Exhibit 3.

1
Balance Sheet of Horizon Limited as at March 31, 20x1
Rs in million
20 x 1 20x0
EQUITY AND LIABILITIES
Shareholders Funds 500 450

Share capital (Par value Rs.10) 100 100

Reserves and surplus 400 350

Non-current Liabilities 300 270

Long-term borrowings 200 180

Deferred tax liabilities (net) 50 45

Long-term provisions 50 45

Current Liabilities 200 180

Short-term borrowings 40 30

Trade payables 120 110

Other current liabilities 30 30

Short-term provisions 10 10

1,000 900

ASSETS
Non-current Assets 600 550

Fixed assets 500 450

Non-current investments 50 40

Long-term loans and advances 50 60

Current Assets 400 350

Current investments 20 20

Inventories 160 140

Trade receivables 140 120

Cash and cash equivalents 60 50

Short-term loans and advances 20 20

1000 900
 Exhibit 3.2

Statement of Profit and Loss for Horizon Limited for Year Ending March 31, 20x1

Rs. in million

20X1 20X0

Revenues from Operations 1290 1172

Other Income 10 8

Total Revenues 1300 1180

Expenses

Material expenses 600 560

Employee benefit expenses 200 180

Finance costs 30 25

Depreciation and amortisation expenses 50 45

Other expenses 240 210

Total expenses 1120 1020

Profit before exceptional and extraordinary Items and tax 180 160

Exceptional Items

Profit before Extraordinary Items and Tax 180 160

Extraordinary Items

Profit Before Tax 180 160

Tax Expense 50 40

Profit (Loss) for the period 130 120

Earning Per Equity Share

Basic ( in Rs.) 13

Diluted ( in Rs.) 13
 Exhibit 3.5
Cash Flow Statement
(Rs. in million)
Formula
A. CASH FLOW FROM OPERATING ACTIVITES

PROFIT BEFORE TAX 180 =B53

Adjustments for :
Depreciationandamortisation 50 =B45
Financecosts 30 =B44
Interestincome* 10 =-B39

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 250 =sum(B65:B69)

Adjustments for changes in working capital :

Tradereceivablesandshorttermloanandadvances
20 =-(B27-C27)
Inventories 20 =-(B26-C26)

=(B15-C15)
Tradepayables,shorttermprovisions,andothercurrentliabilities
10

CASH GENERATED FROM OPERATIONS 220 =B70+B72+B73+B74

Directtaxespaid 50 =-B54

NET CASH FROM OPERATING ACTIVITIES 170 =B75+B76

B. CASH FLOW FROM INVESTING ACTIVITIES

Purchaseoffixedassets 100 =-(B21-C21+B45)
Increaseofnoncurrentinvestments 10 =-(B22-C22)
Reductioninlongtermloansandadvances 10 =(C23-B23)
Interestincome 10 =B39

NET CASH USED IN INVESTING ACTIVITIES 90 =SUM(B79:B82)

C. CASH FLOW FROM FINANCING ACTIVITIES

Increaseinlongtermborrowings 20 =B10-C10
Increaseinshorttermborrowings 10 =B14-C14
Increaseindeferredtaxliabilities 5 =B11-C11
Increaseinlongtermprovisions 5 =B12-C12
Dividendpaid -80 =-(B55-(B8-C8))
Financecosts 30 =-B44
NETCASHFROMFINANCINGACTIVITIES 70 =SUM(B85:B90)
NET CASH GENERATED(A +B+C) 10 =B77+B83+B91

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50 =C28

CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 60 =B28

* It is assumed that the entire other income is interest income.

 Amplified Sources and Uses of Cash Statement ( Rs.in million
Sources Formula

Netprofit =B55 130

Depreciationandamortisation =B45 50

Increaseinlongtermborrowings =B10-C10 20

Increaseindeferredtaxliabilit=B11-C11 5

Increaseinlongtermprovisions =B12-C12 5

Increaseinshorttermborrowings=B14-C14 10

Increaseintradepayables =B15-C15 10

Decreaseinlongtermloansanda=-(B23-C23) 10

Totalsources =SUM(G6:G13) 240

es of Cash Statement ( Rs.in million)
Uses Formula

Dividendpayment =G6-(B8-C8) 80

Purchaseoffixedassets =B20-C20+B45 100

Increaseinnoncurrentin =B22-C22 10

Increaseininventories =B26-C26 20

Increaseintradereceivab =B27-C27 20

Totaluses =SUM(J6:J13) 230

Netadditiontocash =G14-J14 10
 Exhibit 4.1 Balance Sheet of Horizon Limited as on March 31,
20X1
(Rs.inmillion)
EQUITY AND LIABILITIES 20X1 20X0

Shareholders Funds 500 450

Sharecapital(ParvalueRs.10) 100 100
Reservesandsurplus 400 350
Non-current Liabilities 300 270
Longtermborrowings 200 180
Deferredtaxliabilities(net) 50 45
Longtermprovisions 50 45
Current Liabilities 200 180
Shorttermborrowings 40 30
Tradepayables 120 110
Othercurrentliabilities 30 30

Shorttermprovisions 10 10
1,000 900
ASSETS
Non-current Assets 600 550
Fixedassets 500 450
Noncurrentinvestments 50 40
Longtermloansandadvances 50 60
Current Assets 400 350
Currentinvestments 20 20
Inventories 160 140
Tradereceivables 140 120
Cashandcashequivalents 60 50
Shorttermloansandadvances 20 20
1000 900

Exhibit 4.2
Statement of Profit and Loss for Horizon Limited for Year Ending March 31, 20X1
(Rs.inmillion)

20X1 20X0

RevenuesfromOperations 1290 1172

OtherIncome 10 8
TotalRevenues 1300 1180
Expenses
Materialexpenses 600 560
Employeebenefitexpenses 200 180
Financecosts 30 25
Depreciationandamortisationexpenses50
50 45
Otherexpenses 240 210
TotalExpenses 1120 1020
ProfitbeforeExceptionaland
ExtraordinaryItemsandTax 180 160
ExceptionalItems
ProfitbeforeExtraordinaryItemsandTax
180 160
ExtraordinaryItems
ProfitBeforeTax 180 160
TaxExpense 50 40
Profit(Loss)fortheperiod 130 120
EarningPerEquityShare
Basic
13
Diluted13
13
.Dividend 80

Exhibit 4.7 Common Size Statements

Part A : Statement of Profit and Loss
Regular( in million) Common Size
20X0 20X1 20X0
Total revenues 1180 1300 100
Total expenses other than finance cost 995 1090 84
PBIT 185 210 16
Finance costs 25 30 2
PBT 160 180 14
Tax 40 50 3
PAT 120 130 10

Part B : Balance Sheet

Regular( in million) Common Size
20X0 20X1 20X0
Shareholders funds 450 500 50
Non current liabilities 270 300 30
Current liabilities 180 200 20
Total 900 1000 100
Non current assets 550 600 61
Current assets 350 400 39
Total 900 1000 100

Exhibit 4.8 Common Base Year Financial Statements

Part A : Statement of Profit and Loss

Regular( in million) Common Bas
20X0 20X1 20X0
Total revenues 1180 1300 100
Total expenses other than finance cost 995 1090 100
PBIT 185 210 100
Finance costs 25 30 100
PBT 160 180 100
Tax 40 50 100
PAT 120 130 100

Part B : Balance Sheet

Regular( in million) Common Bas
20X0 20X1 20X0
Shareholders funds 450 500 100
Non current liabilities 270 300 100
Current liabilities 180 200 100
Total 900 1000 100
Non current assets 550 600 100
Current assets 350 400 100
Total 900 1000 100
 Exhibit 4.3 Comparison of Ratios of Horizon Limited with Industry Average
Industry
Ratio Foumula Average
Current ratio 2.00 =B24/B13 1.8
Acid-test ratio 1.20 =(B24-B26)/B13 1.05
Debt-equity ratio 1.00 =(B9+B13)/B6 1.1
Debt ratio 0.50 =(B9+B13)/B18
Interest coverage ratio 7.00 =(B49+B44)/B44 5
Inventory turnover 8.60 =B38/((B26+C26)/2 8.4
Debtors turnover 9.92 =B38/((B27+C27)/2) 10.1
Fixed assets turnover 2.72 =B38/((B21+C21)/2) 2.75
Average collection period in days 36.78 =365/F24
Total assets turnover 1.37 =B40/((B30+C30)/2) 1.4
Gross profit margin 36.43% =(B38-F39)/B38 34%
Net profit margin 10.0% =B55/B40 8.50%
Return on assets 13.68% =B55/((B30+C30)/2) 12.50%
Earning power 22.1% =(B53+B44)/((B30+C30)/2) 19.30%
Return on capital employed 15.5% =(B53+B44)*(1-F40)/((B30+C30)/2 13.80%
Return on equity 27.4% =B55/((B6+C6)/2) 23.20%
Price-earning ratio 15.38 =F38/(B55/F41 12.00%
Yield 15.56% =F38/(B6/F41) 14.10%
Market value to book value ratio 4 =F38/(B6/F41) 3.20%
Given:
--The market price per share of Horizon as ason31stMarch
on 31st March 20X1 is Rs. 200 20X0isRs. 180
-The estimated cost of goods sold in Rs.
million 820
--Income tax rate 30%
-Par value of equity share-in Rs. 10
ss
Common Size (%)
20X1
100
84
16
2
14
4
10

Common Size (%)

20X1
50
30
20
100
60
40
100

ss
Common Base (%)
20X1
110
110
 114
120
113
125
108

Common Base (%)

20X1
111
111
111
111
109
114
111
Exhibit 5.2 Pro Forma Statement of Profit and Loss for Spaceage Electronics for 20X3
Based on Per cent of Sales Method

Historicaldata Average
per cent
20X120X2 of sales
RevenuesfromOperations 1200 1280 100
Otherincome 8 10 0.72
Totalrevenues 1208 1290 100.72
Expenses
Materialexpenses 547 590 45.84
Employeebenefitexpenses 274 295 22.94
Financecosts 60 65 5.04
Depreciationand 75 80 6.25
amortisationexpenses
Otherexpenses 98 103 8.11
Totalexpenses 1054 1133 88.17
Profitbeforeexceptionalitemsandother 154 157 12.55
ExceptionalItems 30 32 2.50
ProfitbeforeExtraordinaryItemsandTa 184 189 15.05
ExtraordinaryItems
ProfitBeforeTax 184 189 15.05
TaxExpense 82 90 6.93
Profit(Loss)fortheperiod 102 99 8.12
Dividends 60 63
Retainedearnings 42 36

Exhibit 5.3 Pro Forma Statement of Profit and Loss for Spaceage Electronics for 20X3
Combination Method

Historicaldata Average
per cent
of sales
20X1 20X2
RevenuesfromOperations 1200 1280 100
Otherincome 8 10 0.72
Totalrevenues 1208 1290 @
Expenses
Materialexpenses 547 590 45.84
Employeebenefitexpenses 274 295 22.94
Financecosts 60 65 5.04
Depreciationand 75 80
Budgete
amortisationexpenses d
Otherexpenses 98 103
Budgete
Totalexpenses 1054 1133 d
@
Profitbeforeexceptionalitemsand
otherincome 154 157 @
ExceptionalItems 30 32 2.50
ProfitbeforeExtraordinaryItemsand
Tax 184 189 @
ExtraordinaryItems
ProfitBeforeTax 184 189 @
TaxExpense 82 90
Budgete
Profit(Loss)fortheperiod 102 99 d
@
Dividends 60 63
Budgete
Retainedearnings 42 36 d
@
@ These items are obtained using accounting identities.

Exhibit 5.4 Pro Forma Balance Sheet of Spaceage Electronics for December 31, 20X3
Historicaldata Average
per cent
20X1 20X2 of sales
Revenues from operations 1200 1280 100
EQUITY AND LIABILITIES
ShareholdersFunds
Sharecapital(ParvalueRs.10) 300 300 Nochange
Pro
forma
statemen
Reservesandsurplus 250 286 tofP&L
NoncurrentLiabilities
Longtermborrowings 500 505 40.56
Deferredtaxliabilities(net) 45 50 3.83
Longtermprovisions 55 50 4.24
CurrentLiabilities
Shorttermborrowings 200 200 16.15
Tradepayables 100 112 8.54
Othercurrentliabilities 20 30 2.01
Shorttermprovisions 30 17 1.91
Externalfundsrequirement

ASSETS
NoncurrentAssets
Fixedassets 750 775 61.52
Noncurrentinvestments 40 40 Budgeted
Longtermloansandadvances 60 60 Budgeted
CurrentAssets
Currentinvestments 30 33 2.54
Inventories 375 380 30.47
Tradereceivables 200 212 16.61
Cashandcashequivalents 25 28 2.14
Shorttermloansandadvances 20 22 1.69
Electronics for 20X3

Pro forma statement

of profit and loss of
20X3 assuming
revenues from
operations of 1400
1400
10
1410

642
321
71
88

113
1234
176
35
211

211
97
114

Electronics for 20X3

Pro forma statement

of profit and loss of
20X3 assuming
revenues from
operations of 1400
1400
10
1410

642
321
71
85

107
1225

185
35

220

220
 90
130
70
60

onics for December 31, 20X3

sheet of 20X3
assuming revenues
from operations of
1400
1400

300

346

568
54
59

226
120
28
27
13
1740

861
60
70

36
427
233
30
24
1740
 Exhibit 5.5 A Spreadsheet Template for Financial Statements
Before
Historical data
iteration
Average
per cent of Formulae Pro forma
sales statement
of profit
and loss
20X1 20X2 20X3
Revenues from
operations 1200 1280 100 1400.0
Other income 8 10 Accounting =$F$5*D6/10
0.72 10.1
identity
Total revenues 1208 1290 [@] =F5+F6 1410.1
Expenses
Material expenses 547 590 45.84 =$F$5*D9/10
641.7
Employee benefit 274 295 22.94 =$F$5*D10/1
321.2
Interest on debent
Depreciation and 48 52 =C32*0.13 52.0
Other finance cost
amortisation 12 13 1.01 =$F$5*D12/1
14.1
expenses 75 80 Budgeted 85.0
Other expenses
Profit before 98 103 Budgeted 107.0
Total expenses
exceptional and 1054 1133 @ =SUM(F9:F14) 1221.0
extraordinary
items and tax 154 157 @ =F7-F15 189.1
Exceptional
Profit beforeItems 30 32 2.50 =$F$5*D17/1 35.0
Extraordinary
Items and Tax 184 189 @ =F16+F17 224.1
Extraordinary Items 0.00 =$F$5*D19/1 0.0
Profit Before Tax 184 189 @ =F18+F19 224.1
Tax Expense 82 90 Budgeted 90.0
Profit (Loss) for the period
102 99 @ =F20-F21 134.1
Dividends 60 63 Budgeted 70.0
Retained earnings 42 36 @ =F22-F23 64.1

Pro forma
Balance Sheet balance
sheet of
20X3
EQUITY AND LIABILITIES
Shareholders Funds
Share capital (Par 300 300 No change =C28 300.0
Pro forma
statement
Reserves and surp 250 286 of P&L =C29+F24 350.1
Non-current Liabilities
Long-term borrowings =F41-F28-
F29-F33-F34-
F35-F37-F38-
-----Debentures 400 400 F39-F40 460.2
------Others 100 105 8.27 =$F$5*D33/1 115.8
Deferred tax liabili 45 50 3.83 =$F$5*D34/1 53.6
Long-term provisio 55 50 4.24 =$F$5*D35/1 59.4
Current Liabilities
Short-term borrowi 200 200 16.15 =$F$5*D37/1 226.0
Trade payables 100 112 8.54 =$F$5*D38/1 119.6
Other current liabil 20 30 2.01 =$F$5*D39/1 28.1
Short-term provis 30 17 1.91 =$F$5*D40/1 26.8
Total =F53 1739.6
ASSETS
Non-current Assets
Fixed assets 750 775 61.52 =$F$5*D44/1 861.3
Non-current inves 40 40 Budgeted 60.0
Long-term loans a 60 60 Budgeted 70.0
Current Assets
Current investmen 30 33 2.54 =$F$5*D48/1 35.5
Inventories 375 380 30.47 =$F$5*D49/1 426.6
Trade receivables 200 212 16.61 =$F$5*D50/1 232.6
Cash and cash equ 25 28 2.14 =$F$5*D51/1 29.9
Short-term loans 20 22 1.69 =$F$5*D52/1 23.7
Total =SUM(F44:F52 1739.6
ements
After iteration

Pro forma
statement of
profit and loss
of 20X3
20X3

1400.0
10.1

1410.1

641.7
321.2
61.0
14.1
85.0
107.0
1230.0

180.1
35.0

215.1
0.0
215.1
90.0
125.1
70.0
55.1

Pro forma
balance sheet
of 20X3

300.0

341.1

469.2
115.8
 53.6
59.4

226.0
119.6
28.1
26.8
1739.6

861.3
60.0
70.0

35.5
426.6
232.6
29.9
23.7
1739.6
Amountofdepositperperiod(PMT)Rs. 30,000
No.ofperiods(NPER)years 30
Interestrate(RATE)p.a. 8%
Accumulatedamount(FV)Rs. 3,398,496
Formulaused =FV(B3,B2,B1)
Future value(Fv) 8,000
Periods in years (Nper) 6 Rate 11.43%
Periodic payment(Pmt) 1,000 =RATE(B2,-B3,,B1)
Year 1 2 3 4 5 6 7 8
Cash flow 1,000 2,000 2,000 3,000 3,000 4,000 4,000 5,000
Discount rate 12% =NPV(B3,B2:I2) 13,375
Monthly payment(Pmt) Rs. 12,000
Period in months(Nper) 36 Present value 331,928
Rate of interest per month(Rate) 1.50% =PV(B3,B2,-B1)
 No. of Annual
instalments instalment
Present value Interest rate (in years) amount
1,000,000 15% 5 (298,316)
Beginning Annual Principal Remaining
Year amount instalment Interest repayment balance
1 1,000,000 298,316 150000 148,316 851,684
2 851,684 298,316 127753 170,563 681,121
3 681,121 298,316 102168 196,148 484,973
4 484,973 298,316 72746 225,570 259,403
5 259,403 298,316 38910 259,406 (3)
Initial deposit 300,000
Interest rate 10% Annual withdrawal 48,824
Period in years 10 =PMT(B2,B3,-B1)
Settlement 1/1/2015 This is the date of purchase. If not certain, fill in any date.
Maturity ### The formula in this case is = B3+365*8 , as the maturity period is 8 years.
Rate 12% The annual coupon rate
Yield 14% The required return per annum
Redemption 100 Fill in the redemption value as a percentage of the par value
Frequency 2 This represents the number of times interest is paid in an year
Basis 3 3 represents the day count convention: actual no. of days/365 in int.calculatio
Price 90.57 To get the result in B8, use the function =PRICE(B1,B2,B3,B4,B5,B6,B7)
Bond price is obtained per Rs.100 of the face value of the bond. Thus,had the redemption value bee
Rs. 1000, the price would have been Rs.90.55 x 10
 Formula used
Price of the bond at present(PV) Rs. 800
Par value/Maturity value of the bond(FV) Rs. 1,000
Coupon rate per period 9%
Coupon amount payabole per period(PMT) R =C3*C4 90
No. of periods(NPER) 8
Yield to Maturity(RATE) =RATE(C6,C5,-C2,C3,0) 13.20%

Yield to maturity of a bond can also be obtained using the Yield formula in Excel, as shown below
Formula used
Settlement As the date is not given, use any date 1/1/2015
Maturity =C11+365*8 12/30/2022
Rate 9%
Redemption 100
Frequency 1
Basis 3
Price =800/10 80
Yield to maturity =YIELD(C11,C12,C13,C17,C14,C15,C16) 13.20%
Note: The parameters are the same as that used in the spreadsheet illustration for 'PRICE'
 g1 g2 n(years)
20% 10% 6
P0(Rs) Formula used=E2*(1+A2)*(1-((1+A2)/(1+D2))^C2)/(D2-A2)+E2*(1+A2)*(1+A2)^(C2-1)*(1+B2)/(D2-B2)/(1+D2)^C2
 r D0(Rs)
15% 2
+A2)/(1+D2))^C2)/(D2-A2)+E2*(1+A2)*(1+A2)^(C2-1)*(1+B2)/(D2-B2)/(1+D2)^C2 70.76
 ga gn H(years) r D0(Rs)
50% 12% 5 16% 3
P0(Rs) Formula used =E2*((1+B2)+C2*(A2-B2))/(D2-B2) 226.50
 Exhibit8.1
DataontheNiftyIndex
YEAR NIFTY ANNUAL DATE NIFTY ANNUAL
ENDING RETURN(%) RETURN(%)

1990 331 - 2002 1094 3.25

1991 559 68.84 2003 1880 71.90
1992 761 36.28 2004 2081 10.68
1993 1043 36.95 2005 2837 36.34
1994 1182 13.40 2006 3966 39.83
1995 909 -23.15 2007 6139 54.77
1996 899 -1.04 2008 2959 -51.79
1997 1079 20.05 2009 5201 75.76
1998 884 -18.08 2010 6135 17.95
1999 1480 67.42 2011 4624 -24.62
2000 1264 -14.65 2012 5905 27.70
2001 1059 -16.18 2013 6304 6.76
2014 8284 31.41

CalculationoftheMeans
YEAR NIFTY ANNUAL 1+ANNUAL
ENDING RETURN(%) RETURN
1990 331 -
1991 559 68.84 1.6884
1992 761 36.28 1.3628
1993 1043 36.95 1.3695
1994 1182 13.40 1.1340
1995 909 -23.15 0.7685
1996 899 -1.04 0.9896
1997 1079 20.05 1.2005
1998 884 -18.08 0.8192
1999 1480 67.42 1.6742
2000 1264 -14.65 0.8535
2001 1059 -16.18 0.8382
2002 1094 3.25 1.0325
2003 1880 71.90 1.7190
2004 2081 10.68 1.1068
2005 2837 36.34 1.3634
2006 3966 39.83 1.3983
2007 6139 54.77 1.5477
2008 2959 -51.79 0.4821
2009 5201 75.76 1.7576
2010 6135 17.95 1.1795
2011 4624 -24.62 0.7538
2012 5905 27.70 1.2770
2013 6304 6.76 1.0676
2014 8284 31.41 1.3141
Arithmetic mean= 19.57
Product= 25.04
Geometric
Mean= 14.36%
Period 1 2 3 4 5 6
Return(Ri) 15 12 20 10 14 9
Mean =AVERAGE(B2:G2) 10
Standarddeviation =STDEV(B2:G2) 10.45
 Exhibit8.2&8.3

ILLUSTRATIONSOFTHECALCULATIONOFSTANDARDDEVIATION

BHARATFOODS

i=Stateof (Ri Pi(Ri
theEconomy Pi Ri% pi*Ri RiRbar Rbar)^2 Rbar)^2

1.Boom 0.30 16 4.8 4.50 20.25 6.075
2.Normal 0.50 11 5.5 0.50 0.25 0.125
3.Recession 0.20 6 1.2 5.50 30.25 6.050

CALCULATIONS

Sumof(Pi)
(Ri)= 11.50

SumofPi(RiRbar)^ 12.25

Standard
Deviation= [Sum{Pi(RiRbar)^2}]^0.5= 3.50%

ORIENTALSHIPPING

i=Stateof (Ri Pi(Ri
theEconomy Pi Ri% pi*Ri RiRbar Rbar)^2 Rbar)^2

1.Boom 0.30 40 12 27.00 729 218.700
2.Normal 0.50 10 5 3.00 9 4.500
3.Recession 0.20 20 4 33.00 1089 217.800

CALCULATIONS

Sumof(Pi)
(Ri)= 13.00

SumofPi(RiRbar)^ 441

Standard
Deviation= [Sum{Pi(RiRbar)^2}]^0.5= 21.00%

Exhibit8.10
CALCULATIONOFBETA

YEAR Rjt Rmt Rjt Rmt (RjtR#j)x (Rmt
R#j R#m (RmtR#m) R#m)^2

1 10 12 2 1 2 1
2 6 5 6 8 48 64
 3 13 18 1 5 5 25
4 4 8 16 21 336 441
5 13 10 1 3 3 9
6 14 16 2 3 6 9
7 4 7 8 6 48 36
8 18 15 6 2 12 4
9 24 30 12 17 204 289
10 22 25 10 12 120 144

Total= 120 130 778 1022

MeanRj=R#j= 12
MeanRm=R#m= 13

86.4
Beta=Bj=Cov(Rj,Rm)/Var(Rm)= = 0.76
113.6

Alpha=R#jBj*R#m= 12(0.76) 2.12%

VIATION

0.00
Year
Return on security 1 2 3 4 5 6 7 8 9
j(%)
Return on market 10 6 13 (4) 13 14 4 18 24
portfolio (%) 12 5 18 (8) 10 16 7 15 30
=SLOPE(B2:K2,B3:K3) 0.76 =INTERCEPT(B2:K2,B3:K3)
 10
22
25
2.10
 Exampleoncovariance

Deviationof
Deviationof
thereturn
Returnon thereturnon Returnon
Stateof onsecurity
Probability security1 security1 security2
nature 1fromits
(2) (%) fromits (%)
(1) expected
(3) expected (5)
value
value(4)
(6)
1 0.1 10 26.0 5 (8.5)
2 0.3 15 1.0 12 (1.5)
3 0.3 18 2.0 19 5.5
4 0.2 22 6.0 15 1.5
5 0.1 27 11.0 12 (1.5)
Expected return on security 1= 16.0 Covariance=
Expected return on security 2= 13.5

Efficientfrontierforatwosecuritycase
Coefficient
Expected Standard of
Return Deviation Correlation
SecurityA 12% 20% 0.2
SecurityB 20% 40%
Proportionof Proportion Expected Standard
Portfolio A ofB Return Deviation
1(A) 1 0 12.00% 20.00%
2 0.9 0.1 12.80% 17.64%
3 0.759 0.241 13.93% 16.27%
4 0.5 0.5 16.00% 20.49%
5 0.25 0.75 18.00% 29.41%
6(B) 0 1 20.00% 40.00%
Product
ofthe
deviatio
nstimes
probabil
ity
(2)x(4)
x(6)
22.1
0.45
3.3
1.8
1.65
26
Price of stock now
Exercise price
Standard deviation of continuously
compounded annual return
Years to maturity
S0
E 60
56
t 0.3

Interest rate per annum r 0.5

d1 0.14
d2 =(LN(C1/C2)+(C5+(C3^2)/2)*C4)/(C3*(C4^0.5)) 0.7613
Equilibrium value of call option now, C0 =C6-C3*(C4^0.5) 0.5492
= C1*NORMSDIST(C6)-(C2/EXP(C5*C4))*NORMSDIST(C 9.61
 Year 0 1 2 3 4 5
Cash flow (1,000,000) 200,000 200,000 300,000 300,000 350,000
Cost of capital 10% NPV =NPV(B3,C2:G2)+B2 (5,272)

SECTION 11.5: Example: Benefit Cost Ratio

Year 0 1 2 3 4
Cash flow 100,000 25,000 40,000 40,000 50,000
Cost of capital 12%
Presentvalueofbenefits=114,456
BenefitCostRatio= 1.145 NBCR= 0.145
Year 0 1 2 3 4

Cash flow (100,000) 30,000 30,000 40,000 45,000

=IRR(B2:F2) 15.37%

SECTION 11.8: Calculation of payback period

Year 0 1 2 3 4 5 6
Cash flow of A (100,000) 50,000 30,000 20,000 10,000 10,000
Unrecovered
investment
balance 100,000 50,000 20,000 0
Payback period
in years 3 years
Cash flow of B (100,000) 20,000 20,000 20,000 40,000 50,000 60,000
Unrecovered
investment
balance 100,000 80,000 60,000 40,000 0
Payback period
in years 4 years
 Exhibit11.5
CalculationofDiscountedPaybackPeriod
Cumulativenet
Discounting Present cashflowafter
Year Cashflow factor@10% value discounting
0 10000 1.000 10000 10000
1 3000 0.909 2727 7273
2 3000 0.826 2479 4793
3 4000 0.751 3005 1788
4 4000 0.683 2732 944
5 5000 0.621 3105
6 2000 0.564 1129
7 3000 0.513 1539

Section 11.9: Accounting Rate of Return

Bookvalue
offixed Profitafter
Year investment tax
1 90,000 20,000
2 80,000 22,000
3 70,000 24,000
4 60,000 26,000
5 50,000 28,000
AccountingRateofReturn= 0.34
 Exhibit12.2
ProjectCashFlows

YEAR> 0 1 2 3 4

1.FixedAssets (80.00)
2.Networkingcapitalmargin (20.00)
3.Revenues 120.00 120.00 120.00 120.00
4.Costs(OtherthanD&I) 80.00 80.00 80.00 80.00
5.Depreciation 20.00 15.00 11.25 8.44
6.ProfitbeforeTax 20.00 25.00 28.75 31.56
7.Tax 6.00 7.50 8.63 9.47
8.Profitaftertax 14.00 17.50 20.13 22.09
9.Netsalvagevalue
10.NetrecoveryofWCmargin
11.InitailFlow (100.00)
12.OperatingFlow 34.00 32.50 31.38 30.53
13.TerminalFlow
14.NetCashFlow (100.00) 34.00 32.50 31.38 30.53

BookValueofInvestment 100.00 80.00 65.00 53.75 45.31

TaxRate 0.3 0.3 0.3 0.3

Irr= 26.18% DR= 25.00% C.o.C.=


5

120.00
80.00
6.33
33.67
10.10
23.57
30.00
20.00

29.90
50.00
79.90

0.3

30.00%
 Exhibit12.3

CASHFLOWSFORTHEKCINPROJECT

YEARS (Rs.Million)
0 1 2 3 4

1.CapitalInvestment (100.00)
2.LevelofWorkingCapital 20 30 40 30 20
3.Revenues 100 150 200 150
4.RawMaterialCost 30 45 60 45
5.LabourCost 20 30 40 30
6.OperatingandMaintenanceCost 5 5 5 5
7.LossofContribution 15 15 15 15
8.Depreciaiton 25.00 18.75 14.06 10.55
9.BadDebtLoss
10.ProfitBeforeTax 5.00 36.25 65.94 44.45
11.Tax 2.00 14.50 26.38 17.78
12.ProfitAfterTax 3.00 21.75 39.56 26.67
13.NetSalvageValueofEquipment
14.RecoveryofWorkingCapital

15.InitialInvestment (100.00)
16.OperatingCashInflow(12+8+9) 28.00 40.50 53.63 37.22
17.ChangeinWorkingCapital 20.00 10.00 10.00 10.00 10.00
18.TerminalCashFlow(13+14)

19.NetCashFlow(15+1617+18) 120.00 18.00 30.50 63.63 47.22

ASSUMPTIONS

RawMaterialCost= 30.00% ofsales
LabourCost= 20.00% ofsales
Operating&MaintenanceCost= 1 million
OverheadAllocation= 10.00% ofsales
DepreciationRate= 25.00%
WorkingCapital= 0.2 ofsales
ShortTermBorrowingforW/C= 0.5 ofW/C
InterestonShortTermBorrow= 0.18
Debentures= 0.5 ofCapitalInvestment
InterestonDebentures= 0.15
TaxRate= 0.4
NetSalvageValueofEquipment 4 lakhs



(Rs.Million)
5

0
100
30
20
5
15
7.91
5
17.09
6.84
10.25
20
15

23.16

35

58.16

 Exhibit12.4
CashFlowsfortheReplacementProject
Year 1 2 3 4
I.InvestmentOutlay
1.CostofNewAsset 1600.00
2.SalvageValueofOldAsset 500.00
3.IncreaseinNetWorkingCapital 100.00
4.TotalNetInvestment(12+3) 1200.00
II.OperatingInflowsOverthe
ProjectLifeCycle
5.AfterSavingsinManufacturing
Costs 180.00 180.00 180.00 180.00
6.DepreciaitononNewMachine 400.00 300.00 225.00 168.75
7.DepreciationonOldMachine 100.00 75.00 56.25 42.19
8.IncrementalDepreciation(67) 300.00 225.00 168.75 126.56
9.TaxsavingsinIncremental
Depreciaiton 120.00 90.00 67.50 50.63
10.NetOperatingCashFlow(5+9) 300.00 270.00 247.50 230.63
III.TerminalCashFlow
11.NetTerminalValueofNew
Machine
12.NetTerminalValueofOld
Machine
13.RecoveryofIncrementalWorking
Capital
14.TotalYerminalCashFlow(11
12+13)
IV.NetCashFlow(4+10+14) 1200.00 300.00 270.00 247.50 230.63

DepreciationRate 25%
TaxRate 40%
 5

180.00
126.56
31.64
94.92

37.97
217.97

800.00

160.00

100.00

740.00
957.97
 Exhibits13.2&3onSensitivityAnalysisIllustration
(AllamountsinRupeesthousands)
Factors Expected values Calculation of expected net present value
Initialinvestment 20,000 Investment
Costofcapital 12% Sales
Sales 18,000 Variablecosts
Variablecostper
unitasafraction
ofsales 2/3 Fixedcosts
Fixedcosts 1,000 Depreciation
Depreciationasa
percentageofthe
investment 10% Pretaxprofit
Taxrate 1/3 Taxes
Lifeoftheproject
inyears 10 Profitaftertaxes
Cashflowfrom
Netsalvagevalue 0 operations
Salvagevalue
Netpresentvalue

Forsensitivityanalysisproceedasfollows.Incell
B18copytheformulaforNPVfromcellE14..Leave
theadjcacentcelltotheleft(A18)blankandthen
fillthevariousvaluesofinvestment,onebelow
theotherfromcellA19onwards(inthiscase
24,000and18,000).Highlight(select)A18toB20
andthenfromthedropdownmenuforData,select
table.Inthedialogueboxthatappears,type
againstcolumninputcell,thecellreferenceB4
andclickOK.TheNPVvaluescorrespondingtothe
variousinvestmentfigureswillbeautomatically
filledin.NextgiveheadingsInvestmentandNPV
incellsA18andB18respectivelyasseparately
shown.Tochangethenumericalvalueintotextin
cellB18gotoFormat>Cells>Customandagainst
Type,typeout"Netpresentvalue"
Investment 2,601 Sales
24,000 (646) 15000
18,000 4,224 21,000
Thefollowinganalysisisdoneusingtheabovetechnique
Variablecostsasa
percentageofsales Netpresentvalue FixedCosts
70% 340.80 1,300
65% 3730.94 800
llustration
mountsinRupeesthousands)
ion of expected net present value
20,000
18,000
12,000

1,000
2,000

3,000
1,000

2,000

4,000
0
2,601

NetPresentValue
(1,166)
6,368

Netpresentvalue
1,471
3,354
 Discount rate Project life Tax rate
12% 10 33.33%
Expected values
Investment in year 0 (20,000)
Variable costs as a percentage of sales 66.67%
For years 1 to 10
Sales 18,000
Variable costs =C7*C5 12,001
Fixed costs 1,000
Depreciation =-C4/B2 2,000
Pre-tax profit 2,999
Taxes =C11*C2 1,000
Profit after taxes =C11-C12 2,000
Cash flow from operation =C13+C10 4,000
Present value of the cash flow stream =PV(A2,B2,-C14) 22,599
Net present value of the project =C15+C4 2,599

Key variables Pessimistic Expected Optimistic

Investment -24,000 -20,000 -18,000
Sales 15,000 18,000 21,000
Variable costs as a percent of sales 70 66.67 65
Fixed costs 1,300 1,000 800
 Pessimistic

24000
0.7

15000

1300

Page69
 Expected

20000
0.6667

18000

1000

Page70
 Optimistic

18000
0.65

21000

800

Page71
Scenario Summary
Current Values: Pessimistic Expected Optimistic
Changing Cells:
$C$4 (20,000) (24,000) (20,000) (18,000)
$C$7 18,000 15,000 18,000 21,000
$C$5 66.67% 70.00% 66.67% 65.00%
$C$9 1,000 1,300 1,000 800
Result Cells:
$C$16 2,599 -7,426 2,599 10,064
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
CalculationofFinancialBreakevenusingthedata
inExhibit13.7
('000)
Year 0 1to10
Investment 20,000
Variablecostsasa
fractionofsales 2/3
Taxrate 33.33%
Salesperyear 18,000
Variablecostsperyear 12,000
Fixedcostsperyear 1,000
Depreciationperyear 2,000
Pretaxprofitperyear 3,000
Taxesperyear 1,000
Profitaftertaxesper
year 2,000
Cashflowfromoperation
peryear 4,000
Accountingbreakeven
levelofsales 9,000
Calculationofthe
financialbreakeven
levelofsales
Discountrate 12%
Projectlifeinyears 10
Totalofthepresent
valuesofthecash
inflows 22,601
Initialinvestment 20,000
Financialbreakeven
levelofsales 15,928
 Section 14.2 : Calculation of average cost of debt for Multiplex Limited
Multiplex Limited: Debenture details
Face value Rs. 1,000
Coupon rate 12%
Remaining period to Yield to maturity using the
maturity(in years) 4 approximate formula 10.7%
Current market price 1,040 =(B3*B4+(B3-B6)/B5)/(0.4*B3+0.6*B6)

Illustration of Commercial paper cost calculation

Face value 1,000,000 The implicit interest rate for the remai 3.63%
Remaining period(in years) 0.5 =B9/B11-1
Current market price 965,000 The implicit interest rate/discount ra 7.39%
Formula used =(1+F9)^(1/B10)-1
Calculation of the average cost of debt
(Amounts in million)
YTM or
Current
Debt Instrument Face Value Market ValueCoupon RateRate
Non-convertible debentures 100 104 12% 10.7%
Bank loan 200 200 13% 12%
Commercial paper 50 48.25 NA 7.39%
Total = 352.25
Average cost of debt using market value proportions and yields 11.00%
Formula used=E16*(C16/C19)+E17*(C17/C19)+E18*(C18/C19)

Post-tax cost
of debt
Tax rate = 35% = 7.15%

Exhibit 14.1
Calculation of the WACC for Bharat Nigam Limited
Cost of equity 16%
Cost of preference 14%
Cost of debt 12%
Tax rate = 30%
Weighted
Cost [(1) x
Source of Capital Proportion (1) Cost (2) (2)]

Equity 0.60 16.00% 9.60%

Preference 0.05 14.00% 0.70%

Debt 0.35 8.40% 2.94%
WACC = 13.24%

Exhibit 14.2 Determination of Breaking Points and the Resulting Range of Total
New Financing for Shiva Electronics
 Range of New
Source of Financing (Rs. In Breaking Point ( Rs. In
Capital Cost million) million)

Equity 18% 0to 30 75

20% Above 30

Debt 10% 0to 50 83.33

11% Above 50

Proportion: Equity 40%

Debt 60%

Exhibit14.3WeightedAverageCostofCapitalforVariousRangesofTotalFinancingfor

RangeofTotalNew
SourceofCapital Proportion
Financing(Rs.Mill)

(1) (2)
0 to 75.00 Equity 40%
Debt 60%
WeightedAverageCostofCapital
75 to 83.33 Equity 40%
Debt 60%
WeightedAverageCostofCapital
Above 83.33 Equity 40%
Debt 60%
WeightedAverageCostofCapital

Exhibit14.4TheWeightedMarginalCostofCapital
WeightedMarginal
CostofCapital
RangeofTotalFinancing (%)
0 to 75 13.20%
75 to 83.33 14.00%
Above 83.33 14.60%
ulting Range of Total
 RangeofTotalNewFinancing

0to 75.00
Above 75.00

0to 83.33
Above 83.33

TotalFinancingforShivaElectronics

Cost% weightedcost%

(3) (2)x(3)
18.00% 7.20%
10.00% 6.00%
13.20%
20.00% 8.00%
10.00% 6.00%
14.00%
20.00% 8.00%
11.00% 6.60%
14.60%
 Exhibit15.1
(Rs.in'000)
Debtrepayablein
Interest
equalamountsover Taxrate
rate
years
14% 8 60%
CalculationofthePresentValueofTaxShield

Presentvalueoftax
Debtoutstanding Tax
Year Interest shieldusinga
atthebeginning shield
discountrateof14%
1 2400 336 202 177
2 2100 294 176 136
3 1800 252 151 102
4 1500 210 126 75
5 1200 168 101 52
6 900 126 76 34
7 600 84 50 20
8 300 42 25 9
 Section 19.2: Illustration of Net Income Approach
(Rs.in million)
Firm A Firm B
Net operating income 10,000 10,000
Interest on debt 0 3,000
Cost of debt 6% 6%
Cost of equity 10% 10%
Market value of debt 0 50,000
Market value of equity 100,000 70,000
Average cost of capital 10% 8.3%

Illustration of tax advantage of a rupee

tc 50%
tps 5%
tpd 30%
Tax advantage of a rupee of debt( in rupees) 0.32
 IllustrationCalculatingtheBreakEvenPBITLevel
(Amountsin
Presentcapitalstructure:
No.of equity shares 1,000,000 Taxrate
Face value of equity share 10
Externalfinancing
planned 10,000,000
Plan (i)
No.ofequitysharesto
beissued 1,000,000
Issueprice 10 EPSunderPlan(i)
Plan (ii)
Amountofdebentures
tobeissued 10,000,000
Interestrateon
debenture 14% EPSunderPlan(ii)
EPSunderPlan(i)EPS
underplan(ii) 0 BreakevenPBITlevel

NOTE:Tostartwith,enteronlytheformulaforEPSincellsD9andD12andtheirdifferen
fornulaform)incellB13keepingthecellno.D13blank.NextusethefeatureGoalSeeki
dropdownmenuofData>WhatifAnalysis,bysettingB13tothevalue0andholdingD13a
variablecell.Thisfeature,aftersomeiterations,willpostthecorrectvalueinthedesi
cell.

Cash Flow Coverage Ratio: Illustration

(Rs.in million)
Depreciation 20
EBIT 120
Interest on debt 20
Tax rate 50%
Loan repayment instalment 20

Cash Flow Coverage Ratio: 2.33

DSCR
Year 1 2
Profit after tax -2 10
Depreciation 12 10.8
Interest on long term loan 17.6 17.6
Loan repayment instalment
DSCR= 1.89
 20.7
(Rs.inmillion)
Depreciation 3
PBIT 15
Interestondebt 4
Taxrate 50%
Loanrepaymentinstalme 2.5
(a)Interestcoverager 3.75
(b)Cashflowcoverage 2

20.8

Year1 Year2
Profitaftertax 4 22
Depreciation 12 10.8
Interestontermloan 21.1 21.2
Termloanrepayment
instalment
DSCR 1.66

20.9
(a) (AmountsinRs.million)
Amountofdebtfinance 300
Interestrateondebt 15%
Annualinterestondebt 45
Expectedvalueofthe
netcashflows,
withouttakingthe
interestondebtinto
account 80

Expectedvalueofthe
netcashflows,taking
theinterestondebt
intoaccount(A) 35
Standarddeviationof
theabovenetcash
flows 40
Specifiedvalueofthe
netcashflow(which
signifiescash
inadequecy)(B) 0
Standardised
differencebetweenB
andA(thezvalue) 0.875
Probabilityofcash
inadequecy 19.08%
(b)

WecanuseGoalSeekfeatureinData>Whatif
Analysis,togetthezvalue(incellB128)
correspondingtoacumulativeporbabiliyof
5percentasshownbelow.
zvalue 1.640
Probabilityofcash
inadequecy 0.051

Again,usetheGoalSeekfeatureasshown
belowtogetthecashflow(incellB42
below)correspondingtoazvalueof1.15
Cashflowthatwould
giveazvalueof
1.64 14.4
zvalue 1.64
Thedebtthatcanbe
servicedwithan
interestofRs.14.4
millionis 96
BITLevel
(AmountsinRupees)

50%

0.7

2,800,000

andD12andtheirdifference(in
sethefeatureGoalSeekinthe
value0andholdingD13asthe
correctvalueinthedesired
9

3 4 5 6 7 8 9
20 25 30 40 40 50 55
9.72 8.75 7.87 7.09 6.38 5.74 5.17
17.05 14.85 12.65 10.45 8.25 6.05 3.85
20 20 20 20 20 20 20
 (Rs.inmillion)
Year3 Year4 Year5 Total
25 40 50 133
9.72 8.75 7.87 49.14
20.5 17.8 15.2 95.8

24 24 24 72
 10 Sum
55 323
4.65 78.17
1.65 110
20 160
Exhibit 21.1: Numerical Examples of Walter Model
Earning per share 4
Dividend payment 4 2
Rate of return required by investors 15%
Price per share
as per Walter
Rate of return on investments model
20% 26.67 31.11
15% 26.67 26.67
10% 26.67 22.22

Exhibit 21.2 : Numerical Examples of Gorden Model

Fraction of earnings the firm
ploughs back 0.25 0.5
Price per share
as per Gorden
Rate of return on investments model
20% 30.00 40.00
15% 26.67 26.67
10% 24.00 20.00

UsingthedatainExhibit21.3toseehowdividendpolicyaffectsthecu
FirmA FirmB
Next year's price(Rs) 120 105
Dividend )Rs) 0 15
Total pre-tax payoff 120 120
Note:AswewishtousetheGoalSeekfeat
Current price 102.86 101.43 blanktostartwith.Therequiredvaluesw
Capital gain 17.14 4 automaticallyattheend.
Dividend tax rate 20%
Tax rate on capital gains 10% 10%
Post-tax dividend 0 12
Post-tax capital gains 15.43 3.21
Total post-tax return 15.43 15.21 ifAnalysis,togetthecorrespondingsha
1/Post-tax rate of return 6.67 6.67 respectively
The Steps
1.OntheDatamenu>WhatifAnalysisselectGoalSeek.
2.IntheSetcellbox,enterthereferenceforthecellthatcontainstheformulaHere,t
3.IntheTovaluebox,typetheresultyouwant.Hereitis6.666667i.e.1/0.15seetheN
4IntheBychangingcellbox,enterthereferenceforthecellthatcontainsthevalueyou
forFirmAandC22forFirmB
5ClickOK.
SimilarlyyoucanfindthecurrentpriceofB
ndpolicyaffectsthecurrentprice

ousetheGoalSeekfeatureinData,keepB22andC22
h.Therequiredvalueswouldgetfilledup
heend.

etthecorrespondingsharepriceinB22andC22

instheformulaHere,thisiscellB29
667i.e.1/0.15seetheNoteabove
tcontainsthevalueyouwanttoadjustviz.cellB22
 Section 22.4 : Example of Lintner Model
EPS for year t (EPSt) 4
DPS for year t-1 (Dt-1) 1.5
Target payout ratio( r) 0.6
Adjustment rate( c) 0.5
DPS for year t according to the Lintner model(D t) 1.95
 Exhibit 23.7 Financial Information for Horizon Limited

Balance sheet data

Profit and Loss account data Beginning End of
of 20X0 20X0
Sales 800 Inventory 96 102
Cost of goods sold 720 Accounts receivable 86 90
Accounts payable 56 60
Inventory period in days 50.2
Accounts receivable period in days 40.2
Accounts payable period in days 29.4
Operating cycle in days 90.3
Cash operating cycle in days 60.9

Section 23.6: Example of Cash Requirement for Working Capital (Rs.in million)
Credit period granted
Sales 240 on sales(months) 2
Credit period extended
Material cost 72 by suppliers(months) 3
Period of arrear in
payment of
Wages paid 48 wages(months) 1
Period of arrear in
Manufacturing expenses outstanding payment of cash
at the end of the year 4 expenses(months) 1
Period of arrear in
payment of total
administraive
Administrative and sales expenses 30 expenses(months) 0
Gross profit 25%
Stocking period of raw
materials(months) 2
Stocking period of finished
goods(months) 1
Cash balance maintained 5
Safety margin on working capital
requirement 10%
Total manufacturing cost 180
Manufacturing expenses 60
Cash manufacturing expenses 48
Depreciation 12
Cash manufacturing cost 168
Add:Administrative and sales expenses 30
Total cash cost 198 ( Rs.in million)
Current assets Current Liabilities
Debtors 33 Sundry creditors 18
Manufacturing expeses
Raw material stock 12 outstanding 4
Finished goods stock 14 Wages outstanding 4
Cash balance 5
Total current assets 64 Total current liabilities 26
Working capital 38
Safety margin on working capital 3.8
Working capital required 41.8
 Exhibit24.2
ForecastofCashReceipts
January February March April May June
1.Sales 100000 100000 100000 120000 120000 120000

2.CreditSales 80000 80000 80000 96000 96000 96000

3.CollectionofAccounts
Receivables 80000 80000 80000 80000 88000 96000
4.CashSales
5.ReceiptfromSaleof 20000 20000 20000 24000 24000 24000
Equipment 5000
6.Interest 2000
TotalCashreceipts 100000 100000 105000 104000 112000 122000

Exhibit24.3
ForecastofCashPayments
January February March April May June
1.MaterialPurchases 40000 40000 48000 48000 48000 48000
2.CreditMaterial
Purchases 40000 40000 48000 48000 48000 48000
3.PaymentofAccounts
Payable 40000 40000 40000 48000 48000 48000
4.MiscellaneousCash
Purchases 2000 2000 2000 2000 2000 2000
5.Wages 15000 15000 15000 15000 15000 15000
6.ManufacturingExpenses 20000 20000 20000 20000 20000 20000
7.GeneralAdmin.and
SellingExpenses 10000 10000 10000 10000 10000 10000
8.Dividend 20000
9.Tax 20000
10.CapitalExpenditure 50000
Total 87000 87000 137000 95000 95000 135000

Exhibit24.4
SummaryofCashForecast
January February March April May June
1.OpeningCashBalance 22000
2.Receipts 100000 100000 105000 104000 112000 122000
3.Payments 87000 87000 137000 95000 95000 135000
4.NetCashFlow 13000 13000 32000 9000 17000 13000
5.CumulativeNetCashFlow 13000 26000 6000 3000 20000 7000
6.OpeningCashBalance 35000 48000 16000 25000 42000 29000
7.MinimumCashBalance
Required 20000 20000 20000 20000 20000 20000
8.SurplusorDeficitin
RelationtotheMinimum
CashBalancdRequired 15000 28000 4000 5000 22000 9000
 Exhibit24.7
EstablishingtheOptimalCashConversionSize
(Amou
Cashconversionsize(theamountof
1 marketablesecuritiesthatwillbe
convertedintocash) 100,000 200,000
Numberofconversionsduringthe
2 planningperiodofthreemonths
(1,500,000/line1) 15 7.5
3 Averagecashbalance(line1/2) 50,000 100,000
4 Interestincomeforegone 2,000 4,000
(line3x.04)
5 Costofcashconversion 7500 3750
(Rs.500xline2)
Totalcostoforderingandholding
6 cash(line4+line5) 9,500 7,750
Amountrequiredformeetingitstransactionneeds 1,500,000
Annualyieldonitsmarketablesecurities 16%
Fixedcostperconversiontransaction 500
ConversionSize
(AmountsinRs.)

300,000 400,000 500,000

5 3.75 3
150,000 200,000 250,000
6,000 8,000 10,000

2500 1875 1500

8,500 9,875 11,500

inthenext(months) 3
 Exhibit25.2
Construction of a Credit Rating Index (based on a 5-point rating scale)
Rating
Factor Factorweight 5 4
Pastpayment 0.30 *
Netprofitmargin 0.20 *
Currentratio 0.20
Debtequityratio 0.10 *
Returnonequity 0.20 *
Ratingindex

IllustrationofDaysSalesOutstanding

Sales(Rs.in No.ofdaysin
Month million) Receivables themonth
January 150 400 31
February 156 360 28
March 158 320 31
April 150 310 30
May 170 300 31
June 180 320 30
July 190 340 31
August 200 350 31
September 210 360 30
October 220 380 31
November 230 400 30
December 240 420 31
DaysSalesOutstanding
Endofquarter1 62
Endofquarter2 58
Endofquarter3 55
Endofquarter4 56
 Rating Factor
3 2 1 score
1.20
0.80
* 0.60
0.40
1.00
ingindex 4.00
 SafetystockandcalculationsinExhibit26.2
Dailyusage
ratein Leadtimein
tons Probability days Probability
10 0.2 20 0.25
20 0.6 30 0.50
30 0.2 40 0.25
Stockoutcostestimatedperton(Rs.) 10,000
Carryingcostpertonperyear(Rs.) 1,400
(a)
Normalusageintons 600
=SUMPRODUCT(A43:A45,B43:B45)*SUMPRODUCT(C43:C45,D43:D45)
Possible
Dailyusage Leadtime levelsof Safety
rate indays usage stock
10 20 200
10 30 300
10 40 400
20 20 400
20 30 600
20 40 800 200
30 20 600
30 30 900 300
30 40 1200 600

Expected
stockout Carrying
Safetystock Stockout Stockoutcost Probability cost cost Totalcost
600 0 0 0.00 0 840,000 840,000
300 300 3,000,000 0.05 150,000 420,000 570,000
200 100 1,000,000 0.10 100,000 280,000 580,000
400 4,000,000 0.05 200,000
300,000
0 200 2,000,000 0.15 300,000
300 3,000,000 0.10 300,000
600 6,000,000 0.05 300,000 0 900,000
900,000
Theoptimallevelofsafetystockis27tonsbecauseatthatlevelthecostis
minimised.
Exhibit 28.2 Good Accounts Bad Acounts
Xi Yi Xi Yi
Account Current Returnon Account Current Returnon
Number Ratio Investment Number Ratio Investment
1 1.10 13 11 0.70 11
2 1.50 15 12 0.90 4
3 1.20 17 13 0.80 6
4 0.90 21 14 1.30 2
5 1.60 7 15 1.10 6
6 2.20 8 16 0.50 8
7 0.90 16 17 0.30 8
8 1.00 13 18 1.40 6
9 1.30 8 19 0.90 3
10 1.30 2 20 1.10 14

Sums 13.00 120.00 9.00 60.00

Averages 1.30 12.00 0.90 6.00
Averageforbothgroups
X 1.1
Y 9

(X-X_bar)*
No. (X-X_bar)^2 (Y-Y_bar)^2 (Y-Y_bar) No. (X-X_bar)^2 (Y-Y_bar)^2
1 0.00 16 0.00 11 0.16 4
2 0.16 36 2.40 12 0.04 169
3 0.01 64 0.80 13 0.09 9
4 0.04 144 -2.40 14 0.04 49
5 0.25 4 -1.00 15 0.00 9
6 1.21 1 -1.10 16 0.36 1
7 0.04 49 -1.40 17 0.64 1
8 0.01 16 -0.40 18 0.09 9
9 0.04 1 -0.20 19 0.04 36
10 0.04 49 -1.40 20 0.00 25
SUM 1.80 380 -4.70 1.46 312.00
Averages
x^2 3.26
y^2 692.00 2 of X 0.172
xy 1.70 2 of Y 36.421
dx 0.40 of XY 0.089
dy 6.00
Coefficients of the Discriminant Function
a 2.4203
b 0.1707

Exhibit28.3
Z Scores for various accounts
AcountNo. ZScore
1 4.8812
2 6.1907
3 5.8060
 4 5.7627
5 5.0673
6 6.6901
7 4.9092
8 4.6392
9 4.5119
10 3.4878
11 3.5718
12 1.4955
13 2.9604
14 3.4878
15 3.6864
16 2.5756
17 2.0916
18 4.4125
19 2.6903
20 5.0519
(X-X_bar)*
(Y-Y_bar)
-0.80
2.60
0.90
-1.40
0.00
0.60
0.80
-0.90
1.20
0.00
3.00
 Exhibit29.4
CalculationofDurationBondA
Present Proportionofthe Col4X
Year CashFlow Valueat Bond'sValue Time Year
18%
1 2 3 4 5 1

1 15.00 12.71 0.142 0.142 1

2 15.00 10.77 0.120 0.241 2
3 15.00 9.13 0.102 0.306 3
4 15.00 7.74 0.086 0.346 4
5 15.00 6.56 0.073 0.366 5
6 115.00 42.60 0.476 2.856 6
Duration 4.257 years D

FaceValueoftheBond 100 FaceValueofth

CurrentValueoftheBond 89.5 CurrentValueoft

Coupon(interestrate) 15% Coupon(interest

 BondB
Present Proportionofthe Col4X
CashFlow Valueat Bond'sValue Time
18%
2 3 4 5

10.00 8.47 0.118 0.118

10.00 7.18 0.100 0.200
10.00 6.09 0.085 0.254
10.00 5.16 0.072 0.287
10.00 4.37 0.061 0.304
110.00 40.75 0.566 3.397
Duration 4.558 years

FaceValueoftheBond 100

CurrentValueoftheBond 71.98

Coupon(interestrate) 10%
Face value 100

Coupon payable per annum 15%

Years to maturity in years 6

Redemption value 100

Current market price 89.5

Any date, if the
date of purchase is
Settlement not certain) 1/1/2006
Maturity =C6+365*C3 12/31/2011
No. of times
interest paid in a
Frequency year 1
3 represents the
day count
convention: actual
no. of days/365 , in
Basis interest calculation 3

Example : Forward rates calculation

Year 1 2
SpotRate 7.50% 8%
Forwardrate 7.50% 8.50%

Bond refunding illustration

Old bonds New bonds
Amount 100,000,000 ###
Balance maturity in years 10 10
Coupon rate 18% 16%
Call premium on old bonds 5%
Issue cost on new bonds 5,000,000
Unamortised portion of the issue cost on
old bonds 3,000,000
Marginal tax rate 40%
Cost of calling the old bonds 105,000,000
Net proceeds of the new issue 95,000,000
Tax savings on tax-deductible expenses 3,200,000
Initial outlay 6,800,000
Annual interest outflow on old bonds 18,000,000
Tax savings on interest expenses and
amortisation of issue costs of old bonds 7,320,000
Annual interest ouflow on new bonds 16,000,000
Tax savings on interest expenses and
amortisation of issue costs of new bonds 6,600,000
Annual net cash savings 1,280,000
After-tax cost on new bonds 0.096
Present value of the annual cash savings 8,002,032
Net present value of refunding the bond 1,202,032
 Excel based on Exhibit 29.4

=RATE(C3,C1*C2,-C5,C4) 18%

=DURATION(C6,C7,C2,F3,C8,C9) 4.26

mple : Forward rates calculation

3 4
0 9%
9.51% 10.51%
Given: (Rs.inmillion)
Costofthevehicle 1.2
Operating,
maintenance,insuranceand
othercostsinyear1 0.2
Increaseintheabovecost
perannum 8%
Usefullifeofthecarin
years 5
Netsalvagevalueofthecar
attheendof5years 0.4
DepreciationrateWDV 40%

MarginaltaxrateofCentaur 35%
CostofcapitalofCentaur 11%
Exhibit30.1

PosttaxCashFlowsAssociatedwiththeOwnershipandOperationoftheCar
Year
0 1 2 3 4
Initialcost 1.200
Operatingandothercosts 0.200 0.216 0.233 0.252
DepreciationrateWDV 0.480 0.288 0.173 0.104
Taxshieldoperatingcosts
anddepreciation 0.238 0.176 0.142 0.124
Netsalvagevalue
Posttaxcashflow 1.200 0.038 0.040 0.091 0.127
Discountfactor 1.000 0.901 0.812 0.731 0.659
Presentvalue 1.200 0.034 0.032 0.067 0.084

Presentvalueofthecosts 1.203
PVIFA 3.696
PosttaxEAC 0.326
Leaserental 0.501
Exhibit30.2CashFlowoftheLeaseContract
Year
0 1 2 3 4
1.Costofforklift 10
2.Depreciation 4.00 2.40 1.44 0.86
3.Lossofdepreciationtax
shield(2*0.35) 1.40 0.84 0.50 0.30
4.Leasepayment 2.4 2.4 2.4 2.4
5.Taxshieldonlease
payment(4*0.35) 0.84 0.84 0.84 0.84
6.Lossofsalvagevalue
7.Cashflowoflease
(1+3+4+5+6) 10.00 2.96 2.40 2.06 1.86

ComparingleaseandHirepurchaseoptions
(AmountsinRs.)

Given:
Costoftheequipment 1,000,000
Yearsofuseofthe
equipment 10
Netsalvagevalueafter10
yearsofuse 100,000
Posttaxcostofdebtto
SyntheticChemicals 8%
TaxrateforSynthetic
Chemicals 50%
Depreciationrateforthe
equipmentasperWDVmethod 33.33%
HirePurchaseoption:
Flatinterestrate 0

HirePurchaseperiodin HP Principal
months 36 Year instalment Interest repayment
Totalinterestburden 420,000 1 473,333 230,811 242,523
AnnualHPinstalment 473,333 2 473,333 140,000 333,333
MonthlyHPinstalment 39,444 3 473,333 49,189 424,144
Leaseoption:
Primaryleaseperiodin
years 5

Leaserentperyearduring
primaryleaseperiodasa
fractionoftheleaseamount 0.3
Secondaryleaseperiodin
years 10
Leaserentperyearduring
secondaryleaseperiod 12,000
Exhibit30.3
CashFlowsofLeasingandHirePurchaseOptions
Year Leasing HirePurchase

Depn.tax
Rent Interest Principal shield NSV
1 150,000 115,405 242,523 166,667
2 150,000 70,000 333,333 111,111
3 150,000 24,595 424,144 74,074
4 150,000 49,383
5 150,000 32,922
6 6,000 21,948
7 6,000 14,632
8 6,000 9,755
9 6,000 6,503
10 6,000 4,335 100,000

PVoftheleasecashflows 615,211
PVoftheHPcashflows 587,125 ChoosethelessercostHPoption
 (Rs.inmillion)

0.272
0.062

0.117
0.400
0.245
0.593
0.145

5 6

0.52 0.31

0.18 0.11
2.4 2.4

0.84 0.84
1.00

1.74 2.67
e
NetHP
cash
flow
191,261
292,222
374,665
49,383
32,922
21,948
14,632
9,755
6,503
104,335
 Exhibit 32.3 Exhibit
Projected Profit and Loss account 32
for Ma
Financial Statements of Matrix for the Preceding Three Years( Years 1-3) through 8- The Explicit
(Rs.in million)
Profit and Loss Account
1 2 3
Net sales 180 200 229

Income from marketable securities 3

Non-operating income 8
Total income 180 200 240
Cost of goods sold 100 105 125

Selling and general administration expense 30 35 45

Depreciation 12 15 18
Interest expenses 12 15 16
Total costs and expenses 154 170 204
PBT 26 30 36
Taxes 8 9 12
PAT 18 21 24
Dividend 11 12 12
Retained earnings 7 9 12

Balance Sheet
1 2 3
Equity capital 60 90 90
Reserves and surplus 40 49 61
Debt 100 119 134
Total 200 258 285
Fixed assets 150 175 190
Investments 20 25
Net current assets 50 63 70
Total 200 258 285

The calculation of NOPLAT for Matrix Limited: Exhibit 32

Free Cash Flow Forecast for Matrix Limited
Tax rate for Matrix Limited 40% - The Explici
Year 1 Year 2 Year 3
EBIT
(= PBT+interest expense-interest income
-non-operating income) 38 45 41
Tax provision from income statement 8 9 12 1
Add: Tax shield on interest expenses 4.8 6 6.4 2
Less: Tax on interest income 0 0 1.2 3
Less: Tax on non-operating income 0 0 3.2 4
=Taxes on EBIT 12.8 15 14 A
NOPLAT
(=EBIT-taxes on EBIT) 25.2 30 27 5
ROIC
(=NOPLAT/INVESTED CAPITAL) 15.0% 11.3% 6
Net investment
[=(Net fixed assets at the end of the year +
net current assets at the end of the year)
- (Net fixed assets at the beginning of the
year + net current assets at the beginning
of the year)] 38 22 7
8
Exhibit 32.4 : Free Cash Flow B
Gross cash flow
(=NOPLAT +depreciation) 45 45 C
Gross investment
(= increase/(decrease in net current
assets + capital expenditure) 53 40 D
Free cash flow -8 5 E

Exhibit 32.5- Cash Flow Available to Investors F

Year 2 Year 3
Free cash flow -8 5
Add: After-tax non-operating cash flow 0 4.8
Cash flow available to investors -8 9.8

After-tax interest expenses 9 9.6

Add: Cash dividend on equity and
preference capital 12 12
Add: Redemption of debt 0 0

Less: New borrowing 19 15

Add: Share buybacks 0 0
Less: Share issues 30 0
Add: Excess marketable securities 20 5
Less: After-tax income on marketable
securities 0 1.8
Financing flow -8 9.8
 Projected Profit and Loss account Exhibit 32.7 Limited for five Years- Years 4
for Matrix
through 8- The Explicit Forecast Period
Profit and Loss account
(Rs.in million)
4 5 6 7 8
Net sales 270 320 360 400 440
Income from excess
marketable securities 3 2
Non-operating income
Total income 273 322 360 400 440
Cost of goods sold 144 173 193 218 245
Selling and general
administration 47 59 67 70 77
Depreciation 22 26 29 32 35
Interest expense 18 20 21 23 25
Total costs and expenses 231 278 310 343 382
Profit before tax 42 44 50 57 58
Tax provision 13 16 18 19 18
Profit after tax 29 28 32 38 40
Dividend 15 15 15 16 16
Retained earnings 14 13 17 22 24

Projected Balance Sheet

Equity capital 90 90 90 90 90
Reserves& surplus 75 88 105 127 151
Debt 140 150 161 177 192
Total 305 328 356 394 433
Fixed assets 220 240 266 294 324
Investments 10
Net current assets 75 88 90 100 109
Total 305 328 356 394 433

Exhibit 32.8
Free Cash Flow Forecast for Matrix Limited for Five Years- Years 4 through 8
- The Explicit Forecast Period
( Rs.in million)

4 5 6 7 8
Profit before tax 42 44 50 57 58
Interest expense 18 20 21 23 25
Interest income 3 2 0 0 0
Non-operating income 0 0 0 0 0
EBIT:[(1)+(2)-(3)-(4)] 57 62 71 80 83
Tax provision on income
statement 13 16 18 19 18
Tax shield on interest expense 7.2 8 8.4 9.2 10

Tax on interest income 1.2 0.8 0 0 0

Tax on non-operating income 0 0 0 0 0
TAXES ON EBIT:[(5)+(6)-(7)-(8) 19 23.2 26.4 28.2 28

NOPLAT:[(A)-(B)] 38 38.8 44.6 51.8 55

NET INVESTMENT[ 35 33 28 38 39
FREE CASH FLOW:[(C)-(D)] 3 5.8 16.6 13.8 16
ROIC=NOPLAT/INVESTED
CAPITAL 12.9% 11.8% 12.5% 13.1% 12.7%

Note that the invested capital for year 4 after adjustment is Rs.295 million
Terminal steady growth rate, g 10%
Target capital structure, i.e. D:E 2 : 3
Cost of debt 12.67%
Cost of equity 18%
WACC = 14.0%

Value of operations, PV(FCF) =NPV(I56,H49:L49) Rs.in million 34.78

Continuing value,=FCF8(1+g)/
(WACC-g) =L49*(1+I52)/(I56-I52) Rs.in million 439.69
PV(CV) =L59/(1+I56)^L36 Rs.in million 228.33
Value of operations =L58+L60 Rs.in million 263.11
Value of non-operating assets =D29 Rs.in million 25.00

VALUE OF MATRIX LIMITED =L61+L62 Rs.in million 288.11

,
 Two Stage Growth Model

Base Year( Year 0) Information Inputs for High Growth rate period
( Amounts in Rs.million) Length of the period(in years) 5
Revenues 4,000 Growth rate in revenues & EBIT 10%

as a
percentage of
EBIT revenues 12.5% Growth rate in capital expenditure 10%
Capital expenditure 300 Growth rate in depreciation 10%
Net working capital as a
Depreciation 200 percentage of revenue 30%
as a
percentage of
Net working capital revenues 30% Cost of debt ( pre-tax) 15%
Coroporate tax rate for all time 40% Debt equity ratio 1 :
Paid up equity capital Rs.10 par 300 Risk-free rate 13%
Market value of debt 1,250 Market risk premium 6%
Equity beta 1.333

Exhibit 32.9
Forecasted FCF: Exotica Corporation
(Rs.in million)
1 2 3 4
1 Revenues 4400 4840 5324 5856.40
2 EBIT 550 605 665.5 732.05
3 EBIT(1-t) 330 363 399.3 439.23
Capital
expenditure-
4 depreciation 110 121 133.1 146.41
Net working
5 capital 120 132 145.2 159.72
6 FCF (3-4-5) 100 110 121 133.10

Stable
growth
High growth period period
Cost of equity 21.0% 19.00%
WACC 15.0% 15.00%

Present value of the FCF during the explicit forecast period =NPV(D27,C23:G23)
Present value of terminal value =H23/(E27-H4)/(1+D27)^G17
The value of the firm =H29+H30

Three Stage Growth Model

 High
Growth Transition
Base Year (Year 0 ) Information Inputs for the period period

(amounts in Rs.million) Length of the period in years 5 5

Growth rate in revenues,EBIT,
depreciation and capital
Revenues 1,000 expenditure 25%
Decrease per year in the growth
rate of
revenues,EBIT,depreciation and
EBIT 250 capital expenditure 3%
Net working capital as a
Capital expenditure 295 percentage of revenues 20% 20%
Depreciation and
amortisation 240 Cost of debt( pre-tax) 15% 14%
Net working capital
as a percentage of
revenues 20% Risk free rate 12% 11%
Tax rate for all time to
come 40% Market risk premium 6% 6%
Equity beta 1.583 1.1

During High growth period Transition period Stable growth

Cost of equity =E40+E42*E4 21.50% =F40+F42*F41 17.60% =G40+G42*G41

=I35/(I35+K35)*E39*(1- =I36/(I36+K36)*F39*(1-
WACC B41)+K35/(I35+K35)*C45 B41)+K36/(I36+K36)*E45 =I37/(I37+K37)*G39*(1-B41)+K
14.00% 13.00% 16.00%

Exhibit 32.10
Forecasted FCF: Multiform Limited (amounts in Rupees million)

Period Growth rate EBIT(1-t) Capital expenditure Depn. NWC

1 25% 187.5 368.8 300 250
2 25% 234.4 460.9 375.00 312.5
3 25% 293.0 576.2 468.75 390.6
4 25% 366.2 720.2 585.94 488.3
5 25% 457.8 900.3 732.42 610.4
6 22% 558.5 1098.3 893.55 744.6
7 19% 664.6 1307.0 1063.33 886.1
8 16% 770.9 1516.1 1233.46 1027.9
9 13% 871.1 1713.2 1393.81 1161.5
10 10% 958.2 1884.6 1533.19 1277.7

Terminal value at the end of year 10 =H61*(1+G36)/(F47-G36) 8996.87

=F63/(1+B47)^A56/
Present value of the terminal value (1+D47)^(A61-A56) 2536.24
Value of the firm =J62+F64 3512.61
 Free Cash Flow to Equity (FCFE) Model ( see para 32.11)
(Rs.incrore)
3 4 5 6 7

Profitaftertax 24 29 28 32 38
Preference
dividend
Fixedassets
(net) 190 220 240 266 294
Investments 25 10
Netcurrent
assets 70 75 88 90 100
Debt 134 140 150 161 177
Preference

The FCFE forecast for the explicit period, years 4 through 8:

4 5 6 7
(Profitaftertax
Preferencedividend) 29 28 32 38

(Capitalexpenditure
Depreciation) 30 20 26 28

(Changeinnetcurrent
assets) 5 13 2 10
+(Newdebtissuedebt
repayment) 6 10 11 16
(Changeininvestmentin
marketablesecurities) 15 10 0 0
FCFE 15 15 15 16
Costofequity 18.27%
Theconstant
FCFEgrowthrate
afterthe
explicitgrowth
period 10%
Equityvalue(at
theendofyear
3) Formulaused Rs. 139.53
=NPV(B86,C85:G85)+G85*(1+B87)/(B86B87)/(1+B86)^(G79B69)
Growth rate period Stable Growth Period

6%

is equal to
growth rate
in
depreciation

30%

15%
1 2 : 3
12%
7%
1.0

(Rs.in million)
5 Terminal year
6442.04 6828.56
805.26 853.57
483.15 512.14

161.05

175.69 115.96
146.41 396.19

398.59 million rupees

27-H4)/(1+D27)^G17 2,188.70 million rupees
2,587.29 million rupees
 Stable
Growth
period High Debt : Equity
Growth
Period 1.5 : 1

Transition
10% Period 1 : 1

Stable
Growth
Period 0 : 1

20%

12%

10%

6%
1.00

Stable growth period

=G40+G42*G41 16.00%

=I37/(I37+K37)*G39*(1-B41)+K37/(I37+K37)*H45
16.00%

ounts in Rupees million)

Presen
NWC FCF WACC t value
50 68.8 14.00% 60.31
62.5 85.9 14.00% 66.13
78.1 107.4 14.00% 72.51
97.7 134.3 14.00% 79.51
122.1 167.8 14.00% 87.18
134.3 219.4 13.00% 100.85
141.5 279.4 13.00% 113.66
141.8 346.5 13.00% 124.72
133.6 418.1 13.00% 133.18
116.2 490.7 13.00% 138.34
Sum= 976.37
million rupees

million rupees
million rupees
 (Rs.incrore)
8

40

324

109
192

40

30

15

0
16

crores
^(G79B69)
 Exhibit 33.2
Determination of Value Created by a New Strategy
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
Current Income Statement Projections
Value 1 2 3
(Year 0)
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
Sales 1000 1100 1210 1331
Gross Margin 250 275 303 333
S & G.a. 100 110 121 133
Profit Before Tax 150 165 182 200
Tax 60 66 73 80
-------------- ------------------------ ---------------- ----------------------------------
Net Profit 90 99 109 120
-------------- ------------------------ ---------------- ----------------------------------
Balance Sheet Projections
Fixed Assets 300 330 363 399
Current Assets 200 220 242 266
-------------- ------------------------ ---------------- ----------------------------------
Total Assets 500 550 605 666
Equity 500 550 605 666
-------------- ------------------------ ---------------- ----------------------------------
Cash Flow Projections
Profit After Tax 99 109 120
Depreciation 30 33 36
Capital Expenditure 60 66 73
Increase in Current Assets 20 22 24
-------------- - - -
Operating Cash Flow 49 54 59
-------------- - - -
Present Value Factor 0.862 0.743 0.641
PV of Operating Cash Flow 42 40 38
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------
PV of Operating Cash Flow Stream 190
Residual value 906
PV of Residual Value 431
Total Share Holder Value 622
Pre-Strategy VAlue 563
Value of Strategy 59
---------------------------------------------------- -------------- ------------------------ ---------------- ----------------------------------

ASSUMPTIONS

Annual rate of increase in Sales 10.00%

Gross Margin 25.00%
S and G.A: 10.00%
Fixed Assets 10.00%
Current Assets 10.00%
Discount rate for Present Value 16.00%
Tax rate 40.00%
 Exhibit 33.4 Balance Sheet and Profit and Loss Account of Melvin Corporation
(in million)
Cost of equity 18%
Interest rate on debt 12%
Tax rate 30%
Profit and Loss Statement for the
Balance Sheet as on 31-3-20X0 Year Ending on 31-3-20X0
Liabilities Assets
Equity 100 Fixed assets 140 Net Sales

Debt 100 Net current assets 60 Cost of goods sold

200 200 PBIT
Interest
PBT
Tax
PAT
Post-tax cost of debt 8.40%
WACC 13.20%
NOPAT 29.4
Return on capital 14.7%
Formula used
EVA 3 =B68-B67*B61
EVA 3 =B61*(B69-B67)
EVA 3 =(F65+F62*(1-B56))-B67*B61
EVA 3 =F65-B54*B59
Exhibit 33.5
Depreciation Charge and Capital Charge under Alternative Methods
Cost of the equipment 100,000
Economic life(in years) 5
Cost of capital 15%
Salvage value 0
Part A: Straight Line Method
1 2 3 4
Capital 100,000 80,000 60,000 40,000
Depreciation 20,000 20,000 20,000 20,000
Capital charge 15,000 12,000 9,000 6,000
Sum 35,000 32,000 29,000 26,000
Part B: Sinking Fund Method
Capital 100,000 85,168 68,112 48,497
Depreciation 14,832 17,056 19,615 22,557
Capital charge 15,000 12,775 10,217 7,275
Sum(Annuity) 29,832 29,832 29,832 29,832
=PMT($B$79,$B$78,-($B$77-$B$80))

Exhibit 33.6 Capital Budgeting : DCF Method and EVA Method

Part A: Project Details
Investment 100 Equity financing 100
Project life ( in years) 4 Depreciation Straight line
Salvage value 0 Tax rate 50%
Annual revenues 200 Annual costs 135
(excluding depreciation,
Cost of equity 15% interest and taxes)
Part B: Cash Flow and EVA Projections
Year 1 2 3 4
Revenues 200 200 200 200
Costs (excluding dep, interest & taxes 135 135 135 135
PBDIT 65 65 65 65
Depreciation 25 25 25 25
PBIT 40 40 40 40
NOPAT 20 20 20 20
cash flow 45 45 45 45
Capital at charge 100 75 50 25
Capital charge 15 11.25 7.5 3.75
EVA (NOPAT - Capital charge) 5 8.75 12.5 16.25

Part C: NPV Calculation

PV of cash inflows 39.13 34.03 29.59 25.73
NPV under DCF method
28.47 =SUM(B115:E115)-B96
PV of EVA 4.35 6.62 8.22 9.29
NPV using EVA
28.47 =SUM(B118:E118)

Exhibit 33.8 Bonus Bank System

Normal
year Good year Bad year
Bonus earned 50 200 -100
Beginning bank 100 100 200
Cumulative balance 150 300 100
Payout ratio 1/3 1/3 1/3
Bonus paid 50 100 33 1/3
Bonus forward 100 200 66 2/3

Exhibit 33.11 Annual Measurement of the Project in Three Sample Years

Initial investment 300,000
Investment in fixed assets 250,000
Net working capital 50,000
Economic life of the plant (in years) 14
Salvage value of the fixed assets at
the end of 14 years 0
Salvage value of the net working
capital at the end of 14 years 100%
Annual depreciation charge on fixed
assets 17,857
NOPAT each year 21,080
Cost of capital 10%
Cost of replacement of fixed assets 250,000
Year 1 6 12
NOPAT 21,080 21,080 21,080
Depreciation 17,857 17,857 17,857
Cash flow(1+2) 38,937 38,937 38,937
Economic depreciation 8,937 8,937 8,937
Sustainable cash flow 30,001 30,001 30,001
Book capital 300,000 210,714 103,571
CFROI (%) 10.00% 10.00% 10.00%
ROCE(%) 7.03% 10.00% 20.35%
ROGI (%) 12.98% 12.98% 12.98%

Exhibit 33.12 EVA and CVA Calculations

Panel A: EVA
Year 1 6 12
NOPAT 21,080 21,080 21,080
Book capital 300,000 210,714 103,571
Cost of capital 10% 10% 10%
Capital charge 30,000 21,071 10,357
EVA -8,920 9 10,723
Panel B: CVA
NOPAT 21,080 21,080 21,080
Depreciation 17,857 17,857 17,857
Cash flow 38,937 38,937 38,937
Economic depreciation 8,937 8,937 8,937
Cash invested 300,000 300,000 300,000
Cost of capital 10% 10% 10%
Capital charge on gross investment 30,000 30,000 30,000
CVA 1 1 1

Note: CVA is 1 owing to rounding off errors. It should be 0

y
---------- --------------- ---------------
ojections Residual
4 5 value
5+
---------- --------------- ---------------
1464 1611 1611
366 403 403
146 161 161
220 242 242
88 97 97
---------- --------------- ---------------
132 145 145
---------- --------------- ---------------
ections
439 483 483
293 322 322
---------- --------------- ---------------
732 805 805
732 805 805
---------- --------------- ---------------
tions
132 145 145
40 44 44
80 88 44
27 29 0
- - -
65 72 145
- - -
0.552 0.476
36 34
---------- --------------- ---------------

---------- --------------- ---------------

tion
(in million)

ss Statement for the

ng on 31-3-20X0

300

258
42
12
30
9
21

5
20,000
20,000
3,000
23,000

25,940
25,940
3,891
29,832
 Exhibit34.3
Balance Sheet of Alpha Company and Beta Company
Part A: Before Merger Part B: After Merger
Alfa Beta Pooling Purchase
Liabilities Company Company Method Method
Share capital (10 par 4000 1000 4600 4600
Capitalreserve - - 400 1900
Share premium 2000 500 2500 2000
General reserve 5000 1000 6000 5000
P&L account 1000 500 1500 1000
Loan funds 4000 2500 6500 6400
Current liabilities 2000 1500
and provisions 3500 3600
18000 7000 25000 24500
Assets
Net fixed assets 7000 3000 10000 10200
Investments 3000 500 3500 3400
Current assets 7000 3000 10000 9900
Miscellaneous 1000 500
expenditure 1500 1000
18000 7000 25000 24500

Share swap ratio

No.of Alfa shares 3
forBetashares 5
Par value of shares 10 Afterthemerger
of each company thecapitalof
Alfawill
increaseby 600
On revaluation under the
'purchase method', the revised
values are:
Net fixed assets 3200
Investments 400
Current assets 2900
Current liabilities 1600
Loan funds 2400
Exhibit 34.4 Relevant Information for Firms 1 and 2
Firm 1 Firm 2
Total earnings, E 18,000,000 6,000,000
No.of outstanding shares, S 9,000,000 6,000,000
Earnings per share, EPS 2 1
Market price per share, P 24 8
Price/earnings ratio, PE 12 8

Maximum exchange ratio acceptable to the shareholders of firm 1 for some illustrativ
PE12 9 10 11
Maximum ER1 0 0.17 0.33

Minimum exchange ratio acceptable to the shareholders of firm 2 for some illustrativ
PE12 3 9 10
Minimum ER2 3.00 0.43 0.38
Exhibit 34.6 Free Cash Flow

Year 1 2 3
Invested Capital ( Beg.) 50.00 60.00 72.00
NOPAT 6.00 7.20 8.64
Net investment 10.00 12.00 14.40
Free cash flow (4.00) (4.80) (5.76)
Growth rate (%) 20.00 20.00 20.00
Return on invested capital 12%
WACC 11%
PV of the FCF during the planning period (9.39)
Horizon value at the end of the 6th year 156.1
PV of the horizon value 83.4
Enterprise DCF value 74.0
of firm 1 for some illustrative values of PE 12
12 15 20
0.50 1.00 1.83

of firm 2 for some illustrative values of PE 12

11 12 15 20
0.33 0.30 0.23 0.17
ee Cash Flow
( in million )
4 5 6 7
86.40 96.77 108.38 117.05
10.37 11.61 13.01 14.05
10.37 11.61 8.67 9.36
0.00 0.00 4.34 4.68
12.00 12.00 8.00 8.00
 International Capital Budgeting: Para 37.5 Illustration

Current spot exchange rate of USD in

Rupees 65
Risk-free rate of interest in India 8%
Risk-free rate of interest in the US 2%
Required rupee return 15%
Expected Cash
exchange flow in
Cash flow in rate(Rs per rupees(
Year USD(million) USD) million)
0 -100 65.00 -6500
1 30 68.82 2064.7
2 40 72.87 2914.9
3 50 77.16 3857.9
4 60 81.70 4901.8
Home Currency Approach:
NPV in rupees(million) 2,838.76 =NPV(B6,D9:D12)+D8

Foreign Currency Approach

Risk premium implicit in the risk-
adjusted rupee return 0.065 =(1+B6)/(1+B4)-1
Risk -adjusted dollar rate 0.0861 =(1+B5)*(1+B16)-1
NPV in million dollars 43.673 =B8+NPV(B17,B9:B12)
Rupee NPV of the project(Rs.million) 2838.8 =B18*B3