Corporate Finance

Corporate Finance
Ans 1.
Introduction: - Weighted Average Cost of Capital (WACC) is a crucial financial metric that
represents the average cost of capital for a company, taking into account its various sources
of financing. It is a composite measure that considers the cost of both equity and debt,
weighted by their respective proportions in the company's capital structure. In this scenario,
we will calculate the WACC for M/s Antara Limited, utilizing information on its capital
structure, share price, dividend, beta, debentures, and bank loan.
Concept and Application: -
Solution: To calculate the cost of equity capital, we have to calculate the rate of return on the
security.
Dividend = 5
Capital appreciation = 55-50 = 5
Total returned = Dividend + capital appreciation = 5+5= 10
Investment = 50
Equity Risk Premium (Rm) is 10/50* 100 = 2%
Cost of equity using capm
Rf+ beta (Rm – Rf) = 4%+0.6(20% - 4%)
=4% +9.6%
=13.6%
Since tax rate is not given, assuming a tax of 0%
Cost of debt on bank loan =2,00,000 / 10,000
=5% * (1-0.0)
= 5.0%
Cost of debentures = 15,00,000 * 8% = 1,20,000
Therefore, 1,20,000 / 15,00,000 * 100 = 8%
Since tax rate is not given, assuming a tax rate of 0%
=8% (1-0.0)
=8%
Cost of Retained Earnings = Cost of equity (1- floating costs)
Since floating costs are not provided in the problem, cost of retained earnings = cost of equity
=13.6%.
Particulars Weight (w) Cost of Capital W* Cost of Capital
Share Capital 71.94% 13.6% 9.78
Retained Earnings 3.60% 13.6% 0.49
Bank Loan 2.88% 5.0% 0.14
Debentures 21.58% 8.0% 1.73
100% 12.14%
Share Capital Weight = 50,00,000 / 69,50,000 * 100

Share Capital Weight = 71.94
Bank Loan Weight = 2,00,000 / 69,50,000 * 100
Bank Loan Weight = 2.88
Debentures Weight = 15,00,000 / 69,50,000 * 100
Debentures Weight = 21.58
Retained Earnings Weight = 2,50,000 / 69,50,000 * 100
Retained Earnings Weight = 3.60
Weighted Average Cost of Capital = 9.78+0.49+0.14+1.73
Weighted Average Cost of Capital = 12.14%
Conclusion: The WACC for M/s Antara Limited is a critical metric for assessing the cost of
the company's capital. It considers the cost of equity and debt, weighted by their respective
proportions in the capital structure. The cost of equity is influenced by the risk-free rate, the
market return, and the company's beta. On the other hand, the cost of debt is determined by
the fixed interest rate for debentures and the floating interest rate for the bank loan.
The weighted average cost of capital provides valuable insights for decision-making,
especially in evaluating potential projects or investments. A lower WACC suggests that the
company can obtain financing at a lower cost, making investments more attractive.
Conversely, a higher WACC may indicate higher financial risk and a higher hurdle for
investment opportunities.
In the case of M/s Antara Limited, the calculation of WACC involves considering the market
values of equity and debt, providing a more accurate reflection of the company's capital
structure. By incorporating the cost of both equity and debt, WACC serves as a
comprehensive metric for assessing the overall cost of capital and plays a vital role in
financial management and strategic planning.
Ans 2.
Introduction: -
Solution:
Calculate the components of Gross Operating Cycle:
 Raw Material Holding Period (RMHP):

RMHP = (Average Raw Material / Annual Purchase of Raw Material) * Number of
days in a Year.
RMHP = (2,00,000+3,00,000/2) / 32,00,000* 360
RMHP = 2,50,000 / 32,00,000 *360
RMHP = 29 Days
 Work in Progress Holding Period (WIPHP):
WIPHP = Average Work in Progress / Average cost of productions
Average Work in progress = Opening WIP+ Closing WIP/2
Average Work in progress = 60,000+65,000/2
Average Work in progress = 62,500
Average cost of production = Opening WIP +Consumption of raw material +
Manufacturing expense +depreciation – Closing WIP
Average cost of production = 60,000+31,00,000+5,50,000 -65,000/360
Average cost of production = 10,125
WIPHP = 62500/10,125
WIPHP = 6 Days
 Finished Goods Holding Period (FGHP):
FGHP = Opening Stock Finished Goods / Average daily cost of sales
Average Finished Goods = Opening stock of Finished Goods + Closing Stock of
Finished Goods / 2
Average Finished Goods = 6,00,000+7,25,000 / 2
Average Finished Goods = 6,62,500
Average daily cost of sales = Opening stock of finished goods + cost of production
+ selling and other expenses + excise duty – closing stock of finished goods / 360
Average daily cost of sales = 6,00,000+ 36,45,000 + 3,00,000 – 7,25,000 /360
Average daily cost of sales = 10,611
FGHP = 6,62,500 / 10,611
FGHP = 62 Days
 Debtors Collection Period (DCP) = Average Debtors / Average daily credit sales
Average Debtors = Opening Debtors + Closing Debtors / 2
Average Debtors = 2,50,000 + 2,15,000 /2
Average Debtors = 2,32,500
Average daily credit sales = Average credit sales /360
Average daily credit sales = 44,80,000 / 360
Average daily credit sales = 12,444
Debtors Collection Period (DCP) = 2,32,500 + 12,444
Debtors Collection Period (DCP) = 19 Days
 Creditors Payment Period (CPP): Average Balance of creditors / Average daily
credit purchase
Average Balance of creditors = Opening balance of creditors + closing creditors/
2
Average Balance of creditors = 5,50,000 +5,75,000 / 2
Average Balance of creditors = 5,62,500
Average daily credit purchase = Annual Credit Purchase / 360
Average daily credit purchase = 3,20,000 / 360
Average daily credit purchase = 8,888
Creditors Payment Period (CPP): 5,62,500 / 8,888
Creditors Payment Period (CPP): 63 days
Therefore, Gross Operating Cycle (GOC):
GOC=RMHP+WIPHP+FGHP+DCP
GOC= 29 Days + 6 Days + 62 Days + 19 Days
GOC = 116 Days
Net Operating Cycle (NOC):
NOC= GOC−CPP
NOC = 116 Days - 63 days
NOC = 53 Days
Conclusion: The Gross Operating Cycle for Vishal & Co. Ltd. is approximately 116 days
and Net Operating Cycle is 53 days.
Ans 3(a).
Introduction: - Investment decisions are crucial in financial planning, and understanding the
present value of perpetual cash flows is essential for informed choices. In this analysis, we
will explore two scenarios: the first involves receiving Rs. 2,00,000 per annum in perpetuity
at an interest rate of 8%, while the second includes a growth rate of 3% per annum in addition
to the conditions of the first scenario. The goal is to determine the required investment
amounts for these perpetual cash flows.
Scenario I: Rs. 2,00,000 Per Annum at 8% Interest Rate:
To calculate the present value (PV) of perpetuity, the formula PV = C / r, where C is the
annual cash flow and r is the discount rate, is used. For Scenario I, where the annual cash
flow (C) is Rs. 2,00,000 and the interest rate (r) is 8%, the calculation is as follows:
PV of Perpetuity = 2,00,000/0.8
PV of Perpetuity = 25,00,000
Therefore, an initial investment of Rs. 25,00,000. is required to receive Rs. 2,00,000 per
annum in perpetuity at an 8% interest rate.
Scenario II: Rs. 4,00,000 Per Annum at 5% Interest Rate with 3% Growth:
In this scenario, the perpetuity formula is adjusted to account for the growth rate, becoming
PV=C/r-g, where g is the growth rate. For Scenario II, with an annual cash flow (C) of Rs.
4,00,000, an interest rate (r) of 5%, and a growth rate (g) of 3%, the calculation is:
PV of Perpetuity = 400,000/0.05-0.03
PV of Perpetuity = 20,00,000
Therefore, an initial investment of Rs. 20,00,000 is required to receive Rs. 4,00,000 per
annum in perpetuity at a 5% interest rate with a 3% growth rate.
Conclusion:
Understanding the present value of perpetuity is crucial for investors seeking a steady income
stream. In Scenario I, the higher interest rate of 8% results in a higher initial investment of
Rs. 25,00,000 to achieve an annual income of Rs. 2,00,000. Conversely, in Scenario II, the
introduction of a growth rate influences the calculation, demonstrating that even with a lower
interest rate of 5%, the initial investment is reduced to Rs. 20,00,000 due to the expected
growth of 3% per annum.
In conclusion, investors must carefully consider interest rates and potential growth when
evaluating perpetuity investments. The presented scenarios highlight the impact of these
factors on the required initial investment for perpetual income streams. Additionally, this
analysis underscores the importance of staying informed about financial concepts to make
informed investment decisions that align with individual financial goals.
Ans 3(b).
Introduction: - The liquidity of a company is a critical aspect of its financial health,
reflecting its ability to meet short-term obligations. Two key ratios used to assess liquidity are
the Current Ratio and the Acid Test Ratio (also known as the Quick Ratio). In this analysis,
we will delve into these ratios using the provided financial information, which includes
Debtors, Cash and Bank, Inventory, Trade Payables, and Bank OD.
I. Current Ratio Calculation: The Current Ratio is a measure of a company's ability to
cover its short-term liabilities with its short-term assets. It is calculated by dividing
current assets by current liabilities.
Current Ratio = Current Assets/Current Liabilities
In this case, the current assets include Debtors, Cash and Bank, and Inventory, while
the current liabilities consist of Trade Payables and Bank OD. Using the provided
values:
Current Assets=Debtors+Cash and Bank+Inventory
Current Assets= 500,000+200,000+400,000
Current Assets=1,100,000
Current Liabilities= Trade Payables+Bank OD
Current Liabilities= 150,000+50,000
Current Liabilities= 200,000
Current Ratio = 1,100,000/200,000
Current Ratio = 5.5
II. Acid Test Ratio Calculation: The Acid Test Ratio, or Quick Ratio, is a more
stringent measure of liquidity as it excludes inventory from current assets. It is
calculated as follows:
Acid Test Ratio= Current Assets−Inventory/ Current Liabilities
Acid Test Ratio= 1,100,000 - 400,000/ 200,000
Acid Test Ratio= 3.5
Conclusion:
The analysis of the Current Ratio and Acid Test Ratio reveals a financially healthy situation
for the company. The Current Ratio of 5.5 indicates a significant cushion to cover short-term
liabilities, while the Acid Test Ratio of 3.5 reinforces this strength by excluding the potential
variability in the value of inventory.
These ratios provide valuable insights for investors, creditors, and management. A high
current ratio suggests a reduced risk of insolvency in the short term, indicating a stable
financial position. Furthermore, the Acid Test Ratio offers a more conservative view of
liquidity, emphasizing the ability to meet obligations without relying on the sale of inventory.
In managing the company's finances, it is crucial to strike a balance between liquidity and
profitability. While high liquidity ensures the ability to meet short-term obligations, excess
liquidity might indicate underutilized resources. Therefore, continuous monitoring and
strategic financial planning are essential to maintain a healthy balance.
In conclusion, the Current Ratio and Acid Test Ratio serve as key tools in assessing a
company's short-term financial health, and the robust ratios derived from the provided
information suggest a strong and resilient financial position for the company.

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Share Capital Weight = 50,00,000 / 69,50,000 * 100

 Raw Material Holding Period (RMHP):

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