Assessing corporate performance
DCF
1.1 The following information relates to Polaris Ltd. for the last FY:
Revenue 200 crores
Asset Turn 10 times
Interest Pa 1.5 crores
Interest co 5 times
What is the return on capital employed for the company for the year?
2 The following is an extract of MS Co., statement of financial position:
in crores in crores
Total assets 1000
Rs.1 ordinary share ca 100
Retained earnings 400
Total equity 500
Loans debentures/ bo 500 1000
The ordinary shares are currently quoted at Rs.5.50 and loan debentures/bonds are trading at Rs.125
per Rs.100 face value.
What is MS Co., financial gearing ratio using market values?
3 Who suffers financial risk as financial gearing increases and why?
a. Lenders because they are less likely to berepaid
b. Lenders because there are fewer assets to offer as security
c. Shareholders as their returns are lower
d. Shareholders as their dividends become more variable
4 Unitech Ltd, has a n interest cover greater than one and gearing of 50%.
What will be the impact on interest cover and gearing of issuing shares to repay half the debt?
Interest coGearing
A Rise Rise
B Rise Fall
C Fall Rise
D Fall Fall
5 All else being equal, a poor set of results and lower dividends that aren't as bad as shareholders
were expecting would probably have the following impact:
P/E Ratio Dividend yield
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease Decrease
6 A share in AB Co. has an equity beta of 1.3 and debt betais0.1. It has gearing ratio of 20% (debt/Equity).
The market premium is 8% and the risk free rate is 3%. AB Co., pays 30% corporation tax.
What is the cost of equity for AB Co?
A 8.40%
B 12.20%
C 13.40%
D 9.50%
7 HB Co., has in issue 10% irredeemable bonds,currently trading at 95% cum interest.
If thetax changes from 30% to 20% for the company, what will happen to the cost of irredeemable bond
A Increases to 9.4%
B Increases to 8.4%
C Decreases to 9.4%
D Decreases to 8.4%
8 Snapkart has a capital structure as follows:
Rs. (lakhs)
50 lakhs Re.1 ordinar 50
Reserves 200
13% irredeemable bo 70
320
The ordinary shares are currently quoted at Rs.6 and the bonds at Rs.90. Snapkart has a cost
of equity of 12% and pays corporation tax at 30%.
What is Snapkart 's weighted average cost of capital?
A 10.40%
B 11.20%
C 11.70%
D 11.80%
9 Which of the following are assumed if a company's current WACC is to be used to appraise a
potential project?
1. Capital structure will remain unchanged for the duration of the project
2. The business risk of the project is the same as the current business operations
3. The project is relatively small in size
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1,2 and 3
10 Which of the following assumptions is not required when using the CAPM to estimate the cost of equity
for project appraisal?
A Efficient capital markets
B Well diversified investors
C Future periods are consistent with the present
D Companies are well diversified
11 Alligator Ltd can achieve a profit after tax of 20% on the capital employed. At present its capital structure
is as follows:
2,00,000 ordinary shares at Re.10 each 2,000,000
Retained earnings 1,000,000
3,000,000
The directors propose to raise an additional Rs.12.6 lakhs from a rights issue. The current market price is
Rs.18 per share.
a. Calculate the number of shares that must be issued if the rights price is Rs.16; what if price is Rs. 12?
b. Calculate dilution in EPS in each case.
c. At high rights price, what is the effect on EPS--increases/ decreases?
d. In comparison to bonus shares, what effect does rights have on EPS?
e. In comparison to bonus and rights share, what effect does split have?
12 Tea Day Ltd, is a new company that is making its IPO. It has decided to make it by offer for sale by tender
The intention is to issue up to 40 lakhs shares (the full amount of authorised share capital) at a minimum
price of Rs.300.
The money raised, net of issue costs of Rs.10 crores, would be invested in projects which would earn ben
with a present value equal to 130% of the net amount invested.
The following tenders have been received. (Each applicant has made only one offer.)
Price tendered per shNumber of shares applied for at this price
600 50,000
550 100,000
500 300,000
450 450,000
400 1,100,000
350 1,500,000
300 2,500,000
6,000,000
a How many shares would be issued, and how much in total would be raised, if TD chooses:
1. to maximise the total amount raised?
2. to issue exactly 40 lakhs shares?
b Goldie Eagle, a private investor, has applied for 12,000 shares at Rs.550 and has sent a cheque
for Rs. 66 Lakhs to the merchant banker/ underwriter handling the issue. IN both cases
a) 1 and 2, how many shares would be allotted to Mr. Eagle, assuming that any partial acceptance of
offers would mean allotting shares to each accepted applicant in proportion to the number of shares
applied for? How much willMr. Eagle receive back out of the Rs.66 Lakhs he has paid?
If Goldies had put in a bid at Rs.300, for 12,000 shares , how much allotment would he receive
c Estimate the likely market value of shares after the issue, assuming that the market price fully
reflects the investment information given above and that exactly 40 lakhs shares are issued.
DISCOUNTED CASH FLOW TECHNIQUES
1 Airtel is considering a project which would cost Rs.5 Lakhs now. The annual benefits for 4 years
would be a fixed income of Rs.2.5 Lakhs a year, plus other savings of Rs.50,000 a year in year 1,
rising by 5% each year because of inflation. Running cost will be Rs.1 Lakh in the first year, but
would increase at 10% each year because of inflating labour costs. The general rate of inflation
is expected to be 7.5% and the company's required money rate of return is 16%. Is the project
worthwhile? Ignore taxation.
2 A company is considering whether or not to purchase an item of machinery costing Rs.40,000 in 2015. It
have a life of four years after which it would be sold for Rs.5,000. The machinery would create annual co
of Rs.14,000.
The machinery would attract tax-allowable depreciation of 25% on the RB basis which could be claimed a
taxable profits of the current year, which is soon to end. A balancing allowance or charge would arise on
The tax rate is 30%. Tax is payable half in the current year, half one year in arrears. The after-tax cost of c
8%. Should the machinery be purchased?
es/bonds are trading at Rs.125
s to repay half the debt?
n't as bad as shareholders
earing ratio of 20% (debt/Equity).
% corporation tax.
cum interest.
to the cost of irredeemable bonds?
0. Snapkart has a cost
be used to appraise a
PM to estimate the cost of equity
yed. At present its capital structure
issue. The current market price is
e is Rs.16; what if price is Rs. 12?
make it by offer for sale by tender.
orised share capital) at a minimum
d in projects which would earn benefits
nly one offer.)
ised, if TD chooses:
0 and has sent a cheque
ue. IN both cases
that any partial acceptance of
ortion to the number of shares
hs he has paid?
otment would he receive
at the market price fully
khs shares are issued.
nnual benefits for 4 years
s.50,000 a year in year 1,
akh in the first year, but
general rate of inflation
urn is 16%. Is the project
inery costing Rs.40,000 in 2015. It would
machinery would create annual cost savings
RB basis which could be claimed against
lowance or charge would arise on disposal.
ar in arrears. The after-tax cost of capital is