7 August Financial Analysis

Financial Analysis AFTERSCHOOOL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’ Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL

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Financial Analysis Dr. T.K. Jain. AFTERSCHOOOL Centre for social entrepreneurship Bikaner M: 9414430763 [email protected] www.afterschool.tk www.afterschoool.tk www.afterschoool.tk

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There are three companies A,B,C. You want to invest in only one of these, Tax rate 50%. Minimum dividend is 20% (all these). Expected rate of return is 25%. Where will you invest? (each share is of Rs. 10)

Shares capital

B 20

C 10

14% debentures

20

15

Loan from F.I. at18%

10

25

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A 50

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SOLUTION . . . EBIT

12.5

12.5

12.5

Interest on debenture

2.8

2.1

Interest on debt

1.8

4.5

EBT

12.5

7.9

5.9

EAT

6.25

3.95

2.95

EPS

1.25

1.975

2.95

ROE

12.5

19.75

29.5

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Solution . . . C

company is the best option.

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Equity 10 lakh, 10% preference shares 4 Lakh, 12% debentures 6 Lakh. Market price of share 110, dividend 10/ Tax 50%. We want to borrow 10 Lakhs at 14%, it will reduce market price from 110 to 105 but dividend will increase from 10 to 12. should we go for it? Growth rate 6%  Let

us take 3 criteria 1. Debt Equity ratio, 2. WCC, 3. EPS.  New Debt Equity ratio = (10+6) / (10+4)  =16/14 ( OK – it is still less than 2:1. www.afterschoool.tk

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Solution . . . .  Weighted

average cost of capital . . .  It is weighted cost of all the sources of capital.  Cost of equity = (dividend / Market price) + growth rate  =12/105 + .06 = .114+.06 = .174 (earlier it was (.09+.06) = .15 (thus it has increased. www.afterschoool.tk

AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Solution . . .  Cost

of Debt.  Debentures = .12  Cost of loan = .14  Preference shares = .10

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Calculation of weighted cost of capital . .  Let

us take weights. . .  Total equity is 10 lakh, preference is 4 lakhs, debentures is 6 lakhs and loans are 10 lakhs. = total = 30 weightes are  10/30 = .33 for equity, .13 for preference, .2 for debentures, .33 for debentures. Let us multiply these weights to the costs, and we will get the answer. www.afterschoool.tk

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New wcc.

cost

weight

wcc

0.174

0.33

0.0574

0.12

0.2

0.024

0.14

0.33

0.0462

0.1

0.13

0.013 0.1406

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Solution. . .  Thus

this option is better as per new option as WCC is very low and cost of equity is also low - not very high. EPS is also increasing. Cost of equity is less than 20%.

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Operating income of my company is 1.86 lakhs. We pay 35% tax. Our capital structure consists of 14% debenture of 4 lakh and 15% preference shares of Rs. 5 lakh and equality shares of Rs. 4 lakh (100 each), what is my EPS? 

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Step 1. (deduct interest and tax) Income (minus interest) – tax = 1.86 ( - .56) – (.35 of 1.3) = 1.3-.455 = .845 Step 2 : deduct preference dividend) = .845 – (preference dividend .75) = .095 lakkhs Step 3 : divide by number of shares. 9500 / 4000 = 2.3 approx. Interest on debenure = .14*4 = .56 lakhs. www.afterschoool.tk

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Operating income of my company is 1.86 lakhs. We pay 35% tax. Our capital structure consists of 14% debenture of 4 lakh and 15% preference shares of Rs. 5 lakh and equality shares of Rs. 4 lakh (100 each), what is my DFL?  

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DFL = Degree of Financial Leverage DFL = EBIT / (EBIT – Int. – (Dividend on preference / 1-tax) ) =1.86 / (1.86 - .56 – (.75/.65)) =1.86 / (1.3 – 1.15) =1.86 / .15 = 12.4 (it is very risky company). Ans. www.afterschoool.tk

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My sales are Rs. 25 lakhs and my fixed costs are Rs. 7.5 lakhs. Variable expenses are 50% of sales. What is my DOL?     

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DOL = Degree of Operating Leverage. DOL = (Sales – Variable expenses ) / EBIT EBIT = (sales – all expenses) = 25 – (7.5+12.5) = 5 lakhs = (25-12.5) / 5 =12.5 / 5 = 2.5 (my business risk is not very high – if DOL had been more, my business risk would have been higher). EBIT = Earning before interest and taxes

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I want to buy a new business, the sales in that is 20 lakhs, fixed expenses are 15 lakhs and variable expenses are 12% of sales. Is the decision to buy the business appropriate on the business risk criteria? (I don’t want to take high risk)  DOL

= (sales – Variable exp) / EBIT  = (20-2.4) / (20-(15+2.4))  =17.6 / 2.6  =6.76 (which is high risk) www.afterschoool.tk

AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

EBIT is 1200 lakhs, EBT is 320 lakhs and Fixed costs are 700 lakhs. What is DCL? What is interest coverage?         

DCL = degree of combined leverage It is calculated by any of two methods: DCL = DOL * DFL Or DCL = Contribution / EBT Contribution = Sales – variable cost (Sales – Variable cost ) = EBIT + Fixed cost. = 1200 + 700 = 1900. 1900 / 320 = 5.93 answer. Interest coverage = EBIT / Interest =1200 / (1200-320) = 1200 / 880 = 1.36 ans.

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As an investor, I have 2 options, in which I get 6000 after 1 year in another, I get 9000 after 4 years. Discount rate is 10%. Which option is better?  6000

after one year mean 6000/ (1.1)^1 today, thus I have 5454 today.  9000 after 4 years mean 9000/ (1.1)^4 means 6147, thus second option is better.

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AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

As an investor, I have 2 options, in which I get 6000 after 1 year in another, I get 9000 after 4 years. Discount rate is 20%. Which option is better?  6000

after one year mean 6000/ (1.2)^1 today, thus I have 4999 today.  9000 after 4 years mean 9000/ (1.2)^4 means 4340, thus 1st option is better.

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As an investor, I have 2 options, in which I get 6000 after 2 year in another, I get 9000 after 5 years. Discount rate is 18%. Which option is better?

 6000

after 2 year mean 6000/ (1.18)^2 today, thus I have 4316 today.  9000 after 5 years mean 9000/ (1.18)^5 means 3933 , thus 1st option is better.

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I will need 100 crores after 5 years from now. How much money should I deposit in my bank account every year? Rate : 10%  Amt

((1+interest rate)^N – 1) / rate of interest) = future value of amount.  Thus Amt ((1.1)^5 -1)/.1 = 100  Or amt (.61/.1) = 100  Or amount = 100/6.1  Or amount = 16.38 approximate every year. www.afterschoool.tk

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My equity capital is 60 lakh, debt is 40 lakh. Beta of my stocks is 1.5, risk premium in the market = 10% and treasury bill is at 8%. What is my cost of capital ? 

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Treasury bill (govt. bill) have risk free interest = so risk free rate of return is 8%. Market rate = risk free rate + risk premium CAPM = capital asset pricing model CAPM fomulae : Risk free rate + Beta * (Market rate – risk free rate) =8 + 1.5* (18-8) =8 + 15 = 23 %.

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Risk free rate = 7.75%, Beta = 2, Market rate = 16%. Calculate cost of capital using CAPM?  CAPM

= capital asset pricing model  CAPM fomulae : Risk free rate + Beta * (Market rate – risk free rate)  =7.75 + 2 (16-7.75)  =24.25 answer.

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Risk free rate = 7.75%, Beta = 2, My cost of capital = 16%. Calculate market rate of returns using CAPM?  CAPM

fomulae : Risk free rate + Beta * (Market rate – risk free rate)  =16= 7.75 +2 (Market rate – 7.75)  =16-7.75 = 2M – 15.5  =8.25 +15.5 = 2M  M = 11.78 answer.

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If Market rate is 14%, risk free rate is 8.25% and my cost of capital is 18%. What is my BETA?  CAPM

fomulae cost of capital = : Risk free rate + Beta * (Market rate – risk free rate) 18 = 8.25 + Beta (14-8.25) 18-8.25= beta (5.75) Beta = 9.75 / 5.75 = 1.7 answer.

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You have invested your money in four sectors. The average returns are 18, 18, 24 and 16 respectively. Your beta of these sectors are .9, 1.12, 1.5, .95. which is best sector? Risk free return = 10 and market return = 18%  Expected

returns = RF + Beta(RM-RF)  =10+.9(18-10) = 10+7.2 = 17.2 so on.  Thus we get expected returns for these four sectors which are 17.2, 19, 22 and 17.6. Thus third sector has outperformed in comparison to expectations (24-22 = 2) www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Solution . . . .  We

get 18% in comparison to 17.2 in the first sector, thus it is very profitable (by .8)  In second sector, we get 18% but expectation is 19%, so it is not upto the mark. Third sector is the best performing sector.

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I shall get 100 crore after 5 years (from afterschooolians), what is the value of that today? Rate = 10% =

100 / (1+interest rate)^n  =100/ (1.1)^5  =100/1.61  =62.11 approximate.

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ABO UT A FTERSCH OOO L Afterschoool conducts three year integrated PGPSE (after class 12th along with IAS / CA / CS) and 18 month PGPSE (Post Graduate Programme in Social Entrepreneurship) along with preparation for CS / CFP / CFA /CMA / FRM. This course is also available online also. It also conducts workshops on social entrepreneurship in schools and colleges all over India – start social entrepreneurship club in your institution today with the help from afterschoool and help us in developing society.

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Why such a programme? 

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To promote people to take up entrepreneurship and help develop the society To enable people to take up franchising and other such options to start a business / social development project To enable people to take up social development as their mission To enable people to promote spirituality and positive thinking in the world

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our past beneficiaries, entrepreneurs and social entrepreneurs are supporting us.  You can also support us – not necessarily by money – but by being promotor of our concept and our ideas.

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About AFTERSCHOOOL PGPSE – the best programme for developing great entrepreneurs     

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Most flexible, adaptive but rigorous programme Available in distance learning mode Case study focused- latest cases Industry oriented practical curriculum Designed to make you entrepreneurs – not just an employee Option to take up part time job – so earn while you learn The only absolutely free course on internet

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Workshops from AFTERSCHOOOL         

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Flexible Specialisations:          

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Salient features: The only programme of its kind (in the whole world)  No publicity and low profile course  For those who want to achieve success in life – not just a degree  Indepth knowledge and expertise  Professional approac: World class approach  Strong intellectual and business capabilities  Flexible – you may stay for a month and continue the rest of the education by distance mode. / you may attend weekend classes  Scholarships for those from poor economic background  Latest and constantly changing curriculum – keeping pace with the time  Placement for those who are interested  Admissions open throughout the year  Latest and most advanced technologies, books and study www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS material 

Components              

Pedagogy curriculum and approach based on IIM Ahmedabad and ISB Hyderabad (the founder is alumnus from IIMA & ISB Hyderabad) Meditation, spiritualisation, and self development Essential softwares for business Business plan, Research projects Participation in conferences / seminars Workshops on leadership, team building etc. Written submissions of research projects/articles / papers Interview of entrepreneurs, writing biographies of entrepreneurs Editing of journals / newsletters Consultancy / research projects Assignments, communication skill workshops Participation in conferences and seminars Group discussions, mock interviews, self development diaryng Mind Power Training & writing workshop (by Dr. T.K.Jain)

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Pedagogy          

Case analysis, Articles from Harvard Business Review Quiz, seminars, workshops, games, Visits to entrepreneurs and industrial visits Presentations, Latest audio-visuals Group discussions and group projects Periodic self assessment Mentoring and counselling Study exchange programme (with institutions out of India) Rural development / Social welfare projects

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Branches  AFTERSCHOOOL

will shortly open its branches in important cities in India including Delhi, Kota, Mumbai, Gurgaon and other important cities. Afterschooolians will be responsible for managing and developing these branches – and for promoting social entrepreneurs.

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Case Studies  We

want to write case studies on social entrepreneurs, first generation entrepreneurs, ethical entrepreneurs. Please help us in this process. Help us to be in touch with entrepreneurs, so that we may develop entrepreneurs.

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Basic values at afterschoool        

Share to learn more Interact to develop yourself Fear is your worst enemy Make mistakes to learn Study & discuss in a group Criticism is the healthy route to mutual support and help Ask fundamental questions : why, when, how & where? Embrace change – and compete with yourself only

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