CapStrTheo&Policy Assignment Piyush

7/31/2019 CapStrTheo&Policy Assignment Piyush

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From the following financial data for the years 1992-2002(year ending 31 December) for H Lt

Year GFA NCA INVST NW Debt NS PBIT INT

1992 330.5 323.1 12.3 333.3 200.3 1221.1 197.0 32.2

1993 365.6 285.8 51.0 385.7 115.2 1505.0 244.9 27.2

1994 491.8 299.7 191.5 538.3 146.5 1721.3 327.4 29.5

1995 563.8 193.0 122.8 638.3 160.2 2039.4 385.2 20.21996 953.6 168.9 328.8 937.5 260.1 2798.8 654.2 57.0

1997 1035.2 567.2 544.6 1260.8 186.6 3337.8 874.2 33.9

1998 1273.4 895.3 729.5 1712.4 264.3 6560.7 1130.5 29.3

1999 1349.7 1151.8 1068.1 2102.6 177.3 7736.8 1420.1 22.4

2000 1539.4 1087.1 1832.2 2487.6 111.6 9426.1 1668.4 13.2

2001 1778.3 1349.7 1668.9 3043.0 83.7 10116.5 1865.6 7.7

2002 1836.9 1639.0 2397.7 3658.2 58.3 10588.2 2154.4 9.2

GFA=Gross Fixed Assets,NCA=Net Current Assets,INVST=Investment,NW=Net Worth,TD=Total debt b

STBB=Short term bank borrowings,LTB=Long term borrowings including debentures,DEBN=debentur


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.Critically review the co's financing practice.

(Rs crore)

PAT

60.0

79.8

97.3

122.1185.2

232.0

404.7

570.3

808.2

1079.8

1300.3

rrowings,NS=Net Sales,

s,PAT=Profit after tax


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Find below data for P Ltd. for the years 1990-2002.The co' has changed its accounting period

data for theyear 1993 are for 9 months.Comment on the co's investment and financing polic

Year GFA NCA INVST NW TD STBB LTB DEBN

1990 154.7 82.1 2.1 41.3 116.5 12.1 104.4 56.7

1991 162.1 97.1 7.6 63.6 101.8 16.0 85.8 48.3

1992 181.8 122.9 12.2 76.5 114.6 31.1 83.6 41.21993 232.1 112.8 13.8 129.3 69.3 6.4 52.9 22.8

1994 253.1 141.3 13.2 175.9 62.5 12.8 39.6 3.2

1995 319.2 223.4 14.7 187.4 169.7 91.3 63.4 3.0

1996 376.1 194.3 19.6 190.9 186.9 71.5 100.3 32.7

1997 386.0 175.8 16.7 171.7 168.3 47.6 80.7 32.7

1998 414.8 217.8 15.5 176.2 195.7 44.8 110.9 72.2

1999 330.4 213.1 14.0 191.6 159.9 35.4 104.5 50.0

2000 363.3 134.1 14.0 167.8 127.3 25.8 86.5 53.8

2001 334.7 40.0 17.3 147.3 66.1 45.9 20.2 0.0

2002 605.4 67.6 1.9 306.4 48.0 5.5 42.5 8.3

GFA=Gross Fixed Assets,NCA=Net Current Assets,INVST=Investment,NW=Net Worth,TD=Total debt b

STBB=Short term bank borrowings,LTB=Long term borrowings including debentures,DEBN=debentur


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from March to December in 1993,thus,

.

(Rs crore)

NS PAT

391.2 -8.2

523.1 26.7

689.5 21.5672.0 9.0

1092.7 33.7

1454.4 22.1

1438.8 11.8

1509.4 44.6

1620.1 39.2

1662.9 41.4

1444.4 -3.1

1459.5 40.4

1492.8 85.5

rrowings,NS=Net Sales,

s,PAT=Profit after tax


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Firm L and U have same expected earnings before interest and taxes of Rs 25,000.Firm U has employe

Rs 50,000 equity and Rs 50,000 debt at an expected rate of return(cost of debt) of 15%.You are requir

(a)earnings of all investors and (b)value of interest tax shield under the following alternatives:(1)no c

(2)50% corporate taxes & 0% personal taxes (3)50% corporate taxes & 30% personal taxes and (4)50

and 40% personal taxes on interest income.


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d 100% equity of Rs 100,000 while firm L has employed

ed to calculate for each firm:

orporate & personal taxes

corporate taxes,20% personal taxes on dividend income


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S Co' is an all-equity firm.It has a beta of 1.21.The current-risk free rate is 6.5% and the market premi

S is considering a new project with similar risk,but the project will be financed 30% by debt and 70%

Debt is risk free.What is the expected rate of return on equity that the project should earn to be acce


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m is 9.0%.

y equity.

ptable by the firm?


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Given below are the protfolio for 4 shares: What is the expected rate of return on ypur

Share Beta Investment(Rs) expected market rate of return is 16%?

A 0.8 100,000

B 1.25 100,000

C 1 75,000

D 0.6 125,000


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ortfolio if the risk-free rate of return is 9% and the


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X Co' has a net operating income of Rs 2,00,000 on an investment of Rs 1,000,000 in assets.It can rais

(a)Using the NI approach and an equity capitalization rate of 18%,compute the total value of the firm

(b)Rs 300,000 debt and (c) Rs 600,000 debt. (b) Using the NOI approach and an overall capitalization

value of shares and the cost of equity if the firm has (a)no debt (b)Rs 300,000 debt and (c) Rs 600,00


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debt at a 16% rate of interest.Assume that taxes dont exist.

and the WACC if the firm has (a)no debt

rate of 12%,compute the total value of the firm ,

debt.


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Firm L & Uare in the same risk class and are identical in every respect except that Firm L is levered an

outstanding.Both firms earn 18% before intrest and taxes on their total assets of Rs 800,000.Assume

rate of 15%.(a)Compute the total value of the firms using (a) NI approach (b)NOI approach.

(b)Using the NOI approach,caluclate the after tax WACC for both the firms.Which of the 2 firms has a

(c) Acc. to NOI approach,the values for Firms A and B computed in Part A using the NI approach are n

Under such a situtation,an investor can secure same return at lower cash outlay through the arbitrag

Show the arbitrage process.When would this arbitrage process stop?


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Firm U is unlevred.Firm L has 12% Rs 400,000 debentures

a corporate tax rate of 50% and a pure equity capitalization

optimum capital structure and why?

t in equillibrium.

process.Assume that an investor owns 5% of L'shares.


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The values for 2 firms X-unlevered and Y-levered,with Rs 600,000 debt at 6% rate of interest are give

An investor holds Rs 20,000 worth of Y's shares.Show the process by which he can earn the same ret

Particulars X(Rs) Y(Rs)

Net operating income,X' 200,000 200,000

Cost of debt,INT=Kd*D 0 36,000

Net Income,NI 200,000 164,000

Equity capitalization rate,Ke 0.111 0.125Market value of Equity,E 1,800,000 1,312,000

Market value of Debt,D 0 600,000

Total value of the firm,V=E+D 1,800,000 1,912,000

Overall capitalization rate,Ko 0.1111 0.1046


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below.

rn at a lesser cost.


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2 firms A &B are identical in all respect except that B has Rs 500,000 debt outstanding at a 6% rate of

Particulars A(Rs) B(Rs) Assume that an investor owns 10% of A's sha



Net Income,NI 150,000 120,000

Equity capitalization rate,Ke 0.1 0.15

Market value of Equity,E 1,500,000 800,000Market value of Debt,D 0 500,000

Total value of the firm,V=E+D 1,500,000 1,300,000



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interest.The values of the 2 are given below:

res.How can the investor obtain same return at a lower cost?


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Suppose X=Rs 50,000,Kd=0.06,Eu=Vu=Rs 500,000,El=Rs 2,80,000,Dl=Rs 2,50,000 and Vl=Dl+El=Rs 530,

If an investor owns 5% of the levered firm's shares,how can he be benefited by resorting to the arbitr


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000.Caluclate the cost of equity and WACC for the 2 firms.

age process?


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A new co' proposes to invest Rs 10 lakh in assets and will maintain its capital structure at book value.It i

The co' wants to have an optimum mix of debt and equity.The cost of debt and equity-capitalization rat

D/E ratio Cost of Debt Equity capitalization rate

0 0 0.125 (a)What is the optimum capital structure for this

11.11% 0.05 0.13 (b)If the MM hypothses is valid,what should be t

0.25% 0.05 0.136

0.43% 0.06 0.1430.67% 0.07 0.16

1.00% 0.08 0.18

1.50% 0.1 0.2


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s expected to earn a net operating income of Rs 160,000.

e at different debt-equity ratois are as follows:

ompany

e equity-capitalization rate at different D/E ratios?


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The values for the firms X1 & Y1 are in accordance with the traditional theory:

Particulars X1(Rs) Y1(Rs) Compute the values for firms X &

Expected Net operating income,X' 50,000 50,000 (a)Corporate income taxes dont

Total Cost of debt,INT=Kd*D 0 10,000 (b)equillibrium value of Ko=12.5

Net Income,NI=X'-INT 50,000 40,000

Equity capitalization rate,Ke 0.1 0.11

Market value of Equity,E 500,000 360,000Market value of Debt,D 0 200,000

Total value of the firm,V=E+D 500,000 560,000


D/E ratio 0 0.556


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Y as per the MM thesis.Assume that

xist


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The following table has the equillibrium values for 2 firms M & N as per the Modigliani-Miller approac

Recompute the values for firms M and N in accordnce with the traditional theory.Assume that the cos

Particulars M(Rs) N(Rs)



Net Income,NI 12,000 10,000

Overall capitalization rate,Ko 0.08 0.08Total value of the firm,V=X/Ko 1,50,000 1,50,000

Market value of Debt,D 0 40,000

Market value of Equity,E=V-D 1,50,000 1,10,000

Cost of debt,Kd=INT/D 0 0.05

Equity capitalization rate,Ke=[(X'-INT)]/E 0.08 0.091


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h:

t of equity of the firm M is 10% and for firm N is 10.5%


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A co' has set its target D/E ratio at 1:1 and target payout ratio at 40%.The company wants to achivev

before tax return on assets of 21%.Its sales-to-assets ratio is 1.8 times.The current interest rate is 12

Can the company sustain its intended growth?What should it do to achieve the growth rate?


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a growth rate of 20% per annum.The co' is expecting

.The corporate tax rate for the co' is 35%.

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CapStrTheo&Policy Assignment Piyush

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