MINI CASE The balance sheet and profit and loss account of GNL Limited for the year 20X5 are given below:Balance Sheet, GNL Limited (Rs. In million) 20 X4 20 x5 Liabilities and Equity 6.5 6.5Share capital 7.4 9.3Reserves and surplus 5.2 8.8Long-term dept 8.3 6.7Short-term blank borrowing 6.6 6.7Current liabilities 34.0 38.0AssetsNet fixed assets 19.6 23.2Current assets Cash and bank 0.6 1.1 Receivables 2.9 2.0 Inventories 8.2 9.3Other assets 2.7 2.4 34.0 38.0

Profit and Loss Account, GNL Limited(Rs. In million) 20X4 20X5Net sales 39.0 57.4Cost of goods sold 30.5 45.8Gross profit 8.5 11.6Operating expenses 4.9 7.0Operating profit 3.6 4.6Non-operating surplus/deficit 0.5 0.4Profit before interest and tax 4.1 5.0Interest 1.5 2.0Profit before tax 2.6 3.0Tax Profit after tax 2.6 3.0Dividends 0.9 1.1Retained earnings 1.7 1.9

Requireda. Compute the key ratios for GNL Limited for the year 20X5.b. Prepare the Du Pont Chart for the year 20X5.c. Prepare the common size and common base financial statements for GNL.d. Identify the financial strengths and weaknesses of GNL Limited.e. What are the problems in analyzing financial statements?f. Discuss the qualitative factors relevant for evaluating the performance and prospects of a company.

MINI CASE As an investment advisor, you have been approached by a client called Ramesh, who wants some help in investment related matters. Ramesh is currently 45 years old and has Rs. 600,000 in the bank. He plans to work for 15 more years and retire at the age of 60. Rameshs present salary is Rs. 400,000 per year. He expects his salary to increase at the rate of 12 percent per year until his retirement. Ramesh has decided to invest his bank balance and future savings in a portfolio in which stocks and bonds would be equally weighted. For the sake of simplicity, assume that these proportions will be maintained by him throughout. He also believes that bonds would provide a return of 7 percent and stocks a return of 13 percent. You concur with his assessment. Once Ramesh retires at the age of 60 he would like to withdraw Rs. 500,000 per year from his investments for the following 15 years as he expects to live upto the age of 75 years. He also wants to bequeath Rs. 1,000,000 to his children at the end of his life. How much money would he need 15 years from now? How much should Ramesh save each year for the next 15 years to be able to meet his investments objectives spelt out above? Assume that the savings will occur at the end of each year. Suppose Ramesh wants to donate Rs. 200,000 each year in the last three years of his life to a charitable cause. Each donation would he made at the beginning of the year. How much money would he need when he reaches the age of 60 to meet this specific need? Ramesh recently attended a seminar on human capital where the speaker talked about a persons human capital as the present value of his life time earnings. Ramesh is curious to find out the present value of his life time salary. For the sake of simplicity assume that his present salary of Rs. 400,000 will be exactly one year from now, and his salary will be paid annual installments. What is the present value of his life time salary, if the discount rate is 8n percent? Remember that Ramesh expects his salary to increase at the rate of 12 percent per year until his retirement. In answering the above questions, ignore the tax factor.

MINI CASE You have recently graduated from a business school and joined SMART INVEST as a financial analyst. Your job is to help clients in choosing a portfolio of bonds and stocks. Dinshaw Mistry, a prospective client, seeks your help in understanding how bonds and stocks are valued and what rates of return they offer. In particular, you have to answer the following questions.a. How is the value of a bond calculated?b. What is the value of a 5-year, Rs. 1,000 par value bond with a 10 percent annual coupon, if the required rate of return is 8 percent?c. What is the approximate yield to maturity of an 8-year, Rs. 1,000par value bond with a 10 percent annual coupon, if it sells for Rs. 1,060.d. What is the yield to call of the bond described in part (c), if the bond can be called after 2-years at the premium of Rs. 1.050.e. What is the general formula for valuing any stock, irrespective of its dividend pattern?f. How is a constant growth stock valued?g. Magnum chemicals is a constant growth company which paid a dividend of Rs. 6.00 per share yesterday (D = Rs. 6.00) and the dividend is expected to grow at a rate of 12 percent per year forever. If investors require a rate of return of 15 percent (i) what is the expected value of the stock a year from now? (ii) What is the expected dividend yield and capital gains yield in the first year?h. Zenith Electronics paid a dividend of Rs. 10.00 per share yesterday (D = Rs. 10.00). Zenith Electronics is expected to grow at a supernormal growth rate of 25 percent for the next 4 years, before returning to a constant growth rate of 10 percent thereafter. What will be present value of the stock, if investors require a return of 16b percent?i. The earnings and dividends of Ravi Pharma are expected to grow at a rate of 20 percent for the next 3 years. Thereafter, the growth rate is expected to decline linearly for the following 5 years before settling down at 10 percent per year forever. Ravi Pharma paid a dividend of Rs. 800 per share yesterday (D = Rs. 800). If investors require a return of 14 percent from the equity of Ravi Pharma, what is the intrinsic value per share?

MINI CASE You have recently graduated as a major in finance and have been hired as a financial planner by Radiant Securities, a financial services company. Your boss has assigned you the task of investing Rs. 1,000,000 for a client who has a 1-year investment horizon. You have been asked to consider only the following investment alternatives: T-bills, stock A, Stock B, Stock C, and market index. The economics cell of Radiant Securities has developed the probability distribution for the state of the economy and the equity researchers of radiant securities have estimated the rates of return under each state of the economy. You have gathered the following information from them:Returns on Alternative Investments State of the Probability T-Bills Stock A Stock B Stock C Market Economy Portfolio Recession0.26.0% (15.0%) 30.0%(5.0%)(10.0%) Normal0.56.0 20.0 5.015.016.0 Boom0.36.0 40.0 (15.0)25.030.0Your client is a very curious investor who has heard a lot relating to portfolio theory and asset pricing theory. He requests you to answer the following question:a. What is the expected return and the standard deviation of return for stocks A,B,C, and the market portfolio?b. What is the covariance between the returns on A and B? returns on A and C?c. What is the coefficient of correlation between the returns on A and B? returns on A and C?d. What is the expected return and standard deviation on a portfolio in which stocks A and B are equally weighted? In which the weights assigned to stocks A,B and C are 0.4, 0.4, and 0.2 respectively?e. The beta coefficients for the various alternatives, based on historical analysis, are as follows: Security Beta T-bills 0.00 A 1.20 B (0.70) C 0.90i. What is the SML relationship?ii. What is the alpha for stocks A, B, and C?f. Suppose the following historical returns have been earned for the stock market and the stock of company D.

PeriodMarketD 1(5%) (12%) 2 46 3 812 4 1520 5 96What is the beta for stock D? How would you interpret it?g. What is Capital Market Line (CML)? Security Market Line (SML)?h. What is the basic difference between the CAPM and the APT?

MINI CASE Delphi Capital Management (DCM) is an investment management firm which, inter alia, offers portfolio management service to high net worth individuals. Avinash Joshi, managing director of DCM, realized that many clients have interest inn using options, but often do not understand the risks and rewards associated with these instruments. You have joined DCM about six months ago. After majoring in finance you worked for a well known securities firm where you received good exposure to derivative instruments, before joining DCM. Appreciating your expertise, Avinash Joshi has asked you to educate and guide clients interested in using options. You have been approached by Pradeep Sharma, an eminent surgeon and long-time client of DCM, who wants to understand about options and the strategies based on options. You have decided to use the following data of Newage Hospitals Limited, a company in which Pradeep Sharma has equity shares, to guide him.

Newage Hospitals Option QuotesStock Price: 325 Calls PutsStrike Price Jan Feb March Jan Feb March 280 4853_* _ _ _ 300 343841 2 4 6 320 151820 6 9 _ 340 5814 17 19 21 360 245 _ 40 _ *A blank means that no quotation is available.

To educate your client you have to develop answers for the following questions:a) What do the following terms mean: call option, put option, strike price (exercise price), and expiration date?b) Which options are in-the-money and which options are out-of-the-money?c) Assume that Pradeep Sharma owns 1000 shares of Newage Hospitals. What are the relative pros and cons of selling a call against the position using (i) January/340 versus (ii) March/300.d) What is the maximum profit, maximum loss, and break-even price associated with the strategy of simultaneously buying March/340 call while selling March/360 call?e) What are the implications for Pradeep Sharma if he simultaneously writes March/340 all and buys March/300 put?f) What impact do the following have on the value of a call option?(i)Current price, (ii) Exercise price, (iii) Option term to maturity, (iv) Risk-free rate, and (v) V variability of the stock price. g) What should be value of the March/320 call as per the Black-Scholes model? Assume that t = 3 months, rf= 6 percent, and = 0.30.

MINI CASE Aman Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined Aman Limited as a financial analyst reporting to Ravi Sharma, the CFO of the company. He has provided you the following information about three projects, A, B, and C, that are bring considered by the Executive Committee of Sona Limited: Project A is an extension of an existing line. Its cash flow will decrease over time. Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time. Project C is concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost initially which will be followed by a huge benefit for one year. However, in the year following that a substantial cost will be incurred to raze the paviliorThe expected net cash flows of the three projects are as follows.

YearProject AProject BProject C0(15,000)(15,000)(15,000)1 11,000 3,500 42,0002 7,000 8,000 (4,000)3 4,80013,000 _

Ravi Sharma believes that all the three projects have risk characteristics similar to the average risk of the firm and hence the firms cost of capital, viz. 12 percent, will apply to them. You are asked to evaluate the projects.a) What is payback period and discounted payback period? Find the payback periods and the discounted payback periods of Projects A and B.b) What is the net present value (NPV)? What are the properties of NPV? Calculate the NPVs of projects A, B and C.c) What is internal rate of return (IR)? What are the problems with IRR? Calculate the IRRs for projects A, B and C.d) What is modified internal rate of return (MIRR)? What are the pros and cons of MIRR vis--vis IRR and NPV? Calculate the MIRRs for projects A, B, and C assuming that the intermediate cash flows can be reinvested at 12 percent rate of return.

MINI CASE After seeing Snapples success with fruit drinks, the board of directors of modern Foods is seriously considering a proposal for a lemon juice project. You have been recently hired as a financial analyst by Modern Foods and you report to Mahajan, the CEO of the company. You have been entrusted with the task of evaluating the project. The lemon juice would be produced in an unused building adjacent to the main plant of Modern Foods. The building, owned by Modern Foods, is fully depreciated. However, it can be rented out for an annual rental of Rs. 1 million. The outlay on the project is expected to be Rs. 25 million Rs. 15 million toward plant and machinery and Rs. 10 million toward gross working capital. You can assume that the outlay will occur right in the beginning. This means that there is no interest during the construction period. The proposed scheme of financing is as follows: Rs. 10 million of equity, Rs. 8 million of term loan, Rs. 5 million of working capital advance, and Rs. 2 million of trade credit. The term loan is repayable in 8 equal semi-annual installments of Rs. 1 million each. The first installment will be due after 18 months. The interest on the term loan will be 15 percent. The levels of working capital advance and trade credit will remain of Rs. 5 million and Rs. 2 million respectively, till they are paid back or retired at the end of 5 years , which is the expected life of the project. Working capital advance will carry an interest rate of 14 percent. The lemon juice project is expected to generate a revenue of Rs. 30 million a year. The operating costs (excluding depreciation and interest) are expected to be Rs. 20 million a year. For tax purposes, the depreciation rate on fixed assets will be 25 percent as per the written down value method. Assume that there is no other tax benefit. The net salvage value of plant and machinery is expected to be Rs. 5 million at the end of the year 5. Recovery of working capital, at the end of year 5, is expected to be at book balue. The income tax rate is expected to be 30 percent. Mahajan wants you to estimate the cash flows from two different points of view:a. Cash flows from the point of all investors (which is also called the explicit cost funds point of view)b. Cash flows from the point of equity investors.

MINI CASE Suman Joshi, Managing Director of Omega Textiles, was reviewing two very different investment proposals. The first one is for expanding the capacity in the main line of business and the second one is for diversifying into a new line of business. Suman Joshi asks for ypur help in estimating Omegas weighted average cost of capital which he believes is relevant for evaluating the expansion proposal. He also wants you to estimate the hurdle rate for the new line of business. To enable you to carry out your task, he has provided the following data. The latest balance sheet of Omega is given below.(Rs. In million)LiabilitiesEquity capitalPreference capitalReserves and surplus

DebentureCurrent liabilities and provisionsAssets350100200

4501001200Fixed AssetsInvestmentsCurrent Assets,Loans and advances700100

400

1200

Omegas target capital structure has 50 percent equity, 10 percent preference, and 40 percent debt. Omega has Rs. 100 par, 10 percent coupon, annual payment, noncallable debentures with 8 years to maturity. These debentures are selling currently at Rs. 112. Omega has Rs. 100 par, 9 percent annual dividend, preference shares with a residual maturity of 5 years. The market price of these preference shares is Rs. 106. Omegas equity stock is currently selling at Rs. 80 per share. Its last dividend was Rs. 2.80 and the dividend per share is expected to grow at a rate of 10 percent in future. Omegas equity beta is 1.1, the risk-free rate is 7 percent, and the market risk premium is estimated to be 7 percent. Omegas tax rate is 30 percent. The new business that Omega is considering has different financial characteristics that omegas existing business. Firms engaged purely in such business have, on overage, the following characteristics: (i) Their capital structure has debt and equity in equal proportions. (ii) Their cost of debt is 11 percent. (iii) Their equity beta is 1.5.a. What sources of capital would you consider relevant for calculating the weighted average cost of capital?b. What is Omegas post-tax cost of debt?c. What is Omegas cost of preference?d. What is Omegas estimated cost of equity using the dividend discount model?e. What is Omegas estimated cost of equity using the capital asset pricing model?f. What is Omegas weighted average cost of capital? Use the capital asset pricing model to estimate the cost of equity.g. What would be your estimate for the cost of capital for the new business?h. What is the difference between company cost of capital and project cost of capital?

MINI CASE PTR is a venerable restaurant of Bangalore set up decades ago by Prakash Naik. Despite its phenomenal success, Prakash Naik was unwilling to set up branches because he was concerned about the dilution of quality. In the last decade, however, alluring business opportunities and competitive compulsions persuaded Prakash Naik to set up a few branches of PTR at select locations in Bangalore and Chennai. This initiative, financed mainly through internal accruals, turned out to be quite profitable. Buoyed by this success, the Naik family, which owns 100 percent equity of PTR Limited, has chalked up an ambitious plan to set up a nation-wide chain of PTR restaurants and to support this initiative it wants to raise Rs. 100 crore through an initial public offering. Prakash Naik has asked you to brief the family members on various issues associated with the move, by answering the following questions(a) What the pros of going public?(b) What are the cons of going public?(c) What conditions should a company satisfy to make an IPO?(d) What is book building?(e) What are the principal steps in an IPO?(f) What role is played by the lead manager?(g) What are the costs of a public issue?(h) Can a company making a public issue freely price its shares?(i) Why is under-pricing of IPOs a universal phenomenon?(j) What is a rights issue?(k) What are the different kinds of dilution?

MINI CASE Divya Electronics was promoted about twenty years by Dipankar Mitrs, who continues to be the Executive Chairman of the firm. Initially, the firm employed a dept-equity ratio of 1.5:1 as the promoter had limited resources. While the firm had a few bad patches, it has performed fairly well and has been reasonably profitable. Over time, the proportion of dept in the capital structure diminished. The firm also issued bonus shares on two occasions once before making its IPO eight years ago and once subsequently. The financial statements of the firm for the just concluded financial year are given below.The profit and loss account has been cast in the contribution format to facilitate the calculation of leverages. Balance Sheet Profit And Loss Account

Sources of Funds Rs. In million Rs. In million1. Shareholders Funds Revenues 800 Paid up equity capital (140 million shares of 1400 Variable costs 4800 Rs. 10 each) Contribution margin 3200 Reserve and surplus 2500 Fixed operating costs 18002. Loan Funds 2000 Profit before interest and taxes 1400 6000 Interest 200Application of funds Profit before tax 1200 1. Net Fixed Assets 4000 Tax 3602. Net Current Assets 2000 Profit after tax 840 6000

The current market price per share is Rs. 115, giving a retrospective PE ratio of 19.17, the highest in its history. Dipankar Mitra and his family holds 45 million shares of Divya Electronics. The rest is held more or less equally by institutional investors and retail investors. The firm has an expansion project on hand that will require an outlay of Rs. 2000 million which will be supported by external financing. The expansion project is expected to generate annual revenue of Rs. 2400 million. Its variable costs will be 60 percent of revenues and its fixed operating costs would be Rs. 500 million. The expansion can be completed quickly. EMAN Consultants, the merchant bankers of Divya Electronics, believe that Divya Electronics can make public issues of equity shares at Rs. 106. The issue expenses, however, will be Rs. 6 per share. The other option is to privately place debentures carrying an interest rate of 8 percent. The board of directors of Divya Electronics would be meeting shortly to decide on the means of financing to be adopted for the proposed expansion plan. You have been requested to present an analysis of the two options. In particular, you have been asked to.a. Compute the EPS-PBIT indifference point for the two financing options.b. Calculate the EPS for the following year under the two financing options assuming that the expansion project would be fully operational.c. Show how the degree of total leverage will change under the two financing options.d. Highlight any other issues that you believe are important for taking the decision.