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Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Interpretation
ROCE should always be higher than the rate at which the company borrows.
Intangible assets (assets which have no physical existence like goodwill, patents and trade-marks) should be included in the capital employed. But no fictitious asset (such as deferred expenses)... | [
-0.0016422750195488334,
0.05595099925994873,
-0.01729966700077057,
-0.04421616718173027,
-0.015201812610030174,
-0.03607594966888428,
0.024058472365140915,
-0.03711095079779625,
-0.012658951804041862,
0.0759417787194252,
0.05511052906513214,
0.017048750072717667,
0.018649544566869736,
0.01... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
- (ii) Return on Capital Employed (ROCE): It is another variation of ROI.
The ROCE is calculated as follows:
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
Sometimes, it is also calculated as:
<!-- formula-not-decoded -->
3.25
<!-- formula-not-decoded --> | [
-0.003811582922935486,
0.031850285828113556,
-0.02700299397110939,
0.0027890820056200027,
-0.045750025659799576,
-0.02995491586625576,
0.016760442405939102,
-0.03812659904360771,
-0.03471396863460541,
0.06318677961826324,
0.05248090624809265,
0.05552174523472786,
-0.01444481872022152,
0.01... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Interpretation
Return on equity is one of the most important indicators of a firm's profitability and potential growth. Companies that boast a high return on equity with little or no debt are able to grow without large capital expenditures, allowing the owners ... | [
-0.017315829172730446,
0.06066577881574631,
-0.018440881744027138,
-0.0011681405594572425,
-0.027707066386938095,
-0.049774449318647385,
0.00978209637105465,
-0.0106145478785038,
0.005055743735283613,
0.034975141286849976,
0.03780646249651909,
0.0599183589220047,
-0.001739121857099235,
-0.... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Return on Equity using the Du Pont Model:
A finance executive at E.I. Du Pont de Nemours and Co., of Wilmington, Delaware, created the DuPont system of financial analysis in 1919. That system is used around the world today and serves as the basis of components that make up... | [
-0.006940007675439119,
0.03793397918343544,
-0.016769494861364365,
-0.016510844230651855,
-0.03517822548747063,
-0.004334373399615288,
-0.020794158801436424,
-0.020260239019989967,
0.013247571885585785,
0.06466750800609589,
0.014698749408125877,
0.049194395542144775,
0.004717428237199783,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
Net profit margin is a safety cushion; the lower the margin, the less room for an error. A business with 1% margin has no room for flawed execution. Small miscalculations on management's part could lead to tremendous losses with little or no warning.
- (ii) Investment... | [
0.027421556413173676,
0.048235777765512466,
-0.007975962944328785,
0.00862477719783783,
0.0012310947058722377,
-0.06700984388589859,
0.025174573063850403,
0.0033737188205122948,
-0.023562230169773102,
0.04627249389886856,
0.01588849350810051,
0.0021965771447867155,
-0.013524836860597134,
-... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Calculation of Return on Equity
To calculate the return on equity using the DuPont model, simply multiply the three components (net profit margin, asset turnover, and equity multiplier.)
Return on Equity = (Profitability/ Net profit margin) x (Investment Turnover/ Asset Turnove... | [
-0.012893056496977806,
0.03870350867509842,
-0.017555832862854004,
-0.017189282923936844,
-0.006619128864258528,
-0.03130554035305977,
-0.01850743591785431,
-0.02477317303419113,
0.016017550602555275,
0.06610319763422012,
0.015486974269151688,
0.06490682810544968,
-0.010746914893388748,
-0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL ANALYSIS AND PLANNINGRATIO ANALYSIS
3.27
Here, Return on Equity as per Du Pont Model will be calculated as follows:
Net Profit Margin = Net Income ( ` 4,212) ÷ Revenue ( ` 29,261)
= 0.14439 or 14.39%
Asset Turnover = Revenue ( ` 29,261) ÷ Assets ( ` 27,987) = 1.0455
Equity Multipli... | [
-0.0036763427779078484,
0.06237348914146423,
-0.02850216254591942,
-0.03234143182635307,
-0.030528375878930092,
-0.05125856027007103,
-0.014332408085465431,
0.007344873156398535,
-0.011831444688141346,
0.060370005667209625,
0.0294419527053833,
0.041849520057439804,
-0.005134244915097952,
-... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3.4.3 Profitability Ratios Required for Analysis from Owner's Point of View
- (a) Earnings per Share (EPS): The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of earnings per share basis. It is calculated as follows:
<!-- formula-not-... | [
0.00836502481251955,
0.02555260993540287,
0.008290895260870457,
-0.03209305182099342,
-0.0009872975060716271,
-0.03356629237532616,
0.004805088508874178,
0.0077429404482245445,
0.00944912526756525,
0.034995004534721375,
-0.03180205076932907,
0.03545814007520676,
0.023660872131586075,
0.012... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
- (c) Dividend Pay-out Ratio (DP): This ratio measures the dividend paid in relation to net earnings. It is determined to see to how much extent earnings per share have been retained by the management for the business. It is computed as:
<!-- formula-not-... | [
0.016724493354558945,
0.0032556483056396246,
0.008291078731417656,
0.005310063250362873,
-0.0178826991468668,
-0.024000506848096848,
0.02905588038265705,
-0.019922498613595963,
0.010271325707435608,
0.04255294427275658,
-0.008678551763296127,
0.049551233649253845,
0.01857876591384411,
0.03... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3.4.4 Profitability Ratios related to market/valuation/ Investors
These ratios consider the market value of the company's shares in calculation. Frequently, share prices data are punched with the accounting data to generate new set of information. These are (a) Price- Earnings Rati... | [
0.006668343674391508,
0.03999677672982216,
0.015204186551272869,
-0.011715707369148731,
0.0009988046949729323,
-0.038481343537569046,
0.028967127203941345,
-0.006921618245542049,
-0.004691082052886486,
0.05005782097578049,
-0.02152073197066784,
0.05971881374716759,
0.018995147198438644,
-0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Interpretation
This ratio indicates return on investment; this may be on average investment or closing investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is the indicator of true return in which share capital is taken at its market value.
- (c) Market Value/ Book... | [
0.0013273956719785929,
0.022987637668848038,
-0.010898598469793797,
-0.022455833852291107,
-0.013491799123585224,
-0.057677678763866425,
0.04226664826273918,
-0.022797269746661186,
0.005620575975626707,
0.03748759627342224,
-0.02010563760995865,
0.03126279264688492,
0.03554150462150574,
0.... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Interpretation
This ratio indicates market response of the shareholders' investment. Undoubtedly, higher the ratio, better is the shareholders' position in terms of return and capital gains.
- (d) Q Ratio: This ratio is proposed by James Tobin, a ratio is defined as
```
Q Ratio = Market Val... | [
0.003982556983828545,
0.04780874401330948,
-0.002225547796115279,
0.025487085804343224,
-0.04180734232068062,
-0.033492665737867355,
0.03691939264535904,
0.010765926912426949,
0.010757648386061192,
0.07089012861251831,
0.043098680675029755,
0.019884120672941208,
-0.0000790571648394689,
0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Notes for calculating Ratios:
1. EBIT (Earnings before interest and taxes) = PBIT (Profit before interest and taxes),
EAT (Earnings after taxes) = PAT (Profit after taxes),
EBT (Earnings before taxes) = PBT (Profit before taxes)
2. In absence of preference dividend PAT can be taken as earnin... | [
-0.005990203935652971,
0.046342961490154266,
-0.004362503997981548,
-0.012694435194134712,
-0.01616922952234745,
-0.025086984038352966,
0.006397553253918886,
0.002982896054163575,
0.0032452158629894257,
0.06158753111958504,
0.014680342748761177,
0.011915919370949268,
0.02326766774058342,
-... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4. USERS AND OBJECTIVE OF FINANCIAL ANALYSIS - A BIRD'S EYE VIEW
Financial Statement analysis is useful to various shareholders to obtain the derived information about the firm.
| S.No. | Users | Objectives ... | [
0.006310783326625824,
0.0009559335885569453,
0.022608254104852676,
-0.011335179209709167,
-0.024861443787813187,
-0.010801498778164387,
0.0049048434011638165,
0.02371937222778797,
0.000558415544219315,
0.023518724367022514,
0.012675836682319641,
0.01616428978741169,
0.004618360195308924,
0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| 6. | Regulator / Government | They will analyse the financial statements to determine taxations and other details payable to the government. | ♦ Profitability Ratios ... | [
0.02971201203763485,
0.003746449714526534,
0.024505479261279106,
-0.015058337710797787,
-0.031375426799058914,
-0.024676833301782608,
0.0040123919025063515,
0.0029960123356431723,
-0.008244493044912815,
0.0718204453587532,
0.014653741382062435,
0.017656564712524414,
0.017736734822392464,
0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5. APPLICATION OF RATIO ANALYSIS IN FINANCIAL DECISION MAKING
A popular technique of analysing the performance of a business concern is that of financial ratio analysis. As a tool of financial management, they are of crucial significance.
The importance of ratio analysis lies i... | [
0.020127689465880394,
0.03336654230952263,
0.0008612519595772028,
0.017571985721588135,
-0.038405291736125946,
0.012210008688271046,
-0.00003410381395951845,
-0.02389242872595787,
-0.0023587853647768497,
0.06306883692741394,
0.03289390355348587,
-0.006513320375233889,
-0.02707919105887413,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.1 Financial Ratios for Evaluating Performance
- (a) Liquidity Position: With the help of ratio analysis one can draw conclusions regarding liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its obligations when they become due. T... | [
0.020567115396261215,
0.026163727045059204,
0.024354835972189903,
0.0205081719905138,
-0.00907822698354721,
-0.011200692504644394,
0.0259307362139225,
-0.010483515448868275,
-0.0132098738104105,
0.060782335698604584,
0.003939510323107243,
0.012135334312915802,
-0.01464900467544794,
-0.0015... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6. LIMITATIONS OF FINANCIAL RATIOS
The limitations of financial ratios are listed below:
- (i) Diversified product lines: Many businesses operate a large number of divisions in quite different industries. In such cases ratios calculated on the basis of aggregate data cannot be used for i... | [
-0.004897858016192913,
0.004964364692568779,
0.030548550188541412,
0.017499452456831932,
-0.021236184984445572,
0.00032153810025192797,
0.007919215597212315,
0.004763967823237181,
-0.00035897575435228646,
0.09077851474285126,
0.010017069056630135,
-0.002210501814261079,
0.0070833470672369,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL ANALYSIS AND PLANNINGRATIO ANALYSIS
3.37
- (vi) No standard set of ratios against which a firm's ratios can be compared: Sometimes a firm's ratios are compared with the industry average. But if a firm desires to be above the average, then industry average becomes a low s... | [
0.014836817048490047,
0.019718073308467865,
0.017483539879322052,
-0.040969692170619965,
-0.014193071983754635,
-0.04380577430129051,
0.015936970710754395,
0.003834166331216693,
-0.003782229032367468,
0.08826988190412521,
0.04857800155878067,
0.03476092964410782,
-0.01652621105313301,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7. FINANCIAL ANALYSIS
It may be of two types: - Horizontal and vertical.
Horizontal Analysis : When financial statement of one year are analysed and interpreted after comparing with another year or years, it is known as horizontal analysis. It can be based on the ratios derived from ... | [
-0.01017153449356556,
0.002874503144994378,
0.007214089389890432,
-0.0226367749273777,
-0.019952457398176193,
-0.011252776719629765,
0.02693859115242958,
0.0022606870625168085,
-0.012648195959627628,
0.08898913115262985,
0.034844037145376205,
0.06253112852573395,
-0.010771156288683414,
-0.... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 8. SUMMARY OF RATIOS
Another way of categorizing the ratios is being shown to you in a tabular form. A summary of the ratios has been tabulated as under:
| Ratio | Formulae | Interpr... | [
0.031292255967855453,
0.03308992087841034,
0.023725613951683044,
0.003664531745016575,
-0.03106909617781639,
-0.0326477475464344,
0.024498596787452698,
0.005415163468569517,
0.0005225985660217702,
0.08661739528179169,
0.041042666882276535,
0.0015714674955233932,
-0.004065757617354393,
0.00... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| | | sales are being generated by each rupee's worth of assets invested in the business? ... | [
0.013036114163696766,
0.016665330156683922,
0.01492241770029068,
0.013072287663817406,
-0.030449774116277695,
-0.04700496047735214,
0.015308232977986336,
-0.004553456325083971,
-0.016679205000400543,
0.059645578265190125,
0.006146455183625221,
0.01725495420396328,
0.013995792716741562,
-0.... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| Return on Capital Employed ROCE (Pre-tax) | EBIT ×100 Capital Employed | It measures overall earnings (either pre-tax or post tax) on total capital employed. ... | [
0.016225015744566917,
0.03183922916650772,
-0.0069773453287780285,
0.0028201877139508724,
-0.024573668837547302,
-0.033095285296440125,
0.009619742631912231,
-0.032731108367443085,
-0.01425881590694189,
0.07517635822296143,
0.040397677570581436,
0.046024732291698456,
0.016019541770219803,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 1
In a meeting held at Solan towards the end of 2021-22, the Directors of HPCL Ltd. have taken a decision to diversify. At present HPCL Ltd. sells all finished goods from its own warehouse. The company issued debentures on 01.04.2022 and purchased fixed assets on the same day. The pu... | [
0.0009586612577550113,
0.016678955405950546,
-0.0031654215417802334,
-0.003234193194657564,
-0.02217472344636917,
-0.012345386669039726,
0.03291128948330879,
0.004354062490165234,
0.021127451211214066,
0.02012406289577484,
0.03715420886874199,
0.019156232476234436,
0.018748527392745018,
-0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INCOME STATEMENT
| Particulars | 2021-22 ( ` ) | 2021-22 ( ` ) | 2022-23 ( ` ) | 2022-23 ( ` ) |
|---------------------------|-----------------|-----------------|-----------------|-----------------|
| Cash Sales | 30,000 | | 32,000 ... | [
0.01421639695763588,
-0.004704826977103949,
-0.038590528070926666,
-0.002194827888160944,
-0.00724619859829545,
-0.01847383938729763,
0.027563946321606636,
0.018619127571582794,
-0.007947957143187523,
0.05553003028035164,
-0.003911929205060005,
0.024559514597058296,
0.016525665298104286,
0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## BALANCE SHEET
| Assets & Liabilities | 2021-22 ( `) | 2021-22 ( `) | 2022-23 ( `) | 2022-23 ( `) |
|--------------------------------|----------------|----------------|----------------|----------------|
| Fixed Assets (Net Block) | - | 30,000 | - ... | [
0.02132776379585266,
0.017015399411320686,
-0.005762782413512468,
0.035438280552625656,
-0.035786960273981094,
-0.042429737746715546,
0.042487744241952896,
0.0005584984901361167,
0.0276140496134758,
0.0520847924053669,
0.034091487526893616,
0.006095276214182377,
0.03168587014079094,
0.0128... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
3.45
| Represented by: | | |
|---------------------|----------|----------|
| Share Capital | 75,000 | 75,000 |
| Reserve and Surplus | 25,000 | 42,000 |
| Debentures | - | 30,000 |
| | 1,00,000 | 1,47,0... | [
0.03305751085281372,
0.03549548238515854,
0.013399550691246986,
-0.013358750380575657,
-0.018949829041957855,
-0.017251351848244667,
0.0327247679233551,
-0.0006279569352045655,
0.005581089295446873,
0.0681404247879982,
0.033229537308216095,
0.011490918695926666,
0.011286366730928421,
0.010... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| Computation of Ratios | Computation of Ratios | Computation of Ratios |
|------------------------------------------------------------------|------------------------------|------------------------------|
| Ratio ... | [
0.018453458324074745,
0.030693216249346733,
-0.032691843807697296,
-0.004955394193530083,
-0.020328463986516,
-0.024244563654065132,
0.014479405246675014,
0.003736963029950857,
-0.005594043526798487,
0.04541001841425896,
0.017813289538025856,
0.02310316078364849,
0.007901628501713276,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| 4. Capital turnover ratio (Sales / capital employed) | 3,00,000 =3 1,00,000 | 3,74,000 1,47,000 = 2.54 |
|------------------------------------------------------------------------------------------------------|------... | [
0.046717673540115356,
0.032677095383405685,
0.02089005708694458,
0.013469364494085312,
-0.02442677691578865,
-0.01829739846289158,
0.03218592330813408,
0.0028102570213377476,
0.004098362289369106,
0.07996440678834915,
0.030869634822010994,
0.02411605603992939,
0.0026731432881206274,
-0.004... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 2
Following is the abridged Balance Sheet of Alpha Ltd.:
| Liabilities | ` | Assets | ` | ` |
|-------------------------|----------|-----------------------|--------|----------|
| Share Capital | 1,00,000 | Land and Buildings ... | [
0.04636865854263306,
0.025986190885305405,
0.0008816036861389875,
0.00700186425819993,
-0.028346164152026176,
-0.04307785630226135,
0.03782135620713234,
0.0030751500744372606,
0.0011088030878454447,
0.03900647908449173,
0.03621663153171539,
0.015142006799578667,
0.01577824540436268,
0.0053... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
(The total fixed assets then constituted 60% of total fixed and current assets.)
- (iii) Working capital ratio was 8 : 5.
- (iv) Quick assets ratio was 1 : 1.
- (v) The receivables (four-fifth of the quick assets) to sales ratio revealed a credit period of 2 months. There wer... | [
0.01666068285703659,
0.032130833715200424,
0.02244345284998417,
-0.009097452275454998,
-0.04892532527446747,
-0.03609595075249672,
0.027452776208519936,
-0.01545714307576418,
-0.011937694624066353,
0.08953063935041428,
0.0341741107404232,
0.014697927981615067,
0.0013105404796078801,
-0.009... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| Particulars | % | ( ` ) |
|----------------------------------|------|----------|
| Share capital (given to be same) | 50% | 1,00,000 |
| Other shareholders funds | 15% | 30,000 |
| 5% Debentures | 10% | 20,000 |
| Current Liab... | [
0.03706573322415352,
0.03106708638370037,
0.0033080484718084335,
-0.0025110491551458836,
0.005395244341343641,
-0.045695699751377106,
0.032253868877887726,
-0.005107427481561899,
0.015914395451545715,
0.046194419264793396,
0.042282238602638245,
0.016194729134440422,
0.03363281488418579,
-0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Calculation of Assets
Total liabilities =
Total Assets
` 2,00,000 =
Total Assets
Fixed Assets =
60% of total fixed assets and current assets
=
` 2,00,000 × 60/100 = ` 1,20,000
Current Assets =
Total Assets - Fixed Assets
=
` 2,00,000 - ` 1,20,000 = ` 80,000 | [
-0.030591150745749474,
0.03709230571985245,
-0.02745060995221138,
-0.013812782242894173,
-0.0405803844332695,
-0.052089251577854156,
0.04412304237484932,
-0.019795812666416168,
0.019503377377986908,
0.05218172445893288,
0.051873818039894104,
-0.004685513209551573,
0.031748250126838684,
0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Calculation of additions to Plant & Machinery
| | ` |
|---------------------------------------------------------------------------------------------|----------|
| Total fixed assets ... | [
0.0058927228674292564,
0.027464335784316063,
-0.0009100221213884652,
-0.017453450709581375,
-0.029248585924506187,
-0.03679656237363815,
0.03529970720410347,
0.012824539095163345,
0.004688477609306574,
0.03335690498352051,
0.038415271788835526,
0.007767639122903347,
0.01292162574827671,
-0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Calculation of stock
Quick ratio: =
Current assets -stock = 1 Current liabilities
=
80,000 - stock =1 50,000 ` `
` 50,000 =
` 80,000 - Stock
Stock =
` 80,000 - ` 50,000
=
` 30,000
Receivables =
4/5 th of quick assets
=
( ` 80,000 - ` 30,000) × 4/5
=
` 40,000
Receivables turnove... | [
0.018648996949195862,
0.05394325777888298,
0.003928042016923428,
0.0011937881354242563,
-0.03100154548883438,
-0.04473404958844185,
0.04556204378604889,
0.004877430386841297,
0.010349268093705177,
0.08463786542415619,
0.02995203249156475,
0.021980565041303635,
0.012901761569082737,
-0.0048... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Projected profit and loss account for the year ended 31 st March, 2023
| Particulars | ` | Particulars | ` |
|--------------------------------------------------|----------|--------------------------|----------|
| To cost of goods sol... | [
0.001271553453989327,
-0.005595913622528315,
-0.011591336689889431,
-0.05697760358452797,
-0.006405672058463097,
-0.01886827126145363,
0.04172193259000778,
0.027376974001526833,
0.001162037835456431,
0.04713572561740875,
0.02192070707678795,
-0.001426166738383472,
0.03431911766529083,
0.01... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Projected Balance Sheet as at 31 st March, 2023
| Liabilities | ` | Assets | | ` |
|-----------------------------------|-----------------|--------------------------------|--------|----------|
| Share capital Profit and loss... | [
0.007512260694056749,
-0.0017578741535544395,
0.002840884728357196,
-0.0006511888350360096,
-0.028783932328224182,
-0.038342710584402084,
0.05265983194112778,
0.016811704263091087,
0.01722455956041813,
0.03891591727733612,
0.024348432198166847,
0.0012389980256557465,
0.030852729454636574,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 3
X Co. has made plans for the next year. It is estimated that the company will employ total assets of ` 8,00,000; 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are esti... | [
0.008457381278276443,
0.02239176072180271,
-0.022323740646243095,
-0.034055378288030624,
-0.002206592122092843,
-0.03731681406497955,
0.026270879432559013,
0.0032330979593098164,
-0.008376853540539742,
0.051741573959589005,
0.022806936874985695,
0.025161415338516235,
0.014385626651346684,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## The net profit is calculated as follows:
| Particulars | ` |
|---------------------------------------|------------|
| Sales (150% of ` 4,80,000) | 7,20,000 |
| Direct costs | (4,80,000) |
| Gross profit ... | [
0.008653534576296806,
0.01764850877225399,
-0.02628904953598976,
-0.022782253101468086,
-0.00024170753022190183,
-0.05205706134438515,
0.007418353576213121,
0.005949360318481922,
-0.004945633001625538,
0.05597488954663277,
0.02775191143155098,
0.036583542823791504,
0.034679070115089417,
-0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 4
From the following ratios and information given below, PREPARE Trading Account, Profit and Loss Account and Balance Sheet of Aebece Company:
| Fixed Assets | ` 40,00,000 |
|-----------------------------------|---------------|
| Closing Stock ... | [
0.022573349997401237,
0.030509892851114273,
0.018389802426099777,
0.003980119246989489,
-0.036895427852869034,
-0.03587750345468521,
0.011621602810919285,
0.011835558339953423,
0.0020627116318792105,
0.043552570044994354,
0.04904608055949211,
0.0000034044865060423035,
0.013847414404153824,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL ANALYSIS AND PLANNINGRATIO ANALYSIS
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
*It is assumed that total liabilities do not include capital.
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
<!-- for... | [
-0.012813392095267773,
0.026077475398778915,
0.016836341470479965,
-0.011322654783725739,
-0.013489262200891972,
-0.030429180711507797,
0.029602929949760437,
0.03233401104807854,
-0.007452557794749737,
0.08963661640882492,
0.0645027682185173,
0.016044676303863525,
0.00850662961602211,
0.01... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Trading Account
| Particulars | ( ` ) | Particulars | ( ` ) |
|----------------------------------------------------|-----------|------------------|-----------|
| To Opening Stock | 80,000 | By Sales | ... | [
0.04713711142539978,
0.017154978588223457,
0.0034739200491458178,
0.0021083189640194178,
-0.010037308558821678,
-0.03716792166233063,
0.0377148762345314,
0.020689120516180992,
-0.008212253451347351,
0.0815231204032898,
0.012296648696064949,
0.04405621439218521,
0.025343818590044975,
-0.000... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Profit and Loss Account
| Particulars | ( ` ) | Particulars | ( ` ) |
|-----------------------|----------|---------------------|----------|
| To Operating Expenses | 1,60,000 | By Gross Profit c/d | 8,00,000 |
| To Net Profit | 6,40,000 | | ... | [
0.02158895693719387,
-0.013974379748106003,
-0.004221951123327017,
-0.02946457639336586,
-0.0065715983510017395,
-0.035980239510536194,
0.02243202179670334,
0.012237481772899628,
-0.021587654948234558,
0.05700458213686943,
0.015747323632240295,
0.0358237698674202,
0.02432933636009693,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Balance Sheet
| Capital and Liabilities | ( ` ) | Assets | ( ` ) |
|---------------------------|-----------|------------------------------------|-----------|
| Capital | 32,00,000 | Fixed Assets | 40,00,000 |
| Liabiliti... | [
0.011743683367967606,
0.005149517208337784,
0.01120363362133503,
0.0296137947589159,
-0.020015479996800423,
-0.05254603922367096,
0.04650614783167839,
0.001510915346443653,
0.011845415458083153,
0.06303636729717255,
0.053097087889909744,
0.02092982456088066,
0.016630282625555992,
-0.005160... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
ABC Company sells plumbing fixtures on terms of 2/10, net 30. Its financial statements over the last 3 years are as follows:
| Particulars | 2020-21 | 2021-22 | 2022-23 |
|---------------------|-----------|-----------|-----------|
| | `... | [
0.03855687752366066,
0.016006724908947945,
-0.003007485531270504,
0.01138293743133545,
-0.04290374740958214,
-0.013148554600775242,
0.014707263559103012,
0.020738128572702408,
0.003321135649457574,
0.06214536726474762,
0.059770356863737106,
0.005640668794512749,
0.00233371090143919,
0.0044... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL ANALYSIS AND PLANNINGRATIO ANALYSIS
3.55
| | ` | ` | ` |
|------------------------|-----------|-----------|-----------|
| Accounts payable | 2,30,000 | 3,00,000 | 3,80,000 |
| Accruals | 2,00,000 | 2,10,000 | 2,25,... | [
0.019033467397093773,
-0.004655786324292421,
-0.007789056748151779,
-0.00991857424378395,
-0.013531033881008625,
-0.015806451439857483,
0.025494754314422607,
0.020019307732582092,
-0.002915693446993828,
0.06863303482532501,
0.03879258781671524,
0.02145080640912056,
0.02036457695066929,
-0.... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| Ratios | 2020-21 | 2021-22 | 2022-23 |
|------------------------------------------------------|----------------------------------------|------------... | [
0.03894718363881111,
0.04251881688833237,
-0.015372985042631626,
0.02820010297000408,
-0.0632762461900711,
-0.022517802193760872,
0.03677411377429962,
0.016779134050011635,
0.0218869186937809,
0.05833078920841217,
0.01743306964635849,
-0.01750042848289013,
0.032894477248191833,
0.016046639... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| Receivables turnover ratio (Sales/ Average Receivables) (Refer Working Notes) | 20 ` ` 40,00,000 2,00,000 | 18.70 ` ` 43,00,000 2,30,000 | 13.82 ` ` 38,00,000 2,75,000 |
|------------------------------------------------... | [
0.029646778479218483,
0.01137798372656107,
0.007344957906752825,
0.029492110013961792,
-0.04672388359904289,
-0.0111535107716918,
0.03211347758769989,
0.008664900436997414,
0.013975942507386208,
0.0821203738451004,
0.014594437554478645,
0.02436155080795288,
0.01472296193242073,
0.010730920... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL ANALYSIS AND PLANNINGRATIO ANALYSIS
3.57
| Return on assets (Net profit/ Total Assets) | 0.21 ` ` 3,00,000 14,30,000 | 0.13 ` ` 2,00,000 15,60,000 | 0.06 ` ` 1,00,000 16,95,000 |
|-----------------------------------------------|--------------... | [
0.012928551994264126,
0.026059933006763458,
0.00006199753988767043,
-0.01212155818939209,
-0.044840630143880844,
-0.024841368198394775,
0.0192381851375103,
0.01721247285604477,
-0.0038500940427184105,
0.07289378345012665,
0.028833584859967232,
0.023965023458003998,
0.00918903760612011,
0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 6
Following information are available for Navya Ltd. along with various ratios relevant to the particular industry it belongs to. APPRAISE your comments on strength and weakness of Navya Ltd. comparing its ratios with the given industry norms.
Navya Ltd. | [
0.029637308791279793,
0.009542466141283512,
0.01567145809531212,
-0.009883720427751541,
-0.008686552755534649,
0.003258198732510209,
0.01431075856089592,
0.00478699617087841,
0.012337172403931618,
0.06750519573688507,
0.02581866644322872,
0.024452993646264076,
-0.015553471632301807,
-0.020... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Balance Sheet as at 31.3.2023
| Liabilities | ( ` ) | Assets | ( ` ) |
|---------------------------|-----------|----------------|-----------|
| Equity Share Capital | 48,00,000 | Fixed Assets | 24,20,000 |
| 10% Debentures | 9,20,000 | Cash ... | [
0.014003190211951733,
0.010110066272318363,
-0.009942928329110146,
0.01979278214275837,
-0.025473155081272125,
-0.04060528054833412,
0.04448472708463669,
-0.0022045166697353125,
0.023092346265912056,
0.06615623086690903,
0.03552747145295143,
0.00850590318441391,
0.034357842057943344,
-0.00... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## For the year ending 31.3.2023
| Particulars | ( ` ) | ( ` ) |
|-------------------------------------|-----------|-------------|
| Sales | | 1,10,00,000 |
| Less: Cost of goods sold: | | |
| Ma... | [
0.0173130314797163,
0.019876770675182343,
-0.0209349412471056,
-0.01283313985913992,
-0.02229139395058155,
-0.022891318425536156,
0.016061803326010704,
0.012681149877607822,
-0.007352665066719055,
0.06306163966655731,
0.008538544178009033,
0.006110454443842173,
0.019548475742340088,
-0.005... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Industry Norms
| Ratios | Norm |
|-------------------------------------------|--------|
| Current Ratio | 2.5 |
| Receivables Turnover Ratio | 8.0 |
| Inventory Turnover Ratio (based on Sales) | 9.0 |
| Total ... | [
0.025653356686234474,
0.0293250884860754,
-0.007621435448527336,
0.028365731239318848,
-0.05408947914838791,
-0.026855051517486572,
0.02869259938597679,
0.0013947582338005304,
-0.01151818223297596,
0.07494456321001053,
0.010073045268654823,
0.034239113330841064,
-0.0057286364026367664,
0.0... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| Ratios | Ratios | Navya Ltd. | Industry Norms |
|----------|----------------------------------------------------|---------------------------------|------------------|
| 1. | Current Ratio = Current Assets Current... | [
0.03098149597644806,
0.04063055291771889,
-0.000007476684004359413,
0.02063564956188202,
-0.038909345865249634,
-0.031596194952726364,
0.015382352285087109,
0.00568817276507616,
-0.003080029971897602,
0.05751040577888489,
0.028610199689865112,
0.021548690274357796,
0.0003774249635171145,
-... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
1. The position of Navya Ltd. is better than the industry norm with respect to Current Ratio and Receivables Turnover Ratio.
2. However, the Inventory turnover ratio and Total Asset Turnover ratio is poor comparing to industry norm indicating that company is inefficient to uti... | [
0.02742011286318302,
0.015114465728402138,
-0.0008469194290228188,
0.009037722833454609,
-0.03950206935405731,
-0.012398574501276016,
0.028309041634202003,
-0.01763111911714077,
0.014880518428981304,
0.060258518904447556,
0.048652954399585724,
-0.014217826537787914,
-0.010525889694690704,
... |
Inter_P6A_FM_Mod1_Chapter_3_Financial_Analysis_and_Planning_Ratio_Analysis.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SUMMARY
- ♦ Financial Analysis and its Tools: For the purpose of obtaining the material and relevant information necessary for ascertaining the financial strengths and weaknesses of an enterprise, it is necessary to analyze the data depicted in the financial statement. The financi... | [
0.03138697147369385,
0.019391348585486412,
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0.07214371114969254,
0.027444658800959587,
-0.0028780766297131777,
-0.0035752621479332447,
... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## After studying this chapter, you would be able to -
- ♦ Discuss the need and sources of finance of a business entity.
- ♦ Discuss the meaning of cost of capital for raising fund from different sources of finance.
- ♦ Measure cost of individual components of capital.
- ♦ Calculate weighted cost ... | [
0.03891730308532715,
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0.01718764752149582,
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0.04218607023358345,
0.03154449537396431,
0.006645711604505777,
0.028007909655570984,
-0.02... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 1. INTRODUCTION
We know that the basic task of a finance manager is procurement of funds and its effective utilization in business. Whereas objective of financial management is maximization of wealth of shareholders. Here wealth or value is equal to performance divided by expec... | [
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0.034901462495326996,
0.05051584914326668,
0.006387540604919195,
0.026705853641033173,
0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2. MEANING OF COST OF CAPITAL
Cost of capital is the return expected by the providers of capital (i.e. shareholders, lenders and the debt-holders) to the business as a compensation for their contribution to the total capital. When an entity (corporate or others) p... | [
0.002959326608106494,
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0.029929617419838905,
0.0703224465250969,
0.007495957892388105,
-0.022719675675034523,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3. SIGNIFICANCE OF COST OF CAPITAL
It is important to determine the correct amount of cost of capital as it helps management and investors to take an appropriate decision.
The correct cost of capital helps in the following decision making: | [
0.028982382267713547,
0.025345204398036003,
0.04491917043924332,
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0.03220996633172035,
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0.03390486165881157,
0.04719344154000282,
0.026485620066523552,
-0.02394714020192623,
-0.01... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## COST OF CAPITAL
- (i) Evaluation of investment options: The estimated benefits (future cash flows) from available investment opportunities (business or project) are converted into the present value of benefits by discounting them with the relevant cost of capital . Here it is ... | [
0.029716860502958298,
0.007328150328248739,
0.03673054650425911,
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0.021692313253879547,
-0.020010774955153465,
-0.01763039454817772,
0.054595641791820526,
0.031719379127025604,
0.015558083541691303,
0.023513980209827423,
-0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4. DETERMINATION OF COST OF CAPITAL
Cost is not the amount which the company plans to pay or actually pays, rather it is the expectations of stakeholders . Here, stakeholders includes providers of capital (shareholders, debenture holder, money lenders etc.), intermediarie... | [
0.02670460194349289,
0.040974248200654984,
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0.005159696098417044,
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0.04495621472597122,
0.001971690682694316,
-0.015009795315563679,
0.0590309239923954,
0.049687955528497696,
0.0194532573223114,
0.022189117968082428,
-0.0034... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## In General, some of the factors may affect the Cost of Capital:
- ♦ Supply and Demand: Just like any good, the cost of capital is influenced by supply and demand. When there are lots of exciting business opportunities, there's more competition for funding, driving the cost of capital up. On the ot... | [
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0.02885543927550316,
0.010900643654167652,
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0.021623855456709862,
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0.02930721454322338,
0.006142423488199711,
-0.019365083426237106,
0.07116445899009705,
0.03849830850958824,
0.0053976173512637615,
0.009675998240709305,
-0.043... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## COST OF CAPITAL
influence how much people save and invest. Higher returns generally lead to more savings.
- ♦ Risk and Return: There's always a trade-off between risk and reward. Businesses with high-risk ventures need to offer investors a higher potential return to compensate for th... | [
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0.019691789522767067,
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0.011496059596538544,
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0.04689197242259979,
0.04967329278588295,
-0.011157757602632046,
0.0036251433193683624,
-0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5. COST OF LONG-TERM DEBT (KD)
External borrowings or debt instruments do no confers ownership to the providers of finance. The providers of the debt fund do not participate in the affairs of the company but enjoys the charge on the profit before taxes. Long te... | [
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0.03172002360224724,
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-0.026943683624267578,
0.04449313133955002,
0.021910395473241806,
0.016702579334378242,
0.045898936688899994,
... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.1 Features of Debentures or Bonds
- (i) Face Value : Debentures or bonds are denominated with some value, this denominated value is called face value of the debenture. Interest is calculated on the face value of the debenture. E.g. if a company issue 9% non- convertible debe... | [
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0.046235959976911545,
-0.02357015199959278,
-0.011379809118807316,
0.022268490865826607,
0.010408781468868256,
0.018682576715946198,
0.04489488527178764,
0.0116... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
payable to the holders of debentures periodically (annually, semi-annually, etc.).
- (iii) Maturity period: Debentures or Bonds has a fixed maturity period for redemption. However, in case of irredeemable debentures maturity period is not defined and it is taken as... | [
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0.04100743681192398,
0.002336376579478383,
0.04995857551693916,
0.04653551056981087,
0.029... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.2 Cost of Irredeemable Debentures
The debentures which are not redeemed by the issuer of the debentures is known as irredeemable debentures. Cost of debentures not redeemable during the life time of the company is calculated as below:
<!-- formula-not-decoded -->
Where,
I
= Interest paym... | [
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0.02893567457795143,
-0.02505584806203842,
-0.019295627251267433,
0.06807226687669754,
0.032232046127319336,
0.04548995569348335,
0.038326334208250046,
0.01595... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 1
Five years ago, Sona Limited issued 12 per cent irredeemable debentures at ` 103, at ` 3 premium to their par value of ` 100. The current market price of these debentures is ` 94. If the company pays corporate tax at a rate of 35 per cent CALCULATE its curr... | [
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0.0035404888913035393,
-0.00955772865563631,
-0.004036793950945139,
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0.023299051448702812,
-0.01829742267727852,
0.00013825974019709975,
0.0599851980805397,
0.032028552144765854,
0.06353108584880829,
0.023672984912991524,
0.01... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## COST OF CAPITAL
premium. If discount on issue and/ or premium on redemption are tax deductible, the following formula can be used to calculate the cost of debt:
<!-- formula-not-decoded -->
In absence of any specific information, students may use any of the above formulae to calculat... | [
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0.037920743227005005,
-0.018094435334205627,
-0.025506746023893356,
0.06473299115896225,
0.05892613157629967,
0.008298610337078571,
0.031144356355071068,
0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 2
A company issued 10,000, 10% debentures of ` 100 each at a premium of 10% on 1.4.2023 to be matured on 1.4.2028. The debentures will be redeemed at par on maturity. COMPUTE the cost of debentures assuming 35% as tax rate. | [
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0.037570469081401825,
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0.008580932393670082,
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0.03199097141623497,
-0.007294207811355591,
-0.005775448400527239,
0.03529786691069603,
0.021448155865073204,
0.02829453907907009,
0.02662413753569126,
0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The cost of debenture (Kd) will be calculated as below:
<!-- formula-not-decoded -->
I = Interest on debenture = 10% of ` 100 = ` 10
NP = Net Proceeds = 110% of ` 100 =
` 110
RV = Redemption value =
` 100
n = Period of debenture
= 5 years
t = Tax rate
= 35% or 0.35 | [
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0.05712157487869263,
0.002376559190452099,
-0.025765396654605865,
0.048920754343271255,
0.014321102760732174,
0.019736463204026222,
0.04869033768773079,
0.021... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 3
A company issued 10,000, 10% debentures of ` 100 each at par on 1.4.2018 to be matured on 1.4.2028 at par. The company wants to know the cost of its existing debt on 1.4.2023 when the market price of the debentures is ` 80. COMPUTE the cost of existing debentures assuming 35% tax ra... | [
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0.03883945196866989,
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0.0036203796043992043,
0.016492316499352455,
-0.025488872081041336,
0.03791125491261482,
-0.01728038676083088,
0.000977401388809085,
0.044882189482450485,
0.016036871820688248,
0.019542107358574867,
0.03287972882390022,
0.025... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
<!-- formula-not-decoded -->
I = Interest on debenture = 10% of ` 100 = ` 10
NP = Current market price = ` 80
RV = Redemption value = ` 100
n = Period of debenture = 5 years
t = Tax rate = 35% or 0.35
<!-- formula-not-decoded -->
<!-- formula-not-decoded --> | [
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0.051515012979507446,
0.0008298501488752663,
-0.006249172613024712,
0.07687535136938095,
0.029362311586737633,
0.024919601157307625,
0.044095415621995926,
0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.3.1 Cost of Debt using Present value method [Yield to maturity (YTM) approach]
The cost of redeemable debt (Kd) is also calculated by discounting the relevant cash flows using Internal rate of return (IRR). (The concept of IRR is discussed in the Chapter 7 - Investment De... | [
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0.04022347554564476,
0.00006086734720156528,
0.015297159552574158,
0.009103701449930668,
... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Steps to calculate relevant cash flows:
Step-1: Identify the cash flows.
Step-2: Calculate NPVs of cash flows as identified above using two discount rates (guessing).
Step-3: Calculate IRR.
Example-2: A company issued 10,000, 10% debentures of ` 100 each on 1.4.2023 to be matured on... | [
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0.057971011847257614,
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0.026623860001564026,
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-0.017025696113705635,
0.065513476729393,
0.013699819333851337,
0.020556190982460976,
0.026995746418833733,
0.... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Step- 3: Calculation of IRR
<!-- formula-not-decoded -->
YTM or present value method is a superior method of determining cost of debt of company to approximation method and it is also preferred in the field of finance. We may keep in mind that in the above formula, higher the difference between H... | [
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0.010777009651064873,
0.03793458268046379,
-0.010914094746112823,
0.010762225836515427,
-0.... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
Here,
Redemption Value (RV)= ` 1,00,000
Net Proceeds (NP) = ` 2,500
Interest = 0
Life of bond = 25 years
There is huge difference between RV and NP, therefore, in place of approximation method, we should use trial & error method.
FV = PV x (1+r) n
<!-- formula-not-decoded -->
... | [
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0.012654059566557407,
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0.025927597656846046,
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0.006776431575417519,
0.041761018335819244,
0.05339168384671211,
0.01688397489488125,
0.02531786821782589,
0.013... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.3.2 Amortisation of Bond
A bond may be amortised every year i.e., principal is repaid every year rather than at maturity. In such a situation, the principal will go down with annual payments and interest will be computed on the outstanding amount. The cash flows of the bonds will be uneven.
The... | [
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0.04715866595506668,
0.004612537566572428,
0.010346109978854656,
0.014824018813669682,
... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
RBML is proposing to sell a 5-year bond of ` 5,000 at 8 per cent rate of interest per annum. The bond amount will be amortised equally over its life. CALCULATE the bond's present value for an investor if he expects a minimum rate of return of 6 per cent? | [
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0.02870526909828186,
-0.03466935083270073,
-0.0030370838940143585,
0.0015805850271135569,
-0.02938852459192276,
0.04052416980266571,
-0.03067639283835888,
0.0094465222209692,
0.06414952129125595,
0.05739849433302879,
0.0036951859947293997,
-0.0068102446384727955,
0.007... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The amount of interest will go on declining as the outstanding amount of bond will be reducing due to amortisation. The amount of interest for five years will be:
First year:
` 5,000 × 0.08 = ` 400;
Second year:
( ` 5,000 - ` 1,000) × 0.08 = ` 320;
Third year:
( ` 4,000 - ` 1,000) ×... | [
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0.041992511600255966,
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-0.008710541762411594,
0.025587797164916992,
-0.019480280578136444,
-0.01660021021962166,
0.05588219314813614,
0.047244466841220856,
-0.00023244874319061637,
-0.013637909665703773... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## COST OF CAPITAL
in lieu of cash. The calculation of cost of convertible debentures are very much similar to that of redeemable debentures. While determining the redemption value of the debentures, it is assumed that all the debenture holders will choose the option which ha... | [
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0.050635308027267456,
0.025715230032801628,
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0.011853660456836224,
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0.025635365396738052,
-0.001583578996360302,
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0.047631409019231796,
0.04891597479581833,
0.025369882583618164,
0.021719319745898247,
0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Determination of Redemption value:
Higher of
- (i) The cash value of debentures
- = ` 100
- (ii) Value of equity shares
- = 10 shares × 12 (1+0.05)
` 5
= 10 shares × 15.312 = ` 153.12
` 153.12 will be taken as redemption value as it is higher than the cash option and is more attractive to t... | [
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0.05413247272372246,
0.010219855234026909,
0.0709683820605278,
0.030837124213576317,
0.03... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| Year | Cash flows ( ` ) | Discount factor@ 15% (L) | Present Value ( ` ) | Discount factor@ 20% (H) | Present Value ( ` ) |
|--------|--------------------|----------------------------|-----------------------|----------------------------|-----------------------|
|... | [
0.051801424473524094,
0.016607586294412613,
0.007345582824200392,
0.028015829622745514,
-0.04458584263920784,
-0.019822970032691956,
0.03878822550177574,
0.0034676636569201946,
-0.003567551728338003,
0.06197833642363548,
0.029301268979907036,
0.012018470093607903,
0.03454025462269783,
0.00... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6. COST OF PREFERENCE SHARE CAPITAL (KP)
The preference shareholders are paid dividend at a specified rate on face value of preference shares. Payment of dividend to the preference shareholders are not mandatory but are given priority over the equity shareholder. The payment of divide... | [
0.023506341502070427,
0.03768531233072281,
-0.007274274248629808,
0.015509444288909435,
-0.013692028820514679,
-0.02572091482579708,
0.018220745027065277,
0.005333153530955315,
-0.025026418268680573,
0.008265497162938118,
0.0424945130944252,
0.035237595438957214,
0.037496551871299744,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.1 Cost of Irredeemable Preference Shares
The cost of irredeemable preference shares is similar to the calculation of perpetuity. The cost of irredeemable preference share is calculated by dividing the preference dividend with the current market price or net proceeds from the issue. T... | [
-0.02091361954808235,
0.04001813009381294,
0.009074879810214043,
0.01185906957834959,
0.010807774029672146,
0.000038590686017414555,
0.014520645141601562,
0.01059513259679079,
-0.013512194156646729,
0.008315927349030972,
0.041269879788160324,
0.056297726929187775,
0.02252938039600849,
0.02... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.2 Cost of Redeemable Preference Shares
Preference shares issued by a company which are redeemed on its maturity is called as redeemable preference shares. Cost of redeemable preference share is similar to the cost of redeemable debentures with the exception that the dividends paid ... | [
0.005458138417452574,
0.045129816979169846,
0.012472346425056458,
0.015782305970788002,
0.008578946813941002,
0.0020614212844520807,
0.03353956341743469,
-0.00011189180077053607,
-0.018140966072678566,
0.017403222620487213,
0.022500338032841682,
0.0653800442814827,
0.03679218888282776,
0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 8
XYZ Ltd. issues 2,000 10% preference shares of ` 100 each at ` 95 each. The company proposes to redeem the preference shares at the end of 10 th year from the date of issue. CALCULATE the cost of preference share? | [
0.032981570810079575,
0.04148238152265549,
0.03903162479400635,
0.014211641624569893,
-0.0182657353579998,
-0.034543123096227646,
0.039168450981378555,
0.009553949348628521,
-0.0037107637617737055,
0.042149562388658524,
0.034179095178842545,
0.052323468029499054,
0.02594427578151226,
0.027... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7. COST OF EQUITY SHARE CAPITAL (KE)
Just like any other source of finance, cost of equity is expectation of equity shareholders. We know that the value is performance divided by expectations. If we know the value and performance, then we can calculate expectation as a bal... | [
-0.007552260532975197,
0.053890589624643326,
0.0002738184412010014,
-0.015333923511207104,
-0.00047567428555339575,
-0.0227471012622118,
0.05872029438614845,
-0.017146728932857513,
-0.02182891219854355,
0.046404898166656494,
0.030442334711551666,
0.018653731793165207,
0.038843389600515366,
... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7.1 Dividend Price Approach
This is also known as Dividend Valuation Model . This model makes an assumption that the dividend per share is expected to remain constant forever. Here, cost of equity capital is computed by dividing the expected dividend by market price per share as follows... | [
0.0013310580980032682,
0.05189796909689903,
-0.0044077192433178425,
-0.01939769648015499,
0.03577519580721855,
-0.010421792976558208,
0.046193528920412064,
-0.010529113002121449,
-0.009999842382967472,
0.055227845907211304,
0.028701338917016983,
0.018807144835591316,
0.0182902030646801,
-0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7.2 Earnings Price Approach
The advocates of this approach co-relate the earnings of the company with the market price of its share. Accordingly, the cost of equity share capital would be based upon the expected rate of earnings of a company. The argument is that each investor expe... | [
-0.005046451929956675,
0.07242512702941895,
0.0013527910923585296,
-0.03323203697800636,
0.0033968924544751644,
-0.01082617323845625,
0.005858920514583588,
-0.010869666002690792,
-0.015196273103356361,
0.057754773646593094,
0.014935429207980633,
0.05146964639425278,
0.008763646706938744,
0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Earnings Price Approach:
Where,
<!-- formula-not-decoded -->
E = Current earnings per share
P = Market price per share
This approach assumes that the earnings per share will remain constant forever. The Earning Price Approach is similar to the dividend price approach; only it seeks to nullify ... | [
-0.013550727628171444,
0.04589143767952919,
-0.01069079339504242,
-0.0078052026219666,
0.000021671385184163228,
-0.020722629502415657,
0.002993752947077155,
0.0016548933926969767,
-0.001982173416763544,
0.0584418959915638,
-0.009044595062732697,
0.0665278434753418,
0.02097497321665287,
-0.... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7.3 Growth Approach or Gordon's Model
As per this approach, the rate of dividend growth remains constant. Where, earnings, dividends and equity share price all grow at the same rate, the cost of equity capital may be computed as follows:
<!-- formula-not-decoded -->
D1 = [D0 (1+ g)] ... | [
0.002690088702365756,
0.053282760083675385,
0.007115672808140516,
-0.007941974326968193,
0.033658090978860855,
-0.022241270169615746,
0.04960862547159195,
0.006907034199684858,
0.004533705767244101,
0.052158016711473465,
0.03279518336057663,
0.029038505628705025,
0.021923113614320755,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 9
A company has paid dividend of ` 1 per share (of face value of ` 10 each) last year and it is expected to grow @ 10% every year. CALCULATE the cost of equity if the market price of share is ` 55. | [
0.009306291118264198,
0.06006252393126488,
-0.018529802560806274,
-0.007504848297685385,
0.028626469895243645,
-0.03971606492996216,
0.031125353649258614,
0.009378546848893166,
-0.008843772113323212,
0.030315794050693512,
0.01935505121946335,
0.021849412471055984,
0.029774349182844162,
0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## COST OF CAPITAL
Growth rate can also be found as follows:
Step-I: Divide D0 by Dn, find out the result, then refer the FVIF table.
Step-II: Find out the result found at Step-I in corresponding year's row.
Step-III: See the interest rate for the corresponding column. This is the growth... | [
0.009897947311401367,
0.00689290463924408,
0.03178287297487259,
-0.009871918708086014,
0.008690005168318748,
-0.018051741644740105,
0.026832176372408867,
0.020713089033961296,
0.005834640935063362,
0.04681224375963211,
0.046923547983169556,
0.016770711168646812,
0.025476809591054916,
-0.00... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## (ii) Gordon's Growth Model
Unlike the Average method, Gordon's growth model attempts to derive a future growth rate. As per this model, increase in the level of investment will give rise to an increase in future dividends. This model takes Earnings retention rate (b) and rate of return on ... | [
0.00903512816876173,
0.007860000245273113,
-0.007303527556359768,
-0.027505172416567802,
0.016686415299773216,
-0.015129578299820423,
0.018339332193136215,
0.022174565121531487,
0.01910356990993023,
0.06666413694620132,
0.027690140530467033,
0.006423672661185265,
0.017788367345929146,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## It can be calculated as below:
<!-- formula-not-decoded -->
b = earnings retention rate*
r = rate of return on fund invested
*Proportion of earnings available to equity shareholders which is not distributed as dividend.
(This Model is discussed in detail in chapter 8 - Dividend Decisi... | [
-0.021360760554671288,
0.0012851328356191516,
-0.03473959118127823,
-0.01676090434193611,
0.0122001264244318,
-0.030263308435678482,
0.027247723191976547,
0.0034371870569884777,
-0.013819077052175999,
0.05411761999130249,
0.0226953886449337,
0.05885377526283264,
0.017622405663132668,
-0.01... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7.4 Realized Yield Approach
According to this approach, the average rate of return realized in the past few years is historically regarded as 'expected return' in the future . It computes cost of equity based on the past records of dividends actually realised by the equity shareholders. Though, t... | [
-0.006499486044049263,
0.05044231936335564,
-0.013323912397027016,
-0.03273751959204674,
-0.010691638104617596,
0.002756028203293681,
-0.008363986387848854,
-0.03923680633306503,
0.00893770344555378,
0.060889892280101776,
0.01189946848899126,
-0.014457250945270061,
0.008313908241689205,
0.... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 10
Mr. Mehra had purchased a share of Alpha Limited for ` 1,000. He received dividend for a period of five years at the rate of 10 per cent. At the end of the fifth year, he sold the share of Alpha Limited for ` 1,128. You are required to COMPUTE the cost of equity as per r... | [
0.02542114071547985,
0.03985372930765152,
-0.008403139188885689,
-0.01208509597927332,
0.004323579370975494,
-0.006390217691659927,
0.010103278793394566,
-0.0019299914129078388,
-0.02533493936061859,
0.0565175786614418,
0.016469188034534454,
0.056380853056907654,
0.028831249102950096,
0.01... |
Inter_P6A_FM_Mod1_Chapter_4_Cost_of_Capital.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
We know that as per the realised yield approach, cost of equity is equal to the realised rate of return. Therefore, it is important to compute the internal rate of return by trial and error method. This realised rate of return is the discount rate which equates the present value of the di... | [
-0.011004669591784477,
0.016820179298520088,
-0.0024895218666642904,
-0.0319695919752121,
-0.021998349577188492,
-0.026891574263572693,
0.01350974291563034,
-0.004305257461965084,
-0.010672543197870255,
0.06940994411706924,
0.018970023840665817,
0.03521926328539848,
0.021981919184327126,
0... |
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