Respected seniors and Raz sir, I need you people to kindly solve this question for me. I tried a lot but couldnt solve it. So please help me.

Q. Following is the data for ABC company:

1.Sales /Total Assets 2.5
2.Return of Assets 6%
3.Return of Equity 9%
4.Current Ratio 2:1

Required:

1.Profit Margin
2.Debt Ratio


Waiting for all MBA'z response, specially sir Raz.

@sultanakbar

1. Profit margin= Net income or net profit/ sales or revenues

Return on equity=net income/ average total assets

0.06=net income/ 1.25
net income=0.06*1.25
net income=0.075

profit margin= 0.075/2.5
profit margin=0.3

2. Debt ratio= total liabilities/total assets

current asset= 2:1 or 2/1, current liabilities=1
total liabilties= 1- return on equity
total liabilities=1-0.09
total liabilities=0.91

debt ratio=0.91/2.5
debt ratio=0.364

Thats what i could do.

__________________
Beauty

Here goes my next questions:

Q.1 Delta motors is considering one of two mutually exclusive projects. Projects A requires an initial investment of Rs.200,000 and generates net income of Rs.60,000 every year for the next five years.Project B would involve an investment of Rs.300,000 and would return net income of Rs.70,000 every year for the next 8 years.

Required:
Calculate the net present value(NPV) for both the projects.
__________________________________________________ __________

Q2. Sapphire corporation is considering cash outlay of $ 800,000 for acquistion of new equipment. The useful life is four years and residual value is zero at the end of four years. After-Tax cash inflows of $200,000 are expected in year 1, 250,000 in year 2, $300,000 in year 3, $400,000 in year 4. The company falls in the tax bracket of 50%.

i) If the required rate of return is 15 percent, what is the net present value of the project? Is the project acceptable?

ii) What is the internal rate of return?
__________________________________________________ ______________

Q3. A stock currently sells for %50 per share. The market requires a 13% return on the firm's stock. If the company maintains a constant 5% growth in dividends, what was the most recent dividend per share paid on the stock?


Sister kindly solve these questions for me.

@sultanakbar

Here goes my next questions:

Q.1 Delta motors is considering one of two mutually exclusive projects. Projects A requires an initial investment of Rs.200,000 and generates net income of Rs.60,000 every year for the next five years.Project B would involve an investment of Rs.300,000 and would return net income of Rs.70,000 every year for the next 8 years.

Required:
Calculate the net present value(NPV) for both the projects.

------------------------

Solution:

Initial investment = Rs.200,000(projectA), 300,000(Project B)
Net income = Rs.60,000(Project A for 5 years), 70,000(project B for 8 years)
Discount rate=Nil

Project A

NPV= -Ci + C1/(1+r)1+ C2/(1+r)2+ C3/(1+r)3+ C4/(1+r)4+ C5/(1+r)5

NPV= -200,000+ 60,000/(1+0)1+60,000/(1+0)2+60,000/(1+0)3+60,000/(1+0)4+60,000/(1+0)5

NPV= -200,000+60,000+60,000+60,000+60,000+60,000

NPV= -200,000+300,000

NPV= Rs. 100,000


Project B

NPV= -300,000 + 70,000/(1+0)1+70,000/(1+0)2+70,000/(1+0)3+70,000/(1+0)4+70,000/(1+0)5+70,000/(1+0)6+70,000/(1+0)7+70,000/(1+0)8

NPV= -300,000 +70,000+70,000+70,000+70,000+70,000+70,000+70,000+ 70,000

NPV= -300,000+ 560,000

NPV= 260,000

Project B is more suitable for the Delta motors.

__________________
Beauty

Dear member,

Without the cost of money you can just add all the cash flows and subtract them from the initial investment and you can get the answer.

@sultanakbar
Q2. Sapphire corporation is considering cash outlay of $ 800,000 for acquistion of new equipment. The useful life is four years and residual value is zero at the end of four years. After-Tax cash inflows of $200,000 are expected in year 1, 250,000 in year 2, $300,000 in year 3, $400,000 in year 4. The company falls in the tax bracket of 50%.

i) If the required rate of return is 15 percent, what is the net present value of the project? Is the project acceptable?

ii) What is the internal rate of return?

--------------------------

Solution:

i)NPV= -800,000 + 200000/(1.15)1 +250000/(1.15)2 +300000/(1.15)3 +400000/(1.15)4

NPV= -$800,000+ 173913 + 189035 + 197368 + 229885

NPV= -800,000+790201

NPV=$ (9798)

ii) IRR is the discount rate t which the NPV of an investment becomes zero.
Internal Rate of Return is not separate from the NPV, for the acceptable project, NPV and IRR should be close/equal to zero
but not less than zero, above mentioned answer tells that %age of r should be reduced to have the NPV and IRR Close or equal to zero.

Take r=14.4% instead of 15%

IRR= 200,000/(1.144)1+250,000/(1.144)2+300,000/(1.144)3+400,000/(1.144)4 - 800,000= 0

IRR= 174825 + 191131+ 200534 + 233781 - 800,000 = 0

IRR= 800271 - 800,000 = 0

IRR= 271(Approximately equal to zero) = 0

IRR ≈ 14.4%

__________________
Beauty

__________________________________________________ _____________

Q3. A stock currently sells for %50 per share. The market requires a 13% return on the firm's stock. If the company maintains a constant 5% growth in dividends, what was the most recent dividend per share paid on the stock?

Solution

By Using Gordon growth model,

we have P=D(1+g)/(k-g) where,

P=Stock Price= 50 per share
D= most recent dividend
g=Dividend growth rate = 5%
k=Required return = 13%

P=D(1+g)/(k-g)

or,

D=P(k-g)/(1+g)

D=50(1+0.05)/(1+0.13)

D=46.46
--------

Solved.

__________________
Beauty

DP Company presently has Rs.3 million in debt outstanding bearing an interest rate of 12
percent. It wishes to finance a Rs.4 million expansion program and is considering three
alternatives: additional debt at 14 percent interest, preferred stock with a 12 percent dividend,
and the sale of common stock at Rs.16 per share. The company presently has 800,000 shares of
common stock outstanding and is in a 40 percent tax bracket.
(i) If earnings before interest and taxes are presently Rs.1.5 million, what would be
earnings per share for the three alternatives, assuming no immediate increase in
profitability?
(ii) Develop a break-even, or indifference chart for these alternatives. What are the
approximate indifference points? To check one of these points, what is the
indifference point mathematically between debt and common?
(iii) Which alternative do you prefer? How much would EBIT need to increase before the
next alternative would be best?


Kindly solve this question.

Net Present Value

Net present value (NPV) expresses the sum total of an investment’s future net cash flows (receipts less payments) minus the investment’s initial costs. It is an investment appraisal tool.

CALCULATION METHODS AND FORMULAS:

The net cash flows may be even (i.e. equal cash inflows in different periods) or uneven (i.e. different cash flows in different periods). When they are even, present value can be easily calculated by using the present value formula of annuity. However, if they are uneven, we need to calculate the present value of each individual net cash inflow separately.

In the next step we subtract the initial investment on the project from the total present value of inflows to arrive at net present value.

Thus we have the following two formulas for the calculation of NPV:

1. When cash inflows are even:
NPV = R × 1 − (1 + i)^-n/i − Initial Investment

In the above formula,
R is the net cash inflow expected to be received each period;
i is the required rate of return per period;
n are the number of periods during which the project is expected to operate and generate cash inflows.

2. When cash inflows are uneven:
NPV = R1 + R2 + R3 + ... − Initial Investment
(1 + i)1 (1 + i)2 (1 + i)3

Where,
i is the target rate of return per period;
R1 is the net cash inflow during the first period;
R2 is the net cash inflow during the second period;
R3 is the net cash inflow during the third period, and so on.

Example:

1. When cash inflows are even:

The management of Abid Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $6,000 and will increase annual cash inflow by $2,200. The useful life of the equipment is 6 years. After 6 years it will have no salvage value. The management wants a 20% return on all investments.

Required:
Compute net present value (NPV) of this investment project.

Given data:
Initial cost ------------- $ 6000
Life of the asset -------6 years
Annual cash inflow ---$ 2,200
Salvage value ----------- 0
Required rate of return- 20%

Solution: (without present value of $1 table)
Formula:
NPV = R × 1 − (1 + i)^-n/i − Initial Investment

NPV= $2,200 [1-(1+0.20)^-6]/0.20 – $6,000
NPV=2,200 [1-(1.20)^-6]/0.20 – 6,000
NPV=2,200[1-0.3348]/0.20 – 6,000
NPV=2,200 (0.6651) /0.20 – 6,000
NPV=2,200 * 3.3255 – 6000
NPV= 7,316 – 6000
NPV= $1,316
---------------------------------------------------

Using present value of $1 table, take the value in the 6th year with 20% rate.
The value is 3.326, put this value at the place of [1-(1+0.20)^-6]/0.20
(NPV= $2,200 * 3.326 – 6000) and the rest is same as above.

3. When cash inflows are uneven:


A project requires an initial investment of $225,000 and is expected to generate the following net cash inflows:
Year 1 2 3 4
Cash inflow $95,000 $80,000 $60,000 $55,000

Required:
Compute net present value of the project if the minimum desired rate of return is 12%

Solution: (without present value of $1 table)

Formula : NPV = R1 + R2 + R3 + ... − Initial Investment
(1 + i)1 (1 + i)2 (1 + i)3

NPV = $95,000/(1+0.12)^1 + 80,000/(1+0.12)^2 + 60,000/(1+0.12)^3 + 55,000/(1+0.12)^4 – 225,000
NPV= $95,000/1.12 + 80,000/1.254 + 60,000/1.404 + 55,000/1.574 – 225,000
NPV= $84,821 + 63,795 + 42735 + 34942 – 225,000
NPV= $226,293 – 225,000
NPV=1,293
--------------------------------------------------------------------
Take the value from present value of $1 table
Solution:
1 0.893 * $ 95,000 $ 84,835
2 0.797* 80,000 63,760
3 0.712* 60,000 42,720
4 0.636* 55,000 34,980

Total $ 226,295
Initial investment required 225,000

Net present value $ 1,295


Decision rule for any project:
Accept the project only if its NPV is positive or zero. Reject the project having negative NPV. While comparing two or more exclusive projects having positive NPVs, accept the one with highest NPV.

__________________
Beauty

Solution:

i)

Debt preferred stock commn stock

EBIT Rs. 1500,000 1500,000 1500,000

interest on existing debt 360,000 360,000 360,000

int. on new debt 560,000 ------ -----
-----------------------------------------------
Profit before tax 580,000 1,140,000 1,140,000

taxes 232,000 456,000 456,000
-----------------------------------------------
profit after tax 348,000 684,000 684,000

pref. st. dividend ------- 480,000 -- --
------------------------------------------------
Earnings available 348,000 204,000 684,000

no. of shares 800,000 800,000 1050,000
-------------------------------------------------

Earning per share Rs. 0.435 0.255 0.65



Additional calculation:
interest (12% * 3000,000)
int. on new debt ( 14% * 4000,000)
No. of shares in common stock = sale of com. stock at 16/share (4000,000/16= 250,000) plus 800,000------1,050,000.



-------------------------------------------------

__________________
Beauty