NMIMS Global Access School for Continuing Education (NGASCE)

Course: Corporate Finance

Assignment

1) Calculation of the WACC for M/s Antara Limited with the given
information:

Step 1: Calculate the market value of equity

Market value of equity = Number of shares outstanding * Market price per

share

Market value of equity = 500,000 shares * Rs. 55 per share

Market value of equity = Rs. 27,500,000

Step 2: Calculate the book value of equity

Book value of equity = Share capital + Retained earnings

Book value of equity = Rs. 50, 00,000 + Rs. 2, 50,000

Book value of equity = Rs. 52, 50,000

Step 3: Calculate the weight of equity

Weight of equity = Book value of equity / (Book value of equity + Debt)

Weight of equity = Rs. 52, 50,000 / (Rs. 52, 50,000 + Rs. 17, 00,000)
Weight of equity = 0.7568

Step 4: Calculate the cost of equity

The cost of equity can be calculated using the Capital Asset Pricing Model
(CAPM):

Cost of equity = Risk-free rate + Beta * (Market return - Risk-free rate)

Assuming a risk-free rate of 4% and a market return of 12%, the cost of equity
would be:

Cost of equity = 4% + 0.6 * (12% - 4%)

Cost of equity = 10.2%

Step 5: Calculate the weight of debt

Weight of debt = Debt / (Book value of equity + Debt)

Weight of debt = Rs. 17, 00,000 / (Rs. 52, 50,000 + Rs. 17, 00,000)

Weight of debt = 0.2432

Step 6: Calculate the after-tax cost of debt

After-tax cost of debt = Interest rate * (1 - Tax rate)

Assuming a tax rate of 30%, the after-tax cost of debt would be:

After-tax cost of debt = 8% * (1 - 30%)

After-tax cost of debt = 5.6%

Step 7: Calculate the WACC

WACC = Weight of equity * Cost of equity + Weight of debt * After-tax cost

of debt

WACC = 0.7568 * 10.2% + 0.2432 * 5.6%

WACC = 8.27%

Therefore, the WACC for M/s Antara Limited is 8.27%.

2.

Sure, here are the gross and net operating cycles for Vishal & Co. Ltd. using the
information provided:

Particulars Amount
(Rs.)
Opening Balance - Raw Material 200,000
Opening Balance - Work-in- 60,000
Progress
Opening Balance - Finished Goods 600,000
Opening Balance - Debtors 250,000
Opening Balance - Creditors 550,000
Closing Balance - Raw Material 300,000
Closing Balance - Work-in-Progress 65,000
Closing Balance - Finished Goods 725,000
Closing Balance - Debtors 215,000
Closing Balance - Creditors 575,000
Annual Purchase of Raw Material 3,200,000
Manufacturing Expenses 550,000
Selling & Distribution Costs 300,000
Sales 4,480,000

Gross Operating Cycle

The gross operating cycle is the average amount of time it takes for a company
to convert its raw materials into cash. It is calculated as follows:
 Gross Operating Cycle = (Average Inventory + Average Debtors) / Cost of
Goods Sold * 360
 Average Inventory = (Opening Inventory + Closing Inventory) / 2
 Average Inventory = (860,000 + 1,090,000) / 2 = 975,000
 Gross Operating Cycle = (975,000 + 232,500) / 2,660,000 * 360 = 115.92 days

Net Operating Cycle

The net operating cycle is the gross operating cycle minus the average time it
takes for a company to collect its receivables from its customers. It is calculated
as follows:

Net Operating Cycle = Gross Operating Cycle - Average Debtors Collection

Period

 Average Debtors =(Opening balance + Closing balance )

 Average Debtors =250000+215000/2 = 3,57,500
 Average Debtors Collection Period = Average Debtors * 360/ Sales
 Average Debtors Collection Period = 3,57,500 * 360 / 44,80,000
 Average Debtors Collection Period =28.73
 Average payables =550000+575000/2 = 5,62,500
 Payables payment period = 5,62,500 * 360 / 4480000 = 45.20
 Net operating cycle ==Gross operating cycle –average debtors /Cogs*360
 Net operating cycle =115.92- 562500/2660000*360
 Net operating cycle = 61.92 days.

In this case, the net operating cycle is 61.92 days.

Interpretation

The Gross Operating Cycle of 115.92 days indicates that it takes Vishal & Co.
Ltd. 115.92 days to convert its raw materials into cash from customer
collections. The Net Operating Cycle of 61.92 days is a more conservative
measure that takes into account the company's payables. This means that it
takes Vishal & Co. Ltd. 61.92 days to convert its raw materials into cash after
considering the time it takes to pay its suppliers.

A shorter operating cycle is generally considered to be better, as it indicates that

the company is efficiently using its resources. Vishal & Co. Ltd.'s operating
cycles are relatively high, which suggests that there may be some inefficiencies
in its operations. The company could look for ways to reduce its inventory
levels, improve its collection process, or negotiate better terms with its
suppliers.
 3. (A) the formula for the present value of a perpetuity is:

PV = PMT / r

 PV is the present value (the amount to be invested)

 PMT is the annual payment
 r is the interest rate

Using this formula, we can calculate the amount to be invested in each case:

I. PV = 2, 00,000 / 0.08 = 25, 00,000

PV = 25, 00,000

Therefore, to receive Rs. 2, 00,000 per annum in perpetuity at an interest rate of

8%, the amount to be invested is Rs. 25, 00,000.

II. To receive Rs. 4,00,000 per annum in perpetuity at an interest rate of 5%,
considering a growth rate of 3% every year:
In this case, we need to account for the growth rate in addition to the interest
rate.
Using the formula for the present value of a growing perpetuity, we have:
A = Cash Flow / (Interest Rate - Growth Rate)
A = 4, 00,000 / (0.05 - 0.03)
A = 20, 00,000
Therefore, to receive Rs. 4, 00,000 per annum in perpetuity at an interest rate of
5% with a growth rate of 3% every year, the amount to be invested is Rs. 20,
00,000.

3. (B) The calculations for the current ratio and Acid Test Ratio:

Current Ratio

The current ratio is a measure of a company's short-term liquidity. It is

calculated by dividing the company's current assets by its current liabilities.

Formula: Current Ratio = Current Assets / Current Liabilities

Calculation:

Current Assets = Debtors + Cash and Bank + Inventory = 500,000 + 200,000 +

400,000 = 1,100,000

Current Liabilities = Trade Payables + Bank OD = 150,000 + 50,000 = 200,000

Current Ratio = 1,100,000 / 200,000 = 5.50

Acid Test Ratio

The Acid Test Ratio is a more conservative measure of a company's short-term

liquidity. It is calculated by dividing the company's quick assets by its current
liabilities. Quick assets are current assets that can be quickly converted into
cash, such as cash, accounts receivable, and marketable securities.

Formula: Acid Test Ratio = Quick Assets / Current Liabilities

Calculation:
Quick Assets = Cash and Bank + Accounts Receivable = 200,000 + 500,000 =
700,000

Acid Test Ratio = 700,000 / 200,000 = 3.50

Interpretation:

A current ratio of 1.5 or higher is generally considered to be good, while an

acid test ratio of 1.0 or higher is generally considered to be good. In this case,
the company's current ratio is 5.50 and its acid test ratio is 3.50, both of which
are well above the recommended minimums. This indicates that the company
has a strong ability to meet its short-term obligations.