rs. Per share +
8% term loan term loan 5% preference
(Rs.10,00,000) (Rs.15,00,000) shares
(Rs.10,00,000)
(IV)
(II) (III)
(I)
No. of Equity 45,000 35,000 30,000 35,000
Shares
EBIT 8,00,000 8,00,000 8,00,000 8,00,000
(-) Interest 0 80,000 1,35,000 0
EBT 8,00,000 7,20,000 6,65,000 8,00,000
(-) Tax @35%of
EBT 2,80,000 2,52,000 2,32,750 280000
EAT 5,20,000 4,68,000 4,32,250 5,20,000
- Preference 0 0 0 50,000
Dividend
EAT and
Preference
Dividend 5,20,000 4,68,000 4,32,250 4,70,000
/ No. of Equity 45,000 equity 35,000 equity 30,000 equity 35,000 equity
Shares shares shares shares shares
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EPS 11.56 per equity 13.37 per equity 14.41 per equity 13.43 per equity
 share share share share
Preference IV III I `II

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