FINEST QUALITY PAPER LTD COMPANY ESTABLISHMENT ANALYSIS

Presented To: Prof. Nandita Mishra Presented By: Sharvangi (BM-013075) Shubham Verma (BM-013081)

COMPANYS KEY FEATURES

AIM- To provide finest quality of products at cheap rates in comparison with its competitors. Work done is Ethical in nature. Contribution towards the society: For every 4 notebooks the customer buys, company contributes Re.1 to its rural development initiative.

EXPENSES REQUIRED FOR THE ESTABLISHMENT OF THE COMPANY

Expenses Establishment of New Plant Amount (in Rupees) 3 Cr.

Investment in Machine and Tools

1.6 Cr.

Fixed Costs Other Expenses Total Investments

20 lakhs 20 lakhs 5 Cr.

OPTIONS AVAILABLE UNDER DIFFERENT PLANS

Company issues EQUITY SHARES Option 1 Option 2 Option 3 50,00,000 @ Rs. 10 each DEBENTURES PREFERENCE SHARES 2,50,000 of Rs. 100 @ 10% EBIT 60,00,000 60,00,000 60,00,000

25,00,000 @ Rs. 10 2,50,000 of Rs. each 100 @ 12% 25,00,000 @ Rs. 10 each -

CALCULATION OF EPS
When only equity shares are issued: both equity and debentures are issued: equity and preference shares are issued.
Particulars
EBIT (-) Interest EBT (-) Tax @ 30%

1
60,00,000 60,00,000 18,00,000

2
60,00,000 30,00,000 30,00,000 9,00,000

60,00,000
60,00,000 18,00,000 42,00,000 25,00,000 17,00,000 25,00,000 .68

EAT
(-) PD EAE No. of equity shares EPS

42,00,000
50,00,000 .84

21,00,000
25,00,000 .84

Determining COST OF CAPITAL

Individual Cost of Capital: (a) on equity Shares Ke = Dividend * 100 = (.5/10) *100 = 5 % Market Price (assumed dividend .5 %) (b) on Prefeernce Shares Kp = Dividend * 100 = 10% Net Price (c) on Debentures Kd = I(1-t) *100 = 8.4% Net Price

Weighted Average Cost of Capital:

Source Equity Shares Total Amount (Rs.) 5Cr. 5 Cr. Weight 1 Cost 5% WACC 5% 5%

Weighted Average Cost of Capital:

Source Equity Shares Debentures Amount (Rs.) 2,50,00,000 2,50,00,000 Weight 0.5 0.5 Cost 5% 8.41% WACC 2.5% 4.2%

Total

5 Cr.

6.7%

Weighted Average Cost of Capital:

Source Equity Shares Preference Shares Amount (Rs.) 2,50,00,000 2,50,00,000 Weight 0.5 0.5 Cost 5% 10% WACC 2.5% 5%

Total

5 Cr.

7.5%

LEVERAGES
(b)FINANCIAL LEVERAGE (a)OPERATING LEVERAGE = EBIT = Contribution EBT EBIT Contribution = Sales- Variable Cost Sales(Expected)=1cr. Variable=20,00,000 Fixed cost =20,00,000
(c)COMBINED LEVERAGE = O.L. * F.L.

 Operating leverage =1.33

Financial leverage, In case of Equity shares=1 In case of Equity shares and debentures=2 In case of Equity shares and Preference Shares=1 So, Combined leverage, In case of Equity Shares=1.33 In case of Equity shares and debentures=2.66 In case of Equity shares and Preference Shares=1.33

INTERPRETATION
As seen, EPS is same in case of equity shares, and equity and debentures but minimum in case of preference shares so both option 1 and 2 are good. WACC is less in option 1 in comparison of option 2 and option 3 So, option 1 is an ideal condition. As from all leverages point of view combined leverage is same in option 1 and option 3 , so both the options are ideal.