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FINEST QUALITY PAPERLTD

COMPANY ESTABLISHMENT

ANALYSIS

Presented To: Presented By:Prof. Nandita Mishra Sharvangi (BM-013075)

Shubham Verma (BM-013081)

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COMPANYS KEY FEATURES

AIM- To provide finest quality of products at

cheap rates in comparison with its

competitors.

Work done is Ethical in nature. Contribution towards the society:

For every 4 notebooks the customer buys,

company contributes Re.1 to its rural

development initiative.

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EXPENSES REQUIRED FOR THE

ESTABLISHMENT OF THECOMPANY

Expenses Amount (in Rupees)

Establishment of New Plant 3 Cr.

Investment in Machine and Tools 1.6 Cr.

Fixed Costs 20 lakhs

Other Expenses 20 lakhs

Total Investments 5 Cr.

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OPTIONS AVAILABLE UNDER

DIFFERENT PLANS

Company issues

EQUITY SHARES DEBENTURES PREFERENCE

SHARES

EBIT

Option 1 50,00,000 @ Rs. 10

each

- - 60,00,000

Option 2 25,00,000 @ Rs. 10

each

2,50,000 of Rs.

100 @ 12%

- 60,00,000

Option 3 25,00,000 @ Rs. 10each

- 2,50,000 of Rs. 100@ 10%

60,00,000

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CALCULATION OF EPS

When only equity shares are issued: both equity and debentures are

issued: equity and preference shares are issued.

Particulars 1

EBIT 60,00,000

(-) Interest -EBT 60,00,000

(-) Tax @ 30% 18,00,000

EAT 42,00,000

(-) PD -

EAE

No. of equity shares 50,00,000

EPS .84

2

60,00,000

30,00,00030,00,000

9,00,000

21,00,000

-

25,00,000

.84

3

60,00,000

-60,00,000

18,00,000

42,00,000

25,00,000

17,00,000

25,00,000

.68

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Determining COST OF CAPITAL

Individual Cost of Capital:

(a) on equity Shares

Ke= Dividend * 100 = (.5/10) *100 = 5 %

Market Price (assumed dividend .5 %)

(b) on Prefeernce Shares

Kp= Dividend * 100 = 10%

Net Price

(c) on Debentures

Kd= I(1-t) *100 = 8.4%

Net Price

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Weighted Average Cost of Capital:

Source Amount (Rs.) Weight Cost WACC

Equity Shares 5Cr. 1 5% 5%

Total 5 Cr. 5%

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Weighted Average Cost of Capital:

Source Amount (Rs.) Weight Cost WACC

Equity Shares 2,50,00,000 0.5 5% 2.5%

Debentures 2,50,00,000 0.5 8.41% 4.2%

Total 5 Cr. 6.7%

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Weighted Average Cost of Capital:

Source Amount (Rs.) Weight Cost WACC

Equity Shares 2,50,00,000 0.5 5% 2.5%

Preference Shares 2,50,00,000 0.5 10% 5%

Total 5 Cr. 7.5%

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LEVERAGES

(a)OPERATING LEVERAGE

= Contribution

EBIT

Contribution = Sales- Variable CostSales(Expected)=1cr.

Variable=20,00,000 Fixed cost =20,00,000

(b)FINANCIAL LEVERAGE

= EBIT

EBT

(c)COMBINED LEVERAGE= O.L. * F.L.

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Operating leverage =1.33

Financial leverage, In case of Equity shares=1

In case of Equity shares and debentures=2

In case of Equity shares and PreferenceShares=1

So, Combined leverage, In case of Equity

Shares=1.33

In case of Equity shares and debentures=2.66 In case of Equity shares and Preference

Shares=1.33

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INTERPRETATION

As seen, EPS is same in case of equity shares, and equity and

debentures but minimum in case of preference shares so both

option 1 and 2 are good.

WACC is less in option 1 in comparison of option 2 andoption 3

So, option 1 is an ideal condition.

As from all leverages point of view combined leverage is

same in option 1 and option 3 , so both the options are ideal.