Que 1

Part - A

T=0
T=1
$
(110,000) $

1 Cash Flow
2 Discount Rate @ 10%
3 PV
4 NPV( Inflow-Outflow)
Part- B

$
$

1
(110,000) $
3,721

T=2
30,000
0.9091
27,273

T=3
### $ 30,000
0.8264

24,792

0.7513
$

22,539

Refer Doc. Notes

Part- C

Improved Machine replacement

T=0
T=1

T=2

T=3

1 Cash Flow
Outflow $

(150,000)

Incremental Revenue

2 Discount Rate @ 10%

3 PV
4 NPV( Inflow-Outflow)

1
$

(150,000) $

1,628

40,000

### $

0.9091
36,364

0.8264
$

33,056

40,000
0.7513

30,052

QUE -2

A Mini-case on Relevant Cash Flows (6 Points)

Items (in thousands of dollaT=0
1 Revenues
2 Raw Material Costs
3 Direct costs
4 Depreciation
5 EBIT (1-2-3-4)
6 Tax Rate 40% of 5
7 NOPAT (5-6)
8 Increase in Inventories
9 Capital Expenditures
10 Cash Flow of Project (7+4
11 NPV of line 10 @11%

T=1 to 4
T=5
12,000
12,000
4,000
4,000
1,000
1,000
4,000
4,000
3,000
3,000
1,200
1,200
1,800
1,800
-400
0
400
-20,000
0
0
-20,400
5,800
6,200
$1,274

The cash flow projections did not include effect of accounts receivables and payables. The average collection per
expected to be 50 days, and 36 days respectively based on 365 days.
Change in WCR
Accounts receivable

Accounts Payable

(sales/365)* 50

Total Inflow
T=4
T=5
$ 30,000 $ 30,000 $ 150,000
0.683
$

20,490

T=4

40,000

0.6209
$

18,627 $ 113,721

T=5

Total

40,000 $ 200,000

0.683
$

27,320

0.6209
$

24,836

3.7907
$ 151,628

The firm replaces the old machine with new machine. Two years later
improved machine becomes available which makes the existing ma
obsolete with no salvage value. The improved machine will cost $150
last five years. The annual additional cost savings over the previous m
is expected to be $40,000. This machine will be depreciated on a stra
towards a zero book value. Other items remain same

es. The average collection period for receivables and average payment period for payables are

new machine. Two years later, an

hich makes the existing machine
roved machine will cost $150,000 and
st savings over the previous machine
e will be depreciated on a straight line
remain same

Calculation of Cost of Capital

Part A
Particulars
A
1. E
2. D/E
3. kD %
4. A (Business Risk)1 A = E /{1+D/E}1
5. % Business Risk 4/1
6. % Financial Risk (100-line 5)
7. E for sample firms; A x{1+(D/E)}1
E = A x{1+ (1-t) D/E}

Part B

8. kE: = RF + MRP x E
9. WACC: = kD(1-T)x D/(D+E) + kE x E/D+E
E/(D+E)
D/(D+E)
Refer the document file

B
1.2
1.25
6
0.53
53%
47%

0.95
1.85
7
0.33
33%
67%

1.00
5.05
4.58
0.44
0.56

0.77
5.038
4.95
0.35
0.65

1.35
1.35
7.5
0.57
57%
43%

1.45
1.7
7.25
0.54
54%
46%

1.12
5.056
5.17
0.43
0.57

1.18
5.059
5.07
0.37
0.63

Average
1.55
1.3
3.4
1.91
8.5
7.25
0.35
0.466
35%
47%
65%
53%
1.19
5.060
5.75
0.23
0.77

1.05
5.05
5.10

Homework on Financial Analysis:

QUE - 1

PART- A
Managerial Income Statement
2003
1 Sales
2 EBIT
3 NOPAT (2x.6)
4 Interest A Tax
5 Net Income
Managerial Balance Sheet
6 Cash
7 Accts. Receivable
8 Inventories
9 Accts. Payables
10 Accrued Expenses
11 WCR (7+8-9-10)
12 Net Fixed Assets
13 Invested Cap (11+12+6)
14 Short Term Debt
15 Long Term Debt
16 Owners Equity
17 Cap Employed (14+15+16)

Managerial Cash Flow Statement

18 NOPAT
19 Depreciation
20 Operating Cash Flow (18+19)
21
Change In Cash Balance
22
Change in WCR
23 Change in Net Fixed Assets
24
Depreciation
25 Capital Expenditures (23+24)
26 Investment CF (22+25-21)
27 Free Cash Flow(20+26)
28 Financial Cash Flows
29
Interest After Taxes
30 Change in Short Term Debt
31 Change in Long Term Debt
32 CF to Debt (29+30+31)
33
Dividends to Equity
34
New Equity Issued

110

2004
$
22,100
650
386
66
320

130

600
2,730
2,800
1,400
200

3,100
3,200
1,600
260
3,930
1,200
5,730
300
1,300
4,130
5,730

538
0
250
-510
-100
0

-78
200
-100
-200
0

35 CF to Equity (33 + 34))

36 Free Cash Flow (32+35)

2004

2005
$
24,300
900
538
78
460

267

350

Remarks
$
31,600
1,350
810 Tax @40%
160
650

300
4,200
4,300
2,050
350

4,440
1,300
6,090

6,100
1,440
7,840

500
1,200
4,390
6,090

1,900
1,100
4,840
7,840
Inflow or
Outflow
810
0

538

810 Inflow
50
-1,660
-140
0

-100
-360
178

-1,610 Outflow

-140 Outflow
940 Outflow
160
-1400
100

22

outflow
Inflow
-1140 Inflow

200
0

-200
-178

200 outflow
940 Inflow

Homework on Financial Analysis:

QUE - 1

PART -D
TABLE - 1

MANAGERIAL BALANCE SHEET & CASHFLOW STATEMENT

BALANCE SHEET
Item
Cash

New Amt

INCOME STATEMENT

Old Amt
1,285

$300

Item
1. Sales

WCR

3215

6,100

2. EBIT

Net Fixed Assets

1440

1,440

3. NOPAT

Invested Capital

5940

7,840

4. Interest1
5. Int. After Tax

Short Term Debt

1,900

6. EBT (2-4)

Long Term Debt

1100

1,100

7. Tax 40% of 6

Owners Equity

4840

4,840

8. Net Income(3-5 or 6-7)

Cap. Employed

5,940

7,840

Dividends

Part D: Assume that firm can improve its cash conversion cycle for 2005 such that
i. It will have an average collection period of 30 days, an average payment period of 33
ii. Inventory turnover of 8.
iii. Accrued expenses will remain unchanged.
iv. Further assume that interest expense will be 4% of EBI
v. Tax rate will remain at 40%.
VI. Sales and EBIT will not change.
VII. Use 365 days in a year.
VIII. Assume that dividends in 2005 will be $328 instead of $200,
IX. Any cash savings derived from reduction in working capital will be used to pay short t

sis:

& CASHFLOW STATEMENT

ME STATEMENT

CASH FLOW STATEMENT

Amount
$31,600
1,350

Item
1. NOPAT .6 x EBIT
2. WCR

Amount
810

Inflow

1,225

Inflow

3. Net Fixed Assets

-140 Outflow

54

4. Cash Balance

-935

32

5. FCF (1+2+3+4)

960

810

1,296

6. Dividends

Inflow

-328

518

7. Int. A. Taxes

778

8. S.T & LT Debt

-600

328

9. FCF (6+7+8)

-960 Outflow

or 2005 such that

ge payment period of 33 days.

will be used to pay short term debt.

-32

TABLE -2
Item
Formula

Working Capital Required

Accounts Receivable

Inventories

Sales/365 x 30 days

COGS/8

31600/365 x 30

25100/8 =

Acct. Payables
(COGS + Inventory)/365x 33

25100+(3200-4300)/365 x 33 =

New AMT 2005

2597

3138

2170

Old AMT 2005

4,200

4,300

2,050

Old AMT 2004

3,100

3,200

1,600

Change in WCR

Decrese in Accounts Receivable

Decrese in Inventory
increse in accounts payable
Increse in Accrued Exp

503 Inflow
63 Inflow
570
90
1,225

New WCR = A/R + Inventory A/Payable Accrued Exp

Accrued Exp

WCR

350
350

3215
6100

260

4440

Homework on Financial Analysis:

QUE - 1

PART-B

Compute ROE, ROIC and their components for 2005:

(4 points)

ROE = Net Inc /Equity = EBIT/Sales x Sales/Inv. Cap x EBT/EBIT x Inv. Cap/Equity x Net Inc/EBT

Margin x Turnover x Int. Factor x Lev. Factor x Tax Fact

Particulars
Formulae
1 Op. Margin
EBIT/Sales
2 Turnover
Sales/Inv. Capital emp
3 ROICBTax
EBIT/Inv. Capital emp
4 Int. Factor
EBT/EBIT
5 Lev. Factor
Inv. Cap/Equity
6 Financial Multiplier
EBT/EBIT x Inv Cap/Equity
7 Tax Factor
Net Inc/EBT
8 ROE
Net Inc/Equity
Alternate Formula: ROE = Net. Inc/Equity = ROICAT + (ROICAT Int. RateAT) x D
9 ROICAT
10 Int. RateBT
11 Int. RateAT
12 Spread (9-11)
13 Debt Equity
14 ROE

NOPAT/InvCap
Int./Total Debt
IntAT/T. Debt
(ROICAT Int.RateAT)
T. Debt/Equity
Net Inc/Equity

PART - C Refer the Document file for ans.

alysis:

(4 points)

x Inv. Cap/Equity x Net Inc/EBT

Factor x Lev. Factor x Tax Factor

2003
650/22100
2.90%
22100/5730
3.86
650/5730
11.34%
540/650
0.83
5730/4130
1.39
0.83 x 1.39
1.155
320/540
0.59
320/4130
7.75%
+ (ROICAT Int. RateAT) x Debt/Equity
386/5730
110/1600
66/1600
1600/4130
320/4130

6.74%
6.88%
4.13%
2.63%
38.70%
7.75%

2004

2005

Remarks

3.70%
3.99
14.80%
0.86
1.39
1.2
0.6
10.48%

4%
4.031
17%
0.80
1.620
1.30
0.60
13.43%

8.83%
7.65%
4.59%
4.24%
38.70%
10.48%

10.33%
8.90%
5.33%
5.00%
61.98%
13.43%