INTRODUCTION
Financial management is that managerial activity which is concerned with the planning and controlling of the firm's financial resources. As a separate activity or discipline, financial management is of immense interest to both academicians and practicing managers
Financial management as an integral of the overall management, the finance people must have analytical tools to make rational decisions in keeping with the objective of the firm some of the more useful tools of financial analysis and planning are the subjects of study.
The firm itself and out side providers of capital creditors all undertake financial statement analysis. Trade creditors (suppliers owned money for goods and services) are primary interested in liquidity of a firm.
Investors in a company's common stock are principally concerned with about a tend line as a result investors usually focus on analyzing profitability. They would also be concerned with the firms financial condition in so for as it affect - the ability of the firm to play dividends and avoid bankruptcy.
Management also employs financial analysis for the purpose of internal control and better provides what capital suppliers seek in financial condition and performance from the firm.
The need for is to study to asses the firm present financial control and educate opportunity in relation to the current position.
Also suggestions are to take a notice of financial position of the concern to the financial manager for future plan.
Financial management refers to that part of the management activity, which is concerned with the planning, and controlling if the firm's financial resources. The focus of financial management is a decision- making and decisions are made on the basis of financial statement analysis.
Financial statement analysis is a process of identifying the financial strengths and weakness of the firm by properly establishing relationships between financial statements.
Through proper analysis, interpretation, financial statements can provide valuable insights into firm's performance.
DEFINITIONS:-
"The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the increase statement showing the results of operations during a certain period."
--John N.Myer
"Financial statements are organized summaries of detailed information and are thus a form of analysis."
--W.B.Meig
"Financial analysis is process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firm's position and performance ".
--Metcalf & Titard
INDUSTRY PROFILE
INDUSTRY PROFILE OF BHEL
Heavy Electrical Industry covers Units manufacturing large plant and machinery required for power generation, transmission, distribution and utilization these includes turbo-generators, boilers, and various types of turbines, transformers, motors switchgears and such items.
Majority of products manufactured by Heavy Electrical Industry in the country, which includes items like power generating unit's electric motors, transforms; switchgears etc.,are used by all sectors of the Indian Economy. Some major areas where these are used large projects for power generation including nuclear power stations, petrochemical complexes, chemical plants integrated steel plants, non-ferrous metal unit's etc. The industry has been upgrading the existing technology. As a result, today India is among a handful of nations to have strong industrial base can be undertake complex projects on turnkey basis for export markets also. The industry is free to take up manufacture of my items.
The existing installed capacity in the industry is of the order of 4500MW of thermal, 1345MW of Hydro and 25MW of Gas based Power generation equipment per annum and manufacturing units depending upon the needs and their capacity are augmenting the capacity. The Industry has also established a strong manufacturing base for the requirement of equipment for nuclear power plants in the country. The share of domestic equipment is about 66% in the country's generation capacity. The heavy Electrical Industrial is capable of manufacturing transmission and distribution equipment unto 400KV AC and voltage DC.
The Indian industry has taken up the work for up gradation of transmission to next voltage system of 765KV class transformers, reactors, CTs, CVTs, bushing and insulators etc. Large electrical motors used in Steel Plants, petrochemical complex and other such heavy industries are also being manufacturing in the country.
HISTORY OF BHEL
BHARAT HEAVY ELECTRICAL LIITED (BHEL) is one of the pioneers in engineering industries in the world. The vital role played by the BHEL today in the country is the mark of its continuous effects to improve the service in the nation by consultancy, manufacturing and offering services in power section.
The success story of BHEL however goes back to 1956 when its first plant was set up in Bhopal. There major plants in Harridwar, Hyderabad and Tiruchinapalli followed this. These plants have been the core of BHEL's effects to grow and diversify and become one of the most integrated powers and industrial equipment manufactures in the world. The company now has 14 manufacturing units, 8 service centers and 4 power stations spread all over India and abroad.
BHEL manufactures over 180 products under 30 major product groups and meet the needs of crore sector like Power, Industry, Transmission, Defences, Tele communications, and Oil Business etc. Its products have established in enviable reputation of high quality and reliability. This is due to the emphasis paced all along on Design, Engineering and manufacturing to international standards by acquiring and adopting some of the best technologies developed in its own centers. BHEL has acquired ISO 9000 certification for Quality Management and ISO 14001 certification for Environment Management, BHEL caters to the needs of different sectors by designing and Manufacturing according to the needs of its clients in Power Sector.
BUSINESS OFFICES, MANUFACTURING UNITS, SERVICES CENTERS
BANGLORE BARODA BOMBAY
CHANDIGAR CHENNI JAIPUR
BHUVANESHWAR KOLKATTA PATNA
NEW DELHI GUWATHI JABALPUR
LUCKNOW HYDERABAD NAGPUR
BHOPAL
COMPANY PROFILE
&
OBJECTIVES
BHARAT HEAVY ELECTRICAL LIMITED
The vital role played by the BHEL today in the country is the mark of it continuous efforts to improve the service in the nation by consultancy, manufacturing and offering services in power sector.
This success story of BHEL however goes back to 1956 when its first plant was set up in BHOPAL. Three more major plants in HARDWARE, HYDERABAD and THRICHIRAPALLI followed this. These plants have been the core of. BHEL'S efforts to grow and diversify and become one of the most integrated power and industrial equipment manufacturers in the world. The company now has 14 manufacturing units,8 service centers and 4 power sector regional centers, besides project sites spread all over India and abroad.
BHEL manufactures over 180 products under 30 major product groups and meets the needs of core sector like power, industry, transmission, defense, telecommunications, oil business etc. its products have established an enviable reputation for high quality and reliability. This is due to the emphasis placed all along on design, engineering and manufacturing to international standards by acquiring and adopting some of the best technologies developed in its own R&D centers. BHEL has acquired ISO 9000 certification for environments. BHEL caters to the needs of different sectors by designing and manufacturing according to the need of its clientele in power sector.
COMPANY VISION, MISSION AN OBJECTIVE
VISION
A world Class, Innovation, Competitive and profitable Engineering Enterprise Providing total Business Solutions.
MISSION
To be the leading Engineering Enterprise providing Quality products System and services in the field of Energy, Transportation, Industry, Infrastructure and other potential areas.
VALUES
Meeting commitments made to External and Internal customers.
Faster learning, Creativity and Speed of response.
Respect for Dignity and potential of individuals.
Loyalty and Pride in the COMPANY.
Team playing
Zeal to Excel
Integrity and fairness in all matters.
OBJECTIVES
GROWTH
To ensure a steady growth by enhancing the competitive edge of BHEL in existing Business, new areas and international operation so as to fulfill National expectations from BHEL.
PROFITABILITY
To provide a reasonable and adequate return on Capital employed, primarily through improvements in Operational efficiency, Capacity Utilization and Productivity and generate adequate internal resources to Finance the company growth. Confidence in providing increased value for this money through International Standards of Product, Quality, Performance and superior customer services.
TECHNOLOGY
To achieve Technology excellence in operations by development of indigenous Technologies to and efficient absorption and adaptation of imported Technologies to suit Business needs and priorities and provide a competitive advantage of the company.
IMAGE
To fulfill the expectation which stockholders like Government as own employees, customers and the country at large have from BHEL.
SWOT ANALYSIS OF BHEL
The Strength, Weakness, Opportunities and Threats which are being experienced by BHEL as a growing concern have been summarized up in the following lines.
STRENGTHS
Vast pool of Trained Man Power.
Excellent state of art facilities.
Good working atmosphere
Rapport between Management and Union.
Product manufactured to international Quality
Low labour Cost and low manufacturing cost.
WEAKNESS
Excess Man power.
Slippage in delivery commitments.
System implementation inadequate.
No financial package.
Inadequate compensation package to employees.
OPPORTUNITIES
Growing Power Sector Machinery.
Liberalization has opened up the market.
Navratna Company Status.
Dominant player in Domestic Market.
THREATS
Liberalization - Entry of MNCs or private sector - more competition.
MNCs taking away good employees with attractive packages.
Government taxation policy - against manufacturing sector.
Poor infrastructure.
INTERNATIONAL OPERATIONS
BHEL has exported its equipment and services to over 50 countries. In Malaysia, BHEL has supplied 80% of the Boilers besides several hydro sets and gas turbines. BHEL equipment are in operation in Matta, Cy, Saudi Arabia, Oman, Egypt, Libya, Greece, Bangladesh, Srilanka, Iraq, Australia etc. BHEL exports turnkey power projects of Thermal, Hydro, Gas based types, Substation projects Rehabilitation project besides a wide variety of product like Insulators, values, Motors, traction Generators and services for Renovation and Modernization and Operation PowerStation.
RESEARCH AND DEVELOPMENT (R & D)
BHEL is one of the few companies world wide involved in Development of Integrated Gasification Combined Cycle (IGCC) Technology, which word uses in clean Coal Technology. BHEL R & D efforts have produced several new products. Some of the recent successful R & D products are Automated Storage Retrieval Systems. Automated Guided Vehicles for Material Transportation, Automatic Robotic Welding Systems.
HUMAN RESOURCE AND DEVELOPMENT (HRD)
The greatest strength of BHEL is its highly skilled and committed people. Every employee is given equal opportunity to develop himself and improve his position. Continuous training and retraining a positive work culture and participation style of management have led to the Development of a motivated work force and enhanced Productivity and Quality.
THERMAL POWER PLANT:
Steam turbine, boilers and generators of up to 500 MW capacities to manufacture boilers and stem turbines with super critical steam cycle parameters and matching generators up 660 MW unit facilities available for 1000 MW size.
HYDRO POWER PLANTS:
Mini/micro hydro sets spherical, butterfly, rotary values and auxiliaries for hydro station.
GAS BASED POWER PLANTS:
Gas turbines and generators up to 260 mw (150) rating gas turbines based co-generation and combined cycle system for industry and utility applications.
BIOLERS:
Heat recovery stem generators pressure vessels chemical recovery boilers for paper industry ranging from capacity of 100 to 100t/day of dry solids
POWER DEVICES:
High power capacity silicon diodes, thirstier devices, and solar photovoltaic cells.
EQUIPMENT FOR NUCLEAR POWER PLANTS
Turbines and generators up to 500 mw capacity.
Steam generators for utilities up to 500 MW.
Reheated / separator
Heat exchangers and pressure vessel
Products:-
BHEL manufactures a wide range of power plant equipments and also caters to the industry sector.
The products profile includes:
Gas turbines
Steam turbines
Compressors
Turbo generators
Pumps
Pulverizes
THEORETICAL
REVIEW OF THE
TOPIC
FINANCIAL STATEMENTS ANALYSIS
( A THEORETICAL BACK GROUND )
INTRODUCTION:
Every organization whether it may be a business one or non business one is to maintain accounting is mandatory because is the process of identifying measuring and communicating economic information to permit informed judgments and decisions by users of the information. It involves recording classifying and summarizing various business transactions. The end products of business transactions are the financial statements.
A financial statement is a collection of data according to logical and consistent accounting procedures. Its purpose is so clear from the data above is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment in time, as in the case of a balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement.
In the words of John N.Myer,"the financial statement provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the increase statement showing the results of operations during a certain period".
Accounting ratios calculated for numbers of years how of the changes of position. The ascertainment of trends helps in making estimate for the future.
According to Accounting principles Board of America states the following objectives of financial statements are:
To proved reliable financial information about economic resources and obligations of a business firm.
To provide other needed financial information about changes in such economic resources and obligations.
To provide reliable financial information that assists in estimating future earning potentials.
FINANCIAL STATEMENTS:
Financial statements primarily comprise two basic statements.
Balance sheet
Profit and Loss Account.
However GAAP specifies that a complete set of financial statement must include:
Balance sheet.
Income Statement.
A statement of changes in owner's accounts.
A statement of changes in financial position.
ANALYSIS OF FINANCIAL STATEMENTS
Financial statements are prepared primarily for decision making. It plays a dominate role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn. The information to the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.
The term, 'Financial analysis,' also refers to the process of determining financial strengths and weakness of the firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and operative data.
According to Myers 'Financial Statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements, and a study of the trend of these factors as shown in series of statements'.
TYPES OF FINANCIAL STATEMENT ANALYSIS:
The financial analysis may be
The nature of the analysis and the material used by him
The objective of the analysis and
The modus operandi of the analysis
METHODS OR DEVICES OF FINANCIAL ANALYSIS
The analysis and interpretation of financial statements is used to determine the financial position and result of operation as well. A number of methods or devices are used to study the relationship between different statements. An effort is made to use those devices, which clearly analyze the position of the enterprise. The following methods of analysis are generally used:
Comparative balance sheet
Common size statement
Funds flow analysis
Trend ratios
Ratio analysis
COMPARATIVE FINANCIAL STATEMENTS
The comparative financial statements are statements of the financial position at different periods of time. The elements of financial position are shown in a comparative from as to present an idea of financial position at two more periods. Not only the comparison of the figures of two periods but also be relationship between balance sheet and income statement enables an in depth study of financial position and operative results. The comparative statement may show:
Absolute figure in "MONEY "values of item 'separately' for EACH
of the periods stated.
Changes in absolute figures i.e., increase or decrease in terms of
"MONEY" values.
Absolute data in terms of percentages.
Increase of decrease in terms of percentages.
Increase of decrease in terms of percentages.
Such "comparative financial statements" are necessary for the study of TRENDS and the direction of movement in the financial position and operating results.
RATIO ANALYSIS
Introduction:
Financial analysis depends to very large extents of the use of ratios through there are other equally important tools of such analysis. Thus,a direct examination of the magnitude of two released items is somewhat enlightening but the comparison is greatly facilitated by expressing the relationship as a ratio.
Ratio analysis of business enterprises enters on efforts to derive quantitative measures or guides concerning the expected capacity of the firm to meet its future financial obligations or expectations present and past data are used for the purpose and what ever extrapolations appear necessary. They are made to prove an indication of feature performance. Alexander Walt, who criticized the bankers for its lap sided development owing to their decisions regarding the grant of credit on current ratios alone, made the presentation of an elaborate system of ratio analysis in 1919.
RATIO:
Ratio is an expression of the quantitative relationship that exits between the two numbers. The ratio is defined as "the indicated quotient of two mathematical expressions." The ratio should be determined between related accounting variables to be meaningful and effective.
INTERPRETATION OF THE RATIOS
The interpretation of ratio is an import factor. The inherent limitation of ratio analysis should be kept in mind while interpreting them. The interpretation of ratios can be made in the following ways.
1. SINGLE ABSOLUTE RATIO
Generally speaking one cannot draw conclusion when a single is considered in isolation. But single ratios may be studied in relation to certain thumb-rules, which are based upon all proven conventio
2. GROUP OF RATIOS:
Ratios can be interpreted by calculated a group of related ratios. A single ratio supported by other related additional ratios becomes more understanding and meaningful.
3.HISTORICAL COMPARISON:
One of the easiest and most popular ways of evaluating the performance is to compare its present ratios called 'comparison overtime'. It gives an indication of a direction of change and reflects whether the firm's performance and financial position has imported, deteriorated or remained constant over a period of time.
4.PROJECTED RATIO:
Ratios can be calculated for future standards based upon the projected financial statements. These future ratios are compared with the actual ratios to find variance, if any such variance helps in interpreting and taking corrective action.
5.INTERFIRM COMPARISON:
Ratio of firm can also be compared with the ratios of some other firms in the industry at the same point of time. This helps in evaluating relative financial position and performance of the firm.
STEPS INVOLVED:
Selection:- Selection of relevant data from the statements is depending upon the objective of the analysis.
Calculation:- Calculation of appropriate ratios from the above data.
Comparing:- Comparing of calculated ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of other firms or the comparison with the industry to which the firm belongs.
Interpretation: Interpretation of the ratios.
DATA ANALYSIS
AND
INTERPRETATION
COMPARATIVE BALANCE SHEET for year ended 2006- 2007 and 2007-2008
(Rs.In Lakhs)
Particulars
2006-2007
2007-2008
Increase/decre-ase in amounts
%
CURRENT ASSETS
Inventories
81476
111466
29990
36.80
Book debts
177301
215291
37990
21.42
Cash /bank balances
12
14
2
16.70
Loans &advances
17273
24379
7206
41.71
Totals current assets (A)
276062
351150
75088
27.19
FIXED ASSETS
Gross block
50268
55091
4823
9.59
Less cum depreciation
38021
41214
3193
8.39
Net block
12247
13877
6843
55.90
Capital work in progress
7563
5404
-2159
-28.54
In tangible assets
19
1667
1648
8673.6
Total fixed assets (B)
108118
117253
9135
8.44
TOTAL ASSTES (A+B)
384180
468403
84223
21.92
Current Liabilities
Advances from customers
104813
131969
27156
26.00
Sundry creditors
46452
54586
8134
18.00
Other liabilities
3093
3034
- 59
-1.9
Provisions
54511
65151
10640
19.51
Total liabilities (c)
208869
254740
45871
22.00
Resources
Funds from corp.office
3252
6504
3252
100
Reserves & surplus
212474
241734
29260
13.77
Inter unit balances (net)
(129311)
(131467)
2156
0.16
Differed credit
607
587
-20
-3.29
Loans
-
-
TOTAL
87022
117358
30336
34.86
Differed rev.expenditure
-
-
TOTAL
87022
117358
30336
34.86
Capital employed (exclu iu & ca)
79459
111954
32495
40.89
INTERPRETATION:-
The current assets have increased by75088 lakhs between 2007-2008 on 27.19% while the current liabilities have increased by 463580 lakhs i.e., 22.00%.
The company enjoying high working capital.Long term liabilities increased by 30336 lakhs i.e.,34.86%
The total fixed assets block of the company have increased by 9135 lakhs i.e.,8.44%this is majority because of the deprecation of fixed assets slowly increased.
There has a grate rise in cash &bank balanced in the year 2007- 2008 i.e., 16.70 % remaining current assets are also increased.
All loans are also clear in the year 2007-2008.
Advances from customers
32228
44162
11934
37.02
Sundry creditors
27610
20461
-7149
-25.89
Other liabilities
2612
7841
5229
200.19
Provisions
11977
12520
543
4.53
Total liabilities (c)
74427
84990
1053
14.19
Resources
Funds from corp.office
3252
3252
0
0
Reserves & surplus
102496
110026
7530
7.34
Inter unit balances (net)
(2066)
(36196)
34130
1651.9
Differed credit
573
386
-187
-32.63
Loans
-
-
TOTAL
104255
81768
-22487
-21.56
Differed rev.expenditure
-
-
-
TOTAL
104255
81768
-22487
-21.56
Capital employed (exclu iu & ca)
99337
79114
-20223
-20.35
COMMON SIZE BALANCE SHEET OF BHEL
2007
2008
PARTICULARS
AMOUNT
RS
PERCENTAGE
%
AMOUNT
RS
PERCENTAGE
%
000'S
000'S
CUREENT ASSETS:
INVENTORIES
81476
19.16
111466
22.13
BOOK DEBTS
177301
41.69
215291
42.75
CASH & BANK BAL
12
0.028
14
0.00278
LOANS & ADVANCES
17273
4.06
24379
4.84
TOTAL CURRENT ASSETS(A)
276062
64.92
351150
69.73
FIXED ASSETS:
Gross block
50268
16.98
55091
14.80
Less cum depriciation
38021
12.84
41214
11.07
Net block
12247
4.13
13877
3.72
Capital work in progress
7563
2.55
5404
1.45
In tangible assets
19
0.006
1667
0.44
Total fixed assets(B)
19829
6.70
20948
5.62
Total assets (A+B)
295891
100.00
372098
100.00
9) NET PROFIT MARGIN:
Net profit is obtained when operating expenses interest and taxes are subtracted from gross profit. This ratio establishes relationship between net profit and sales and indicates management efficiency in manufacturing, administrating and selling the products. The ratio is over is over all measures of the firms ability to turn each rupees sales into net profit.
NET PROFIT
NET PROFIT = ---------------------------X 100
SALES
10) RETURN ON EQUITY CAPITAL:
In the real sense, ordinary shareholders are the owners of the company. They assume the highest risk. Preference shareholders have a preference over ordinary shareholders in the payment of divided as well as capital. Preference shareholders got a fixed rate of dividend irrespective of the quantum of profits of the profits of the company. The rate of dividend varies with the variability of profits in case of the ordinary shares only. Thus the ordinary shareholders are more interested in the profitability of a company and the performance of the company should be judged on the basis of return on equity capital of the company. Return on equity capital is the relation between profits of a company and its equity capital. It can be calculated as follows
NET PROFIT AFTER TAX - FREE.DIVIDEND
RETURN ON EQUITY CAPITAL= -----------------------------------------------x 100
EQUITY SHARE CAPITAL
Comprehensive ROI Analysis - Chart
Particulars
2010 (Rs. In Crores)
2009 (Rs in Crores)
Sources of funds:
Share holders funds
Equity Capital
Reserves and surplus
Loan Funds
Secured loans
Finance lease obligations
Unsecured loans
1,121
8,950 10,071
--
74
171 245
931
7,999 8,930
259
-
115
Total
10,316
9,403
Application of Funds :
Fixed Assets
Gross Block
Less : Depreciation
Net Block
Capital Work in progress
Investments Current Assets, Loans & Advances
Inventories
Sundry Debtors
Cash and Bank Balances
Loans and Advances
Less : Current Liabilities
Provisions
Net Current Assets
Net Deferred Tax Liability
6,667
3,150
3,517
27 3,544
288
2,709
9,468
3,206
2,043
17,426
10,109
513
10,622
6,804
(320) (320)
5,747
2,561
3,186
28 3,214
222
2,540
9,428
662
1,712
14,342
7,902
572
8,474
5,868
-
10,316
9,304
.
ANALYSIS CHART
For 2010 For 2009
Return 1912 1586
Return on capital Employed= ------------------------ = ------------ =18.53%= ---------------- = 17.06%
Capital Employed 10316 9304
Profitability Capital Turnover Ratio
For 2010 For 2009 For 2010 For 2009
Return = 1912 =8.05% 1586 =8.74% Sales = 23756 =2.30times 18155 =1.95times
Sales 23756 18155 Capital Employed 10316 9304
Materials = 15179 =63.90%. 10996 =60.57%
Sales 23756 18155 Fixed Assets Turnover
For 2010 For 2009
Wages = 2543 =10.70%. 2293 =12.63% Sales = 23756 =6.20times 18155 =5.28times
Sales 23756 18155 Capital Employed 3832 3436
Over heads = 3546 = 14.93%. 2815 = 15.51%
Sales 23756 18155
Depreciation = 412 = 1.73%. 377 = 2.08%
Sales 23756 18155
Int.& Fin. Exp. = 164 = 0.69%. 88 = 0.48%
Sales 23756 18155
Working Capital Turnover
For 2010 For 2009
Sales/Working capital = 23756/6484 = 3.66 times 18155/5868 = 3.09 times
Inventory Turnover
Sales/Inventory = 23756/2709 = 8.7 times 18155/2540 = 7.15 times
Debtors Turnover
Sales/creditors = 23756/9468 = 2.51 times 18155/9428 = 1.92 times
Other current Assests Turnover
Sales/Other CA = 23756/5249 = 4.53 times 18155/2374 = 7.65 times
Creditors TurunOver
Sales/Creditors = 23756/10109 = 2.35 times 18155/7902 = 2.30 times
Other Current Liabilities Turnover
Sales/Other CL = 23756/833 = 28.52 times 18155/572 = 3.14 times s
INCOME STATEMENTS
PARTICULARS
YEAR1(R.S)
YEAR 2(R.S)
CASH SALES
CREDIT SALES
COST OF GOODS SOLD
30,000
2,70,000 3,00,000
2,36,000
32,000
3,42,000 3,74,000
2,98,000
GROSS PROFIT
64,000
76,000
Optimistic Lad
(a ) Ke = Dividend +g = 90x40% +5%
Price 360
= 10% +5% = 15%
Futuristic Limited
(b) Ke = Dividend +g = 2 +10%
Price 40
= 5% +10% = 15%
(c) Ke = Dividend +g
Price
0.15 = 2 + 0.11
mps
Hence MPS 2/ 0.04 = Rs.50
(d) Ke = Dividend +g
Price
0.16 = 2 + 0.10
mps
Hence MPS = 2 / 0.06 = Rs.33.33
Computation of WACC
The Capital Structure of BHEL Ltd is - Equity Capital Rs5 lakhs; Reserves and Surplus Rs.2 lakhs au Debentures Rs.3 lakhs. The Cost of capital before tax are (a) Equity -18% and (b) Debentures - 10%. You ai required to compute the Weighted Average Cost of Capital.
From the following information, compute WACC of Super-Good Ltd.
• Debt to Total Funds: 2:5
• Preference Capital to Equity Capital: 1:1
• Preference Dividend Rate: 15%
• Interest on Debentures: Rs.20000 for half-year.
• EB1T at 30% of Capital Employed: Rs.3 lakhs
• Cost of Equity Capital is 24%.
(c) Backwork Ltd has a Debt Equity Ratio of 2:1 and a WACC of 12%. Its Debentures bear interest of 15%. Fin out the cost of Equity Capital.
Component
Amount
(Rs._in_Iakhs)
% of Amount
Cost in %
Product %
Equity
Reserves
Debentures
5.00
2.00
3.00
10.00
50%
20%
30%
18%
18%
6.5%
9%
3.6%
1.95%
14.55%
Note: (i) Reserves are taken at same rate as equity
(ii) After tax cost of debentures = Interest x(1- Tax rate)
= 10 x (1- 0.35) 6.5%
Therefore WACC = 14.55%
EBIT@ 30% of capital Employed = Rs.3 lakhs
Therefore Capital Employed = 3lakhs/30% = Rs.10 lakhs
Total Capital
Rs. 10 lakhs
Capital Debt
Rs. Lakhs (bal fig) 2/5 ths of total funds = Rs. 4 lakhs
Preference 1:1 Equity
Rs. 3 lakhs Rs. 3 lakhs
Interest Amount = 20000Ã-2 = Rs. 40000
Interest rate = 10%
component
Amount
%(Amount)
Cost in %
WACC
Equity
Preference
Debt
Rs.3 lakhs
Rs.3 lakhs
Rs.4 lakhs
30%
30%
40%
24%
15%
6.5%
(10%Ã-65%)
WACC
7.20%
4.50%
2.60%
14.30%
component
Ratio
Cost in %
WACC
Equity
Debt
2/3
1/3
15% x 65% = 9.75%
5.50 = 16.50%
1/3
6.50% [9.75 x 2/3]
5.50 % (bal fig)
12.00% (given)
Prefire ke= 16.50%
Adminstration 10 : WACC computation with and without tax -RTP
The following information has been extracted from the Balance Sheet of ABC Ltd. as on 3 1 December:
Rs.inLakhs
Equity Share Capital 400
12% Debentures 400 1196 Term loan 1200
2000
WACC of the company. It had been paying dividends at a consistent rate of 20% per annum.was difference will it make if the current price of the Rs. 100 share is Rs. 160?
The effect of Income Tax on WACC under both the above situations. (Taxte4O%).
Competation of WACC (based on Book Vahie Proportions and Ignoring Tax)
components
Proportion(b)
Individual cost (c)
WACC (d) = (b) Ã- (c)
Equity Share Capital
Debentures
Term loan
4/20
4/20
12/20
Ke = 20% (dividendapproach)
Kd= 12%
Kd= 18%
4.00%\
2.40%
10.80%
WACC
17.20%
Particulars
Year 1 (Rs.)
Year 2 (Rs.)
Cash sales
Credit Sales
Less: Cost of goods sold
Gross Profit
30,000
2,70,000 3,00,000
2,36,000
64,000
32,000
3,42,000 3,74,000
2,98,000
76,000
11. Evaluation Techniques - RTP
BHEL Limited Company is considering investing in a project requiring a capital outlay of Rs.4, 00,000. Forecast for annual net income after depreciation but before tax is follows -
Years
1
2
3
4
5
Profit
2,00,000
2,00,000
1,60,000
1,60,000
80,000
Depreciation may be taken as 20% en Original Cost and taxation at 50% of Net Income.
You are required to evaluate the project according to each of the following methods:
(a) Pay-Back method
(b) Rate of return on Original investment Method.
(c) Rate of return on Average Investment method.
(d) Discounted Cash Flow method taking cost of capital as 10%.
(e) not present value ------------- method
(f) Internal rate of return method.
1. Statement of Cash Flows
Year
PBT
PAT
Depn.
Profit
Cumulative cashflows
Disc. Factor® ]Disc.Cash 1 Cum.Disc. 20% Flow | CashFlow
1
2,00,000
1,00,000
80,000
1,80.000
1.80.000
0.909
1,63,620
1,63,620
2
2,00,000
1,00,000
80,000
1,80,000
3,60,000
0.826
1.48,680
3,12300
3
1,60,000
80,000
80,000
1,60,000
5,20,060
0.751
1,20,160
4,32,460
4
1,60,000
80,000
80,000
1,60,000
6,80,000
0.683
1,09,280
5,41,740
5
80,000
40,000
80,000
1,20,000
8,00,000
0.621
74,520
6,16,260
Total Cash Inflows
8,00,000
6,16,260
0
Less: Cash Outflow (
investment)
4,00,000
1.000
(4,00,000)
Net Present Value
2,16,260
2. Evaluation of Project (a) Pay Back Period
Since, the investment of Rs.4,00,000 is recovered completely in the year back period lies between 2 and 3.
Pay Back Period = Base Year + [Investment Amount Less Cumulative Cash Inflow till Base Yearl
[Cum. Cash Inflow for Next year Less Cum. Cash Inflow for Base Year]
= 2Years + [(4,00,000-3,60,000).. (4,20,000-3,60,000)]
= 2 Years + (40,000 + 1,60,000)
= 2 4- 0.25 = 2.25 Years or 2 Years and 3 Months
Conclusion: Since the project cost is recovered during the project period itself, the project may be
undertaken.
(b) Rate of Return on Original Investment Method
- Particulars
Rs
Total Return
[Total Cash Inflows]
8,00,000
Period of Return
5 Years
Average Return
[Total Cash Inflows /5 Years]
1,60,000
Original Investment
4,00,000
Rate of Return
[Average Return /Original Investment]
40%
Note: It is assumed that Return obtained is reinvested in the business and not withdrawn. Hence, the return for the period of 5 years is equal to sum of Returns for the period.
Conclusion: If the Rate of Return is higher than a comparable return rate, then the project may be accepted.
Rate of Return on Average Investment Method
Particulars
Rs
Total Return Period of Return Average Return
[Total Cash Inflows]
[Total Cash Inflows /5 Years]
8,00,000 5 Years 1,60,000
Original Investment Add: Average Return
4,00,000 1,60,000
Average Investment
5,60,000
Rate of Return
[Average Return/ Average Investment]
28.6%
Conclusion: If the Rate of Return on Average Investment is higher than a comparable return rate, then the project may be accepted.
(D) DISCOUNTED CASH FLOW METHOD (Npv method)the project has yiels a positive NPV of 2,16,260 on an investment of Rs 4,00,000 there for the project may be under taken
(E) NET PRESENT VALUE METHOD
The profitability index of de project is higher than 1 , and there for the project can be implemented
(F) INTERNAL RATE OF RETURN METHOD
TIME
CASH FLOW
PV FACTOR
RATE 1=25%[R1]
DISCOUNT CASH FLOW
P V FACTOR 40%[R2]
PV FACTOR
DISCOUNT CASH FLOW
PV FACTOR
DISCOUNT CASH FLOW
1
2
3
4
5
1,80,000
1,80,000
1,60,000
1,60,000
1,20,000
0.800
0.640
0.512
0.410
0.328
1,44,000
1,15,200
81,920
65,600
39,360
0.735
0.541
0.398
0.292
0.215
1,32,300
97,380
63,680
46,720
25,800
o
8,00,000
(4,00,000)
1.000
4,46,080
(4,00,000)
3,65,880
(4,00,000)
NET PRESENT VALUE
46,080[VJ
34,120[V2
Rate 1 [R1: = [(Total Cash Inflows + Total Outflow) - 1] ^ [Period - 1]
= [(800 h-400)-1] h- [5-1]
= [2.00-1]-4
=25%
Rate 2 [R2]: = R, + (Profitability Index under R1 - 1)
= 0.25 + [(4,46,080 - 4,00,000) - 1] = 0.25+[1.11-1]
: =0.25 + 0.11
= 0.36
= Value at IRR = 0
internal Rate of Return [IRR] = R2 + [v2-vm] * [r1-r2]
V2-v1
36% + [(-34,120-0)/(-34,120-46,080)] x [25%
36% + [-34,120/-80,200] x [-11%]
36%+ 0.425 x -11%
36% - 4.675%
Conclusion: IRR is greater than the Cost of Capital of 10%. Therefore, the project may be accepted
12. Computation of I.R.R - Difference in Project IRR and Equity IRR - N 01
XYZ Ltd an infrastructure company is evaluating a proposal to build, operate and transfer a section of 35 kms of
road at a project cost of Rs.200 Crores to De financed as follows -
' Equity Share Capital
Loans at the rate of interest of 15% p.a. from financial institutions Rs.150 Crores
Period
Actual Value
Budget Value
Reason
1
180000
185000
Actuals are almost in line with budget
2
180000
225000
High Labour and Machine Turnover
3
160000
150000
In time receipt of required inputs
4
160000
165000
Actuals are almost in line with budget
5
120000
150000
Lack of availability of required raw material (Insufficient Quantities & Poor quality)
CONCLUSION
Suggestions
It is suggested that the should concentrate on the management of current assets and current liabilities more effectively.
The inventory should be reduced to the maximum possible extent by following procedures like :just in time ", import substitution, As far as possible ,the raw material should be bought as and well necessary.
The debtors constitute nearly 50% of total current assets. As the company would find difficult to carry and manage such huge receivables, it should endeavor to realize its receivables as quickly as possible.
Company's average collection period of debtors is not satisfactory when company to the previous year. So, the company should strict minimize the period future.
A major proportion of sundry debtors constitute dues from state electricity boards and public sectors undertaking. The company should examine the feasibility of entering into such agreement with SEB'S and PSU'S to BHEL.So that the long outstanding debts can be cleared off.
There should be revisions of credit policy on sales and liquidity to reduce the debtors there by increase the efficiency in collection performance.
Steps should also be taken to reduce the scrap, which has been increasing over the years. Necessary measures should be taken for the disposal of the scrap as soon as possible.
The investment in loans and advances should be minimized to the possible extent.
