INDIVIDUAL ASSESSMENT – 1

Question 1: The following Financial Statement is taken from the Annual Report
of Nestle India Limited:

1(a) Please write any one item from the Balance Sheet which is impacted by the
following financial decisions. Also, state your reasons:

1. Investment Decisions or Capital Budgeting Decisions.

One of the balance sheet items which is impacted by capital budgeting

decisions is Property, plant & equipment.

Capital budgeting decisions include analysing the feasibility of investment

opportunities using techniques such as NPV, IRR, etc. The decisions result in
either acceptance or rejection of an investment proposal. When a project is
considered feasible and the investment is made, it usually involves purchase of
property, plant & equipment, which increases the value of property, plant &
equipment on the balance sheet.

2. Financing Decisions.

One of the balance sheet items which is impacted by financing decisions is

Equity share capital.

Financing decisions include evaluating the optimal way to raise funds for a
project, such as equity, loans, bonds, retained earnings. When a financial
manager decides to raise funds for a project via issue of fresh equity capital, it
increases the value of 'Equity share Capital' on the balance sheet.

3. Dividend Decisions.

One of the balance sheet items which is impacted by Dividend decisions is

cash and cash equivalents

When a company makes a dividend decision, it includes deciding the amount of

dividend they want to shell out to the shareholders. When the dividend is paid, it
reduces company's cash and cash equivalents, and thus cash and cash
equivalents are reduced on the balance sheet.

4. Working Capital decisions.

One of the balance sheet items which is impacted by working capital
decisions is Inventories

Working capital decisions include managing the cash flow of the business
efficiently so that the operations are conducted smoothly and the business is
able to handle its operating costs and short-term debt obligations. It includes
deciding the level of inventories that are required for smooth functioning of
operations. When the working capital manager makes a decision to change the
level of inventories that are required, it directly affects the 'Inventories' item on
the balance sheet

1(b) There is a drastic decrease in the value of Other Equity – from Rs.35,
773.20 to Rs.18, 358.40. Write the probable financial decision behind it.

The 'Other Equity' section includes components of equity other equity share
capital such as reserves & surplus, other comprehensive income, etc.

In this case, there has been a significant fall in the value of other equity from
Rs.35, 773.2 to Rs.18, 358.4. This is most likely to be a result of a financial
decision to pay dividend to shareholders. When the dividend is paid, it is paid
out of the reserves & surplus on the balance sheet, due to which the dividend
payment results in the reduction of reserves & surplus and hence the 'other
equity' figure in the balance sheet. Since the amount of reduction in value of
'other equity's is so large, it is most likely due to the payment of dividend.

Question#2: Answer the following questions:

2(a). A person has purchased a bond on June 21, 2019, at a price of Rs.105. The
bond has a face value of Rs.100 and a coupon of 10% p.a. payable half-yearly
on June 30 and December 31 of each year. He sold the bond on September 12,
2020, at a price of Rs.108. You are required to determine the holding period
return on the bond.

Calculation of holding period return:

Sale value of bond: Rs.108

Purchase price of bond: Rs.105

Interest received on 30-06-2019 (Rs100*10%1/2) = Rs.5

Add: Interest received on 31-12-2019 (Rs100*10%1/2) = Rs.5

Add: Interest received on 30-06-2020 (Rs100*10%1/2) = Rs.5

Total cash inflow = sale value + Interest received on 30-06-2019 + Interest

received on 31-12-2019 + Interest received on 30-06-2020

= 108 + 5 + 5 + 5

Total cash inflow = Rs.123

HPR = ((Income + (end of period value - original value)) / original value) *

100.

Holding period return = [(A-B)/B*100]

Total cash inflow A = Rs.123

Purchase Price B = Rs.105

= [(123-105)/105*100]

= 0.171*100

= 17.14%

Holding period return on the bond = 17.14%

2(b). Historical index and share price data of Infosys Ltd., ONGC, Tata Motors,
Indigo Aviation & BSE S&P 500 are given here. You are required to determine
the following for the above-mentioned companies and BSE S&P 500 index:   
Question 3:

ESTIMATION OF RELEVANT CASH FLOWS: Master Pasta, Ltd., has

projected a sales volume of Rs.1,432 lakhs for the second year of a proposed
expansion project. Costs estimated to be incurred in this (second) year are
Rs.1,002 lakhs. The depreciation expense will be Rs.80 lakhs (calculated
annually), and the tax rate is 34%. What is the operating cash flow?

Solution:

MASTER PLASTA LTD: INCOME STATEMENT

Projected Sales - Rs.1432 lakhs

Cost Estimated for 2nd year - Rs.1002 lakhs

Depreciation Expenses - Rs.80 lakhs

Tax rate – 34%

Earnings before taxes = Sales-Cost-Depreciation Expenses

= 1432-1002-80

= 350

Earnings before taxes = Rs.350 lakhs

Less Taxes = 350*34/100

= Rs.119 lakhs

Net Income = Earnings before taxes – Less taxes

= 350-119

= 231

Net Income = Rs.231 lakhs

Operating cash flow = Add Back: Depreciation Expenses + Net Income

= 231+80

= 311

Hence the operating cash flow will be Rs.311 lakhs

4(a). Calculate the Payback Period in years for both projects.

Project -A Cash Flows

Pay Back Period 4.642857  
Pay Back Period 4 Years & 6 Months
 Project -B Cash Flows
Pay Back Period 3.959016  
Pay Back Period 3 Years & 9 months

4(b). Calculate NPVs for both projects

CALCULATION OF NET PRESENT VALUE OF A
 
PROJECT
Project -A
Year Cash Flows DISCOUNTING FACTOR PV OF CASH FLOWS

0 (Rs.4,500) 1.0000 (Rs.4,500.000)

1 Rs.600 0.8929 Rs.535.714
2 Rs.800 0.7972 Rs.637.755
3 Rs.1,000 0.7118 Rs.711.780
4 Rs.1,200 0.6355 Rs.762.622
5 Rs.1,400 0.5674 Rs.794.398
6 Rs.1,500 0.5066 Rs.759.947
7 Rs.1,600 0.4523 Rs.723.759
    NET PRESENT VALUE Rs.425.974
Discount rate 12%

Project – A Net present value = Rs.425.974

CALCULATION OF NET PRESENT VALUE OF A PROJECT  

Project -B
Year Cash Flows DISCOUNTING FACTOR PV OF CASH FLOWS

0 (Rs.4,000) 1.0000 (Rs.4,000.000)

1 Rs.800 0.8929 Rs.714.286
2 Rs.950 0.7972 Rs.757.334
3 Rs.1,080 0.7118 Rs.768.723
4 Rs.1,220 0.6355 Rs.775.332
5 Rs.1,500 0.5674 Rs.851.140
6 Rs.1,000 0.5066 Rs.506.631
7 Rs.800 0.4523 Rs.361.879
    NET PRESENT VALUE Rs.735.325
Project -B Net present value = Rs.735.325

4(c). Calculate IRRs for both projects.

 CALCULATION OF INTERNAL RATE OF RETURN
(IRR) OF A PROJECT - A
Project-A
Years
Cash Flows
0 (Rs.4,500)
1 Rs.600
2 Rs.800
3 Rs.1,000
4 Rs.1,200
5 Rs.1,400
6 Rs.1,500
7 Rs.1,600
IRR 14.375%

CALCULATION OF INTERNAL RATE OF RETURN

(IRR) OF A PROJECT - B
Project-B
Years
Cash Flows
0 (Rs.4,000)
1 Rs.800
2 Rs.950
3 Rs.1,080
4 Rs.1,220
5 Rs.1,500
6 Rs.1,000
7 Rs.800
IRR 17.36%

Project- A Internal Rate of Return = 14.375%

Project- B Internal Rate of Return = 17.36%

4(d). On the basis of the calculated Payback Period, NPVs, and IRRs
above, decide which project should be selected by the firm.
 Project -A Cash
  Project -B Cash  
Flows
Flows
YEARS CASH FLOWS YEARS CASH FLOWS
0 (Rs.4,500) 0 (Rs.4,000)
1 Rs.600 1 Rs.800
2 Rs.800 2 Rs.950
3 Rs.1,000 3 Rs.1,080
4 Rs.1,200 4 Rs.1,220
5 Rs.1,400 5 Rs.1,500
6 Rs.1,500 6 Rs.1,000
7 Rs.1,600 7 Rs.800
Discount rate 12%

  Project-A Project-B

PAY BACK PERIOD (in years) 4.642857143 3.959016393

NPV RS.425.974 RS.735.325

IRR 14.375% 17.36%

Based on this two projects, Project – B should be selected.

Project – B
PAY BACK PERIOD (in years) 3.959016393

NPV RS.735.325

IRR 17.36%

Kindly check the attached Excel for the calculations

Question#5: Answer the following questions:

a) Skylark Limited’s share has a beta of 1.5. The risk-free rate prevailing
in the bond market is 6.75% and the market expected rate of return is
15.50%. Using the Capital Asset Pricing Model, you are required to
determine the cost of equity.

Solution:

Beta β = 1.5
Risk free rate Rf = 6.75%
Market Return RM = 15.50%

Using CAPM, one can determine cost of an equity

Expected return = [6.75% + (15.50% - 6.75%) 1.5]

= [6.75% + (8.75%) 1.5]
= 6.75% + 13.125%
= 19.875%

Cost of equity = 19.875%

b) A company’s preference share is trading at BSE at Rs.110. The

preference share is a redeemable share and the Company will redeem
them after 15 years at a premium of 5% - that is, it will be redeemed
after 15 years at
Rs.105; and it is 10% Preference Share – the company will pay a
dividend of Rs.10 every year. You are required to determine the cost of
preference shares to the Company.

Solution:

Nper, period = 15 years

PMT, payments = Rs10 per year

PV, present value = Rs110 (this is the current market price)

FV, future value = Rs105 (this is the redemption value)

We can find the cost of preference shares using the RATE function in excel

=RATE (nper, PMT, PV, FV)

No of Periods (nper) 15
Yearly Payment ( PMT) 10
Present Value (PV) -110
Future Value (FV) 105

Cost of preference share 9%

Kindly check the attached Excel for the calculations