Q1

Final Paper Strategic Finance Sem

Electrical Systems(in millions)

10% increase

Sales 4230 4653 Current Assets 1100

Cost 3920 4312 Fixed Assets 2150

Taxable Income 310 341 Total Assets 3350

Taxes at 30% 93 102.3

Net Income 217 238.7 Current Liabilities 658

Dividends 86.8 95.48 Long T – Debt 850

Retained Earnings 130.2 143.22 Equity 1842
3350
Difference

CAPACITY Level 6042.8571429

At this capacity level, firm can increase sales without changing fixed assets

External Financing Need Total debt and equity 3470

current liability 65.8
retained earning 13.02
current long ter debt 850
current comon stock 1842
EFN 699.18

As both business segments are working under one group, Thal ltd, do you think
the company will be in EFN? If ‘Yes’ then how and how much in total, if ‘No’ then
why?

Engineering division of Thal limited is basically in external financing need because overall one group is operating all th

they totally need external financing for two segments

Electrical system 699.18

Engine components 2091.468
Total 2790.648

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 Q1

per Strategic Finance Semester 1 Spring 2021

Engine Components(in millions) in millions

20% increase

1210 Sales 7550 9060 Current Assets 2129

2150 Cost 4908 5889.6 Fixed Assets 5096

3360 Taxable Income 2642 3170.4 Total Assets 7225

Taxes at 30% 792.6 951.12

723.8 Net Income 1849.4 2219.28 Current Liabilities 2332

850 Dividends 647.4 776.748 Long T – Debt 1000

1842 Retained Earnings 1202 1442.532 Equity 3893
3470 7225

CAPACITY Level 7947.368421

At this capacity level, firm needs more fixed assets to increase sales

External Financing Need Total debt and equity 7691.4

current liability 466.4
retained earning 240.532
current long ter debt 1000
current common st 3893
EFN 2091.468

hal ltd, do you think

in total, if ‘No’ then

se overall one group is operating all these segments.

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 Q1

2554.8

6115.2

8670

2798.4

1000
3893
7691.4

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 section3

Section 3
Suppose you own 10,000 shares of stock in Rawal flour mills. What is your cash flo
1 current capital structure (100% Equity)?

What will your cash flow be under the proposed capital structure of the firm (i.e 40 debt)?
2 keeps all 10,000 shares.

Assume you have 10,000 shares

Firm L Firm U
Equity 1500000 2500000

Debt 1000000 0

D/E Ratio 0.4 0

share price 25 25

shares 60000 100000

interest rate 10% 0

EBIT 500000 500000

profit 400000 500000

ownership 16.67% 10%

return 66666.67 50000

Suppose the company does not convert, but you prefer the proposed levered capital str
3 firm. Show how you could lever your shares of stock to recreate the levered capital structu

To recreate leveraged capital structure

Shares 150000
Debt 100000
operating income 500000
10000 cash flow will raise
profit 50000
interest 10000
Cash flow generated to recreate l 40000

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 section3

lour mills. What is your cash flow under the

Firm U

structure of the firm (i.e 40 debt)? Assume you

Firm L

r the proposed levered capital structure of the

ecreate the levered capital structure.

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 Q2

PART 1

Initial Cash Outflow in millions

cost of new asset 60
old machine current salvage value 8.5
Tax 1.05
Initial cash outflow 52.55

PART 2
D/E ratio
cost of internal equity (E)
cost of external equity
condition1 if borrowing 40m as prime debt pre tax cost of debt
condition 2 if borrowing 60m as subprime pre tax cost of debt
Tax rate 30%

condition1 if borrowing 40m as prime debt

Pretax cost of debt 15.00%
after tax cost of debt 0.105

WACC 1/1(0.13) + 1/1(0.105)

0.235

23.50%

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 Q2
Q No 6 Investment Project

Profit 42 millio
Leverage 19.50%
WACC 23.5

Formula 42000000/(0.235-0.195)
Required 1050000000

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 Q2

year 1 2 3 4
savings 12.00 12 12 12
New depreciation 11.25 11.25 11.25 11.25
old depreciation 5.00
earning before tax 5.75 0.75 0.75 0.75
Tax at 30% 1.725 0.225 0.225 0.225
earning after tax 4.025 0.525 0.525 0.525
operating cash flow 13.73 12.23 12.23 12.23
salvage value 9.45
net cash flow 13.73 12.23 12.23 21.68

1 D + E = 1+ 0 = 1
13
17.5
15
19.5

condition2 if borrowing 60m as 2nd subprime debt

Pretax cost of debt 19.50%
after tax cost of debt 13.65 0.195

1/1(0.13) + 1/1(0.195)

0.02535

2.54%

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 Q2

0.04

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 Q2

Terminal year cash flow

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