Dr.

ARUN JULKA
QUESTION
In A Ltd.
IRR (r) 10.00%
Ke 10.00%
EPS (E) ₹ 20.00
Using Walter model, calculate the effect of dividend payment on the value of share of A Ltd.
Dividend Payout Ratio 0.00% 20.00% 40.00% 60.00% 80.00%

Solution
Market price of the share as per Walter Model:
𝑃= 𝐷+(𝑟/𝑘_𝑒)(𝐸−𝐷)/𝑘_𝑒

DPR 0.8 DPR 0.00% 20.00% 40.00% 60.00%

D ₹ 16.00 D ₹ - ₹ 4.00 ₹ 8.00 ₹ 12.00
P ₹ 200.00

P ₹ 200.00 ₹ 200.00 ₹ 200.00 ₹ 200.00

 15%
10%
8%

100.00%

80.00% 100.00%
₹ 16.00 ₹ 20.00

₹ 200.00 ₹ 200.00
QUESTION
In A Ltd.
IRR (r) 15.00%
Ke 10.00%
EPS (E) ₹ 20.00
Using Walter model, calculate the effect of dividend payment on the value of share of A Ltd.
Dividend Payout Ratio 0.00% 20.00% 40.00% 60.00% 80.00%

Solution
Market price of the share as per Walter Model:
𝑃= 𝐷+(𝑟/𝑘_𝑒)(𝐸−𝐷)/𝑘_𝑒

DPR 0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

D ₹ - ₹ 4.00 ₹ 8.00 ₹ 12.00 ₹ 16.00 ₹ 20.00
P ₹ 300.00 ₹ 280.00 ₹ 260.00 ₹ 240.00 ₹ 220.00 ₹ 200.00
 15%
10%
8%

100.00%

market price as per walter method

p= (d+(r/ke)(e-d))/ke

dpr 0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

d ₹ - ₹ 4.00 ₹ 8.00 ₹ 12.00 ₹ 16.00 ₹ 20.00

P= ₹ 300.00 ₹ 280.00 ₹ 260.00 ₹ 240.00 ₹ 220.00 ₹ 200.00

QUESTION
In A Ltd.
EPS ₹ 20.00
Ke 12.00%
r 15.00%
Dividend Payout Ratio
Calculate Price per share as per Gordon Model
Solution
𝑃=𝐸(1−𝑏)/𝑘_𝑒−𝑏𝑟

DPR 0.3 DPR 30.00% 40.00%

b 0.7 B 70.00% 60.00%
b*r 10.50% BR 10.50% 9.00%

P ₹ 400.00 P ₹ 400.00 ₹ 266.67

 9.00%
12.00%
15.00%

50.00% 70.00% 90.00% 100.00%

50.00% 30.00% 10.00% 0.00%
7.50% 4.50% 1.50% 0.00%

₹ 222.22 ₹ 186.67 ₹ 171.43 ₹ 166.67

QUESTION
In A Ltd.
EPS ₹ 15.00
Ke 12.00%
r 12.00%
Dividend Payout Ratio 30.00% 40.00% 50.00% 70.00% 90.00% 100.00%
Calculate Price per share as per Gordon Model
Solution
𝑃=𝐸(1−𝑏)/𝑘_𝑒−𝑏𝑟

DPR 30.00% 40.00% 50.00% 70.00% 90.00% 100.00%

b 70.00% 60.00% 50.00% 30.00% 10.00% 0.00%
b*r 8.40% 7.20% 6.00% 3.60% 1.20% 0.00%

P 125 125 125 125 125 125

 9.00%
12.00%
15.00%
QUESTION
EPS ₹ 10.00
P/E Ratio 10
Ke 10.00%
No. of Outstanding shares (n) 20000
Expected Dividend (D1) ₹ 5.00
Expected Net Income (E) ₹ 300,000.00
New Investment (I) ₹ 600,000.00
As per MM Approach, show that the payment of dividend does not affect the value of the firm.
Use the above data to prove the statement.
Solution

case 1 When Dividend is Paid

D1 ₹ 5.00 ₹ 5.00
P0 ₹ 100.00 P0=EPS*P/E RATIO ₹ 100.00
P1 ₹ 105.00 P1=P0*(1+KE)-D1 ₹ 105.00
A ₹ 400,000.00 A=I-(E-n*D1) ₹ 400,000.00
m ₹ 3,809.52 m=A/p1 3809.523809524
V 2000000 V=n*P0 ₹ 2,000,000.00
QUESTION
EPS ₹ 10.00
P/E Ratio 10
Ke 10.00%
No. of Outstanding shares (n) 50000
Expected Dividend (D1) ₹ 8.00
Expected Net Income (E) ₹ 500,000.00
New Investment (I) ₹ 1,000,000.00
As per MM Approach, show that the payment of dividend does not affect the value of the firm.
Use the above data to prove the statement.
Solution
CASE WHEN DIVIDEND IS PAID

D1 EXPECTED DIVIDEND
P0 EPS*PE RATIO
MARKET PRICE(P1) PO*(1+KE)-D1 PO=(P1+D1)/(1+KE) OR P1=PO(1+KE)-D1

AMOUNT TO BE RAISED BY THE ISSUE OF NEW EQUITY(A)

I-[E-N*D1]

NUMBER OF NEW SHARES TO BE ISSUED(M)

A/P1

VALUE OF FIRM(V) N*P0

 PAID NOT PAID

D1 ₹ 8.00 0
P0 100
P1 102

A ₹ 900,000.00

M ₹ 8,823.53

V 5000000
Question
EBIT ₹ 2,000,000.00
ke 10.00%
kd 6.00%
Debts ₹ 5,000,000.00 ₹ 2,000,000.00 ₹ 8,000,000.00
Find Value of Firm & ko , using NI
Solution
debts ₹ 5,000,000.00 ₹ 2,000,000.00 ₹ 8,000,000.00

EBIT ₹ 2,000,000.00 ₹ 2,000,000.00 ₹ 2,000,000.00

INT ₹ 300,000.00 ₹ 120,000.00 ₹ 480,000.00
EBT ₹ 1,700,000.00 ₹ 1,880,000.00 ₹ 1,520,000.00

EQUITY(E) EBT/KE 17000000 18800000 15200000

DEBTS(D) ₹ 5,000,000.00 ₹ 2,000,000.00 ₹ 8,000,000.00
VALUE OF FIRM(V) E+D 22000000 20800000 23200000

K0 EBIT/V 9.09% 9.62% 8.62%

WHEN DEBT AMT IS DECREASING THE VALUE OF THE FIRM IS INCREASING AND OVERALL COST STARTS INC
ND OVERALL COST STARTS INCREASING
Question
EBIT ₹ 500,000.00
ko 10.00%
kd 6.00%
Debts 20% 30% 40% 50%
Find ke, using NOI
Solution
debts 20% 30% 40% 50%

EBIT ₹ 500,000 ₹ 500,000 ₹ 500,000 ₹ 500,000

ko 10.00% 10.00% 10.00% 10.00%
value of firm(V) EBIT/KO ₹ 5,000,000 ₹ 5,000,000 ₹ 5,000,000 ₹ 5,000,000
debt(D) ₹ 1,000,000 ₹ 1,500,000 ₹ 2,000,000 ₹ 2,500,000
equity(E) V-D ₹ 4,000,000 ₹ 3,500,000 ₹ 3,000,000 ₹ 2,500,000
int ₹ 60,000 ₹ 90,000 ₹ 120,000 ₹ 150,000
EBT ₹ 440,000 ₹ 410,000 ₹ 380,000 ₹ 350,000
Ke EBT/E 11.00% 11.71% 12.67% 14.00%
 60%

60%

₹ 500,000
10.00% AMT OF DEBT IS INCREASING THE COST OF EQUITY ALSO STARTS INCREASING
₹ 5,000,000
₹ 3,000,000
₹ 2,000,000
₹ 180,000
₹ 320,000
16.00%
Question
L U
Debts ₹ 450,000.00 ₹ -
kd 12.00% 0.00%
ke 16.00% 15.00%
EBIT ₹ 150,000.00 ₹ 150,000.00
Find Value of Firms & ko
Solution
Question
A performa cost sheet of a company provide you with the following particulars: Additional information:
Estimated Cost per unit: Level of activity
Cost elements Amt. per unit Raw materials in stock
Raw Materials ₹ 150.00 Work in progress
Direct Labour ₹ 60.00 Finished goods in stock
Overheads ₹ 70.00 Credit allowed by suppliers
Selling Price ₹ 350.00 Credit allowed to debtors
Lag in payment of wages
Cash at bank is expected to be 20% of gross working capital Lag in payment of overheads
Calculate WCR Credit Sales
Solution
notes: 1 year= 52 weeks
cost of WIP ₹ 215.00
cost of PROD ₹ 280.00
cost of sales ₹ 280.00

current assets current liabilities

rm ₹ 6,000,000.00 creditors of RM ₹ 3,000,000.00
wip ₹ 2,580,000.00 wages ₹ 960,000.00
fg ₹ 4,480,000.00 overhead ₹ 840,000.00
inventories 13060000 ₹ 4,800,000.00
debtors 7616000
cash balance 5169000
25845000
total wcr ₹ 21,045,000.00
Additional information:
Level of activity 208,000 units of production
Raw materials in stock Average 10 Weeks
Work in progress Average 3 Weeks
Finished goods in stock Average 4 Weeks
Credit allowed by suppliers Average 5 Weeks 156,000
Credit allowed to debtors Average 8 Weeks 8
Lag in payment of wages Average 4 Weeks 2
Lag in payment of overheads Average 3 Weeks 3
Credit Sales 85% 4
6
3
2
Question
A LTD. B LTD.
Sales ₹ 10,000,000.00 ₹ 8,000,000.00
Variable Cost ₹ 5,000,000.00 ₹ 3,000,000.00
Contribution ₹ 5,000,000.00 ₹ 5,000,000.00
Fixed Costs ₹ 2,250,000.00 ₹ 2,500,000.00
EBIT ₹ 2,750,000.00 ₹ 2,500,000.00
Interest ₹ 750,000.00 ₹ 1,000,000.00
EBT ₹ 2,000,000.00 ₹ 1,500,000.00
Find Operating and Financial Leverage
Solution
OPERATING LEVERAGE= CONTRIBUTION/EBIT

A LTD. 1.81818181818182
B LTD. 2

FINANCIAL LEVERAGE= EBIT/EBT

A LTD. 1.375
B LTD. 1.66666666666667
Question
No. of Equity Shares 25000 12500
Rate of Equity Share ₹ 100.00 ₹ 100.00
Equity ₹ 2,500,000.00 ₹ 1,250,000.00
Debt ₹ - ₹ 1,250,000.00
Rate of Debts 15%
Tax Rate 30%
Case I Case II
EBIT ₹ 250,000.00 ₹ 250,000.00
Calculate EPS in both cases.
Solution
CASE 1 CASE2
EBIT ₹ 250,000.00 ₹ 250,000.00
INTEREST 0 187500
EBT ₹ 250,000.00 ₹ 62,500.00
TAX ₹ 75,000.00 ₹ 18,750.00
EAT ₹ 175,000.00 ₹ 43,750.00
EPS= ₹ 7.00 ₹ 3.50
QUESTION
Cost of Asset ₹ 400,000.00 Year Inflows
Installation Charges ₹ - 1 ₹ 80,000.00
Scrap Value ₹ - 2 ₹ 120,000.00
Life 5 3 ₹ 130,000.00
Working Capital ₹ - 4 ₹ 120,000.00
5 ₹ 160,000.00

SOLUTION

INITIAL OUTFLOW= ₹ 400,000.00

Year Inflows
0 ₹ (400,000.00)
1 ₹ 80,000.00
2 ₹ 120,000.00
3 ₹ 130,000.00
4 ₹ 120,000.00
5 ₹ 160,000.00

IRR= 14.42%
QUESTION
Cost of Asset ₹ 400,000.00 Year Inflows
Installation Charges ₹ - 1 ₹ 80,000.00
Scrap Value ₹ - 2 ₹ 120,000.00
Life 5 3 ₹ 130,000.00
Working Capital ₹ - 4 ₹ 120,000.00
5 ₹ 160,000.00
Discount Rate 14.00%
SOLUTION

PV OF INFLOWS= ₹ 404,406.46
NPV= ₹ 4,406.46
QUESTION
Cost of Asset ₹ 400,000.00 Year Inflows
Installation Charges ₹ - 1 ₹ 80,000.00
Scrap Value ₹ - 2 ₹ 120,000.00
Life 5 3 ₹ 130,000.00
Working Capital ₹ - 4 ₹ 120,000.00
5 ₹ 160,000.00
Discount Rate 15.00%

INITIAL OUTFLOW= ₹ 400,000.00

Year Inflows
1 ₹ 80,000.00
2 ₹ 120,000.00
3 ₹ 130,000.00
4 ₹ 120,000.00
5 ₹ 160,000.00

PV OF INFLOWS ₹ 393,938.23
NPV OF OUTFLOW ₹ 400,000.00

PI= 0.98
QUESTION
Cost of Asset ₹ 500,000.00 Year Inflows
Installation Charges ₹ 30,000.00 1 ₹ 200,000.00
Scrap Value ₹ 12,000.00 2 ₹ 200,000.00
Life 5 3 ₹ 200,000.00
Working Capital ₹ 50,000.00 4 ₹ 200,000.00
5 ₹ 200,000.00

initial outflow = cost of capital+installation+working captal

₹ 580,000.00

pay back period= initial cash outflow/expected cash outflow

2.9
QUESTION
Cost of Asset ₹ 400,000.00 Year Inflows
Installation Charges ₹ - 1 ₹ 80,000.00
Scrap Value ₹ - 2 ₹ 120,000.00
Life 5 3 ₹ 140,000.00
Working Capital ₹ - 4 ₹ 120,000.00
5 ₹ 180,000.00

initial outflow = ₹ 400,000.00

Year Cash Inflows CCINFLOW

1 ₹ 80,000.00 ₹ 80,000.00 I
2 ₹ 120,000.00 ₹ 200,000.00 N
3 ₹ 140,000.00 ₹ 340,000.00 CCN
4 ₹ 120,000.00 ₹ 460,000.00 CN+1
5 ₹ 180,000.00 ₹ 640,000.00

PBP= N+(I-CCN)/CN+1
PBP= 3.5
₹ 400,000.00
3
₹ 340,000.00
₹ 120,000.00
Question In case of equity (If Do is Given)
Ke = ?
Do = ₹ 4.00
g = 8%
Po = ₹ 30.00
Solution:
Cost of Equity
Ke = D1/Po + g
Ke = Cost of Equity 22.40%
D1 = Expected Dividend d0(1+g) ₹ 4.32
Po = Current market Price ₹ 30.00
g = Growth Rate 8%
Question In case of equity (If D1 is Given)
Ke = ?
D1 = ₹ 11.00
g = 10%
Po = ₹ 110.00
Solution:
Cost of Equity
Ke = D1/Po + g 20.00%
Ke = Cost of Equity
D1 = Expected Dividend ₹ 11.00
Po = Current market Price 110
g = Growth Rate 10%
Question In Case of Irredeemable Pre. Shares (WHEN AMT IS GIVEN)
Preference Shares ₹ 1,000,000.00
Rate of dividend 10%
Issued at par
Issued at discount of 5.00%
Issued at premium of 15.00%
Floatation Cost 1.00%

solution KP= PD/NP

ISSUED AT PAR 10.10%

ISSUED AT DISCOUNT 10.64%

ISSUED AT PREMIUM 8.78%

AT PREMIUM
MT IS GIVEN)
Question In Case of Redeemable Pre. Share Capital (WHEN AMT IS GIVEN)
Pre. Share Capital ₹ 1,000,000.00
Rate of Interest 10%
Issued at par Reedemable at par
Issued at discount 8.00% Reedemable at disc
Issued at premium 50.00% Reedemable at prem
Floatation Cost 1.00%
Tax Rate 30%
SOL
Issued at PAR ISSUED AT PREMIUM
PD ₹ 100,000.00 PD
NV ₹ 990,000.00 NV
T 30% T
RV ₹ 1,000,000.00 RV
N 10 N
KP 10.15% KP

WHEN ISSUED AT DISCOUNT

PD ₹ 100,000.00
NV ₹ 910,000.00
T 30%
RV ₹ 900,000.00
N 10
KP 10.94%
al (WHEN AMT IS GIVEN)

Years
after 10
10.00% after 10
5.00% after 10

kp= [PD+(RV-NP)/N]/(RV+NP)/2
ISSUED AT PREMIUM
₹ 100,000.00
₹ 1,485,000.00
30%
₹ 1,050,000.00
10
4.46%
Question
Capital Structure :
Sources Book Value Market value Specific Cost(%)
Equity Share Capital ₹ 4,000,000.00 ₹ 5,000,000.00 17%
Pre. Share Capital ₹ 1,000,000.00 ₹ 1,500,000.00 9%
Debenture ₹ 3,000,000.00 ₹ 3,500,000.00 8%

Tax Rate 30%

Solution
Book Value weight Specific Cost(%) weighted cost
Equity Share Capital ₹ 4,000,000.00 0.5 17.00% 0.085
Pre. Share Capital ₹ 1,000,000.00 0.125 9.00% 0.01125
Debenture ₹ 3,000,000.00 0.375 5.60% 0.021
₹ 8,000,000.00 11.73%

Market value weight Specific Cost(%) weighted cost

Equity Share Capital ₹ 5,000,000.00 0.5 17.00% 8.50%
Pre. Share Capital ₹ 1,500,000.00 0.15 9.00% 1.35%
Debenture ₹ 3,500,000.00 0.35 5.60% 1.96%
₹ 10,000,000.00 11.81%
QUESTION
Capital Structure :
Sources Rs. Each Book Value Specific Cost In %
Equity Share Capital ₹ 10.00 ₹ 400,000.00
Retained Earnings ₹ 100,000.00
Pre. Share Capital ₹ 100.00 ₹ 300,000.00 ₹ 18.00 18.00%
Debentures ₹ 100.00 ₹ 800,000.00 ₹ 12.50 12.50%
Term loan ₹ 400,000.00 12.00%
NP RV N Market Price
Debenture ₹ 95.00 ₹ 95.00 10 ₹ 95.00
Pre. Share Capital ₹ 90.00 ₹ 90.00 10 ₹ 90.00
Po D1 g
Equity Share ₹ 64.25 ₹ 8.40 7.00% ₹ 64.25

Tax Rate 30.00%

Calculation of Weighted Averare Cost of Capital.
Solution
QUESTION IN CASE OF IRREDEEMABLE DEBTS(WHEN AMT IS GIVEN)
DEBENTURE 1000000
RATE OF INTEREST 10%
ISSUED AT PAR
DISCOUNT 5%
PREMIUM 15%
FLOATATION COST 2%
TAX RATE 30%

SOLUTION
cost of debt
kd= I(1-T)/NP HERE
I=DEB*RATE
NP=DEB(1-DISCOUNT)-FC

WHEN ISSUED AT PAR 7.14%

AT DISCOUNT 7.53%

AT PREMIUM 6.19%
QUES IN CASE OF REDEEMABLE DEBTS(WHEN AMT IS GIVEN)
DEBT 1000000
INT 10% YEARS
ISSUED AT PAR REDEEMABPAR AFTER 10
DISCOUNT 5% PREMIUM 2% AFTER 10
PREMIUM 10% PREMIUM 5% AFTER 10
FLOATATIO 1%
TAX 30%

SOLUTION
KD= [I(1-T)+(RV-NP)/N]/(RV+NP)/2 I 100000
NP 990000
WHEN ISSUED AT PAR RV 1000000 WHEN ISSUED AT PREMIUM
i= 7.14% 1-T 70%
I= 6.18%
WHEN ISSUED AT DISCOUNT
I= 7.96% I 100000
NP 940000
RV 1020000
1-T 70%
UED AT PREMIUM I 100000
NP 1089000
RV 1050000
1-T 70%