Final Examination Questions

Mergers and Acquisitions

Question 1. X limited wants to take over Y limited. Share exchange ratio based on EPS

Particulars X Y
PAT 36,00,000 7,20,000
Equity shares (No/s) 9,00,000 2,40,000
Market price per share 30 14

a. Calculate no of shares to be issued to Y co shareholders

b. Calculate EPS after merger
c. If PE ratio goes to 12 after merger, what will be the market price of new firm
after merger? What is the gain or loss to both of the shareholders on the
basis of market value?

Solution: The ratio is for every 4 shares of Y limited, X Limited will Issue 3 shares

𝟐𝟒𝟎𝟎𝟎𝟎
a) Therefore: For 240000 shares of Y limited, X limited will issue 𝒙 𝟑 = 180000 Shares
𝟒

𝑷𝑨𝑻 𝟑𝟔𝟎𝟎𝟎𝟎𝟎+𝟕𝟐𝟎𝟎𝟎𝟎 𝟒𝟑𝟐𝟎𝟎𝟎𝟎

b) EPS = 𝑵𝑶.𝑶𝑭 𝑺𝑯𝑨𝑹𝑬𝑺 = = 𝟏𝟎𝟖𝟎𝟎𝟎𝟎 = 4
𝟗𝟎𝟎𝟎𝟎𝟎+𝟏𝟖𝟎𝟎𝟎𝟎

𝑴𝒂𝒓𝒌𝒆𝒕 𝑷𝒓𝒊𝒄𝒆 𝑴𝒂𝒓𝒌𝒆𝒕 𝑷𝒓𝒊𝒄𝒆

c) i) PE (Price earning) = = 12 =
𝑬𝑷𝑺 𝟒

Therefore, Market Price = 12*4 = Rs. 48 Market Price after merger.

ii) The Gain for shareholder X will be 48-30 = Rs. 18

i.e. The total gain for X shareholders is 90000 * 18 = Rs. 1,62,00,000.00

Before Merger the Market value for Y = 240000 * 14 = Rs. 33,60,000.00

After Merger the Market value for Y = 180000 * 48 = Rs. 86,40,000.00

Therefore, the gain for Y will be Rs. 86,40,000 – Rs. 33,60,000 = Rs. 52,80,000.00
 Time Value of Money

Question 2. TML borrows Rs.20 lacs from HDFC on the terms of repayment in 5 years in EMI
and at the interest rate of 12% pa. calculate EMI, total interest paid in 5 years. What would
be the impact on total interest and EMI if period reduced to 4 years or increased to 6 years?

1
1− (1+𝑟)𝑛
Solution: Formula, Present value of Annuity (PV) = Amount of Annuity x { }
𝑟

Given, Present Value = Rs. 20,00,000.00

Rate of Interest = 12% p.a

No. of Years = 5, there no. of Months is 5*12 = 60

EMI = ?
1
1−
(1+0.01)60
Therefore, (i) 20,00,000.00 = EMI x { }
0.01
20,00,000
EMI = = Rs. 44489.00
44.955

Total EMI = 44489 *60 = Rs. 2669340.00

Principal = Rs. 2000000.00, Therefore,

Interest = Total Amount – Principal = Rs. 6,69,340.00

Similarly for 6 Years (i.e. 72 Months)

1
1−
(1+0.01)72
(ii) 20,00,000.00 = EMI x { }
0.01
20,00,000
EMI = = Rs. 39101.00
51.150

Total EMI = 39101 * 72 = Rs. 28,15,272.00

Therefore Interest = Rs. 815272.00 (28,15,272 – 20,00,000)

Similarly For 4 Years (i.e. 48 Months)
1
1−
(1+0.01)48
(iii) 20,00,000.00 = EMI x { }
0.01
20,00,000
EMI = = Rs. 52668.00
37.974

Total EMI = 52668 * 48 = Rs. 25,28,064.00

Therefore Interest = Rs. 5,28,064.00 (25,28,064 – 20,00,000)

Total Interest amount reduced by Rs. 1,41,276.00 (6,69,340.00 - 5,28,064.00) in case EMI
period is reduced to 4 years and EMI amount Increased by Rs. 8179 per Month.

Total Interest amount Increased by Rs. 1,45,932.00 (6,69,340.00 – 8,15,272.00) in case EMI
period is Increased to 6 years and EMI amount Reduced by Rs. 5,388.00 per Month.

Capital Structure
Question 3. Company at present has 50000 no. of Equity shares of Rs. 10 each. It is in the
need of another Rs. 500000.00 for expansion, to raise this funds it has following options.

a) Equity Share of Rs. 10 each, 13% Debenture and 18% Preference share in the ratio of 6 : 2
:2

b) Equity Share of Rs. 10 each, 18% Preference shares in the ratio 3 : 7

c) Equity Shares of Rs. 10 each 20% Debenture and 15% Preference share in the ratio of 3 : 4
:3

Company expects to get EBIT of Rs. 300000.00 after expansion, the tax rate 30%, Calculate
EPS and suggest the Best option.

Solution: Working Note

Option A Option B Option C

500000 500000 500000

6 : 2 : 2 3 : 7 3 : 4 : 3

3Lacs 1Lac 1Lac 1.5 Lacs 3.5Lacs 1.5 Lacs 2Lacs 1.5 Lacs

Equity Debt Pref. Share Equity Pref. Share Equity Debt Pref. Share
Statement Showing EPS

Particular Option A Option B Option C

EBIT 3,00,000 3,00,000 3,00,000

Less: Interest 13,000 - 40,000

EBT 2,87,000 3,00,000 2,60,000

Less: Tax@ 30% 86,100 90,000 78,000

PAT 2,00,900 2,10,000 1,82,000

Less: Preference Dividend 18,000 63,000 22,500

Profit for Equity 1,82,900 1,47,000 1,59,500

No. of Equity Shares 80,000 65,000 65,000

EPS 2.286 2.262 2.454

Conclusion: Since EPS is highest under Option C, we should raise Rs. 500000.00 by way of
equity shares, Debenture and Preference shares in the ratio 3 : 4 : 3

Question 4. Existing capital structure of company is as under –

Equity shares of 100 each – Rs.40,00,000
Retained earnings – Rs.10,00,000
9% preference shares – Rs.25,00,000
7% debentures – Rs25,00,000
Existing rate of return is 12% and income tax rate is 30%. Company needs another 25 lacs to
finance its expansion programme. It is considering following three alternatives –
a. Issue of 20,000 equity shares at 25% premium
b. Issue of 10% preference shares
c. Issue of 8% debentures
It is estimated that PE ratio in case of equity, Preference and debentures would be 20, 17
and 16 respectively. Suggest best alternative

Solution:

Particular Option A Option B Option C

Existing Capital 1,00,00,000 1,00,00,000 1,00,00,000
Additional 25,00,000 25,00,000 25,00,000

Total Capital 1,25,00,000 1,25,00,000 1,25,00,000

EBIT @ 12% 15,00,000 15,00,000 15,00,000

Less: Interest Old 1,75,000 1,75,000 1,75,000

Interest New - - 2,00,000

PBT 13,25,000 13,25,000 11,25,000

Less: Tax @ 30% 3,97,500 3,97,500 3,37,500

PAT 9,27,500 9,27,500 7,87,500

Less: Preference Dividend (Old) 2,25,000 2,25,000 2,25,000

Preference Dividend (New) - 2,50,000 -

Profit for Equity 7,02,500 4,52,500 5,62,500

No. of Equity Shares (Old) 40,000 40,000 40,000

No. of Equity Shares (New) 20,000 - -

EPS 11.708 11.313 14.063

PE Ratio 20 17 16

Market Price (EPS*PE ratio) 234.17 192.31 225.00

Conclusion: Since Market price is highest under option A we should go for equity shares
option for Raising Funds.
Question 5. Exe Limited is considering three alternatives to raise 2,00,000

a. 100% equity

b. Debt : equity = 50%:50%

c. 50% equity, balance preference shares

Cost of debt and preference shares is 8% , tax rate 35%

Equity shares of the value 10 each will be issued at 100% premium

Expected EBIT 80,000

Determine – EPS under each plan and suggest.

Solution:

Particular
Option A Option B Option C

EBIT 80,000 80,000 80,000

Less: Interest - 8,000 -

PBT 80,000 72,000 80,000

Less: Tax @ 35% 28,000 25,200 28,000

PAT 52,000 46,800 52,000

Less: Preference Dividend - - 8,000

Profit for Equity 52,000 46,800 44,000

No. of Equity Shares 10,000 5,000 5,000

EPS 5.200 9.360 8.800

Conclusion: Since EPS is highest under option B we should go for 50% equity 50% Debt
option for Raising Funds.
 Cost of Capital
Question 6. Comment on optimum debt equity mix from the following –

Debt as % of total Cost of debt %(after Cost of equity %

capital employed tax)

0 6 11

11 6 11

22 7 12.5

35 7 12.5

41 7 13.5

56 7.5 13.5

61 8.5 14

Solution:

% of Debt % of Equity Cost of debt Cost of equity % WACC %

%(after tax)
0% 100% 6.00 11.00 11.00
11% 89% 6.00 11.00 10.45
22% 78% 7.00 12.50 11.29
35% 65% 7.00 12.50 10.58
41% 59% 7.00 13.50 10.84
56% 44% 7.50 13.50 10.14
61% 39% 8.50 14.00 10.65

Comment: 56% Debt and 44% Equity is optimum debt equity mix as weighted Average cost
of Capital (WACC) is 10.14% which is least in all given option.

Capital Budgeting
Question 7. Calculate discounted payback at the discounting rate of 10% for the following
Mr X purchased a machine for a business costing 20 lacs which would be depreciated over
next 4 years under SLM method of depreciation, Income tax rate is 30%. His expected cash
inflow / profits before tax and depreciation are as under –

Year 1 – 9 lacs, Year 2 – 6 lacs, Year 3 – 8 lacs , Year 4 – 8 lacs

𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑪𝒐𝒔𝒕−𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆

Solution: SLM Depreciation =
𝑵𝒐.𝒐𝒇 𝒀𝒆𝒂𝒓𝒔

Particular Year 1 Year 2 Year 3 Year 4

PBDT 9,00,000 6,00,000 8,00,000 8,00,000
Less: Depreciation 5,00,000 5,00,000 5,00,000 5,00,000
PBT 4,00,000 1,00,000 3,00,000 3,00,000
Tax @ 30% 1,20,000 30,000 90,000 90,000
PAT 2,80,000 70,000 2,10,000 2,10,000
Add: Depreciation 5,00,000 5,00,000 5,00,000 5,00,000
Cash Flow 7,80,000 5,70,000 7,10,000 7,10,000
Discount Factor 0.909 0.826 0.751 0.683
DCF 7,09,091 4,71,074 5,33,434 4,84,940
Cumulative DCF 7,09,091 11,80,165 17,13,599 21,98,538

Payback period = 3Years +{ (20,00,000.00 – 17,13,599.00)*365/4,84,940.00}

= 3 Years + 216 days

Question 8. Calculate NPV ( Net Present Value ) and PI ( Profitability Index ) for the
following two projects by considering 8% discounting factor, and suggest the best project to
be selected under each method –

Each project costs Rs.100,000 as initial investment and their projected cash flows after taxes
( CFAT ) are given as under –

Year Proj A Proj B

1 15,000 55,000

2 25,000 45,000

3 35,000 25,000

4 45,000 15,000

5 65,000 15,000
 Solution: Initial Investment is Rs. 100000.00

Cost of Capital = 8%

Project A Project B
Particular Cash Flow DF DCF PV Cash Flow DF DCF PV

Investment -1,00,000 1.000 -1,00,000 -1,00,000 1.000 -1,00,000

1st Year 15,000 0.926 13,889 13,889 55,000 0.926 50,926 50,926

2nd Year 25,000 0.857 21,433 21,433 45,000 0.857 38,580 38,580

3rd Year 35,000 0.794 27,784 27,784 25,000 0.794 19,846 19,846

4th Year 45,000 0.735 33,076 33,076 15,000 0.735 11,025 11,025

5th Year 65,000 0.681 44,238 44,238 15,000 0.681 10,209 10,209

NPV 40,421 1,40,421 30,586 1,30,586

𝑷𝑽 𝒐𝒇 𝑭𝒖𝒕𝒖𝒓𝒆 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘𝒔

Profitability Index of Project A =
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

𝟏𝟒𝟎𝟒𝟐𝟏
= = 1.40
𝟏𝟎𝟎𝟎𝟎𝟎

𝑷𝑽 𝒐𝒇 𝑭𝒖𝒕𝒖𝒓𝒆 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘𝒔

Profitability Index of Project B =
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

𝟏𝟑𝟎𝟓𝟖𝟔
= = 1.31
𝟏𝟎𝟎𝟎𝟎𝟎

Conclusion: Since NPV and PI is better in Project A, we should select Project A under both
the Methods.

Question 9. Alpha limited is considering purchase of new machine. Two alternatives have
been suggested each costing 400000. CFAT are estimated as under –
 CFAT

A B

1 40,000 1,20,000

2 1,20,000 1,60,000

3 1,60,000 2,00,000

4 2,40,000 1,20,000

5 1,60,000 80,000

Calculate NPV and suggest the best machine by considering 10% DF

Solution: Initial Investment = Rs. 400000.00

Discounting Factor = 10%

Machine A Machine B
Particular Cash Flow DF DCF Cash Flow DF DCF

Investment -4,00,000 1.000 -4,00,000 -4,00,000 1.000 -4,00,000

1st Year 40,000 0.909 36,364 1,20,000 0.909 1,09,091

2nd Year 1,20,000 0.826 99,174 1,60,000 0.826 1,32,231

3rd Year 1,60,000 0.751 1,20,210 2,00,000 0.751 1,50,263

4th Year 2,40,000 0.683 1,63,923 1,20,000 0.683 81,962

5th Year 1,60,000 0.621 99,347 80,000 0.621 49,674

NPV 1,19,018 1,23,221

Conclusion: Since NPV is better in Machine B, Machine B is Best.

Question 10. A firm whose cost of capital is 10% is considering two mutually exclusive
projects X and Y. details are as under
 Project X Project Y

Investment -70,000 -70,000

CFAT Yr 1 10,000 50,000

CFAT Yr 2 20,000 40,000

CFAT Yr 3 30,000 20,000

CFAT Yr 4 45,000 10,000

CFAT Yr 5 60,000 10,000

Compute NPV at 10%, also calculate IRR for X and Y

(Hint for X consider 25-30% DF and for Y 35-40%)

Solution:

@10% Project X Project Y

Year DF CF DCF CF DCF
Investment 1.000 -70,000 -70,000 -70,000 -70,000
CFAT Yr 1 0.909 10,000 9,091 50,000 45,455
CFAT Yr 2 0.826 20,000 16,529 40,000 33,058
CFAT Yr 3 0.751 30,000 22,539 20,000 15,026
CFAT Yr 4 0.683 45,000 30,736 10,000 6,830
CFAT Yr 5 0.621 60,000 37,255 10,000 6,209
NPV 46,150 36,578

IRR 27% Project X 38% Project Y

Year DF CF DCF DF CF DCF
Investment 1.000 -70,000 -70,000 1.000 -70,000 -70,000
CFAT Yr 1 0.786 10,000 7,861 0.727 50,000 36,350
CFAT Yr 2 0.618 20,000 12,360 0.529 40,000 21,141
CFAT Yr 3 0.486 30,000 14,575 0.384 20,000 7,685
CFAT Yr 4 0.382 45,000 17,187 0.279 10,000 2,793
CFAT Yr 5 0.300 60,000 18,016 0.203 10,000 2,031
NPV -0.0 -0.0

𝑆
IRR = 𝑆𝑅 + [𝑆+𝐼𝐷𝐼 𝑥 (𝐸𝑅 − 𝑆𝑅)]

Where, SR= Start rate, ER= End rate, S= Surplus, D = Deficit

Start rate is the rate in which NPV is positive

End rate is the rate in which NPV is negative

 Receivables Management
Question 11. In order to increase sales from a normal level of 2.4 lacs per annum, marketing
manager submits following proposals for extension of credit period. Its PV ratio is 33.33%
expected rate of return 20%. Advice on following proposals.(assume 360 days)

Proposed increase in period beyond Increase over normal sales

30 days of normal period

15 days 12,000

30 days 18,000

45 days 21,000

60 days 24,000

Solution:

Particulars 30 Days 45 Days 60 Days 75 Days 90 Days

Sales 2,40,000 2,52,000 2,58,000 2,61,000 2,64,000

Less: Variable Cost 1,60,000 1,68,000 1,72,000 1,74,000 1,76,000

Contribution 80,000 84,000 86,000 87,000 88,000

Less: Opportunity Cost 2,667 4,200 5,733 7,250 8,800

Profit 77,333 79,800 80,267 79,750 79,200

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏
PV Ratio =
𝑺𝒂𝒍𝒆𝒔

(𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕+𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕)∗𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝑹𝒆𝒕𝒖𝒓𝒏∗𝑵𝒐. 𝒐𝒇 𝑫𝒂𝒚𝒔

Opportunity Cost =
𝑻𝒐𝒕𝒂𝒍 𝑫𝒂𝒚𝒔

Conclusion: Since highest profit is Rs. 80267.00 under 60 days Credit Period, Manager
should go for 60 days Credit policy.
Question 12. A trader whose current sales are in the range of 6 lacs pa and credit period of
30 days wants to take more liberal credit policy to improve sales. A study made reveals the
following information

Policy Increase in collection period Increase in sales Bad debts

A 10 days 30,000 1.5%

B 20 days 48,000 2.0%

C 30 days 75,000 3.00%

D 45 days 90,000 4.00%

Selling price per unit 3.00, average cost per unit 2.25, variable cost per unit 2.00. current
bad debts 1%. Required rate of return 20%. Which policy would you recommend?

Solution:

Selling Price = Rs. 3 Per Unit, Therefore, Total Unit = 600000/3 = 200000 Units

Average Cost = Rs. 2.25 Per Unit, Variable Cost = Rs. 2 Per unit,

Therefore, Fixed Cost = Average Cost – Variable Cost = 0.25 Per unit

Expected Return = 20%

Particulars 30 Days 40 Days 50 Days 60 Days 75 Days

Sales 6,00,000 6,30,000 6,48,000 6,75,000 6,90,000

Less: Variable Cost 4,00,000 4,20,000 4,32,000 4,50,000 4,60,000

Contribution 2,00,000 2,10,000 2,16,000 2,25,000 2,30,000

Less: Fixed Cost 50,000 50,000 50,000 50,000 50,000

Less: Opportunity Cost 7,500 10,444 13,389 16,667 21,250

Less: Bad debts 6,000 9,450 12,960 20,250 27,600

Profit 1,36,500 1,40,106 1,39,651 1,38,083 1,31,150

Conclusion: Since Policy A gives Highest Profit of Rs. 140,106.00, 40 Days credit period policy
is better.
 Working Capital Management
Question 13. Proforma cost sheet of a company provides following data of cost and S.P per
unit

Raw material 80

Direct labour 30

Overheads 60

Raw material is in stock in average one month. Material is in process on average half
month. Finished goods are in stock for one month. Credit allowed by suppliers one month.
Credit allowed to debtors 2 months lag in payment of wages 1.5 weeks. Lag in payment of
overheads one month. 25% of the output sold in cash. Cash on hand expected to be 25000.
Prepare statement showing working capital at the level of activity of 104000 units. Assume 4
weeks equivalent to 1 month, 12 months in a year.

Solution:

Calculation of Working Capital for 104000 Units

A. Current Assets:

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟖𝟎∗𝟏
i) Stock of Raw Material = = Rs. 693333.33
𝟏𝟐

ii) Stock of WIP

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟖𝟎∗𝟎.𝟓
a) Material = = Rs. 346666.67
𝟏𝟐

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟑𝟎∗𝟎.𝟓
b) Labour = * 0.5 = Rs. 65000.00
𝟏𝟐

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟔𝟎∗𝟎.𝟓
c) Overhead= * 0.5 = Rs. 130000.00
𝟏𝟐

𝟏𝟎𝟒𝟎𝟎𝟎∗(𝟖𝟎+𝟑𝟎+𝟔𝟎)∗𝟏
iii) Finished Goods = = Rs. 1473333.33
𝟏𝟐

𝟏𝟎𝟒𝟎𝟎𝟎∗(𝟖𝟎+𝟑𝟎+𝟔𝟎)∗𝟎.𝟕𝟓∗𝟐
iv) Debtors = = Rs. 2210000.00
𝟏𝟐
v) Cash Balance = Rs. 25000.00

Total Current Assets = Rs. 693333.33 + Rs. 346666.67 + 65000.00 + Rs. 130000.00 + Rs.
1473333.33 + Rs. 2210000.00 + Rs. 25000.00 = 4943333.33

B) Current Liabilities:

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟖𝟎∗𝟏
i) Creditors = = Rs. 693333.33
𝟏𝟐

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟑𝟎∗𝟏.𝟓
ii) Outstanding Wages = = Rs. 97500.00
𝟒𝟖

𝟏𝟎𝟒𝟎𝟎𝟎∗𝟔𝟎∗𝟏
iii) Outstanding Overheads = = Rs. 520000.00
𝟏𝟐

Total Current Liabilities = Rs. 693333.33 + Rs. 97500.00 + Rs. 520000.00 = Rs. 1310833.33

Therefore Working Capital = Current Assets – Current Liabilities

= Rs. 4943333.33 – Rs. 1310833.33 = Rs. 3632500.00 Ans

Theory Questions:

1) Objective of Financial Management

2) Decision of Finance Manager
3) Factor Affecting Working Capital
4) What are the different methods under Capital Budgeting for risk measurement?