Advance

Corporate
Finance
Final
Project

RAJIB ALI
FATIMA TU ZEHRA
AMAR KUMAR

Q#1
FAR &Co is a company which operates in constructing
tunnels in mountainous areas. Company is in process of
submitting a bid for construction of 10 km large tunnel in
Baluchistan. As per the map of Economic Corridor. CFO
got following data that was anticipated by managers. The
project initial investment is Rs.2 million with WACC of
10%. Inflow will be Rs.10 on each vehicle which passes
the tunnel. It is anticipated that almost 100,000 vehicles
per year and project will benefit company till 5 years.
Project Manager has calculated NPV of Rs.

Data:

Rs:

NPV

1.7907 m

Years

5 year

Initial cost

2m

Inflow

1m

Vehicles

100000

Per vehicle revenue

10

WACC

10%

Sensitivity Analysis:
Change in NPV due to
change in WACC.
WACC = 9%

Rs:

CFC 1

0.91743119

CFC 2

0.84167999

CFC 3

0.77218348

CFC 4

Change in NPV due to

change in per unit price
price= Rs 11

Rs:

0.70842521

CFC 1

CFC 5

0.64993139

CFC 2

0.90909091

NPV

1.88965126

CFC 3

0.82644628

CFC 4

0.7513148

CFC 5

0.68301346

NPV

2.16986545

Change in initial
investment.
initial cost= 1.5m

Rs:

CFC 1

0.90909091

CFC 2

0.82644628

CFC 3

0.7513148

CFC 4

0.68301346

CFC 5

0.62092132

NPV

2.29078677
Change in life of project.
years=3

Change in number of
vehicles.
Rs:
units= 95,000
CFC 1
CFC 2
CFC 3
CFC 4
CFC 5

0.863636364
0.785123967
0.713749061
0.648862783
0.589875257

NPV

1.601247431

CFC 1

0.90909091

CFC 2

0.82644628

CFC 3

0.7513148

NPV

0.48685199

Scenario Analysis
Base
case

Best case

Data:

Data:

Worst
Case
Data:

NPV
Years
Initial cost

1.7907 m
5
2m

NPV
Years
Initial cost
Inflow

Inflow
Vehicle
Per vehicle
revenue
WACC

1m
100,000

10
10%

Vehicles
Per vehicle
revenue
WACC

4.83447 m
5
1m

NPV

1.01110m

Years

Initial cost

2.5 m

1.5 m
100,000

Inflow

.95 m

Vehicles

95,000

15

Per vehicle
revenue

10

9%

WACC

11%

 Break even analysis

Break even analysis

Break even analysis

DEGREE OF OPERATING
LEVERAGE
Base case:

DEGREE OF OPERATING
LEVERAGE
Worst case

DEGREE OF OPERATING
LEVERAGE
Best case

Q.NO.2

CASE 1
PROJECT A:
The initial cost of project a is 10,000.
Cash inflows:

2,000

10

1500

1500

2000

2500

3000

2000

1500

2500

3500

CASE 1
Project A

CASE 1
Project B

The initial outlay/ cost of project B is = (20,000)

CASE 1
Project B

IRR Rule:

IRR > COST OF CAPITAL

CONCLUSION

CASE 2 (XYZ)
PROJECT X

PROJECT Y

Question 3
Agency problem case
Put a relevent picture on this slide

Agency problem

Empire building
Entrenching investment
Substantial cost
Losing human capital
Low work and high perks

Solution
Revise compensation plan
Revise incentive plan
Involve shareholders in decision

Residual income or EVA

Net income after deducting the dollar return required
by investor is called residual income or EVA.
EVA = Income earned Income required
Income required = cost of capital * investment
Economic profit is better measure of return than
accounting profit. Economic profit is equal to
difference between return on investment and cost of
capital.

 Based on EVA manager can take better decision of

investment.
For example, if the company is expecting to earn $6m net
income from project and its cost of capital is 10% and
project requires investment of 50m, then EVA will be:
EVA = 6 50*.10 = 1million
Keeping all other thing constant, if cost of capital increase
from 10% to 13% than EVA will be negative and project
will be accepted.
EVA = 6 50*.13 = (0.5) million

 Apparently which project seems better can be

worse based on EVA if it doesnt greater
earning greater than cost of capital. Manager
will take investment decision only of the
earning of project will be high enough to
cover cost of capital.
EVA makes the cost of capital apparent to
manager and help to reduce it by increasing
earning and reducing capital employed.

Question 5
Aslam ltd, a public listed well recognized
energy producing company issue 1million
share to finance its new project of solar
energy. This project has positive NPV but due
to high cost of interest company goes for
issuance of equity.
Face value of each share is Rs.10. Flotation
cost per share including cost of underwriter
was Rs.1. Net proceeds equal 9million.
Project required rate of return is 15%
(calculated by using CAPM model).

No of share

Price per share Total

400,000 shares

Rs.10

Rs. 4000,000

100,000 shares

Rs.10

Rs. 1000,000

In year 4, company sold additional .3 million shares to

underwriter. Information of issue is summarized as:
No of shares

Price per share

Total

300,000 shares

Rs. 12

Rs. 3600,000

As the project requirement explained above,

company issue .2million in year 6 details are as
follows:
No of shares
200,000 shares

Price per share

Rs. 11

Total
Rs. 2200,000

During this 10-year company, has not only issued share three
times but buy back and took advantage of low price. When the
price of share went down company buy back share and due to
increased demand pressure price of stock increase.
Date

No of shares

Market price

Price of buyback

Amount paid by
company

Year 2

100,000

Rs. 8

Rs. 9

Rs. 900,000

Year 5

200,000

Rs. 6

Rs. 8

Rs. 1600,000

Year 7

200,000

Rs. 7

Rs. 8

Rs. 1600,000

What was the par value of each share?

Par value of each share is Rs. 10
What was the average price at which shares
were sold?
Issue was made 3 times during 10 years.
Average price= (10+12+11) / 3 = Rs. 11

How many shares had been repurchased?

Company repurchases share three times
first in year 2 then in year 5 and 7.
Date
Year 2
Year 5
Year 7

No of shares
100,000
200,000
200,000

What was the average price at which the shares were

repurchased?
Date

No of shares

Price of buyback

Year 2
Year 5
Year 7

100,000
200,000
200,000

Rs. 9
Rs. 8
Rs. 8

Average price= (9+8+8) / 3 = Rs. 8.33

What was the net book value of companys common equity?

Par value of share is Rs.10. At the end of year 10 total

number of share were 500,000 shares.
Book value is equal to Rs. 5000,000.

Q#6: Answer.

Thank You