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28.03.10

BMS .

S.S.F.

I FINANCIAL MGT. OBJECTIVES

ROI = Net PAT ROI = Net Profit Margin X

Total Assets

ROI = PAT X

Net Sales

CHAPTER 2

CAPITAL EXPENDITURE P

II CAPITAL EXPENDITURE PROJECTS EVALUATION M

1 PAYBACK PERIOD METHODA --( when every year same amount of cash inflow )

PAYBACK PERIOD= Initial Investment

Annual Cash Inflow

B ---( when every year same amount of cash inflow is n

cumulative cash inflows should be found

PAYBACK PERIOD = completed years X

C ---( when annual cost savings are given )

PAYBACK PERIOD= Initial Investment

Annual Cost Savings

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PAYBACK PROFITABILITY = [Avg. Annual Cash Inflow

PAYBACK PROFITABILITY = [Total Earnings from the

Payback Profitability = Surplus Life Profitability

Payback Profitability Index = Total Cash Inflows + Scra

Cost of ass

Payback Profitability Index = Surplus Life Profitability +

Cost of ass

--------------------------------------------------------------------------------------

2 ARR -- Average Rate of Return Method OR Accounting

ARR = Avg. PAT X 100

Original Investment

ARR = Avg. PAT X 100

Avg. Investment

Avg. Investment = ( Initial cost of machine - S

( When existing Profits and Profits after investment giv

ARR = Incremental Earnings or Profit X 100

Incremental Investment

Incremental Earnings or Profit = Profit after Inv

Incremental Investment + = Investment in

( When Profits from existing machine and new mach

ARR = ( PAT from new machine - PAT from old machine

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( Investment in new machine - sale proceeds of old

( When Profits from machine 'A ' and machine 'B" gi

ARR = ( PAT from machine 'A' - PAT from new machine 'B'

( Investment in machine 'A' - Investment in machine '

III DISCOUNTED CASH FLOW METHODS

a) PRESENT VALUE METHOD

b) NET PRESENT VALUE METHOD

c) PROFITABILITY INDEX ( PI ) or BENEFIT - COST RATIO (B

d) IRR---- Internal Rate of Return

e) DISCOUNTED PAYBACK PERIOD

a) PRESENT VALUE METHOD

Year Profit before Dep PBT TaxDep. & Tax

Dep as per SLM = Cost of Asset -Scrap valueEstimated life of Asset

Dep as per WDV method = Dep % X Opg. Bal. Of Asset

PV Factor /% also called as Post Tax Cutoff Rate

If Total PV > Cost of Project ----- Accept ProjectIf Total PV < Cost of Project ----- Reject ProjectIf Total PV = Cost of Project ----- Indifferent ie Neither profit nor lo

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b) NET PRESENT VALUE METHOD

Year Profit before Dep PBT Tax

Dep. & Tax0 Cost of machine0 Working Capital123455 Release of WCap.5 Sale of Scrap

If NPV > Zero ----- Accept ProjectIf NPV < Zero ----- Reject ProjectIf NPV = Zero ----- Indifferent

c) PROFITABILITY INDEX ( PI ) or BENEFIT - COST RATIO (B

PI = PV of cash inflows = Discounted cas

PV of cash inflows Discounted cas

PI = BenefitsCost

PI > 1 accept project ---- (NPV + ve )PI < 1 reject project --- (NPV - ve)PI = 1 indifferent --- (NPV zero )

d) IRR---- Internal Rate of Return

IRR is the rate at which Total Cash Inflow = Cost of Project

eg. If discounting factors are given for 10 % and 14%IRR = 10% + (Total PV at 10% - Cost of Asset ) X ( 14 - 1

(Total PV at 10% -Total PV at 14% )

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e) Discounted Payback Period

Use discounted cash inflows ie. Present values of cash inflows , thto calculate Payback Period .

CHAPTER 3

RATIOS

1 INTEREST COVERAGE RATIO = EBITAnnual Interest on loan

INTEREST COVERAGE RATIO = PATAnnual Interest on loan

2 INTEREST & LOAN REPAYMENT COVERAGE RATIO =

Annual Loan Instalments = EMI X 12 mths.EMI means Equated Monthly Instalment

3 DEBT EQUITY RATIO = Long Term DebtShareholders Funds

Long Term Debt = long Term Loans, Debentures etc.Shareholders Funds = Eq. Sh. Cap. + Pref. Sh. Cap. +

4 SOLVENCY RATIO = Long Term Debt + Current Liab.Shareholders Funds

5 DSCR ie. Debt Service Coverage Ratio = PAT + Dep + IAnnual Loan In

6 SECURITY COVERAGE RATIO = Value of Securities given by bTerm Loan bal. + DPG Liabi

Value of Securities given by borrower =

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DPG Liability = Drawing Power for W. Cap.

7 Project Profitability = EBIT

Total Capital Employed

Total Capital Employed = Share holder's Funds + Borrow

2007 2008EBITLess : InterestEBTLess: TaxPATAdd back : Dep.Add back : InterestAmt available for repayment (A)

PrincipalAdd: InterestTotal repayment ( B )

DSCR = AB

Interest Coverage Ratio= EBIT

Interest

Int & Loan repayment coverage Ratio= EBIT

Interest + principal repayment

CHAPTER 7

COST OF RETAINED EARNINGS

X= [ D - C ( 1 - BTR) ] ( 1 - STR) X [ ( 1 - STR ) X R ]

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X = Cost of retaining earningsD = Gross amount of dividendC = Cost of replacing funds paid out as dividendsBTR = Business Tax RateSTR = Shareholder Tax Rate

R = Rate at which shareholder can earn by investing dividend amt.

INVESTIBILITY RATIOS

1 EPS = PAT - Pref. Div. -----No. Of Eq. Shares -----

Earning Per Share

2 P/E Price Earning Ratio

P/E = MPS ------EPS ------

150 = 3 times50

3 DP Ratio --- Payout Ratio

DPR = DPS ------EPS

4 Dividend Yield = DPS ------MPS

5 Value per share = Equity Share Cap. + Res. - LossesNo. Of Equity Shares

6 DPS = Total Equity DividendNo. Of Equity shares

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CHAPTER 8

BONUS SHARES

Balancesheet before Bonus Issue

Liabilities

10000 Shares of Rs 100 each 1,000,000.00

Reserves 500000

Other Liabilities 1000000

2,500,000.00

Value of Eq. Share= 1,400,000.00 =10,000.00

Therefore if Amit holds 25 shares , Value of his shareholding =-----------------------------------------------------------------------------------------------------If Bonus shares are issued at 1 share for every 5 shares heldBonus shares to be issued = 10000Eq Shares X

Reserves to be utilized for bonus issue = 2000 sh. X Rs

Balancesheet after Bonus Issue

Liabilities

10000 Shares of Rs 100 each 1,200,000.00

Reserves 300000

Other Liabilities 1000000

2,500,000.00

Value of Eq. Share= 1,400,000.00 =

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12,000.00

Therefore if Amit holds 25 shares , he will get (25 X 1/5 ) ie 5 bon

Value of his shareholding = ( 25 + 5 ) shares X 116.67

Thus though no of shares held increase , total value of holding rem

CHAPTER 8EQUITY CAPITAL

BUYBACK OF SHARES

Balancesheet before BUY BACK

Liabilities

10000 Shares of Rs 100 each 750,000.00( Rs. 75 paidup)Reserves 500,000.00

Other Liabilities 1,000,000.00

2,250,000.0010,000.00

Condition no 1 Buyback can be made of fully paid up Eq. SharTherefore Rs25/- should be collected from 10000And Cash bal in Other Assets shall also increas

Condition no 2 Buyback not to exceed 25% of paidup capital +Amt Available for BUYBACK = (Eq Cap + ResIf company wants to buyback shares of Rs 100,ie 287500 / 115 = 2500 shares can be bought ba

Condition no 3 After buyback debt Equity Ratio not to exceed 2

Debt Equity Ratio = DebtEq Shareholder'

Debt Eq Ratio after buyback = 1,000,000.00

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(750000 +5000

Since all conditions are fulfilled company can bu

CHAPTER 9

RIGHTS ISSUE OF EQUITY SHARES

1 No. Of new shares to be issued as rights = Desired Funds

Rights Subscrip

2 No. Of rights required to acquire one new share = Existing SharesNew Shares

3 Value of one right----Cum - rights

( when shareholder possesses right to purchase rights shares )

Value of one right----Ex - rights( when right to purchase rights shares has ended )

Ex- Rights ( Theoretical ) Market Price per Share

( when right to purchase rights shares has ended )

Mo = Cum Rights MPSMe = Ex - Rights MPSN = No. Of rights required to acquire one new rights shareS = Rights subscription priceRc = Cum - RightsRx = Ex - Rights

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CHAPTER 14

BASIC VALUATION CONCEPT

A ) Intrinsic Value Method / Net Assets Method / Balancesheet M

STEP 1

Calculation of Capital Employed ( at real values )

Fixed Assets

Trade Investments ( compulsory / statutory invt)Current AssetsUnrecorded Assets

Less :

Long term loansDebenturesCurrent LiabilitiesUnrecorded Liabilities(eg. Workers claim)

Capital Employed

STEP 2

Calculation of Future Maintainable Profit ( FMP )

Average PBT of past given years

Add : Expenses no longer to be incurred

Less : Income from non trade/ Personal Investment

Increase in Exp. / new exp.

Dep. On increase in value of assets

PBT

Less : Tax

PATLess : Pref. Div.Less : Trf. To ReservesPAES/ FMP

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STEP 3Valuation of Goodwill

Future Maintainable Profit ( FMP )Capital Employed ( Step 1)Rate of Return / NRRNormal Profit = Capital employed X NRRSuper Profit = FMP - Normal Profit

Goodwill = Super Profit X No. Of years of purchase

STEP 4Calculation of Net Assets for Equity Shareholders

Goodwill ( Step 2 )Market Value of Personal / Non Trade InvestmentsCapital Employed

Less :

Preference Share CapitalArrears of Preference Dividend

Net Assets

Value per Equity Share = Net Assets for Equity ShareholdersNo. Of Equity Shares

-----------------------------------------------------------------------------------------------------ADJUSTMENTS

1 For Calculating value of shares before & After Bonus Issue

eg. Net Assets are Rs 500000 and EQ. Shares are 5000 .

Bonus shares are issued 1 share for every 5 shares held .

Value of Eq. Sh before Bonus Issue = Net Assets =No. of Equity Shares

Value of Eq. Sh after Bonus Issue = Net Assets =Changed Equity Shares

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2 If Eq Shares of different paidup value giveneg. Net Assets are Rs 500000 . And 1000 EQ. Shares are Rs.10While calculating Intrinsic value , Unpaid Amt (Rs 25 X 3000 sh. ) RsNet Assets = 500000 + 75000 = 575000

Intrinsic Value of Fully paidup Share ( Rs 100/-) = 5750004000

Intrinsic Value of partly paidup Share ( Rs 75/-) = 143.75 - 25

-----------------------------------------------------------------------------------------------------B Yield Value

STEP 1

Calculation of Profit Available to Equity Shareholders ( PAES )

Average PBT of past given yearsAdd : Expenses no longer to be incurred

Less : Income from non trade/ Personal Investment

Increase in Exp. / new exp.

Dep. On increase in value of assets

PBT

Less : Tax

PATLess : Pref. Div.Less : Trf. To ReservesPAES/ FMP

STEP 2

Actual Rate of Return ( ARR )

ARR = PAES X 100Total Paidup Equity Capital

STEP 3Value per Equity Share = ARR X Paid -up Value per Equity

NRR

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C FAIR VALUE

Fair Value per share = Intrinsic Value + Yield Value2

If Fully paid up and partly paid shares are given

Calculate seperately Fair Value of fully paid share =

Fair Value of partly paid share =

ADJUSTMENTS

1 If Controlling Interest in a Company is to be purchased -- Calculat

If only a few shares are to be purchased , use Yield method taking

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CHAPTER 15

CORPORATE TAXATION

STEP 1

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY ( UN

Profit as per P&L A/c.

Add : 1) Depreciation as per A/cs. (normal )2) Depreciation on revaluation of assets

3) Provision for unascertained ( not specific) liabilties

4) Proposed / paid Dividends5) Income Tax Provn./ paid6) Provision for losses of subsidiary companies7) Transfer to Reserves8) Expenses relating to incomes u/s 10(38),10A,10B,11,12(C9) Interim Dividend paid10) Bad Debts11) Provision for Contingencies

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12) Fringe Benefit Tax

13) Unpaid / outstanding customs duty, excise duty, sales

Less : 1) Transfer from / withdrawn from Reserves2) Incomes to which Sec 10(38),10A,10B,11,12 of Income T3) Profits of Sick Industrial company

4) Depreciation as per Income Tax Rules

5) Transfer from Revaluation Reserve

6) Brought forward Business Loss or unabsorped Dep.

Taxable Income

Tax @ 30%Add : Surcharge @10% ( If Taxable Income is more than 1 crore)Tax + Surcharge

Add : Education Cess @ 2% of (Tax +Surcharge )Add : Higher & Secondary Education Cess @ 1% of (Tax +Surcharge )Total Tax Liability

COMPUTATION OF BOOK PROFITS MAT u/s115JB

Profit as per P&L A/c.

Add : 1) Depreciation as per A/cs.2) Depreciation on revaluation of assets3) Provision for unascertained ( not specific) liabilties4) Proposed / paid Dividends5) Income Tax Provn./ paid

6) Provision for losses of subsidiary companies7) Transfer to Reserves8) Expenses relating to incomes u/s 10(38),10A,10B,11,12(C9) Interim Dividend paid10) Bad Debts11) Provision for Contingencies

Less : 1) Transfer from / withdrawn from Reserves

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2) Incomes to which Sec 10(38),10A,10B,11,12 of Income T3) Profits of Sick Industrial company

4) Depreciation as per A/cs.

5) Transfer from Revaluation Reserve( to the extent it d

Taxable IncomeTax @ 30%Add : Surcharge @10% ( If Taxable Income is more than 1 crore)Tax + Surcharge

Add : Education Cess @ 2% of (Tax +Surcharge )Add : Higher & Secondary Education Cess @ 1% of (Tax +Surcharge )Total Tax Liability

Higher of the tax liabilities between the two ie. as per normal provns

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Total Assets Turnover

Net Sales

Total assets

ROJECTS

THODS

ot same )

( Balance Amt. 12 mths. )

( next year's annual cash inflow )

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X( Expected life of project - Payback Period) ] + sale of scrap

Project - Cost of Project ] + sale of scrap

p Value

t

Cost of Asset

t

--------------------------------------------------

Rate of Return Method

alvage value ) + Addnl. W. Cap. + Salvage Value2

n )

estment

roject

ine given )

) X 100

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machine )

en )

) X 100

' )

C RATIO)

PAT Cash Inflow Present value PV(PAT+Dep) Factor @ --- % (Present Value)

--- Every year same amount

s from Project

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PAT Cash Inflow Present value PV

(PAT+Dep) Factor @ --- % (Present Value)

C RATIO)

inflows

inflows

)

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n calculate cumulative PV of Cash inflows

Lending Bank gets to know how much earnings are availablefor payment of their interest .

EBITAnnual Loan Instalments

es. - losses

tereststalments

orrowerlity

Primary Sec .+ Collateral Sec.

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d Funds

2009 2010

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In market

Shows howmuch the Co. Is earning on its Share CapitalHow much against each Share

How many EPS are required to cover Market Price per shareWithin how many years Market price will be recovered eg. 3 years

Shows what proportion of earnings are distributed as dividends .

Shows how much dividend the shareholder receives against amt.invested inshares .

-------- Shows book Value per share. Ie. Net Assets available per share.

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Assets

Fixed Assets 1,750,000.00

Other Assets 650000

Misc. Expenses 100000

2,500,000.00

Rs. 140 per Eq. Sh.

25 shares X Rs140 = 3500-------------------------------------------------------------

1 = 2000 shares5

100each = 200000

Assets

Fixed Assets 1,750,000.00

Other Assets 650000

Misc. Expenses 100000

2,500,000.00

Rs. 116.67 per Eq. Sh.

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us shares.

= 3500

ains same.

Assets

Fixed Assets 1,500,000.00

Other Assets 650,000.00

Misc. Expenses 100,000.00

2,250,000.00

es onlyshares . Ie Eq Sh Cap shall increase by Rs 250000by Rs 250000.

Res - losses- loss ) X 25 % = 287,500.00

at Rs 15 premium, thenk.

: 1 .

Fund

= 1.11 : 1

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00-100000 ) - 250000

back 2500 shares @ Rs115 each.

tion Price

Rc = Mo - S

N + 1

Rx = Mo - SN

Me = ( Mo X N ) + S

N + 1

Me = Mo - Rc

Me = ( Cum rights price per share ) - ( Cum Rights Value )

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ethod / Assets Back -up Method / Net Worth Method

NOTES :

1) All assets to be taken at current values / market values , if give

2) Fixed Assets should be taken after deducting depreciation.3) Asset is overvalued by 15000 means take that asset less by 154) Trade Invt= Invt. In Subsidiary , Deposits in MIDC, MSEDC, Shares5) Deduct Bad debts & PBD if given from Debtors. But RDD is6) Stock-- from stock deduct obsolete , redundant, slow moving sto

1) Consider Interest payable on Loan / Deb. Also as liability

2) Current Liab= Creditors , O/s. Expenses, Provn for tax, Proposed3) Contingent Liabilities are uncertain liabilities and not to be consi

NOTES :

1) If past profits show increasing/ decreasing trend use weighted a

2) 7% Govt. Security of RS 400000/- means interest received @ 6

EXAMPLE -- If adjustments are for specific past years.

a) Goodwill w/off in 2006 is Rs.4000.

b) Asset Rs 10000 purchased debited to P&L A/c in 2005. Dep 10

c) Closing Stock was overvalued in 2006 by Rs 6500.

2005 2006 2007

PBT 30000 40000 50000

Add: Goodwill w/off + 4000

Add :Asset debited P& L A/c. + 10000Less : Dep on above asset - 1000 - 1000 - 1000Closing Stock Adjt. - 6500 + 6500Changed PBT 39000 36500 55500Less : TaxPATLess : Pref Div.Less : Trf. To Res.PAES / FMP

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NRR= Normal Rate of Return= Dividend rate declared by similar co

Personal / Non Trade Invt = Govt. Securities, Deposits in Banks , Sh

Pref. Div. To be deducted if stated that it is unpaid and the Pref

------------------------------------------------------------------------------------------------------------------------------

Rs500000 = Rs.125 per share4000

Rs500000 = Rs.104.17 per share4000+800

104.17

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paid up , 3000 shares are Rs 75 paid up .5000 should be added to the Net assets.

= 143.75

= 118.75

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1)The Co. Pays 20% Dividend means ARR is 20% .

Share

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Intrinsic Value of fully paid sh + Yield Value of fully paid sh.2

Intrinsic Value of partly paid sh + Yield Value of partly paid sh.2

Value of shares as per Fair Value Method.

average of past dividend rates as ARR.

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ER NORMAL PROVISIONS )

aritable activities)

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tax

x Act apply(Charitable activities)

Carried forward , whichever is less.

aritable activities)

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x Act apply(Charitable activities)

es not exceed extra dep. On revaluation )

. And MAT should be paid.

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n .Appreciation means value to be increased .

00of Society in which Co has office/Factory.reserve therefore donot consider.k.

iv., Bank overdraft,ered .

erage using given weights or 1,2,3 etc as weights.

% on Rs 400000/-= 24000

SLM

2008

60000

- 1000 --If Dep is WDV then Dep would be 1000 , 900, 810& 729.-- Closing stock of 2006 becomes Opg. Stock of 2007.

59000

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mpanies

ares of Co.

. Shares are cumulative in nature.

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