ANSWER1
ANSWER 2
Kd = I(1-t)+(RV-NP)/N / ((RV+NP)/2)
ANSWER3
ANSWER4
ANSWER 5
Answer 6
FM LAB PROJECT
NAME SOMAYA MODI
ROLL NO. 23/33516
COURSE [Link] (HONS)
SECTION A
EQUITY SHARE CAPITAL 4000000.00
PREFERENCE SHARE CAPITAL 3000000.00
DEBENTURE CAPITAL 2000000.00
PREFERENCE INTEREST RATE 10.00%
DEBENTURE INTEREST RATE 12.00%
NET SALES 16000000.00
EBIT% AS ON SALES 10.00%
CORPORATE TAX RATE 40.00%
FIXED COST 5000000.00
INCOME STATEMENT
NET SALES 16000000.00
VARIABLE COST 9400000.00
CONTRIBUTIONS 6600000.00
FIXED COST 5000000.00
EBIT 1600000.00
INTEREST 240000.00
EBT 1360000.00
TAX 544000.00
EAT 816000.00
PREFERENCE DIVIDEND 300000.00
NET PROFIT 516000.00
NO. OF EQUITY SHARES 400000.00
EPS=NP/NO. OF EQUITY SHARES 1.29
OPERATING LEVERAGE
(CONTRIBUTIONS/EBIT) 4.13
FINANCIAL LEVERAGE
EBIT/EBT-(PD(1-T)) 1.86
COMBINED LEVERAGE 7.67
(OL*FL)
%CHANGE IN EPS
(FL*%CHANGE IN EBIT) 18.60%
DEBENTURE BOOK VALUE 1000000.00
PREFERENCE SHARE BOOK VALUE 500000.00
DEBENTURES BOOK VALUE 2000000.00
RETAINED EARNINGS 500000.00
Debenture Market Price (per unit) 110.00
Preference Shares Market Price 120.00
Equity share market price 22.00
Debenture Coupon Rate 8.00%
Debenture floating cost 4.00%
Preference Dividend Rate 10.00%
Preference floating cost 5.00%
Equity floating cost Rs. 2
Equity dividend expected Rs. 2
Equity dividend growth rate 5.00%
corporate tax rate 30.00%
Kd = I(1-t)+(RV-NP)/N / ((RV+NP)/2)
I 8
t 0.3
RV 100
NP 96
NP 20
5.8
98
Kd 0.0591836734693878
D1 2
P0 22
g 0.05
NP 20
Ke 0.15
CAPITAL MARKET VALUE WEIGHT
DEBENTURES 1100000 0.180327868852459
PREFERENCE SHARES 600000 0.0983606557377049
EQUITY SHARES* 3520000 0.577049180327869
RETAINED EARNINGS* 880000 0.144262295081967
6100000 1
YEAR PROJECT X PROJECT Y
0 100000 100000
1 10000 50000
2 20000 40000
3 30000 20000
4 45000 10000
5 60000 10000
YEAR PROJECT X PROJECT Y
0 -100000.00 -100000.00
1 10000.00 50000.00
2 20000.00 40000.00
3 30000.00 20000.00
4 45000.00 10000.00
5 60000.00 10000.00
NPV OF PROJECT X 16150.1636127686
IRR OF PROJECT X 14.71%
PROFITABILTY INDEX 1.16
SO PROJECT X IS BETTER
INITIAL INVESTMENT 250000
MACHINE LIFE(IN YEARS) 5.00
SALVAGE VALUE 0
TAX RATE 40%
COST OF CAPITAL 10%
DEPRECIATION METHOD SLM
YEAR EAT
1 6000
2 12000
3 24000
4 30000
5 60000
DEPRECIATION 50000
YEAR EAT CF=EAT+DEP
1 6000 56000
2 12000 62000
3 24000 74000
4 30000 80000
5 60000 110000
PBP 3.725
ARR 21.12
NPV 30688.48
IRR 14%
FIRM OUTPUT(units) FIXED COST(RS.)
A 60000.00 7000.00
B 15000.00 14000.00
C 100000.00 1500.00
INCOME STATEMENT
PARTICULARS FIRM A
SALES 36000.00
VARIABLE COST 12000.00
CONTRIBUTION 24000.00
FIXED COST 7000.00
EBIT 17000.00
INTEREST 4000.00
EBT 13000.00
DOL=C/EBIT 1.41
DFL=EBIT/EBT 1.31
DCL=DOL*DFL 1.85
FIRM A: has a DCL of 1.85,indicating that a 1% increase in sales will result in a 1.85% increase in Earn
FIRM B: Has a DCL of 1.71, so a 1% increase in sales leads to a 1.71% increas
Firm C: Has a DCL of 1.23, indicating minimal leverage. Since Firm C has no financial leve
lower risk and lower sensitiv
Cost of Capital
Ke 17.00%
( Expected Dividend / Price of current year ) + Growth
Kp 6.00%
Kd 5.60%
( Interest * (1 - t ) )
Category Amount (Rs.)
Part (i) Existing Capital Structure
Equity 4000000
Pref. Shares 1000000
8% Debentures 3000000
Total 8000000
New Kd 7.00%
( Interest * (1 - t ) )
Revised Ke 27.00%
( Expected Dividend / Price of current year ) + Growth
Category Amount (Rs.)
Part (ii) Revised Capital Structure
Equity 4000000
Pref. Shares 1000000
8% Debentures 3000000
10% Debentures 2000000
Total 10000000
FM LAB PROJECT
Kp= (PD+(RV-NP)/N) / ((RV+NP)/2)
PD 10
RV 100
NP 95
N 15
10.3333333333333
97.5
Kp 0.105982905982906
D1 2
P0 20
g 0.05
NP 20
Kr 0.140909090909091
SPECIFIC COST WACC MARKET VALUE OF EQUITY
0.0591 0.0106573770491803 EQUITY*
0.1059 0.010416393442623 RETAINED EARNINGS*
0.15 0.0865573770491803
0.1409 0.0203265573770492
0.127957704918033
NET PRESENT VALUE
NPV OF PROJECT Y
IRR OF PROJECT Y
PROFITABILITY INDEX
OUTFLOW -250000
INFLOW 56000
62000
74000
80000
110000
CCF
56000
118000
192000
272000
382000
AVERAGE PROFIT 26400
AVERAGE INVESTMENT 125000
VARIABLE COST(RS.) INTEREST ON BORROWED FUNDS (Rs.) SELLING PRICE PER UNIT (Rs.)
0.20 4000.00 0.60
1.50 8000.00 5.00
0.02 0.00 0.10
FIRM B FIRM C
75000.00 10000.00
22500.00 2000.00
52500.00 8000.00
14000.00 1500.00
38500.00 6500.00
8000.00 0.00
30500.00 6500.00
1.36 1.23
1.26 1.00
1.72 1.23
INTERPRETATION
ales will result in a 1.85% increase in Earnings per Share (EPS).This firm has has moderate operating and financial leverage
increase in sales leads to a 1.71% increase in EPS. Firm B has a slightly lower combined leverage than Firm A.
everage. Since Firm C has no financial leverage, the combined leverage reflects only the operating leverage. This suggests
lower risk and lower sensitivity to sales changes.
Weight Cost of Capital (%) Weighted Cost of Capital (%)
0.5 17.00% 8.50%
0.125 6.00% 0.75%
0.375 5.60% 2.10%
11.35%
Weight Cost of Capital (%) Weighted Cost of Capital (%)
0.4 27.00% 10.80%
0.1 6.00% 0.60%
0.3 5.60% 1.68%
0.2 7.00% 0.014
14.48%
4400000
3520000
880000
10%
6578.04049648866
14%
1.06578040496489
al leverage
D1 2
P0 20
G 7%
PD 6%
I 8%
t 30%
New I 10%
t 30%
Revised D1 3
Revised P0 15
G 7%