Income Statement: Particulars Sales (-) Variable costs (40% ) (=) Contribution (-) Fixed costs (Working note

1) (=) EBIT (-) Interest (=) EBT (-) Tax (=) EAT Calculation of Leverage: Operating leverage: DOL Financial leverage: DFL Combined leverage: DCL Amt (Rs.) 1,500,000 600,000 900,000 300,000 600,000 80,000 520,000 234,000 286,000

1.50 1.15 1.73 OR 1.73

Working note 1 - Calculation of fixed cost Variable cost 600,000 Total Cost 900,000 Fixed cost 300,000

Company A Ltd. 2009-10 Calculation of price as per Walter's model: P= D + r/ko(E - D) ko Earnings per share = Dividend per share = Return on investment = Cost of capital = 16.67 5 0.18 0.12

E= D= r= ko =

P = 187.5

Refer to Question 19.12 of Khan and Jain. This sum is a replica.

Part a Particulars Sales 2009 1000 2010 1300 (See Comment)

The balance sheet of Deepak Ltd. on December 31, 2009: Liabilities Amt (Rs.) Assets Share capital 150 Fixed assets Retained earnings 180 Inventories Term loans 80 Receivables Short term bank borrowings 200 Cash Accounts payable 140 Provisions 50 TOTAL 800

Amt (Rs.) 400 200 150 50

800

EFR = A/S (S) - L/S (S) - m*S1*r EFR = 144 (See Comment) A/S = L/S (spontaneous liabilities only) = S = m (assuming after tax) = S1 = r= 0.8 0.19 300 6% 1300 50%

Part b Projected balance sheet of Deepak Ltd. on December 31, 2010: Liabilities Amt (Rs.) Assets Share capital 150 Fixed assets Retained earnings 219 Inventories Term loans 152 Receivables Short term bank borrowings 272 Cash Accounts payable 247 Provisions TOTAL 1040 Calculation of Retained Earnings: RE = 39

Amt (Rs.) 520 260 195 65

1040

Forecasted performance of the capital project of Acme Ltd. Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 2,000 2,000 2,000 2,000 2,000 Costs (excluding depreciation, interest & taxes) 1,400 1,400 1,400 1,400 1,400 PBDIT 600 600 600 600 600 Depreciation 100 100 100 100 100 Accumulated depreciation 100 200 300 400 500 PBIT 500 500 500 500 500 NOPAT (PBIT(1-t)) 300 300 300 300 300 Cash flow (NOPAT + Depreciation) 400 400 400 400 400 Capital at charge (Investment - Accumulated depreciation of previous year) 1,000 900 800 700 600 Capital charge ( Capital at charge*cost of capital) 140 126 112 98 84 EVA (NOPAT - Capital charge) 160 174 188 202 216 NPV (using EVA) NPV (using cash flows) 1,086.45 1,086.45 Part b

Year 6 Year 7 Year 8 Year 9 Year 10 2,000 2,000 2,000 2,000 2,000 1,400 1,400 1,400 1,400 1,400 600 600 600 600 600 100 100 100 100 100 600 700 800 900 1,000 500 500 500 500 500 300 300 300 300 300 400 400 400 400 400 500 70 230 400 56 244 300 42 258 200 28 272 100 14 286 Part a