DFM15
Business Analysis and Valuation
Assignment – I
Assignment Code: 2015DFM15A1 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. One of the fastest growing industries in the last twenty years is the memory chip industry, which supplies memory chips for personal computers and other electronic devices. Yet the average profitability for this industry has been very low. Using the industry analysis framework, list all the potential factors that might explain this apparent contradiction.
Q.2. ABC Company recognizes revenue at the point of shipment. Management decides to increase sales for the current quarter by filling all customer orders. Explain what impact this decision will have on:
• Days’ receivable for the current quarter
• Days’ receivable for the next quarter
• Sales growth for the current quarter
• Sales growth for the next quarter
• Return on sales for the current quarter
• Return on sales for the next quarter
SECTION B (50 Marks)
Case Study: Tarapore Company Limited
The shareholder’s equity section of Tarapore Company Limited on March 31, 2009 was as follows:
Share Capital
10% Preference Shares, Rs 100 Par Value, 5000 shares Rs 5,00,000
Equity Shares, Rs 10 Par Value, 5000 shares authorised and
3,00,000 shares issued and fully paid up Rs 30,00,000
----------------
35,00,000
-----------------
Reserves and Surplus
Capital Redemption Reserve Rs 4,00,000
Share Premium 9,00,000
Revaluation Reserve 7,00,000
General Reserve 10,00,000
Profit and Loss Appropriation Account 17,00,000
---------------
47,00,000
---------------
Total Shareholder’s Equity 82,00,000
___________
On May 5, the board of directors decided to recommend a dividend of 10 percent on preference as well as equity share capital. The net profit for the year had been transferred to retained earnings from which the dividend would be paid.
Questions
1. Compute the book value per share on March 31, 2009 (Hint: the estimated liability for payment of dividends should be deducted from retained earnings.)
2. Tarapore Company’s equity share was quoting at Rs 120 on the balance sheet date.
3. Can the company raise additional equity? If yes, how much?
4. What was the maximum ratio of bonus issue the company could have made on the balance sheet date? The company would like balance of Rs 6,50,000 to be left in the retained earnings after the bonus issue.
DFM15
Business Analysis and Valuation
Assignment – II
Assignment Code: 2015DFM15A2 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. Intergalactic Software Company went public three months ago. You are a sophisticated investor who devotes time to fundamental analysis as a way of identifying mispriced stocks. Which of the following characteristics would you focus on in deciding whether to follow this stock?
• The market capitalization
• The average number of shares traded per day
• The bid-ask spread for the stock
• Whether the underwriter that brought the firm public is a Top Five investment banking firm
• Whether its audit company is a Big Four firm
• Whether there are analysts from major brokerage firms following the company
• Whether the stock is held mostly by retail or institutional investors
Q.2.a. What are likely to be the long-term critical success factors for the following types of firms?
• a high technology company such as Microsoft’s take-over of Nokia mobile phone business.
• A large low-cost retailer such as Reliance Fresh. (12 Marks)
b. How useful is financial accounting data for evaluating how well these two companies are managing their critical success factors? What other types of information would be useful in your evaluation? What are the costs and benefits to these companies from disclosing this type of information to investors? (13 Marks)
SECTION B (50 Marks)
Case Study
Senior executives of Laxmi Rice Mill Ltd have been considering the proposal to replace the existing coal-fired furnace in the paddy boiling section by a new furnace is cyclone type husk-fired furnace. The capital cost of the new furnace is expected to be Rs 1 lakh. It will have useful life of 10 years at the end of which period its residual value will be negligible. The present furnace has a book value of Rs 15,000 and can be used for another 10 years with only minor repairs. If scrapped now, it can fetch Rs 10,000 but it cannot fetch any amount if scrapped after ten more years of use.
The basic advantage of the new furnace is that it does not depend on the coal whose supplies are becoming increasingly erratic in recent years. On a conservative estimate, the new furnace will result in a saving of Rs 25,000 per annum on account of eliminated coal cost. However, the cost of electricity and other operating expenses are likely to go up by Rs 8,000 and Rs 4,000 per annum respectively.
The husk which results as a by-product during the normal milling operations at 3,000 metric ton of paddy milled per year is considered adequate for operating the new furnace. On an average, for every metric ton of paddy milled, the husk content is 20 per cent. At present, the husk resulting during the milling operations is sold at a price of Rs 50 per metric ton. Once the new furnace is installed, the husk will be diverted for own use. ‘White Ash’ which constitutes about 5 percent of the husk burnt in the new furnace, will be collected in a separate ash-pit as it has considerable demand in the refractory industry. It can be sold very easily at a price of Rs 1,500 per metric ton.
The new furnace will require a motor of 15 HP, whose cost is not included in Rs 1 lakh, the capital cost of the furnace. A 15 HP motor is lying idle with the polishing section of the Mill which can fetch an amount of Rs 3,000 on sale. It has a net book value of Rs 5,000. The motor can be used for the new furnace. At the end of the ten years, it can be scrapped at zero residual value.
All the assets of the company are in the same block. Depreciation will be on straight-line basis and the same is assumed to be acceptable for tax purpose as well. Applicable tax rate is 35 per cent and cost of capital is 12 per cent.
Questions:
(i) Formulate the incremental net after-tax cash flows associated with the replacement project.
(ii) Also calculate the project’s NPV.
(iii) Give your recommendation.
(Marks 20+20+10)
Business Analysis and Valuation
Assignment – I
Assignment Code: 2015DFM15A1 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. One of the fastest growing industries in the last twenty years is the memory chip industry, which supplies memory chips for personal computers and other electronic devices. Yet the average profitability for this industry has been very low. Using the industry analysis framework, list all the potential factors that might explain this apparent contradiction.
Q.2. ABC Company recognizes revenue at the point of shipment. Management decides to increase sales for the current quarter by filling all customer orders. Explain what impact this decision will have on:
• Days’ receivable for the current quarter
• Days’ receivable for the next quarter
• Sales growth for the current quarter
• Sales growth for the next quarter
• Return on sales for the current quarter
• Return on sales for the next quarter
SECTION B (50 Marks)
Case Study: Tarapore Company Limited
The shareholder’s equity section of Tarapore Company Limited on March 31, 2009 was as follows:
Share Capital
10% Preference Shares, Rs 100 Par Value, 5000 shares Rs 5,00,000
Equity Shares, Rs 10 Par Value, 5000 shares authorised and
3,00,000 shares issued and fully paid up Rs 30,00,000
----------------
35,00,000
-----------------
Reserves and Surplus
Capital Redemption Reserve Rs 4,00,000
Share Premium 9,00,000
Revaluation Reserve 7,00,000
General Reserve 10,00,000
Profit and Loss Appropriation Account 17,00,000
---------------
47,00,000
---------------
Total Shareholder’s Equity 82,00,000
___________
On May 5, the board of directors decided to recommend a dividend of 10 percent on preference as well as equity share capital. The net profit for the year had been transferred to retained earnings from which the dividend would be paid.
Questions
1. Compute the book value per share on March 31, 2009 (Hint: the estimated liability for payment of dividends should be deducted from retained earnings.)
2. Tarapore Company’s equity share was quoting at Rs 120 on the balance sheet date.
3. Can the company raise additional equity? If yes, how much?
4. What was the maximum ratio of bonus issue the company could have made on the balance sheet date? The company would like balance of Rs 6,50,000 to be left in the retained earnings after the bonus issue.
DFM15
Business Analysis and Valuation
Assignment – II
Assignment Code: 2015DFM15A2 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. Intergalactic Software Company went public three months ago. You are a sophisticated investor who devotes time to fundamental analysis as a way of identifying mispriced stocks. Which of the following characteristics would you focus on in deciding whether to follow this stock?
• The market capitalization
• The average number of shares traded per day
• The bid-ask spread for the stock
• Whether the underwriter that brought the firm public is a Top Five investment banking firm
• Whether its audit company is a Big Four firm
• Whether there are analysts from major brokerage firms following the company
• Whether the stock is held mostly by retail or institutional investors
Q.2.a. What are likely to be the long-term critical success factors for the following types of firms?
• a high technology company such as Microsoft’s take-over of Nokia mobile phone business.
• A large low-cost retailer such as Reliance Fresh. (12 Marks)
b. How useful is financial accounting data for evaluating how well these two companies are managing their critical success factors? What other types of information would be useful in your evaluation? What are the costs and benefits to these companies from disclosing this type of information to investors? (13 Marks)
SECTION B (50 Marks)
Case Study
Senior executives of Laxmi Rice Mill Ltd have been considering the proposal to replace the existing coal-fired furnace in the paddy boiling section by a new furnace is cyclone type husk-fired furnace. The capital cost of the new furnace is expected to be Rs 1 lakh. It will have useful life of 10 years at the end of which period its residual value will be negligible. The present furnace has a book value of Rs 15,000 and can be used for another 10 years with only minor repairs. If scrapped now, it can fetch Rs 10,000 but it cannot fetch any amount if scrapped after ten more years of use.
The basic advantage of the new furnace is that it does not depend on the coal whose supplies are becoming increasingly erratic in recent years. On a conservative estimate, the new furnace will result in a saving of Rs 25,000 per annum on account of eliminated coal cost. However, the cost of electricity and other operating expenses are likely to go up by Rs 8,000 and Rs 4,000 per annum respectively.
The husk which results as a by-product during the normal milling operations at 3,000 metric ton of paddy milled per year is considered adequate for operating the new furnace. On an average, for every metric ton of paddy milled, the husk content is 20 per cent. At present, the husk resulting during the milling operations is sold at a price of Rs 50 per metric ton. Once the new furnace is installed, the husk will be diverted for own use. ‘White Ash’ which constitutes about 5 percent of the husk burnt in the new furnace, will be collected in a separate ash-pit as it has considerable demand in the refractory industry. It can be sold very easily at a price of Rs 1,500 per metric ton.
The new furnace will require a motor of 15 HP, whose cost is not included in Rs 1 lakh, the capital cost of the furnace. A 15 HP motor is lying idle with the polishing section of the Mill which can fetch an amount of Rs 3,000 on sale. It has a net book value of Rs 5,000. The motor can be used for the new furnace. At the end of the ten years, it can be scrapped at zero residual value.
All the assets of the company are in the same block. Depreciation will be on straight-line basis and the same is assumed to be acceptable for tax purpose as well. Applicable tax rate is 35 per cent and cost of capital is 12 per cent.
Questions:
(i) Formulate the incremental net after-tax cash flows associated with the replacement project.
(ii) Also calculate the project’s NPV.
(iii) Give your recommendation.
(Marks 20+20+10)
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