Chapters

1. Leverage 1- 66

2. Cost of Capital 67 - 137

3. Investment Decisions 138 - 233

4. Capital Structure 235 - 293

5. Ratio Analysis 294 - 359

6. Dividend Decisions 360 - 407

7. Management of working 408 - 506

capital

CA Inter FM-ECO CA Swapnil Patni

been
Ch - 1 Financial Decisions - Leverages

I change in sales

return on investment
interest bat fig
Comparision blw companies
t change in EPS
calculate PAT
f change of in EPS
degree change

Debt capital
asset turnover ratio
EBT zero
if decegaseveerages
increase
Use Fr
of
2 situations 2 plans
analyzing schemes
asset turnover
different EPS
Income statement
P v ratio

leverages PIVratio
asset turnover ratio
increase in units
percentage changes

CA Inter FM-ECO
aerated CA Swapnil Patni 1
 similar to 915
I change in EPS
EBI 7

Return onyield
Earning capital
employed
pre tax interest
negative interest

different situations
percentage changes
EPS leverages
Beta
leverages EPS
. change in units
percentage changes
comparision
of Companies
Alternative Schemes
margin of safety
DFL preferenceDividend

CA Inter FM-ECO CA Swapnil Patni 2

need
 SUPER STAR QUESTIONS

Q8. Practical Q4
Q10. Practical Q10
Q13. Practical Q8
Q26. PY Nov 19
Q27. PY Jan 21

Q11. Practical Q6
Q14. Practical Q9
Q16. Additional Question
Q40. RTP Nov 22
Q24. PY Dec 21

CA Inter FM-ECO CA Swapnil Patni 3

need
 LEVERAGE
combined
Financial DCL
DFL Operational occurs due to
occurs due to IDOL both fired
finedfinancial occursdue to financial cost
cost
fired operational and operational
cost eg rent
eg Interest cost
depreciation salary
knample
1 With fined cost
ve ve
Before
Sale 10,0002 20,000 5,000
H Variable Cost 13,0001 16,0007 1,500

contribution 7,000 14,000 3,500

It cost 14,0007
fined rent 14,0001 14,0001
eg salary
E BIT 3,000 10,000 500

Um
12 without fined cost

Sale 10,000 2times 20,000

Variable cost 13,000 16,0001

contribution 7,000 14,000

it cost
fined 10 o

EB IT 7,000 14,000

CA Inter FM-ECO CA Swapnil Patni 4

sees
 DOL Conti
EBIT
i 11 DOL 7,000 2.33 times
3,000

3000 2.33 3 000 10,000

increased
by2.33times
4 Doc I time
Eff
Whenfined cost is zero DOL would always be't

13 cost
high fined
sale 101000 201000
Variable cost 3,000 6,0001

contribution 7,000 14,000

it cost
fined 6,000 61000

EB IT 1,000 8,000

DOL 7,000 F times

1,000

conclusion cost Doc

fined
1 4,000 2.33 times
2 6,000 7 times

cost increases Dol increases Hence

If fined leverage more risk is more

CA Inter FM-ECO CA Swapnil Patni 5

ends
 Summary
companies like
PVR Air India
cost like rent
having
interest
high fined will
have more leverage
salary
Although there is no sale during
coccid still all such
fined cost
remain constant Hence company
is high risk investor
As an
taking
should
we prefer to invest in a
low fined cost
company
well
having love
as as
leverage

case
study
Air India 1,000 aircrafts
Debt 10,000 Cr Adverse impact
ofleverage
ROI 181 ROI 6 f
Int 101 Fut 101
Profit St loss 141

Interpretation of leverage
DFL S5 Doc 5

Debt stil
Id
fined cost 545
Int Rent Salary
Risk Ed Risk
5

Benefit Ed Profit 5T
so
Profit

CA Inter FM-ECO
e CA Swapnil Patni 6
 Lets understand Doc DFL DCL with
the help of following example
FY 23 F 24
change
Sale 20,000 24,000
Variable cost 61000 17,2007 20.1
13011
contribution 14,000 16,800 201
it cost
fined 4,000 9,000 of

E BIT 10,000 12,800 281

1 I Interest 15,000 151000 of

EBT 5,000 7,800 561

Answer

DOL Contribution Change in EBI

EBIT YES i change in Sales
14,000 281
10,000 207
1.4 1.4

EB17 change in EBT

DFL By
DEE change in EBM
10,000 561
5,000 281
2 2
DCL DOLX DFL
1.4 x 2
2.8
DCL Conti taint
H EBT IEE Dry i change in Sales
I change in EBT
tchangeinEBT
CA Inter FM-ECO CA Swapnil Patni 7
 Dee Conti I changein EBT
Fi EBT EFF t changein Sales

561
15,88
0 201
2.8 2.8

Doc f change in EBM

f change in sales

Particulars Aunt

Sale 50100,000
Variable cost 20,001000

contribution 30,001000
it cost 125,0010001
fined
E BIT 5,001000

a DOL Contribution
EBIT

30,001000
5,001000

CA Inter FM-ECO CA Swapnil Patni

so 8
 b DOL I change in EBIT
I change in sale

6 I change in EBIT
101
I change in [Link] 601
i new EBIT 5,001000 60 5,00 000
8,001000

Doc Conti
EBM

Particulars A B C D
Sales 1,001000 1,601000 2,501000 350,000
1 variablecost 130,000 801000 1,001000 2,501000

contribution 70,000 80,000 1,501000 1100,000

1
finedcost 1601000 140,000 11100,000 nil

EBIT 10,000 40,000 50,000 1,001000

DOL Conti 701000 s 1,501000 1 00,000

EBIT 10,000 50,000 1,00 000
7 2 3 1

CA Inter FM-ECO CA Swapnil Patni 9

so
 ROI PAT
shareholders fund

Particulars Aunt

Sale 24,001000
Variable cost 12,001000

contribution 12,001000
it cost
fined 10,001000

EB T 2,001000
It Interest 11,001000
10100,000 101

EBT 1,001000
1 i Jax 501 50,000

PAT 50,000

a DOL Contri 121001000 g

EB y 2,001000

b DEC Eggs 2,001000 2

1,001000

CA Inter FM-ECO
e CA Swapnil Patni 10
 C DCL DOC X DFL
6 2
12

d ROI PAT
Shareholdersfund

50,000
10100,0007100

51

e t change in EBM
Dog
i change in Sale

6 f change in 5317
251

t change in EB 7 1501

new EBIT Old EBM 1501 old EBM

new EBIT 2100,000 1501 2100,000
new EBI T 5,001000

Other interest Balancingfigure

CA Inter FM-ECO CA Swapnil Patni 11

 5100,000
No
of shales 50100,000
10
Interest 37 Lakh x 121 4,441000

Sale 84100,000
variable cost 160185,800

Contribution 23 14,200
fined cost 6,96 000

ii
E BIT 16 18,200
t latest 9144,000 16118,200 1.49
EBT
F Other Int
Balancingfigure
EBT 1119,8880400
1 7 Jax 401 4,341416

PAT 6,51 624

II no
ofshares 5,001000

EPS 7.30

i Doc Conti 1.43

EBIT 2,311310

wi DFL 16 18,200 1.49

53,4 10,86 040

wii Dec 1.49 1.43

2.13

CA Inter FM-ECO CA Swapnil Patni 12

so
 DFL
Eff interest

out EBM
Working note find
AA B
DFC EBIT DFC
EBT Effy
3 EBIT 2 E BIT
EBIT Interest EBIT interest
3 EBI 2
EBIT 20,000 ÉB 1,001000

in EBIT 30,000 EBIT 2,001000

out and
working note
find
sales
contribution

A
DOC Conti DOC Conti
EB T EBIT
5 2
Coffs Giotto

Contribution 30,000 Contribution 4,001000

CA Inter FM-ECO
a CA Swapnil Patni 13
 Sales00137500 Sales 8,001000
V cost 2,251000 H V cost 14,0010007
50
contri 4011,501000 contre 4,00 000

fined cost 1.20.000 finedcost 12,001000

E BIT 30,000 EBT 2,001000

Doc and Dre B Ltd is betterplaced

Considering

read formulas

Conceptal Understanding
change
Sale 101000 14,000 401
H Variable cost 2,000 2,800 407
go
Coutee 8,000 11,200 401
I I
fined cost 3,000 3,000 Of

E BIT 5,000 8,200 641

f Interest 2,000 2,000 Of

EBT 3,000 6,200 1061

1 Tax 501 1,500 3,100
PAT 1,500 3,100 106 I
100
no
ofshares 100
EPS 15 31 1061
CA Inter FM-ECO CA Swapnil Patni 14
so
 I change in EBT PAT EPS are same

hence we can use EBT PAT EPS

In the DFL Dee and
anwar
foemulla
will remain the
same

DOL change in EBIT

Fal t
change in sales

2 t changein EBT
Dry I
Change in EB 7
3 Dec i change in ERS
i change in Sales

And
Particulars Aunt

Contribution 33,07 500

I I cost 1157,500
fined
EB T 31 50,000
1I Interest 17,501000

EBI 14 00,000

DOL 33 07,500 1.05

Config 31 150,000

DFL 0 2.25
Eff 3,14
8 0

CA Inter FM-ECO CA Swapnil Patni 15

so
 DCL 2.25 1.05
2.3625

Deter t change in EPS

i in sales
change
2.3625 f change in EPS
101

I
change in EPS 23 6251

Basic calculations

Particulars Aunt E

Contribution 3,751000
it 13112,500
fined cost
E BIT 62,500
1 1 Interest 46,875

EBT 15,675
H Jax 301 14,687.5
EAT 10,938

CA Inter FM-ECO CA Swapnil Patni 16

8
 Working note 1
Doc Conti
EBIT

6 3,751000
EBIT
i EB T 62,500

Working note 2

DFL EBIT
EBT
4 62,500
EBT
EBT 15,625

CA Inter FM-ECO CA Swapnil Patni 17

8
 Particulars 19 20 20 21

Sold 1,201000
Price
Qty
Unit 12
001000
12
i Sale Value 14 90,00 12,001000

1 Variable cost 8 g
f u
i V cost 9160,000 8100,000

contre Y 80,000 4100,000

I I
fined cost 2,001000 2,001000
EBIT 2,801000 2,001000
11 Interest 7,001000 1,001000

EBT 1,801000 1,00 000

C Jax 301 54,000 30,000

PAT 1126,000 70,000

no
of shares 10,000 10,000
i EPS 12.6 77

DOL 1.71 2
Coty
DFL 1.55 2
EEF
t change in EPS
12 x100
fi
44.44 t decreased
ffgx100
CA Inter FM-ECO
c CA Swapnil Patni 18
 Particulars Aunt E

Sales 20100,000
1
variable cost 110,001000

contribution 10,001000
A
fined cost 16100,0003

EBIT 4,00 000

A Interest 11150,000

EBT 2,50 000

11 Tax 11125,000

PAT 1,251000
no
ofshares 1,001000

EPS 1.25

Wailing notes
1 DOL Coutee
EBIT
2 5 10,001000
EBIT

EBIT 4100,000

CA Inter FM-ECO CA Swapnil Patni 19

so
 2 BCL f Change in EPS
I change in sales

4 DOL DFL
4 2.5 X DFL
DFL 1.6

3 DFC E BIT

16
41088

EBT 2,501000

9 Debt Capital 1,501000

Gi 1Gt
937500

Pluratio Cosutig Total assets DTE

CA Inter FM-ECO CA Swapnil Patni 20

so
 note 1 DCL DOLT DFL
Walking 2 2.5 X DFL
DFL 1 25

2 DFL
EBay
1.25
ÉBB Interest

1 25
ÉB 242,000
E BIT 12,101000
3 Income Statement
Particulars Aunt E Aunt E

Sales 50,00 000 18177,419100

Variable cost 134,501000 12,951419769

3t
Contribution 15150,000 582,000
1 Cost
fined 3,401000 3,401000

EB 7 12110,000 2142,000
11 Interest 12142,0007 2,421000

EBT 9,681000 0
H Jax 30 f 12,190,400

PAT 6,77 600

11 no
ofshares 3140,000
EPS 1.99

CA Inter FM-ECO CA Swapnil Patni 21

08
 4 PIV ratio Contri 15,501000 3
Sales 50,00000

5 Asset 7 0 Ratio

Total Assets DTE

30,251000 34100,000
64,251000

Industry 7 0 ratio 1.5

Industry would have made the sale of

64,251000 x 1.5
96,371500

Our sale 50100,000

Due TO ratio is lower than

Industry

Alternatively students can solve

by
considering Doc first In that case
answer
Kindly check
the ICAI may vary
module Answer

CA Inter FM-ECO CA Swapnil Patni 22

 Particulars DOL DCL

M 0.92 1.14
22g 331
N 1 26 0.96
311 2ft
P 38 f 52 0.92
251 23,1

Q 4231
1.87 1.17
231
R 1.6 1.12
151 It

CA Inter FM-ECO CA Swapnil Patni 23

so
 PLAN
fined cost
15,000
fired cost
20,900
t
In a B

Particulars
fined cost
fined cost
15000 20,000
A B A B
Sales 90,000 90,000 90,000 90,000
Variable Cost 45,000 45,000 45,000 451000

Contribution 45,000 45,000 45,000 45,000

H
fined cost 15,000 15,000 20,000 20,000

EB 7 30,000 30,000 25,000 25,000

H Interest 2,000 1,000 2,000 11000

EBT 28000 29,000 23,000 29,000

DOL Contai 1.5 1.5 1.8 1.8

EBT

DFL EDIT 1.07 1.03 1.09 1.04

EBT

DCC DOC 1.605 1.545 1.962 7.872

DFL
1

CA Inter FM-ECO CA Swapnil Patni 24

8
 Sales Assets x Asset turnover
ratio

Working note 1 Sales Assets x2 S

48,001000 x 2.5
1,20 00,000
2 Income Statement

Particulars Aunt E

Sales 1,201001000
11 Variable Cost 17400,000
contribution 48100,000
cost
it
finedEBIT 128100,000
20,00 000
Interest 4120,000
EBT 15,801000
It Jax 301 14174,000
PAT 11106,000
I shales 11001000
no
of
EPS 11 06
Conti EBT 3.04
Dcc
CA Inter FM-ECO CA Swapnil Patni 25
so
 Particulars Aunt EPS 4 EPS 2 EPS O

Sales 90,001000
HV Cost 601 54100,000

Contribution 36100,000
finedcost 110,001000

EBIT 26100,000 27,651714 16122,857 4,801000

Interest 4,801000 14,8010007 4,801000 4,801000

EBT 21,201000 22,851714 11142,857

H Jax 301 6136,000 6185,714 3142,857 q
PAT 14,841000 16100,000 8100,000 0
F no shales
of 4,001000 4100,000 4,001000 4,001000

EPS 3.71 4 2 0

Dolcoutri EBM 1.38

Dfe EBM EBT 1.23

DCLDOLXDF 1.6974

CA Inter FM-ECO CA Swapnil Patni 26

so
 Working note 1 Sales Assets x5
1,00 00,000 5
5,00 00,000

2 Income Statement

Particulars Aunt E

Sales 5100100,000
variable cost Got 3,001001000
Contribution 2,001001000
cost
fixedEBIT 20100,000
1,80 00,000
Interest 16,001000
EBT 1174100,000
H Jax 251 43150,000
PAT 1,3050,000
CA Inter FM-ECO CA Swapnil Patni 27
ooo
 a DOL Conti 200,001000 1.11
EDIT 1,801001000

b DFL EDIT 80100,000 1 03

EB 1174100,000

C DCL DFL x DOC

1 03 x 1 11
1.1433

Working note 1 Sales Assets 72.5

30,0000,000 2.5
75,001001000

2 Income Statement

Particulars Aunt E

Sales 75100100,000
Variable cost Got 145,001001000
CA Inter FM-ECO CA Swapnil Patni 28
8
 Contribution 30,001001000
it Cost 16100100,0007
fined
EBIT 24100,001000
Interest 12,251001000

EBT 21,751001000
14 Tax 401 18,7010010007

PAT 13,051001000
f shales 75,001000
no
of
EPS 17.4

DOL Couthie 30,00 00,000 1.25

EB 7 24,00100 000

DFC 29,001001000 1.10

EBay 21175,001000

DCC DFL X DCL

1.10 1.25
1.375

CA Inter FM-ECO CA Swapnil Patni 29

so
 Working note's Sales Assets 4
6100,000 4
24,001000

Income Statement
Particulars Ant EPS I EPS 2 EPS O

Sales 24,001000
Variable Cost 14,401000
Got
Contribution 9,601000
cost
fined 12,001000

EB 7 7,601000 49,714 75,429 291000

Interest 24,000 24,000 24,000 241000

EBT 7136,000 25,714 51,429 0

11 Tax 301 12,201800 7,714 115,429 0

PAT 5 15,200 18,000 36,000 0

f no
of shares 18,000 18,000 18,000 18,000

EPS 28.62 1 2 O

DOL 1.263
Coff
DFL 1.033
EBay
DCL DFLxDOL 1.304

CA Inter FM-ECO CA Swapnil Patni 30

one
 Particulars Aunt E Aunt E

Sales 2,001000 2,401000

Pty
SP pie 10 10
Sales Value 20100,000 24,001000

v cost 6 6
1
pie
variable cost 112,001000 114140,000

contribution 8100,000 9,601000

cost
fined 4,001000 4,001000

EB T 4,001000 5,601000
1 Interest 2100,000 12100,000

EBT 2100,000 3,601000

1 I Jax 501 11100,000 1,801000

DAT 1,001000 1,801000

f no
of shares 20,000 20,000
EPS 5 9
EBIT EBT
DFL 2 1.5556
Conti Eble
Doc 2 1.7143
CA Inter FM-ECO CA Swapnil Patni 31
Boo
 Working notes I Dri
Egg
11001000
75,000
1.333
DFL y change in EBT
i change in EBM

13333 f change in EBT

lot
t Change in EBT 13 3331
2 DOL Conti 3
3,488888
EBM

Doc I change in EB T
t change in Sale

3 y change in EB 17
101
I change in EB T 301

CA Inter FM-ECO CA Swapnil Patni 32

so
 Particulars Suit E Sales A lot

Sales 5,00 000 5,501000

A variable lost 2100,000 2,201000

Contribution 3100,000 3130,000

H
fined cost 2,001000 2100,000

E BIT 1100,000 1130,000

301increase
DCL 3100,000 4
Coyt 75,000
DCL f Change in EBT
i change in Sales

4 I change in EBT
101
f change in EBT 40

raining yield Egg

other interest bat figure
CA Inter FM-ECO CA Swapnil Patni 33
see
 Particulars Ant R
Sales 84,001000
variable cost 63100,000

Contribution 21100,000
it
fined Cost 7,501000

EB T 13,501000
1I Interest 3,601000 DEL
EEL
t Other Interest 18,777
1.39 13,501000
EBT 9171,223 EBT
t Jax 301 2,911367 EBT 9171,233

PAT 6,79 856

17 shares 50,000
no
of
EPS 13.5971

DOC 1.56
Conti
DFLY DCL
Del 2.1684

13.5971 6.7986
learning Yeild EMI 200

However Student
might get different
answer 360,000 interest is considered
if DFC kuen that answer
ingrowing is acceptable
CA Inter FM-ECO
a CA Swapnil Patni 34
 revisefee tax
PE ratio
interest calculation
MPS EPS

working note I DF EB 7
EBT
15
EEB
interest
1 5
133 10,008
EBI 7 30,000
Interest calculation

1001 Income
8f
301 Jax
56y 701 Post tax
y
Pre tax interest rate
x 100 8 t
Joe
Interest 1,25 000 x 81
10,000

CA Inter FM-ECO CA Swapnil Patni 35

woo
 2 DOL
GIF
2 Conti
301000
i Contribution 60,000

3 Income Statement

Particulars Aunt E

Sales 2100,000
variable cost 1140,000

contribution 601000
I cost 130,000
fined
E BIT 30,000
1I Interest 110,000

EBT 20,000
is Jax 301 160007

DAT 14,000

DIE ratio MPS

EPS
10 140
EPS
EPS 14

no
of shares 141,0400 17,1 1,000 shares

CA Inter FM-ECO CA Swapnil Patni 36

Be
 Particulars
fined cost
fined cost
15000 20,000
A B A B
Sales 90,000 90,000 90,000 90,000
Variable Cost 45,000 45,000 45,000 451000

Contribution 45,000 45,000 45,000 45,000

H
fined cost 15,000 15,000 20,000 20,000

EB 7 30,000 30,000 25,000 25,000

H Interest 2,000 1,000 2,000 1,000

EBT 28000 29,000 23,000 29,000

DOL 1.5 1.5 1.8 1.8

DFC 1.07 1.30 1.08
DCL 1 60 1.55 195

CA Inter FM-ECO CA Swapnil Patni 37

robs
 ROE EDIT Debt
We use Equity
EBIT above as cit shows five profits

Particulars Aunt E

Sales 75100,000 22,89 091

1 7 Variable cost 142100,000 12,79 091
5Gt
Contribution 33,001000 10,051000
1 I
fined
EB 17
Cost 6100,000 6,001000
4,051000
27,001000
1 I Interest 14,051000 4,05 000
EBT 22,951000 O

ie ROI EBI 27100,000 00027

Debt 55100,000 45,00
lequityt
in The company's ROI is 271 and financialleverage
is 91 company is having favourable financial
leverage

iii Industry To ratio 3

Industry would have 45,001000

5500000 3
made sale 3,00 00,000
of
Our sale 75,00 000
Thus our capital 7 0 ratio is less
CA Inter FM-ECO CA Swapnil Patni 38
Mom
 DOC 33100,000 1 222
Cozy 27100,000

DFC EDIT 27100,000 1.1764

EBY 22195,000

DCL DFC XDOL

I 1764 1.2222
1.4379

Dole t change in EDIT

f change in Sales

1 222 i change in EBIT

101
f change in EB T 12.2221

CA Inter FM-ECO CA Swapnil Patni 39

BOB
 Working note 1 Sales
Sales Assets x2 5
400 Ce x 2.5
1,0006

Particulars Aut E in crores

Sales 1000
H variable cost 650

Contribution 350
fired cost 80

EB 7 270
1 I Interest 130

EBT 240
1 I Jax 401 196

PAT 144
H shares 10
no
of
EPS 14.4

DOC Conti EB17 1.2963

EBM EBT 1.125
Pf DFCXDOL I 4583

CA Inter FM-ECO CA Swapnil Patni 40

too
 ie Particulars Doc

Aud 0.63
2331
Bud 3254
s

CHI 0.90
22h
Dad 330 0.94

It is level specific

Doc leads to beta

iii
High When DOC is
high
0.63 least
at that time beta is 1 minimum
and when DOL is 1.46 high at that time
beta is 1.65 maximum

in content
Working note
ITC
of 0.26 RIL
learning yeild 100 learningyield Isoox100
1
4.5.1 2.41

CA Inter FM-ECO CA Swapnil Patni 41

no
 Particulars Basic it
by201 by201
Sales 3140,000 4,081000 2,721000
variable cost 160,000 72,000 48,000

Contribution 2,801000 3136,000 2124,000

fined Cost 1601000 60,000 160,000

EBIT 2,201000 2176,000 1,641000

1 Interest 160,000 60,000 60,000

EBT 1160,000 2,161000 1,09000

H Jax 56,000 75,600 36,400

PAT 104000 1 67.600

d DOL
a DFL
1.27
1 37 30
1.21
1.27
1.36
1.57
iii DCL 1.7399 2.1352
vie EPS 1.3 1.755 0.845

CA Inter FM-ECO CA Swapnil Patni 42

soon
 Income statement
Particulars Ant E

Sales 48,000 1001

H variable cost 36,000 757

Contribution 12,000 251

H
fined lost 81000

E BIT 4,000
14 Interest 2,000

EBT 21000
H Jax 301 1600

PAT 1,400

note
Working
DFL EBIT EB T
EBT EBIT Interest

2 EDIT
EDIT 2,000

ZEB T 4,000 EB T
i EBIT 4,000

DOL Conti

3
If
Conti i Conti 12,000

CA Inter FM-ECO
noooo CA Swapnil Patni 43
 Particulars Base Option Option 2 Option
Sales unit 1,001000 7150,000 7150,000 7,501000
SP p.u 40 40 40 40
Sales value 40,001000 60100,000 60,001000 60,001000
variable [Link] 20 18 18 18
variable cost 20,001000 27100,000 27100,000 O
Contribution 20,001000 33,001000 33,001000 33,001000
fined cost 10100,000 15,001000 15,00000 115,001000
EBIT 10100,000 18,001000 18,001000 18,001000
f Interest 70,000 70,000 70,000301000 70,000 60,000
EBT 9,301000 730,000 17100,000 16170,000
Jax 401 3172,000 6,921000 6,801000 6168,000
PAT 5,581000 101381000 1188880,1 0
F no
18 8
shales 1100,000 11009 81000
EPS
of 5.58 5.19 6.68 10.02
CA Inter FM-ECO CA Swapnil Patni 44
room
 Since Option 3 is
giving the highest EPS it is the
best option

Income statement
Particulars Aunt E

Sales 1,00 00,000

It variable cost 73100,000
Contribution 27,001000
1I Cost
fined
EBIT
4 501000
22150,000
1 I Interest 10100,000
EBT 12,501000
1 DFL E BIT EBIT
EB EBIT latest

18 EDIT
EDIT 10,001000

i EB 7 22,501000

2 DCC DOL XDR 3 DOC Coutee

2 16 1.2 X DFL EDIT
i DFL 1.8 1.2 Conti
22150,000
CA Inter FM-ECO CA Swapnil Patni 45
took
 Conti
27100,000
4 PIV ratio
100
Costly
27100,000 x 100 277
1,00 00,000

Docking note 1 Doc

Conley
k Sales
4 N 6,00 ooo
O In 30,000
0.4N t 1,20 000 N 6100,000
O On 7120,000
i n 12100,000

CA Inter FM-ECO CA Swapnil Patni 46

SEE
 Income statement
Particulars Ant E

Sales w 72,001000
V cost 6,001000 6100,000

contri n 6100,000 6100,000

f fined cost 4,501000

EB T O IN 30,000 1150,000
1 Interest 301000 30,000

EBT 0 In 1120,000
Tax 501 160,000

ya 0.05W 60,000

DFL 1 50,000 1.25

EBELL
1120,000

DCC DFC X DOC

1 25 4
5

DCL t in EPS
change
I change in sales

5 1 change in EPS
57
i I change in EPS 251

CA Inter FM-ECO CA Swapnil Patni 47

see
 Revise return Capital Employed
ofand
Pee tax
posttax
Particulars Ant E

Sales 86100,000 49,28 571

f Variable Cost 55,901000 28178,571

Coutiibutiou 351.30 I0,000 15150,000

cost
is
fined 10 00,000 10,001000

EBIT 20 10,000 5,501000

f Interest 5,501000 5150,000

EBT 4160,000 0
1 I Jax 401 5184,000

EAT 8176,000

DOL 1.99
Cage
CA Inter FM-ECO CA Swapnil Patni 48
see
 DFL 1.37
Effy
Des DR X DOC
2.04

Interest 5 50,000
EBI T 20,101000

EBM is
Hence
much
higher than isInterest
financial leverage favourable

DOL Y change in EBIT

I change in sales

1 49 change in EB 17
lot
in t Chang in EB 7 14.9

ROLE

s
u
Pee Tax Post Tax
v u

InteresttPAT Interested
EBI
20110,000 x 100
1,3000,000
15.46 f

CA Inter FM-ECO
e CA Swapnil Patni 49
 DFL
DefenceDividend
Only Tut gut pp
DFL EBI DFL EDIT
EBT EDIT Int
PItax
EB T 10,000
H Int 2,000
for interest we require
fee tax funds thats
EBT 8,000 Why 2000 2000
f Tax sot 4,000
foe DD we require
EAT
PD
4,000
4,000
Lost
thats
tax funds
why
Distributable O 2000
profit
79
208g
4000

DFL
Eff int PD l tax

Working note 1
DOL Coutee
EBM
CA Inter FM-ECO CA Swapnil Patni 50
so
 3 125 00 EBI 7 1,361000
4,28

2 Dcc t change in Conti

f change in sales
2.5
198,1
3 DCL DFC X DOL
2 5 DFL X 3 125
DFL O S

Y 0.8 EB T
EBM Interest
Tax
0.8 1136,000
136,000 Tut 15,000
1 0.5

0.8 1,36 000

1136,000 tut
15,88
Interest 64,000
i
Income statement
Contribution 4125,000
1I cost
fined
EBIT
2,891000
1136,000
1I Inteest 64,000
EBT 2,001000
H Jax 501 1100,000
PAT 1100,000
I I DD 15,000
DP 85,000
4 no shares 2500
of
EPS 34
CA Inter FM-ECO CA Swapnil Patni 51
 DrulPD
Tenth Ifaf
Particulars Plant Plant Plant Plant

E BIT 521001000 521001000 52,001000 52100,000

1 put 12 3172,000
H Int 91
i 3,511000
EBT 52100,000 48 88,000 48,491000 52100,000
1 Jax 401 20180,000 19,551200 19,391600 20,801000
EAT 31 000 291321800 29109,400 31120,000
1
pref dividend 2,341000
a 31120,000 29,321800 29109,400 28,861000
b no
ofshares 20,801000
netyamings
C EPS a b 1.5
18,201000 16,901000 16,901000

too i ios

DEL in case of
preference dividends

E BIT
CEBIT int
P1
52100,000 s
52,001000 0 213,410.0400
CA Inter FM-ECO CA Swapnil Patni 52
no
 Self Assessment Questions

CA Inter FM-ECO CA Swapnil Patni

ease 53
CA Inter FM-ECO CA Swapnil Patni
ease 54
CA Inter FM-ECO CA Swapnil Patni
ease 55
CA Inter FM-ECO CA Swapnil Patni
ease 56
CA Inter FM-ECO CA Swapnil Patni
ease 57
CA Inter FM-ECO CA Swapnil Patni
ease 58
CA Inter FM-ECO CA Swapnil Patni
ease 59
CA Inter FM-ECO CA Swapnil Patni
ease 60
CA Inter FM-ECO CA Swapnil Patni
ease 61
CA Inter FM-ECO CA Swapnil Patni
ease 62
CA Inter FM-ECO CA Swapnil Patni
ease 63
CA Inter FM-ECO CA Swapnil Patni
ease 64
CA Inter FM-ECO CA Swapnil Patni
ease 65
CA Inter FM-ECO CA Swapnil Patni
ease 66
 Ch-2 Cost of Capital

Kd Basic question
Kd redeemable Basic
Kd Basic
Ke growth model
Kd growthquestion
Kd I
annuity
Kd decisionmaking
Kp Bac
Kp redeemable
Ke
growth
realised yield
realised yield hod
CAPM method
calculation
ke ke
of
CAPM method
WACC Revise
Revise wau Mv
for
Marginal Cost B DID
weighted marginal
cost
similar to 419
WALL

CA Inter FM-ECO CA Swapnil Patni 67

Mmm
 Kd
WALL
Similar to 939
revise Rd Ke
Ke wale

capital structure
capital structure
wall
batterofraisingfunds
Best pus MV
for
Caculation of Wale
Wale Kd
Kp
Eu dividend div
cum dividend

Project's wall
wall MU BU
WA Ce
W Ace
Similar to 918
Similar to 019
Similar to 928
Calculation ofMV
Costof Deb Bank loan
W All MACC

CA Inter FM-ECO CA Swapnil Patni 68

Poor
 SUPER STAR QUESTIONS

Q12. Illustration 11
Q13. Illustration 12
Q39. May 18

. Q34. July 21

Q18. Illustration 17
Q19. Illustration 18
Q28. Practical Q6
Q36. May 22
Q48. May 22
Q49. Nov 23

CA Inter FM-ECO CA Swapnil Patni 69

Woo
 FORMULAS

1 Kd
I
Redeemable Irredeemable
Kd Int l tax RV Np Rd Int l tax
n
up
R
typ Assumption
RUYI capital
expenditure

4 Kp
I
Redeemable 1
Irredeemable

Kp PD
RFP Kp If
RUINI
3 Kr
Taxable non taxable
Ke Ke 1 tax Kee Ke
a person Income tax and
Ke
n
2 not corporate tax

u v KuningPrice Earning
Dividend CAPM approach Price growth
price approach d ke ke ta
ke Rftp rm R Ept Efg
ke Rm Rf Rishpremium
Dj
v
u DividendPrice growth
CF DF DCF Ke
CA Inter FM-ECO
year BottCA9Swapnil Patni 70
so
 COST OF CAPITAL

Investor 00s Company

110000
Investor Company after 1 year
10,000 cost
ofcapital
cost 101
of capital 1 0,080
100

Of 20,000 will cost 20,000

of capital 100,000 x100

201

2 Return cost capital

of
Return C cost of capital
acceptable
notaccept able

Cost
of capital Return
Investment

3
capital Debt Equity hand
Reserves PSM
Pref shares
RSM

4 Cost
id ke of capital Ir Ep
Debt 10 10 t pref
PSL PSL
Int 10 100 Profit100 100
Profit 90
tax 90 301 tax 100 30 t
27 Ee 30

CA Inter FM-ECO CA Swapnil Patni 71

 Debt
go
5 Reedemable 6 Irredeemable
approx
method
Int 101
Interest 101 Tax 30 f
Tax 301
life 5years Tut 10 100
Profit 100
RV 120 Profit90
Jax 90 301 100 301
Rd Int L tax RVNP 27 30
I

RVII Jaxsaved E3
Int outflow 10
n
life HJax saved 3
NP Net proceeds Net Int 7
RV Redeemable Value
Kd Kd
ofdebtfor 1year
Cost Int
NP
10 1 0.3 1205100 10 1 0.3 x 100
100
100 20
1 7t

7,44 1100 lot

aligned petard aligned pitied pgtend

4 4th 44 44 4 16
8 4 12 41,4 20

O I 1 2 2 3 3 4 4 5
100 104 108 112 116

CA Inter FM-ECO CA Swapnil Patni 72

Soa
 7 FU 100
Brokerage 2 Tan 201
Interest 10 y

Rd Interest 1 tax
NP
10 1 0.2
100 21
x 100 8 16 t or 0.0816

8 Brokerage fined cost

Ola Byju's
nyhaa
Information
memorandum
v
Investors SoftBaule Tig Global
I
evaluate

L 3
Debt Equity
50 Crore 50 Crore

v
Val 2000 x 1st
Interest lot 300 Ce
eg j 3866x 100
16 f
I
4 X 50 crore
floationcost Brokerage
2 Core
Net proceeds 48 Core
CA Inter FM-ECO CA Swapnil Patni 73
ear
 9 Fu 100
Discount issued 90
Interest lot
Tax 201
Brokerage 21

Kd Interest 1 tax
NP
10 f 1 0.2
90 2
x 100 0.0909 a 9.09 1

3 Kd Int 11 tax
formula NP

Kd Tut I tax
NP
12 1 O 35 x 100
94
8.29

CA Inter FM-ECO
e CA Swapnil Patni 74
 O Kd

redeemable Irredeemable

FV 100
DD lot DD 101
Tax 301 Tax 307
RV 110
5
life years up
Pfp i tax

Rp PD RV NP
n go
101
RVINI
PD is never
considered as a
10051 revenue expenditure
That is why no
tax
10,1g hence
saving
do not
11.43 t write l tax

no 1 tax because PD is not

revenue expenditure
dont write
Ruge
1 tax because this is not
revenue expenditure

CA Inter FM-ECO CA Swapnil Patni 75

so
 11 RV NP
n

Debt Pref
No
no l tax
i tax
yesl tax
because it
Ifconsidered
it is
Ifconsidered
it is is
undoubtely
as capital as revenue a capital
expenditure as expenditure expenditure
the Income
fee
Tax act
fee
as
IncomeTax
Act

Kd Int l taxi
Ruff Ruth
RV 100
NP 170
Interest 210
Jax 351
5 years
life
lets is capital
assume
Ruff expenditure

CA Inter FM-ECO CA Swapnil Patni 76

seed
 Kd Int 11 tax
Rund
RUYI
0 1 0.35
11005110
100 110
2
6.5 f 2
105

4.281

Kd Int I tax
FRUIT RUYI
NP 280
RU 2100
Tax 351
Interest lot
5
life years
Assumed RV NP is
n
capital expenditure

Kd Int 1 tax RV NP

P
RUIN
CA Inter FM-ECO CA Swapnil Patni 77
see
 Kd 10 1 0.35 80
1005
100
21
Kd
6.59ft
Kd 0.1166 a 11.66 1

floation cost is excluded from

net proceeds

pep
Pfp
I
100 31
12.37 1

PD
up RUSH RUTTY
NP 95
RV 100
PD 10
10
life years

CA Inter FM-ECO CA Swapnil Patni 78

see
 Kp DD
RAP
RUINI
Kp 10 100 95
10

100191
10 0.5
97.5
Rf 10.767

Trial Error method

RU E 1 00,000
NP 2500
25
life
Interest
years

Kd Interest
IRVnNPJof
RUTNP Walkable
2

Lets use Trial and error method

FV PV Itr

1 101 100,000 2500 11 to 10725

1100,000 I 2500 10.83

CA Inter FM-ECO CA Swapnil Patni 79

sees
 2 151 100000 2500 0.15325
1001,000 2500 32.91
1,001000 82293

3 161 1 00,000 2500 0.16325

1100,000 2500 40.87
1,001000 102185

19888 a
82293 102185

1 1 It 16 t

I t 19888
2185

ratio15.891ii in

or

11 79888
17703
n 0.89

Kd 157 0.891
15.891

CA Inter FM-ECO CA Swapnil Patni 80

to
 Time Value
d
of money I
Discounting
compounding
FU 2150,000
PV Fr at end 10
Intof lot
years
i Pr 21 PV
3
year
Interest 1
101 After 10years
calc 1.1 1.1 1.21 0.38 Oyeaes
F 1.331 2,501000 95,000

PV At end
in 1100,000
2 I o
ofBye
FU 1 00,000 2.48 years
2,481000
Int 201 Interest lot
5years calc
life I 1.1 0.9
0.82
end
of 2ndyear
3rdyear
12 1.2 1.44
1.72
0.35

4th 2.073
5
year 2.48
year
Lets understand importance
of time value
1,00 00,000
ofmoney
ef Yash
Inflow 1 3,001001000
Inflow 2 4,001001000 Int 121
Inflow 3 51001001000

Our
2670000 type Zyr
40L
Bye
50C
3160000
3550000
9380000 0.89 0.79 0.71
CA Inter FM-ECO CA Swapnil Patni 81
so
 Donat give 1a to yash taking la giving
9380000

valued
Discount
1 Int flow payment
O 1 0.945000 x 87 400 inflow 1400 1316
1 2 0.89 5000 1800 81 1320 1174
2 3 0.84 5000
320
inflow
2000 87 240 inflow 1240
3 4 0.79 5000 3000 81 160 inflow 1160 916
4 50.75 5000 810
4000 87 So inflow 1080
Ke Cost of Equity
1 Dividend Price Approach
Ke
Apj
and

[Link]
price of
Po market O year

21

21 learning price approach

Gaming fee share Dividend
fee share

CA Inter FM-ECO CA Swapnil Patni 82

so
 EPS 100
Div Go

ke
Eff
Lfo
4t

3 Capital Asset pricing model

ke Rm
Rft B Rf
Risk 71
Rf free
Fs
Op
eg
Basket 50 shares
Nifty
IB 121
of
Reliance 1.5 B
Op 71 ED
IB 121 nifty
JB y

515 Premium
I Flys given to
investor for
Reliance mish
ke B Rm
7
Rft 15 12 7
Rf
7 t 7.51
14 t

Adami
Ke 7ft 3 Sf 221
CA Inter FM-ECO CA Swapnil Patni 83
no
 Ke Rf P Rm Rf

Rf
Rm
lot
157
B 1.75

Ke Rft B Rm
Rf
lot 1.75 1st 107
101 8.757
18.751

CE DE DLF
year

CE DE 121 DCF
Year
At the end 1st 100 0.89 89
At the end2nd 100 0.79 79
At the end 31 100 0.71 71
At the end 4th 100 0.63 63
At the end 5th 100 0.56 56
At the end 5th 100 0.56 631.68

989.63

CA Inter FM-ECO CA Swapnil Patni 84

does
 Ke 121 cost 121
ofcapital
Notes
1 How did we
get 121

With the help of trial and error method

suggested in moduletried different
we
discounting factors and bydoing necessary
calculations we
found the discounting
factor 121
Let us understand trial and error method
to
get correct discounting factor Kel
cost capital with the help
of of
following examples
Sample question
years
2500 Po investment O
200 Dividend 1
200 Dividend 2
200 Dividend 3
3500 Sell 3

Let take DF lot

CF DF 107 DCF
year 200 0.90 160
2 200 0.82 164
3 200 0.75 150
3 3500 0.75 2625

Pv
ofPrfuture inflow 3119
2500
of outflow
CA Inter FM-ECO CA Swapnil Patni 85
0003
 Lets take DF 257
CF DF 25 1 DCF
Year
200 0.80 160
2 200 0.64 128
3 200 0.51 102
3 3500 0.51 1785

PV 2175
ofoutflow
Inflow
Prof 2500

iot 25
3119 619 2500 325 2175
I
ayy
944
7 I 619

n 9.8
DF 101 9.81
19.81
or

157 944 DF 257 5.161

325 19.81
2 5.16 f

CA Inter FM-ECO CA Swapnil Patni 86

so
 year of Df at 19.81 DCF

I 200 0.83 166

2 200 0.69 138
3 200 0.58 116
3 3500 0.58 2033

2450 2500
Proffuture inflow 2500
Prof Outflow
Sample question 2

year of Df lot Def

I 3 a 0.9 2.76
2 46 0.82 3.26
3 6A 0.75 4.506

10.46
Proffuture inflow 10A
of outflow
NPV 0.49
net present value

notes
is the cost
Iot of capital
After giving lotis returns to
fapaji
40,001000
company calming

CA Inter FM-ECO CA Swapnil Patni 87

see
 Ke Re
Ke expectations
shareholders
of
ke cost reserve
of

I 1
If income
taxable
is
in the
income is not
Iftaxable in the
hands shareholders hands
of ofshareholders
Ke Ke 1 tax Ke Ke
Ke lot

re
Rft B Rm
Rf

Ke
Rf B Rm Rf
Ff 1.2 16 t
Ft 7.21
14.2 t

CA Inter FM-ECO CA Swapnil Patni 88

see
 Lets understand

Ke
I I
constant
If If no
growth growth
ke t ke
g Dpg

Titan example to understand the formula

dividend price approach and growth
of

Po so
growth 297

1 Dividend price approach

ke ut
Bt go
little inaccurate

2 Dividend price approach growth

ke
Dp t
g
29 t
If
331

CA Inter FM-ECO CA Swapnil Patni 89

0002
 dont include cost of issue and
discount of21 5 1 in NP

loan Kd Int I tax

NP
14 1 0.5
100
7 f
debentures Kd Tut I tax
Np
13 1 0.05
100 2.5 1

x 100
got
6.731

expected to be refers to dividend of

vent year ieDa
dividend
of nextdividend
year
Ke at the
p end
ofyear
Ke 10 t 51
200 10 g

CA Inter FM-ECO CA Swapnil Patni 90

 re 57
if
5.405 51
10.4057

leupected Dividend D
Current Dividend Do
Dividend
of neut
present dividend Do
year D

9 current dividend 10
growth of comp St
What is D

D Do 57 Do
D 10 51 10
D 10.5

ke ke
I I
taxable non taxable
301 O
of 30 1107 101 O
Ff lot

ke ke
ke Dpg 51

Ur St
Yoo
Kr 51 51
Ke 101

CA Inter FM-ECO CA Swapnil Patni 91

soon
 It is considered as
capital expenditure
Do 2
D 2 12

i ke
BI g
t

2,1 t g
8.481 6f
14 48 f

ai Ke Bp t
g
14.48 St
2,11
6 481 2
pt
Po
2fFgf
Po 33.33

iii AV 112 d ht Eat pump

NP 96 n
Int lot
Tax go
RIND
CA Inter FM-ECO CA Swapnil Patni 92
see
 Ad 10 1 0.5 t 112 96
12
172
296
Kd 5 1.33
104
Kd 6.081

Do I
9 lot
D 1I
Po 55

ke ke
Dj Bpg g
100 lot
Sfx100 by
21 12 f

I
ke
t t
Dividend price approach Dividend price
approach with growth
ke
Dpt
re g
Dio t
21
Ist x100
x100
CA Inter FM-ECO
my
It 107 129
CA Swapnil Patni 93
 Re
Dpt g

Do 4.19
Po 50
9 51
D 4.39
Ke
Dj x100 t
g
100 51
43,9
8.79 Y f 51
13.79 f

WACC
1006 capital requirement
20A debt Kd lot
sole ke not
20A
equity
preference Kp 151
10A reserve ke 201
Source Ant cot rate Waco

Debt 20 201 101 21

equity 50 501 201 701
Preference 20 201 151 37
Reserve 10 101 201 21
1001 177
CA Inter FM-ECO CA Swapnil Patni 94
so
 Method2

Cost
of Capital How much youspend
How much capital you
used

Lat 10 at 36 26
100A
17 f

WALL a
Book Value Market Value

1 retained Earnings 1 Retained

reserves are Earnings are
considered ignored
2 The weights used are 2 The weight used
derived from are derivedfrom
Book Value market Value

3 Use this method 3 Use this method

only
when question is when question
about it
only
is about it
asking asking

CA Inter FM-ECO
BE CA Swapnil Patni 95
 Source Aunt alt Rate Wace

lequity 65100,000 16.37 10.081

Preference 12100,000 11.427 121 1.371
Debts 20100,000 19.041 10.51 1.991
Debt 8100,000 7.621 Ff 0.531
1,051001000 100h WALL 13.971

1 Debt Equity
3 7

2 Total funds 10100,000

3100,000 7100,000
Debt equity
2,181000 d
4,901000

reserve equity
CA Inter FM-ECO CA Swapnil Patni 96
so
 3 Kd Int I tax
10 11 0.5
51
Kd Int 1 tax
16 1 tax
8 1

4 Dividend price approach with

growth
Ke
Dip g
lot
y
151

5 Ke Ke 151

no personal tax rate is

given
hence considered as on
tax

o Wall

Source Aunt we rate ware

Equity 4,901000 491 151

Reserve 210,000 211 15 3 151
Debt 180,000 181 51 0.9.1
Debt 1,201000 121 0.96 1

10100,000 100 12.361

Wall 72.361
CA Inter FM-ECO CA Swapnil Patni 97
see
 rate of Ke and Ke and different

Ke 10.4 it
Ke lot
Book value
reserequey É's
market value
2
of Equity
250 5000
225,001000
This 25100,000 includes the Vallee
rescue so while
calculating able
of
dont consider reserve separately

3 Calculation Wall
of
Source Aunt E Weight rate with

lequity 25,001000 1001 10.417 10.411

above solution is INCORRECT because
Ke and Rate
rate
of of Ke are different
rate Ke 10.411
of Ke 70 t

CA Inter FM-ECO CA Swapnil Patni 98

no
 Source Aunt weight rate whee

Gquity 6125,000 251 10.417 2.607

Reserves 18,75,000 751 101 7.51
25100,000 1001 WAG 10.101

I
100,000 15,001000
3
625000 18175,000

Do 4 2.51 D 1.10
Po 50
Tax 301
É of
i Rd int i tax
10 1 0.3 71
CA Inter FM-ECO CA Swapnil Patni 99
and
 Kd Int I tax
15 1 0.3
10.51
wi Ke 9
Dpg
we lot
[Link]
Ke 12.27
iii Calculation wall
of
Source Aunt alt Rate Wace

0.6
lequity 6,001000 12.2.1
Preference 2,001000 OY 10 f 1.4
Debt 2,001000
10,00 ooo j 3 21

D
eupected Dividend

CA Inter FM-ECO CA Swapnil Patni 100

if
 D 22
9 51
Po 25 enfected dividend
Tax 25 y is considered as D

a format similar
to question26
5Gt
Debt Guity
B
1.25 Cl 3.75 Cl

u 1
Debt Debt Equity
0.75 0.5 Reserve 2.756
lakhs lakhs IN

WAC

Source Aunt Weight rate wall

lequity 2,75 00,000

Reserve 1,0000,000 201 131 2.61
Debt 75,001000 151 7.51 1.1251
Debt 50,001000 101 a 0.91
500,00ooo WALL 11.771s

Ke
Bt 9

223 51 131

CA Inter FM-ECO CA Swapnil Patni 101

mood
 Kd Int I tax
10 1 0.25
7.51

kdz Tut I tax

12 1 0.25
91
cost debt Kd wet Rd at
average of
Ut 75100,000 601 7.5 1601 9 1407
1,25100 000 4.51 3.61
8 It
Let 2 50 00,000 901
125,00 000

net proceeds 100 2 98

ont

I Calulation WAC per Market Value

of as

CA Inter FM-ECO CA Swapnil Patni 102

nor
 Source Aunt Weight rate ware
Mv
Debenture 3,301000 17831 727 t
Preference 2,70 000 14.59.1 1.821
Equity 1350 ooo 67 go 9.791
18,50 ooo poop Wall 12.91

net proceeds debentureconsidered the IP

of
was 100 floating cost 2 NP 98 Assumed
calculation aunt
Mu was quien
column
only
Sauce is foe of
applicable for preference

WN I Kd lat I tax RV NP
n

Ruth
10 1 0.3 98
100,2
100
291
7 271
WN I Kp PD
RUYI
RVII
12 100 97 12.481
10
100 97
2
WN I Ke 9
Dip t

57 14.51
254
CA Inter FM-ECO CA Swapnil Patni 103
so
 a Pattern for additional
of
requirement
raising finance

Additional finance
30100,000
bequity 1 2 tbt
10 00,000 20,001000
I t d
Debt Debt Debt
5 00,000
5898.9 at 108 9

b Kd Int I tax
when debt 25,001000 Iet 101
Kd 10 1 0.3
71
CA Inter FM-ECO CA Swapnil Patni 104
too
 when debt 10,001000 Int 81
Kd Int I tax
5 6

Average cost debt Kd suet tkdz acts

of Kd fats
5100,000 77 5100,000 6.3 7
10,001000 5.67
20,001000
6 1257

c Ke 9
Dpt
D Do t Gt Do
G t 6f 6
6.36

Re 61
6.31
71.3 f

d wale

Source Aunt cot rate Waco

33.331 3 3.766
equity 101001000
60.671 4.083
Dept g
39,88880
0 7 849 1

Wall 7.8991

CA Inter FM-ECO
e CA Swapnil Patni 105
 method
1 calculation wall per Mu
of as

Source Ant cot rate Waco

Deff 6,101000 i
38.777
Equity
4500 1807
8110,000 55.101 24 13.221
14,701000 16.991

Wall 16.99 1

Kd Int 7 tax lat l tax

NP up
Kd 12 1 0.3 12 1 0.3
100 110
8.41 7.6361

method 2
Source Ant cot rate Waco

94.891 7 or 3 421
equity 660000 55.101 13.33 7.3Mt
Debt
WALL 10.777
CA Inter FM-ECO CA Swapnil Patni 106
so
 Ke
291.4100
18
13.331

Invest 100
return 24 24
MV 180 981

revise Kd

W NP 125 5 120

ii 61 Trial and levee

growth
D 15

Ke 9
Ho t

Ke ft
o
Ke 18.51

Wii NP 105
PD 15

CA Inter FM-ECO CA Swapnil Patni 107

so
 Kp Pfp x 100

14.285 t Or 0.14285

ir Kd
our co rate on deb 15
other to rate on deb of
100 161
1st

Cross multiplication
By
93.757
still we are 100 161
getting 937

Kindly issue discount

at
cie 93.75

NP 93.75 2 91.75
life
5.351 RU 100

Kd Int i tax Run NP

Ruth
Kd 15 7 0.35 100 91 75

91.757100
2
Kd 70.91
It is capital eupinditive
CA Inter FM-ECO CA Swapnil Patni108
so
 Re Ike

Ke
If Bq 9
t Gt
s

181
Dont deduct
floating cost
from
125 because no floating cost to be paid
for using retained Earnings
V Calculation
of Wall as
fee BV

Source Aunt weight rate wall

Gquity 1,2000,000 61.531 18.51 11.381

Preference 36,001000 18.461 14.281 2.631
Reserves 30,001000 15.381 181 2.7 1
Debt 9100,000 4.611 10.91 0.51
195100,000 Wall 17.271

V Calculation
of Wall as
fee MV
Source Aunt weight rate wall

Equity
Resumes
1160100,000 65.51 18.51 12.1231
40,00 000 16.381 181 2.491
Preference 33,75 000 13.821 14.287 1.931
Debt 10,40 000 4.251 10.951 0.461
244,15000 WALL 17.481

In this question Mv scenario

reserves both shall
as
per
be
equity
written because rate
Ke and Ke are different If rate of
of
not required to write reserve separately
Keke then

CA Inter FM-ECO
e CA Swapnil Patni 109
 BU MU

Source Use reserve Donat use

reserve
Aunt as
perBook
value
As per MV

on the basis On the basis

weight aunt
of given
aunt ofgivencolumn
column 2of ofno 2

rate same same

wall rate x rate x

weight weight

Inception
not then write
If Ke
reserves
and Ke are
with equity amount
same

as
along
fee MV will be broken down ofinto
equity
2
facts ie equity and reserves in proportion
Book Value
of

calculation
of V
CA Inter FM-ECO CA Swapnil Patni 110
to
 I Aunt debt
of
Kd 81
Interest 7,501000

Suit of debt 7,501000

Sf
93 75,000

2 Aunt
of rquity
Ke 16 f
leavings before Interest and Tax
EBIT 3450,000

Interest 7,501000
EBT 27100,000

tut 27 00,000
of equity 161
1,6875,000
3
Capital Before
debt 9375000
16875000
Equity
Total 26250000

capital after
before 26250000
debt 7500000
Total 33750000

CA Inter FM-ECO CA Swapnil Patni 111

 4 Wall Before
Source Aunt Weight rate wale

equity 16875000 69.287 161 10281

Debt 9375000 35.721 ST 2.851
13.151
26250000

5 Whee
after
Source Aunt Weight rate wale

Equity
Debt
16875000
9375000 5g
2.0.881 10.41
St 41
7500000

16875000 14.447

6
Before EBIT I 3450000
additional EBT 1425000

Total EDIT 4875000

fI interest 1 750000
Interest 2 1600000
2500000 x St
distributable 3525000
profit
value 16875000
of Equity
Ke 20 Sty
I

CA Inter FM-ECO CA Swapnil Patni 112

 d Pattern
for raising additional finance
10,001000

I I
Debt 401 equity 1601
4100,000 6100,000

d d
Debt 1 Debts
180000 2120,000
101 161

I I
retained Balance
Earnings Equity
3100,000 3,001000
CA Inter FM-ECO CA Swapnil Patni 113
see
 in calculation Post tax
cost ofadditional average
debt
of

when debt 1,801000 Interest rate 101

Kd Tut I tax
10 1 0.5
0.5 a 51
when debt 2 20,000 Interest rate 161
Kd Tut I tax
1611 0.5
81 or 0.08

cost
average debt
Kd Cult Kds alt

180000 54 2,201000 81 4100

24,001000

9,000 17,600 100

4,001000

6.657 Oh 0.0665

CA Inter FM-ECO CA Swapnil Patni 114

no
 iii Calculation
ofand
cost
ofcostretained
earnings of Equity
Ke
DA t 9
cot
If
151
Ke Ke no personal tax

iv calculation wall
of
source Aunt Weight rate wall

rarity 4.5

g
Reserves 3,001000 30 157 4.5
Debt 1180,000 187 0.9
Debt 229 sy 1.76

1001 WALL 11.61

CA Inter FM-ECO CA Swapnil Patni 115

one
 check highlighted points

Working note
1 Ke
Dpt g
71
If
16 f

2 Kp PD RV NP
n

RVII

CA Inter FM-ECO CA Swapnil Patni 116

 11
100,75
100
275
15.43 f
3 Kd Int i tax RV NP
RV NP 2
13.5 1 200

0.441006
100 80

72.71
4 Re ke lot
! Students kindly note that
if floatation
cost is ke ke because NP will
be changed
given then ke and he In ke formula
NP IP FC
for whereas in Ke NP IP
formula
5 NACC as per Bu in Crores

Source Aunt ht rate Wace

z

lequity 5 16 f 4 lot
RetainedEarnings 20 3 984 q 5.461
Preference I 1.70 y 15.421 0.261
Debt 10 17 091 12.71 2.17
Debt 12.5 21 361 91 1.921

58.5 WACC 13.9 1

CA Inter FM-ECO CA Swapnil Patni 117

no
 G WACO as fee MV in Crores

Source Aunt ut rate Wale

z

Squity 0.75
73.847 161 11.817
Preference 0.921 15.421 0.141
Debt 8 9.841 1.291
Debt 12.5 15.381 1271 1.381
81.25 14.571

Value loan in Book value and market

valueof dont change

iii WACC

u v s

existing marginal Total

or 68 5h
58.5A additional
109
refer921
refer921
wall cost
of marginal
Source Amt E
weight rate wmoc

lequity 6.661
reserve 1.5 35 18 7 2.731
Debt 2.5 251 2.251
Debt 251 2.47
2.18 It
a WALC

new ke 3 71 19.031
Dj g 63271
CA Inter FM-ECO CA Swapnil Patni 118
sees
 noooo

I WACC

Source tut ut late Wace

z
3 601 251
equity 257
Preference
Debenture 9
10,00000 20 t
00201
50,001000
fp
9 out
1 ft

III
n
1 FV PV I
g7
14.07 10
g
g 51

2 Ke Dp t g
16 80 51 251
CA Inter FM-ECO
see CA Swapnil Patni 119
 3 Kp PD
Ruano
RV NP 2
8 104
1063
106 04

81
4 Kd Int tax
i
Rund
RV NPR

1211 0.4 120 95

10
120 95
2
9.021
2 Wall after expansion
Source tut wet rate Wace
E

aim i
Reference 10100,000 12.51 St I
Debenture 10100,000 12.51 9.021 1 Itf
at 3 3751
80100,000 WACC 16.752 1

ke 57
new
If
301

CA Inter FM-ECO
e CA Swapnil Patni 120
 een dividend price
Dividend 50 declared but
not yet paid on
1stmay
1stmay 2550 an price
seller will not
getthe dividend
will the dividend
buyer get
1stmay 2500 een div price
seller will the dividend
get
buyer will not
getthe dividend
calculation
1
Source Aunt
of Wale
Wall
weight rate
19,589888
equity
Preference 2,561000 8.741 12.57
12.601
1.091
Debentures 7120,000 24.601 7f 1 729
29126,000 15.471

CA Inter FM-ECO CA Swapnil Patni 121

see
 I Gu div price 18 2
16

dividend 25 87
2
NO's 4,001000
25
16000
MU 16000 16 256000

2
Kp A Kp 4 100 12.51
3 Rd Tut 1 tax
NP
1211 0.3
120
71

CA Inter FM-ECO CA Swapnil Patni 122

ooo
 Self Assessment Questions

CA Inter FM-ECO
NODS CA Swapnil Patni 123
CA Inter FM-ECO
NODS CA Swapnil Patni 124
CA Inter FM-ECO
NODS CA Swapnil Patni 125
CA Inter FM-ECO
NODS CA Swapnil Patni 126
CA Inter FM-ECO
NODS CA Swapnil Patni 127
CA Inter FM-ECO
NODS CA Swapnil Patni 128
CA Inter FM-ECO
NODS CA Swapnil Patni 129
CA Inter FM-ECO
NODS CA Swapnil Patni 130
CA Inter FM-ECO
NODS CA Swapnil Patni 131
CA Inter FM-ECO
see CA Swapnil Patni 132
CA Inter FM-ECO
See CA Swapnil Patni 133
CA Inter FM-ECO
See CA Swapnil Patni 134
CA Inter FM-ECO
See CA Swapnil Patni 135
CA Inter FM-ECO
See CA Swapnil Patni 136
CA Inter FM-ECO
See CA Swapnil Patni 137
 Ch-3 Investment Decisions
capital budgeting

CFAT Basic
ARR Basic
NPV Basic
NPV
for different projects
desirability factors
IRR Basic
IRR

MIRI method
I RR NPV
IRR NPV
IRR NPV
Combination
of Projects
99 anaturalized method
Payback ARR IRR NPV
Ranking usingYmethods
Payback NPV PI IRR
Machine Replacement
will be solvedin furtherchat
Costofprojectcapital NPV
Desirabilityfactor
NPV IRR
PayBack
Combination
ofProjects
NPV
Machine analysisNPV
Machineanalysis

CA Inter FM-ECO CA Swapnil Patni 138

so
 Machine analysis NPV PI
loss setoff
Machine analysis
Machine replacement
Eta
Machine replacement
decision making
Commission Income Cases
Machine replacement

Machine replacement
Machineiii replacement
Project analysis
FAT NPV IRR

IncrementalMethod
Similar to 0.18
Similar to 0.31
question incomplete
Similar to 928

CA Inter FM-ECO
B CA Swapnil Patni 139
 SUPER STAR QUESTIONS

Q9. Illustration 9
Q13. Illustration 13
Q15. Illustration 15
Q20. Practical Q1
Q25. Practical Q6
Q31. Practical 12
Q42. May 18 RTP

Q18. Illustration 18
Q30. Practical 11
Q40. Nov 22
Q4. PY July 21

CA Inter FM-ECO CA Swapnil Patni 140

B
 Capital Budgeting

BUSINESS
IDEA
M
me
COMPANY
START UP

method 1 NPV

100 a Oya
pg startup
306
Shack 1 year
406
2
30 Ce year
3
256 year
a
4
year
Amount
of Investment 100 a

Inflow
Net
125 a

flow 256

Can I shark is
getting the
benefit
say25 crore

No
Because Investment is done in
zero
CA Inter FM-ECO CA Swapnil Patni 141
we
 year Inflow is coming over the periodof
4
years
There is Time value
El will be of money means
value than
Today's

El getting
having4greater
after years
I 2 3 4
Yeah
30 40 30 25

i
PV 32.8
2
ofInflow
4 PV 17.0
ofInflow
Taz
100

net present 0.7

value
Lets understand from the
following eg

0.90

0.75
0.68 m
T Pv
of futureInflow

variables
1
2Inflow
life
3 Rate
of Discounting
CA Inter FM-ECO CA Swapnil Patni 142
so
 How to Use Calculator

Step 1 I 1.1 If DE 101

I 1.2 If Df 201

step 2 PRESS 0.9090

PV 1st inflow
of
step3 PRESS 0.82
2ndInflow
step4 press
i i
[Link]
3rd Inflow
steps press Ifaf
Pv
of 4thInflow

Investor
i Paisa
Brain
u v
Reward AND reward
NPV u

ByDiscounting
factor

CA Inter FM-ECO CA Swapnil Patni 143

so
 Tone to present above answer
alternatively
CF AT DE DCFAT
Year
I 30 0.90 27
2 40 0.82 32.8
3 30 0.75 22.5
4 25 0.68 17

PV 99.25
PV
of Inflow 100
of outflow
netpresent value 0.75

eras Cash
flow after tax
Df Discounting factor
Generally
PAT CAAT

Calculation of CFAT

CA Inter FM-ECO CA Swapnil Patni 144

so
 Project A
year fat of
121
Defat
I 0.892 44.6
5,00
2 0.797 39.85
3 50 0.711 35.55
4 50 0.635 31.75
5 50 0.567 28.35
Present Value ofInflow 180.11
Present Value of Outflow 200
Net presentValue 1989

CA Inter FM-ECO
noooo CA Swapnil Patni 145
 Project B
year fat 121
of Defat
I 40,000 0.892 35680
2 50,000 0.797 39850
3 70,000 0.711 49770
4 75,000 0.635 47625
5 75,000 0.567 42525
Present Value ofInflow 215.525
Present Value of outflow 190.00
Net presentValue 25.525

Compared to A B option is more

attractive hence
company
would invest in project B
and not project A

year fat of
Tot Dfat
I 55,000 0.909 49.995
2 80,000 0.826 66.08
3 75,000 0.757 56.775
present value 172.85
offuture
value
inflow too
s
present of
outflow
net value 72.85
CA Inter FM-ECO
noooo CA Swapnil Patni 146
 Since it is a
positive NPV
we must invest

Depreciation 25000
Tax 201
Calculation of CFAT
I 2 3 4
EBT Dep 45000 30,000 251000 35,000
1 1 Depreciation 25000 25,000 25,000 12510001
EBT 201000 5,000 0 10,000
Tax 201 4,000 1,000 62000.7
EAT 16,000 4,000 q 8000
4 Depreciation 25,000 25,000 25000 25000
CFAT 41,000 29000 25000 33000

CA Inter FM-ECO CA Swapnil Patni 147

nooo
 Payback Period
u v

normal discounted
Time Value
of
money Time value of
is not considered money is
considered

Lets understand Payback through

following example
PAPA 10100,000 BETA
CFAT 2,501000
yearly
Aunt Bal
year
I CFAT 750000
250000 sooooo
3
Eg
CHAT 250000
250000
250000
0

PayBaileperiod 4 years

Discounted Period
Pay Back
CFAT DF101 DCFAT Balance
Year
I 250000 0.90 225000 775000
2 250000 0.82 205000 570000
3 250000 0.7 187500 382500
4 250000 0.68 170000 212500
5 250000 0.62 155000 57500
6 250000 0.56 140000

Payback Period 5years 4.92 mouths

CA Inter FM-ECO CA Swapnil Patni 148

000
 Total Earnings
of year 6 140000
earnings for a month 140000
12m
I 11666

Balance 57500
Balance Period 57500
11666
4.92 mouths

ARR

Investment 1100100,000
PAT 20 00,000

ARR 20,00 000 7100

100,00 ooo
207

ARR
u r
Version I Version 2
Avg PAT Aught
Initial Investment Aug Investment
Income
I I
PAT C FAT

ARE Method
d d d d PI
IRR NPV
Pay Dir
Back Payback
CA Inter FM-ECO CA Swapnil Patni 149
nooo
 ARR Average PAT Average Pat
Wital Investment AverageInvestment

1 Calculation
of Average rate of
return

version 1
ARR Average PAT
Initial Investment

ARR 92000 4 6 000

10100,000
9.21

Version 2
ARR Average PAT
Average investment
92000
10,001000 80,000
2
92000 17 031
540000

CA Inter FM-ECO CA Swapnil Patni 150

moon
 Project A Project B
Investment 10,000 I crore

PV 40,000
of Inflow 1110,001000

NPV
Present Value 1170,001000
4,03 0100,000
ofPresent
Outflow
Value
1,001001000
10,001000
reject
ofInflow select

PI
PV 40,000 1110,001000
of Inflow
PV Outflow 101000 1,001001000
of
4001 110 f
select
reject

A tall PI IM

PI PV Inflow
PV ofoutflow
of

CA Inter FM-ECO CA Swapnil Patni 151

 1 Calculation
of desirability factor
Particulars 1st 2nd zed
PV 5,501000 751000 7,001201000
PV ofOutflow
of Inflow
PI
6,501000
l
95,000 7100,301000
78 1.26 1.00014
comment good Best Bad

NPV
If o
101
By taking it discounting
means
factor
IRR lot

WALL LIRR go for it

If 101 201
If WAU 7 IRR dont invest
201 lot
WALL IRR it
If lot lot
dont
go for

Practice IRR calculation

for

1 CFAT DF 101 DCFAT

Year
I 2501000 0.90 225000
2 250,000 0.82 205000
3 250,000 0.75 187500
4 125,01000 0.68 170000
5 250,000 0.62 155000
6 1250,000 0.56 140000

CA Inter FM-ECO CA Swapnil Patni 152

0
 PU
PV of Inflow 1082,500
of Outflow
NPV
10,001000
82,500
2 CFAT DF 157 DCFAT
Year
I 2501000 0.86 215000
2 2501000 0.75 187500
3 250,000 0.65 162500
4 1250,000 0.57 142500
5 2150,000 0.49 122500
6 1250,000 0.43 107500

PU 937,500
PV of Inflow
of Outflow
NPV
10100,000
62,500

10 2.1151 157
2.817 g H
1 781500 F 62500

method
145000
guy 62500

U 62500 57
145000
N 2.1157

IRR 157 2.1151

12.841

CA Inter FM-ECO CA Swapnil Patni 153

NOW
 method
c 145000
gy 82500

U 82500 X 57
145000
n 2.841

TRR 10 f 2.847
12.84 t

Conclusion Since IRR 12.854

make sure wall is lessee than
12.857 to avoid losses
NAI Wace IRR T TT 3T
ST 1
Profit

1 Calculation CFAT
Income of
Hafter depreciation
Jax 451
68000
30600
come after tax 37400
It Depreciation 72000
CFAT 109400
CA Inter FM-ECO CA Swapnil Patni 154
sons
 2 Calculation
of depreciation

depreciation Asset value

life
360,000
Syears
72,000
3 Calculation DCFAT
of
CFAT DF 141 DCFAT
year
I 109400 0.87 95178
2 109400 0.76 83144
3 109400 0.67 73298
4 109400 0.59 64546
5 109400 0.51 55794

PV 371960
Du of Inflow 360000
net of
outflow
Value 11960
feesent
DF loved NPV
higher
shortcut
1 2 3 4 5
109400 109400 109400 1094,00 109400

DE 141 3.43
PV 109400 3.43
of Inflow 375242
x

PV
of Outflow 360000
NPV H 15242
CA Inter FM-ECO CA Swapnil Patni 155
0000
 DF 171
I 2 3 4 5
109400 109400 109400 109400 109400
I

PV 109400 3.20 350080

Pr
of Inflow 360000
of Outflow
NPV 9920

DF NPV
141 15242
171 1 19920
31 25162

1 25162 p
15242 1 79920

147 31 171

25162 3
9920

2 9920
31
25162
u 1.187

IRR 171 1.181

15.827

When even CFAT is like 109400 then

given
CDF method instead column
gofor
tabular method
of

CA Inter FM-ECO CA Swapnil Patni 156

nor
 I
year
CFAT life Ray future Value
end I 30,000 4 1.36 40800
end 2 3 510,000
30,000 1.25
end 3 30,000 2 1.16 69,600
end 4 30,000
10
1 32,400
0,8
end 5 30,000 20,000

Total Value 2112,800

future
Future Value
of Inflow 212800
Present Value 136000
of outflow
life 5years

At O year Aunt of Investment 136000

At 5thyear Aunt received 212800

MIRR 91 approx
9.351

CA Inter FM-ECO CA Swapnil Patni 157

so
 INVESTMENT DECISION

FPV
Year CFAT DF DCFAT PAY BACK
1 10,000 0.9 9000
2 20,000 0.82 16400 v
3 30,000 0.75 22500 NON DISCOUNT
Invest
Pr
Pr
of Inflow 47900
401000
CFAT
1,001000

of Outflow 25,000
NPV 7900
PayBack 4years
DISCOUNT
PI PV
ofInflow CFAT Dera Bal
Prof outflow year DE
I 25000 0.95 23750 76250
47900 1.19 2 25000 0.90 22500 53750
40,000 3 25000 0.86 21500 32250
4 25000 0.32 20500 11750
5 25000 0.78 19588

19588 12m
11750
V mouths 71mouths
MIRR
St
Df 40,000
Inv
life 3years
CFAT remaining rate Fr
year
I ok tf1.16 11600
2 20K I 1.08 21600
3 30K 0 I 30000

FrofInflow 63200
40,1000
PV
rate
n 3
years
rate 16.41 trial and error
CA Inter FM-ECO CA Swapnil Patni 158
see
 IKR u

find out a DF where ARR

NPV O Use Trial
and Eval method v
Version 1
DF NPV
701 50,000 [Link]
201 20,000 vow 2
Aug PAT
101 70,000 Aug Inv
U 20,000
Aug Investment
U 2.857 it Initial Invest
Closing Bal
2
IRR 201 2.85711
17.1431 AverageRAT
PATI PAT2 PATT
PAT 4
to find out Nov use
4
4 column

CA Inter FM-ECO CA Swapnil Patni 159

nooo
 1 Foe Project A and B NPV [Link]

year crane CFAL griot Daft Daft

I
2 60,000 1,901000 0.82 49200 155800
3 75000

PV Inflow 124200 356800

PV of 100000 300000
of NPV
Outflow 24200 56800
Comments Reject Accept

2 Foe Project A and B DF 257

CA Inter FM-ECO CA Swapnil Patni 160

anaro
 CRAY
year CRI B If DFAT DFAT

2 60,000 190,000 0.64 38,400 1,21 600

3 51,200

98880 284,800
Prof
PV
Inflow 100000 300000
of NPV
Outflow 1,120 15,200

ProjectA
24200 25320 1 I 1120

101 251
1st

157 25320
1120

U 0.66351
IRR 24.3361

ProjectB
7
56800 n 15200

101 251
1st

CA Inter FM-ECO CA Swapnil Patni 161

Now
 157 72000
15200

re 3 1661
IRR 251 3.1661
21.841
Conclusion

NPV IRR
AB
24200 24.341
56800 21 841

Selection B A

Additional question
wall is 231 then which
If will still
project give Profit
Any Project A LIRR Wace

CA Inter FM-ECO CA Swapnil Patni 162

no
 Pay Back Period
5 years 7.5 mouths

CAAT DF DCFAT DF DCFAT

year
I 1400000 0.90 1260000 1204000
2 1400000 0.82 1148000 0.75 1050000
3 1400000 0.75 1050000 0.65 910000
Y 1400000 0.68 952000 0.57 798000
g 1400000 0.62 868000 0.49 686000
6 1600000 0.56 896000 0.43 688000
7 2000000 0.51 1020000 0.37 740000
8 3000000 0.46 1380000 0.32 960000
g 2000000 0.42 840000 0.28 560000
10 8000000 0.38 304000 0.24 192000

PV
Pr
of Inflow 9718000 7788000
of NPV
Outflow 8000000
1718000
8000000
212000

CA Inter FM-ECO
Noooo CA Swapnil Patni 163
 a 101 151p
5
1718000 212000

51 1950000
W 212000

U 0.549

IRR 187 0.599

14.451

CA Inter FM-ECO CA Swapnil Patni 164

so
 a
Pay Back Period
Project A 5 years 6.66 mouths

900 12m
500 n

u 6.66 months

Project B 5 years 5 mouths

1200 12m
500 n

u 5 mouths

Project C 2
years 6 mouths

2000 12m
1000 w

u 6 mouths

b Calculation NPV
of
ProjectA
Method CDF
CFA T 900
CDF 6.14

PV 900 6.14
of Inflow 5530
Pv 5000
of outflow
NPV 530
CA Inter FM-ECO
soooo CA Swapnil Patni 165
 Project B
CAAT DF DCFAT
years 101
I 700 0.90 630
2 800 0.82 656
3 900 0.75 675
4 1000 0.68 680
5 1100 0.62 682
6 1200 0.56 672
7 1300 0.51 663
8 1400 0.46 644
9 1500 0.42 630
10 1600 0.38 608

6540
Prof Inflow 5000
Prof Outflow
NPV 1540

Project C
FAT DF DCFAe
year 101
I 2000
2 2000 0.82 1640
3 2000 0.75 1500
2000 0.68 680

5620
Prof
PV
Inflow 5000
Net of
Outflow
Present Value 620

CA Inter FM-ECO
sooooo CA Swapnil Patni 166
 a calculation Internal Rate
of Return of
Project A
Npv 201 crat 900
CDF 4 19

Pv 900 4.19
of Inflow 3773

PV 5000
of Outflow
NP V F 1226 775

Toy 5775 201

d
10.1

n 1226 775
101 1756 775

n 6.98311
IRR a 201 6.98311
13 017

CA Inter FM-ECO CA Swapnil Patni 167

0000
 Project B
CFAT DE ACFAT
year soy
I 700 0.83 581
2 800 0.69 552
3 900 0.57 513
4 1000 0.48 480
5 1100 0.40 440
6 1200 0.33 396
7 1300 0.28 364
8 1400 0.23 322
9 1500 019 285
10 1600 0.116 256

1 Prof Inflow
IPV
4189
5000
ofNPV
Outflow 1 1811

2351
a c
1
lot O 201
171540 I 11 1811
pop

101 2351
n 811

M 3.457

IRRB 201 3.451

16.551

CA Inter FM-ECO
mood CA Swapnil Patni 168
 Project C

CFAT
year 0.83
I 2000 1660
2 2000 0.69 1380
3 2000 0.57 1140
4 no 0.48 482

I 9508 y
101 201
11620 A I 1 1338
pop

101 958
n 620

U 620 101
958

U 6.47181
IRRC 10ft 6.47181
16.47187

Version 1

Project A ARR Arg PAT

Initial investment

Aug PAT
900 10 9000
Invest 5000
PAT 4000
Avg PAT I 4000 10
2400
CA Inter FM-ECO
more CA Swapnil Patni 169
 Investment 5000

ARR ft
188
ProjectB

PAT 11500 5000

Aug 10
650
Investment 5000

ARR Aug PAT

Initial Investment

650
5000
131

Project C
PAT 7000 5000 500
Aug 4
ARR Aug PAT
Initial Investment

500 107
5000

Alternatively we can use version 2

whee ARR Aug PAT

Aug investment

CA Inter FM-ECO CA Swapnil Patni 170

now
 sojectA
Aug PAT 2400
Aug Investment 50020
2500

ARR 16
Ypg
ProjectB
PAT 2650
AugInvestment 2500
Aug 550,01

ARR 261
gtfo
Project C
Aug PAT 500
Aug Investment 50200 2500

ARR 500
2500
201

CA Inter FM-ECO CA Swapnil Patni 171

no
 I I 2 3 4
100000 100000 100000 100000
O

CDF 121 3.038

PV 100000 3.038
of Inflow 303800
PV 303800
of outflow
this is because IRR 121
where PV PV
of Inflow
of Outflow
2 P1 PV of Inflow
Prof Outflow
1 064 n
303800

N PV Df 3 23,243
of Inflow

3 I 2 3 Y
100,000 100000 100000 100000
0
of
323243
CA Inter FM-ECO
made Prof Inflow CA Swapnil Patni 172
 CDF 97 trial and
error method
4
Payback Period
CFAT Balance
Year
I 100000 303800 100000 203800
2 100000 103800
3 100000 3800
4 100000

Payback Period
3 14days
years
100000 273.9
365days

32893.0g 13.8 14days

CA Inter FM-ECO
noooo CA Swapnil Patni 173
 1 Project Investment NPV NPV Ranking
ist per rupee
A 50,000 15400 0.308 5
B 40,000 18700 0.467 2
C 25,000 10100 0.404 3
D 30,000 11200 0.373 4
E 35,000 19300 0.551 I

2 Capital Spending of E 120000 based on

rankings divisible

Project Divisible NPV

120.000
A
B 40,000 18700
C 25,000 10100
D 20,000 7466
E 35,000 19300

Indivisible
Et Bt C
option 1
19300 18700 10100
48100 Reject
Option 2 Et BAD

19300 18700 11200

49200 Select

Option 3 At B C

15400 18700 10100

44200
CA Inter FM-ECO
Reject CA Swapnil Patni 174
noo
 Equivalent Annualized method

1 Project A
NPV
64901
6years life
DF
CDF 121 of 6years 4.111

u n u
649049 7 1 y
121 CDF 4.111
4 1112 649049
M 649049 4.111
CA Inter FM-ECO
wrong CA Swapnil Patni 175
 this is not Cray
U 157850 this is everyyear's
profit
2 ProjectB
NPV 575488
3
life years
DF 121
CDF 2.40

MY 2.4018 575488
U 239606.91

1 2 3
year year year
profit profit profit
A 157850 157850 157850
13 239606 239606 239606
lencess 81753 81753 81753

In this project A and

question
Project B was life notof same That is
whyIRR we can't NPV and
Hence werelyare on

using
equivalent Annualized Method

CA Inter FM-ECO CA Swapnil Patni 176

no
 1 Project A
Payback Period year
Project B year 4 mouths

CFAT Balance
year
7500 2500
I 7500

625 m
750,7

4 mouths
25828

Project C Payback Period 2years

4mouths
CFAT Bal
year
12000 sooo
by 4000 4000
12000

Project D
payback Period Yeah
CFAT
yeay 10,000 Bag
Calculation ARR
2
we are
of initial investment
using
Project A ARR
Aug PAT
Initial investment

CA Inter FM-ECO CA Swapnil Patni 177

nooo
 0
gooo

Project B 2500 257

10,000

Project C 2667 26.6 y

10,000

Project D 2000 20 y
10,000

Particulars Payback ARR

A 1 Tye O 4
B d
ly um 251 2
c 3 244m 26.61
g 4 20 f 3
y

3 Calculation of NPV and IRR

ProjectA
CFATD DOA
year [Link].y
I 10,000 0.909 9090 0.769 7692

PV 9090 7692
1 I Pu of Inflow 10000 10000
Outflow
of NPV 1 1910 12308

since the net cash proceeds in

I to the
year are
just
investment
equal
i IRR 01
CA Inter FM-ECO
show CA Swapnil Patni 178
 Project B
CRAY DF DCFAT DF DCFAT
year lot 301
7500 0.90
I 7500 0.82 8,58 839 572s

12900 10125
Prof
PV Inflow 101000 101000
of outflow
NPV 2900 125

year CFAl DCFAT

Dg.y
7500 0.79 5550
I 7500 0 4050

Pr 9600
of Inflow 10,000
Prof outflow
NPV I I 400

a
lot O 351
1712900 1
3300
149
2 400
257 3300
n 3.03

IRR 357 3.031

31.96 f

CA Inter FM-ECO
8 CA Swapnil Patni 179
 Project C
CFAT DF DCFAT DF DCFAT
year lot 301
I 2000 0.90 1800 0.76 1520
2 4000 0.82 3280 0.59 2360
3 12000 0.75 9000 0.45 5400

14020 9280
Prof
PV Inflow 10000 10,000
of Outflow
NPV 9080 1 I 720

201
a
Hot to
301
740.80 1I
7,20
4800

201 4800
n 720
u 31
IRR 301 31
271

Projects
CFAT DF DCFAT DF DCFAT
year lot 301
I 10,000 0.90 9,000 0.76 7800
2 3,000 0.82 2460 0.59 1770
3 3,000 0.75 2250 0.45 1350
CA Inter FM-ECO CA Swapnil Patni 180
v0
 PUof Inflow 13710 10720
PV 10,1000 101000
of outflow 143710 H
NPV 720

year CFAT DF DCFAT

hot
I 10,000 0.71 7100
2 3,000 0.51 1530
3 0.36 1080
35
of Inflow 9710
Prof Outflow 10,000

NPV 290

301
a
101 401
t 3710
4000 2,90

4000 301
290 n

u 2.1751
IRR 401 2.1757
37.821

CA Inter FM-ECO CA Swapnil Patni 181

we
 Working Note

Calculation
of NPV
1

year CFATCFATDFDCFATDCFATAB
16t.A B
1 60,000 0.862 51720
2 30,000 84,000 0.743 22290 62412
3 1,32000 96,000 0.641 89612 61536
4 84,000 102,000 0.552 46368 56304
5 84,000 90,000 0.476 39984 42840

193254 274812
Prof
PV
Inflow 135000 240000
ofOutflow
NPV 58254 34812

2 Discounted Back Period

Pay
Project A 3 years 7 mouths

CA Inter FM-ECO CA Swapnil Patni 182

so
 96368 12m
28098 n

n 7.27

Project B 4 2 mouths
years
42840 12m
8028 n
M 2.48 m

3 Calculation Juden
of Profitability
Project A
pg pv
of Inflow
Prof Outflow
1.43
133ft
Project B py pv
of Inflow
Prof Outflow
274812 1.15
240000

4 Conclusion

ProjectA 5 2 4 I Accept
Project 34812 1.15
Reject

CA Inter FM-ECO CA Swapnil Patni 183

AND
 A Calculation NPV 157 and 101
of
CFAT DF DCFAT DF DFAT
Year ist lot
I 0.86 0 0.90
2 2,501000 0.75 187500 0.82 205000
3 3100,000 0.65 195000 0.75 225000
4 3,501000 0.57 199500 0.68 238000
5 4100,000 0.49 196000 0.62 248000
6 4100,000 0.43 172000 0.56 224000
7 4100,000 0.37 148000 0.51 204000
8 4100,000 0.32 128000 0.46 184000
9 4,001000 0.28 0.42 168000
1 4,001000 0.24 96000 [Link] 152000

A PV 1434000 1848000
B PV of Inflow
of Outflow
year 7,00 000 1 700000 700000
101001000 860000 900000
year x 0.86 0000 1600000
NPV A B 126000 248000

CA Inter FM-ECO CA Swapnil Patni 184

good
 b Calculation IRR
of
101
H 248000
É H
157
126000
374000

51 374000
N 126000

re f 687
IRR 151 1.68 f
13.321
C
Payback Period 6
years

combination
of projects
practice
analysis

CA Inter FM-ECO
meeee CA Swapnil Patni 185
 1 Calculation NPV the projects
of of
Projects Investment ProfInflow NPV

I d

2 1,151000 1185,000 70,000

g gyp 4 1130,000

land 2 2,001.000 1,151000 2,901000 1,851000 1,601000

3 15,000 4,751000
I and 3 2,901000 4,001000 2,501000
6,901000
2 and 3 1115,000 270,000 6,201000 2,351000
3185,000 given
lizards 2,301000
20019,095000
2,70100925000
É
7 10,000 9110,000
H 30,000
g

conclusion I and 3 Best Option

It has the highest NPV

CA Inter FM-ECO CA Swapnil Patni 186

oooo
 1 Calculation CRAY
of
contribution
year fined
cost
CFA

7 62500 21000 41500

2 62500 21000 41500
3 62500 21000 41500
4 62500 21000 41500
5 62500 21000 41500
30,000
71,500
2 Calculation NPV
of
CRAY DF DEFAT
year
I 41500 0.90 37350
2 41500 0.82 34030
3 41500 0.75 31125
4 41500 0.68
5 41500 0.62 49338

Prof
Pv
Inflow B
A 175055
143800
of Outflow
O 1,001000 1
1 25000110,000 0.9
2 15000 0.82

NPV A B 31255
note
working
1 depreciation 125,000 30,000
5
CA Inter FM-ECO
years
CA Swapnil Patni
ummm 187
 19,000

2 Tined Cost other than depreciation

40,000 219,000
21,000
3 Sales Value 23
Variable cost 1.75

contribution 1.25

Quantity 50,000

Total Contribution I 62,500

CA Inter FM-ECO
Mmm CA Swapnil Patni 188
 1 Machine X

CFAT DF 91 DCFAT
Year
15100,000 15100,000
103 4100,000
2.153
10 2,400

Present Value 25112,400

of Outflow
PV 992
Equivalent year
48
2 Machine t
CFAT DF 91 DCFAT
Year
O 10100,000 1 10100,000
1 2 6100,000 1.759 10,55 400

Present Value 20.55.400

of Outflow
PV 11,681500
Equivalent year
1 55
Conclusion
Machine x should be
brought by
the company

CA Inter FM-ECO
MMM CA Swapnil Patni 189
 Working note

1 Model A 2 Model B

Basic Cost 5 Basie Cost 5

0 2
Utility Utility
add cost I add cost O
6 I
salvage i
salvage I
value net cost I
net cost 5 salvage value 0.20

of oldutility 5 go

CA Inter FM-ECO CA Swapnil Patni 190

mom
 Calculation NPV
a
of
CFA CFAT DF DCFAT DCFAT
year A B 157 A B
I 1100,000 200,000 0.870
2 1150,000 2,101000 0.756 1113,400 1,581760
3 1,801000 1180,000 0.658 1118,440 1118,440
4 2,001000 1,701000 0.572 1114,400 97,240
5 1,70 000 40,000 ay 1109,340 49,700
50,000 1760,000
2120,000 1100,000

PV
of Inflow
5 42,580 5,981140
PV Outflow 5,001000 5.80000
ofNPV 42,580 18,140

b Calculation
of desirability factor
P1 Pv
desirabilityfactor Inflow
PV
outflow
model A 542580 1.08
5106000

model 13 5,98 140 1.03

5 80,000

c Calculation Period
of Payback
DCFAT Bal DCFAY Bal
Year
O A 5,001000 13 5,801000

I 87000 4,131000 1174,000 4,061000

y 113400 2,991600 1,581760 2,471290
CA Inter FM-ECO
MMM CA Swapnil Patni 191
 3 18440 8 100 118440 128800
114400 66760 97240 31560
Y 109340 49700

Period A Yyears
Payback of 66760
109340
4
years 0.61 yes
Y yest 7.32 mouths

Period B 4 37560
Payback of years 49700
4years 0.62yrs
4 7.62 mouths
years
machine A must be selected

CA Inter FM-ECO CA Swapnil Patni 192

DOM
 1 Gaming from commission
36000 x CAF
36000 5.332
192024

2 Calculation NPV
of
year CFAT DF DCFAT
1
1 75075 5.332 400300
88 18000 6 467 8406

NDU 208706
NPV Commission 192024
of
Net in Purchase 16682
gain
3 Calculation CFAT
of
Sales 1,201000
H Cost 22,500
operating
97,500
depreciation 22,750
21001000
8 18,003
PBT 74,750

CA Inter FM-ECO CA Swapnil Patni 193

so
 To solve I any investment decision questions
gather the
following data
1
outflow
2 CFAT
3 DF learn IRR ARR formula
4 depreciation
5 Sales Value
6 Jax
7 4 column

CFAT is same years We

1
If can use CDF to
for multiple
reduce time

2 Donat deduct and add back depreciation

there is no tax
if
3 Working capital
add at the start in
outflow
add at the end in inflow
refer 928
4
PBT 20 50 when loss is
Tax 301 0 9 carried forward
PAT 20 41 in the neut
H Dep 40 40 year's refer928
CFAT 20 81

5 O Initial outflow 100 1 100

3 Outflow of 3rdyear 37.5

PV 137.5
CA Inter FM-ECO
no
of Outflow CA Swapnil Patni 194
 6 Jax

no
carryforward guy guard
028
a b
PB pay 10 50
5g
f
o Tax 2
Tyg saving
pm 10 42 g

SPC SPC
Education audition
10 40
Tax saving at SPC 10
audition is 8 6 26 30
means loss is beneficial 20 t
to save tax 26 Tax 6
of

7 FORMATS

Pay Back Period

Year CFAT Balance

NPV format
in CFAT DF DCFAT

Discounted payback Period

CFAT DF DCFAT Bal

year

CA Inter FM-ECO CA Swapnil Patni 195

nooo
 8 Incremental NPV Steps

ie Incremental Outflow
outflowof new 10109000
tale Valueof a 2,001000
8,001000

ii Find out incremental crate

of new

Part Old New Difference

Ai NPV
Incremental DF DCFAT
year
1 O O
2 O o
3 O O O
4 O O O
PV
PV
Inflow
ofincremental xxx
xxx
of
outflow
Incremental Npv xxx

9
NPI
u u
Choose deepika Deepika old
or Katrina Katrina new
Can we
shift
u
from deepika
a NPV to Katrina
b NPV
of deepika
Katrina
of
Compare NPV
c
both and
of
then
u
Choose incremental
select approach
CA Inter FM-ECO CA Swapnil Patni 196
mom
 fo CFAT

Sales

É
t VC xx
ft Fe xx
Depreciation
PBT xx
Jax I xx
PAT
H Depreciation
can

11 Capital Gain
sin WDU
Investment 10,001000
Invest 10,00 000 Sale Value 200,000
Sale 2 00,000 WAV method
Value 201

life 4 years Dep Y 2100,000

Depreciation 2,001000 42 1,601000
43 1 28,000
Yu 1 02,400

12 BS
10 Balance 4,09 600
42 Sales 200,000
8
loss capital 2,09600

Impact on Cray

CA Inter FM-ECO CA Swapnil Patni 197

some
 BIS
8 4thyear inflow 2001000
2 4thyear
6 inflow 41,920
209600 201
Bls Tax on
gain
6 capital loss
2
1 Assumption loss
setif
Bls
can
off
against
4
to
capital
I
gain
20 SalesValue

13 ARR

v u

Avg PAT Aug PAT

Initial investment Aug Investment

Any Investment op 2 ce
Closing Salvage
Value

14 equivalent Annualized Method

NPV year O
EAM BY In
compare at all
the
years separately
CA Inter FM-ECO CA Swapnil Patni 198
000
 PV 10,00 000
3 DF 101
life years

equivalent annual
profit
10,00 000
2.48
4,03 225

I 2 3
403225 403225 403225
10,001000

UDF 2.48

refer 919 different life of

projects

CA Inter FM-ECO CA Swapnil Patni 199

oooo
 1 PV 101001000
of Outflow
H 2,001000
8,001000

Calculation
2
of CFAT
Particulars Old New Difference

Quantity 30,000 751000 45000

rate 15
sales 4 50,000 1125,000 6 75,000
Op hotels 3,000 3000
Material unit 4 a
Total Material 1,201000 3100,000 1,801000
Cost
labour he 40 70
Total labour 1 20,000 210,000 90,000
cost
Indirect 50,000 15,000
5 5 88
Profitbefore 601000 3,901000
depreciation

PB7DDep [Link].y PV
year
flow
I 390,000 1160,000 2,301000 69,000 3,211000 0.893 2,861653
2 390,000 1,281000 2,621000 78,600 3,111400 0.797 2,48 Ise
3 390,000 1102,400 2,871600 86,280 3.03.720 0 216,248
4 Iggy 1.89.258
390,000 81,920 3108,080 92,424 2197,576 0.636
5 390,000 65,536 324,464 97,339 2,921660 1 65,938
11.06.284

Add
Prof salvage Value neat'riadine 22,080
less Initial Cash Outflow 8,001000
NDU 3,281964

CA Inter FM-ECO CA Swapnil Patni 200

nooo
 Unique Question for finding out
when to replace machine

New Machine
Investment on machine 90,000
Maintenance cost year 10,000
DF 157
8 years
life
CAF 4.4873

PV Maintenance
of 10,000 4.4873 44873
Salvage value
DF fye 0.32690 6538

Net Outflow 128335

90,000 44873 6538

Equivalent Annual Cost 128335

CDF
CA Inter FM-ECO CA Swapnil Patni 201
nooo
 128335
4 4873
28600

Scenario CFAT DF DCFAT

year
Replace at O O 40,000 I 40,000
28,600 I 128600
NPV s 71,400
Replace at I I 28600 0.87 124882
25,000 0.87 21750
10,000 [Link]
Nov 197
Replace at 2 128600 0.75 121450
15,000 0.75 11250
20,0001 0.75 1150007
110,000 0.87 187007
NPV s 33,900

Replace at 3 28600 0.65 185907

10,000 0.65 6500
30,000 0.65 19500
20,000 0.75 115000
10,000 0.87 18700
NPV s 55290

Replace immediately since Nov is highest

CA Inter FM-ECO CA Swapnil Patni 202

MOM
 1 PV 4,501000
ofnewOutflow
machine
for
value 1,00100
of replacement
net
outflow 3,501000

2 Depreciation
diff additional
Old New
3,5840
gg
26,250 additional

CA Inter FM-ECO CA Swapnil Patni 203

off
 3 Particulars Old New Difference

Sale 8 10,000 8,701000

Mat Cost 261250 53750

II
y yay ay 25000
1135,000
variable on [Link] 8750
fined cost 90,000 97,500 7,500

348750 80,000
Profitbefore 4,281750
depreciation

Depreciation 1426250
WAV
350,000 7.57
PBT 53750
1 1 Tax 301 16,125
PAT 37,625
depreciation 8385
can
Incremental

4 Calculation Incremental NDU

Year PBT Deb
of
PBT TAX PAT Dep
I 80,000 26250 53750 16125 37625 26250 7 5
2 80,000 24281 55719 16715 39003 24281 63284
3 80,000 22,460 59224 17262 40271 22960 62738
4 80,000 20776 59224 17767 41456 20776 62232
5 80,000 19217 60783 18234 42548 19217 61765
6 80,000 19776 62229 18667 43557 19776 61332
7 80,000 16443 6355719067 44490 16443 60932
8 80,000 15210 64790 19437 45353 15210 60562
9 80,000 14069 65931 19779 46152 14069 60220
10 80,000 13014 66986 20095 46891 13014 59904

CA Inter FM-ECO
no CA Swapnil Patni 204
 Yeah CFAT DF DCFAT
I 63875 0.909 58062
2 63284 0.826 52273
3 62738 0.751 47116
4 62232 0.683 42505
5 61765 0.621 38356
6 61332 0.564 34591
7 60932 0.513 31259
8 60562 0.467 28283
9 60220 0.424 25534
10 59904 0.386 23123
35000 0.386 13510
PV 394612
PV
of Inflow 3,501000
of Outflow
NPV 44,612

Hence old machine should be replaced

tax is not
If capital gain ignored
WBU attire end of 2,061362
10thyear
sale value 35,000

cap loss 1713621

tax
saving
171362 201
34,272

CA Inter FM-ECO CA Swapnil Patni 205

mom
 1 Calculation CFAT
of
Particulars Aunt E
Sales 40,000
c I Cost 7,500
Profit before Tax 32,500
and dep 9,250
1801000 6000318

PBT 23,250
Tax 301 975
PAT 16,275
depreciation 9,250

CFAT 25,525

2 Calculation of NPV

Particulars Aunt
25,525 5.334 1,36 150
6000 0.46 2,800
Pr
of Inflow 1138,150
80,000
of outflow
NPV 58,950
CA Inter FM-ECO CA Swapnil Patni 206
 d

[Link]
Pee tax
12000
Post tax
Tax 301 3600 5.334 CDF
PAT 8400 64000 NPV
CDF 5.334
NPV 44,805

Conclusion
Old new
Pretax 44805 58950
Post tax 64000158950
DEC 21

CA Inter FM-ECO CA Swapnil Patni 207

too
 1 Maline I

a Depreciation 72100,000 11201000

3
years
E 3,601000

b Calculation CFAY
of
Particulars I 2 3

Contribution 11,601000 11,601000 11,601000

fined maintenance
cost
40,000 40,000

I 3 60,000
fined operating 3160,000 3,60 000
cost other than def
CF Al 7160,000 7 60,000 8,001000

c Calculation NPV
of
CFAT DF DCFAT
year

7160,000 0.797 6,05 720

oooo
PV 1939.440
Puof Inflow 112401000
of Outflow
12100,000
40,000
NPV 6,991440

CA Inter FM-ECO
MOOD CA Swapnil Patni 208
 2 Machine 2

a Depreciation 76100,000 11001000

3
years
E 3,00,000

b Calculation CFAY
of
Particulars I 2 3 4 5

Contribution 1200,000 12100,000 12100,000 12100,000 12,001000

fined maintenance
cost
80,000 80,000 80,000 80,000

I
fined operating 3110,000 3110,000 3110,000 3110,000 3110,000
cost other than def

CF Al 8,101000 8,101000 8,101000 8110,000 8,901000

c Calculation NPV
of
CFAT DK DCFAT
year
I 0.893 7,231330
2 811010 0.797 6,451570
3 8110,000 0.712 5,76 720
8110,000 [Link] 5 15,160
y 8,901000 g gag 5,61 330

PV 30,22 110
Puof Inflow
of Outflow
16100,000
16,80 000

80,000
NPV 13142,110

CA Inter FM-ECO CA Swapnil Patni 209

nooo
 conclusion
Machine Machine 2
699440 13,42 110
Equivalent 2.402 3.605
Annualized 291,190.67 372,291.26
gym

Machine 2 is
beneficial

July21

1 Present value
of outflow
10,00 000 3,001000
7,00 000
CA Inter FM-ECO CA Swapnil Patni 210
nooo
 2 Calculation CFAT
of
Particulars Old New Difference
SP per unit
31000 72000 36000
quantity
Sales Value
Material cost Injo
3 60,000 7120,000
36000 2 [Link]
72000 2
3,601000
7210007
Labour Cost 1360001 4540001 18,000
1800 20 1800 30

FOH encluding 100,0001 60,0001 140,000

Profit before 152,000 4,621000 3,101000

def and tax

Calculation
3
of CFAT
PBTD Dep PBT PAT Dep CFAT
Year not Iago
I 3.10.000 140,000 170,000 51,000 119000 140,000 2,591000
2 3.10.000 1,121000 198,000 59.400 138600 1,121000 2.50.600
3 3.10.000 89,600 2,201400 66.120 154280 89,600 2.43.880
4 3.10.000 71,680 2.38.320 71,496 166824 71,680 2.38.504

CA Inter FM-ECO
MOOD CA Swapnil Patni 211
 4 Calculation NPV
of
Gear DF DCFAT

I 2 59,000 0.909 235431

2 2,501600 0.826 206995.6
3 2,43 880 0.751 183153.80
y 2138,504 0.683 162898.232
1181000 0.683 68,300

PV Inflow 856778.712
PV ofof Outflow 8,001000
7,001000 1,00 000
NPV 56,778.712

May 18

I Calculation
of depreciation
depreciation 60100,000
5
CA Inter FM-ECO CA Swapnil Patni 212
see
 12001000
Calculation
2
of CFAF
PBTD Deep PBT Jax PAT Dep CFAT
Year
I 24100,000 12.00.000 12.00.000 36100,000 840,000 12.00.000 2040000
2 24100,000 12,00100012,001000 36100,000 8,401000 12,001000 2040000
3 24100,000121001000 12,001000 36100,000 8,401000 12100,000 20,401000
4 24100,0001400,000 1400,000 36100,000 8,401000 1400,000 20,401000
5 24100,000 12100,000 12100,000 36100,000 8,401000 12100,000 20,401000

3 Calculation of NPV

CFAT CDF DeFAT

it
1 5 20,401000
1200,000
3 605
0.567
7354200
680400

PV 80,341600
PV of
Inflow
of Outflow
160.100,000 12,001000
7400,000
NPV 8,341600

conclusion

Company should accept the project

as NPV is positive

CA Inter FM-ECO CA Swapnil Patni 213

Bob
 Self Assessment Questions

CA Inter FM-ECO
so CA Swapnil Patni 214
CA Inter FM-ECO
so CA Swapnil Patni 215
CA Inter FM-ECO
so CA Swapnil Patni 216
CA Inter FM-ECO
so CA Swapnil Patni 217
CA Inter FM-ECO
so CA Swapnil Patni 218
CA Inter FM-ECO
so CA Swapnil Patni 219
CA Inter FM-ECO
so CA Swapnil Patni 220
CA Inter FM-ECO
so CA Swapnil Patni 221
CA Inter FM-ECO
so CA Swapnil Patni 222
CA Inter FM-ECO
so CA Swapnil Patni 223
CA Inter FM-ECO
so CA Swapnil Patni 224
CA Inter FM-ECO
so CA Swapnil Patni 225
CA Inter FM-ECO
so CA Swapnil Patni 226
CA Inter FM-ECO
so CA Swapnil Patni 227
CA Inter FM-ECO
so CA Swapnil Patni 228
CA Inter FM-ECO
so CA Swapnil Patni 229
CA Inter FM-ECO
so CA Swapnil Patni 230
CA Inter FM-ECO
so CA Swapnil Patni 231
CA Inter FM-ECO
so CA Swapnil Patni 232
CA Inter FM-ECO
so CA Swapnil Patni 233
234
 4 Capital Structure
Ch-5
[Link]

Basic Ko
Basic Ko
Basic Ko
Basic Value of fin
Implied rate ofreturn
arbitrage
MM approach

arbitrage
Unlevered to levered
MM approach
EPS alternatives
EPS alternatives
alternatives
DID E Price
of share
Indifference Point
Indifference Point
Indifference Point
EPS Break Even
EPS alternatives
Indifference Point
Cost of Equity
MM approach

EPS Break Even

CA Inter FM-ECO
some CA Swapnil Patni 235
 alternatives
alternatives
Similar to 9.22
Similar to 418

Implied rate of return

MM approach
alternatives
alternatives
Combined question
MPS

CA Inter FM-ECO CA Swapnil Patni 236

sets
 SUPER STAR QUESTIONS

Q9. Illustration 9
Q12. Illustration 12
Q16. Practical Q2

. Q28. May 21

Q14. Illustration 14
Q22. Practical Q8
Q18. Practical Q4
Q24. Nov 18
Q31. May 22
Q32. Nov 22
Q33. May 23

CA Inter FM-ECO CA Swapnil Patni 237

sees
 Capital Structure depends upon three factors

t Cost
2 Risk Achieving all these
3 Control three objectives
is not possible at a time

debt will be reduced

If
but
you
will
increase cost
risle increase whereas if we increase
there will be high cost but less risk
ie selection debt
why
structure
of equity
capital structure depends
the Value
upon of the company

Debt Equity
20 50
2 50 50
anything
3 80 20 can happen
4 75 25 depends upon
the value

How to get
there
the
is
value
no tax
of the company
if
Sales 10,001000
H Variable cost 2100,000
contribution 8,001000
fined cost 4,001000
EBI 4,001000

CA Inter FM-ECO CA Swapnil Patni 238

so
 Debt 50,00 000
equity 50,001000
Value 1,0000,000

Wall
no GE value
4 00,000
1100100,000
41
Wall EB 7
Value
201 2,001000
value

value I 10 00,000

How to the value

if there is
get
TAI

Sales 10100,000
variable cost 12,001000
Contribution 8,001000
H
finedE cost 14,0010007
BIT 4,001000
f Interest 11100,000
EBT 3,001000
Tax 301 90,0007
EAT 2 10,000

CA Inter FM-ECO CA Swapnil Patni 239

to
 Debt 50,001000
Equity 50,001000
1,00 00,000

wall Interest Dividend

Value
2 10,000 1100,000 3598h
1,001001000
2.81

Gnample 2 How to get value

of company
EBIT 50 00,000
Interest 101 20,001000

Ke 181
value Tax 0

Value Dt E

EBIT 50,001000
Int 20,001000

EBT 30,001000
Tax O
EAT 30,001000

Re 187

Equity Value 30100,000

187
1 66,61 661
value DTE
2,00 00,000 t
1,66 66,661
366,661666
CA Inter FM-ECO CA Swapnil Patni 240
see
 I Calculation MV and
value of ofequity
of firm
EBI T 5,001000
H Interest on debentures 2,001000
101 On2,001000

EBT EAT 3,001000

equity Capitalization
rate
lot

MV debt 20100,000
Mv of 18,751000
of Mquity
30
9.0
value 38,751000
of fined
2 Cost capital
of
Wall 5,001001
Effy 38,751000
12.901

CA Inter FM-ECO CA Swapnil Patni 241

see
 d EDIT 5 00,000
Interest on 1150,000
debentures
EAT EBT 3150,000

Overall Cost 151

of
Capital
Value
of fin17 5,001000
157

33,33 333

value
33,331333of fin
u r

Debt Equity
15,001000 33,33333 15100,000
18 33,333
given
Ke 3 50,000 x 100
18,33 333
Ke 19.09 f

CA Inter FM-ECO CA Swapnil Patni 242

so
 Modigliani Miller Approach
(MM Approach)

Generally Kd is lower than ke because

of
tax benefit let say

ke 101
Kd 71

when we add more proportion of debt in

the capital structure then we will get
more capital at the lower cost Hence
Ko kw must be reduced but it is not
like that in the above diagram It
seems Ko is constant throughout because
when we add more debt proportion
investor finds company more risky that's
shareholders increases
why expectation of May
be 131 to 141 from lot in nutshell we are getting
the advantage of more debt but suffering
equal loss due to increased Ke Hence no
impact on ko irrespective of debt equity
structure as per mm approach

CA Inter FM-ECO CA Swapnil Patni 243

so
 mm
approach
not tax tax
u v

leverage unleverage leverage unleverage

leverage If there is Tax Benefit

debt

there is
unleverage If debt
no

Particulars N ltd Mtd

EDIT 20,000 201000

Ke 101 11.501
Delet 1,001000
Kd
unlevered lettered
Type
value
of lequity 20,000 20,000 7000
10.1 11.57
2,00 000 1,13 043

Value DTE
of firm DTE
0 2,001000 113,043
1,001000
200,000 213,043
CA Inter FM-ECO CA Swapnil Patni 244
0000
 After Arbitrage
Salem 101 and N lot
Buy u
107 213,043 12100,000 x 101
21,304 20,000

u s
Debt equity
11,304 10,000
H H

1304 101.120 igooft

Profit sale
on

EBM 101 2000 700

101 20,000 10,000 77
7
3,304

Arbitrage 3304 2000

1304

Alternatively
N
Buy j 21,304
2100,000
10.6521

CA Inter FM-ECO CA Swapnil Patni 245

0003
 H H

2130 700 Int

120,000 10.65271
1300

2130 2000
r

130
Arbitrage
A stake 0.6521

students the alcove

2 methods
can use
any of

Lets understand MM approach to know debt

equity structure whether it is levered or
unlevered will have
any inimpact
not
on valuation the the
of
In the long
company
long will
run run arbitrage
levered
be over Valuation
and unlevered will
of become same
company
through following example
M N
sell
levered
Buy
unlevered
Ko d Kot
value 110 value 100

In the long run 705 105

Infosys 105 Arbitrage
CA Inter FM-ECO CA Swapnil Patni 246
nooo
 Turf question for arbitrage

Particulars levered Unlerend

EBIT 30,000
30,900
11 Interest 1100100907
10,000

EBT
20,900 30,900
H Jax
EAT 20,000 30,000
Ke 12.51 12.57

Value 1,601000 2,401000

of equityEAI
0
Value
of Debt 1,001000

Total Value of film 2,601000 2140,000

Arbitrage
1 sell I levered
Clulevered
Buy all
assumption deploy money
air culevered

CA Inter FM-ECO CA Swapnil Patni 247

0000
 2 Sale value leveled 39000
2160,000 of 151
OR
eg 1,60 000 157 24,000
balance debt 151000
739,000
3 SBI loan levered 1 00,000

levered
SBI loan
in

Interest Investor 15000 101 1,500

levered 85,000
101 8,500

4 Purchase Total Value 39,000

value 2140,000
of
Mlevered

i stake in unlevered
39,000 100
240,000
16.257

5 Evaluation loss
ofgain
Gain Loss
stake 1.251
old dividend 3000
new dividend
4875
30,000 16.257
Interest liability 1500
15,000 x toy
CA Inter FM-ECO
see CA Swapnil Patni 248
 Net Effect 4875 3000 1500 1.251
stake gain
375T 1.257 stake gain

cost of debt cost t of debt

Options of Equity on total Value

I 11.0 Of 13.0 1001 131 0.0

2 11.0 joy 13.0 901 12.81 0 I

3 11.6 201 14.0 801 13.521 0.2

4 12.0 301 15.0 701 14.11 0.3

5 13.0 x 401 16.0 601 14.81 0.4

6 15.0 501 18.0 501 16.51 0.5

7 18.0 X 601 20.0 401 18.81 0.6

CA Inter FM-ECO CA Swapnil Patni 249

see
 This Rd is already Tut 1 tax so no
need to deduct tax
saving additionally

Nia Approach
Net Income Approach

When we add more proportion of

debt into the
existing capital
structure then ko decreases

It is assumed Kd is cheaper than

ke

Traditional Approach

CA Inter FM-ECO CA Swapnil Patni 250

see
 When we add more proportion of debt
as
per traditional
certain level
approach
cost
theorydebtafter will be increased
of because bank
more
find company
risky
time
At the same
equity investor
find
company

NOI Approach
net operational Income

when we add more proportion debt it

of
will reduce Ko because Kd is cheaper than ke
but at the same time investor will expect
more returns because company is becoming
it means benefits debt will
more
risky
with loss ke
of
compensated
of

CA Inter FM-ECO CA Swapnil Patni 251

nope
 Net
NI
Income
Approach

Change in DIE Traditional

structure Ko changes Approach

Capital structure
relevance
theory Modigliani
and Millie
MM

approach
Capital Structure with tax
Theories lev
pulev
Tax save

Capital structure
irrelevance theory Net

f operating
Income
Irrespective of DIE approach
structure Ko
remains the
same Modigliani
and miller
approach
without
tax

CA Inter FM-ECO CA Swapnil Patni 252

8000
 1 Particulars U Ltd ltd

EBIT 2201000 20,000

debt 1,001000

Kd 77
Ke 10 f 1st
2 00,000
Value
of EquityIntCapital 712,222
20,000 71000
CEBIT 401,000,0
Ke 1st
Total value of film 21001000 1172,222
V sty

2 Arbitrage
Uted Lted
Value 2,001000 1 72,222
lot sell 20,000
debt 1,001000
equity value 72,222
101 delet 77 10,000
equity 101 7,222

CA Inter FM-ECO CA Swapnil Patni 253

0000
 3 H e
20,000 10,000 7,222
2,778
Int 10,000 71 2,000
700

Die 20,000 7,000 101

go

Net Gain 2,778

This is a
special question where the value

ofwillunlevered is more
sell unlevered to
than levered
levered
i e we

buy

Particulars Plant Plan B Plane

EBIT 5100,000 5001000 5,001000

I Interest 25,000 1,371500 2,371500
2.52 101 2.51 101
7.51 151 7.51 151
52 207

537 4 75,000 3 62,500 2162,500

CA Inter FM-ECO CA Swapnil Patni 254
0000
 1 Jax 501 2,371500 181.250 1131,250
EAT 2 37,500 1.81.250 1,311250
shares
no
of
EPS
15,000
15.83
10,000 8,000

decisions reject suit bij

Calculation
of no
of shares
Plan Delet equity SP no shares
150
of15,000

I 10,001000 15,001000 150 10,000

so

calculation of shares
BEP E1377
no
of

Darticulars Debt
Equity Preference

E 1317 3,121500 3,121,500 3,121500

Interest 1201000
it
EBT 2,921500 3 12,500 3112,500
1 I Jax 501 1 46,250 1 56,250 1156,250

PAT 461250 1 56,250 1156,250

Pref dividend 201000
87
1146,250 y 7136,250
CA Inter FM-ECO CA Swapnil Patni 255
NEE
 no
of shares 1,00 000 1100,000
1425,000
1,001000

EPS 1.46 1.25 1.3625

decision select reject reject

BEP EBM

Q Tax 501
Interest 20,000
Pref dividend 20,000
BEP EB T

BEP EB T Interest PD
1 tax
20,000 20,000
0.5
20,000 40,000
60,000

Let's
verify it

5317 60,000
Interest 20,000 n

EBT 40,000
cs Jax sot 20,000

PAT 20,000
t DD 20,000

distributable O
profit

CA Inter FM-ECO CA Swapnil Patni 256

now
 Indifference Point

It is an 5317 where irrespective of

capital structure EPS remains same

DE 40 60 EPS 3
DE 60 40 EPS 3

Particulars E E E

EBIT 11001091000 11001001000 1100,001000

It Interest 8100,000 4100,000

EBT 1,00 00,000 92100,000 96,001000

Jax 501 50,00 000 96,001000 48100,000

PAT 50100,000 46,001000 48,001000

F no shales 1200,000
ofINN 10,001000 10,501000

EPS 4.17 4.60 4.57

CA Inter FM-ECO CA Swapnil Patni 257

0000
 WN Calculation of shares
Particulars I I I

Equity shares
rusting 10100,000 101001000 10,001000
New 2 00,000 50,000
50,00 000 25,00 ooo
10 15 10 40
12100,000 10100,000 10,501000
Debentures 50,001000 25100,000

ROI new 5317

CA Inter FM-ECO CA Swapnil Patni 258

0000
 debt 12,001000 1,00 00,000
127
equity 2,00 00,000
8100,000 225
3,00100 000

1317 52,001000
ROI 5200,000 100
3100,00 ooo
17.331
new EB 7 52,001000 40,001000 x 17.331
58,931200

Particulars 40 Lakhs 40 tables

debt equity
E BIT 58,931200 58,931200
1 Interest 12,00 000 12100,000
New Interest 5,601000
40,001000 141

41,33 200 46,931200

EBT 20 66,100 23146,600
1 Tax 501
y 23,461600
EAT

no equity 8100,000 960,000

of shales 8100,000 1,601000
Eps 2 58 2.44

3 loan D 1100,001000 40,001000 41.1761

DTE 3,40 00,000 PE 8
4 lequity 1,00 00,000 29.411 PE 10
II 3,4000,000

CA Inter FM-ECO CA Swapnil Patni 259

0000
 Particulars see equity Dte

EBIT n n
H Interest 72,001000

EBT W N 72100,000
H Jax 301 0.30N 0.30m 216000

PAT 0.70W 0.702 50140,000

F no
equity 90,001000
of
It is assumed that cost
0.7W
of sharp'ÉÉ
0.72 50 40,000
EPS 90,00 000 30,00 000

2 In 6.32 [Link]
w 1,08 00,000

Indifference 5317 E 1,08 00,000

CA Inter FM-ECO CA Swapnil Patni 260

room
 Particulars

EBIT 4,801000
H Interest
81000
148,000
4100,000 14
EBT 4,321000 4 80,000
H Jax 301 11129,600 1 44,000

3102,400 3,361000
H Pref dividend w

3102,400 3,361000 n

3,02 400 3,36 000 W

N 33,600

rate dividend 33,600 100

of 900,000
8.41

CA Inter FM-ECO CA Swapnil Patni 261

0003
 Particulars all equity debt equity
EB T n n
1 Interest 7,201000

EBT N U 7 20,000

Tax 401 0.4N 0.4N 288000

PAT 0.6W 0.6N 432000

F no
of shares 6,00 000 2100,000

EPS O Gu 0.62 432000

600,000 2,001000

0.6N X2 10.62 432000 6

1 2n 3.6m 25,921000

n 10,801000

CA Inter FM-ECO CA Swapnil Patni 262

was
 lequity debt Puf shares
Plant 2,0019881

Plan B 1100,000 001000

50 1

Plan C 0
1100,08g
00,0

Particulars Plant PlanB Plane

E BIT U n
8,000
1 1 Interest 1100,000
81
EBT u n 8,000 N

t Jax 501 0.5W 0.5m 4000 0.5W

PAT 0.5N 0.5N 4000 0.52

dividend 8,000
Puf 1100,000
87
PAT after 0.52 0.5N 4000 0.5m 8000
Dividend

F 10,000 5000 5000

no
of
shares

EPS 0.5W 0.52 4000 0.5N 8000

10,000 5,000 5000

CA Inter FM-ECO CA Swapnil Patni 263

0000
 Indifference point between A and B

0.5m 0.52 4000

10,000 5,000

0.52 2 0.52 4000

n 16,000

Indifference point between B and C

0.5W 4000 0.52 8,000

5000 5,000

On 4000

hence no
indifference point between
B and C

Indifference point between A and C

5
2
0.52 8,000
1 5,000
0.5W 2 0.5 8000
0.5W 16,000

w 32,000

CA Inter FM-ECO CA Swapnil Patni 264

so
 Computation of EPS under various plans
Particulars Plan A Plan B Plane

EBIT 80 00 855 [Link]

1 1 Interest 8,000

EBT 80,000 72,000 80,000

Jax 501 140,000 36,000 40,000

PAT 40,000 36,000 40,000

dividend 8,000
Puf
PAT after 40,000 36,000 32000
Dividend

F 10,000 5,000 5,000

no
of
shares

EPS 4 7.2 6.4

Financial Break Even point

Bep tut
Ifax
Plan A 0
Plan B 8,000
Plan 0 0 8,000 16,000
l 0.5

CA Inter FM-ECO CA Swapnil Patni 265

0000
 revise highlighedpoints

1 As per MM approach no tax

levered unlevered
Sanghmai Tamsui

2 ltd
Sangmani
Debt 1
3
Int 101
Kea
equity 43
WAC 101 x ke
113 3
16 f
f x 101 3 Re
we 19 f

3 Sansei Utd

Ke 161 all equity

Ke No 16 f

As per MM approach

Ko
of Samui Ko
of Sangmai lot

CA Inter FM-ECO
MOOD CA Swapnil Patni 266
 MM approach
d u

Tax No Tax

lev curler Tax lev curler

A B 401 5,401000 1,0000,000 100,001000

No Tax
Particulars A B

EBIT 18100,000 1810,01000

Interest 6148,000

537 11,521000 18100,000

PAT 11,525000 18100,000
ke 25.041 187
11521000146,001000 100

Value 1,00 00,000 1100100,000

18100,000 187
NACC
0.54 12118 1 25.047
Debt 54,001000
Equity 46100,000
CA Inter FM-ECO CA Swapnil Patni 267
nooo
 Particulars A B

E BIT 18,001000 18,001000

Interest 6,481000

EBT 11,521000 18700,000

Tax 401 4,60 800 7120,000

PAT 6,911200 10,80 000

Ke 25.047 187
691200 100
2,0900
Value
offilm 81,601000
60,001000 t
601001000

5400,000 401

debt 54,001000
equity 27,601000

WALL 3.24125.04 1St

21 37
5

MM approach Value

A B
Tax 81,60 000 60,001000
60,001000
540998

No Tax 1100,001000 1100,001000

CA Inter FM-ECO CA Swapnil Patni 268

need
 MM approach Wace
A B

Tax 13.221 187

cost reduced due
to tax
No Tax gaming 1st

In long run value and Ko remains sauce

in no tax situation Also value
and no remains sauce in tax world
tax
except saving

1 value tax
of Equity no

Particulars R ltd S ltd

E BIT 10100,000 10,001000

14 Interest 3,301000

EBT PAT 6,701000 10,001000

CA Inter FM-ECO CA Swapnil Patni 269
see
 Ke 151

Value
of Equity 37122,222 66,66 666

Total value
offirm
Particulars

I
Debt 33,001000
66,65 666
Equity 37122,222

Value
offin

or
revise part
lat
Particulars Debt PerfShares Equity
EBIT 15,001000 15100,000 15,001000
1 1 Tut on debt
Guesting 3,601000 3160,000 3,601000
New 4,801000

EBT 6160,000 11140,000 11,401000

t Taxes 401 2164,000 4,561000 4,561000

PAT 3,961000 6184,000 6,841000

CA Inter FM-ECO CA Swapnil Patni 270
one
 E Pref dividend 9 40,000

PAT after div 3,961000 2144,000 6,841000

No
Of Alraess 900,000 8,001000 8100,000

EPS 0.495 0.305 0.651

Best

b
Particulars Debt
Equity
EBIT U n
17 Interest 8,40000 3,601000

EBT N 840000 N 360000

1 1 Jax 401 0.4N 336000 0.4N 144000

PAT 0.6N 504000 0.6N 216000

no
ofshares 8,001000 10,501000

EPS 0.6N 504000 0.6N 216000

8100,000 10150,000

0.6N 504000 0.6N 216000

8100,000 10,501000

U 23,761000

kqistwingeggy 15,001000
23176,000

increase 8176,000
by
CA Inter FM-ECO CA Swapnil Patni 271
If
 Valuation A and B are same
both of identical except
capital structure

value
of Company No
no
4,501000
1st
25,001000

Aud
25100,000
J t
Got 401
debt
lequity
15100,000 20,001000

25100,000
Byte
Sof 801
debt equity
5,001000 20,001000

CA Inter FM-ECO CA Swapnil Patni 272

so
 Particulars Altd Bltd

EBIT 4,501000
H Interest 1120,000 40,000

EBT 3130,000 4 10,000

H Tax
PAT 3,301000 4 10,000

Equity
Ke
10100,000
331
201001000
20.57
X's return 9900
µ

since A has debt

and B has less
more component of duet
component of
ie there is difference in
Ke
why

CA Inter FM-ECO CA Swapnil Patni 273

so
 calculation of Interest
and no
ofshares

Calculation EBM
of
Output 1150,000
Selling Price 40

Value 60100,000
Variable Cost 2550,000

Contribution 34,501000
fined cost 15100,000

5317 19,501000

2 Schemes

Debt
lequity
Alt I 500,000 15,001000
Alt 2 10,001000 10100,000
At 3 14,00 000 6,001000

CA Inter FM-ECO CA Swapnil Patni 274

me
 Calculation
of EPS
Particulars I 2 3

5317 19,501000 19,501000 19,501000

H Interest 50,000 1,251000 2,05000
5100,000 101 t 500000 aloft
5,604000
500,000 157 151
4,001000 201

EBT 19,00 000 1825000 17,451000

t Tax 401 7160,000 7130,000 6,981000

PAT

No
Of Shares 107500
1100,000 7500
105000
1100,000
103000
5000 1100,0003000

Ggg 7500
10
5000
1 0
3000

y 10.60 10.43 10.17

Alternative I
shall be selected because of highest EPs

CA Inter FM-ECO CA Swapnil Patni 275

nooo
 Capital Structure
v
BEP u
EBIT Int t MM Approach

eax u s
TAX NO TAX
Indifference
EBIT earner
Particulars A B under
EBIT I X 926
Int 10,000 Tax Debt Tax rate
EBT n 10,000 n
Tax 50t.O.sn5,000 0 su A B
PAT 0.52 5000 0.5W EBIT GOR GOR
NO 5000 2000 tut zone
EPS 05 EBT 40k Gok
800 0255
Tax O O
U 6666 EAT YOK GOK
Ko 201
Value 3,0010003100,000
Debt 200,000
Equity 1,001000
ke 401 201
v
EPS
ACD BCP CLE
EBIT 2100,000 2100,000 2,001000
Int 20,000
EBT 1180,000 2100,000 2100,000
Tax 90,000 1100,000 1100,000
PAT 90,000 1,001000 1,001000
PD 20,000
DP 90,000 80,000 1100,000
Nos 10,000 10,000 20,000
EPS 9 8 5
CA Inter FM-ECO CA Swapnil Patni 276
so
 t
Arbitrage Value
94
10 1 EBIT 500,000
A lev B Unler hit 1,501000
EBIT 100,000 1,001000 EBT 3150,000
20,000 Ko 151
not
EBT 80,000 1100,000 Value EB 7
401000 50,000 Ko
daffy
33133,333
PAT 40,000 50,000
Ke 101 201 Equity 18,331333
equity 4,001000 2,501000 debt 15100,000
Value 6100,000 2,501000 Ke 3,501000 100
18133,333

equity 40,000 19.027

delet
Total
stake 247

Dividend 12000 4000

Int 2000
stake 191
Net Gain 6000 141 stake

CA Inter FM-ECO CA Swapnil Patni 277

see
 Self Assessment Questions

CA Inter FM-ECO CA Swapnil Patni 278

see
CA Inter FM-ECO CA Swapnil Patni 279
see
CA Inter FM-ECO CA Swapnil Patni 280
see
CA Inter FM-ECO CA Swapnil Patni 281
see
CA Inter FM-ECO CA Swapnil Patni 282
see
CA Inter FM-ECO CA Swapnil Patni 283
see
CA Inter FM-ECO CA Swapnil Patni 284
see
CA Inter FM-ECO CA Swapnil Patni 285
see
CA Inter FM-ECO CA Swapnil Patni 286
see
CA Inter FM-ECO CA Swapnil Patni 287
see
CA Inter FM-ECO CA Swapnil Patni 288
see
CA Inter FM-ECO CA Swapnil Patni 289
see
CA Inter FM-ECO CA Swapnil Patni 290
see
CA Inter FM-ECO CA Swapnil Patni 291
see
CA Inter FM-ECO CA Swapnil Patni 292
see
CA Inter FM-ECO CA Swapnil Patni 293
see
 5 Financial Analysis and
Ch-6
Planning - Ratio Analysis

average
inventory710 collection
dividendyield
Pll Afc
operating expenses
balance sheet
proprietary ratio
combined question
balance Sheet
Debtor Creditor Velocity
combined question
cafetiere
re
org of
income statement
PSL Ale
trading
company'sfinancialcondition
company us industry

balance sheet
combined question
combined question
return ratio
owners
equity
balance sheet
operating expense
balance sheet

CA Inter FM-ECO CA Swapnil Patni 294

 combined question
combined question
equity dividendcoverage

To ratios
analysis
analysis
combined question
combined question
balance sheet
financial advise
ROLE EPS PIE ratio
velocity
Pll BalanceSheet
Balance Sheet

CA Inter FM-ECO CA Swapnil Patni 295

 SUPER STAR QUESTIONS

Q19. PY Nov 19
Q20. PY Nov 20
Q28. RTP Nov 18
Q29. RTP May 19
Q37. RTP May 23
Q11. Illustration 1
Q33. RTP May 21

Q21. PY Jan 21
Q22. PY July 21
Q30. RTP Nov 19
Q26. PY May 23
Q36. RTP Nov 22

CA Inter FM-ECO CA Swapnil Patni 296

 ChDo
9 – Ratio Analysis ( Chart
the9.1 )
No. Ratio Formula No. Ratio Formula No. Ratio Formula
1 Current Ratio Current Assets Gross Profit Gross Profit
11
Current Liabilities Ratio Sales
2 Quick Ratio (Also Operating Operating Profit
12
called as Liquid Quick Assets Profit Ratio Sales
Ratio or Acid Quick Liabilities 13 Net Profit Net Profit
Test Ratio) Ratio Sales
3 Absolute Cash Cash + Contribution
Ratio or Absolute Marketable 14 Contribution
Sales Ratio
Liquidity Ratio Securities Sales
or PV Ratio
Current liabilities
Debt to Total Debt Cost of Raw Material
4 Funds Ratio (or) Raw Material Consumed
Total Funds 15 Turnover
Debt Ratio Average Stock of
Ratio Raw Material
Equity to total Equity Factory Cost
16 WIP
5 Funds Ratio (or) Total Funds Turnover Ratio Average Stock of WIP
Equity Ratio
Debt – Equity Debt Cost of Goods Sold
6 17 Finished Goods or Avg. Stock of
Ratio Equity Stock Turnover
Ratio Finished Goods
Preference
Capital Gearing capital + Debt Debtors Credit Sales
7 18 Turnover
Equity Average Accounts
Ratio Ratio Receivable
Shareholders
Creditors Credit Purchases
Funds 19 Turnover Average Accounts
Ratio Payable
Proprietary Funds
8 Proprietary Ratio Working Capital
Total Assets Turnover Ratio
20 (also called Turnover
Debt total Assets Debt Funds Operating Turnover Net Working Capital
9 or Cash Turnover
Ratio Total Assets
Ratio)
Fixed Asset to Fixed Assets Turnover
10 Fixed Assets
Long Term Fund Long Term Funds 21 Turnover Ratio Net Fixed Assets
Ratio

297
 Chor9 – Ratio Analysis ( Chart
ones9.2 )
Term Alternative Term Formula for Computation
Borrowed funds (or) Loan = Debenture + Long term loans from banks,
a) Debt Funds financial Institutions, etc.
Net worth (or) Shareholders = Equity Share Capital +Preference Share Capital +
funds (or) Proprietors funds Reserves & Surplus – Miscellaneous expenditure
b) Equity
(or) Owners funds (or) Own (as per balance sheet) – Accumulated losses.
funds
= Equity as above – preference share capital, i.e.
Equity = Equity Share Capital + Reserves & Surplus -
c) Shareholders Miscellaneous expenditure (as per balance sheet)
Funds – Accumulated losses.

Long Term funds (or) = Debt + Equity (i.e. a + b as above)/.. Liability

d) Total Funds Capital employed (or) Route
Investment = Fixed !ssets + Net Working Capital//.. !sset
Route
Item Computation
a) Number of days Average Stock of Raw Materials held 365
Raw Material T/O Ratio
b) Number of days Average Stock of WIP held 365
WIP T/O Ratio
c) Number of days Average stock of Finished gods held 365
(Or) Number of days sales in inventory or Average stock velocity Finished Goods T/O Ratio
d) Average collection period (of debtors) 365
(or) Number of days sales in Receivable Debtors T/O Ratio
to
e) Average Payment period (of Creditors) 365
(Or) Average payment velocity Creditors T/O Ratio
f) Number of days working capital held 365
020–24466748 / 9011854340 / 9011851796
(also called Operating Cycle or Cash cycle or Working Capital Cycle) Working Capital T/O Ratio

298
 EBM 50,001000
Interest 10,001000

EBT 40,001000 1 Interest Coverage

Tax 301 1200,000 ratio
EBT
PAT 28100,000 Interest

PD 2 80,000 50 Lakhs
10tables
Dp 25,201000
5
Dividend 10,00 000
2 Preference
diorg
ratio

Pff
10
[Link]
3 dividend
Equity
coverage ratio

DP ED V

25,201000
10,001000
2.52

CA Inter FM-ECO CA Swapnil Patni 299

 Balance Sheet

Equity owner'sfund Fixed Assets

Proprietor's
fund land
Building
Investment
share capital Machine
reserves
securities premium Current Assets
Preference sharecapital stock
Cash
Debt term Bank
long
debentures B R
long term loans Debtors

Current liabilities
dividend proposed
Trade Payable
Creditors

1 Debt Equity ratio

Debt
Equity
debt
long
she
term debt
reserves Spt
Equity cap Pref
2 Current Ratio

Current Assets
Current liabilities

CA Stock Debtors BR t Baule Cash

Short term loans disposable Invest
CA Inter FM-ECO CA Swapnil Patni 300
 Cl Creditors Short term borrowings
TOD t CC proposed die t

prov foe tax outstanding eup

3 Quick ratio 1 Acid ratio

QuickAssets Only
cash
cc

CA Investment prepaid expenses

4 Net CA
working capital CL

5
lequity ratio equity
Net
Assets

6 Debt ratio Delete

Net Assets

FA t CA LL

7 Debt to total assets Debt

Total Assets

8 Proprietary ratio Equity 1Prepfunds

to total assets Total Assets
Equity

CA Inter FM-ECO CA Swapnil Patni 301

 9 Turnover ratio

Total Assets
T o ratio Inuit Art was
7 0 ratio To ratio
To Cogs
Total assets To cogs To cogs
CA INCapp

FixedAssets
To ratio u

Net Assets
TO COGS To ratio
Fixed Assets
To Cogs
Net Assets

tigher To ratio good aunt of sales

10 Equity Proprietor'sfund 1
Net worth1 owners fund
SHfund

Aqsh PufSh t
reserves

11 Stock To ratio COGS

stock
aug
12 Debtor's To ratio Credit Sales
Aug deletes

Collection period 360 5 72days

Ang
CA Inter FM-ECO CA Swapnil Patni 302
 13 Creditors To ratio Credit purchase
creditors
aug
aug paymentperiod 362 days
3 days

14 GP ratio GP sales
Gp Sales Cogs
GP Sales Direct Surpluses

15 NP ratio NP sales

NP GP Indirect Sales
NP Sales direct expenses Indirect eup

M
PBT PAT

16 Operating profit ratio operating profit EBM

sales

CA Inter FM-ECO CA Swapnil Patni 303

 Profit and loss Afc
factory Direct Enpenses
rent royalty wages cogs Sales
fuel power GP

Salary GP
Indirect Depreciation
lap Electricity
printing et
Profit

Interest operatingprofit
dividend
NP interest

17 Operating ratio cogs operatingeup

sales
or Direct Eup Indeup Int
sales

of eup Indirect Interest tax

eup
op eup admin t market Sales
distribution
18 ROA PAY
Aug total assets FICAgrinch
or PAT
Aug fined assets
is demanding
Ifusequestion fee tax then
PBT instead PAT
CA Inter FM-ECO
of CA Swapnil Patni 304
 19 ROI

Pretax Post tax

EBM Int PAT

DTE DTE
BIS
FA
Equity
Delet

Cc Cc

Capital Employed
DTE
FA CA CL
FA t we

Lets understand with enample

Income Statement
EBIT 101001000 10100,000
gut
I D
200,000 C 2100,000

EBT 8,001000 8100,000

E
Tax O 1400,000

PAT 8100,000 6,001000

2 8
DTE Itf
EBIT lat PAT
DTE DTE

CA Inter FM-ECO CA Swapnil Patni 305

 so returns

Total asset
Equity
capital
employed

PAT PAT pg
Pretax Post tax Pte Etres
EBM
Dte wtf
v
PAT
FA TAT PAT
Ary
Aug TA Ang tangible
assets

21 ROE PAT PD
Equity tres
or PAT
res
leg Pref
22 Equity multiplier
Investment assets
Sh equity
In assets
leg Res Pref
23 EPS Total profit available for equity
Total no shares of
of
CA Inter FM-ECO CA Swapnil Patni 306
 24 DPS Total dividend paid to
[Link]
No
of eg shares of
DP ratio 401
EPS 100

dividend 100 401

40
reserves 60

25 P E ratio Market Price Pee share

Mff

26 Dividend Yield ratio Dividend

MPS
27 Capital Gearing ratio

Pref sharecapital t debenture other

borrowedfunds

by shareholders fund reserves and

surplus losses

27 Book Value
fee share
Mv
fee share
share
Buper

CA Inter FM-ECO CA Swapnil Patni 307

 a GP i 91
Sales
201 601200

W Sales E3 00,000
60209.0

b Total assets To ratio Turnover

Total assets

0.3 3100,000
Total assets

Total assets 1000,000

CA Inter FM-ECO CA Swapnil Patni 308

 C Net worth to total assets Net worth
Total Assets

0.9 Net worth

10 00,000
Net Worth 9100,000

d Current liability Total Assets

Net worth
10,001000 9,001000
1,001000

e Current ratio Current Assets

Current liabilities

1.5 Current Assets

1,001000

Current Assets 1,501000

f liquid assets to current liabilities

liquid assets
count
liability
I liquid assets
1,001000

liquid assets 1,001000

Stock current liquid assets

g 1 50,000 1100,000
50,000

CA Inter FM-ECO CA Swapnil Patni 309

 h Credit sales to total assets

Credit Sales
Total assets
0.8 Credit Sales
3,00 000

Credit Sales 2,401000

i Debtors To ratio Credit Sales

debtors
Aug
6 4401000
Égay aug
debtors

debtors 40,000
Aug
Balance sheet
E Assets E
liability
Net Worth 9,001000 Fixed Assets 8,501000

Current 1,001000 Stock 50,000

liabilities Debtors 40,000
Cash
10100,000 1 8 00

7A
fined assets CA
1
10,001000 50,000
8150,000

CA Inter FM-ECO CA Swapnil Patni 310

 a Now current assets to sales
Non current assets
sales
50,001000
4 Sales
b Now current assets to
current assets

I 50100,000
C A

C A 1,00 00,000

c
GP 201 x sales
40,001000

CA Inter FM-ECO CA Swapnil Patni 311

 d NP 101 sales
20,001000

e
Cogs Sales GP
1,60 001000

current
f ratio
city
2 1,00 00,000
c c
CL 50,00 000

debtors To ratio Credit sales

g
any debtors
4 I 2,00 00,000
123
Aug deleton
deletes 50,001000
aug
h Stock To ratio cogs
any inventory

4 1,60 00,000
stock
any
Aug Stock 40100,000

is Current Assets 1100100,000

L s
debtors Hoch Cash
50 Lakhs 40Lakhs 10Lakhs

CA Inter FM-ECO CA Swapnil Patni 312

 a Cogs Sales GP
30,00 000 257
22,50 000

b Stock To ratio Cogs

Aug Inventory
6 22,501000
aug inventory
8,751000
any inventory
closing stock aug
stock
ASSUMED

c Fixed Asset To Cogs

finedassets
1.5 22150,000
FA

FA 15,001000

CA Inter FM-ECO CA Swapnil Patni 313

 d Current ratio 1s
cry
Ct
1.5cL CA
quick ratio CA stock
cc
1 1.56 3,751000
Cl
CL 7,501000
CA 11,251000

e Debtor's 70 ratio Credit sales

deletes
any
12 6 30,001000
2
debtors
any
anydebtors 5,001000

Fined assets to Net worth

f Fingetttooth
1.2 15,001000
net worth

net worth 12,501000

aunt ratio
By using stock value
quick ratio the value CA
we
get of cc

CA Inter FM-ECO CA Swapnil Patni 314

 ROLE
u
r
Pretax Post tax

EBIT PAT Int

DTE DTE
4,001000 2,401000 60,000
6,001000 20,001000 6100,000 20,001000
15.387
53
10,001000 200,00 0
8,001000

b EPS PAT
Perf Dividend
no
of equity shares
EPS 2140,000 20,000
1,001000
EPS 2.2
CA Inter FM-ECO CA Swapnil Patni 315
 1 PE ratio 6.34
Mfg 342

Reserves
Equity Ey Sh Puf
when nothing is mentioned in the
question solve
and post by using both fee

sales 8,251000
Direct cost Boy

delete 10,00 000 501

5,001000

Interest 5 00,000 87
40,000

CA Inter FM-ECO CA Swapnil Patni 316

 NP 8,25000 5,501000 901000 40,000
1,45000

i NP
margin States

145000 17.5761
825000

iii Net Profit Margin

v u
Pie tax Post tax
Pstaees
Sales
145000 101500
185000 8,25000
17.5761 12.301

iii ROA PAI

total assets

101500 10.151
10100,000

die Assets turnover Sales

Total Assets

825,000 0.825
10100,000

v ROE PAIwnees
fund
101,500 20.31
10100,000 50
or PAT PD 101500 o 20.31
E seer 500,000
CA Inter FM-ECO CA Swapnil Patni 317
 share capital
Mquityas there is
2,001000
owner's
and
fund
no
fief reserves

i debt 0.75
Equity
i total debts Equity x 0.75

2,00 000 0.75

1,50 000

Ii Current debt 0.4

Total debt

Current debt 0.4

1150,000

Current debt 60,000

CA Inter FM-ECO CA Swapnil Patni 318

 term debt 1 50,000
long 90,000
60,000

iii Fined Assets 0.6

Owners equity

Fined assets 0.6

2,001000

Fined assets 1,201000

lie Inventory 70 ratio cogs Aug Inv

8 7 00,000

any inventory
any inventory 87,500

Total assets To 701 total assets

2
3 50,000

Teen over 7100,000

Balance Sheet
liabilities Assets
Eq share 21001000 Fired Assets 1 so ooo
CementAssets 2,301000
capital
teen delete 90,000
long Inventory 87,500
Current debt 00,000 Cash 1,421500

3,501000 3,501000

CA Inter FM-ECO CA Swapnil Patni 319

 calculation
of operating expenses

Income Statement
Sales 75100,000
Cogs
I 22,501000
µ
1
top eups 42100,000 Bal figure
t
EB 7 10,501000
t Int 751000
EBT 9,751000
Tax 501 14,871500
PAT 4,871500
CA Inter FM-ECO CA Swapnil Patni 320
 Balance Sheet
Liabilities I
Shall capital
Reserves and
11,701000
7,801000
threat
Fired Assets 18,501000
Assets 10,001000
Surplus
157Debentures 5,001000 Stock 187500
75000 157 Receivables 2,001000
Payaliles 2,501000 Cash 612.500
Barhop 1,501000

28150,000 18,501000

a
Inventory To ratio cogs
stock
any
12 22,501000
stock
any
stock 1,871500
any assumed as

closing stock
b Current ratio Current Asset
current
liability
2.5 C Assets
4 00,000

C Assets 10100,000
C PAT 27
Net Worth 48257 Note
19 50,000

CA Inter FM-ECO CA Swapnil Patni 321

 1 Sales 09

641008
So 00,000

2 Debt to total assets

Delet
Total Arts
0.4 Debt
50 00,000
Debt 20100,000

3 tem debt to Le beat

Lory equity
equity
CA Inter FM-ECO CA Swapnil Patni 322
 0.3 27 Debt
30,001000

T Delet 9 00,000

4 Total Debt 27 Debt se Delet

20100,000 9,001000 ST Delet
St Debt 11,001000

5 Debtor 710 ratio To CreditSales

Aug Debtors
10 80 00,000
Aug Deletes

Ary debtors 8,001000

Assumption 1 des A Des

2
Any
Sales 7 0 Credit
sales

6 Stock To ratio cogs

Stock
try
6.545 64,001000
Stock
Ary
Stock 9 77,845
try
7 Guide Ratio CA Stock
cc
0.9 Des Stock Cash Stock
a
Cash 1,901000

CA Inter FM-ECO CA Swapnil Patni 323

 1 Fined assets to Total CA Ratio

FA
Totaled

40,001000
I CA

CA 56 00,000

2 Fined assets to capital

FTapital
40,001000
capital
capital 3200,000

CA Inter FM-ECO CA Swapnil Patni 324

 3 Capital to total liabilities

capital
Liabilities
12 3200,000
liabilities

4 Net to capital
profit
NI
capital
3 00,000

ND 6,901000
5 NP ratio 201 ofSales
6 40,000 Sales
207
Sales 3400,000
6
GP ratio 257 of Sales
8,001000
7 Stock 710 ratio Cogs
Stoch
try
10 Sales GP
Stock
try
10 32100,000 8100,000
Stock
try
Stock 2,901000
Ary
CA Inter FM-ECO CA Swapnil Patni 325
 8 Stock A Stock
Any Stock Of 2
2,901000 Stock 4,001000
of 2

Op Stock 80,000

Trading Afc and

Pll Afc
Particulars Aunt Particulars Aunt
Toop Stoch 80,000
By Sales 3200,000
To Superises 27,2010000 Stoch 4,001000
To GP 800,000
Byll
36100,000 36100 000
To Surpluses
70 NP
1160,000
6140,000
Byp 8,001000

8100,000 8,001000

Balance Sheet
Liabilities Suit Assets

Capital 3200,000 Fined Assets 40100,000

Total liabilities 64,001000 CementAssets 56,001000

96100,000 96,001000

doesnt include capital

cogs oft leap Cl
80,000 27,201000 4100,000
24,001000
CA Inter FM-ECO CA Swapnil Patni 326
CA Inter FM-ECO CA Swapnil Patni 327
 Normal Industry
Navya
f Current
ratio 2.5
City CAT
8,801000 11100,000
33,001000
6160,000 8180,000
4,401000

52 80,000
19180,000

2.67 Benitoustey

2 Dees 7 0 8 1110,001000
ratio 11,001000
Credit Sales 10 Better than
industry
Debtors
try
All sales are credit sales
we assume that all receivables as

average receivables
3 Stud 710 9 1,10 00,000
ratio 33100,000
3.33 Poor
MT Stow
than industry

is
Closing inventory average
inventory
4 Total assets
7 0 ratio 2 1110100,000
77100,000
Total 7 0
Total assets 1.4285
Pathan
CA Inter FM-ECO CA Swapnil Patni 328
 5 Net profit 3.5 2,311000
ratio 1110,001000
2.1 Poor than
netofit industry

6 ROA 77 5,591000
77100,000
gets 7.191 thientdustry

7 ROLE 10.51 2131,000

48100,000
FFworth 4 se Poofthany

8 Total Debt 601 29100,000

Total Asset 77100,000
37.661 than
Better
industry

CA Inter FM-ECO CA Swapnil Patni 329

 1 Dividend yield on
Equity share
Dividend
DPS 10 201 MPS
2 2 40
51

2 EPS Total profit

Total no
available
for
shares
Eg
of
2 43,000 3.03
80,000

3 Price earning ratio MPS

EPS
40 3.03
13.20

4 ratio PAY
Pref coverage PD
270,000
27,000
10

CA Inter FM-ECO CA Swapnil Patni 330

 Balance Sheet
Liabilities Aunt Assets Ault

equity Sh Cap 3,001000 Timedassets 26,001000

Reserves 1200,000 Aleut assets 2400,000
Cash 1,701700
Debt 2400,000 Des 13100,000
Curent RM 3,311500
liability 11100,000
M 3197
48100,000 48,00000

FA tea TA
TA
th
TL
ret cesta flow
1 Sale 78100,000
NP Sf 78,001000
of
6,241000

GP 151 of 78100,000
11170,000
COGS 78100,000 11170,000
66,301000

2 Dus 7 0 ratio Credit Sales

try debtors

6 78700,000
deletoes
try
debtors 13,001000
Any

CA Inter FM-ECO CA Swapnil Patni 331

 Trading a
RM 13,261000
Labour 6,361000 gales 78,001000
OH 46,411000

GP 11170,000

78100,000 78100,000

COGS 66,301000

L u OH
RM labour
201 101 46,411000
13126,000 863,000

Pee Af

To op Kup 1170,000
BMP
Y3
70 NP 6,241000

11,701000

CA Inter FM-ECO CA Swapnil Patni 332

 Cogs 6 40,000 157
5,44 000

2 Aunt ratio
of
2.5
9 00
CA 240,000

3 Stock 7 0 ratio cogs

Stock
try
5 5,44 000
Stock
Ary
Stock 1,08 soo
Sry
4 CA 2,40 000

L u Cash
Dis Stock 161000
176,000 48,000

CA Inter FM-ECO CA Swapnil Patni 333

 5 Deletes the
Ary of
2
80,000 171,000
2
1,28 000

6 Dees 7 0 ratio Audit Sales

Dee
try
6,40 000
1128,000

5 times

7 Des collection period 3

72 days

a Current ratio
CAT
2.5
CE
CA Inter FM-ECO CA Swapnil Patni 334
 2.5cL CA

b Net worth ca ch
480000 2.56 Cl

1 5cL 4,801000
CC 3,201000
CA 2.5 x Cl
8,001000

c
Quick ratio CA stock
a
1.5 8,00 00
804
Stock 3,201000

d proprietary FA ca U
Prof FA We
we
ftp
FA 0.78
FA typo ooo

FA 14,401000

i proprietary 14,401000 4,801000

19,201000

CA Inter FM-ECO CA Swapnil Patni 335

 Balance Sheet
liabilities E Assets

Equity 16,001000 19,201000 Fired Assets 14,401000

Reserves 3,201000
Stock 3120,000
3120,000 Others
Overdraft 4,801000

Other 2,401000
liability
2240,000 2240,000

a Net Working capital ca ce

13,501000 CA UL
CL CA 13,501000

CA Inter FM-ECO CA Swapnil Patni 336

 b Current ratio
I
2.5
YI 13,501000
CA 22,501000 A 9,001000
C Total Asset FA tea
30,001000 t 22,50 000
5250,000

d Total assets 710 ratio

FaeAssets
2 TO
5450,000

Tumour 1,05 00,000

e ROA
Total Assets

151
ETO 000
PAT 7 87,500

wt sales
f GP
20 f of1,0500,000
of
21,00 000

cogs Sales GP
g 1,05 00,000 21 00,000
84,00 000
CA Inter FM-ECO CA Swapnil Patni 337
 h Stock Horatio Coy
stock
any
7 84,001000
stock
any
Stock 12,001000
Acy
12100,000
Opry

[Link] a
i
22,501000 12 60,000
9,001000
1.1

ratio
j FA 7 0
Twenty
1,05 00,000
30 00,000
3.5

k Proprietary ratio
Equity
26 10,000
52,50 000
0.49

e EPS PAT PD 787500 54000

shay 1,801000
no
of 4.075
60,0004949

CA Inter FM-ECO CA Swapnil Patni 338

 Balance sheet
liabilities E Assets E

1.5 assets 30,001000

Equity 21,101000
fined
Debt I 17140,000 Current 22,501000
current liability 9,001000 assets

52,501000 5250,000

here equity means eg share capital t

whereas in module
pref reserves
assumption of
eg was considered w o
fief

CA Inter FM-ECO CA Swapnil Patni 339

 a
fined assets 230,001000
401
275,001000

b Net
profit 25100,000
20100,000
5100,000

Sales 5,00 000 6250,000

81
c GP not of sales
12,501000

d Cogs Sales GP
62,50 000 12,501000
50,001000

e Stock 7 0 ratio
cogs
stock
any
4 50,001000
any stock
stock 12,501000
any
assumed stock
any closing stock
all sales are credit sales assumed

debtors 7 0 ratio credit sales

f deletes
any
4 62,50 000
deletes
CA Inter FM-ECO
any CA Swapnil Patni 340
 deletes 15 62,500
any
assumed debtors
any closing
debtors

Cash Cogs
g if
cash 50100,000
1,12
6,251000

Balance Sheet
liabilities E Assets E
shall capital 40,001000 assets 75,001000
reserves 25,001000
fined
deletes 15162,500
d Stock 12150,000
long term debt 30,001000 Cash 6,251000

creditors 14,371500 1109,371500

Semidey
1109,371500

CA Inter FM-ECO CA Swapnil Patni 341

 a GP 00
GPiatio 35
Sales
4,001
16,001000

b cogs Sales GP
16,00000 4,001000
12,001000

C Deleton 7 0 ratio 12m Um

3m

Debtors 70 ratio audit sales

deletes
assumed all tryare
sales
on credit
4
talyTdeleton

Ary deletes 4,00 000

d Stock 7 0 ratio Coy

any stock
15 12100,000
stock
auf
any stock 8100,000

avg stock of stocht d stock

2

CA Inter FM-ECO CA Swapnil Patni 342

 8100,000 of stock 10,000 of stock
2
16100,000 10,000 t 20ps stock

opening stock 8,051000

asset 710
fined
e
Saff
4 16,001000
FA
FA 4 00,000

Creditor's 710 ratio

f tam
6m

Credit 710 ratio Credit Purchase

Crediton
try
6 1410,000
Crediton
Ary
any Creditor 2,011667

Particulars
Trading
Aunt Particulars Aunt
To Opening Stock 7,951000
By Sales 16,001000

To Purchases
To GP
1210,000
4,001000
By Closing
Stock
8,051000

CA Inter FM-ECO CA Swapnil Patni 343

 Important RTP
questions for practice

CA Inter FM-ECO CA Swapnil Patni 344

CA Inter FM-ECO CA Swapnil Patni 345
CA Inter FM-ECO CA Swapnil Patni 346
CA Inter FM-ECO CA Swapnil Patni 347
CA Inter FM-ECO CA Swapnil Patni 348
CA Inter FM-ECO CA Swapnil Patni 349
CA Inter FM-ECO CA Swapnil Patni 350
CA Inter FM-ECO CA Swapnil Patni 351
CA Inter FM-ECO CA Swapnil Patni 352
 Hot

CA Inter FM-ECO CA Swapnil Patni 353

CA Inter FM-ECO CA Swapnil Patni 354
CA Inter FM-ECO CA Swapnil Patni 355
CA Inter FM-ECO CA Swapnil Patni 356
CA Inter FM-ECO CA Swapnil Patni 357
CA Inter FM-ECO CA Swapnil Patni 358
CA Inter FM-ECO CA Swapnil Patni 359
 Ch 6
7
use Dividend Decisions
or

Basic MM approach
optimum dividendpayout
Basic Walter
Basic gordan
Basic
Basic gordan
market pricevaluation
graham and Dodd
graham and Dodd
Leiter's model
MM approach
Walter and
optimumpayout
goedan
Walter and gordan
and dodd
graham
MM approach
Advance Walter
Walter and gordan
gordan
intrinsic value
perpetuity
MM approach

CA Inter FM-ECO
seeded CA Swapnil Patni 360
 Walter
Walter and
golden
Walter
war
Walter and gordan
Walter
Intrinsic value
Advanced Walter

Walter
Walter
gordan
Walter
Walter
gordan and walter
walter
MM approach
optimum payout
MM hypothesis
MM approach

CA Inter FM-ECO CA Swapnil Patni 361

see
 SUPER STAR QUESTIONS

Q26. PY Nov 20
Q25. PY Nov 19
Q19. Practical Q5
Q8. Illustration 8
Q10. Illustration 10

Q30. PY May 23
Q28. PY July 21
Q27. PY Jan 21
Q22. Practical Q8
Q40. RTP Nov 22

Additional Questions for practise Q29, Q21

CA Inter FM-ECO
no CA Swapnil Patni 362
Moo ist

363
ODB Gt r

364
 PO
u s

No
growth growth
Po De Po
Ke
g
I
Po
Ie Ie Ie Ie Ie
Fa It Est Foi
71.42 100 50 40 20

Lets understand like this

10 10 10 10 10

Po OO
Df lot

I
100

CA Inter FM-ECO
a CA Swapnil Patni 365
 Dividend policy

Ke R Rear
201 710 me p 201 301
my p
EPS 100
die W
specific EPS 100
dice 100 aunt DPS
anything is DPS O
fine

relevance Irrelevance

gordanmodel walter
Modigliani and
Miller MM
nogrowth
growth value of share
value share price is price is not
of
dependent on dividend dependent
on dividend

CA Inter FM-ECO CA Swapnil Patni 366

 Gordan

no
growth
51
growth

method method
Po ke Po
II If DI
lot
toy st Foo x100
200 method 2
If
method 2 10 10 10 10 10 70
D D2 Dz Dy De De
Ke D
g Annie
Prof infinite
ke D 10
lot future airflow
g 100 Po
Diz
Po
Eg 10101 100

method3

re
E gValue
gain
Rent

18 988 301

401

Ke D t g
re
g Ho

CA Inter FM-ECO
Po D
I ke
g CA Swapnil Patni 367
so
 Walter

Po CPS DPS R
By
for example

DPS 40

Po 100 40 101
II Ke
Ke
Po 4
1 fog
Po 400 600
1000

Di Da Des Du Des Da
EPS 00 100 100

Dps 40 40 40 40 40
RES 60 60 60 60 60

F 6 a 6
6 6

70
Epe
Po 600

CA Inter FM-ECO CA Swapnil Patni 368

so
 upper floor EPS DPS XR

Go

600
ground floor Ey
400
He 4,87

Po 400 600 1,000

Point to be noted In walter approach it

ignores growth it has an
assumption that there will not be
any
growth
whereas in we have
gordan's approach
two different methods withgrowth
without
growth
In Walter's approach return earned on
reserves is also considered Whereas in
gordan's approach it ignores returns
earned on reserves

conclusion Both methods are

having there
own advantages and disadvantages It
is very important to understand that
these theories will give us theoretical
MP and not correct valuation Just
us an approximate valuation
give
In both the methods TMP Po depends on
dividend whereas in MM approach valuation
is not at all dependent upon dividend

CA Inter FM-ECO
so CA Swapnil Patni 369
 CPS DPS R
PAT Po
H PD 12 DI ke
18 ke
Dist P
m 42 6 DI
Dj
t
201
1Gt
EPS 6 161
D 3.12 EPS 6

dividend payout ratio 3 x 100

521

In this question growth is not given directly

We have to calculate growth on the basis
balance aunt and Return on Investment of

CA Inter FM-ECO CA Swapnil Patni 370

so
 0
9 151 9 101 9
Bal 751 Baro
201 R 201 R 201
Rg
1st 9 0

Po Di Po Di Po D
ke ke ke
g g g
EPS 6 EPS 6 EPS 6
DP 25 DP 501 DP 100
DPS 1.5 DPS 3 DPS 6

It
If
1st Got
101
150 37.5

PAT 30,001000
PD 12 00,000

DP 1800,000
no
ofshares 3,001000

EPS 6100,000

Let's understand how to calculate growth

G BR
B Bal ant not paid as a
dividend
R Return on investment

CA Inter FM-ECO CA Swapnil Patni 371

so
 CE una I I Guess
EPS 100 100
DPS 30 100
Bal 70 O
en cap 50 50
Total 120 50
R 101 101
return 120112 5 7
132
funds
Bal XR
growth to a X101
The

growth rate 707 101

77

Re 151
g 21
! Do 2
D 2 21 2
2.04

Po DI 15.69
ke
g 21

CA Inter FM-ECO
see CA Swapnil Patni 372
 dont forget to check calculation of
optimum payout

W Po EPS DPS XR
II ke
ke
53 151
Ig 121
127
45.83

in optimum payout
R 151
Ke 121
Dice o
EPS 5

Po IEDS DPS x R
DIE ke
ke
Po 15 0 x 157
Op 127
127
Po 52.08
CA Inter FM-ECO CA Swapnil Patni 373
so
 At optimum payout level MP is 52.08
whereas when dividend was E3 the MP
was 45.83
only
mm approach

Ke 10
Po 100

Calculation
of P
1
mm

dividend dividend
paid not paid
dir 2 d O
P 108 P 110

2 New Issue

existing share 5,001000

net income 5,001000
expansionfunds 20,001000

more
funds
dividend no dividend
20,001000 20,001000
5,001000 5,001000
15,001000 15,001000
die 10 00,000 0
funds 25,001000 1.5 00,000
no.s 25100,000 15109,880
108
CA Inter FM-ECO CA Swapnil Patni 374
so
 23148 13636
5 00,000 23148 5,001000 13636
Totaling
523148 513636
Value 523148 108 513636 110
564,99984 564,99960

MM
Steps of approach
out P
I
find
dividend no dividend

out shams issue

2
find no
of of new

dividend no div

3 Valuation

dividend Mand
y Conclusion

Although P is not same but valuation

remains whether dividend
you pay
same
or don't dividend
you pay

CA Inter FM-ECO CA Swapnil Patni 375

 Ke lot
existing shares 10,000
Po 100
dividend 5
net income E1100,000
expansionfunds 52100,000
a Calculation
ofP
dividend no dividend
dir 5 die O

1 105 P 110

in Calculation issue
of new

funds 2100,000 2,001000

incorrect 1100,000 1100,000
1100,000 1,001000
dividend 50,000 0
Total 1,501000 1100,000
P 105 110
no.s 1 50,000 1100,000
105 110
1429 shares 909 shares

CA Inter FM-ECO CA Swapnil Patni 376

so
 Total shares
10,000 1429 10,000 909
11,429 Shares 10909 shares

value 11429 105 10909X 110

12,00 000 12100,000

value remains
of company
in both the cases
same

Re 101
ROI 121
EPS 10

R Ke
din o c
optimum dividend
payout ratio
Po EPS DPS XR
DE ke
ke
10 0 121
g 101
107
2120

CA Inter FM-ECO CA Swapnil Patni 377

 J 25
Ke 101

Po 50
He

Particulars I I

51 81 31
growth
Ke 151 151 157

Do 2 2 2

Di 2 2151 2 2181 2 2131

2.1 2.16

Eg [Link] Een III

21 30.8 17.16

CA Inter FM-ECO CA Swapnil Patni 378

 Graham and Dodd Model

i EPS 20 D 4

Po
MIDEI
mfutz
m 4 6.66
10 10.66
106.6

ai EPS 20 D 12

Po
MIDEI
10 12
4
10 12 6.66
186

Wii EPS 20 D 20

Po
MIDEI
10 20
3
10 20 6.66
266

As per G D approach more dividend

more Po although company is
same EPS
CA Inter FM-ECO
having CA Swapnil Patni 379
 EPS 30
DPS 18
m 2

Po M
DTE
2 18
303
2 18 10
56

EPS
DPS 5
m 7
Po 58.33

Po M I DIE
58.33 7 5 EPS 10
5
CA Inter FM-ECO CA Swapnil Patni 380
 Lintels model

EPS 100
Do 10
Af 401
DPR 301
D Do EPS XDPR Do
Af
D 10 100 301 10 401
D 10 20 x 401
Di 28

D Do EPS XDPR Do
9So 20 0.60 9.80 Af
451
9.8 2.2 451
10.79

CA Inter FM-ECO CA Swapnil Patni 381

 Ke 121
shares 10,000
existing Po 700
dividend 210
expansionfunds 10,001000
net income 5100,000

i calculation P
of
L s
dividend no dividend

din 10 die O
7 102 P 112

ii Calculation new shares

of
u s
dividend no dividend

10100,000 10,001000
funds
income 5,001000 5,001000
5,001000 5,001000
dividend 1100,000 o
total 6100,000 5100,000
P 102 112
no's 6,00 000 5,0912000
102
5882 4,464
Total 10,000 5,882 10,000 4,464
15,882 shares 14,464 shares

valuation 15882 102 14,464 112

16,19964 16.19964

CA Inter FM-ECO CA Swapnil Patni 382

so
 Particulars r ke t ke take
growth 9g y 4.81
Di 4 4 4

Po 400 4 100 76.92

Efg fog 101 of
[Link]

Assumed s
ravings given in the question
is EPS that is EPS x Dieu
D
why Payout
equal to

Po m
Dte
Po 9 0.45 6.6 times
53
CA Inter FM-ECO
so CA Swapnil Patni 383
 10,001000
Wtf shay 50,000
20

Die payout ratio 501 of 20

10

i Po EPS DPS XR
Ke
Ke
120 107 121
Ig 101
101
220

iii Re CR
din O
Po EPS DPS XR
BE Ke
Ke
O 120 07 121 240
101
101
CA Inter FM-ECO CA Swapnil Patni 384
 assumed growth is
included
already
EPS 40,001000
Idg way
EPS 10
4,001000

i Walter

Po EPS DPS XR
II ke
ke
assumed that in din 4
growth is
already included ie
why D 4

70 10 4 201
I 161
lol
Po 25 46.875
Po 71 875

ii
gordan Po
Ffg
Po 4 PO 100
161 12g
CA Inter FM-ECO CA Swapnil Patni 385
 I PE 0

leavings 10,001000
Value 1,001001000

Ke lot Earnings 100

Value
iii dividend 3
EPS 5
R 201
Ke 101
Po EPS DPS XR
II Ke
Ke
Po 1533 201
3g lot
101
Po 70

CA Inter FM-ECO
e CA Swapnil Patni 386
 Iii Ke CR
din o

Iv Po EPS DPS XR
II Ke
Ke
Po O 5 0 201
lot
lot
Po 2100

EPS PAT dividend

no
of shares
EPS 50,001000 26,001000
6,001000

EPS EU

Po EPS DPS XR
II ke
ke

40 16 0 1 0.2501
15,3
151

CA Inter FM-ECO CA Swapnil Patni 387

so
 151 X 6 1 0.1 D
0.9 1 0.1 D
D I

DIE ratio DPI 100

EPS
Ily x 100

251

dont to deduct PD
PAT forget
to calculate EPS from
Dividend EPS X Payout Ratio

EPS 3
D 0.75 assumed 0.75 is D
growth is included in D

R 221
Ke 187
9 22 751
16.51

i Golden Po 0.75
2g 181 16.51
50
CA Inter FM-ECO CA Swapnil Patni 388
0s
 ai Walter
Po EPS DPS XR
II Ke
Ke
Po 3 0.75 x 221
0,72
1st
18
l
Po 19.44

Po at optimumpayout ratio will be always

greater than Po of existing dividend
policy
EPS 30,00 000 6
5,001000
D 3.6 6 601
assumed 3.6 is D

W Po EPS DPS XR
II Ke
Ke
Po 3,31
6 3.6 151 49
131
By
CA Inter FM-ECO CA Swapnil Patni 389
 iii R Ke optimum dividend
dice O

Po D EPS DPS XR
Ke
Ke
Po 6 0 151 53.25
131
131

g edetA E 0

Intrinsic Value

L S
5th
upto 4th year year onwards
G 121 DY 220.29
Do 140 9 51
D 156.8 15 231.30
D2 175.61 Py
13 196.68
Dy 220.29 Py D
ke
g
231.30
I 2 3 4 187 57
PO 0.847
156.8 175.61
078
196.68 220.20 1779.23
491.92 nocos [Link]
CA Inter FM-ECO CA Swapnil Patni 390
 Po 1779.23 x 0.515
916.34

Total Po 491.92 916.34

1408.26

Intrinsic value 1408.26

m value 2185

Hence overpriced 776.74

by

Part is very important

EPS 2,001000 10
20,000
DPS 1150,000 7.5
20,000

raining 2,00 000

PIEratio 12.5
value 25,001000

CA Inter FM-ECO
so CA Swapnil Patni 391
 Ke 2 00,000 x 100
25100,000
81

Po EPS DPS XR
II Ke
Ke

Po 78.5
10 7.5 x of
St
St
93.75 39.06
132.81

i R ke
die 0 optimum dividend
Po Ot 10 o x of
St
St
Po 156.25

ii At R ke
dividend policy may not have
share
any
impact on price
current R 101
ke of

PE
Z
PE lot
É
Gaming El c euplanation
value 10
CA Inter FM-ECO CA Swapnil Patni 392
 PE 10
Ke 10
to
Ii PE 8
KE 12.51 Ke a
I 12.51 7101
R toy dividend 10

optimum dividend co

Po 0
Es [Link]
Po SO

we can calculate Po with

Alternatively actual dividend that is 7.5

Po 110 7 5 x lot
15 x
12.51
12.51
Po 76.00

CA Inter FM-ECO CA Swapnil Patni 393

 i 9 7.51
D 220
Po 1460
ke

Po D 1460
peg Easy
Ke 8.861

ai R lot
Balance Got
i 9 61

G BR
7 5 B XR

x 101
lid data
7.5 retention
retention ratio 757
dividend payout ratio 257

dividend 20

Eps 2294

So

EPS 80

DPS 20 Res 60

EPS so I data a

Payout ratio not

dividend 32
CA Inter FM-ECO CA Swapnil Patni 394
 0.6 101
g
Gf
Po 1460

Re t
g
of
3
8.19 f

CA Inter FM-ECO
L CA Swapnil Patni 395
 Self Assessment Questions

CA Inter FM-ECO
ooo CA Swapnil Patni 396
CA Inter FM-ECO
ooo CA Swapnil Patni 397
CA Inter FM-ECO
ooo CA Swapnil Patni 398
CA Inter FM-ECO
ooo CA Swapnil Patni 399
CA Inter FM-ECO
ooo CA Swapnil Patni 400
CA Inter FM-ECO
ooo CA Swapnil Patni 401
CA Inter FM-ECO
ooo CA Swapnil Patni 402
CA Inter FM-ECO
ooo CA Swapnil Patni 403
CA Inter FM-ECO
ooo CA Swapnil Patni 404
CA Inter FM-ECO
ooo CA Swapnil Patni 405
CA Inter FM-ECO
ooo CA Swapnil Patni 406
CA Inter FM-ECO
ooo CA Swapnil Patni 407
 7 Management of
Ch-8
Working Capital

alternative policies
net operating cycle
WC requirements
WC requirements
additional requirements
monthly case budget
monthly cash budget
cash
from operations
unclearedfundsfloat
optimum cash balance
cash cycle To Savings

Eod Basic
Eod
optimum ordering qty
Inventory ngt policies
Inventory nyt policies
change in credit teens
analysis
policy analysis
creditors nge analysis
creditors nyt
of cycles
CA Cl Wc requirements
CA Inter FM-ECO CA Swapnil Patni 408
Boss
 Balance sheet
working capital
Pee we
net we required
WC statement
cash budget
cash budget
cash budget bIs
incremental approach
risk analysis
credit analysis

Cash Cost Basis

policy analysis
WC requirements
Current ratio
forecast
WC Cash CostBasis
WC requirement
Creditpolicyanalysis
Benefit analysis
Max permissiblefinance
policy analysis
cash balance
credit teens

discount analysis
operating cycles

CA Inter FM-ECO CA Swapnil Patni 409

see
 credit period
WC investment
WC requirements
we requirements
credit policyanalysis
cash cost basics
credit period
Bls we required
folicyntialysis
additional we required
WC cash cost basis
we statement
receivables analysis
estimate WC
cash
from operations
attuned
WL operating
nonce statement bls

Net we

policy analysis

CA Inter FM-ECO CA Swapnil Patni 410

so
 SUPER STAR QUESTIONS

Q13. Illustration 13
Q11. Illustration 11
Q21. Illustration 21
Q40. PY Jan 21
Q41. PY July 21
Q42. PY Dec 21
Q45. PY Nov 22
Q52. RTP Nov 19
Q53. RTP Nov 19

Q50. RTP Nov 18

Q24. Practical Q3
Q31. Practical Q10
Q35. PY May 18

Additional Questions for practice - Q9, Q61

CA Inter FM-ECO CA Swapnil Patni 411

see
 Ch 10 – Working Capital Management (EFFETE
NAPA Chart 10.1 )
A
Gross Working Capital Permanent Working Capital
(i.e. current assets only)
Classification
Based on of Based on
Concept Working Time Factor
Net Working Capital Capital Temporary Working Capital
(i.e. Current Assets Less Current Liabilities)

B Operating Cycle
Raw Material Storage period + WIP holding period + Finished goods storage period +
Debtors collection period Creditors payment Period

C
Working Capital Estimation Approaches Rates of valuation of various items
Component Total Approach Cash Cost Approach
Raw Materials Purchase price net of Discount Purchase price net of Discount
Raw Materials + 50% of (Direct Labour +
Work – in Raw Materials + 50% of (Direct Labour +
Progress Direct Expenses + Production OH
Direct Expenses + All production OH) excluding depreciation)
Finished Goods Cost of Production Cost of Production Less Depreciation
Sundry Debtors Selling Price Selling Price Less Profit Margin Less
Depreciation
Sundry Creditors Purchase price net of Discount Purchase price net of Discount
Note – For WIP valuation, it is assumed that materials are fully issued and conversion (i.e. Labour and
POH) is 50% complete.
D BAUMOl Model

Optimum investment size = 2AT

I
A = Annual Cash requirement
T = Transaction cost per purchase / sale of investment
I = Interest rate per rupee per annum
Note – Average Cash balance = Ω of optimum investment size (as computed above)
Associated costs of optimum investment size = Transaction costs p.a. + Interest costs p.a.
= [(No. of transactions ◊ Cost per Transaction) + (Average Cash Balance ◊ Interest rate p.a.)]
At the optimum investment size level, Transaction costs p.a. =
Interest cost p.a. = Ω of associated costs p.a.

412
 Ch 10 – Working Capital Management ( Chart
800s othe10.2 )

E
Debtors Decision Making

The following cost benefit analysis procedure should be adopted

a) Compute Gross benefit = Contribution or profit. (Compute profit if total fixed costs are specifically
given in the question, otherwise contribution may be used)
b) Compute costs relating to debtors = Interest on average debtors + bad debts + discount allowed +
Specific costs
i) Interest = Cost of debtors p.a. ◊ Collection Period ◊ Interest Rate
360
ii) Bad debts = Sales ◊ Bad debts percentage, if any
iii) Discount allowed = Sales ◊ Percentage of debtors availing discount ◊ Percentage of discount, if any.
iv) Specific collection costs should be considered only if given in the question, e.g. collection costs, etc.
c) Compute Net benefit = Gross benefit Less Cost of Debtors = Step 1 Less Step 2.
The credit policy with the maximum Net Benefit should be selected by the firm.

F
Working Capital Funding Approach

Approach Matching Approach Conservative Approach Aggressive Approach

Long term Fixed Assets & Permanent Fixed Assets, Permanent Fixed Assets & Part of
funds used in Working Capital Working Capital & part of Permanent Working Capital
Temporary Working Capital
Short term Balance part of Temporary Balance part of Permanent
Temporary Working Capital Working Capital & entire
funds used in Working Capital
Temporary Working Capital
Effect on Well - balanced High Liquidity Low Liquidity
Liquidity
Effect on Comparatively Well - Low profitability & return on High return on assets but
Profitability balanced Assets risky

M e

413
 Lets understand the FM
syllabus of
Balance Sheet
Source of
finance
Capital Equity FA Cap B
structure Preference
Coc Delet Invest 7 risk in CB

CL CA WCAP
Average
Stoch
Cash
Debtors

Profit and loss Afc

rent
DOL
salary
depreciation

PAT

application of funds

WCAP
Problems u r

more funds LARGE SMALL

real estate Brokers
costly
CA
profits
bad debts
premium cars
Twellus SPC
firm
slow emit Petrol Pump advocate
carriage cost doctors

Jewellers shop
eg
CA Inter FM-ECO CA Swapnil Patni 414
see
 delet
Funds pref

Capital guttweap
Investment
showroom gold
furniture silver
land

fired assets current assets

encess less
profit sales
profit

conclusion That is
why we must have
adequate WCAP

Cash Budget

Tan Feb Mar

refund opening 2,001000 4100,000 3100,000
sale inflow 3,001000 2,001000 1100,000
dividend outflow 1,001000 3100,000 7,001000

Purchase
Balance 4,001000 3100,000 3100,000
rent
salary

CA Inter FM-ECO
a CA Swapnil Patni 415
 Particulars Feb Mar April May Luce July Aug Sept
Sales 120K 140K SOK GOK SOK
Cash 201 24K 28k 16k 12k con EE Yok

Balance 96K 112K 64K 48k GUK SOK GUK USR

757of Bal
Bal
of257
Net 124K SSK 68K SOR 92K Sok
Inflow
from sales
CA Inter FM-ECO CA Swapnil Patni 416
so
 Particulars April May Tune July Aug Sept

opening 20K K 20K 20K 20k 20k

Inflowsales 124k 88K GUK 20k 92k Sok

outflow

wages 9k 8k lok lok 9k 9k

interest ya 3k
adv tax 5k
purchases 48k 64k Sok 64k 98 sole
Sotof sotof
GOK SOK

Balance 84K 36k 2 18K 55K 11K

min bal LOK LOK LOK LOK 20K

surplus 64k 16k 35K

22k 2K
deficit
v Imp

CA Inter FM-ECO
a CA Swapnil Patni 417
CA Inter FM-ECO CA Swapnil Patni 418
too
 Particulars Jan Jeb March

Opening balance 545 315 65

Inflow
Investment 700
plant
deletes 2070 1900
Iso
2615 2915 1965

outflow
investment 400
dividend payable 485
plant soo
255 210 195
operating expenses
creditors 1645 pg 1280
2300 2850 1675

315 65 290
Closing balance

note

1 No impact on cash budget because other creditors

do not change through out and same effect
on tax audit

2 Since depreciation is now cash item it can't

added in outflow

CA Inter FM-ECO CA Swapnil Patni 419

she
 DebtorsAfc
Jan Feb Mar Jan Feb Mar

ToBalbld 2570 2600 2500 Cash 2070 1900 1850

By
To Sales 2100 1800 1700
By Bal
old
2600 2500 2350

op stock purchases closing stock cogs

Jan Feb March

COGS 1635 1405 1330
closingstock 1100
t 1200 1000
11100
openingstock 1300 1200

Purchases 1535 1305 1230

Creditors At
Jan Feb Mar Jan Feb Mar

To Cash 1645 1355 1280 ByBalbld 2110 2000 1950

To Bal 2000 1950 1900

By
Purchases 1535 7305 1230
bid

CA Inter FM-ECO
e CA Swapnil Patni 420
 a Cash cycle 45 days 75 days 30days
90 days 3 months

b Cash turnover 4
13mg

c Minimum operating cost sales

cash To
120,001000
4m
30,00 000

Stock De Total Crs Casque

Before 75 45 120 30 90

90 30 60
Afterme's 45 45
o s 60
Gi 120
121 7 180 Cash 7 0 3
1st 3 240
241 300 6
go 360
CA Inter FM-ECO CA Swapnil Patni 421
 minimum cash 120 20Lakers
tables
Gallier min cash 30 tables
reduced win Cash 10 Lakhs

ROI lot

10,001000 x 101
saving E 1 00,000

Formula as fee Bound model

c
of
Annual Cash Payment
Y Cost
fee
transfer
s cost
opportunity
Minimum Cash Balance

2 12,60 000 20
Sf
25,100

CA Inter FM-ECO CA Swapnil Patni 422

so
 Cash WC unit 2

Cash Cash cycle cashflow NJ

Budget cash T 0 Peale Boumal
model
06,07 911 48
[Link]

and loss Ale

Projected Profit for the year 3
Particulars 2 3 Particular 2 3
Tomat consumed 350 420
Tostores 120
To
144
192
By sales 1,000 1,200
mfg expenses 160
To other euperises 100 150 misc
To Depreciation 100 100
Byuncoure 10 10

To Net 180 204

profit 1,010 1,210 1,010 1,20

CA Inter FM-ECO CA Swapnil Patni 423

now
 Cash
flow
Profit I
t depreciation
304
cash required 50

net cash inflow 254

loan repayment
254 757 1190.5
net cash 63.5

How to
get material corruption through
other method

opening stock 150

RM 480
Closing stock 1200
430

RM consumed
foe year 3 350
420
201

However 420 looks more

logical because
there is a disproportionate incremental
in stock

1 Although sales increased by 20

depreciation will remain same
Incremental in sales will not have
3rdyear any
impact on sales in

CA Inter FM-ECO CA Swapnil Patni 424

see
 2 In is added back
because
cash
flow
it is now
depreciation
cash item

3 RM consumption eup ofstores mfg expenses

increased
are in proportion
of sales ie 201

4 Other eup specifically given 150 in years

ie we have taken 150 not 120
why

Particulars 2 3

Sales 20,001000 20100,000 20100,000

EDIT 2100,000 2100,000 2100,000
FA 5100,000 5,001000 5,001000
CA 3100,000 4,001000 5,001000
TA 8100,000 9100,000 10100,000

ROA 2100,000 2,001000 2,001000

8100,000 9,001000 10100,000
251 221 201
conclusion more WAP lessROA
less Wap more ROA

CA Inter FM-ECO CA Swapnil Patni 425

so
 Net Docking cycle 30 22 18 45 307days
85 days

No
of operating cycle in a
year 3g
85days
4.23

Total cycle period

May Wday Afoot Owaedit
sales
a credit
Puch
days days days

CA Inter FM-ECO CA Swapnil Patni 426

F
 CA C NCAP

be Material
stock case War On

WN I Raw material and Inventory

1 60,000 x 5 3,001000

M selling
lab on
Got eup
1,801,2000 2

30,000

2 WIP
OH
pm labour
1001 of 201

CA Inter FM-ECO
a CA Swapnil Patni 427
 5 60,000 601 5 60,000 101 5 60,000 201
12 12 12
15,000 1250 2500

Total WIP 15000 1250 2500

18750

v04 If nothing is given take sot

I don't
501 then it
If take
means
utilising 1001 labour and
I am
OH on
day 1
itself but in realthelife
OH and labour is used in span
in this question 1001
of WIP cycle ie
In short
Thode labour DayI be
Theda labour Day 2 be
Thode Day 3 to
go on

That is I do take im 501

why any
15days

3 Finishedgoods
FG

RM
labour
100 o loot
poop

Sale price 60,000 5

3,001000
Sales cost of mat 180,000 1001 180,000

201 OH 60,000 1001 60,000

101 labour 30,000 1001 30,000

2,701000
CA Inter FM-ECO CA Swapnil Patni 428
see
 Profit
sales cost feoft SP
2170,000 30,000 3100,000
FG 2,700,200
3

67,500

4 Debtors Fly Sales eup x3

12
3
270,00010
67,500

5 Cash 2000

6 Material

Total material 1,801000

Creditors aunt 1,801,200 2
feed 2M
30,000

F Wages 3 Im
00,000,2101 x
2500

8 OH 3,001000
42207 x'm
5,000

9 WCAP CA cc
CA Stock Casht Debtors
30,000 18,750 67,500 20,000
67,500
2,031750
CA Inter FM-ECO
e CA Swapnil Patni 429
 CL OH Wages mat
5,000 2,500 30,000
37,500

WCAP 2,03 750 37,500

1166,250

Concept Cash Cost

As per cash cost approach

! Don't include the value of

ii Non cash items
in Profit
RMt OH lab def profit Sales
eg 20 10 10 t 20
to 70

But actual cost included the sale

to 70 def
for of
only 70 10 20 profit
40

CA Inter FM-ECO CA Swapnil Patni 430

see
 Particulars E E

1 Current Assets

Stock
RM 9,00 000 75,000
72
FG I 2 15,000 2,901000
258,02K x

Debtors 29404,22 4,901000

Sales Promotion
1 20,000 30,000 5 20,000
4
Cash
1100,000 1100,000
Total 9110,000

2 Current liabilities

Material 9,001000 2
12

Wages 60,000
y

miss
Cash mfg 960,000,21 80,000

20,000
12

Total 3 10,000

Working Capital CH CL 6100,000

Margin of safety 201 1120,000

Net Working Capital 7120,000

requirement
CA Inter FM-ECO CA Swapnil Patni 431
see
 Working notes
Debtors 900 720 960 240 120
2940K
FG Value 900 720 960
2580K

Particulars January February March

Opening cash 3,571500 6 87,500

balance

cash
Inflow
Deletes collection 10,801000 11125,000 11,701000
term loan 2 00,000
long
11115,000 14 82,500 20,571500

CA Inter FM-ECO CA Swapnil Patni 432

We
 Cash outflow
Creditors
paid
each output
5 62,500 5,851000 6,301000

2 units RM
of150
x

Variable OH and 1,95 000 2110,000 2,251000

wages

Purchase of 3,001000
Machinery
Total B 7157,500 7,95 000 11,551000

Closing ABalance
B
3 57,500 687,500 9102,500

CA Inter FM-ECO
a CA Swapnil Patni 433
 Particulars E E

A Current Assets
Stock
RM 27,092000
3

FG 77,40 008 3 19,351000

27100,000 21160,000 3240,000

Deletes 8812,2000
3

Sales 77 40,000 10,801000

g g

Administration and Selling 90,000

10,8012000 1 OH

cash in hand 3000003

Total 52,051000

B Current Liabilities
27100,000 3 12
Material 6 75,000
0 5 eup 21,60900 1 12 1 80,000
2880908 1 12 2 40,000
mauf eup
3240,000 3,601000
Total 10,951000

Net Working Capital 41110,000

lot
Margin of Safety 4.11.000

Total Working Capital 45,211000

CA Inter FM-ECO CA Swapnil Patni 434

so
 Unit 4

Debtors which credit policy option must be

selected

Present Proposed Proposed

Credit 20 30 40
policy
Sales 20100,000 30,001000 40,001000
a VC 201 4 00,000 6,001000 8,001000

H FC 2,001000 12,001000 2,001000

E1317 14100,000 22,001000 30,001000

Bad Debt 2,001000 4100,000 6,001000

ROI 157 151 157
Funds Blocked 6,00 000 8,001000 10,001000

Interest 5,000 10,000 16,666

62 157 20 8 8657 20 10L xist yo
360 360

Net Benefits 11,951000 17,901000 23,831333

Conceptual Understanding
Credit Period A
Sales A Net
Benefit
H M Bad Debt Int
Profit Profit
17 Bad Debts 9
Interest 9

CA Inter FM-ECO CA Swapnil Patni 435

see
 Particulars I I TI I I

Policy 30 40 50 60 75
Sales 600,000 6130,000 6 48,000 675,000 690,000
SP Unit 3 3 3 3 3

units sold 2,001000 210,000 216,000 225,000 230,000

variable cost unit 2 2 2 2 2

Total VariableCost4,001000 4,201000 4,321000 4150,000 4,601000

Fined Cost Unit 0.25 0.25

Total finedCost 50,000 50,000 50,000 50,000 50,000

EBIT 1150,000 160,000 1 66,000 1 75,000.180,000

Bad Debt It 1.51 21 31 41

6,000 9,450 12,960 20,250 27,600

CA Inter FM-ECO CA Swapnil Patni 436

or
 Funds blocked 4,501000 4170,000 4,821000 5,001000 5,101000
FV Ve

Investment 201 201 201 201 201

No y 40 50 60 75
OfPolicy
Interest 7,500 10,444 13,389 16,667 21.250

Net Benefits 11361500 1140.105 1139,652 1,381883 131,150

Profit Bp Int

select
Option of 40 days credit period must be selected
since it is net
profit
giving highest

Particulars Enisting Policy I Policy I

Sales 50,001000 60,001000 67150,000

Variable Cost 35,001000 142100,000 47.25.000
y
CA Inter FM-ECO CA Swapnil Patni 437
800
 EBIT 15100,000 18100,000 20 25,000

Bad Debts 1 50,000 3100,000 4,50 000

Funds Blocked 35,001000 42100,000 47,25 000

Investment 251 251 251

Interest 218750 3 50,000 4 92,188

Net Benefit 11131,250 11150,000 10182,812

reject select reject
Interest must be calculated on
amount blocked
actually

Particulars I I

Sales 15,001000 17.25.000

It Variable Cost 9,001000 10.35.000
contribution 6,001000 6,901000
17 Cost 2,25 000
fined 2 25,000

EBIT 3,7 5,000 4 65,000

CA Inter FM-ECO CA Swapnil Patni 438
see
 Bad Debts 1510,00
69.000
41
Interest 121 121
Aunt blocked 11125,000 12,60 000
days 30 days 60 days
Interest 11250 25200

Net Benefit 348750 3.70.800

reject select

How to recover Debtors

L

Option 1 Option 2
outsourced
self recovery
u v

Cost 1 Bad Debt 1 Comm

2 Admin 2 Interest
3 Interest
Total Cost Compare Total Cost

CA Inter FM-ECO CA Swapnil Patni 439

nooo
 I would have collected
IfI had to borrow funds
on
my own

which I had to
from interestthe bank

I
on
it pay Then I can
basis
If
give on
factor
save the cost interest since I
don't of the bank
bowene
funds from
Let's assume we have apt for factorial
saving per annum

1 Bad Debts 7120,000

3,6000,000 x 21
2 Admin Cost 1,401000
3 Interest 4100,501
Total 12,60 500

Garlin 30 00,000

loan now 30,001000 sales cost

3100,000 reserves 10 f
ofSales
300,000 If comm on sales
26.70.000 s received from factorial
330,000 loan required

Interest save 26170,000 157

24,00 500

lenpenses due to factoring

1 Commission 3,60 000
3,60 00,000 x 1

2 Interest 4 00,500
26,701000 151

CA Inter FM-ECO CA Swapnil Patni 440

nooo
 net 5,001000
savings
saving eup
There is a difference between the solution
ICAI and ours In our solution
of assumed that we are
we
funds from
the bank 151 which
taking
will be saved now
because it is outsourced to factor whereas
ICAI did not consider saving in the
interest
by assuming that funds blocked
were not taken the bank It was
owned funds
from
Thats
why as
per ICAI
99500
saving
as fee 99500 400500 5,001000
ours
saving
Assumption

Interest rate on bank loan is considered as

15 since no specific interest rate is given
in the question

Therefore always calculate

we interest on funds
blocked and not on sales value but in this
question data of cost is not given therefore we have
assumed Sales value is blocked value

CA Inter FM-ECO
MOOD CA Swapnil Patni 441
 An example is 1 10 net 45 meaning the
customer pays the invoice within 10days instead 45
to earn it discount
of
Particulars 110 2110

Sales 12,001000 16 00,000

c1 Variable cost 9,361000 12 48,000
781
H Bad Debts 1.51 21
G Cash discount 12 00,000 501 16,001000 801
x I f X 21
6,000 25,600

Interest 9 36,000 30 157 12148,000 20 157

360 360
11700 10,400
EBT 228,300 2,84 000

Tax 301 68,490 185,200

m m 1 98,800

CA Inter FM-ECO
nooooo CA Swapnil Patni 442
 If aunt of purchase
is done
10,000
If paymenton 10th 9,800
day
SP s Shashank 35 days
Int rate 251
I
amount 9800
interest 234.93
x 9800 251
333
Shashank SP 9800 235
10,035

Alternatively
shashank does not apt discount
If
and
for
pay 10,000 on 45th day
Then the outflow on 45th
day 10,000

conclusion donat opt cash discount

for
note
rate is
Assuming of borrowings
251

CA Inter FM-ECO CA Swapnil Patni 443

see
 Cash Discount

Benefit cost
1
Benefit received 2
98 100 Is Baule loan Int
in 5 days 2.041 121 f a

2 Benefit received 5 days 2.2.04t

in 365 days 365days
149.1 f a

Conclusion Dear rohit take the loan

and
the
from the Bauh 12t.p.a
getdiscount benefit 1991 f a through cash

Bank is not loan then

If to reduce the giving
cost
it of working
advisable to
capital
the amount
is
on 30th
repay
instead
15th because day discount
of allotedday 15th or
of
30th
is

for day

CA Inter FM-ECO CA Swapnil Patni 444

are
 Net operating cycle period
RM t WIP FG
Des Ces

1 Average raw material

op
55
652
Total Purchase 400

raw material purchase 365

6.90
53 days

CA Inter FM-ECO CA Swapnil Patni 445

0000
 Raw Material
0
Purchase 400 Consumption 380
45
Opening 65
Closing

2 WIP

No 450
of cycle 43
51
235
10.46

WIP period 35 days

38.5

3 Fg period cost
ofgoods FGsold
8.07
Ang
525g
45 days
no
of days 3,657

4 Deletes Collection Period Credit Sales

deletes
Aug
585 4.73
123.5
77
of days days
no 39.573

CA Inter FM-ECO CA Swapnil Patni 446

see
 5 Credit collection Period Credit Sales
cis
aug
5.75
48.5
63
of days days
no 36.575

147
working Capital cycle days
365
coaching cycle
no
of 147
2.48 days

ratios we

ie
gross profit 90,001000
31,50 000
351

CA Inter FM-ECO CA Swapnil Patni 447

000
 in cost sold
of goods Sales GP
90100,000 31150,000
58,50 000

iii Fined Assets To ratio cogs

FA
1.5 58,50 000
FA
FA 39,00 000

in Stock Turnover ratio

cogs
stock
aug
6 58,501000
stock
aug
stock 9.75.000
ang
stock
assuming aug stock closing

U 2.5
CI
CA 2.5cL

CA 1.5
stock
current assets 9,751000 5
Ment
liability
2 5 Cl 9,751000 1.5
a
CA Inter FM-ECO
e CA Swapnil Patni 448
 CL 975000
CA 24,371500
Vi debtors Horatio credit Sales
debtors
aug
12 90100,000
debtors
Aug
debtor 7,501000
aug
vii FA 1.3
net worth

39 00,000 1.3
net worth

net worth 30,001000

Viii
Net Worth 30,001000

reserves
12100,000
equity
18100,000
I 1.5

Balance Sheet
equity assets
reserves
18,001000
fined
meant assets 337 090
12100,000
debts 23162,500 deletes 750,000
current 975,000 Stock 9,751000
liability 0k 7112150
63,37 500 63137,500

CA Inter FM-ECO CA Swapnil Patni 449

ooo
 ix working capital ca a
24,37 500 9 75,000
14 62,500

15 t
safety margin
net working capital
14 62,500 151
16 81,875

This question is the combo

ratios WC of

Total Cost soo

L s

RM Others
600 200

CA Inter FM-ECO CA Swapnil Patni 450

000
 2 Stock
of RM
period of RM stock 20 days
18 times
no
of cycle
Total RM 600 lakhs
stock
Aug 60,9

33.33 lakhs

3 Stock
of FG 45
period of FU days
no
of cycle 360g

8 times

total cost 800

Cost of Fg
Aug of Fy soy
100 lakhs

4 Stock of WIP

RM Others
I 1007 501
cost 200
enact cost 100
WIP x 10 108 x 10
Ggg
16 67 2.77

19.44

CA Inter FM-ECO CA Swapnil Patni 451

so
 5 Cash 10100,000
6 debtors period 30

cycle of deletoes 3368 12

total sales 800

deletes 66.66
aug 80,02

7 advance to supplier 5
63
8
8.33

8 Credit soo
from supplice
Go
of days
no
6 times
cycle 388

Aug creditors 60,0 100

current assets

stock Fy 1,00 00,000

Wplpm I 19,441000
33,33 000

cash 10,001000
debtors 86 66 ooo
advance 8,331000
to ayyy
to advance 1,00 00,000
from supplier
1 37,76 000

CA Inter FM-ECO CA Swapnil Patni 452

0000
 1 Sales

Nov Dec Jan Feb Mar Ape May June JulyAvg

Sales 5K 5K 5K 7875022500 30k 28500 33k 33k 34500

40
Go
I
GR GR
g
GR
gn É zsoÉgÉ7ooo
12K 11400 13200
19800

15K 15K 16500 202502550029400

CA Inter FM-ECO CA Swapnil Patni 453
see
 2 Mouth Production Payment E
no
ofbooks
Jan 1000 Now Law 5000
Feb 1250 dec Feb 6,250
March 1500 Tan March 7,500

April 2000
feb April 10.000

May 1900 March 9,500

May
June 2200 april Lune 111000

3 Variable OH

Nov Dec Jan Fels Mar April May Lurie July

Sales IK 1250 1500 2000 1900 2200 2200

Produce IK 1250 1500 200 2250 2280

Aunt 2K 250030004000 380055005500

payment 2K 2580 3K YR 38805580 5508

4 Using the data for wages first 3m

of OH

Nov Dec Jan Fels Mar April May Lurie July

Aunt 4K 5K GK SR 85509900990010350

P 751 37504500 GK 64127425 7425 7762

P2 12501500 2K 2137247524752587

5750 7500 84129562 9900 10237

CA Inter FM-ECO CA Swapnil Patni 454

0000
 Cash Budget
Particulars Jan Feb March April May Tune

Receipt
Sales 15K 15K 16,500 22,500 25,50029,400
Of 1500 3250 1500 11912 15024 578
Property 25000

Payment
RM 5000 6250 7500 10,000 9500 11000
Variable OH 2500 3K 4K 3800 5500 5500
Wages 5750 7500 8412 9562 9900 10237
Printer 10k
Tax ion I

Closing 32500 1500 11912 15024 576 3239

CA Inter FM-ECO
e CA Swapnil Patni 455
 Jan Feb March April May Tune
receipts
sales 7200097000 86000 88600 102500108700
486500 431000 542505
501 360 0 4 300 350

3600048500 930004430051250
loan 30,000

opening 72500 96340 121330 155650 151292 202567

payments

capeup 8000 25000

dividend 35000
overheads I 11500 130050 13500 15400 19000
material 25000 31000 25500 3060037000
10K 12100 10600 25000 2200023000
salary 2580 2658 3075 3261
commission 2760 2910

closing 96340 121330 155650 157292 205767194706

CA Inter FM-ECO CA Swapnil Patni 456

If
 SP 150
Cost 145

1
Profit in t 3.331
go
Sale Value 15,001000

Total profit 15,001000 3.331

50,000

2 Cost incurred in business 14,501000

cost 5,000
auntyTotal Cost 14,551000

3
Profit I 50,000
cost 5,000
Aunty
Bad debt 15,000
II 15 tables

Balance 30,000

4
If funds would have invested in
other business opportunity cost 241

1001 Cost 157 341 301 201

14155,000 218250 494700 436500 291000

NOD 30 Go 90 100

rate
ofTut 241 241 241 241

Interest 4305 19517 25831 19314

CA Inter FM-ECO CA Swapnil Patni 457

0000
 Total Int would earn 68787
slowpayer profit
Net loss

It is not advisable to sell goods

on credit to slow payer

is
If we assume
at the aunty
end the taking
salary
then cost investment
of is
year
1450000
oflike dove in
only
935
Conclusion

slow payee Investment in

u other business
profit having ROI 241
of
u
u
30,000
reject profit

68784
select

CA Inter FM-ECO CA Swapnil Patni 458

Not
 Unit Tl

Method assuming business will run

10 days
only
Jaxa
D
formula
FOG 2 6300 10 700 approx
0.26

Method 2 assumed Business will run

throughout the year

509 2x 6300 36 707398

0.26

Eop 4176 approx

orders 54 times
no
of 229
0

Total Cost orders 54 2 10

of 2540

CA Inter FM-ECO CA Swapnil Patni 459

see
 Annual 36,000
price
DeLand
OC
Too x 4.5
4.5

top 2x
Ago
360005250
4.5
2000 units

Geordie level lead timex

daily
consumption
25 days x 36000
360
2,500 units

articular Eod NON Eod

AD 36,000 36,000
purchaseprice 2700 99
Luechase cost 3600000 3564000
CA Inter FM-ECO CA Swapnil Patni 460
so
 00 o 9000
18
no
ofOCorders
II
4,500
inventory 1000 4500
any 4.5
Ce per
par
a 4500 20,048
Total cost 361091000 35 85,04g
Petcctoc

Entra Cost company has to incur

for ordering
at top level 23,952

Hence the company should accept the

proposal of it quantity discount

AD 201000 pm
Cl 0.10 pm
OC 40

ii EOQ 2 2000 40
0.10
4000 units

ii when cc 0.05

CA Inter FM-ECO CA Swapnil Patni 461

see
 then 509 2 20,000 40
0.05

5656

iii Whew OC 270

20,000 10
509 2
0.10

2000 units

chichora question

Eo 2x
Ago
2 60,000 100
0.10
10,954 units

2 Per week 60,000 1200 units

50 weeks

2 weeks 1200 2 2400 units

CA Inter FM-ECO
e CA Swapnil Patni 462
 reader level 10,000

Cutie 7,600
current s cost
of inventory
Total Pty
oedey I 9000
no
of
09 30,000
30,000 2
Average stock 15000
stock
Safety
Total stock 3
ang
Total cost

a
O cost C Cost
2 100 22600 0.1
200 2260

Total Cost 2460

3 No orders
of Afo
60,000
10954
5.5 times

CA Inter FM-ECO CA Swapnil Patni 463

0000
 current assets 150 100 150 125 55
24 So habilis

current liabilities loot so 100

280 tables

Method I

permissible bank
Max
finance
757 of sa c
751 oftables480 280
2150

Method 2
max permissible baule finance
CA Ce
751 of 480
751 of 280
80 Lakhs

CA Inter FM-ECO CA Swapnil Patni 464

note
 method 3
Max permissible bank finance
757 of CA Conca a
751 480 30 280
257.5 lakhs

1 751
2
of caCA a
s 751 of a
3 25 Softcore CA Cl

softcore CA CA couch
I Cole CA is kind
of permanent
blockage of funds
It can be encashed anytime

CA Inter FM-ECO CA Swapnil Patni 465

see
 Self Assessment Questions

CA Inter FM-ECO CA Swapnil Patni 466

note
CA Inter FM-ECO CA Swapnil Patni 467
note
CA Inter FM-ECO CA Swapnil Patni 468
note
CA Inter FM-ECO CA Swapnil Patni 469
note
CA Inter FM-ECO CA Swapnil Patni 470
note
CA Inter FM-ECO CA Swapnil Patni 471
note
CA Inter FM-ECO CA Swapnil Patni 472
note
CA Inter FM-ECO CA Swapnil Patni 473
note
CA Inter FM-ECO CA Swapnil Patni 474
note
CA Inter FM-ECO CA Swapnil Patni 475
note
CA Inter FM-ECO CA Swapnil Patni 476
note
CA Inter FM-ECO CA Swapnil Patni 477
note
CA Inter FM-ECO CA Swapnil Patni 478
note
CA Inter FM-ECO CA Swapnil Patni 479
note
CA Inter FM-ECO CA Swapnil Patni 480
note
CA Inter FM-ECO CA Swapnil Patni 481
note
CA Inter FM-ECO CA Swapnil Patni 482
note
CA Inter FM-ECO CA Swapnil Patni 483
note
CA Inter FM-ECO CA Swapnil Patni 484
note
CA Inter FM-ECO CA Swapnil Patni 485
note
CA Inter FM-ECO CA Swapnil Patni 486
note
CA Inter FM-ECO CA Swapnil Patni 487
note
CA Inter FM-ECO CA Swapnil Patni 488
note
CA Inter FM-ECO CA Swapnil Patni 489
note
CA Inter FM-ECO CA Swapnil Patni 490
note
CA Inter FM-ECO CA Swapnil Patni 491
note
CA Inter FM-ECO CA Swapnil Patni 492
note
CA Inter FM-ECO CA Swapnil Patni 493
note
CA Inter FM-ECO CA Swapnil Patni 494
note
CA Inter FM-ECO CA Swapnil Patni 495
note
CA Inter FM-ECO CA Swapnil Patni 496
note
CA Inter FM-ECO CA Swapnil Patni 497
note
CA Inter FM-ECO CA Swapnil Patni 498
note
CA Inter FM-ECO CA Swapnil Patni 499
note
CA Inter FM-ECO CA Swapnil Patni 500
note
CA Inter FM-ECO CA Swapnil Patni 501
note
CA Inter FM-ECO CA Swapnil Patni 502
note
CA Inter FM-ECO CA Swapnil Patni 503
note
CA Inter FM-ECO CA Swapnil Patni 504
note
CA Inter FM-ECO CA Swapnil Patni 505
note
CA Inter FM-ECO CA Swapnil Patni 506
note