Solutions to Financial Management Problems

By Manas Pokley
December 18, 2024

1 Present Value of Annuity (Mr. Aman’s Invest-

ment)
Given:

• Annual payment = $1,250

• Number of years = 4

• Required rate of return = 9.35%

• Ordinary annuity (payments at end of each year)

Using Present Value of Annuity formula:

1
1− (1+r)n
P V = P MT × (1)
r

1
1− (1+0.0935)4
P V = 1250 ×
0.0935
= 1250 × 3.2814
= $4, 101.75

2 Present Value of Annuity Due (Mr. Ramesh’s In-

vestment)
Given:

• Annual payment = $1,500

• Number of years = 4

• Required rate of return = 9%

• Annuity due (first payment today)

1
 Using Present Value of Annuity Due formula:
1
1− (1+r)n
P Vdue = P M T × × (1 + r) (2)
r

1
1− (1+0.09)4
P Vdue = 1500 × × (1.09)
0.09
= 1500 × 3.2397 × 1.09
= $5, 297.71

3 Future Value with Different Compounding Periods

Given:

• Principal (P) = Rs.1,00,000

• Time (t) = 5 years

• Annual interest rate (r) = 8.5%

Table 1: Compound Interest Comparison

Compounding Future Value (Rs.) Effective Rate
Monthly 151,558.44 8.84%
Quarterly 151,402.95 8.77%
Semi-annual 151,249.69 8.72%
Annual 150,946.69 8.50%
Continuous 151,648.52 8.87%

4 EBIT-EPS Analysis (Ms Rishi Steel)

Given:

• Current operating income = Rs.4.80 million

• New investment = Rs.7.50 million

• Expected increase in operating income = Rs.4.20 million

• Tax rate = 33%

2
 Table 2: EBIT-EPS Analysis
Particulars Plan A (Rs.) Plan B (Rs.)
EBIT (Old + New) 9,000,000 9,000,000
Less: Interest (Old) 1,000,000 1,000,000
Less: Interest (New) 223,125 236,250
EBT 7,776,875 7,763,750
Less: Tax (33%) 2,566,369 2,561,938
EAT 5,210,506 5,201,812
Less: Preference Dividend 135,000 150,000
Earnings for Equity 5,075,506 5,051,812
No. of Shares 18,750 18,750
EPS 270.69 269.43

5 NPV and IRR Calculation

Given:

• Initial investment = Rs.6,50,000

• Discount rate = 10%

NPV Formula: n
X CFt
N P V = −C0 + (3)
t=1
(1 + r)t

Table 3: NPV Calculation

Year Cash Flow PV Factor (10%) Present Value
0 -650,000 1.000 -650,000
1 210,000 0.909 190,890
2 195,000 0.826 161,070
3 220,000 0.751 165,220
4 135,000 0.683 92,205
5 88,000 0.621 54,648
NPV 14,033

[Solutions continue...]
Solutions to Financial Management Problems (Part 2) Financial Analysis December
18, 2024

6 Future Education Cost Funding (Question 6)

Given:

• Annual tuition = Rs.2,20,000

3
 • Years of education = 4
• First payment in 15 years
• Interest rate = 5.5%
Step 1: Calculate future value needed in 15 years
(1 + 0.055)4 − 1
F Vneeded = 220, 000 × (4)
0.055

F Vneeded = Rs.957, 169.60

Step 2: Calculate present value needed today
F Vneeded 957, 169.60
PV = 15
= = Rs.442, 283.84 (5)
(1 + 0.055) (1 + 0.055)15

7 Effective Interest Rate Calculation (Question 7)

Given:
• Initial deposit = Rs.2,50,000
• Final amount = Rs.7,90,00,000
• Time period = 13 years
Using compound interest formula:
7, 90, 00, 000 = 2, 50, 000(1 + r)13
316 = (1 + r)13
1
r = (316) 13 − 1
r = 0.3367 or 33.67%

8 University Tuition Funding (Question 8)

Given:
• Annual tuition = Rs.5,00,000
• Years of education = 5
• First payment in 12 years
• Interest rate = 6%
Step 1: Calculate future value needed
(1 + 0.06)5 − 1
F Vneeded = 500, 000 × = Rs.2, 814, 735.25 (6)
0.06
Step 2: Calculate present value
2, 814, 735.25
PV = = Rs.1, 394, 852.63 (7)
(1 + 0.06)12

4
9 Perpetuity Value (Question 9)
Given:
• Annual payment = $250
• Required rate of return = 7%
Using perpetuity formula:
P MT 250
P Vperpetuity = = = $3, 571.43 (8)
r 0.07

10 Monthly Mortgage Payment (Question 10)

Given:
• House price = Rs.9,80,000
• Down payment = Rs.40,000
• Loan amount = Rs.9,40,000
• Term = 22 years (264 months)
• Monthly interest = 0.5%
Using Monthly Payment formula:
r(1 + r)n
P MT = L (9)
(1 + r)n − 1

0.005(1 + 0.005)264
P M T = 940, 000 ×
(1 + 0.005)264 − 1
P M T = Rs.6, 721.84

11 Monthly Mortgage Payment - Case 2 (Question

11)
Given:
• House price = Rs.17,70,000
• Down payment = Rs.1,50,000
• Loan amount = Rs.16,20,000
• Term = 28 years (336 months)
• Monthly interest = 0.75%

0.0075(1 + 0.0075)336
P M T = 1, 620, 000 × = Rs.13, 247.63 (10)
(1 + 0.0075)336 − 1

5
12 Regular Payback Period (Question 12)
Given:

• Initial investment = Rs.17,50,000

• Cash inflows:

– Year 1: Rs.7,00,000
– Year 2: Rs.6,25,000
– Year 3: Rs.3,75,000
– Year 4: Rs.2,95,000
– Year 5: Rs.6,87,000

Table 4: Cumulative Cash Flow Analysis

Year Cash Flow Cumulative Remaining
0 -17,50,000 -17,50,000 17,50,000
1 7,00,000 -10,50,000 10,50,000
2 6,25,000 -4,25,000 4,25,000
3 3,75,000 -50,000 50,000
4 2,95,000 2,45,000 -

Payback Period = 3 + (50,000/2,95,000) = 3.17 years

13 Discounted Payback Period (Question 13)

Given:

• Initial investment = Rs.14,50,000

• Discount rate = 11%

• Cash inflows over 5 years

Table 5: Present Value Analysis

Year Cash Flow PV Factor Present Value Cumulative PV
0 -14,50,000 1.000 -14,50,000 -14,50,000
1 5,00,000 0.901 4,50,500 -9,99,500
2 4,25,000 0.812 3,45,100 -6,54,400
3 3,75,000 0.731 2,74,125 -3,80,275
4 3,95,000 0.659 2,60,305 -1,19,970
5 2,87,000 0.593 1,70,191 50,221

Discounted Payback Period = 4 + (1,19,970/1,70,191) = 4.71 years

6
14 Beta Calculation (Question 14)

Table 6: Market and Stock Returns

Return Type Period 1 Period 2 Period 3 Period 4 Period 5
Market 17% 9% -11% 12% -21%
TCS -12% 17% -6% 19% -19%

Beta formula:
P
Cov(Rs , Rm ) (Rs − Rs )(Rm − Rm )
β= 2
= P = 0.87 (11)
σm (Rm − Rm )2

15 WACC Calculation (Question 16)

Given:

• Total capital = Rs.30 lakhs

• Debt = 30% at 10% cost

• Preference = 25% at 12% cost

• Equity = 45% at 18% cost

• Tax rate = 33%

WACC formula:

W ACC = wd × kd (1 − t) + wp × kp + we × ke (12)

W ACC = 0.30 × 0.10(1 − 0.33) + 0.25 × 0.12 + 0.45 × 0.18

= 0.0201 + 0.0300 + 0.0810
= 13.11%

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Solutions to Financial Management Problems (Questions 16-26) By Manas Pokley
December 18, 2024

16 WACC Calculation with Complex Capital Struc-

ture (Question 16)
Given:

• Total capital = Rs. 30 lakhs

7
 • Capital structure:

– Debt: 30% at 10%

– Preference: 25% at 12%
– Equity: 45% at 18%

• Tax rate = 33%

WACC formula:

W ACC = wd × kd (1 − t) + wp × kp + we × ke (13)

W ACC = 0.30 × 0.10(1 − 0.33) + 0.25 × 0.12 + 0.45 × 0.18

= 0.0201 + 0.0300 + 0.0810
= 13.11%

17 EBIT-EPS Analysis (Question 17)

Given:

• Operating income = Rs.4.80 million

• New investment = Rs.7.50 million

• Expected increase = Rs.4.20 million

• Existing interest = Rs.1.0 million

• Shares = 15,000 (FV = Rs.100)

• Tax rate = 33%

Table 7: EBIT-EPS Analysis Comparison

Particulars Plan A (Rs.) Plan B (Rs.)
EBIT 9,000,000 9,000,000
Less: Interest (Old) 1,000,000 1,000,000
Less: Interest (New) 223,125 236,250
EBT 7,776,875 7,763,750
Less: Tax (33%) 2,566,369 2,561,938
EAT 5,210,506 5,201,812
Less: Preference Dividend 135,000 150,000
Earnings for Equity 5,075,506 5,051,812
No. of Shares 18,750 18,750
EPS 270.69 269.43

8
18 NPV and IRR Analysis (Question 18)
Given:

• Initial investment = Rs.7,75,000

• Cash flows:

– Year 1: Rs.2,75,000
– Year 2: Rs.2,25,000
– Year 3: Rs.2,46,000
– Year 4: Rs.1,67,000
– Year 5: Rs.1,02,000

• Required return = 10%

Table 8: NPV Calculation

Year Cash Flow PV Factor (10%) Present Value
0 -775,000 1.000 -775,000
1 275,000 0.909 250,000
2 225,000 0.826 185,921
3 246,000 0.751 184,846
4 167,000 0.683 114,061
5 102,000 0.621 63,342
Net Present Value 23,170

IRR Calculation (by iteration):

IRR ≈ 11.8% (14)

19 Beta Calculation (Question 19)

Table 9: Market and Stock Returns Data

Period 1 Period 2 Period 3 Period 4 Period 5
Market Return 12% 19% 18% -18% -13%
Stock Return -8% 28% 12% -11% 2%

Beta calculation:
Cov(Rs , Rm )
β= 2
= 0.836 (15)
σm

9
20 ARR Calculation (Question 20)
Given:

• Investment = Rs.12,00,000

• Operating profits:

– Year 1: Rs.4,00,000
– Year 2: Rs.3,75,000
– Year 3: Rs.4,25,000
– Year 4: Rs.4,75,000
– Year 5: Rs.1,75,000

• Tax rate = 30%

P
Operating Profits
Average Annual Profit = × (1 − 0.30)
5
18, 50, 000
= × 0.7
5
= Rs.2,59,000

2, 59, 000
ARR = × 100 = 21.58% (16)
12, 00, 000
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Solutions to Financial Management Problems (Questions 21-26) Financial Analysis
December 18, 2024

21 ARR Calculation (Question 21)

Given:

• Initial investment = Rs.10,00,000

• Operating profits:

– Year 1: Rs.3,00,000
– Year 2: Rs.2,75,000
– Year 3: Rs.3,35,000
– Year 4: Rs.2,75,000
– Year 5: Rs.1,50,000

• Tax rate = 27%

10
 Table 10: ARR Calculation
Particulars Amount (Rs.)
Total Operating Profit 13,35,000
Average Operating Profit 2,67,000
Less: Tax (27%) 72,090
Average Annual Profit after Tax 1,94,910
1,94,910
ARR = 10,00,000
× 100 19.49%

22 Beta Calculation for UPL (Question 22)

Table 11: Market and UPL Returns

Period 1 2 3 4 5
Market Return 12% 19% 18% -18% -13%
UPL Return -8% 28% 12% -11% 2%

Beta calculation:
Cov(RU P L , Rm )
β= 2
(17)
σm

Market Average = 3.6%

UPL Average = 4.6%
Covariance = 0.0214
Market Variance = 0.0256
0.0214
β= = 0.836
0.0256

23 Beta Calculation for TCS (Question 23)

Table 12: Market and TCS Returns

Period 1 2 3 4 5
Market Return 17% 9% -11% 12% -21%
TCS Return -12% 17% -6% 19% -19%

Market Average = 1.2%

TCS Average = −0.2%
Covariance = 0.0198
Market Variance = 0.0234
0.0198
β= = 0.846
0.0234
11
24 Overall Cost of Capital (Question 24)
Given:

• Total capital = Rs.30 lakhs

• Debt: 30% at 10%

• Preference: 25% at 12%

• Equity: 45% at 18%

• Tax rate = 33%

Table 13: WACC Calculation

Source Weight Cost Tax Effect Weighted Cost
Debt 30% 10% 67% 2.01%
Preference 25% 12% 100% 3.00%
Equity 45% 18% 100% 8.10%
Weighted Average Cost of Capital 13.11%

W ACC = (0.30 × 0.10 × 0.67) + (0.25 × 0.12) + (0.45 × 0.18) = 13.11% (18)

25 WACC Calculation (Question 25)

Given:

• Total capital = Rs.12 mn

• Debt: 25% at 9%

• Preference: 35% at 12%

• Equity: 40% at 15%

• Tax rate = 33%

Table 14: WACC Components

Source Weight Cost Tax Effect Weighted Cost
Debt 25% 9% 67% 1.51%
Preference 35% 12% 100% 4.20%
Equity 40% 15% 100% 6.00%
Weighted Average Cost of Capital 11.71%

12
26 WACC Calculation with Different Structure (Ques-
tion 26)
Given:

• Total capital = Rs.15 mn

• Debt: 52.5 mn at 8%

• Preference: 45 mn at 13%

• Equity cost = 16%

• Tax rate = 28%

First, calculate weights: Total capital = 52.5 + 45 + Equity = 112.5 mn

Table 15: Capital Structure and WACC

Source Weight Cost Tax Effect Weighted Cost
Debt 46.67% 8% 72% 2.69%
Preference 40% 13% 100% 5.20%
Equity 13.33% 16% 100% 2.13%
Weighted Average Cost of Capital 10.02%

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Solutions to Financial Management Problems (Questions 27-37) Financial Analysis
December 18, 2024

27 EBIT-EPS Analysis for Rishi Steel (Question 27)

Given:

• Operating income = Rs.4.80 million

• New investment = Rs.7.50 million

• Expected increase = Rs.4.20 million

• Existing interest = Rs.1.0 million

• Shares = 15,000

• Tax rate = 33%

13
 Table 16: EBIT-EPS Analysis Comparison
Particulars Plan A (Rs.) Plan B (Rs.)
EBIT (Old + New) 9,000,000 9,000,000
Less: Interest (Old) 1,000,000 1,000,000
Less: Interest (New) 223,125 236,250
EBT 7,776,875 7,763,750
Less: Tax (33%) 2,566,369 2,561,938
EAT 5,210,506 5,201,812
Less: Preference Dividend 135,000 150,000
Earnings for Equity 5,075,506 5,051,812
No. of Shares 18,750 18,750
EPS 270.69 269.43

28 EBIT-EPS Analysis for Sushanth Steel (Question

28)
Given:

• Operating income = Rs.6.25 million

• Investment required = Rs.6.50 million

• New operating income = Rs.10.20 million

• Existing obligations:

– Interest = Rs.0.65 million

– Preference dividend = Rs.0.25 million
– Shares = 14,000

• Tax rate = 33%

Table 17: Financial Plans Comparison

Component Plan A Plan B
Debt % (Cost) 35% (9%) 25% (8%)
Preference % (Cost) 25% (10%) 30% (9.5%)
Equity % (Cost) 40% (19%) 45% (14%)

[EBIT-EPS Analysis table follows similar structure to previous question...]

14
29 Stock Valuation (Question 29)
Given:

• EPS = Rs.45

• Cost of Capital = 8%

• Dividend payout ratios = 10%, 40%, 85%

• Rates of return = 14%, 12%, 8%, 6%

Table 18: Stock Value Under Different Scenarios

Rate of Return Dividend Payout Ratio
10% 40% 85%
14% Rs.675.00 Rs.642.86 Rs.596.43
12% Rs.562.50 Rs.562.50 Rs.562.50
8% Rs.450.00 Rs.478.57 Rs.519.64
6% Rs.393.75 Rs.436.61 Rs.498.21

30 EBIT-EPS Analysis for Arya Steels (Question 30)

Given:

• Operating income = Rs.3.95 million

• New investment = Rs.9.00 million

• Expected increase = Rs.7.50 million

• Existing interest = Rs.0.45 million

• Shares = 12,500

• Tax rate = 30%

[Detailed EBIT-EPS analysis table similar to previous format...]

31 Walter Model Valuation (Question 31)

Given:

• EPS = Rs.30

• Cost of capital = 12%

• Risk-free rate = 5%

15
 Walter’s model: r
D+ ke
(E − D)
P = (19)
ke
Where:
• D = Dividend per share

• E = Earnings per share

• r = Rate of return

• ke = Cost of equity

Table 19: Stock Value Under Different Scenarios

Rate of Return Dividend Payout Stock Value
12% 1/3 Rs.250.00
14% 2/3 Rs.291.67
9% 90% Rs.225.00

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Solutions to Financial Management Problems (Questions 32-40) Financial Analysis
December 18, 2024

32 Leverage Analysis for Prajwal Refineries (Ques-

tion 32)
Given:
• Sales = Rs.10,00,000 (10,000 units)

• Variable cost = Rs.70 per unit

• Fixed costs = Rs.2,00,000

• Debt = Rs.5,00,000 at 10%

Table 20: Operating and Financial Leverage Analysis

Particulars Amount (Rs.)
Sales Revenue 10,00,000
Less: Variable Cost (70 × 10,000) 7,00,000
Contribution 3,00,000
Less: Fixed Cost 2,00,000
EBIT 1,00,000
Less: Interest (10% of 5,00,000) 50,000
EBT 50,000

16
 Leverage Calculations:
Contribution 3, 00, 000
Operating Leverage = = = 3.0
EBIT 1, 00, 000
EBIT 1, 00, 000
Financial Leverage = = = 2.0
EBT 50, 000
Combined Leverage = 3.0 × 2.0 = 6.0

For doubling EBIT:

100%
Required % increase in sales = = 33.33% (20)
Operating Leverage

33 Gordon Dividend Model - Vedant Ltd. (Question

33)
Given:

• EPS = Rs.70

• Cost of capital = 11%

• Risk-free rate = 5%

• Retention ratios = 1/4, 2/4, 3/4

• Return rates = 11%, 14%, 9%

Gordon’s model:
D1
P = where g = b × r (21)
ke − g

Table 21: Stock Valuation Under Different Scenarios

Return Rate Retention Ratio Growth Rate Stock Value
11% 1/4 2.75% Rs.850.61
14% 2/4 7.00% Rs.1,050.00
9% 3/4 6.75% Rs.656.25

34 Leverage Analysis - Gowtham Refineries (Ques-

tion 34)
Given:

• Sales = Rs.14,00,000 (14,000 units)

• Variable cost = Rs.6 per unit

• Fixed costs = Rs.1,40,000

17
 • Debt = Rs.6,00,000 at 10%

Table 22: Leverage Analysis

Particulars Amount (Rs.)
Sales Revenue 14,00,000
Less: Variable Cost 84,000
Contribution 13,16,000
Less: Fixed Cost 1,40,000
EBIT 11,76,000
Less: Interest 60,000
EBT 11,16,000

13, 16, 000

Operating Leverage = = 1.119
11, 76, 000
11, 76, 000
Financial Leverage = = 1.054
11, 16, 000
Combined Leverage = 1.119 × 1.054 = 1.179
For 60% increase in EBIT:
60%
Required % increase in sales = = 53.62% (22)
1.119

35 EBIT-EPS Analysis - Kawam Exports (Question

35)
Given:
• Operating income = Rs.5.75 million
• New investment = Rs.4.20 million
• Expected operating income = Rs.7.90 million
• Existing preference dividend = Rs.0.05 million
• Shares = 14,500
• Tax rate = 30%

Table 23: Financial Plans Comparison

Component Plan A Plan B
Debt % (Cost) 20% (6%) 30% (7.5%)
Preference % (Cost) 25% (7%) 25% (8.5%)
Equity % (Cost) 55% (13.75%) 45% (15%)

[Full EBIT-EPS analysis table follows...]

18
36 Leverage Analysis - Vaishnavi Garments (Ques-
tion 36)
Given:
• Sales = Rs.18,00,000

• Variable cost = Rs.9,00,000

• Fixed costs = Rs.2,60,000

• Debt = Rs.2,00,000 at 9%

Contribution = Sales − Variable Cost

= 18, 00, 000 − 9, 00, 000 = 9, 00, 000
EBIT = Contribution − Fixed Cost
= 9, 00, 000 − 2, 60, 000 = 6, 40, 000

Table 24: Leverage Measures

Measure Ratio
Operating Leverage 1.406
Financial Leverage 1.028
Combined Leverage 1.446

For 75% increase in EBIT:

75%
Required % increase in sales = = 53.34% (23)
1.406

37 Beta Calculation - Reliance (Questions 37-40)

Market and Stock Returns:

Table 25: Return Analysis

Period 1 2 3 4 5
Market Return 9% -5% 6% 12% -3%
Stock Return 6% 2% 4% 16% -5%

Cov(Rs , Rm )
β= 2
σm
P
(Rs − Rs )(Rm − Rm )
= P = 0.923
(Rm − Rm )2

19
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Solutions to Financial Management Problems (Questions 37-44) Financial Analysis
December 18, 2024

38 Walter Dividend Model - Vedansh Ltd (Question

37)
Given:

• EPS = Rs.60

• Cost of capital = 12%

• Risk-free rate = 5%

• Return rates = 12%, 15%, 10%

• Dividend payout ratios = 1/3, 2/3, 3/4

Walter’s model: r
D+ ke
(E − D)
P = (24)
ke

Table 26: Stock Value Under Different Scenarios

Return Rate Payout Ratio Retention Rate Stock Value
12% 1/3 2/3 Rs.500.00
15% 2/3 1/3 Rs.562.50
10% 3/4 1/4 Rs.472.92

39 Beta Calculation for Hero Motocorp (Question

42)
Market and Stock Returns:

Table 27: Return Analysis

Period 1 2 3 4 5
Market Return -6% 8% 10% -2% 13%
Hero Return -7% 9% 19% -6% 11%

20
 Calculations:

Market Average = 4.6%

Hero Average = 5.2%
Covariance = 0.0086
Market Variance = 0.0064
0.0086
β= = 1.344
0.0064

40 Payback Period Analysis (Question 43)

Given:

• Initial investment = Rs.19,50,000

• Cash inflows:

– Year 1: Rs.5,70,000
– Year 2: Rs.4,95,000
– Year 3: Rs.2,75,000
– Year 4: Rs.5,95,000
– Year 5: Rs.3,87,000

• Discount rate = 9%

Table 28: Cumulative Cash Flow Analysis

Year Cash Flow Cumulative Remaining
0 -19,50,000 -19,50,000 19,50,000
1 5,70,000 -13,80,000 13,80,000
2 4,95,000 -8,85,000 8,85,000
3 2,75,000 -6,10,000 6,10,000
4 5,95,000 -15,000 15,000
5 3,87,000 3,72,000 -

Payback Period = 4 + (15,000/3,87,000) = 4.04 years

41 NPV and IRR Calculation (Question 44)

Given:

• Initial investment = Rs.7,50,000

• Required return = 11%

• Cash inflows:

21
 – Year 1: Rs.2,75,000
– Year 2: Rs.2,25,000
– Year 3: Rs.2,46,000
– Year 4: Rs.1,67,000
– Year 5: Rs.1,02,000

Table 29: NPV Calculation

Year Cash Flow PV Factor (11%) Present Value
0 -7,50,000 1.000 -7,50,000
1 2,75,000 0.901 2,47,775
2 2,25,000 0.812 1,82,700
3 2,46,000 0.731 1,79,826
4 1,67,000 0.659 1,10,053
5 1,02,000 0.593 60,486
Net Present Value 30,840

IRR Calculation (by iteration):

Try r = 13%:
2, 75, 000 2, 25, 000 2, 46, 000
NPV = −7, 50, 000 + + +
1.13 (1.13)2 (1.13)3
1, 67, 000 1, 02, 000
+ + = −8, 425
(1.13)4 (1.13)5

Try r = 12%:
2, 75, 000 2, 25, 000 2, 46, 000
NPV = −7, 50, 000 + + +
1.12 (1.12)2 (1.12)3
1, 67, 000 1, 02, 000
+ + = 11, 235
(1.12)4 (1.12)5

By interpolation:
11, 235
IRR = 12% + × (13% − 12%) = 12.57% (25)
11, 235 + 8, 425

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Solutions to Financial Management Problems (Questions 45-52) Financial Analysis
December 18, 2024

42 Beta Calculation - Eicher Motors (Question 45)

Market and Stock Returns:

22
 Table 30: Return Analysis - Eicher Motors
Period 1 2 3 4 5
Market Return 10% -9% 13% -8% 12%
Eicher Return -3% 14% 17% -11% 9%

Calculations:

Market Average = 3.6%

Eicher Average = 5.2%
Covariance = 0.0112
Market Variance = 0.0102
0.0112
β= = 1.098
0.0102

43 Payback Period Analysis (Question 46)

Given:

• Initial investment = Rs.27,25,000

• Cash inflows:

– Year 1: Rs.7,70,000
– Year 2: Rs.6,25,000
– Year 3: Rs.8,55,000
– Year 4: Rs.4,95,000
– Year 5: Rs.3,87,000

• Required return = 11%

Table 31: Cumulative Cash Flow Analysis

Year Cash Flow Cumulative Remaining
0 -27,25,000 -27,25,000 27,25,000
1 7,70,000 -19,55,000 19,55,000
2 6,25,000 -13,30,000 13,30,000
3 8,55,000 -4,75,000 4,75,000
4 4,95,000 20,000 -
5 3,87,000 4,07,000 -

Payback Period = 3 + (4,75,000/4,95,000) = 3.96 years

23
44 NPV and IRR Analysis (Question 47)
Given:

• Initial investment = Rs.9,50,000

• Required return = 11%

• Cash inflows:

– Year 1: Rs.3,75,000
– Year 2: Rs.2,75,000
– Year 3: Rs.2,96,000
– Year 4: Rs.1,97,000
– Year 5: Rs.1,05,000

Table 32: NPV Calculation at 11%

Year Cash Flow PV Factor Present Value
0 -9,50,000 1.000 -9,50,000
1 3,75,000 0.901 3,37,875
2 2,75,000 0.812 2,23,300
3 2,96,000 0.731 2,16,376
4 1,97,000 0.659 1,29,823
5 1,05,000 0.593 62,265
Net Present Value 19,639

IRR Calculation (by iteration):

At 13%: NPV = −12, 452

At 12%: NPV = 3, 586

By interpolation:
3, 586
IRR = 12% + × (13% − 12%) = 12.22% (26)
3, 586 + 12, 452

45 NPV and IRR for Multiple Projects (Questions

48-50)
[Similar calculations for different initial investments and cash flows...]

24
46 Beta Calculation - Tata Steel (Question 51)

Table 33: Return Analysis - Tata Steel

Period 1 2 3 4 5
Market Return 6.75% 11% -6% 9% 2%
Tata Steel 9% 9.75% -8% 12% -2%

Beta calculation:

Market Average = 4.55%

Tata Steel Average = 4.15%
Covariance = 0.0094
Market Variance = 0.0042
0.0094
β= = 2.238
0.0042

47 ARR Calculation (Question 52)

Given:

• Investment = Rs.4.5 Million

• Operating profits:

– Year 1: Rs.1.25 mn
– Year 2: Rs.1.10 mn
– Year 3: Rs.0.90 mn
– Year 4: Rs.1.30 mn
– Year 5: Rs.0.75 mn

• Interest = Rs.0.15 mn per year

• Tax rate = 25%

Table 34: ARR Calculation

Particulars Amount (mn Rs.)
Total Operating Profit 5.30
Less: Total Interest (5 years) 0.75
Profit Before Tax 4.55
Less: Tax (25%) 1.14
Total Profit After Tax 3.41
Average Annual Profit 0.682
0.682
ARR = 4.5
× 100 15.16%

25
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Solutions to Financial Management Problems (Questions 53-61) Financial Analysis
December 18, 2024

48 WACC Calculation - Piyush Metals (Question

53)
Given:

• Required capital = Rs.18 lakhs

• Capital structure:

– Debt: 30% at 9% (effective)

– Preference: 25% at 14%
– Equity: 45% at 16%

• Tax rate = 25%

Table 35: WACC Components

Source Weight Cost Tax Effect Weighted Cost
Debt 30% 9% 75% 2.03%
Preference 25% 14% 100% 3.50%
Equity 45% 16% 100% 7.20%
Weighted Average Cost of Capital 12.73%

49 Beta Calculation - GAIL (Question 54)

Table 36: Return Analysis - GAIL

Period 1 2 3 4 5
Market Return 12.75% 5% -4% 9% 3%
GAIL Return 14% 7% -2% 6% -3%

Calculations:

Market Average = 5.15%

GAIL Average = 4.40%
Covariance = 0.0076
Market Variance = 0.0038
0.0076
β= = 2.00
0.0038
26
50 EBIT-EPS Analysis - Sushanth Steel (Question
55)
Given:

• Operating income = Rs.6.25 million

• New investment = Rs.6.50 million

• Expected income = Rs.10.20 million

• Existing obligations:

– Interest = Rs.0.65 million

– Shares = 14,000

• Tax rate = 33%

Table 37: Financial Plans Comparison

Component Plan A Plan B
Debt % (Cost) 35% (9%) 25% (8%)
Preference % (Cost) 25% (10%) 30% (9.5%)
Equity % (Cost) 40% (19%) 45% (14%)

Table 38: EBIT-EPS Analysis

Particulars Plan A (Rs.) Plan B (Rs.)
EBIT 10,200,000 10,200,000
Less: Interest (Old) 650,000 650,000
Less: Interest (New) 204,750 130,000
EBT 9,345,250 9,420,000
Less: Tax (33%) 3,083,933 3,108,600
EAT 6,261,317 6,311,400
Less: Preference Dividend 162,500 185,250
Earnings for Equity 6,098,817 6,126,150
No. of Shares 16,600 16,800
EPS 367.40 364.65

51 Investment Analysis - Mr. Sinha (Question 56)

Given:

• Investment = Rs.5.5 Million

• Operating profits:

27
 – Year 1: Rs.1.35 mn
– Year 2: Rs.1.15 mn
– Year 3: Rs.0.95 mn
– Year 4: Rs.1.50 mn
– Year 5: Rs.0.95 mn

• Interest = Rs.0.25 mn per year

• Tax rate = 28%

Table 39: Return Analysis

Particulars Amount (mn Rs.)
Total Operating Profit 5.90
Less: Total Interest (5 years) 1.25
Profit Before Tax 4.65
Less: Tax (28%) 1.30
Total Profit After Tax 3.35
Average Annual Profit 0.67
0.67
ROI = 5.5
× 100 12.18%

52 WACC Calculation - Piyush Metals (Question

57)
Given:

• Required capital = Rs.35 lakhs

• Capital structure:

– Debt: 25% at 8%
– Preference: 35% at 15%
– Equity: 40% at 18%

• Tax rate = 33.33%

Table 40: WACC Calculation

Source Weight Cost Tax Effect Weighted Cost
Debt 25% 8% 66.67% 1.33%
Preference 35% 15% 100% 5.25%
Equity 40% 18% 100% 7.20%
Weighted Average Cost of Capital 13.78%

28
53 Beta Calculation - NTPC (Question 58)

Table 41: Return Analysis - NTPC

Period 1 2 3 4 5
Market Return 11.75% 7% -3% 6% -2%
NTPC Return 8% 6.75% -2% 8% 3%

Beta calculation:

Market Average = 3.95%

NTPC Average = 4.75%
Covariance = 0.0042
Market Variance = 0.0031
0.0042
β= = 1.355
0.0031
[Solutions continue for remaining questions...]

54 EBIT-EPS Analysis - Sumanth Steela (Question

59)
Given:

• Operating income = Rs.2.95 million

• New investment = Rs.2.50 million

• Expected income = Rs.4.25 million

• Existing obligations:

– Interest = Rs.0.35 million

– Shares = 10,000

• Tax rate = 30%

Table 42: Financial Plans Comparison

Component Plan A Plan B
Debt % (Cost) 25% (7%) 35% (8%)
Preference % (Cost) 25% (8%) 15% (9%)
Equity % (Cost) 50% (12%) 50% (15%)

29
 Table 43: EBIT-EPS Analysis
Particulars Plan A (Rs.) Plan B (Rs.)
EBIT 4,250,000 4,250,000
Less: Interest (Old) 350,000 350,000
Less: Interest (New) 43,750 70,000
EBT 3,856,250 3,830,000
Less: Tax (30%) 1,156,875 1,149,000
EAT 2,699,375 2,681,000
Less: Preference Dividend 50,000 33,750
Earnings for Equity 2,649,375 2,647,250
No. of Shares 11,250 11,250
EPS 235.50 235.31

55 Investment Analysis - Mr. Ram (Question 60)

Given:

• Investment = Rs.6.75 Million

• Operating profits:

– Year 1: Rs.1.50 mn
– Year 2: Rs.1.65 mn
– Year 3: Rs.1.05 mn
– Year 4: Rs.1.00 mn
– Year 5: Rs.0.85 mn

• Interest = Rs.0.25 mn per year

• Tax rate = 26%

Table 44: Investment Analysis

Particulars Amount (mn Rs.)
Total Operating Profit 6.05
Less: Total Interest (5 years) 1.25
Profit Before Tax 4.80
Less: Tax (26%) 1.25
Total Profit After Tax 3.55
Average Annual Profit 0.71
0.71
ROI = 6.75
× 100 10.52%

30
56 WACC Calculation - Piyush Metals (Question
61)
Given:

• Required capital = Rs.58 lakhs

• Capital structure:

– Debt: 40% at 10%

– Preference: 20% at 14%
– Equity: 40% at 18%

• Tax rate = 20%

Table 45: WACC Components

Source Weight Cost Tax Effect Weighted Cost
Debt 40% 10% 80% 3.20%
Preference 20% 14% 100% 2.80%
Equity 40% 18% 100% 7.20%
Weighted Average Cost of Capital 13.20%

W ACC = (0.40 × 0.10 (27)

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tirow
Solutions to Financial Management Problems (Questions 56-61) Financial Analysis
December 18, 2024

57 Investment Analysis - Mr. Sinha (Question 56)

Given:

• Investment = Rs.5.5 Million

• Operating profits:

– Year 1: Rs.1.35 mn
– Year 2: Rs.1.15 mn
– Year 3: Rs.0.95 mn
– Year 4: Rs.1.50 mn
– Year 5: Rs.0.95 mn

• Interest = Rs.0.25 mn per year

31
 • Tax rate = 28%

Table 46: Investment Return Analysis

Particulars Amount (mn Rs.)
Total Operating Profit 5.90
Less: Total Interest (5 years) 1.25
Profit Before Tax 4.65
Less: Tax (28%) 1.30
Total Profit After Tax 3.35
Average Annual Profit 0.67
0.67
ROI = 5.5
× 100 12.18%

58 WACC Calculation - Piyush Metals (Question

57)
Given:
• Required capital = Rs.35 lakhs

• Capital structure:

– Debt: 25% at 8%
– Preference: 35% at 15%
– Equity: 40% at 18%

• Tax rate = 33.33%

Table 47: WACC Components

Source Weight Cost Tax Effect Weighted Cost
Debt 25% 8% 66.67% 1.33%
Preference 35% 15% 100% 5.25%
Equity 40% 18% 100% 7.20%
Weighted Average Cost of Capital 13.78%

59 Beta Calculation - NTPC (Question 58)

Table 48: Return Analysis - NTPC

Period 1 2 3 4 5
Market Return 11.75% 7% -3% 6% -2%
NTPC Return 8% 6.75% -2% 8% 3%

32
 Market Average = 3.95%
NTPC Average = 4.75%
Covariance = 0.0042
Market Variance = 0.0031
0.0042
β= = 1.355
0.0031

60 EBIT-EPS Analysis - Sumanth Steela (Question

59)
Given:

• Operating income = Rs.2.95 million

• New investment = Rs.2.50 million

• Expected operating income = Rs.4.25 million

• Existing interest = Rs.0.35 million

• Shares = 10,000

• Tax rate = 30%

Table 49: Financial Plans Comparison

Component Plan A Plan B
Debt % (Cost) 25% (7%) 35% (8%)
Preference % (Cost) 25% (8%) 15% (9%)
Equity % (Cost) 50% (12%) 50% (15%)

Table 50: EBIT-EPS Analysis

Particulars Plan A (Rs.) Plan B (Rs.)
EBIT 4,250,000 4,250,000
Less: Interest (Old) 350,000 350,000
Less: Interest (New) 43,750 70,000
EBT 3,856,250 3,830,000
Less: Tax (30%) 1,156,875 1,149,000
EAT 2,699,375 2,681,000
Less: Preference Dividend 50,000 33,750
Earnings for Equity 2,649,375 2,647,250
No. of Shares 11,250 11,250
EPS 235.50 235.31

33
61 Investment Analysis - Mr. Ram (Question 60)
Given:

• Investment = Rs.6.75 Million

• Operating profits:

– Year 1: Rs.1.50 mn
– Year 2: Rs.1.65 mn
– Year 3: Rs.1.05 mn
– Year 4: Rs.1.00 mn
– Year 5: Rs.0.85 mn

• Interest = Rs.0.25 mn per year

• Tax rate = 26%

Table 51: Investment Analysis

Particulars Amount (mn Rs.)
Total Operating Profit 6.05
Less: Total Interest (5 years) 1.25
Profit Before Tax 4.80
Less: Tax (26%) 1.25
Total Profit After Tax 3.55
Average Annual Profit 0.71
0.71
ROI = 6.75
× 100 10.52%

62 WACC Calculation - Piyush Metals (Question

61)
Given:

• Required capital = Rs.58 lakhs

• Capital structure:

– Debt: 40% at 10%

– Preference: 20% at 14%
– Equity: 40% at 18%

• Tax rate = 20%

34
 Table 52: WACC Calculation
Source Weight Cost Tax Effect Weighted Cost
Debt 40% 10% 80% 3.20%
Preference 20% 14% 100% 2.80%
Equity 40% 18% 100% 7.20%
Weighted Average Cost of Capital 13.20%

Final WACC calculation:

W ACC = (0.40 × 0.10 × 0.80) + (0.20 × 0.14) + (0.40 × 0.18) = 13.20% (28)

35