Ans.

1
a. The project under consideration is vertical integration as it setting up machines for
manufacturing leather which is the raw material for their main operations.
b. Both these technologies are mutually exclusive as only one can be taken up by the
company for the project.
c. Technology A has a higher risk as we can see that it’s the cost of capital is 18% more
than the cost of capital of technology B which is 17%. More the expected return more
is the risk.
d. Payaback period for Project A and B

Technolog Cumalative Technolog Cumalative

Year yA A Year yB B
0 -500   0 -600  
1 150 -350 1 200 -400
2 175 -175 2 250 -150
3 200 25 3 300 150
4 200 225 4 325 475

Payback Period=years to recover cost + remaining/cash flow that year

Payback for A= 2 + 175/200

= 2+0.875
= 2.875

Payback for B= 2 + 150/300

= 2+0.5
= 2.5

Payback for project A is 2.875 years which means the initial cost invested which is 500
crores will be recovered in 2.875 years for project A.

Payback for project B is 2.5 years which means the initial cost invested which is 400 crores
will be recovered in 2.875 years for project B.
Technology A

A1 B C D E F
2 Year Technology A      
3 0 -500      
4 1 150   18%  
5 2 175      
6 3 200      
7 4 200      
8          
9 npv -22.32      
10 irr 16%      
  mirr 17%      

npv =NPV(E4,C4:C7)+C3

irr=IRR(C3:C7)

mirr=MIRR(C3:C7,E4,E4)

Technology B
A1 B C D E F
2 Year Technology B      
3 0 -600      
4 1 200   17%  
5 2 250      
6 3 300      
7 4 325      
8          
9 npv 114.32      
10 irr 26%      
  mirr 22%      

npv =NPV(E4,C4:C7)+C3

irr =IRR(C3:C7)

mirr=MIRR(C3:C7,E4,E4)
 e. NPV for project A is -22.32
NPV for Project B is +114.32

NPV for project A is negative this it doesn’t add value and NPV for project B it is
positive thus it adds value.

we should select project B based on NPV as it is positive for the project as it will add
value to the firm.

f. For project A IRR(IRR<Ko) will be less then cost of capital because NPV we
calculated is negative

For Project B IRR(IRR>Ko) will be more than cost of capital because NPV we
calculated is positive.

g. For Project A MIRR will be less then cost of capital as NPV we calculated is
negative.
For Project B MIRR will be more than cost of capital as NPV we calculated is
positive

Ans 2.

A1 B C D E F G H
2 Debt Ratio pretax kd aftertax kd D/E beta Ke WACC
3 0% 10% 7.00% 0.00 0.80 14.01% 14.01%
4 10% 10.50% 7.35% 0.11 0.86 14.64% 13.91%
5 25% 11% 7.70% 0.33 0.99 15.88% 13.84%
6 50% 12% 8.40% 1.00 1.36 19.62% 14.01%
7 75% 13% 9.10% 3.00 2.48 30.84% 14.53%
8              
9 rf 6%          
10 rp 10%          
11 current D/E 0.8          
12 TAX rate 30%          
13              

for after tax we used=cost of debt*(1-t)

for cell D3=C3*(1-$C$12) and dragged down for all the values.

for D/E when debt ratio is given is D/1-D.

for cell E3 =B3/(1-B3)
for beta,
we first calculated unlevered beta.
from formulas
Bl=Bul*[1+(D/E)*(1-Tax Rate)]
for cell F3 =1.25/(1+0.8*(1-$C$12))
for cell F4= =$F$3*(1+E4*(1-$C$12))
for rest of them dragged the cell F4 down.

for cost of equity

we used
Ke=risk free return + beta*(market risk premium)
for cell G3 =$C$9+F3*($C$10)
and dragged down to get all the values

for WACC=Ke*We+Kd*Wd
H3=(G3*(1-B3))+(D3*B3)
and dragged down to get all the values

A.
Debt Ratio WACC
0% 14.01%
10% 13.91%
25% 13.84%
50% 14.01%
75% 14.53%

These are the values for the weighted average cost of capital for different values of Debt
Ratio.

B.
25% debt ratio represents the optimal debt ratio for the firm as the WACC weighted cost of
capital is the least in all the cases.

25% debt ratio means 0.33 debt equity ratio.

C.
As currently the debt equity ration is 0.8 and optimal capital structure is at 0.33. thus the
firms needs to pay off it’s debt to reach that stage as currently right now cost of debt>benefit
of debt. Paying off it’s debt will reduce the cost of capital for the company.
ANS 3.
Before Split

Particular Amount (Rs. Crores)

1. Paid up Share capital: 100
10 crores shares @ Rs. 10 each (fully paid
up)
2. Reserves and Surpluses:
2.a Free Reserves 200
2.b Profit and Loss A/C 50
2.c Share Premium 25
2.d Other Reserves 25
Total Reserves and Surpluses 300
Total Shareholders’ Fund (Net Worth) 400

After Split
Particular Amount (Rs. Crores)
1. Paid up Share capital: 100
50 crores shares @ Rs. 2 each (fully paid
up)
2. Reserves and Surpluses:
2.a Free Reserves 200
2.b Profit and Loss A/C 50
2.c Share Premium 25
2.d Other Reserves 25
Total Reserves and Surpluses 300
Total Shareholders’ Fund (Net Worth) 400

A. after split of shares the number of shares will increase and face value decreases .
in this case when face goes down to rs2 from rs10 thus shares will go go up by.
10/2=5 times. Thus 10 crore share becomes 50 crores shares and face value rs2.

B. EPS=PAT/Total number of share

As earlier EPS=200crore/10 crore shares.

=Rs. 20 EPS
After split EPS=200crore/50 crore share
=Rs. 4 EPS

we can see that as number of shares increased thus the EPS has decreased from Rs.20
to Rs 4

C. After the stock book value of shares will go down

book value=share holder equity/total share

as shareholder doesn’t change after stock split, the book value will decrease as share
have increased .
Ans. 4

a.

Before
Particular Amount (Rs. Crores)
1. Paid up Share capital: 400
40 crores shares @ Rs. 10 each (fully paid
up)
2. Reserves and Surpluses:
2.a Free Reserves 800
2.b Profit and Loss A/C 100
2.c Share Premium 200
2.d Other Reserves 100
Total Reserves and Surpluses 1200
Total Shareholders’ Fund (Net Worth) 1600

After
Particular Amount (Rs. Crores)
1. Paid up Share capital: 400-40=360
36 crores shares @ Rs. 10 each (fully paid
up)
2. Reserves and Surpluses:
2.a Free Reserves 800
2.b Profit and Loss A/C 100
2.c Share Premium 200
2.d Other Reserves 100
Total Reserves and Surpluses 1200-400=800
Total Shareholders’ Fund (Net Worth) 1600

10% of share means 0.1*40core=4 crore share.

4 crore*Rs100=400 crore
thus new share=40-4=36 crore share

b.

EPS= earning/no of shares.

earlier eps=200/40=5
rs.5 EPS

after EPS=200/36
Rs.5.5 EPS
we can see that the EPS has gone up as no of shares outstanding have been reduced.

c.

P/E remains same thus we can say that.

Po=(P/E)*eps. …… eq

where Po new price and eps is new EPS. and P/E is earlier Price to earing before split
earlier price was Rs. 80 and Earing was Rs. 200 crore.
P/E=mps/eps=80/5=

Thus putting the values in eq we get

Po=(80/5)*5.5
Po=88

Thus new market price for the lamba will be Rs. 88 higher than the earlier price of 80 per
share as shown by calculations above.
ANS 5.
Capital expenditure = Rs. 450cr
Debt equity=1:3
debt ratio= ¼
equity ratio= ¾

equity required is = (¾)*450=337.5 crore…..(i)

rest company will raise from debt.

Profit after Tax=600 crore.

As company follows residual dividend policy,

thus total dividend payout will be= PAT-equity required
= 600-337.5
= rs.262.5 crore

This div payout ratio=(toal div/PAT)*100

=(262.5/600)*100
=43.75%

Dividend Payout for omega is 43.47%

ANS 6.
Particulars Amount (Rs. Crores)
Sales (From October 1, 2021 to December 2700
31, 2021)
Cost of Goods Sold (From October 1, 2021 1800
to December 31, 2021)
Accounts Receivable as on October 1, 2021. 640
Accounts Receivable as on December 31, 560
2021.
Inventories as on October 1, 2021. 520
Inventories as on December 31, 2021 480
Accounts Payable as on October 1, 2021. 210
Accounts Payable as on December 31, 2021. 190

A.
 Average Inventory= (520+480)/2
= 500 crore

 Average payable= (210+190)/2

= 200 crore

 Average Recievable= (640+560)/2

= 600 crore

Operating Cycle = DSI+DSO

days sale outstanding
days sale inventory

DSI=90/(COGS/Avg Inv)
=90/1800/500
=25

DSO= 365/(Sales/Avg receivable)

=90/2700/600
=20

Operating cycle is = 20+25

=45

The operating cycle comes out to be 45 which means that the company takes 45 days to buy
the goods then sell them to the customer and receive cash from them.

B.

COGS=op inv + Purchase-Closing INV

1800= 520+pur-480

purchases = 1760crore
DPO=90/1760/200
=10.22 days.

Cash cycle =OC-DPO

= 45-10.22
=34.78

Cash Cycle for theta retail is 34.78 days which means that company from purchase of goods
to selling and receiving cash from the customer takes 34.78 days.