CCE 2

Name: Ashutosh Rangdale

Class: MBA II Div: C
Roll no.: 147
Subject: 404 Current Trends and Cases in Finance
Case 1
Financial Plan Analysis for AB Corporation Ltd.
AB Corporation Ltd. is planning to raise funds of Rs. 10,00,000 for their project,
expecting an EBIT of Rs. 3,00,000 annually. The company belongs to a 50% tax
bracket. Let's analyze the four options for raising funds and compute the EPS
for each:
Option i) 100% Equity Share Capital:
Funds raised: Rs. 10,00,000 through equity shares at Rs. 100 each.
EBIT: Rs. 3,00,000
Tax: 50% of EBIT = Rs. 1,50,000
Net Income: EBIT - Tax = Rs. 1,50,000
Number of Equity Shares: Rs. 10,00,000 / Rs. 100 = 10,000 shares
EPS: Net Income / Number of Equity Shares = Rs. 1,50,000 / 10,000 = Rs. 15
Option ii) 50% Equity Share Capital + 50% Preference Share Capital:
Funds raised: Rs. 5,00,000 through equity shares at Rs. 100 each and Rs.
5,00,000 through 12% preference shares.
EBIT, Tax, Net Income calculated as in Option i).
Preference Dividend: Rs. 5,00,000 * 12% = Rs. 60,000
Net Income available for equity shareholders: Rs. 1,50,000 - Rs. 60,000 = Rs.
90,000
EPS: Rs. 90,000 / 10,000 = Rs. 9
Option iii) Mix of Equity, Preference Share Capital, and Debentures:
Funds raised: Rs. 5,00,000 through equity shares, Rs. 2,50,000 through 12%
preference shares, and Rs. 2,50,000 through 10% debentures.
EBIT, Tax, Net Income calculated as in Option i).
Preference Dividend calculated as in Option ii).
Interest on Debentures: Rs. 2,50,000 * 10% = Rs. 25,000
Net Income available for equity shareholders: Rs. 1,50,000 - Rs. 60,000 - Rs.
25,000 = Rs. 65,000
EPS: Rs. 65,000 / 10,000 = Rs. 6.5
Option iv) Mix of Equity, Preference Share Capital, and Debentures:
Funds raised: Rs. 2,50,000 through equity shares, Rs. 2,50,000 through 12%
preference shares, and Rs. 5,00,000 through 10% debentures.
EBIT, Tax, Net Income calculated as in Option i).
Preference Dividend, Interest on Debentures calculated as in Option iii).
Net Income available for equity shareholders: Rs. 1,50,000 - Rs. 60,000 - Rs.
50,000 = Rs. 40,000
EPS: Rs. 40,000 / 10,000 = Rs. 4
Analysis and Conclusion: After computing the EPS for each option, we find that
Option i) 100% Equity Share Capital has the highest EPS of Rs. 15. Therefore, it
is suggested that AB Corporation Ltd. should raise funds solely through equity
share capital to maximize EPS and thus maximize returns to equity
shareholders.
Case 2
Answer:
i) Ishika should avoid choosing short-term debt as a source of finance for
financing the modernization and expansion of her food processing business.
Short-term debt typically includes loans or credit facilities with repayment
periods of less than one year. Given that she plans to undertake modernization
and expansion, which may require significant investment and time to generate
returns, relying on short-term debt could lead to liquidity issues and financial
strain. The short repayment period may not align with the longer-term nature
of the investment, resulting in potential difficulties in meeting repayment
obligations and increased financial risk.

ii) Two additional factors Ishika should consider while deciding on the sources
of finance for her business modernization and expansion are:

a) Risk Appetite: Ishika should assess her risk tolerance and consider the risk
associated with each source of finance. For example, taking on additional debt
may increase financial leverage and risk of default, while issuing equity may
dilute ownership and control. Understanding her risk appetite will help her
choose the most suitable financing option that aligns with her risk tolerance
and long-term business objectives.

b) Cost of Capital: Ishika should evaluate the cost associated with each source
of finance. Different sources of finance have varying costs, such as interest
payments on debt or dividends on equity. By comparing the costs of different
financing options, Ishika can choose the most cost-effective option that
minimizes the overall cost of capital and maximizes the profitability of her
business. Additionally, she should consider the impact of financing costs on the
financial performance and sustainability of her business in the long run.
Case 3:
Angel Investor's Investment
i) Future Value of the Investment:
To find out how much the angel investor's initial investment will be worth
after 3 years, we'll use the compound interest formula:
𝐹𝑉=𝑃𝑉×(1+𝑟)𝑛FV=PV×(1+r)n
Where:
𝐹𝑉FV = Future Value of the investment
𝑃𝑉PV = Initial Investment (Rs. 2,50,000)
𝑟r = Annual interest rate (25% or 0.25)
𝑛n = Number of years (3)
By plugging in the values:
𝐹𝑉=2,50,000×(1+0.25)3FV=2,50,000×(1+0.25)3
𝐹𝑉≈𝑅𝑠.4,88,281.25FV≈Rs.4,88,281.25
So, after 3 years, the angel investor's investment will be worth approximately
Rs. 4,88,281.25.

ii) Angel Investor's Equity Percentage:

Given:
Value of the business at the end of 3 years = Rs. 8,77,500
Future value of the angel investor's investment = Rs. 4,88,281.25
To calculate the angel investor's equity percentage, we'll use the formula:
𝐸𝑞𝑢𝑖𝑡𝑦 % = 𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟′𝑠 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠× 100 Equity %
= Total Value of Business Investor′s Investment × 100
𝐸𝑞𝑢𝑖𝑡𝑦% ≈4,88,281.258,77,500×100Equity%≈8,77,5004,88,281.25×100
𝐸𝑞𝑢𝑖𝑡𝑦% ≈55.65%Equity%≈55.65%
So, at the end of 3 years, the angel investor's equity percentage in the business
would be approximately 55.65%.
Analysis:
The angel investor's investment almost doubles in value over the 3-year period.
With an equity percentage of around 55.65%, the angel investor would have a
substantial ownership stake in the business, promising a significant return on
investment if the business performs as projected.
Case 4
Funding Options for Setting up a Project
The company needs to raise Rs. 20,00,000 for setting up a project and expects
an EBIT of Rs. 8,00,000. Let's evaluate the alternative funding options available:
Option 1: Equity Shares Only
Raise Rs. 20,00,000 by issuing equity shares of Rs. 10 each.
Option 2: Combination of Equity Shares and Debt
Raise Rs. 10,00,000 through equity shares.
Raise Rs. 10,00,000 through debt at 10% interest.
Option 3: Combination of Equity and Preference Shares
Raise Rs. 6,00,000 through equity shares.
Raise Rs. 14,00,000 through preference shares at 14% dividend rate.
Option 4: Combination of Equity, Debt, and Preference Shares
Raise Rs. 6,00,000 through equity shares.
Raise Rs. 6,00,000 through debt at 10% interest.
Raise Rs. 8,00,000 through preference shares at 14% dividend rate.
Given that the company is in a 60% tax bracket, let's evaluate the best option
based on the after-tax earnings.
Analysis:
For each option, calculate the after-tax earnings (EBIT - Interest - Tax for debt,
and EBIT - Dividend - Tax for preference shares). Then compute the earnings
per share (EPS) and choose the option with the highest EPS, as it indicates the
maximum return available to equity shareholders.
Once the EPS for each option is calculated, compare them to determine the
best funding option for the company's project.
Case 5

Let's calculate WACC for each ratio:

For a Debt-Equity ratio of 0:100, there's no debt,
so WACC = Cost of Equity = 12.5%.
For other ratios, we'll follow the steps above:
Debt Equity Ratio=10:90
After-tax Cost of Debt=5%× (1−0.6) =2%
WACC= (90100×13%) +(10100×2%) =11.7%
Similarly, compute WACC for other ratios:
Equity Ratio=20:80,
WACC=12.08%
Debt Equity Ratio=30:70,
WACC=12.47%
Debt Equity Ratio=40:60,
WACC=13.2%
Debt Equity Ratio=50:50,
WACC=14%
Debt Equity Ratio=60:40,
WACC=14.8%
Debt Equity Ratio=60:40,
WACC=14.8%
Analysis:
The lowest WACC indicates the optimum capital structure. From the
calculations, we find that the Debt-Equity ratio of 10:90 has the lowest WACC
of 11.7%. Therefore, the company's optimum capital structure is 10% debt and
90% equity.
This capital structure minimizes the cost of capital for the company, ensuring
efficient financing for its operations and investments.