Professional Documents
Culture Documents
Income Statement
Credit Sales 8000
Cost of Goods Sold 5400
Gross Profit 2600
Selling & Admin Expenses 1200
Interest Expenses 400 1600
Profit Before Taxes 1000
Taxes (44%) 40
Profit After Texes 560
Working #1
Calculation of Total Liabilities and Current Liabilities
We Know that Total Liabilities/Equity=1/1=1
TL/3750=1
TL=3750
CL+LTL=TL
CL+2650=3750
CL=3750-2650
CL=1100
Working #2
Calculation of Current Assets and Fixed Assets
Current Ratio=CA/CL=3/1
CA/1100=3
CA=3X1100=3300
CA+FA=TA
3300+FA=7500
FA=7500-3300
4200
Working#3
We know that average collection period= (Receiveable/Credit Sales)x360
Receiveable/8000x360=45
Receiveable=45x8000/360=1000
Working#4
Calculation of Cost of Goods Sold
Inverntory Turnover Ratio=Cost of Goods Sold/Inventory
CGS/Inventory=3
CGS/1800=3
CGS=3X1800=5400
Working#5
Net Profit Margin=NPAT/Sales
NPAT/8000=7%
NPAT=7%X8000
560
Working#6
Net Profit before Tax=X
Then Tax=44%of X is=.44X
and NPAT=x-.44x=.56X
X(1-.44)=.56X
.56X=560
X=560/.56=1000
Q.2 Sian Bodla Corporation
Cashflow Statement for the year ended Dec 31,2002
1- Cashfow from Operating Activity
Profit from Operations(PBIT) 13
Add Back- Depriciation 5
18
Working Capital Items
Increase in A/C Receiveable -7
Increase in Inventory -3
Decrease in Note Payable -20
Increase in A/C Payable 3 -9
Interest Paid -2
Tax Paid -2 -13
2- Cashflows from investing activities
Acquisition of Fixed Asset -10
Disposal of Assets 3 -7
3- Cashflows from Financing Activities
Issuance of Longterm debt 15
Issuance of Common Stock 6
Cash Dividend -3 18
Net Decrease in Cash -2
Cash and Cash equvelent at the begning of year 5 5
Cash and Cash Equvelent at the end of year 3
Salvage value=9000-4000=5000
Salvage value=5000-(-13500)=-8500
c12-4
Remaining life of the machine=4years Annual Saving=12000
Present Salvage Value=$8000 Income Tax rate=40%
Salvage Value after 4 years=$2000 After Tax Cash Flows from sales of Old Machine
Tax Book Value=$4520 Gross Procedes=8000
Depriciation this year Gain Sales (8000-4500)3480
Cost of new machine=60000 Income Tax rate 40%=1392
Salvage Value after 4 years=15000 Net Procedes=6608
3 years property class for depriciation 15000-2000=13000
Depriciation
Gross procedes=3000
Lasson sale(3000-4520)=-1520
Income tax@40%on gain
62000*33.33%
c-13-5
Project A
Cash
flow
generat
Cash flow ed
needed at the during Outstanding Payback
Year begning of year the year Investment period
0
0 28000
1 28000 7184 20816 1year
2 20816 8326 12490 1year
3 12490 7108 5382 1year
4 5382 6377 0 10months
Payback period in year=Cash outflow/Equal Annual cash Inflows
= (5372/6377)x12 3year10months
= 10
Project B
PI= 21600/20000
Cash = 1.08
Calculation of Payback period flow IRR= LDR+{DBDR(NPV@LDR/Sum of Absolute value of NPV at two DR)}
generat
Cash flow ed
needed at the during Outstanding Payback
Year begning of year the year Investment period IRR= 16.61
0 20000
1 20000 4660 15340 1year
2 15340 5476 9864 1year
3 9864 5266 4598 1year
4 4598 4743 0 10months
Payback period in year=Cash outflow/Equal Annual cash Inflows
(4598/4743)x12= 11.6331 3 year 11.63 months
13-8
Project Cash outflow Profitibility Index PV of Cash Inflows NPV
1 500,000 1.22 610,000 110,000
2 150000 0.95 142,500 (7,500)
3 350,000 1.2 420,000 70,000
4 450,000 1.18 531,000 81,000
5 200,000 1.19 238,000 38,000
6 400,000 1.05 420,000 20,000
PI= PV of Cash Inflows / PV of Cash Outflows
PV of Cash Inflows = PI X PV of Cash Outflows
100,000
a-Selecting project highest PI
Project Cash outflow Profitibility Index PV of Cash Inflows NPV
1 500000 1.22 610000 110000
3 350000 1.2 420000 70000
850000 1030000 180000
b- No this is not Optional Stratigy, the Optinal stratigy would have been to pick up all
those projects that have a positive NPV
14-1
Project B
Cash Flows (Ax) Probability (Px) AxPx (Ax-) Px AxPx (Ax-) Px
2,000 0.2 400 18,000,000 200 900,000
4,000 0.3 1,200 300,000 1,600 400,000
6,000 0.3 1,800 300,000 2,400 400,000
8,000 0.2 1,600 1,800,000 800 900,000
=AxPx 5,000 4,200,000 5,000 2,600,000
=(Ax-)Px = 2600000= 1612
= 4,200,000 =2049
CVa=/=2049/500=.41 CVb =/=1612/5000=.32
CH-14 Q-3
NPV= 20,000
= 10,000
NPV*= (i) 0 (ii) 30,000 (iii) 5,000
Zscore= NPV*-NPV/ = 0-20,000/10,000 = - 2.28%
= 30,000-20,000\10,000 = 1 15.77%
= 5,000-20,000/10,000 = -1.5 6.68%
14-2a
Project cost ENPV SD CV Zscore Probability NPV<0
A 100000 10000 20000 2 -0.5 30.85%
B 50000 10000 30000 3 -0.33 37%
C 200000 25000 10000 0.4 -2.5 0.62%
D 10000 5000 10000 2 -0.5 30.85%
E 500000 75000 75000 1 -1 15.77%
a-i
Domination on the basis of ENPV and SD
C Dominates A,B&D
A Dominates B & D
E neither dominates nor is dominated
a-ii- Domination on the Basis of ENPV and CV(graph)
C Dominates A,B&D
A Dominates B & D
E Dominates A,B &D
b
Zscore = NPV*-NPV/ NPV*=0
15-6
Cost of Equipment = $ 600,000 Annual cash saving forever = $ 90,000
Flotation cost of Debt = 4000 (200,000x 2%) WACC = .145
Flotation cost of Common stock = 30,000 (200, 000 x15%) P= A/2 = 90,000 / .145
Total cash outflow = 634,000 = 620,690
15-8
RM = 15 %
Rf = 10 %
B = 1.1
C RM Rf B Ke=Rf+(RM-Rf)B Px KexPrx
0.15 0.10 1 0.15 0.2 0.0300
0.15 0.10 1.1 0.155 0.3 0.0465
0.15 0.10 1.2 0.16 0.2 0.0320
0.15 0.10 1.3 0.165 0.2 0.0330
0.15 0.10 1.4 0.17 0.1 0.0170
Ke = KexPx 0.1585
15-5
Source of Financing Cash Flow wx kx wxkx
Debentures 6000000 0.375 0.078 0.02925
Prefered Stock 2000000 0.125 0.12 0.015
Common Stock 8000000 0.5 0.17 0.085
320000 shares 16000000 1 WACC= 0.12925
12.93%
Ke=13% Tax rate=40%
Kp=12% i=13%
ki=i(1-t)
ki=.13(1-40)
.13x.60
78%
16 - 4
1 2 3 4
16% Dbt - 30% 50% 50%
15% Pref Stock - - - 20%
Common Stock @ 20/m share 100% 70% 50% 30%
Interest expense - 240,000 4,000,000 400,000
Prefered stock provided - - - 150,000
b- (EBIT*-1)(1-t)-PD1/NS1 = (EBIT-2)(1+t)-PD2/NS2
(EBIT-0)(1-.5)-0/250,000=(EBIT-400,000)(1-5)-0/125,000
EBITx.5/2 = (EBIT-400,000)(.5)
EBIT=2EBIT-800,000
EBIT=800,000
(EBIT-1)(1-t)-PD1=0
EBIT* if EBIT is grater than 800,00 plan III will give higher earning per share, if EBIT is less than 800,000
Plan 1 will give higher earning.
16 - 5
NS=100000 MPS=60
6% Bonds=2000000
Interest Expense=2000000x6%=120000
Financing required=3000000 1 2 3 4
8% Bond - 100% - 50%
7% Prefered Stock - - 100% -
C.S @ 60/M/Share 10% - - 50%
Interest Expense - 240000 - 120000
Prefered Dividend - - 210000 -
New common stock to issued 50000 - - 25000
EBIT 100000 100000 100000 100000
(-) Interest Expense 120000 360000 120000 240000
EBT 880000 640000 880000 760000
(-) Tax@50% 440000 320000 440000 380000
(-) PD - - 210000 -
EACS 440000 320000 230000 380000
NS 150000 100000 100000 125000
EPS=(EACS/NS) 2.93 3.2 2.3 3.04
b- (EBIT*-1)(1-t)-PD1/NS1 = (EBIT-2)(1+t)-PD2/NS2
(EBIT*-120000).5/150000=(EBIT-360000).5/100000
3EBIT*-2EBIT=1080000-240000
EBIT*=840000
16-7
1.1 Million shares C.S MPS=20
8 Million in debt at 10%=800000
Financing required=5m
EBIT=6m Tax rate=35% 1 2 3
eareebayan 250000 - -
Debt @11% - 550000 -
Prefered Stock@10% - - -500000
EBIT 6000000 6000000 6000000
Interest (Old+New) 800000 1350000 800000
PBT 5200000 4650000 5200000
Tax(-)35% 1820000 1627500 1829000
EAT 3380000 3022500 3380000
(-)Dividend - - 500000
EACS 3380000 3022500 2880000
NS 1350000 1100000 1100000
EPS=(EACS/NS) 2.50 2.75 2.62
17-2
You own $22500 worth of GH Co stock
Your % ownership in GHCO=2250/2250000=1%
1- Sell your share in GH for $22500 in one Market.
2- Raise personal borrowing equal to 1% of GH Debt@12%
3- You now have $42500
4- Buy 1% of WB shares for $40000
5-You save $2500
a- Your Return Before After
Retun on Equity (22500x16%)= 3600 40000x15% 6000
(-) Interest Expense - -2400
Net Return $3,600 $3,600
b- when too many share holders will sell their share in hope of greater profit, the share will go down and the they will go
to buy WB share, the WB share will go up and stage will come when both the share prices will become equal. At that
point the arbitrage process will seize
17-4a
if Equity
Financed If Recaptilized
EBIT 1000000 1000000
(-)I 0 450000
EBT 1000000 550000
(-) Tax@40% 400000 220000
EAT 600000 330000
Income to Debt Holders - 450000
Income to Security H 600000 780000
b-
PV of Debt tax shiel=TcB= .40x3000000=1200000
c-i- Value of Unleaverd Firm=600000/.2=$3000000
ii-Value of leavered=Value of Unleaverd firm+Pv of Debt tax sheild
3000000+1200000
4200000
17-5
Amount of PV of Debt tax PV of bank Value of Leaverd
Value of Unleaverd Firm Debt (B) sheild (TcB) ruptcy cost firm
10000000 1000000 220000 0 10220000
10000000 2000000 440000 50000 10390000
10000000 3000000 660000 100000 10560000
10000000 4000000 880000 200000 10680000
10000000 5000000 1100000 400000 10700000
10000000 6000000 1320000 700000 10620000
10000000 7000000 1540000 1100000 10440000
10000000 8000000 1760000 1600000 10160000
Since the value of leavered firm is maximum, the family should chose$5000000