Pakistan Textile limited (PTL)

Consolidated BALANCE SHEET

as at December 31st, 2016

2016
(in million)
Issued, subscribed & paid-up capital (par value of Rs. 10 /
Rs4,000
share)
Preferred Stock (Rs. 10 each) 800
Capital Reserve 600
Revenue Reserves 500
Surplus on Revaluation of Fixed Assets 100
Donated Capital 100
Cumulative Translation Adjustment 50
Net Unrealized Investment Gain (Loss) (10)
Redeemable Preferred Stock 150
Long-Term Loans 900
Liabilities Against Asset Subject to Financial Lease 600
Deferred Tax Liabilities 50
Warranty Obligations 100
Current Portion of Liabilities Against Asset Subject to
50
Financial Lease
Trade and Other Payables 800
Accrued Mark-up 20
Short Term Borrowings 100
Current Portion of Long-Term Debt 100
Sales Tax Payable 10
TOTAL 9,020

Property, Plant and Equipment 4,000

Capital work-in-progress 200
Goodwill 300
Patents 100
Franchises 70
Long Term Investments 500
Long Term Loans and Advances 100
Stores, spares and loose tools 100
Stock in Trade 1,100
Trade Debts 900
Loans and Advances 300
Prepayments 100
Other Receivables 50
Short Term Investments 600
Cash and Bank Balances 600
TOTAL 9,020
 Pakistan Textile limited (PTL)
Consolidated Profit and Loss Account
for the year ended on December 31st, 2016
2016 (Rs)
(in million)
Sales 11,000
Share in Associates-net of tax 600
Cost of Sales 5,000
Distribution Cost 1,500
Administration Expenses 400
Other Operating Income 200
Other Operating Expenses 100
Finance Cost 500
Exchange Loss 200
Provision for Taxation (35%) 1,155
Net Profit after taxation 2,275
Cumulative Effect of Change in Accounting (370)
Principle (Loss)
Discontinues Operations 300
NOTES: Net Income 2,205
1. Market Price of its share is Rs. 500.
2. 1st Interim Dividend is Rs. 2/share, 2nd Interim Dividend is Rs. 2/share and the
proposed Final Dividend is Rs.6/share.
3. The company issued 6,000 shares 1st of July and 4,000 at the end of September for
the year 2016.
4. The company has 10,000 convertible bonds. Each option gives the right to buy 3
shares and its share price is Rs.15. If anyone decides to exercise their options, there
can exercise till 2016.
5. Preferred dividends paid during the year are Rs. 200 million out of which 50%
belong to Redeemable Preferred Stock.
6. Depreciation and amortization expenses amount to Rs. 24 million.
7. Financial distress cost is assumed as follows:
Debt Ratio 0 10 20 ……… 90
Financial Distress in Rs. 0 100 200 ……… 900
(million)
Financial Distress in % 0 10 20 ……… 90
8. Fixed cost is assumed to be 30% of total cost.

Assignment 3

Considering the EBIT in the above income statement and the information given, prove all
the propositions of Modigliani and Miller.
[Note: VL = VU + PV (interest tax shield) - PV (Financial distress costs)]
Also identify the optimum capital structure.

Assignment 4

Calculate WACC for the optimum capital structure.

Assignment 5

Pakistan Textile limited (PTL) is contemplating the purchase of a new high-speed grinder to
replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost
of Rs.60 million it was being depreciated under MACRS using a 5-year recovery period. The
existing grinder is expected to have a usable life of 5 more years.

The new grinder costs Rs.105 million and requires Rs.5 million in installation costs; it has a 5-
year usable life and would be depreciated under MACRS using a 5-year recovery period. PTL
can currently sell the existing grinder for Rs.70 million without incurring any removal or cleanup
costs. To support the increased business resulting from purchase of the new grinder, accounts
receivable would increase by 10%, inventories by 20% and accounts payable by 15% with no
changes in cash.

At the end of 5 years, the existing grinder is expected to have a market value of zero; the new
grinder would be sold to net Rs.29 million after removal and cleanup costs. Sales will increase
by 20% per year for new grinder while there will be no change in sales for old grinder.
Determine Initial Investment, Incremental Cash Inflows for all years and Terminal Cash Flow
associated with proposed decision.
[Note: take help of statements of PTL given above]

Assignment 6

Pakistan Textile limited (PTL) is contemplating to renew the existing grinder. The existing
grinder was purchased 2 years ago at an installed cost of Rs.60 million it was being depreciated
under MACRS using a 5-year recovery period. The existing grinder is expected to have a usable
life of 5 more years.

The renewed grinder costs Rs.20 million; it has a 5-year usable life and would be depreciated
under MACRS using a 5-year recovery period. To support the increased business resulting from
purchase of the new grinder, accounts receivable would increase by 10%, inventories by 20%
and accounts payable by 15% with no changes in cash.

At the end, the renewed grinder is expected to have a market value net Rs.29 million after
removal and cleanup costs. Sales will increase by 20% per year for renewed grinder while there
will be no change in sales for old grinder.
Determine Initial Investment, Incremental Cash Inflows for all years and Terminal Cash Flow
associated with proposed decision.
[Note: take help of statements of PTL given above]
 Assignment 7

Pakistan Textile limited (PTL) is contemplating to expand the existing grinder. The existing
grinder was purchased 2 years ago at an installed cost of Rs.60 million it was being depreciated
under MACRS using a 5-year recovery period. The existing grinder is expected to have a usable
life of 5 more years.

The expanded grinder costs Rs.30 million; it has a 5-year usable life and would be depreciated
under MACRS using a 5-year recovery period. To support the increased business resulting from
purchase of the new grinder, accounts receivable would increase by 10%, inventories by 20%
and accounts payable by 15% with no changes in cash.

At the end, the expanded grinder is expected to have a market value net Rs.10 million and
removal and cleanup costs are Rs.05 million. Sales will increase by 20% per year for expanded
grinder while there will be no change in sales for old grinder.
Determine Initial Investment, Incremental Cash Inflows for all years and Terminal Cash Flow
associated with proposed decision.
[Note: take help of statements of PTL given above]

Assignment 8

For all the assignments 5, 6 and 7, use the WACC calculated to determine NPV and IRR.

Assignment 9

Construct Pro forma balance sheet for PTL for 2017 using the information given in assignment 3.

[Note: assume values which are not given but state the reasoning for it]