Misc Topic in SFM

SARVAGYA INSTITUTE OF COMMERCE 1
RIGHT ISSUE
 A right issue is an offer to existing shareholders enabling them to buy more shares, usually at a price
lower than the current market price and in proportion to their existing shareholding.
 Under right issue a company offers the rights to its existing shareholders. The rights are given to
shareholders ‘Free of cost’. The shareholders may use these rights to buy new shares or sell these rights
in the market.
 Suppose a company has 5,00,000 issue of equity shares then it will given 5,00,000 rights (coupon) to
existing shareholders. If the subscription per share is `15 and right offer is 1:5 then the shareholders will
sent 5 coupons to company and `15, then he is allowed one new share.
 Offer price in a right issue will be lower than current market price of existing shares. A company making
right issue must set a price which is low enough to secure the acceptance of shareholders but not too low
that it dilute the earnings per share.
 Market price of shares after a right issue / Theoretical ex – right price / Post right price per share – When
a right issue is announced, all existing shareholders have the right to subscribe for new shares and so
there are rights attached to the existing shares. The shares are therefore described as ‘Cum right’ (with
right attached) and are traded cum rights. On the first day of dealings in the newly issued shares, the
rights no longer exist and the old shares are now ‘Ex - right’. After the announcement of right issue,
share prices normally fall. After the issue has actually been made, the market price per share will
normally fall because there are more shares in issue and the new shares are issued at a discounted price.
 How to calculate theoretical ex – right price per share:
(No.of existing shares∗Current price per share)+(No.of right shares∗issue price per share)
No.of existing shares+No.of right shares
 How to calculate value of a right (one coupon):

Value of one coupon = Current price per share (Before right offer) – Theoretical ex – right price per share
 How to calculate value of rights / Value of number of coupons for one new share:
Value of a right * Number of rights / coupons for one new share
OR
Theoretical ex – right price per share – Subscription for right shares
 How to calculate effect on shareholder’s wealth due to right offer:

Case A: If shareholder exercises the rights in full:
Wealth before right Wealth after right issue
(A) No. of shares before right issue Xxx (A) No. of shares after right issue xxx
(Original + Right shares)
(B) Market price per share before Xxx (B) Theoretical ex – right price per share xxx
right
(A * B) Net wealth Xxx (A * B) Total wealth xxx
Less: Cash paid for purchasing right shares (xxx)
Net wealth xxx
Case B: If shareholder sells the right:
(A) No. of shares before right issue Xxx (A) No. of original shares xxx
right
(A * B) Net wealth Xxx (A * B) Value of original holding xxx
Add: Cash received from sale of rights (xxx)
COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

CLASSES-12th, B.COM, M.COM. CPT, IPCC, FINAL, CS, ICWA, BBA, MBA, ACCA, CIMA
Net wealth xxx

Case: C If shareholder exercise rights in part and remaining rights are sold:
(Original + Right shares)
right
(A * B) Net wealth Xxx (A * B) Total wealth xxx
Less: Cash paid for purchasing right shares (xxx)
Add: Cash received from sale of rights xxx
Net wealth xxx
Case D: If shareholder ignores the right offer / No action taken by the shareholders
(Original shares)
right
(A * B) Net wealth Xxx (A * B) Net wealth xxx
 The actual market price of a share after a right issue may differ from the theoretical ex – right price. This
will occur when:
Expected yield from new funds raised ≠ Earnings yield from existing funds
QUESTIONS RELATE TO RIGHT ISSUE

Q.1 `100 share of SBC Ltd. were being quoted at `180 the company launched an experience program worth
`25 Crore and decided to make a public issue. Part of the issue was to be rights. Members were offered one
right share for every six ordinary shares held by them, at a premium of `50 per share. Determine the
minimum price that can be expected of the shares after the issue. [ICWA Final Dec. 1995]
Q.2 Axles Limited has issued 10,000 Equity shares of `10 each. The current market price per share is `30.
The company has a plan to make a rights issue of one new Equity share at a price of `20 for every four
shares held. You are required to:
(i) Calculate of Theoretical post-Rights price per share
(ii) Calculate the theoretical value of the rights alone
(iii) Show the effect of the rights issue on the wealth of a shareholders who has 1,000 Share assuming he
sells the entire rights, and
(iv) Show the effect if the same shareholders does not take any action and ignores the issue.
[CA Final Nov. 1994]
Q.3 Pragya limited has issued 75,000 equity shares of `10 each. The market price per share is `24. The
company has a make a right issue of one new equity share at a price of ` 16 for every four shares held.
You are required to:
(i) Calculate the theoretical post – rights price per shares
(ii) Calculate the theoretical value of the rights alone
(iii) Show the effect of the rights issue on the wealth of a shareholders who has 1,000 Share assuming he
sells the entire rights, and
(iv) Show the effect if the same shareholders does not take any action and ignores the issue.
[CA Final May 2003]

Q.4 ABC Limited’s Shares are currently selling at `13 per share. There are 10,00,000 shares outstanding.
The firm is planning to raise `20 Lakhs to finance a new project.
Required:
What is the Ex-right price of shares and the value of a right, if
(i) The firm offers one right share for every two share held.
(ii) The firm offers one right share for every four shares held.
(iii) How does the shareholders’ wealth change from (i) to (ii)? How does right issue increases
shareholders’ wealth? [C.A. Final, Nov. 2004]
Q.5 Ray gold Ltd. (RL) has a paid-up ordinary share capital of `200 Lakhs represented by 4 lakh shares of `
50 each. Earnings after tax in the most recent year (2009-10) were ` 80,00,000 of which `26,50,000 was
distributed as dividend. The current price/earnings ratio of these shares as reported in the financial press is
8.
The company (RL) is planning a major investment that will cost `240 Lakhs and is expected to produce
additional after-tax earnings over the foreseeable future at a rate of 15 per cent on the amount invested.
The necessary finance is to be raised by a rights issue to the existing shareholders at a price 25 per cent
below the current market price of the company’s shares.
You are require to calculate:
(i) The current Market price of the shares already in issue
(ii) The Price at which the rights issue will be made
(iii) The Number of new shares that will be issued
(iv) The price at which the shares of the company should theoretically be quoted on completion of the
rights issue (i.e. the ex-rights price) ignoring incidental and transaction costs. Assuming that the rate of
return on existing funds is 12.5% and the market accepts the company’s forecast of incremental earnings.
[I.C.W.A. Final Dec. 2005/ RTP Nov. 2010]
Q.6 Amol Ltd. makes a right issue at `5 a share of one of the new share for every 4 shares held. Before the
issue, there were 10 million shares outstanding and the share price was `6. Based on the above information,
you are require to compute:
(i) The total amount of new money raised.
(ii) How many rights are required to buy one new share?
(iii) What is the value one right?
(iv) What is the prospective ex-right price?
(v) How far could the total value of the company fall before shareholders would be unwilling to take up
their rights?
(vi) Whether the company’s shareholders are just as well as off, if right shares are issued at `5?
[CWA – Final –Dec. 2007]
Q.7 The stock of the Soni Plc is selling for £ 50 per common stock. The company then issues rights to
subscribe to one new share at £ 40 for each five shares held.
(i) What is the theoretical value of a right when the stock is selling rights – on?
(ii) What is the theoretical value of one share of stock when it goes ex – rights?
(iii) What is the theoretical value of a right when the stocks sells ex – rights at £ 50?
(iv) John Speculator has £ 1000 at the time Soni Plc. goes ex – right at £50 per common stock. He feels
that the price of the stock will rise to £ 60 by the time the rights expire. Compute his return on his £ 1000 if
he (a) Buys Soni Plc. stock at £ 50, or (b) buys rights as the price computed in part (iii) , assuming his
price expectations are valid. [RTP – May, 2010]
Q.8 The shares of Galaxy Ltd. of a face value of `10 is being quoted at `24. The company has a plan to
make a right issue of one equity share for every four shares currently held at a premium of 40 % per share.
(i) Determine the minimum price that can be expected of share after the issue.
(ii) Calculate the theoretical value of rights alone.

(iii) Show the effect of the right issue on the wealth of a shareholder who has 1,500 shares, if -
(a) He sells the entire rights and
(b) He ignores the rights. [CA – Nov. 2010]
Q.9 Monopoly Ltd. has a paid up ordinary share capital of `2,00,00,0000 represented by 4,00,000 shares of
`50 each. Earnings after tax in the most recent year were `75,00,000 of which `25,00,000 were distributed
as dividend. The current price / earnings ratio of these shares as normally reported in the financial press is
8. The company is planning a major investment that will cost `2,02,50,000 and is expected to produce
additional after tax earnings over the foreseeable future at the rate of 15 % on the amount invested. It was
proposed by CFO of company to raise necessary finance by a right issue to the existing shareholders at a
price 25 % below the current market price of the company’s shares.
(a) Your have been appointed as financial consultant of the company and are required to calculate:
(i) The current market price of the shares already in issue;
(ii) The price at which the rights issue will be made;
(iii) The number of new shares that will be issued;
(iv) The price at which the shares of the entity should theoretically be quoted on completion of the right
issue (i.e. the ex – right price), assuming no incidental costs and that the market accepts the entity’s
forecast of incremental earnings.
(b) It has been said that, provided the required amount of money is raised and that the market is made
aware of the earning power of the new investment, the financial position of existing shareholders should be
the same whether or not they decide to subscribe for the rights they are offered. You are required to
illustrate that there will be no change in the existing shareholder’s wealth. [CA – RTP – Nov. 2010]
ECONOMIC VALUE ADDED / MARKET VALUE ADDED
EVA (ECONOMIC VALUE ADDED) - Economic value added is primarily a benchmark to measure
earnings efficiency. Stern Stewart & Co. of USA has got a registered trademark for this concept. EVA as a
residual income measure of financial performance, is simply the operating profit after tax less a charge for
the capital, equity as well as debt, used in the business.
Calculation of EVA:
EVA = [ROOC – WACC] OC
ROOC = Return on operating capital
WACC = Weighted average cost of capital
OC = Operating capital
ROOC = Net operating profit after tax (NOPAT)/ OC * 100
Calculation of NOPAT:
EBIT (earnings before interest and tax) xxx
Less: Non – operating income xxx
Operating EBIT xxx
Less: Economic taxes xxx
NOPAT xxx
Calculation of operating capital:
Equity share capital xxx
Add: reserves and surplus xxx
Less: Losses xxx
Add: Preference share capital xxx
Add: Long term debts xxx
Total capital xxx
Less: Non – operating assets xxx
Operating capital xxx

Calculation of WACC: Kd + Kp + Ke
Kd = Rate of interest (1 - T) * Debt / Total capital
Kp = Rate of dividend * Preference capital / Total capital
Ke = [Rf + β (Rm - Rf)]* equity shareholder fund / Total capital
Rm - Rf = Market premium
MVA (Market value added) – This is value recorded as wealth due to increment in market prices of equity,
preference and debt. This shows premium over book value that securities of equity / preference and debt
have.
MVA = Market value of equity / preference / debt – Book value of equity / preference / debt (including
reserve)
 If market value of any security is not available then book value of that security should be
considered.
 MVA can be calculated only for entities having listed securities.
CONCEPT OF ECONOMIC VALUE ADDED AND MARKET VALUE ADDED
Q.10 DISA and Co. has provided the following information:

` in lakhs
Equity share capital (`10 each) 400
15 % Preference share capital (`10 each) 200
Reserves and surplus 220

15 % Debentures 1,600
10 % non – trade investments (Nominal value `100 lakhs) 140
Land and building held as investment 20

Advance given for purchase of plant 10
Capital work in progress 30
Underwriting commission (not written off) 20
Earnings per share 16
Tax rate 30 %
Beta factor 1.65
Market rate of return 16.25 %
Risk free rate of return 9.85 %
Calculate Economic value added by the company. [CA – Nov. 2014]
Q.11 The following data pertains to XYZ Inc. engaged in software consultancy business as on 31st
December 2010:
$ million
Income from consultancy 935.00
EBIT 180.00
Less: Interest on loan 18.00
EBT 162.00
Tax @ 35 % 56.70
105.30
Balance sheet
Liabilities $ million Assets $ million
Equity stock (10 million shares @ $ 100 Land and building 200
10 each)

Reserves and surplus 325 Computer and software 295

Loans 180 Current assets:
Current liabilities 180 Debtors 150
Bank 100
Cash 40
785 785
With the above information and following assumption you are required to compute –
(a) Economic value added
(b) Market value added
Assuming that:
(i) WACC is 12 %.
(ii) The share of company currently quoted at $ 50 each. [RTP (SFM)- May, 2012]
Q.12 ABC Limited has divisions A, B and C. The division C has recently reported on annual operating
profit of `20,20,00,000. This figure arrived at after charging `3 crores full cost of advertisement
expenditure for launching a new product. The benefits of this expenditure is expected to be lasted for 3
years. The overall cost of capital of division C is 11 % and cost of debt is 8 %. The Net assets (Invested
capital) of division C as per latest Balance – sheet is `60 crore, but replacement cost of these assets is
estimated at `84 crores. You are required to compute EVA of the Division C.
[RTP (SFM)- Nov., 2012]
Q. 13 Nappp.com Plc is a closely held company based Lincolnshire in B2B business offering logistic
services mainly to small and medium sized companies through internet, who cannot afford sophisticated
logistics practices. Company is planning to go for public issue in the coming year and is interested to know
what the company’s share will be worth. The company engaged a consultant based in Leicestershire. The
consultant evaluated company’s future prospects and made following estimates of future free cash flows.
Year 1 Year 2 Year 3 Year 4
Sales £1,00,000 £1,15,000 £1,32,250 £1,32,250
Operating income £16,000 £18,400 £21,160 £21,160
(earnings before interest
and taxes)
Less: Cash tax payments (£4,800) (£5,520) (£6,348) (£6,348)
Net operating profit after £11,200 £12,880 £14,812 £14,812
tax
Less: investment in (£1,695.65) (£1950) (£2,242.50) -
working capital
Capital expenditure (£2,347.83) (£2,700) (£3,105) -
Free cash flows £7,156.52 £8,230 £9,464.50 £14,812
Further, the company’s investment banker had done a study of the company’s cost of capital and estimated
WACC to be 12 %. You are required to determine.
(i) Value of Napp.com plc based on these estimates.
(ii) Market value added by company supposing that invested capital in the year 0 was £31,304.05.
(iii) Value per share, if company has 2,000 common equity share outstanding and debt amounting to
£4,000. [RTP (SFM) - Nov. 2010]
Q. 14 Herbal Gyan is a small but profitable producer of beauty cosmetics using the plant Aloevera. This is
not a high – tech business, but herbal’s earnings have averaged around `12 lakhs after tax, largely on the
strength of its patented beauty cream for removing the pimples. The patent has eight year to run and Herbal
has been offered `40 lakhs for the patent rights. Herbal’s assets include `20 lakhs of working capital and
`80 lakhs of property, plant and equipment. The patent is not shown on herbal’s books. Suppose Herbal’s
cost of capital is 15 %. What is the Economic value added? [RTP – May 2010]

Q. 15 Consider the following operating information gathered from 3 companies that are identical except
for their capital structures:
P Limited Q Limited R Limited
Total capital invested €1,00,000 €1,00,000 €1,00,000
Debt / asset ratio 0.80 0.50 0.20
Shares outstanding 6,100 8,300 10,000
Before – tax cost of debt 14 % 12 % 10 %
Cost of equity 26% 22 % 20 %
Operating income €25,000 €25,000 €25,000
Net income €8,970 €12,350 €14,950
Tax rate 35 % 35 % 35 %
(a) Compute the weighted average cost of capital, WACC for each firm.
(b) Compute EVA for each firm.
(c) Based on the results of your computations in part b, which firm would be considered the best
investment and why?
(d) Assume the industry P/E ratio generally 15. Using the industry norms, estimate the price for each share.
[RTP – Nov. 2009]
Q.16 Calculate EVA with the help of following information of a company:
Financial leverage 1.6
Capital structure:
Equity capital `270 lakhs
Reserves and surplus `130 lakhs
10 % Debentures `600 lakhs
Cost of equity 16 %
Income tax rate 30 %
[RTP – June, 2009]
SUSTAINABLE GROWTH RATE

Meaning – Sustainable growth rate of a firm is the maximum rate of growth in sales that can be
achieved, given the firm’s profitability, asset utilization, desired dividend payout ratio and debt
(financial leverage) ratios.
Assumptions of the model:
(i) Assets of the firm will increase proportionally to sales.
(ii) Net profit is a constant proportion of sales.
(iii) Business wants to maintain a target capital structure without issuing new equity.
(iv) Dividend pay – out ratio and debt – equity ratio of the firm are given.
(v) Business wants to maintain a target dividend payment ratio.
(vi) Increase sales as rapidly as market conditions allow.
Computation of SGR:
SGR (g) = ROE (1 – Dividend payout ratio) SGR =

𝑨𝒔𝒔𝒆𝒕𝒔
𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐚𝐟𝐭𝐞𝐫 𝐭𝐚𝐱 𝑵𝒆𝒕 𝒎𝒂𝒓𝒈𝒊𝒏∗𝑹𝒆𝒕𝒆𝒏𝒕𝒊𝒐𝒏∗
𝑬𝒒𝒖𝒊𝒕𝒚
Where ROE = 𝑨𝒔𝒔𝒆𝒕𝒔
𝐍𝐞𝐭 𝐰𝐨𝐫𝐭𝐡 𝑨𝒔𝒔𝒆𝒕 𝒕𝒐 𝒔𝒂𝒍𝒆𝒔−[𝑵𝒆𝒕 𝒎𝒂𝒓𝒈𝒊𝒏∗𝑹𝒆𝒕𝒆𝒏𝒕𝒊𝒐𝒏∗ ]
𝑬𝒒𝒖𝒊𝒕𝒚

OR
𝑰𝒏𝒄𝒓𝒆𝒂𝒔𝒆 𝒊𝒏 𝒂𝒔𝒔𝒆𝒕𝒔
SGR =
𝑨𝒔𝒔𝒆𝒕𝒔 𝒂𝒕 𝒚𝒆𝒂𝒓 𝒆𝒏𝒅−𝒊𝒏𝒄𝒓𝒆𝒂𝒔𝒆 𝒊𝒏 𝒂𝒔𝒔𝒆𝒕𝒔
OR
𝒎 (𝟏−𝒅)𝑨/𝑬
SGR = 𝑨
−𝒎 (𝟏−𝒅)𝑨/𝑬
𝑺𝟎
Where,
m = Net profit margin ratio
d = Dividend payout ratio
A = Total assets
E = Equity / Net worth
S0 = Current sales
HOW TO PREPARE INCOME STATEMENT

Particulars `
Sales xxx
Less: Operating costs (xxx)
Operating profit / EBIT xxx
Less: Interest (xxx)
Earnings before tax / PBT xxx
Less: Tax @ …. % (xxx)
Profit after tax xxx
Less: Dividend (xxx)
Retained earnings xxx
SOME OTHER RATIOS:

(1) Return on Investment (ROI) / Return on capital employed (ROCE)
𝐄𝐁𝐈𝐓
ROI / ROCE =
𝐓𝐨𝐭𝐚𝐥 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝
OR
𝐄𝐁𝐈𝐓 (𝟏−𝐓)
ROI / ROCE =
𝐓𝐨𝐭𝐚𝐥 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝
Note: Bothe equations are correct. Students can use any equation in exam.
Decision: Higher the better.
𝐍𝐞𝐭 𝐬𝐚𝐥𝐞𝐬
(2) Asset turnover ratio (ATR) =
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬
Note: Total asset does not include fictitious assets.


𝐃𝐞𝐛𝐞𝐧𝐭𝐮𝐫𝐞𝐬+𝐋𝐨𝐧𝐠 𝐭𝐞𝐫𝐦 𝐥𝐨𝐚𝐧𝐬+𝐏𝐫𝐞𝐟𝐞𝐫𝐞𝐧𝐜𝐞 𝐬𝐡𝐚𝐫𝐞 𝐜𝐚𝐩𝐢𝐭𝐚𝐥

(3) Capital gearing ratio (CGR) =
𝐄𝐪𝐮𝐢𝐭𝐲 𝐬𝐡𝐚𝐫𝐞 𝐡𝐨𝐥𝐝𝐞𝐫 ′𝐬 𝐟𝐮𝐧𝐝
Decision: Lower the better.
𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐟𝐭𝐞𝐫 𝐭𝐚𝐱+𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭

(4) Fixed interest and fixed dividend coverage ratio =
𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭+𝐏𝐫𝐞𝐟𝐞𝐫𝐞𝐧𝐜𝐞 𝐝𝐢𝐯𝐢𝐝𝐞𝐧𝐝
Q.17 Following financial data are available for PQR Ltd. for the year 2011 (Rs. In lakhs)
8 % debentures 125
10 % bonds (2010) 50
Equity shares (Rs. 10 each) 100
Total assets 600
Assets turnover ratio 1.1
Effective interest rate 8%
Effective tax rate 40 %
Operating margin 10 %
Dividend payout ratio 16.67 %
Current market price of shares 14
Required rate of return of investors 15 %
(i) Draw income statement for the year.
(ii) Calculate its sustainable growth rate
(iii) Calculate the fair price of the company’s share using dividend discount model, and
(iv) What is your opinion on investment in the company’s share at current price?
[CA – Nov. 09]
Q. 18 Following are the financial data of Platinum Limited for a year:
Particulars ` in lakhs
Equity shares (`100 each) 100
8 % Debentures 150
10 % bonds 50
Total assets 500
Assets turnover ratio 1.1
Effective tax rate 30 %
Operating margin 10 %
Required rate of return of investors 15 %
Dividend payout ratio 20 %
Current market price of share `13
You are required to –
(i) Draw income statement for the year.
(ii) Calculate the sustainable growth rate.
(iii) Calculate the fair price of the company’s share using dividend discount model.
(iv) Draw your opinion in the company’s share at current price. [CA – Nov. 2012]
Q.19 MM Ltd. had sales during last year of `10 crores. For the current year projections of the
company
 Growth in sales by 25 %
 Profit margin of 5 %

 Dividend pay – out ratio of 50 %.

 Equity share capital of `200 lakhs
 Total assets and current liabilities worth `650 lakhs and `150 lakhs respectively.
Calculate sustainable growth rate.
Q. 20 From the following information, calculate sustainable growth rate of the BOC India Ltd.
Profit and loss account `61,409
Income `24,01,484
Dividend pay – out Nil
Total assets `50,24,716
Net worth `26,28,869
Current sales `24,01,484
Sales `23,65,596
Depreciation `1,27,552
INTEREST COVERAGE RATIO
The interest coverage ratio is a financial ratio used to measure a company's ability to pay the interest on its
debt. The interest coverage ratio is also known as the times interest earned ratio.
𝐄𝐁𝐈𝐓 (𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐛𝐞𝐟𝐨𝐫𝐞 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐚𝐧𝐝 𝐭𝐚𝐱)

How to compute Interest coverage ratio =
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭
A large interest coverage ratio indicates that a corporation will be able to pay the interest on its debt even if
its earnings were to decrease. A small interest coverage ratio sends a caution signal. The lower the ratio,
the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or
lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1
indicates the company is not generating sufficient revenues to satisfy interest expenses.
Things to Remember:
(i) A ratio under 1 means that the company is having problems generating enough cash flow to pay its
interest expenses.
(ii) Ideally you want the ratio to be over 1.5.
Q. 21 Tiger Ltd. is presently working with Earnings before Interest and Taxes (EBIT) of `90 lakhs. Its
present borrowings are as follows:
` in lakhs
12 % term loan 300
Working capital borrowings:
From bank at 15 % 200
Public deposit at 11 % 100
The sales of the company are growing and to support this, the company proposes to obtain additional
borrowing of `100 lakhs expected to cost 16%.The increase in EBIT is expected to be 15%. Calculate the
change in interest coverage ratio after the additional borrowing is effected and comment on the
arrangement made. [CA – Nov. 2012]

Q.22 A company is presently working with earnings before interest and tax (EBIT) if `15 lakhs. Its
present borrowings are:
` in lakhs
15 % Term loan 50
Borrowing from bank @ 20 % 33
Public deposit @ 14 % 15
The sales of the company are growing and to support this, the company proposes to obtain additional
borrowings of `25 lakhs. The increase in EBIT is expected to be 20 %. Calculate the change in interest
coverage ratio after the additional borrowing is effected and comment on the arrangement made.
MONEY MARKET INSTRUMENTS

(1) Call money – Call money is an amount borrowed or lent on demand for a very short period. The call
money is a part of the money market where day to day surplus funds, mostly of banks are traded.
Moreover, the call money market is most liquid of all short – term money market instruments. Call money
or inter bank money market is a segment of the money market where scheduled commercial banks lend on
call or at short notice to manage the day – to – day surplus and deficits in their cash flows.
(2) Treasury bills (T - Bill) –

 Issuer – Central bank or RBI
 Nature – Negotiable instrument
 Issue mechanism – Issued at discount and redeemable at par on maturity.
 Credit risk – Nil. Considered safest and most marketable instrument in the money market as bills
are issued by the RBI.
 Price risk – Low risk, as the tenure is short.
𝐹−𝑃 365
 Yield rate = 𝑃 x 100 x 𝑚
F = Face value
P = Issue price
m = Maturity period
(3) Certificate of deposits (CD) –
 Issuer – Banks and financial institution
 Maturity – Minimum 15 days and Maximum 12 months
 Amount – Minimum 1 lakh, beyond which in multiple of 1 lakh.
 Lock in period = Nil
 Nature - Negotiable instrument
 Issue mechanism – Issued at discount and redeemable at par on maturity
𝐹−𝑃 365
 Yield = x 100 x
𝑃 𝑚
(4) Commercial paper –

 Issuer – Corporates, primary dealers and financial institution
 Maturity – Minimum 7 days and maximum 1 years
 Lock – in – period – Nil
 Nature – Negotiable instrument
 Issue mechanism – Issued at discount and redeemable at par
 Credit rating – Mandatory
 Buy – back – Issuer can buy back its own CP
𝐹−𝑃 365
 Yield = 𝑃 x 100 x 𝑚
Q.23 AXY Ltd. is able to issue commercial paper of `50,00,000 every 4 months at a rate of 12.50 % p.a.
The cost of placement of commercial paper issue is `2,500 per issue. AXY Ltd. is required to maintain line

of credit `1,50,000 in bank balance. The applicable income tax rate for AXY Ltd. is 30 %. What is the cost
of funds (after tax) to AXY Ltd. for commercial paper issue? The maturity of commercial paper is four
months. [CA – May, 2014]
Q. 24 K Limited issued commercial paper as per following details:

Date of issue 19th October, 2010
Date of maturity 17th January, 2011
Interest rate 7.25 % per annum
Face value of commercial paper `10 crores
What was the net amount received by the company on issue of commercial paper?
[CS – June, 2007]
Q.25 From the following particulars, calculate the effective interest p.a. as well as the total cost of funds to
ABC Ltd., which is planning a CP issue:
Issue price of commercial paper `97,350
Maturity period 3 months
Issue expenses: Brokerage 0.125 % for 3 months
Rating charges 0.50 % p.a.
Stamp duty 0.125 % for 3 months
[CA Final May 2006]
Q.26 X Co. Ltd. issued commercial paper as per following detail:
Date of issue 17th January 1998
Date of maturity 17th April 1998
No. of days 90
Interest rate 11.25%
What was the net amount received by the company on issue of commercial paper?
[CA Final May 1998, CA Final June 2009 adapted]
Q.27 M Ltd has to make a payment on 30the January, 2004 of ` 80 lakhs. It has surplus cash today, i.e. 31st
October, 2003; and has decided to invest sufficient cash in a bank’s certificate of Deposit scheme offering
on yield of 8% p.a. on simple interest basis. What is the amount to be invested now?
[CA Final Nov. 2003, CA Final Nov. 1998 adapted]
Q.28 RBI sold a 91 day T-bill of face value of ` 100 at a yield of 6%. What was the issue price?
[C.A. Final May, 2005]
Q.29 M Limited has to make a payment on 30th January,2011 of `80 lakhs. It has surplus cash today i.e.
31st October, 2010 and has decided to invest sufficient cash in a bank’s certificate of deposit scheme
offering a yield of 8 % p.a. on simple interest basis. What is the amount to be invested now?
[CA – Nov. 2003]
Q.30 (a) Suppose Mr. X purchase Treasury bill for `9,940 maturing in 91 days for `10,000. Then what
would be annualized investment rate for Mr. X and annualized discount rate for the Government
investment.
(b) Suppose government pays `5,000 at maturity for 91 days Treasury bill. If Mr. Y is desirous to earn an
annualized discount rate of 3.50 %, then how he can pay for it. [RTP – Nov. 2011]
Q.31 XYZ & Co plans to issue Commercial paper of `1,00,000 at a price of `97,000.
Maturity period – 3 months
Issue expenses are:
(i) Brokerage is 0.12 %
(ii) Rating charges is 0.50 % and stamp duty is 0.12 %.
What is the effective interest rate per annum and the cost of fund? [RTP – June 2009]

REPURCHASE / BUY – BACK OF SHARES
Q. 32 Rahul Ltd. has surplus cash of `100 lakhs and wants to distribute 27 % of it to the shareholders. The
company decides to buy back shares. The finance manager of the company estimates that its share price
after buy – back is likely to be 10 % above the buy – back price if the buy – back route is taken. The
number of shares outstanding at present is 10 lakhs and the current EPS is `3.
You are required to determine:
(i) The price at which the shares can be re – purchased, if the market capitalization of the company should
be `210 lakhs after buy – back.
(ii) The number of shares that can be re – purchased, and
(iii) The impact of share re –purchase on the EPS, assuming that net income is the same.
[RTP – May, 2012]
Q.33 trust Ltd. is deciding whether to payout `4,80,000 in excess cash in the form of an extra dividend or
go for a share repurchase. Current earnings are ` 2.40 per share and the stock sells for ` 24. The market
value balance sheet currently is as follows:
Balance sheet (`000)
Equity 2,400 Assets other than cash 2,560
Debt 640 Cash 480
3,040 3,040
Evaluate the two alternatives in term of the effect of the price per share of the stock, the EPS and the P/E
ratio. Which alternative do you recommend? Give reasons. [I.C.W.A. Final June 2003]
Q. 34 ABC Company has a surplus of `100 lakhs to distribute 30 % of it to the shareholders. The company
decides to buyback shares. The finance manager of the company estimates that its share price after buy –
back is likely to be 10 % above the buy – back price if the buy – back route is taken. The number of shares
outstanding at present is 10 lakhs and the current EPS is `4.
You are required to determine:
(i) The price at which the shares can be re – purchased, if the market capitalization of the company should
be `200 lakhs after buy – back.
(ii) The number of shares that can be re – purchased, and
(iii) The impact of share re –purchase on the EPS, assuming that net income is the same.
[RTP – June, 2009]
VENTURE CAPITAL FINANCING
Q.35 TMC is a venture capital financier. It received a proposal for financing requiring an investment of `45
crore which returns `600 crores after 6 years if succeeds. However, it may be possible that the project may
fail at any time during the six years. The following table provide the estimates of probabilities of the
failure of the projects.
Year 1 2 3 4 5 6
Probability of failure 0.28 0.25 0.22 0.18 0.18 0.10
In the above table the probability that the project fails in the second year is given that it has survived
throughout year 1. Similarly for year 2 and so forth. TMC is considering an equity investment in project.
The beta of this type of project is 7. The market return and risk free rate of return are 8 % and 6 %
respectively. You are required to compute the expected NPV of the venture capital project and advice the
TMC. [RTP – May, 2011]

FACTORING
Meaning of factoring – Factoring is a financial service, which involves managing, financing and
collecting receivables. It is both a financial as management support to supplier of goods / services. It is a
method of converting non – productive assets (receivables) into productive assets (cash). A factor makes
the conversion of receivables into cash possible. Factoring may be defined as a contract between the
supplier if goods / services and the factor under which the factor agrees to perform at least two of the
following functions:
(i) To finance the assigned book debts (receivables).
(ii) To maintain accounts relating to receivables.
(iii) To collect book debts.
(iv) To provide protection against default in payment by debtors.
(v) To provide credit administration services to the clients to decide whether or not and how much credit
should be extended to the customers.
Factoring commission – The commission charged by the factor for providing factoring services is known
as factoring commission. It is usually expressed as a percentage of face value of receivables factored. The
commission is expected to be lower for recourse factoring since the factor does not assume the risk of bad
debts. The commission is expected to be higher for non - recourse factoring since the factor assumes the
risk of bad debts.

Types of factoring –
(1) Non – recourse factoring – Under non – recourse factoring factor assumes the risk of bad debts and
charges higher commission for and advances up to 80 % - 90 % of book debts immediately.
(2) Recourse factoring – Under recourse factoring, factor does not assume the risk of bad debts and
charges lower commission for and advances cash up to 70 % - 80 % of book debts.
(3) Advance factoring – Under advance factoring, factor advances cash against the book debts due to client
immediately.
(4) Maturity factoring – Under maturity factoring, the factor makes payment on maturity. (i.e. in case of
non – recourse factoring on collection of book debts or on insolvency of customers, in case of recourse
factoring on collection of book debts from customers).
(5) Non – notification factoring – Under non – notification factoring, the notice of assignment of
receivables is not given to the debtors. But the factor performs all his functions without a disclosure to the
customer that he owns the book debts.
How to decide whether or not to engage a factor:

A firm should engage a factor if the benefits exceed the cost or the rate of effective cost of factoring to the
firm is less than the rate of interest on other sources of short – term factoring.
Rate of effective cost of factoring to the firm = Net annual cost of factoring to the firm / Actual advance
granted * 100
Statement showing the evaluation of factoring arrangement:
(A) Annual benefits of factoring to the firm:
Credit administration cost avoided Xxx
Bad debts avoided Xxx
Interest saved due to reduction in average collection period Xxx
[Cost of annual credit sales * rate of interest]*[present collection period – new
collection period]/ 365 period
Total Xxx
(B) Annual cost of factoring to the firm:
Factoring commission [Annual credit sales * % of commission] Xxx
Interest charged by factor on advance Xxx
[Annual credit sales – factoring commission – factoring reserve]* Collection
period / 365 * rate of interest
Total Xxx
Calculation of actual advance granted:
Average age of receivables [credit sales * collection period / 365 days] Xxx
Less: Factoring commission Xxx
Less: Factoring reserve Xxx
Eligible amount of advance Xxx
Less: Interest charges [Eligible amount of advance * rate of interest] * [period Xxx
/ 365]
Actual advance granted Xxx
QUESTION BANK
Q.36 A Ltd has total sales of Rs. 3.2 crores and its average collection period is 90 days. The past
experience indicates that the bad debts losses are 1.5 % on sales. Total expenditure incurred by the firm in
administering its receivable collection efforts are Rs. 5,00,000. A factor is prepared to buy the firm’s
receivables by charging 2 % commission. The factor will pay advance on receivables to the firm at an
interest rate of 18 % p.a. after withholding 10 % as reserve. Calculate effective cost of factoring.(Assume
360 days) [May 2002]
Q.37 A company is considering to engaged a factor, the following information is available:

(i) The current average collection period for the company’s debtors is 80 days and ½ % of debtors default.
The factor has agree to pay money due after 60 days and will take the responsibility of any loss on account
of bad debts.
(ii) The annual charge for the factoring is 2 % of turnover payable annually in arrears. Administration cost
saving is likely to be Rs. 1,00,000 per annum.
(iii) Annual sales all on credit, are Rs. 1,00,00,000. cost is 80 % sales price. The company’s cost of
borrowing is 15 % per annum. Assume the year is consisting of 365 days.
Should the company enter into a factoring agreement. [May 2006]
Q.38 The turnover of PQR Ltd. is Rs. 120 lakhs of which 75 % is on credit. The cost of sales ratio is 80 %.
The credit terms are 2/10, net 30. On the current level of sales, the bad debts are 1 % of sales. The
company spends Rs. 1,20,000 per annum on administrating its credit sales. The cost includes salaries of
staff who handle credit checking, collection etc. these are avoidable costs. The past experience indicates
that 60 % of the customers avail of the cash discount, the remaining customers pay on an average 60 days
after the date of sale. The book debts (receivable) of the company are presently being financed in the ratio
of 1:1 by a mix of bank borrowings and owned funds which cost per annum 15 % and 14 % respectively.
A factoring firm has offered to buy the firm’s receivables. The main elements of such structured by the
factor are:
(i) Factor reserve, 12 %
(ii) Guaranteed payment, 25 days
(iii) Commission 4 % of the value of receivables.
(iv) Interest charged by factor – 15 %
Assume 360 days in a year.
Required: What advise would you give to PQR Ltd. – Whether to continue with the in house management
to receivables or accept the factoring firm’s offer? [PCE – May 2007]
Q.39 The turnover of R Ltd. is Rs. 60 lakhs of which 80 % is on credit. Debtors are allowed one month to
clear off the dues. A factor is willing to advance 90 % of the bills raised on credit for a fee of 2 % a month
plus a commission of 4 % on the total amount of debts. R Ltd. as a result of this arrangement is likely to
save Rs. 21,600 annually in management costs and avoid bad debts at 1 % on the credit sales. A scheduled
bank has come forward to make an advance equal to 90 % of the debts at an interest rate of 18 % p.a.
However, its processing fee will be at 2% on the debts. Would you accept factoring or the offer from the
bank? [CA – May, 97]
Q.40 MSN Ltd. has total sales of Rs. 4.50 crores and its average collection period is 120 days. The past
experience indicates that bad debt losses are 2 % on sales. The expenditure incurred by the company in
administrating its receivable collection efforts are Rs. 6,00,000. A factor is prepared to buy the company’s
receivables by charging 2 % commission. The factor will pay advance on receivables to the company at an
interest rate of 18 % per annum after withholding 10 % as reserve. You are required to calculate effective
cost of factoring to the company. [CA – Nov. 08]
Q.41 A Ltd. is considering to engage a factor and provides you the following informations:
(i) Total annual sales: Rs. 450 lakhs of which 80 % on credit.
(ii) Existing average collection period: 60 days.
(iii) Existing bad debts: 2 %.
(iv) Credit administration cost: Rs. 9,00,000 of which one third is avoidable.
(v) Factoring commission: 2 %.
(vi) Advance against receivable: Factor agrees to grant advance against receivables at an interest rate of 18
% p.a. after withholding 10 % as reserve.
Required: should the company engage a factor if the company can borrow at a rate of (a) 12 % p.a. (b) 15
% p.a. (Assume 360 days in a year).
Q.42 M/s Atlantic Company Limited with a turnover of `4.80 crores is expecting growth of 25 % for
forthcoming year. Average credit period is 90 days. The past experience shows that bad debts losses are
1.75 % on sales. The company’s administering cost for collecting receivables is `6,00,000. It has decided to

take factoring service of Pacific factors on terms that factor will buy receivables by charging 2 %
commission and 20 % risk with recourse. The factor will pay advance on receivables to the firm at 16 %
interest rate per annum after withholding 10 % as reserve. Calculate the effective cost of factoring to the
firm. (Assume 360 days in a year). [CA – Nov. 2013]
Q.43 ABC Limited is considering appointment of a factor. The Following information is available:
(i) Annual sales which are all in credit is 1,20,00,000.
(ii) Variable cost is 80 % of selling price.
(iii) Cost of borrowing is 15 % per annum.
(iv) Current average collection period for debtors is 90 days.
(v) Annual bad debts is 1 % of sundry debtors.
(vi) Saving administration cost `1,00,000.
(vii) Annual charge for factoring is 2.5 % of turnover.
(viii) Factor has agreed to pay money due after 60 days and loss on account of bad debts will be the
responsibility of the factor.
Should the company enter into the agreement? [RTP – June, 2009]
Q.44 X Ltd. has a credit sales of `3,00,00,000 and its average collection period is 90 days. The past
experience indicates that bad – debts losses are 1.10 % on sales, which will be responsibilities of the factor.
The expenditure incurred by the firm in administering its receivable collection efforts are `6,00,000. A
factor is prepared to buy the firm’s receivables by charging 2 % commission. The factor will pay advance
on receivables to the firm at an interest rate of 18 % p.a. after withholding 10 % as reserve and 2 %
commission. Calculate the effective cost of factoring to the firm, taking one year = 360 days.
[RTP – June, 2009]
Q.45 ABC Co. Ltd. has a turnover of 900 lakhs and 80 % of which is on credit. Average collection period
of debtors is one month. A factor is willing to advance against the bills raised after charging a factoring
commission of 2 % and interest @ 12 % per annum on the amount of advance. Administrative expenses
for collection of credit is `5,00,000 per annum. The bad debts remain to be approximately 1 % which will
be the responsibility of the factor. Interest rate of bank on working capital is 18 %. Advise whether the
company should accept the offer of the factor (for calculation, assume one year = 360 days).
[RTP – June, 2009 (New)]
Q.46 The credit sales and receivables of M/s M Limited at the end of the year are estimated at `3,74,00,000
and `46,00,000 respectively. The average variable overdraft interest rate is 5 %. M Ltd. is considering a
proposal for factoring its debts on a non – recourse basis at an annual fee of 3 % on credit sales. As a
result, M Ltd. will save `1,00,000 per year in administration cost and `3,50,000 as bad debts. The factor
will maintain a receivables collection period of 30 days and advance 80 % of the face value thereof at an
annual interest rate of 7 %. Evaluate the viability of the proposal.
[RTP – May, 2012]
Q.47 A firm has a total sales of `12,00,000 and its average collection period is 90 days. The past
experience indicates that bad debts losses are 1.50 % on sales. The expenditure incurred by the firm in
administrating receivable collection effort are `50,000. A factor is prepared to buy the firm’s receivables by
charging 2 % commission. The factor will pay advance on receivables to this firm at an interest rate of 16
% p.a. after withholding 10 % as reserve. Calculate effective cost of factoring to the firm. Assume 360
days in a year. [IPCC – May, 2009]
Q. 48 The credit sales and receivables of DEF Limited at the end of the year are estimated at `561 lakhs
and `69 lakhs respectively. The average variable overdraft interest rate is 5 % per annum. DEF Limited is
considering a factoring proposal for its receivables on a non – recourse basis at an annual fee of 1.25 % of

credit sales. As a result, DEF Limited will save `1.50 lakhs p.a. in administrative cost and `5.25 lakhs p.a.
as bad debts.
The factor will maintain a receivables collection period of 30 days and will provide 80 % of receivables as
advance at an interest rate of 7 % p.a. You may take 365 days in a year for the purpose of calculation of
receivables.
Required: Evaluate the validity of factoring proposal. [CA – May, 2014]
Q.49 The turnover of R Limited is `60 lakhs of which 80 % is on credit. Debtors are allowed one month to
clear off the dues. A factor is willing to advance 90 % of the bills raised on credit for a fee of 2 % a month
plus a commission of 4 % on the total amount of debt. R Limited as a result of this arrangement is likely to
save`21,600 annually in management costs and avoid bad debts at 1 % on the credit sales.
A bank has come forward to make an advance equal to 90 % of the debt at an annual interest rate
of 18 %. However, its processing fee will be at 2 % on the debts. Would you accept factoring or offer from
the bank?
Q.50 PQR Limited has credit sales of `165 crores during the financial year 2014 – 15 and its average
collection period is 65 days. The past experience suggests that bad debts losses are 4.28 % of credit sales.
Administration cost incurred in collection of its receivables is `12,35,000 per annum. A factor is prepared
to buy the company’s receivable by charging 1.95 % commission. The factor will pay advance on
receivables to the company at an interest rate of 16 % per annum after withholding 15 % as reserve.
Estimate the effective cost of factoring to the company assuming 360 days in a year.
[CA – May, 2015]
Q.51 A Limited has an export sales of `50 crores of which20 % is paid by importers in advance of dispatch
and for balance the average collection period is 60 days. However, it has been observed that these
payments have been running late by 18 days. The past experience indicates that bad debts losses are 0.60
% on sales. The expenditure incurred for efforts in receivable collection are `60,00,000 per annum.
So far A Limited had no specific arrangements to deal with export receivables, following two proposals are
under consideration:
(i) A non – recourse export factoring agency is ready to buy A Limited’s receivables by charging 2 %
commission. The factor will pay an advance on receivables to the firm at an interest rate of MIBOR + 1.75
% after withholding 20 % as reserve.
(ii) Insu Limited an insurance company has offered a comprehensive insurance policy at a premium of
0.45 % of the sum insured covering 85 % of risk of non – payment. A Limited can assign its right to a bank
in return of an advance of 75 % of the value insured at MIBOR + 1.50 %
Assuming that MIBOR is 6 % and A Limited can borrow from its bank at MIBOR + 2 % by using existing
overdraft facility. Determine the which of the two proposal should be accepted by A Limited (1 year = 360
days). [RTP – May, 2015]
STOCK SPLIT AND REVERSE SPLIT
Q.52 N Limited has 1,000 shares of `10 each raised at a premium of `15 per share. The company’s retained
earnings are `5,52,500. The company’s stock sells for `20 per share.
(a) If a 10 % stock dividend is declared how many new shares would be issued? What would be the market
price after the stock dividend? How would the equity account change?
(b) If the company instead declares a 5:1 stock split, how many shares will be outstanding? What would be
new par value? What would be the new market price?
(c) Suppose if the company declares a 1: 4 reverse split, how many shares will be outstanding? What
would be the new par value? What would be the new market value?

Q.53 P Limited has 6,000 shares of stock outstanding with a par value of `1 per share. The current market
value of the firm is `1,45,600. The company just announced a 3 – for – 2 stock split. How many shares will
be outstanding? What would be the new market price?
Q.54 A Corporation has 67,000 shares of stock outstanding at a market price of `48 a share. The company
has just announced a 3 – for – 2 stock split. How many shares of stock will be outstanding after the split?
What would be the new market price?
FINANCIAL RESTRUCTURING / INTERNAL RECONSTRUCTION

Q.55 The following is the Balance-sheet of Grape Fruit Company Ltd as at March 31st ,2011.
Liabilities ` in lakhs Assets ` in lakhs
Equity shares of `100 each 600 Land and building 200
14 % Preference shares of `100 each 200 Plant and machinery 300

13 % Debentures 200 Furniture and fixtures 50
Debenture interest accrued and 26 Inventory 150
payable
Lan from bank 74 Sunder debtors 70
Trade creditors 340 Cash at bank 130
Preliminary expenses 10
Cost of issue of debentures 5
Profit and loss account 525
1,440 1,440
The Company did not perform well and has suffered sizable losses during the last few years. However, it is
felt that the company could be nursed back to health by proper financial restructuring. Consequently the
following scheme of reconstruction has been drawn up :
(i) Equity shares are to be reduced to ` 25/- per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of ` 50 each,
fully paid up.
(iii) Debenture holders have agreed to forgo the accrued interest due to them. In the future, the rate of
interest on debentures is to be reduced to 9 percent.
(iv) Trade creditors will forego 25 percent of the amount due to them.
(v) The company issues 6 lakh of equity shares at ` 25 each and the entire sum was to be paid on
application. The entire amount was fully subscribed by promoters.
(vi) Land and Building was to be revalued at ` 450 lakhs, Plant and Machinery was to be written down by `
120 lakhs and a provision of `15 lakhs had to be made for bad and doubtful debts.
Required:
(i) Show the impact of financial restructuring on the company’s activities.
(ii) Prepare the fresh balance sheet after the reconstructions is completed on the basis of the above
proposals. [CA – Nov. 2011]


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SARVAGYA INSTITUTE OF COMMERCE 1

 How to calculate theoretical ex – right price per share:

 How to calculate value of a right (one coupon):

 How to calculate effect on shareholder’s wealth due to right offer:

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

Net wealth xxx

QUESTIONS RELATE TO RIGHT ISSUE

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

ECONOMIC VALUE ADDED / MARKET VALUE ADDED

ROOC = Net operating profit after tax (NOPAT)/ OC * 100

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

CONCEPT OF ECONOMIC VALUE ADDED AND MARKET VALUE ADDED

Q.10 DISA and Co. has provided the following information:

Equity share capital (`10 each) 400

15 % Preference share capital (`10 each) 200

Reserves and surplus 220

Land and building held as investment 20

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

Reserves and surplus 325 Computer and software 295

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

SUSTAINABLE GROWTH RATE

SGR (g) = ROE (1 – Dividend payout ratio) SGR =

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

HOW TO PREPARE INCOME STATEMENT

SOME OTHER RATIOS:

Note: Total asset does not include fictitious assets.

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

𝐃𝐞𝐛𝐞𝐧𝐭𝐮𝐫𝐞𝐬+𝐋𝐨𝐧𝐠 𝐭𝐞𝐫𝐦 𝐥𝐨𝐚𝐧𝐬+𝐏𝐫𝐞𝐟𝐞𝐫𝐞𝐧𝐜𝐞 𝐬𝐡𝐚𝐫𝐞 𝐜𝐚𝐩𝐢𝐭𝐚𝐥

Decision: Lower the better.

𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐟𝐭𝐞𝐫 𝐭𝐚𝐱+𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭

Decision: Higher the better.

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

 Dividend pay – out ratio of 50 %.

INTEREST COVERAGE RATIO

𝐄𝐁𝐈𝐓 (𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐛𝐞𝐟𝐨𝐫𝐞 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐚𝐧𝐝 𝐭𝐚𝐱)

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

MONEY MARKET INSTRUMENTS

(2) Treasury bills (T - Bill) –

(4) Commercial paper –

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

Q. 24 K Limited issued commercial paper as per following details:

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

REPURCHASE / BUY – BACK OF SHARES

VENTURE CAPITAL FINANCING

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

How to decide whether or not to engage a factor:

Q.37 A company is considering to engaged a factor, the following information is available:

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

STOCK SPLIT AND REVERSE SPLIT

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

FINANCIAL RESTRUCTURING / INTERNAL RECONSTRUCTION

14 % Preference shares of `100 each 200 Plant and machinery 300

COMPILED BY ADHISH BHANSALI (M.COM, ACA) (MO.NO.-9829279730)

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