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

Critically review th Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GFA 330.5 365.6 491.8 563.8 953.6 1035.2 1273.4 1349.7 1539.4 1778.3 1836.9 NCA 323.1 285.8 299.7 193.0 168.9 567.2 895.3 1151.8 1087.1 1349.7 1639.0 INVST 12.3 51.0 191.5 122.8 328.8 544.6 729.5 1068.1 1832.2 1668.9 2397.7 NW 333.3 385.7 538.3 638.3 937.5 1260.8 1712.4 2102.6 2487.6 3043.0 3658.2 Debt NS 200.3 1221.1 115.2 1505.0 146.5 1721.3 160.2 2039.4 260.1 2798.8 186.6 3337.8 264.3 6560.7 177.3 7736.8 111.6 9426.1 83.7 10116.5 58.3 10588.2 PBIT 197.0 244.9 327.4 385.2 654.2 874.2 1130.5 1420.1 1668.4 1865.6 2154.4 INT 32.2 27.2 29.5 20.2 57.0 33.9 29.3 22.4 13.2 7.7 9.2

GFA=Gross Fixed Assets,NCA=Net Current Assets,INVST=Investment,NW=Net Worth,TD=Total debt borrowings,NS=Net Sal STBB=Short term bank borrowings,LTB=Long term borrowings including debentures,DEBN=debentures,PAT=Profit after tax

er) for H Ltd.Critically review the co's financing practice. (Rs crore) PAT 60.0 79.8 97.3 122.1 185.2 232.0 404.7 570.3 808.2 1079.8 1300.3

otal debt borrowings,NS=Net Sales, =debentures,PAT=Profit after tax

Find below data for P Ltd. for the years 1990-2002.The co' has changed its accounting period from March to Dece data for theyear 1993 are for 9 months.Comment on the co's investment and financing policy. Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GFA 154.7 162.1 181.8 232.1 253.1 319.2 376.1 386.0 414.8 330.4 363.3 334.7 605.4 NCA 82.1 97.1 122.9 112.8 141.3 223.4 194.3 175.8 217.8 213.1 134.1 40.0 67.6 INVST 2.1 7.6 12.2 13.8 13.2 14.7 19.6 16.7 15.5 14.0 14.0 17.3 1.9 NW 41.3 63.6 76.5 129.3 175.9 187.4 190.9 171.7 176.2 191.6 167.8 147.3 306.4 TD 116.5 101.8 114.6 69.3 62.5 169.7 186.9 168.3 195.7 159.9 127.3 66.1 48.0 STBB 12.1 16.0 31.1 6.4 12.8 91.3 71.5 47.6 44.8 35.4 25.8 45.9 5.5 LTB 104.4 85.8 83.6 52.9 39.6 63.4 100.3 80.7 110.9 104.5 86.5 20.2 42.5 DEBN 56.7 48.3 41.2 22.8 3.2 3.0 32.7 32.7 72.2 50.0 53.8 0.0 8.3

GFA=Gross Fixed Assets,NCA=Net Current Assets,INVST=Investment,NW=Net Worth,TD=Total debt borrowings,NS=Net Sal STBB=Short term bank borrowings,LTB=Long term borrowings including debentures,DEBN=debentures,PAT=Profit after tax

ing period from March to December in 1993,thus, ncing policy. (Rs crore) NS PAT 391.2 -8.2 523.1 26.7 689.5 21.5 672.0 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

otal debt borrowings,NS=Net Sales, =debentures,PAT=Profit after tax

Firm L and U have same expected earnings before interest and taxes of Rs 25,000.Firm U has employed 100% equity of Rs 1 Rs 50,000 equity and Rs 50,000 debt at an expected rate of return(cost of debt) of 15%.You are required to calculate for ea (a)earnings of all investors and (b)value of interest tax shield under the following alternatives:(1)no corporate & personal t (2)50% corporate taxes & 0% personal taxes (3)50% corporate taxes & 30% personal taxes and (4)50% corporate taxes,20% and 40% personal taxes on interest income.

has employed 100% equity of Rs 100,000 while firm L has employed u are required to calculate for each firm: ives:(1)no corporate & personal taxes and (4)50% corporate taxes,20% personal taxes on dividend income

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 premium is 9.0%. S is considering a new project with similar risk,but the project will be financed 30% by debt and 70% by equity. Debt is risk free.What is the expected rate of return on equity that the project should earn to be acceptable by the firm?

arket premium is 9.0%. bt and 70% by equity. n to be acceptable by the firm?

Given below are the protfolio for 4 shares: Share Beta Investment(Rs) A 0.8 100,000 B 1.25 100,000 C 1 75,000 D 0.6 125,000

What is the expected rate of return on ypur portfolio if the risk-fre expected market rate of return is 16%?

rn on ypur portfolio if the risk-free rate of return is 9% and the

X Co' has a net operating income of Rs 2,00,000 on an investment of Rs 1,000,000 in assets.It can raise debt at a 16% rate o (a)Using the NI approach and an equity capitalization rate of 18%,compute the total value of the firm and the WACC if the (b)Rs 300,000 debt and (c) Rs 600,000 debt. (b) Using the NOI approach and an overall capitalization rate of 12%,compute value of shares and the cost of equity if the firm has (a)no debt (b)Rs 300,000 debt and (c) Rs 600,000 debt.

s.It can raise debt at a 16% rate of interest.Assume that taxes dont exist. of the firm and the WACC if the firm has (a)no debt pitalization rate of 12%,compute the total value of the firm , Rs 600,000 debt.

Firm L & Uare in the same risk class and are identical in every respect except that Firm L is levered and Firm U is unlevred.F outstanding.Both firms earn 18% before intrest and taxes on their total assets of Rs 800,000.Assume a corporate tax rate o 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 an optimum capital str (c) Acc. to NOI approach,the values for Firms A and B computed in Part A using the NI approach are not in equillibrium. Under such a situtation,an investor can secure same return at lower cash outlay through the arbitrage process.Assume tha Show the arbitrage process.When would this arbitrage process stop?

levered and Firm U is unlevred.Firm L has 12% Rs 400,000 debentures 00.Assume a corporate tax rate of 50% and a pure equity capitalization

firms has an optimum capital structure and why? roach are not in equillibrium. he arbitrage process.Assume that an investor owns 5% of L'shares.

The values for 2 firms X-unlevered and Y-levered,with Rs 600,000 debt at 6% rate of interest are given below. An investor holds Rs 20,000 worth of Y's shares.Show the process by which he can earn the same return at a lesser cost. 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 0.125 Market 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

est are given below. e same return at a lesser cost.

2 firms A &B are identical in all respect except that B has Rs 500,000 debt outstanding at a 6% rate of interest.The values o Particulars A(Rs) B(Rs) Assume that an investor owns 10% of A's shares.How can the inve Net operating income,X' 150,000 150,000 Cost of debt,INT=Kd*D 0 30,000 Net Income,NI 150,000 120,000 Equity capitalization rate,Ke 0.1 0.15 Market value of Equity,E 1,500,000 800,000 Market value of Debt,D 0 500,000 Total value of the firm,V=E+D 1,500,000 1,300,000 Overall capitalization rate,Ko 0.1 0.1154

a 6% rate of interest.The values of the 2 are given below: % of A's shares.How can the investor obtain same return at a lower cost?

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 530,000.Caluclate the cos If an investor owns 5% of the levered firm's shares,how can he be benefited by resorting to the arbitrage process?

+El=Rs 530,000.Caluclate the cost of equity and WACC for the 2 firms. o the arbitrage process?

A new co' proposes to invest Rs 10 lakh in assets and will maintain its capital structure at book value.It is expected to earn The co' wants to have an optimum mix of debt and equity.The cost of debt and equity-capitalization rate at different debtD/E ratio Cost of Debt Equity capitalization rate 0 0 0.125 (a)What is the optimum capital structure for this company 11.11% 0.05 0.13 (b)If the MM hypothses is valid,what should be the equity-capitaliza 0.25% 0.05 0.136 0.43% 0.06 0.143 0.67% 0.07 0.16 1.00% 0.08 0.18 1.50% 0.1 0.2

ok value.It is expected to earn a net operating income of Rs 160,000. alization rate at different debt-equity ratois are as follows:

ure for this company should be the equity-capitalization rate at different D/E ratios?

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 & Y as per the Expected Net operating income,X' 50,000 50,000 (a)Corporate income taxes dont exist 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 500,000 360,000 Market value of Debt,D 0 200,000 Total value of the firm,V=E+D 500,000 560,000 Overall capitalization rate,Ko 0.1 0.09 D/E ratio 0 0.556

or firms X & Y as per the MM thesis.Assume that axes dont exist of Ko=12.5%

The following table has the equillibrium values for 2 firms M & N as per the Modigliani-Miller approach: Recompute the values for firms M and N in accordnce with the traditional theory.Assume that the cost of equity of the firm Particulars M(Rs) N(Rs) Net operating income,X' 12,000 12,000 Cost of debt,INT=Kd*D 0 2,000 Net Income,NI 12,000 10,000 Overall capitalization rate,Ko 0.08 0.08 Total 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

ller approach: that the cost of equity of the firm M is 10% and for firm N is 10.5%

A co' has set its target D/E ratio at 1:1 and target payout ratio at 40%.The company wants to achiveve a growth rate of 20% before tax return on assets of 21%.Its sales-to-assets ratio is 1.8 times.The current interest rate is 12%.The corporate tax ra Can the company sustain its intended growth?What should it do to achieve the growth rate?

to achiveve a growth rate of 20% per annum.The co' is expecting t rate is 12%.The corporate tax rate for the co' is 35%.