of Im Pandeya

ChapLer 1
Nature of I|nanc|a|
Management
2
llnanclal ManagemenL nlnLh LdlLlon l M
andey
vlkas ubllshlng Pouse vL LLd
8uslness AcLlvlLles
roducLlon
MarkeLlng
llnance

andey
llnance luncLlons
lnvesLmenL or Long 1erm AsseL Mlx
ueclslon
llnanclng or CaplLal Mlx ueclslon
ulvldend or roflL AllocaLlon ueclslon
LlquldlLy or ShorL 1erm AsseL Mlx ueclslon

andey
llnance Manager's 8ole
8alslng of lunds
AllocaLlon of lunds
roflL lannlng
undersLandlng CaplLal MarkeLs

andey
llnanclal Coals
roflL maxlmlzaLlon (proflL afLer Lax)
Maxlmlzlng Larnlngs per Share
Shareholder's WealLh MaxlmlzaLlon

andey
roflL MaxlmlzaLlon
Maxlmlzlng Lhe 8upee lncome of llrm
8esources are efflclenLly uLlllzed
ApproprlaLe measure of flrm performance
Serves lnLeresL of socleLy also

andey
Cb[ecLlons Lo roflL MaxlmlzaLlon
lL ls vague
lL lgnores Lhe 1lmlng of 8eLurns
lL lgnores 8lsk
Assumes erfecL CompeLlLlon
ln new buslness envlronmenL proflL
maxlmlzaLlon ls regarded as
unreallsLlc
ulfflculL
lnapproprlaLe
lmmoral

andey
Maxlmlzlng LS
lgnores Llmlng and rlsk of Lhe expecLed
beneflL
MarkeL value ls noL a funcLlon of LS Pence
maxlmlzlng LS wlll noL resulL ln hlghesL
prlce for companys shares
Maxlmlzlng LS lmplles LhaL Lhe flrm should
make no dlvldend paymenL so long as funds
can be lnvesLed aL poslLlve raLe of reLurn
such a pollcy may noL always work

andey
Shareholders' WealLh
MaxlmlzaLlon
Maxlmlzes Lhe neL presenL value of a
course of acLlon Lo shareholders
AccounLs for Lhe Llmlng and rlsk of Lhe
expecLed beneflLs
8eneflLs are measured ln Lerms of cash
flows
lundamenLal ob[ecLlvemaxlmlze Lhe
markeL value of Lhe flrm's shares
10
andey
8lskreLurn 1radeoff
8lsk and expecLed reLurn move ln Landem
Lhe greaLer Lhe rlsk Lhe greaLer Lhe
expecLed reLurn
llnanclal declslons of Lhe flrm are gulded
by Lhe r|skreturn tradeoff
1he reLurn and rlsk relaLlonshlp
8eLurn 8lskfree raLe + 8lsk premlum
8lskfree raLe ls a compensaLlon for Llme
and rlsk premlum for rlsk
11
andey
Managers versus Shareholders'
Coals
A company has sLakeholders such as employees debLholders
consumers suppllers governmenL and socleLy
Managers may percelve Lhelr role as reconclllng confllcLlng
ob[ecLlves of sLakeholders 1hls sLakeholders' vlew of managers'
role may compromlse wlLh Lhe ob[ecLlve of SWM
Managers may pursue Lhelr own personal goals aL Lhe cosL of
shareholders or may play safe and creaLe saLlsfacLory wealLh
for shareholders Lhan Lhe maxlmum
Managers may avold Laklng hlgh lnvesLmenL and flnanclng rlsks
LhaL may oLherwlse be needed Lo maxlmlze shareholders'
wealLh Such saLlsfylng" behavlour of managers wlll frusLraLe
Lhe ob[ecLlve of SWM as a ootmotlve qolJe
12
andey
llnanclal Coals and llrm's Mlsslon and
Cb[ecLlves
llrms' prlmary ob[ecLlve ls maxlmlzlng Lhe welfare of
owners buL ln operaLlonal Lerms Lhey focus on Lhe
saLlsfacLlon of lLs cusLomers Lhrough Lhe producLlon of
goods and servlces needed by Lhem
llrms sLaLe Lhelr vlslon mlsslon and values ln broad Lerms
WealLh maxlmlzaLlon ls more approprlaLely a Jeclsloo
ctltetloo raLher Lhan an objectlve or a qool
Coals or ob[ecLlves are mlsslons or baslc purposes of a flrm's
exlsLence
1
andey
llnanclal Coals and llrm's Mlsslon and
Cb[ecLlves
1he shareholders' wealLh maxlmlzaLlon ls Lhe
secondlevel crlLerlon ensurlng LhaL Lhe
declslon meeLs Lhe mlnlmum sLandard of Lhe
economlc performance
ln Lhe flnal declslonmaklng Lhe [udgemenL
of managemenL plays Lhe cruclal role 1he
wealLh maxlmlzaLlon crlLerlon would slmply
lndlcaLe wheLher an acLlon ls economlcally
vlable or noL
1
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CrganlsaLlon of Lhe llnance luncLlons
8eason for placlng Lhe flnance funcLlons ln
Lhe hands of Lop managemenL
llnanclal declslons are cruclal for Lhe survlval of Lhe
flrm
1he flnanclal acLlons deLermlne solvency of Lhe flrm
CenLrallsaLlon of Lhe flnance funcLlons can resulL ln a
number of economles Lo Lhe flrm
1
andey
SLaLus and uuLles of llnance LxecuLlves
1he exacL organlsaLlon sLrucLure for
flnanclal managemenL wlll dlffer across
flrms
1he flnanclal offlcer may be known as Lhe
flnanclal manager ln some organlsaLlons
whlle ln oLhers as Lhe vlcepresldenL of
flnance or Lhe dlrecLor of flnance or Lhe
flnanclal conLroller
1
andey
8ole of 1reasurer and ConLroller
1wo more offlcersLhe treasurer and Lhe
contro||ermay be appolnLed under Lhe
dlrecL supervlslon of ClC Lo asslsL hlm or
her
1he Lreasurer's funcLlon ls Lo ralse and
manage company funds whlle Lhe
conLroller oversees wheLher funds are
correcLly applled
ChapLer 2
Concepts of Va|ue
and keturn
1
andey
ChapLer Cb[ecLlves
undersLand whaL glves money lLs Llme
value
Lxplaln Lhe meLhods of calculaLlng presenL
and fuLure values
PlghllghL Lhe use of presenL value
Lechnlque (dlscounLlng) ln flnanclal
declslons
lnLroduce Lhe concepL of lnLernal raLe of
reLurn
1
andey
1lme reference for Money
1|me preference for money ls an
lndlvldual's preference for possesslon of a
glven amounL of money oow raLher Lhan
Lhe same amounL aL some fuLure Llme
1hree reasons may be aLLrlbuLed Lo Lhe
lndlvldual's Llme preference for money
rlsk
preference for consumpLlon
lnvesLmenL opporLunlLles
20
andey
8equlred 8aLe of 8eLurn
1he Llme preference for money ls generally
expressed by an lnLeresL raLe 1hls raLe wlll be
poslLlve even ln Lhe absence of any rlsk lL may
be Lherefore called Lhe r|skfree rate
An lnvesLor requlres compensaLlon for
assumlng rlsk whlch ls called r|sk prem|um
1he lnvesLor's requ|red rate of return ls
8lskfree raLe + 8lsk premlum
21
andey
1lme value Ad[usLmenL
1wo mosL common meLhods of ad[usLlng
cash flows for Llme value of money
Compound|ngLhe process of calculaLlng future
va|ues of cash flows and
D|scount|ngLhe process of calculaLlng present va|ues
of cash flows
22
andey
luLure value
Compound|ng ls Lhe process of flndlng Lhe fuLure values of
cash flows by applylng Lhe concepL of compound lnLeresL
Compound |nterest ls Lhe lnLeresL LhaL ls recelved on Lhe
orlglnal amounL (prlnclpal) as well as on any lnLeresL
earned buL noL wlLhdrawn durlng earller perlods
S|mp|e |nterest ls Lhe lnLeresL LhaL ls calculaLed only on Lhe
orlglnal amounL (prlnclpal) and Lhus no compoundlng of
lnLeresL Lakes place
2
andey
luLure value
1he general form of equaLlon for calculaLlng
Lhe fuLure value of a lump sum afLer o
perlods may Lherefore be wrlLLen as
follows
1he Lerm (1 + l)
n
ls Lhe compound va|ue
factor (I) of a lump sum of 8e 1 and lL
always has a value greaLer Lhan 1 for
poslLlve l lndlcaLlng LhaL I lncreases as l
and o lncrease
n
n
i P F ) 1 ( + =
CVF
n n,i
F PL
2
andey
Lxample
lf you deposlLed 8s 0 ln a bank whlch
was paylng a 1 per cenL raLe of lnLeresL on
a Lenyear Llme deposlL how much would
Lhe deposlL grow aL Lhe end of Len years?
We wlll flrsL flnd ouL Lhe compound value
facLor aL 1 per cenL for 10 years whlch ls
0 MulLlplylng 0 by 8s 0 we
geL 8s 2210 as Lhe compound value
10, 0.12
FV 55,650 CVF 55,650 4.046 Rs 225,159.90 = = L =
2
andey
luLure value of an AnnulLy
Annu|ty ls a flxed paymenL (or recelpL) each
year for a speclfleJ number of years lf you
renL a flaL and promlse Lo make a serles of
paymenLs over an agreed perlod you have
creaLed an annulLy
1he Lerm wlLhln brackeLs ls Lhe compound
va|ue factor for an annu|ty of 8e 1 whlch we
shall refer as I
(1 ) 1
n
n
i
F A
i
+
=

|
CVFA
n n, i
F AL
2
andey
Lxample
Suppose LhaL a flrm deposlLs 8s 000 aL
Lhe end of each year for four years aL per
cenL raLe of lnLeresL Pow much would Lhls
annulLy accumulaLe aL Lhe end of Lhe fourLh
year? We flrsL flnd I whlch ls lf
we mulLlply by 8s 000 we obLaln a
compound value of 8s 21
4 4, 0.06
5,000(CVFA ) 5,000 4.3746 Rs 21,873 F = = L =
2
andey
Slnklng lund
S|nk|ng fund ls a fund whlch ls creaLed ouL of
flxed paymenLs each perlod Lo accumulaLe Lo
a fuLure sum afLer a speclfled perlod lor
example companles generally creaLe slnklng
funds Lo reLlre bonds (debenLures) on
maLurlLy
1he facLor used Lo calculaLe Lhe annulLy for a
glven fuLure sum ls called Lhe slokloq fooJ
foctot (5)
(1 ) 1
n
n
i
A F
i

+
|
2
andey
resenL value
resent va|ue of a fuLure cash flow (lnflow
or ouLflow) ls Lhe amounL of currenL cash
LhaL ls of equlvalenL value Lo Lhe declslon
maker
D|scount|ng ls Lhe process of deLermlnlng
presenL value of a serles of fuLure cash
flows
1he lotetest tote used for dlscounLlng cash
flows ls also called Lhe Jlscooot tote
2
andey
resenL value of a Slngle Cash
llow
1he followlng general formula can be employed Lo
calculaLe Lhe presenL value of a lump sum Lo be recelved
afLer some fuLure perlods
1he Lerm ln parenLheses ls Lhe d|scount factor or present
va|ue factor (9I) and lL ls always less Lhan 10 for
poslLlve l lndlcaLlng LhaL a fuLure amounL has a smaller
presenL value
(1 )
(1 )
n
n
n
n
F
P F i
i
= = +
|
+
,
PVF
n n i
PJ F = L
0
andey
Lxample
Suppose LhaL an lnvesLor wanLs Lo flnd ouL
Lhe presenL value of 8s 0000 Lo be
recelved afLer 1 years Per lnLeresL raLe ls
per cenL llrsL we wlll flnd ouL Lhe
presenL value facLor whlch ls 02
MulLlplylng 02 by 8s 0000 we obLaln
8s 10 as Lhe presenL value
15, 0.09
PV 50,000 PVF 50,000 0.275 Rs 13,750 L L
1
andey
resenL value of an AnnulLy
1he compuLaLlon of Lhe presenL value of an
annulLy can be wrlLLen ln Lhe followlng
general form
1he Lerm wlLhln parenLheses ls Lhe present
va|ue factor of an annu|ty of 8e 1 whlch
we would call 9I and lL ls a sum of
slnglepaymenL presenL value facLors

1 1
1
n
P A
i
i i

=
+

|
PVAF
n, i
P A
2
andey
CaplLal 8ecovery and Loan
AmorLlsaLlon
Cap|ta| recovery ls Lhe annulLy of an
lnvesLmenL made Loday for a speclfled perlod
of Llme aL a glven raLe of lnLeresL CaplLal
recovery facLor helps ln Lhe preparaLlon of a
|oan amort|sat|on (|oan repayment) schedu|e
1he reclprocal of Lhe presenL value annulLy
facLor ls called Lhe copltol tecovety foctot
()
,
1

PVAF
n i
A P

|
CRF
n,i
A P

andey
resenL value of an uneven
erlodlc Sum
lnvesLmenLs made by of a flrm do noL
frequenLly yleld consLanL perlodlc cash
flows (annulLy) ln mosL lnsLances Lhe flrm
recelves a sLream of uneven cash flows
1hus Lhe presenL value facLors for an
annulLy cannoL be used 1he procedure ls
Lo calculaLe Lhe presenL value of each cash
flow and aggregaLe all presenL values

andey
resenL value of erpeLulLy
erpetu|ty ls an annulLy LhaL occurs
loJefloltely erpeLulLles are noL very
common ln flnanclal declslonmaklng
Perpetuity
Present value oI a perpetuity
Interest rate
=

andey
resenL value of Crowlng
AnnulLles
1he presenL value of a consLanLly growlng
annulLy ls glven below
resenL value of a consLanLly growlng
perpeLulLy ls glven by a slmple formula as
follows
1
1
1
n
A g
P
i g i

+
+

+
' '

|

A
P
i g

andey
value of an AnnulLy uue
Annu|ty due ls a serles of flxed recelpLs or
paymenLs stottloq ot tbe beqlooloq of eocb
petloJ for a speclfled number of perlods
Iuture Va|ue of an Annu|ty Due
resent Va|ue of an Annu|ty Due
,
CVFA (1 )
n n i
F A i L +
PVFA (1 )
n, i
P A i

andey
MulLlerlod Compoundlng
lf compoundlng ls done more Lhan once a
year Lhe acLual annuallsed raLe of lnLeresL
would be hlgher Lhan Lhe nomlnal lnLeresL
raLe and lL ls called Lhe effecLlve lnLeresL
raLe
EIR 1 1
n m
i
m
L

+

|

andey
ConLlnuous Compoundlng
1he cont|nuous compound|ng funcLlon Lakes
Lhe form of Lhe followlng formula
resenL value under conLlnuous
compoundlng
i n x
n
F P e P e
L
= L = L

i n
n
n
i n
F
P F e
e
L
= =

andey
neL resenL value
Net present va|ue -9I% of o floooclol
Jeclsloo ls tbe Jlffeteoce betweeo tbe
pteseot voloe of cosb loflows ooJ tbe
pteseot voloe of cosb ootflows
0
1
NPV
(1 )
n
t
t
t
C
C
k
=
0
andey
resenL value and 8aLe of 8eLurn
A bond LhaL pays some speclfled amounL ln
fuLure (wlLhouL perlodlc lnLeresL) ln exchange
for Lhe currenL prlce Loday ls called a zero
|nterest bond or zerocoupon bond ln such
slLuaLlons you would be lnLeresLed Lo know
whaL raLe of lnLeresL Lhe adverLlser ls offerlng
?ou can use Lhe concepL of presenL value Lo
flnd ouL Lhe rate of return or y|e|d of Lhese
offers
1he raLe of reLurn of an lnvesLmenL ls called
|nterna| rate of return slnce lL depends
excluslvely on Lhe cash flows of Lhe
lnvesLmenL
1
llnanclal ManagemenL nlnLh LdlLlon l M andey
lnLernal 8aLe of 8eLurn
1he formula for lnLernal 8aLe of 8eLurn ls
glven below Pere all parameLers are
glven excepL 'r' whlch can be found by
Lrlal and error
0
1
NPV 0
(1 )
n
t
t
t
C
C
r
=
=
ChapLer
Va|uat|on of 8onds and
Shares

andey
ChapLer Cb[ecLlves
Lxplaln Lhe fundamenLal characLerlsLlcs of
ordlnary shares preference shares and
bonds (or debenLures)
Show Lhe use of Lhe presenL value concepLs
ln Lhe valuaLlon of shares and bonds
Learn abouL Lhe llnkage beLween Lhe share
values earnlngs and dlvldends and Lhe
requlred raLe of reLurn on Lhe share
locus on Lhe uses and mlsuses of prlce
earnlngs (9$) raLlo

andey
lnLroducLlon
AsseLs can be real or flnanclal securlLles
llke shares and bonds are called floooclol
ossets whlle physlcal asseLs llke planL and
machlnery are called teol ossets
1he concepLs of reLurn and rlsk as Lhe
deLermlnanLs of value are as fundamenLal
and valld Lo Lhe valuaLlon of securlLles as Lo
LhaL of physlcal asseLs

andey
ConcepL of value
8ook value
8eplacemenL value
LlquldaLlon value
Colng Concern value
MarkeL value

andey
valuaLlon of Crdlnary Shares
1he valuaLlon of ordlnary or equlLy shares ls
relaLlvely more dlfflculL
1he raLe of dlvldend on equlLy shares ls noL known
also Lhe paymenL of equlLy dlvldend ls Jlsctetloooty
1he earnlngs and dlvldends on equlLy shares are
generally expecLed Lo grow unllke Lhe lnLeresL on
bonds and preference dlvldend

andey
ulvldend CaplLallsaLlon
1he value of an ordlnary share ls
deLermlned by caplLallslng Lhe fuLure
dlvldend sLream aL Lhe opporLunlLy cosL of
caplLal
Slngle erlod valuaLlon
lf Lhe share prlce ls expecLed Lo grow aL q per cenL
Lhen 9
We obLaln a slmple formula for Lhe share valuaLlon as

follows
1 1
0
DIV
1
e
P
P
k
+
=
+
1 0
(1 ) P P g = +
1
0
DIV
e
P
k g
=

andey
MulLlperlod valuaLlon
lf Lhe flnal perlod ls o we can wrlLe Lhe
general formula for share value as follows
CrowLh ln ulvldends
normal CrowLh
Supernormal CrowLh
0
1
DIV
(1 ) (1 )
n
t n
t n
t
e e
P
P
k k
=
= +
+ +
rowth Retention ratio Return on equity

ROE g b
L
= L
1
0
DIV
e
P
k g
=
$hare value PV oI dividends during Iinite super-normal growth period

PV oI dividends during indeIinite normal growth period
=
+

andey
Larnlngs CaplLallsaLlon
under Lwo cases Lhe value of Lhe share can
be deLermlned by caplLallslng Lhe expecLed
earnlngs
When Lhe flrm pays ouL 100 per cenL dlvldends LhaL ls
lL does noL reLaln any earnlngs
When Lhe flrm's reLurn on equlLy (8CL) ls equal Lo lLs
opporLunlLy cosL of caplLal
0
LqulLy CaplLallsaLlon 8aLe
lor flrms for whlch dlvldends are expecLed
Lo grow aL a consLanL raLe lndeflnlLely and
Lhe currenL markeL prlce ls glven
1
0
DIV
e
k g
P
= +
1
andey
CauLlon ln uslng ConsLanL
CrowLh lormula
LsLlmaLlon errors
unsusLalnable hlgh currenL growLh
Lrrors ln forecasLlng dlvldends
2
valulng CrowLh CpporLunlLles
1he value of a growLh opporLunlLy ls
glven as follows
1
1
NPV
EP$ (ROE )

( )
g
e
e
e e
J
k g
b k
k k g
=
L
=

andey
rlceLarnlngs (/L) 8aLlo Pow
SlgnlflcanL?
]L rat|o ls calculaLed as Lhe prlce of a share
dlvlded by earnlng per share
Some people use /L mulLlpller Lo value Lhe
shares of companles
AlLernaLlvely you could flnd Lhe share value
by dlvldlng LS by L/ raLlo whlch ls Lhe
reclprocal of /L raLlo

SlgnlflcanL?
1he share prlce ls also glven by Lhe
followlng formula
1he earnlngs prlce raLlo can be derlved as
follows
1
0
EP$
g
e
P J
k
= +
1
EP$
1
g
e
o o
J
k
P P

=

|

andey
SlgnlflcanL?
CauLlons
L/ raLlo wlll be equal Lo Lhe caplLallsaLlon raLe only lf
Lhe value of growLh opporLunlLles ls zero
A hlgh /L raLlo ls consldered good buL lL could be
hlgh noL because Lhe share prlce ls hlgh buL because
Lhe earnlngs per share are qulLe low
1he lnLerpreLaLlon of /L raLlo becomes meanlngless
because of Lhe measuremenL problems of LS
ChapLer
8eta Lst|mat|on and 1he Cost
of Lqu|ty

andey
ChapLer Cb[ecLlves
ulscuss Lhe meLhods of esLlmaLlng beLa
Lxplaln Lhe markeL model for calculaLlng
beLa
Lxamlne Lhe dlfference beLween beLas of
lndlvldual flrms and Lhe lndusLry beLa
PlghllghL Lhe beLa lnsLablllLy
Lxplaln Lhe deLermlnanLs of beLa
Show Lhe use of beLa ln deLermlnlng Lhe
cosL of equlLy

andey
8eLa LsLlmaLlon
ulrecL MeLhod1he raLlo of covarlance
beLween markeL reLurn and Lhe securlLy's
reLurn Lo Lhe markeL reLurn varlance
2
Covar

o
o o Cor o
Cor
o o o
f, m
f
m
f m f, m f
f, m
m m m
.
L
L

8eLa LsLlmaLlon
1he MarkeL Modelln Lhe markeL model we
regress reLurns on a securlLy agalnsL reLurns
of Lhe markeL lndex
f f f m
R R e - . = + +
0
andey
8eLa LsLlmaLlon ln racLlce
ln pracLlce Lhe markeL porLfollo ls
approxlmaLed by a welldlverslfled share prlce
lndex We have several prlce lndlces avallable
ln lndla
1here ls no LheoreLlcally deLermlned Llme
perlod and Llme lnLervals for calculaLlng beLa
1he Llme perlod and Lhe Llme lnLerval may
vary
1he reLurns may be measured on a dally
weekly or monLhly basls Cne should have
sufflclenL number of observaLlons over a
reasonable lengLh of Llme
1
andey
8eLa LsLlmaLlon ln racLlce
1he reLurn on a share and markeL lndex
may be calculaLed as tota| return LhaL ls
dlvldend yleld plus caplLal galn
Cne may calculaLe Lhe compounded raLe of
reLurn as shown below
r
[
log
L

L
1 log
L
/
L
1
2
andey
Summarles of 8egresslon arameLers
for PLL vs MarkeL 8eLurns
Alpha (intercept) 0.0061

$tandard error oI alpha 0.0038

Beta 0.7479

$tandard error oI beta 0.1107

Correlation 0.6635

CoeIIicient oI determination 0.4402

F-statistic 45.6143

$igniIicance 0.0000

Market HLL
Average return
0.00046 0.00647
Variance oI returns
0.00115 0.00149
Variance 0.00086


andey
uoes 8eLa 8emaln SLable Cver 1lme?
8eLas may noL remaln sLable for a company
over Llme even lf a company sLays ln Lhe
same lndusLry 1here could be several
reasons for Lhls Cver Llme a company may
wlLness changes ln lLs producL mlx
Lechnology compeLlLlon or markeL share

andey
ueLermlnanLs of 8eLa
Nature of 8us|ness
Cperat|ng Leverage
I|nanc|a| Leverage

andey
naLure of 8uslness
lf we regress a company's earnlngs wlLh Lhe aggregaLe
earnlngs of all companles ln Lhe economy we would
obLaln a senslLlvlLy lndex whlch we can call Lhe company's
account|ng beta
1he real or Lhe markeL beLa ls based on share markeL
reLurns raLher Lhan earnlngs
1he accounLlng beLas are slgnlflcanLly correlaLed wlLh Lhe
markeL beLas 1hls lmplles LhaL lf a flrm's earnlngs are
more senslLlve Lo bus|ness cond|t|ons lL ls llkely Lo have
hlgher beLa
We musL dlsLlngulsh beLween Lhe earn|ngs var|ab|||ty and
Lhe earn|ngs cyc||ca||ty

andey
CperaLlng Leverage and
llnanclal Leverage
1he degree of operat|ng |everage ls deflned
as Lhe change ln a company's earnlngs
before lnLeresL and Lax due Lo change ln
sales CperaLlng leverage lnLenslfles Lhe
effecL of cycllcallLy on a company's
earnlngs
I|nanc|a| |everage refers Lo debL ln a flrm's
caplLal sLrucLure Slnce flnanclal leverage
lncreases Lhe flrm's (flnanclal) rlsk lL wlll
lncrease Lhe equlLy beLa of Lhe flrm

andey
AsseL 8eLa and LqulLy 8eLa
lor an unlevered (allequlLy) flrm Lhe asseL
beLa and Lhe equlLy beLa would be Lhe same
lor a levered flrm Lhe proporLlon of equlLy
wlll be less Lhan 1 1herefore Lhe beLa of
asseL wlll be less Lhan Lhe beLa of equlLy 1he
beLa of equlLy for a levered flrm ls glven as
follows
Debt
1
Equity
E A
. .

= +

|

andey
CAM and Lhe CpporLunlLy
CosL of LqulLy
lrom Lhe flrm's polnL of vlew Lhe expecLed
raLe of reLurn from a securlLy of equlvalenL
rlsk ls Lhe cosL of equlLy
1he expecLed raLe of reLurn or Lhe cosL of
equlLy ln CAM ls glven by Lhe followlng
equaLlon
( )
f e f m f f
R k R R R . = = +

andey
lndusLry vs Company 8eLa
1he use of Lhe lndusLry beLa ls preferable
for Lhose companles whose operaLlons
maLch up wlLh Lhe lndusLry operaLlons 1he
lndusLry beLa ls less affecLed by random
varlaLlons
1hose companles LhaL have operaLlons
qulLe dlfferenL from a large number of
companles ln Lhe lndusLry may sLlck Lo Lhe
use of Lhelr own beLas raLher Lhan Lhe
lndusLry beLa
8eLa esLlmaLlon and selecLlon ls an arL as
well whlch one learns wlLh experlence
ChapLer
Cap|ta| 8udget|ng Dec|s|ons
1
andey
ChapLer Cb[ecLlves
undersLand Lhe naLure and lmporLance of lnvesLmenL declslons
ulsLlngulsh beLween dlscounLed cash flow (uCl) and nondlscounLed
cash flow (nonuCl) Lechnlques of lnvesLmenL evaluaLlon
Lxplaln Lhe meLhods of calculaLlng neL presenL value (nv) and lnLernal
raLe of reLurn (l88)
Show Lhe lmpllcaLlons of neL presenL value (nv) and lnLernal raLe of
reLurn (l88)
uescrlbe Lhe nonuCl evaluaLlon crlLerla payback and accounLlng raLe of
reLurn and dlscuss Lhe reasons for Lhelr popularlLy ln pracLlce and Lhelr
plLfalls
lllusLraLe Lhe compuLaLlon of Lhe dlscounLed payback
uescrlbe Lhe merlLs and demerlLs of Lhe uCl and nonuCl lnvesLmenL
crlLerla
Compare and conLracL nv and l88 and emphaslse Lhe superlorlLy of
nv rule
2
andey
naLure of lnvesLmenL ueclslons
1he |nvestment dec|s|ons of a flrm are generally known as
Lhe cap|ta| budget|ng or cap|ta| expend|ture dec|s|ons
1he flrm's lnvesLmenL declslons would generally lnclude
expans|on acqu|s|t|on modern|sat|on and rep|acement
of Lhe longLerm asseLs Sale of a dlvlslon or buslness
(d|vestment) ls also as an lnvesLmenL declslon
ueclslons llke Lhe change ln Lhe methods of sa|es
d|str|but|on or an advert|sement campa|gn or a research
and deve|opment programme have longLerm
lmpllcaLlons for Lhe flrm's expendlLures and beneflLs and
Lherefore Lhey should also be evaluaLed as lnvesLmenL
declslons

andey
leaLures of lnvesLmenL ueclslons
1he exchange of currenL funds for fuLure
beneflLs
1he funds are lnvesLed ln longLerm asseLs
1he fuLure beneflLs wlll occur Lo Lhe flrm
over a serles of years

andey
lmporLance of lnvesLmenL
ueclslons
CrowLh
8lsk
lundlng
lrreverslblllLy
ComplexlLy

andey
1ypes of lnvesLmenL ueclslons
Cne classlflcaLlon ls as follows
Lxpanslon of exlsLlng buslness
Lxpanslon of new buslness
8eplacemenL and modernlsaLlon
?eL anoLher useful way Lo classlfy
lnvesLmenLs ls as follows
MuLually excluslve lnvesLmenLs
lndependenL lnvesLmenLs
ConLlngenL lnvesLmenLs

andey
lnvesLmenL LvaluaLlon CrlLerla
1hree sLeps are lnvolved ln Lhe evaluaLlon
of an lnvesLmenL
LsLlmaLlon of cash flows
LsLlmaLlon of Lhe requlred raLe of reLurn (Lhe
opporLunlLy cosL of caplLal)
AppllcaLlon of a declslon rule for maklng Lhe cholce

andey
lnvesLmenL ueclslon 8ule
lL should maxlmlse Lhe shareholders' wealLh
lL should conslder all cash flows Lo deLermlne Lhe Lrue proflLablllLy of Lhe
pro[ecL
lL should provlde for an ob[ecLlve and unamblguous way of separaLlng
good pro[ecLs from bad pro[ecLs
lL should help ranklng of pro[ecLs accordlng Lo Lhelr Lrue proflLablllLy
lL should recognlse Lhe facL LhaL blgger cash flows are preferable Lo
smaller ones and early cash flows are preferable Lo laLer ones
lL should help Lo choose among muLually excluslve pro[ecLs LhaL pro[ecL
whlch maxlmlses Lhe shareholders' wealLh
lL should be a crlLerlon whlch ls appllcable Lo any concelvable lnvesLmenL
pro[ecL lndependenL of oLhers

andey
LvaluaLlon CrlLerla
1 uiscounted cosh l/ow {ucl) criterio
neL resenL value (nv)
lnLernal 8aLe of 8eLurn (l88)
roflLablllLy lndex (l)
2 -ondiscounted cosh l/ow criterio
ayback erlod (8)
ulscounLed ayback erlod (u8)
AccounLlng 8aLe of 8eLurn (A88)

andey
neL resenL value MeLhod
Cash flows of Lhe lnvesLmenL pro[ecL should
be forecasLed based on reallsLlc assumpLlons
ApproprlaLe dlscounL raLe should be
ldenLlfled Lo dlscounL Lhe forecasLed cash
flows 1he approprlaLe dlscounL raLe ls Lhe
pro[ecL's opporLunlLy cosL of caplLal
resenL value of cash flows should be
calculaLed uslng Lhe opporLunlLy cosL of
caplLal as Lhe dlscounL raLe
1he pro[ecL should be accepLed lf nv ls
poslLlve (le nv 0)
0
andey
neL resenL value MeLhod
neL presenL value should be found ouL by
subLracLlng presenL value of cash ouLflows
from presenL value of cash lnflows 1he
formula for Lhe neL presenL value can be
wrlLLen as follows
3 1 2
0
2 3
0
1
NPV
(1 ) (1 ) (1 ) (1 )
NPV
(1 )
n
n
n
t
t
t
C C C C
C
k k k k
C
C
k
=

= + + + +

+ + + +
|
=
+
1
andey
CalculaLlng neL resenL value
Assume LhaL ro[ecL O cosLs 8s 200 now
and ls expecLed Lo generaLe yearend cash
lnflows of 8s 00 8s 00 8s 00 8s 00
and 8s 00 ln years 1 Lhrough 1he
opporLunlLy cosL of Lhe caplLal may be
assumed Lo be 10 per cenL
2 3 4 5
1, 0.10 2, 0.10 3, 0.10
4, 0.10 5, 0.
Rs 900 Rs 800 Rs 700 Rs 600 Rs 500
NPV Rs 2,500
(10.10) (10.10) (10.10) (10.10) (10.10)
NPV |Rs 900(PVF ) Rs 800(PVF ) Rs 700(PVF )
Rs 600(PVF ) Rs 500(PVF

= + + + +

|
=
10
)| Rs 2,500
NPV |Rs 900 0.909 Rs 800 0.826 Rs 700 0.751 Rs 600 0.683
Rs 500 0.620| Rs 2,500
NPV Rs 2,725 Rs 2,500 Rs 225
= L L L L
L
=
2
andey
AccepLance 8ule
AccepL Lhe pro[ecL when nv ls poslLlve
nv 0
8e[ecL Lhe pro[ecL when nv ls negaLlve
nv 0
May accepL Lhe pro[ecL when nv ls zero
nv 0
1he nv meLhod can be used Lo selecL
beLween muLually excluslve pro[ecLs Lhe
one wlLh Lhe hlgher nv should be
selecLed

andey
LvaluaLlon of Lhe nv MeLhod
nv ls mosL accepLable lnvesLmenL rule for
Lhe followlng reasons
1lme value
Measure of Lrue proflLablllLy
valueaddlLlvlLy
Shareholder value
LlmlLaLlons
lnvolved cash flow esLlmaLlon
ulscounL raLe dlfflculL Lo deLermlne
MuLually excluslve pro[ecLs
8anklng of pro[ecLs

andey
lnLernal 8aLe of 8eLurn MeLhod
1he lnLernal raLe of reLurn (l88) ls Lhe raLe
LhaL equaLes Lhe lnvesLmenL ouLlay wlLh Lhe
presenL value of cash lnflow recelved afLer
one perlod 1hls also lmplles LhaL Lhe raLe of
reLurn ls Lhe dlscounL raLe whlch makes nv
0
3 1 2
0
2 3
0
1
0
1
(1 ) (1 ) (1 ) (1 )
(1 )
0
(1 )
n
n
n
t
t
t
n
t
t
t
C C C C
C
r r r r
C
C
r
C
C
r
=
=
= + + + +
+ + + +
=
+
=
+

andey
CalculaLlon of l88
Dneven Cash I|ows CalculaLlng l88 by 1rlal
and Lrror
1he approach ls Lo selecL any dlscounL raLe Lo compuLe
Lhe presenL value of cash lnflows lf Lhe calculaLed
presenL value of Lhe expecLed cash lnflow ls lower Lhan
Lhe presenL value of cash ouLflows a lower raLe should
be Lrled Cn Lhe oLher hand a hlgher value should be
Lrled lf Lhe presenL value of lnflows ls hlgher Lhan Lhe
presenL value of ouLflows 1hls process wlll be repeaLed
unless Lhe neL presenL value becomes zero

CalculaLlon of l88
Leve| Cash I|ows
LeL us assume LhaL an lnvesLmenL would cosL 8s
20000 and provlde annual cash lnflow of 8s
0 for years
1he l88 of Lhe lnvesLmenL can be found ouL as
follows
6,
6,
6,
NPV Rs 20,000 Rs 5,430(PVAF ) 0
Rs 20,000 Rs 5,430(PVAF )
Rs 20,000
PVAF 3.683
Rs 5,430
r
r
r
=
=
= =

andey
nv roflle and l88
A B C D E F H
1 N P V P r o f i l e

2 C a s h F l o w
D i s c o u n t
r a t e A P J
3 - 2 0 0 0 0 0 1 2 , 5 8 0
4 5 4 3 0 5 7 , 5 6 1
5 5 4 3 0 1 0 3 , 6 4 9
6 5 4 3 0 1 5 5 5 0
7 5 4 3 0 1 6 0
8 5 4 3 0 2 0 ( 1 , 9 4 2 )
9 5 4 3 0 2 5 ( 3 , 9 7 4 )
i g u r e 8 . 1 N P V P r o I i l e

R
R

andey
AccepLance 8ule
AccepL Lhe pro[ecL when t k
8e[ecL Lhe pro[ecL when t k
May accepL Lhe pro[ecL when t k
ln case of lndependenL pro[ecLs l88 and
nv rules wlll glve Lhe same resulLs lf Lhe
flrm has no shorLage of funds

andey
LvaluaLlon of l88 MeLhod
l88 meLhod has followlng merlLs
1lme value
roflLablllLy measure
AccepLance rule
Shareholder value
l88 meLhod may suffer from
MulLlple raLes
MuLually excluslve pro[ecLs
value addlLlvlLy
0
andey
roflLablllLy lndex
roflLablllLy lndex ls Lhe raLlo of Lhe presenL
value of cash lnflows aL Lhe requlred raLe
of reLurn Lo Lhe lnlLlal cash ouLflow of Lhe
lnvesLmenL
1
roflLablllLy lndex
1he lnlLlal cash ouLlay of a pro[ecL ls 8s
100000 and lL can generaLe cash lnflow of 8s
0000 8s 0000 8s 0000 and 8s 20000
ln year 1 Lhrough Assume a 10 per cenL raLe
of dlscounL 1he v of cash lnflows aL 10 per
cenL dlscounL raLe ls
. 1235 . 1
1,00,000 Rs
1,12,350 Rs
PI
12,350 Rs 100,000 Rs 112,350 Rs NPV
0.68 20,000 Rs 0.751 50,000 Rs 0.826 30,000 Rs 0.909 40,000 Rs
) 20,000(PVF Rs ) 50,000(PVF Rs ) 30,000(PVF Rs ) 40,000(PVF Rs PV
0.10 4, 0.10 3, 0.10 2, 0.10 1,
= =
=
L L L L
=
2
andey
AccepLance 8ule
1he followlng are Lhe
l
accepLance rules
AccepL Lhe pro[ecL when l ls greaLer Lhan one l 1
8e[ecL Lhe pro[ecL when l ls less Lhan one l 1
May accepL Lhe pro[ecL when l ls equal Lo one l 1
1he pro[ecL wlLh poslLlve nv wlll have l
greaLer Lhan one l less Lhan means LhaL
Lhe pro[ecL's nv ls negaLlve

andey
LvaluaLlon of l MeLhod
lL recognlses Lhe Llme value of money
lL ls conslsLenL wlLh Lhe shareholder value maxlmlsaLlon
prlnclple A pro[ecL wlLh l greaLer Lhan one wlll have
poslLlve nv and lf accepLed lL wlll lncrease shareholders'
wealLh
ln Lhe l meLhod slnce Lhe presenL value of cash lnflows ls
dlvlded by Lhe lnlLlal cash ouLflow lL ls a relaLlve measure
of a pro[ecL's proflLablllLy
Llke nv meLhod l crlLerlon also requlres calculaLlon of
cash flows and esLlmaLe of Lhe dlscounL raLe ln pracLlce
esLlmaLlon of cash flows and dlscounL raLe pose problems

andey
ayback
ayback ls Lhe number of years requlred Lo recover Lhe
orlglnal cash ouLlay lnvesLed ln a pro[ecL
lf Lhe pro[ecL generaLes consLanL annual cash lnflows Lhe
payback perlod can be compuLed by dlvldlng cash ouLlay by
Lhe annual cash lnflow 1haL ls
Assume LhaL a pro[ecL requlres an ouLlay of 8s 0000 and
ylelds annual cash lnflow of 8s 1200 for years 1he
payback perlod for Lhe pro[ecL ls
0
Initial Investment
Payback
Annual Cash InIlow
C
C
Rs 50,000
PB 4 years
Rs 12,000

andey
ayback
Dnequa| cash f|ows ln case of unequal cash
lnflows Lhe payback perlod can be found ouL
by addlng up Lhe cash lnflows unLll Lhe LoLal ls
equal Lo Lhe lnlLlal cash ouLlay
Suppose LhaL a pro[ecL requlres a cash ouLlay
of 8s 20000 and generaLes cash lnflows of
8s 000 8s 000 8s 000 and 8s 000
durlng Lhe nexL years WhaL ls Lhe pro[ecL's
payback?
years + 12 (1000/000) monLhs
years + monLhs

andey
AccepLance 8ule
1he pro[ecL would be accepLed lf lLs
payback perlod ls less Lhan Lhe maxlmum
or standard payback perlod seL by
managemenL
As a ranklng meLhod lL glves hlghesL
ranklng Lo Lhe pro[ecL whlch has Lhe
shorLesL payback perlod and lowesL ranklng
Lo Lhe pro[ecL wlLh hlghesL payback perlod

andey
LvaluaLlon of ayback
CerLaln vlrLues
SlmpllclLy
CosL effecLlve
ShorLLerm effecLs
8lsk shleld
LlquldlLy
Serlous llmlLaLlons
Cash flows afLer payback
Cash flows lgnored
Cash flow paLLerns
AdmlnlsLraLlve dlfflculLles
lnconslsLenL wlLh shareholder value

andey
ayback 8eclprocal and Lhe 8aLe
of 8eLurn
1he reclprocal of payback wlll be a close
approxlmaLlon of Lhe lnLernal raLe of reLurn
lf Lhe followlng Lwo condlLlons are saLlsfled
1he llfe of Lhe pro[ecL ls large or aL leasL Lwlce Lhe
payback perlod
1he pro[ecL generaLes equal annual cash lnflows

ulscounLed ayback erlod
1he d|scounted payback per|od ls Lhe number of perlods
Laken ln recoverlng Lhe lnvesLmenL ouLlay on Lhe presenL
value basls
1he dlscounLed payback perlod sLlll falls Lo conslder Lhe cash
flows occurrlng afLer Lhe payback perlod
3 0| 860UNTE0 PAYA6K | LLU8TRATE0

Cash Flows
(Rs)
C C1 C2 C3 C4
Simple
PB
Discounted
PB
APJ at
1"
P -4,000 3,000 1,000 1,000 1,000 2 yrs
PV oI cash Ilows -4,000 2,727 826 751 683 2.6 yrs 987
Q -4,000 0 4,000 1,000 2,000 2 yrs
PV oI cash Ilows -4,000 0 3,304 751 1,366 2.9 yrs 1,421

100
andey
AccounLlng 8aLe of 8eLurn
MeLhod
1he accounLlng raLe of reLurn ls Lhe raLlo of
Lhe average afLerLax proflL dlvlded by Lhe
average lnvesLmenL 1he average lnvesLmenL
would be equal Lo half of Lhe orlglnal
lnvesLmenL lf lL were depreclaLed consLanLly
A varlaLlon of Lhe A88 meLhod ls Lo dlvlde
average earnlngs afLer Laxes by Lhe orlglnal
cosL of Lhe pro[ecL lnsLead of Lhe average cosL
Average income
ARR
Average investment
101
andey
AccepLance 8ule
1hls meLhod wlll accepL all Lhose pro[ecLs
whose A88 ls hlgher Lhan Lhe mlnlmum
raLe esLabllshed by Lhe managemenL and
re[ecL Lhose pro[ecLs whlch have A88 less
Lhan Lhe mlnlmum raLe
1hls meLhod would rank a pro[ecL as
number one lf lL has hlghesL A88 and
lowesL rank would be asslgned Lo Lhe
pro[ecL wlLh lowesL A88
102
andey
LvaluaLlon of A88 MeLhod
1he A88 meLhod may clalm some merlLs
SlmpllclLy
AccounLlng daLa
AccounLlng proflLablllLy
Serlous shorLcomlng
Cash flows lgnored
1lme value lgnored
ArblLrary cuLoff
10
andey
ConvenLlonal and non
convenLlonal Cash llows
A convenLlonal lnvesLmenL has cash flows Lhe
paLLern of an lnlLlal cash ouLlay followed by
cash lnflows ConvenLlonal pro[ecLs have only
one change ln Lhe slgn of cash flows for
example Lhe lnlLlal ouLflow followed by
lnflows le + + +
A nonconvenLlonal lnvesLmenL on Lhe oLher
hand has cash ouLflows mlngled wlLh cash
lnflows LhroughouL Lhe llfe of Lhe pro[ecL
nonconvenLlonal lnvesLmenLs have more
Lhan one change ln Lhe slgns of cash flows for
example + + + ++ +
10
andey
nv versus l88
ConvenLlonal lndependenL ro[ecLs
ln case of convenLlonal lnvesLmenLs whlch are
economlcally loJepeoJeot of each oLher nv and
l88 meLhods resulL ln same accepLorre[ecL declslon
lf Lhe flrm ls noL consLralned for funds ln accepLlng
oll proflLable pro[ecLs
10
andey
nv versus l88
Cash Flows (Rs)
Project C C1 IRR APJ at 1"
X -100 120 20 9
Y 100 -120 20 -9

Lending and borrowing-type projects:
Project with initial outflow followed by inflows is
a lending type project, and project with initial
inflow followed by outflows is a lending type
project, Both are conventional projects.
10
roblem of MulLlple l88s
A pro[ecL may have
boLh lendlng and
borrowlng feaLures
LogeLher l88
meLhod when used
Lo evaluaLe such non
convenLlonal
lnvesLmenL can yleld
mulLlple lnLernal
raLes of reLurn
because of more
Lhan one change of
slgns ln cash flows
NPV Rs 63
-750
-500
-250
0
250
0 50 100 150 200 250
Discount Rate (%)
NPV (Rs)
10
andey
Case of 8anklng MuLually Lxcluslve
ro[ecLs
lnvesLmenL pro[ecLs are sald Lo be muLually excluslve when
only one lnvesLmenL could be accepLed and oLhers would
have Lo be excluded
1wo lndependenL pro[ecLs may also be muLually excluslve lf
a flnanclal consLralnL ls lmposed
1he nv and l88 rules glve confllcLlng ranklng Lo Lhe
pro[ecLs under Lhe followlng condlLlons
1he cash flow paLLern of Lhe pro[ecLs may dlffer 1haL ls Lhe cash
flows of one pro[ecL may lncrease over Llme whlle Lhose of oLhers
may decrease or vlcevetso
1he cash ouLlays of Lhe pro[ecLs may dlffer
1he pro[ecLs may have dlfferenL expecLed llves
10
andey
1lmlng of Cash llows
Cash Flows (Rs) APJ
Project C C1 C2 C3 at 9" IRR
M 1,680 1,400 700 140 301 23
N 1,680 140 840 1,510 321 17

10
andey
Scale of lnvesLmenL

Cash Flow (Rs) APJ

Project C C1 at 1" IRR
A -1,000 1,500 364 50
B -100,000 120,000 9,080 20

110
andey
ro[ecL Llfe Span
Cash Flows Rs
Project C
C
1
C
2
C
3
C
4
C
5
APJ at 1" IRR
X 10,000 12,000 908 20
Y 10,000 0 0 0 0 20,120 2,495 15
111
andey
8elnvesLmenL AssumpLlon
1he l88 meLhod ls assumed Lo lmply LhaL Lhe
cash flows generaLed by Lhe pro[ecL can be
relnvesLed aL lLs lnLernal raLe of reLurn
whereas Lhe nv meLhod ls LhoughL Lo
assume LhaL Lhe cash flows are relnvesLed aL
Lhe opporLunlLy cosL of caplLal
112
andey
Modlfled lnLernal 8aLe of 8eLurn
(Ml88)
1he mod|f|ed |nterna| rate of return (Ml88)
ls Lhe compound average annual raLe LhaL ls
calculaLed wlLh a relnvesLmenL raLe
dlfferenL Lhan Lhe pro[ecL's l88 1he
mod|f|ed |nterna| rate of return (Ml88) ls
Lhe compound average annual raLe LhaL ls
calculaLed wlLh a relnvesLmenL raLe
dlfferenL Lhan Lhe pro[ecL's l88
11
andey
varylng CpporLunlLy CosL of
CaplLal
1here ls no problem ln uslng nv meLhod
when Lhe opporLunlLy cosL of caplLal varles
over Llme
lf Lhe opporLunlLy cosL of caplLal varles over
Llme Lhe use of Lhe l88 rule creaLes
problems as Lhere ls noL a unlque
benchmark opporLunlLy cosL of caplLal Lo
compare wlLh l88
11
nv versus l
A confllcL may arlse beLween Lhe Lwo
meLhods lf a cholce beLween muLually
excluslve pro[ecLs has Lo be made lollow
nv meLhod
Project C Project D
PV oI cash inIlows 100,000 50,000
Initial cash outIlow 50,000 20,000
NPV
50,000 30,000
PI 2.00 2.50

ChapLer
1he Cost of Cap|ta|
11
andey
ChapLer Cb[ecLlves
Lxplaln Lhe general concepL of opporLunlLy cosL of caplLal
ulsLlngulsh beLween Lhe pro[ecL cosL of caplLal and Lhe
flrm's cosL of caplLal
Learn abouL Lhe meLhods of calculaLlng componenL cosL of
caplLal and Lhe welghLed average cosL of caplLal
undersLand Lhe concepL and calculaLlon of Lhe marglnal
cosL of caplLal
8ecognlse Lhe need for calculaLlng cosL of caplLal for
dlvlslons
undersLand Lhe meLhodology of deLermlnlng Lhe dlvlslonal
beLa and dlvlslonal cosL of caplLal
lllusLraLe Lhe cosL of caplLal calculaLlon for a real company
11
andey
lnLroducLlon
1he pro[ect's cost of cap|ta| ls Lhe
mlnlmum requlred raLe of reLurn on funds
commlLLed Lo Lhe pro[ecL whlch depends
on Lhe rlsklness of lLs cash flows
1he f|rm's cost of cap|ta| wlll be Lhe overall
or average requlred raLe of reLurn on Lhe
aggregaLe of lnvesLmenL pro[ecLs
11
andey
Slgnlflcance of Lhe CosL of CaplLal
LvaluaLlng lnvesLmenL declslons
ueslgnlng a flrm's debL pollcy and
Appralslng Lhe flnanclal performance of Lop
managemenL
11
andey
1he ConcepL of Lhe CpporLunlLy
CosL of CaplLal
1he opporLunlLy cosL ls Lhe raLe of reLurn
foregone on Lhe nexL besL alLernaLlve
lnvesLmenL opporLunlLy of compotoble tlsk
.Equity shares
Risk
.Preference shares
.orporate bonds
.Government bonds
.Risk-free security
120
andey
Ceneral lormula for Lhe CpporLunlLy
CosL of CaplLal
CpporLunlLy cosL of caplLal ls glven by Lhe followlng
formula
where
o
ls Lhe caplLal supplled by lnvesLors ln perlod 0 (lL
represenLs a neL cash lnflow Lo Lhe flrm)
t
are reLurns
expecLed by lnvesLors (Lhey represenL cash ouLflows Lo Lhe
flrm) and k ls Lhe requlred raLe of reLurn or Lhe cosL of
caplLal
1he opporLunlLy cosL of reLalned earnlngs ls Lhe raLe of
reLurn whlch Lhe ordlnary shareholders would have
earned on Lhese funds lf Lhey had been dlsLrlbuLed as
dlvldends Lo Lhem
1 2
0
2
(1 ) (1 ) (1 )
n
n
C C C
I
k k k
= + + +
+ + +
121
andey
WelghLed Average CosL of CaplLal vs
Speclflc CosLs of CaplLal
1he cosL of caplLal of each source of caplLal ls known as
component or spec|f|c cost of cap|ta|
1he overall cosL ls also called Lhe we|ghted average cost of
cap|ta| (WACC)
8elevanL cosL ln Lhe lnvesLmenL declslons ls Lhe future cost
or Lhe marg|na| cost
Marglnal cosL ls Lhe new or Lhe lncremenLal cosL LhaL Lhe
flrm lncurs lf lL were Lo ralse caplLal now or ln Lhe near
fuLure
1he h|stor|ca| cost LhaL was lncurred ln Lhe pasL ln ralslng
caplLal ls noL relevanL ln flnanclal declslonmaklng
122
andey
CosL of uebL
Debt Issued at ar
Debt Issued at D|scount or rem|um
1ax ad[ustment
0
INT
d
k i
B
= =
0
1
INT
(1 ) (1 )
n
t n
t n
t
d d
B
B
k k
=
= +
+ +
AIter-tax cost oI debt (1 )
d
k T =
12
andey
CosL of reference CaplLal
Irredeemab|e reference Share
kedeemab|e reference Share
0
PDIV
p
k
P
=
0
1
PDIV

(1 ) (1 )
n
t n
t n
t
p p
P
P
k k
=
+ +
12
andey
CosL of LqulLy CaplLal
Is Lqu|ty Cap|ta| Iree of Cost? No |t has an
opportun|ty cost
Cost of Interna| Lqu|ty 1he D|v|dend
Growth Mode|
-ormo/ qrowth
5upernormo/ qrowth
2eroqrowth
1
0
DIV
( )
e
P
k g
=
1
0
0
1
DIV
DIV (1 ) 1
(1 ) (1 )
n
s
t
e e
t
n
t n
n e
g
P
k k g k
+
+
= + L
+ +
1 1
0 0
DIV EP$
(since 0)
e
k g
P P
= = =
12
andey
CosL of LqulLy CaplLal
Cost of Lxterna| Lqu|ty 1he D|v|dend
Growth Mode|
Larn|ngsr|ce kat|o and the Cost of Lqu|ty
1
0
DIV
e
k g
P
= +
1
0
1
0
EP$ (1 )
( )
EP$
( 0)
e
b
k br g br
P
b
P
= + =
= =
12
andey
1he CaplLal AsseL rlclng Model
(CAM)
As per Lhe CAM Lhe requlred raLe of
reLurn on equlLy ls glven by Lhe followlng
relaLlonshlp
LquaLlon requlres Lhe followlng Lhree
parameLers Lo esLlmaLe a flrm's cosL of
equlLy
1he rlskfree raLe (
f
)
1he markeL rlsk premlum (
m

f
)
1he beLa of Lhe flrm's share (.)
( )
e f m f f
k R R R . = +
12
andey
CosL of LqulLy CAM vs
ulvldendCrowLh Model
1he dlvldendgrowLh approach has llmlLed
appllcaLlon ln pracLlce
lL assumes LhaL Lhe dlvldend per share wlll grow aL a
consLanL raLe q forever
1he expecLed dlvldend growLh raLe q should be less
Lhan Lhe cosL of equlLy k
e
Lo arrlve aL Lhe slmple
growLh formula
1he dlvldendgrowLh approach also falls Lo deal wlLh
rlsk dlrecLly
12
andey
CosL of LqulLy CAM vs
ulvldendCrowLh Model
CAM has a wlder appllcaLlon alLhough lL ls
based on resLrlcLlve assumpLlons
1he only condlLlon for lLs use ls LhaL Lhe company's
share ls quoLed on Lhe sLock exchange
All varlables ln Lhe CAM are markeL deLermlned and
excepL Lhe company speclflc share prlce daLa Lhey are
common Lo all companles
1he value of beLa ls deLermlned ln an ob[ecLlve manner
by uslng sound sLaLlsLlcal meLhods Cne pracLlcal
problem wlLh Lhe use of beLa however ls LhaL lL does
noL probably remaln sLable over Llme
12
andey
1he WelghLed Average CosL of CaplLal
1he followlng sLeps are lnvolved for calculaLlng
Lhe flrm's WACC
CalculaLe Lhe cosL of speclflc sources of funds
MulLlply Lhe cosL of each source by lLs proporLlon ln Lhe
caplLal sLrucLure
Add Lhe welghLed componenL cosLs Lo geL Lhe WACC
WACC ls ln facL Lhe welghLed marglnal cosL of
caplLal (WMCC) LhaL ls Lhe welqbteJ ovetoqe
cost of oew copltol qlveo tbe fltms totqet
copltol sttoctote
(1 )
(1 )
o d d d e
o d e
k k T w k w
D E
k k T k
D E D E
= +
= +
+ +
10
andey
8ook value versus MarkeL value
WelghLs
Managers prefer Lhe book value welghLs for
calculaLlng WACC
llrms ln pracLlce seL Lhelr LargeL caplLal sLrucLure ln Lerms
of book values
1he book value lnformaLlon can be easlly derlved from
Lhe publlshed sources
1he book value debLequlLy raLlos are analysed by
lnvesLors Lo evaluaLe Lhe rlsk of Lhe flrms ln pracLlce
11
andey
WelghLs
1he use of Lhe bookvalue welghLs can be
serlously quesLloned on LheoreLlcal
grounds
llrsL Lhe componenL cosLs are opporLunlLy raLes and
are deLermlned ln Lhe caplLal markeLs 1he welghLs
should also be markeLdeLermlned
Second Lhe bookvalue welghLs are based on arblLrary
accounLlng pollcles LhaL are used Lo calculaLe reLalned
earnlngs and value of asseLs 1hus Lhey do noL reflecL
economlc values
12
andey
WelghLs
MarkeLvalue welghLs are LheoreLlcally
superlor Lo bookvalue welghLs
1hey reflecL economlc values and are noL lnfluenced by
accounLlng pollcles
1hey are also conslsLenL wlLh Lhe markeLdeLermlned
componenL cosLs
1he dlfflculLy ln uslng markeLvalue
welghLs
1he markeL prlces of securlLles flucLuaLe wldely and
frequenLly
A markeL value based LargeL caplLal sLrucLure means
LhaL Lhe amounLs of debL and equlLy are conLlnuously
ad[usLed as Lhe value of Lhe flrm changes
1
andey
lloLaLlon CosLs CosL of CaplLal and
lnvesLmenL Analysls
A new lssue of debL or shares wlll lnvarlably lnvolve f|otat|on
costs ln Lhe form of legal fees admlnlsLraLlve expenses
brokerage or underwrlLlng commlsslon
Cne approach ls Lo ad[usL Lhe floLaLlon cosLs ln Lhe
calculaLlon of Lhe cosL of caplLal 1hls ls noL a correcL
procedure lloLaLlon cosLs are oot annual cosLs Lhey are
ooetlme costs lncurred when Lhe lnvesLmenL pro[ecL ls
underLaken and flnanced lf Lhe cosL of caplLal ls ad[usLed for
Lhe floLaLlon cosLs and used as Lhe dlscounL raLe Lhe effecL
of Lhe floLaLlon cosLs wlll be compounded over Lhe llfe of Lhe
pro[ecL
1he correcL procedure ls Lo ad[usL Lhe lnvesLmenL pro[ecL's
cash flows for Lhe floLaLlon cosLs and use Lhe welghLed
average cosL of caplLal unad[usLed for Lhe floLaLlon cosLs as
Lhe dlscounL raLe
1
andey
ulvlslonal and ro[ecL CosL of CaplLal
A mosL commonly suggesLed meLhod for
calculaLlng Lhe requlred raLe of reLurn for a
dlvlslon (or pro[ecL) ls Lhe purep|ay
techn|que
1he baslc ldea ls Lo use Lhe beLa of Lhe
comparable flrms called purep|ay f|rms ln
Lhe same lndusLry or llne of buslness as a
proxy for Lhe beLa of Lhe dlvlslon or Lhe
pro[ecL
1
andey
ulvlslonal and ro[ecL CosL of CaplLal
1he pureplay approach for calculaLlng Lhe
dlvlslonal cosL of caplLal lnvolves Lhe
followlng sLeps
ldenLlfy comparable flrms
LsLlmaLe equlLy beLas for comparable flrms
LsLlmaLe asseL beLas for comparable flrms
CalculaLe Lhe dlvlslon's beLa
CalculaLe Lhe dlvlslon's allequlLy cosL of caplLal
CalculaLe Lhe dlvlslon's equlLy cosL of caplLal
CalculaLe Lhe dlvlslon's cosL of caplLal
1
andey
1he CosL of CaplLal for ro[ecLs
A slmple pracLlcal approach Lo lncorporaLe
rlsk dlfferences ln pro[ecLs ls Lo ad[usL Lhe
flrm's WACC (upwards or downwards) and
use Lhe oJjosteJ w Lo evaluaLe Lhe
lnvesLmenL pro[ecL
Companles ln pracLlce may develop pollcy
guldellnes for lncorporaLlng Lhe pro[ecL rlsk
dlfferences Cne approach ls Lo dlvlde
pro[ecLs lnLo broad rlsk classes and use
dlfferenL dlscounL raLes based on Lhe
declslonmaker's experlence
1
andey
1he CosL of CaplLal for ro[ecLs
lor example pro[ecLs may be classlfled as
Low rlsk pro[ecLs
dlscounL raLe Lhe flrm's WACC
Medlum rlsk pro[ecLs
Plgh rlsk pro[ecLs
ChapLer 1
I|nanc|a| and Cperat|ng
Leverage
1
andey
ChapLer Cb[ecLlves
Lxplaln Lhe concepL of flnanclal leverage
ulscuss Lhe alLernaLlve measures of
flnanclal leverage
undersLand Lhe rlsk and reLurn lmpllcaLlons
of flnanclal leverage
Analyse Lhe comblned effecL of flnanclal
and operaLlng leverage
PlghllghL Lhe dlfference beLween operaLlng
rlsk and flnanclal rlsk
10
andey
CaplLal SLrucLure ueflned
1he Lerm caplLal sLrucLure ls used Lo
represenL Lhe proporLlonaLe relaLlonshlp
beLween debL and equlLy
1he varlous means of flnanclng represenL Lhe
flnanclal sLrucLure of an enLerprlse 1he lefL
hand slde of Lhe balance sheeL (llablllLles
plus equlLy) represenLs Lhe flnanclal
sLrucLure of a company 1radlLlonally shorL
Lerm borrowlngs are excluded from Lhe llsL
of meLhods of flnanclng Lhe flrm's caplLal
expendlLure
11
andey
CuesLlons whlle Maklng Lhe llnanclng
ueclslon
Pow should Lhe lnvesLmenL pro[ecL be flnanced?
uoes Lhe way ln whlch Lhe lnvesLmenL pro[ecLs are
flnanced maLLer?
Pow does flnanclng affecL Lhe shareholders' rlsk reLurn
and value?
uoes Lhere exlsL an opLlmum flnanclng mlx ln Lerms of Lhe
maxlmum value Lo Lhe flrm's shareholders?
Can Lhe opLlmum flnanclng mlx be deLermlned ln pracLlce
for a company?
WhaL facLors ln pracLlce should a company conslder ln
deslgnlng lLs flnanclng pollcy?
12
andey
Meanlng of llnanclal
Leverage
1he use of Lhe flxedcharges sources of funds such as
debL and preference caplLal along wlLh Lhe owners' equlLy
ln Lhe caplLal sLrucLure ls descrlbed as f|nanc|a| |everage
or gear|ng or trad|ng on equ|ty
1he flnanclal leverage employed by a company ls lnLended
Lo earn more reLurn on Lhe flxedcharge funds Lhan Lhelr
cosLs 1he surplus (or deflclL) wlll lncrease (or decrease)
Lhe reLurn on Lhe owners' equlLy 1he raLe of reLurn on Lhe
owners' equlLy ls levered above or below Lhe raLe of
reLurn on LoLal asseLs
1
andey
Measures of llnanclal Leverage
uebt rotio
uebtequity rotio
lnterest coverage
1he flrsL Lwo measures of flnanclal leverage can be
expressed elLher ln Lerms of book values or markeL values
1hese Lwo measures are also known as measures of
cap|ta| gear|ng
1he Lhlrd measure of flnanclal leverage commonly known
as coverage rat|o 1he reclprocal of lnLeresL coverage ls a
measure of Lhe flrm's |ncome gear|ng
1
andey
llnanclal Leverage of 1en LargesL
lndlan Companles 2002
Company Capital Cearing Income Cearing
Debt ratio Debt-equity ratio Interest coverage Interest to EBI1 ratio
1. Indian Oil 0.556 1.25:1 4.00 0.250
2. HPCL 0.350 0.54:1 5.15 0.194
3. BPCL 0.490 0.96:1 5.38 0.186
4. $AIL 0.858 6.00:1 - ve - ve
5. ONC 0.106 0.12:1 53.49 0.019
6. TELCO 0.484 0.94:1 0.99 1.007
7. TI$CO 0.577 1.37:1 1.62 0.616
8. BHEL 0.132 0.15:1 8.36 0.120
9. Reliance 0.430 0.75:1 3.46 0.289
10. L&T 0.522 1.09:1 2.31 0.433
11. HLL 0.027 0.03:1 264.92 0.004
12. InIosys 0.000 0.00:1 NA* NA*
13. Voltas 0.430 0.72:1 2.64 0.378

1
andey
llnanclal Leverage and Lhe
Shareholders' 8eLurn
1he prlmary moLlve of a company ln uslng flnanclal
leverage ls Lo magnlfy Lhe shareholders' reLurn under
favourable economlc condlLlons 1he role of flnanclal
leverage ln magnlfylng Lhe reLurn of Lhe shareholders' ls
based on Lhe assumpLlons LhaL Lhe flxedcharges funds
(such as Lhe loan from flnanclal lnsLlLuLlons and banks or
debenLures) can be obLalned aL a cosL lower Lhan Lhe
flrm's raLe of reLurn on neL asseLs (8CnA or 8Cl)
LS 8CL and 8Cl are Lhe lmporLanL flgures for analyslng
Lhe lmpacL of flnanclal leverage
1
andey
LS and 8CL CalculaLlons
lor calculaLlng 8CL elLher Lhe book value or
Lhe markeL value equlLy may be used
N
) T 1 )( INT EBIT (
N
PAT
EP$
shares oI Number
aIter tax ProIit
share per Earnings

=
$
) T INT)(1 (EBIT
ROE
equity oI Value
aIter tax ProIit
equity on Return

1
LffecL of llnanclal lan on LS and 8CL
ConsLanL L8l1
1he flrm ls conslderlng Lwo
alLernaLlve flnanclal plans
%l) elLher Lo ralse Lhe enLlre
funds by lssulng 0000
ordlnary shares aL 8s 10 per
share or
(ll) Lo ralse 8s 20000 by
lssulng 2000 ordlnary
shares aL 8s 10 per share
and borrow 8s 20000 aL 1
per cenL raLe of lnLeresL
1he Lax raLe ls 0 per cenL
Financial Plan
Debt-equity
(Rs)
All-equity
(Rs)
1. Earnings beIore interest and taxes,
EBIT
120,000 120,000
2. Less. interest, INT 0 37,500
3. ProIit beIore taxes, PBT EBIT
INT
120,000 82,500
4. Less. Taxes, T (EBIT INT) 60,000 41,250
5. ProIit aIter taxes, PAT (EBIT
INT) (1 T)
60,000 41,250
6. Total earnings oI investors, PAT
INT
60,000 78,750
7. Number oI ordinary shares, N 50,000 25,000
8. EP$ (EBIT INT) (1 T)/N 1.20 1.65
9. ROE (EBIT INT) (1 T)/S 12.0 16.5
1
andey
LffecL of Leverage on 8CL and
LS
,;4:7,-0 #
Unf,;4:7,-0 #
N0:97, #

1
andey
LffecL of llnanclal lan on LS
and 8CL varlng L8l1
Economic Conditions
Jery poor Poor Aormal Cood
Probability 0.05
0.10

0.15

0.35

0.30

0.05
$ales (Rs) 510 660 710 800 880 1,160
Costs:
Variable (Rs) 255 330 355 400 440 580
Fixed (Rs) 280 280 280 280 280 280
Total Costs (Rs) 535 610 635 680 720 860
EBIT (Rs)
25 50 75 120 160 300
ROI (r) 5 10 15 24 32 60

Plan I: No debt
EBIT 25.00 50.00 75.00 120.00 160.00 300.00

Less. Interest 0.00 0.00 0.00 0.00 0.00 0.00

PBT 25.00 50.00 75.00 120.00 160.00 300.00

Less. tax, 50 12.50* 25.00 37.50 60.00 80.00 150.00

PAT 12.50 25.00 37.50 60.00 80.00 150.00

No. oI shares (000) 50.00 50.00 50.00 50.00 50.00 50.00

PS #8 0.25 0.50 0.75 1.20 1.60 3.00

# 2.50 5.00 7.50 12.00 16.00 30.00

Plan II: 25 debt
EBIT 25.00 50.00 75.00 120.00 160.00 300.00

Less. Interest 18.75 18.75 18.75 18.75 18.75 18.75

PBT 43.75 31.25 56.25 101.25 141.25 281.25

Less. tax, 50 21.88* 15.63 28.13 50.63 70.63 140.63

PAT 21.87 15.62 28.12 50.62 70.62 140.62

No. oI share (000) 37.50 37.50 37.50 37.50 37.50 37.50

PS #8 0.58 0.42 0.75 1.35 1.88 3.75

# 5.80 4.20 7.50 13.50 18.80 37.50

Plan III: 50 debt
EBIT 25.00 50.00 75.00 120.00 160.00 300.00

Less. Interest 37.50 37.50 37.50 37.50 37.50 37.50

PBT 62.50 12.50 37.50 82.50 122.50 262.50

Less. tax, 50 31.25* 6.25 18.75 41.25 61.25 131.25

PAT 31.25 6.25 18.75 41.25 61.25 131.25

No. oI shares (000) 25.00 25.00 25.00 25.00 25.00 25.00

PS #8 1.25 0.25 0.75 1.65 2.45 5.25

# 12.50 2.50 7.50 16.50 24.50 52.50

10
andey
CperaLlng Leverage
Cperat|ng |everage affecLs
a flrm's operaLlng proflL
(L8l1)
1he degree of operat|ng
|everage (uCL) ls deflned
as Lhe percenLage change
ln Lhe earnlngs before
lnLeresL and Laxes relaLlve
Lo a glven percenLage
change ln sales
Change in EBIT
DOL
Change in $ales
EBIT/EBIT
DOL
$ales/$ales
=
A
=
A
11
andey
Comblnlng llnanclal and CperaLlng
Leverages
Cperat|ng |everage affecLs a flrm's
operaLlng proflL (L8l1) whlle f|nanc|a|
|everage affecLs proflL afLer Lax or Lhe
earnlngs per share
1he degrees of operat|ng and f|nanc|a|
|everages |s comb|ned to see the effect of
tota| |everage on LS assoc|ated w|th a
g|ven change |n sa|es
12
andey
Comblnlng llnanclal and CperaLlng
Leverages
1he degree of comb|ned |everage (uCL) ls
glven by Lhe followlng equaLlon
anoLher way of expresslng Lhe degree of
comblned leverage ls as follows
Change in EBIT Change in EP$ Change in EP$
Change in $ales Change in EBIT Change in $ales
= L =
( ) ( ) ( )
DCL
( ) ( ) INT ( ) INT
Q s v Q s v F Q s v
Q s v F Q s v F Q s v F

= L =

1
andey
llnanclal Leverage and Lhe
Shareholders' 8lsk
1he varlablllLy of L8l1 and LS dlsLlngulsh beLween Lwo
Lypes of rlskoperat|ng r|sk and f|nanc|a| r|sk
Cperat|ng r|sk can be deflned as Lhe varlablllLy of L8l1 (or
reLurn on LoLal asseLs) 1he envlronmenLlnLernal and
exLernalln whlch a flrm operaLes deLermlnes Lhe
varlablllLy of L8l1
1he varlablllLy of L8l1 has Lwo componenLs
varlablllLy of sales
varlablllLy of expenses
1he varlablllLy of LS caused by Lhe use of flnanclal
leverage ls called f|nanc|a| r|sk
1
andey
Measurlng CperaLlng and
llnanclal 8lsk
We can use Lwo measures of rlsk
SLandard devlaLlon and
CoefflclenL of varlaLlon
2 2 2 2
1 1 2 2
2
1
1 1 2 2
1
(EP$) |EP$ (EP$)| |EP$ (EP$)| |EP$ (EP$)|
|EP$ (EP$)|
(EP$) EP$ EP$ EP$ EP$
f f
n
f f
f
n
f f f f
f
E P E P E P
E P
E P P P P
9
=
=
= + + +
=
= L + L + + =
ChapLer 1
CaplLal SLrucLure
1heory and ollcy
1
andey
ChapLer Cb[ecLlves
undersLand Lhe LheoreLlcal conLroversy abouL caplLal
sLrucLure and Lhe value of Lhe flrm
PlghllghL Lhe dlfferences beLween Lhe ModlgllanlMlller
vlew and Lhe LradlLlonal vlew on Lhe relaLlonshlp beLween
caplLal sLrucLure and Lhe cosL of caplLal and Lhe value of
Lhe flrm
locus on Lhe lnLeresL Lax shleld advanLage of debL as well
as lLs dlsadvanLage ln Lerms of cosLs of flnanclal dlsLress
Lxplaln how beLa ls relaLed Lo caplLal sLrucLure and Lhe
cosL of caplLal
ulscuss Lhe concepL and uLlllLy of Lhe ad[usLed presenL
value (Av) ln pro[ecL evaluaLlon
1
andey
uebLequlLy Mlx and Lhe value of
Lhe llrm
CaplLal sLrucLure Lheorles
neL operaLlng lncome (nCl) approach
1radlLlonal approach and neL lncome (nl) approach
MM hypoLhesls wlLh and wlLhouL corporaLe Lax
Mlller's hypoLhesls wlLh corporaLe and personal Laxes
1radeoff Lheory cosLs and beneflLs of leverage
1
neL lncome (nl) Approach
Accord|ng to NI approach
both the cost of debt and the
cost of equ|ty are |ndependent
of the cap|ta| structure they
rema|n constant regard|ess of
how much debt the f|rm uses
As a resu|t the overa|| cost of
cap|ta| dec||nes and the f|rm
va|ue |ncreases w|th debt 1h|s
approach has no bas|s |n
rea||ty the opt|mum cap|ta|
structure wou|d be 100 per
cent debt f|nanc|ng under NI
approach
ke
ko
kd
Debt
ost
kd
ke, ko
ChapLer 2
PrincipIes of Working
CapitaI Management
10
andey
1oplcs
ConcepL of worklng caplLal
CperaLlng and cash converslon cycle
ermanenL and varlable worklng caplLal
8alanced worklng caplLal
ueLermlnanLs of worklng caplLal
lssues l worklng caplLal managemenL
LsLlmaLlng worklng caplLal
ollcles of worklng caplLal flnance
11
andey
ConcepLs of Worklng CaplLal
Cross worklng caplLal (CWC)
CWC refers Lo Lhe flrm's LoLal lnvesLmenL ln
currenL asseLs
Current assets are Lhe asseLs whlch can be
converLed lnLo cash wlLhln an accounLlng year
(or operaLlng cycle) and lnclude cash shorL
Lerm securlLles debLors (accounLs recelvable
or book debLs) bllls recelvable and sLock
(lnvenLory)
12
andey
neL worklng caplLal (nWC)
nWC refers Lo Lhe dlfference beLween
currenL asseLs and currenL llablllLles
CurrenL llablllLles (CL) are Lhose clalms of
ouLslders whlch are expecLed Lo maLure for
paymenL wlLhln an accounLlng year and
lnclude credlLors (accounLs payable) bllls
payable and ouLsLandlng expenses
nWC can be poslLlve or negaLlve
oslLlve nWC CA CL
negaLlve nWC CA CL
1
andey
CWC focuses on
CpLlmlsaLlon of lnvesLmenL ln currenL
llnanclng of currenL asseLs
nWC focuses on
LlquldlLy poslLlon of Lhe flrm
!udlclous mlx of shorLLerm and longLern flnanclng
1
andey
CperaLlng Cycle
CperaLlng cycle ls Lhe Llme duraLlon
requlred Lo converL sales afLer Lhe
converslon of resources lnLo lnvenLorles
lnLo cash 1he operaLlng cycle of a
manufacLurlng company lnvolves Lhree
phases
cquisition of resources such as raw maLerlal labour power and
fuel eLc
,onufocture of the product whlch lncludes converslon of raw
maLerlal lnLo worklnprogress lnLo flnlshed goods
5o/e of the product elLher for cash or on credlL CredlL sales creaLe
accounL recelvable for collecLlon
1
andey
1he lengLh of Lhe operaLlng cycle of a
manufacLurlng flrm ls Lhe sum of
|nventory convers|on per|od (lC)
Debtors (rece|vab|e) convers|on per|od
(uC)
1
andey
lnvenLory converslon perlod ls Lhe LoLal
Llme needed for produclng and selllng Lhe
producL 1yplcally lL lncludes
raw mater|a| convers|on per|od (8MC)
work|nprocess convers|on per|od (WlC)
f|n|shed goods convers|on per|od (lCC)
1
andey
1he debLors converslon perlod ls Lhe Llme
requlred Lo collecL Lhe ouLsLandlng amounL
from Lhe cusLomers
1
andey
Cred|tors or payab|es deferra| per|od (Cu)
ls Lhe lengLh of Llme Lhe flrm ls able Lo
defer paymenLs on varlous resource
purchases
1
andey
Gross operat|ng cyc|e (CCC)
1he LoLal of lnvenLory converslon perlod and debLors
converslon perlod ls referred Lo as gross operaLlng cycle
(CCC)
Net operat|ng cyc|e (nCC)
nCC ls Lhe dlfference beLween CCC and Cu
Cash converslon cycle (CCC)
CCC ls Lhe dlfference beLween nC and noncash lLems llke
depreclaLlon
10
andey
ermanent or f|xed work|ng cap|ta|
A mlnlmum level of currenL asseLs whlch ls
conLlnuously requlred by a flrm Lo carry on
lLs buslness operaLlons ls referred Lo as
permanenL or flxed worklng caplLal
I|uctuat|ng or var|ab|e work|ng cap|ta|
1he exLra worklng caplLal needed Lo
supporL Lhe changlng producLlon and sales
acLlvlLles of Lhe flrm ls referred Lo as
flucLuaLlng or varlable worklng caplLal
11
andey
ueLermlnanLs of Worklng CaplLal
naLure of buslness
MarkeL and demand
1echnology and manufacLurlng pollcy
CredlL pollcy
Supplles' credlL
CperaLlng efflclency
lnflaLlon
12
andey
lssues ln Worklng CaplLal ManagemenL
Levels of currenL asseLs
CurrenL asseLs Lo flxed asseLs
LlquldlLy vs proflLablllLy
CosL Lradeoff
1
andey
LsLlmaLlng Worklng caplLal
current ossets ho/dinq period
1o esLlmaLe worklng caplLal requlremenLs on Lhe basls of
average holdlng perlod of currenL asseLs and relaLlng Lhem
Lo cosLs based on Lhe company's experlence ln Lhe
prevlous years 1hls meLhod ls essenLlally based on Lhe
operaLlng cycle concepL
otio of so/es
1o esLlmaLe worklng caplLal requlremenLs as a raLlo of
sales on Lhe assumpLlon LhaL currenL asseLs change wlLh
sales
otio of fixed investment
1o esLlmaLe worklng caplLal requlremenLs as a percenLage
of flxed lnvesLmenL
1
andey
Worklng CaplLal llnance ollcles
LongLerm
ShorLLerm
SponLaneous
$hort-term Vs.
Long-term
financing
ost
Flexibility
Risk
1
andey
Worklng CaplLal llnance ollcles
MaLchlng
ConservaLlve
Aggresslve
1
neL CperaLlng lncome (nCl) Approach
Accord|ng to NCI approach
the va|ue of the f|rm and
the we|ghted average cost
of cap|ta| are |ndependent
of the f|rm's cap|ta|
structure In the absence of
taxes an |nd|v|dua| ho|d|ng
a|| the debt and equ|ty
secur|t|es w||| rece|ve the
same cash f|ows regard|ess
of the cap|ta| structure and
therefore va|ue of the
company |s the same
ke
ko
kd
Debt
ost
1
1radlLlonal Approach
%e traditional approac
argue8 tat moderate degree
of debt can lower te firm`8
overall co8t of capital and
tereby, increa8e te firm
value. %e initial increa8e in
te co8t of equity i8 more tan
off8et by te lower co8t of
debt. But a8 debt increa8e8,
8areolder8 perceive iger
ri8 and te co8t of equity
ri8e8 until a point i8 reaced
at wic te advantage of
lower co8t of debt i8 more
tan off8et by more expen8ive
equity.
ke
ko
kd
Debt
ost
1
MM Approach WlLhouL 1ax
roposlLlon l
MM's ropos|t|on I states
that the f|rm's va|ue |s
|ndependent of |ts cap|ta|
structure W|th persona|
|everage shareho|ders can
rece|ve exact|y the same
return w|th the same r|sk
from a |evered f|rm and an
un|evered f|rm 1hus they
w||| se|| shares of the over
pr|ced f|rm and buy shares
of the underpr|ced f|rm
unt|| the two va|ues equate
1h|s |s ca||ed orbitroqe
ko
Debt
ost
MM's Proposition
1
andey
ArblLrage
Levered Firm ( ):
60, 000 50, 000 110, 000
interest rate 6; NOI 10,000
shares held by an investor in 10
Unlevered Firm ( ):
100, 000
NOI 10, 000
l l l
d
l
u u
L
J S D
k X
L
U
J S
X
-
= + = + =
= = = =
= =
= =
= =
10
andey
ArblLrage

Return Irom Levered Firm:
10 110, 000 50 000 10 60, 000 6 000
10 10, 000 6 50, 000 1, 000 300 700
Alternate $trategy:
1. $ell shares in : 10 60,000 6,000
2. Borrow (personal leverage):
Investment , ,
Return
L
= = =
= L = =
|
L =
10 50,000 5,000
3. Buy shares in : 10 100,000 10,000
Return Irom Alternate $trategy:
10,000
10 10,000 1,000
: Interest on personal borrowing 6 5,000 300
Net return 1,000 300 700
Ca
U
Investment
Return
Less
L =
L =
=
= L =
= L =
= =
sh available 11,000 10,000 1,000 = =
ChapLer 2
#eceivabIes Management
and Factoring
12
andey
1oplcs
Nature and Goa|s of Cred|t o||cy
Cpt|mum Cred|t o||cy
Cred|t o||cy Var|ab|es
Cred|t Lva|uat|on of Ind|v|dua| Accounts
Mon|tor|ng kece|vab|e
Summary of key Concepts
1
andey
naLure of CredlL ollcy
Investment |n rece|vab|e
volume of credlL sales
collecLlon perlod
Cred|t po||cy
credlL sLandards
credlL Lerms
collecLlon efforLs
1
Coals of CredlL ollcy
Market|ng too|
Max|m|sat|on of
sa|es Vs
|ncrementa| prof|t
producLlon and selllng
cosLs
admlnlsLraLlon cosLs
baddebL losses
Profitability
Liquidity
Tight
redit
policy
Loose
osts & Benefits
1
CpLlmum CredlL ollcy
Lst|mat|on of |ncrementa|
prof|t
Lst|mat|on of |ncrementa|
|nvestment |n rece|vab|e
Lst|mat|on of |ncrementa| rate
of return (Ikk)
Compar|son of |ncrementa|
rate of return w|th requ|red
rate of return (kkk)
Cpt|mum cred|t po||cy Ikk
kkk
Marginal cost of capital
Marginal rate of return
Tight
redit
policy
Loose
osts & Return (%)
1
andey
CredlL ollcy varlables
Cred|t standards
Cred|t ana|ys|s
collecLlon perlod
defaulL raLe
characLer
capaclLy
condlLlon
caplLal
collaLeral
1
andey
customer categor|es
good accounLs
bad accounLs
marglnal accounLs
numer|ca| cred|t scor|ng
oJ boc approach
slmple dlscrlmlnanL approach
mulLlple dlscrlmlnanL approach
1
andey
CredlLCranLlng ueclslon
Credit-granting Decision
CREDIT RANTIN
DECI$ION
NO CREDIT RANT CREDIT
PAYMENT
RECEIVED
BENEFIT
PV OF FUTURE
NET CA$H
FLOW$
PAYMENT
NOT RECEIVED
CO$T
PV OF LO$T
INVE$TMENT
NET PAYOFF
PV OF
(BENEFIT - CO$T)
NO PAYOFF
1
andey
Cred|t terms
credlL perlod
cash dlscounL
Co||ect|on po||cy and procedures
regularlLy of collecLlons
clarlLy of collecLlon procedures
responslblllLy for collecLlon and followup
casebycase approach
cash dlscounL for prompL paymenL
10
andey
CredlL LvaluaLlon of CusLomers
Cred|t |nformat|on
flnanclal sLaLemenLs
bank references
Lrade references
Cred|t |nvest|gat|on and ana|ys|s
analysls of credlL flle
flnanclal analysls
analysls of buslness and managemenL
Cred|t ||m|t
Co||ect|on efforts
11
andey
MonlLorlng 8ecelvable
Co||ect|on per|od
Ag|ng schedu|e
Co||ect|on exper|ence matr|x
ChapLer 2
nventory Management
1
andey
1oplcs
Nature of |nventor|es
Need for |nventor|es
Cb[ect|ves of |nventory management
Inventory management techn|ques
Inventory |nvestment
Se|ect|ve |nventory contro|
Inventory management process
1
andey
naLure of lnvenLory
Stocks of manufactured products and the
mater|a| that make up the product
Components
raw maLerlals
worklnprocess
flnlshed goods
sLores and spares (supplles)
1
andey
need for lnvenLorles
1ransact|on mot|ve
recaut|onary mot|ve
Specu|at|ve mot|ve
1
andey
Cb[ecLlves of lnvenLory
ManagemenL
Lnsure a cont|nuous supp|y of raw mater|a|s to fac|||tate
un|nterrupted product|on
Ma|nta|n suff|c|ent stock of raw mater|a|s |n per|ods of
short supp|y and ant|c|pate pr|ce changes
Ma|nta|n suff|c|ent f|n|shed goods |nventory for smooth
sa|es operat|ons and eff|c|ent customer serv|ce
M|n|m|se the |nventory costs
Contro| |nventory |nvestment by ma|nta|n|ng opt|mum
|nventory
1
andey
lnvenLory ManagemenL 1echnlques
Lconom|c order quant|ty (LC)
orderlng cosLs requlslLlonlng order placlng
LransporLaLlon recelvlng lnspecLlng and sLorlng
admlnlsLraLlon
carrylng cosLs warehouslng handllng clerlcal and
sLaff lnsurance depreclaLlon and obsolescence
orderlng and carrylng cosLs Lradeoff
2
EOQ
AO
c
1
andey
lnvenLory ManagemenL 1echnlques
keorder po|nt under certa|nty
lead Llme
average usage
8eorder polnL Lead Llme x average usage
keorder po|nt under uncerta|nty
safeLy sLock
8eorder polnL (Lead Llme x average usage) +
safeLy sLock
1
andey
lnvenLory lnvesLmenL Analysls
Lst|mat|on of |ncrementa| operat|ng prof|t
Lst|mat|on of |ncrementa| |nvestment |n
|nventory
Lst|mat|on of the |ncrementa| rate of
return (Ikk)
Compar|son of the |ncrementa| rate of
return w|th the requ|red rate of return
(kkk)
Cpt|mum |nventory
l88 888
200
andey
SelecLlve lnvenLory ConLrol
A8C ana|ys|s
classlfy lnvenLory lnLo Lhree caLegorles accordlng Lo
value
conLrol by lmporLance and excepLlon maxlmum
aLLenLlon Lo A" lLems
201
andey
lnvenLory ManagemenL rocess
LxpllclLly sLaLe Lhe lnvenLory pollcy
CreaLe an lnvenLory monlLorlng cell
ManagemenL group for conLrolllng purchases
erlodlc meeLlngs beLween purchase
maLerlals plannlng and producLlon execuLlves
MonLhly revlews of LoLal lnvenLory aL
planL/corporaLe level
uoveLall lnvenLory conLrol Lo Lhe LoLal
budgeLlng sysLem
ldenLlfy crlLlcal lnvenLory lLems for closer
scruLlny
ChapLer 0
Cash Management
20
andey
ChapLer Cb[ecLlves
Lxplaln Lhe reasons for holdlng cash
underllne Lhe need for cash managemenL
ulscuss Lhe Lechnlques of preparlng cash
budgeL
locus on Lhe managemenL of cash
collecLlon and dlsbursemenL
Lmphaslse Lhe need for lnvesLlng surplus
cash ln markeLable securlLles
20
andey
Cash ManagemenL
cosh monoqement is concerned with the
monoqinq of
cosh f/ows into ond out of the firm
cosh f/ows within the firm ond
cosh bo/onces he/d by the firm ot o point of time by
finoncinq deficit or investinq surp/us cosh
20
andey
lour laceLs of Cash ManagemenL
cosh p/onninq
,onoqinq the cosh f/ows
Optimum cosh /eve/
lnvestinq surp/us cosh
20
andey
MoLlves for Poldlng Cash
1he LransacLlons moLlve
1he precauLlonary moLlve
1he speculaLlve moLlve
20
andey
Cash lannlng
Cash p|ann|ng |s a techn|que to p|an and
contro| the use of cash
Cash Iorecast|ng and 8udget|ng
Cash budget |s the most s|gn|f|cant dev|ce to p|an for
and contro| cash rece|pts and payments
Cash forecasts are needed to prepare cash budgets
20
andey
ShorLLerm Cash lorecasLs
@he importont functions of shortterm cosh
forecosts
1o deLermlne operaLlng cash requlremenLs
1o anLlclpaLe shorLLerm flnanclng
1o manage lnvesLmenL of surplus cash
5hortterm lorecostinq ,ethods
1he recelpL and dlsbursemenLs meLhod
1he ad[usLed neL lncome meLhod
20
andey
1he 8ecelpL and
ulsbursemenLs MeLhod
1he v|rtues of the rece|pt and payment methods are
lL glves a compleLe plcLure of all Lhe lLems of expecLed
cash flows
lL ls a sound Lool of managlng dally cash operaLlons
1h|s method however suffers from the fo||ow|ng
||m|tat|ons
lLs rellablllLy ls reduced because of Lhe uncerLalnLy of cash
forecasLs lor example collecLlons may be delayed or
unanLlclpaLed demands may cause large dlsbursemenLs
lL falls Lo hlghllghL Lhe slgnlflcanL movemenLs ln Lhe
worklng caplLal lLems
210
andey
1he Ad[usLed neL lncome MeLhod
1he benef|ts of the ad[usted net |ncome
method are
lL hlghllghLs Lhe movemenLs ln Lhe worklng caplLal lLems
and Lhus helps Lo keep a conLrol on a flrm's worklng
caplLal
lL helps ln anLlclpaLlng a flrm's flnanclal requlremenLs
1he ma[or ||m|tat|on of th|s method |s
lL falls Lo Lrace cash flows and Lherefore lLs uLlllLy ln
conLrolllng dally cash operaLlons ls llmlLed
211
andey
LongLerm Cash lorecasLlng
1he ma[or uses of the |ongterm cash
forecasts are
lL lndlcaLes as company's fuLure flnanclal needs especlally
for lLs worklng caplLal requlremenLs
lL helps Lo evaluaLe proposed caplLal pro[ecLs lL plnpolnLs
Lhe cash requlred Lo flnance Lhese pro[ecLs as well as Lhe
cash Lo be generaLed by Lhe company Lo supporL Lhem
lL helps Lo lmprove corporaLe plannlng LongLerm cash
forecasLs compel each dlvlslon Lo plan for fuLure and Lo
formulaLe pro[ecLs carefully
212
andey
Managlng Cash CollecLlons and
ulsbursemenLs
Acce|erat|ng Cash Co||ect|ons
uecentro/ised co//ections
Lockbox 5ystem
contro//inq uisbursements
uisbursement or Poyment l/oot
21
andey
leaLures of lnsLrumenLs of
CollecLlon ln lndla
Instrument Pros Cons
1.Cheques ONo charge
OPayable through clearing
OCan be discounted aIter receipt
OLow discounting charge
ORequires customer limits which are
inter-changeable with overdraIt limits
OCan bounce
OCollection times can be long
OCollection charge

2.DraIts OPayable in local clearing
OChances oI bouncing are less
OCost oI collection
OBuyers account debited on day one

3.Documentary bills OLow discounting charge
OTheoretically, goods are not released
till payments are made or the bill is
accepted
ONot payable through clearing.
OHigh collection cost
OLong delays
.
4.Trade bills ONo charge except stamp duty
OCan be discounted.
ODiscipline oI payment on due date.
OProcedure is relatively cumbersome
OBuyers are reluctant to accept the due
date discipline.

5.Letters oI credit Oood credit control as goods are
released on payment or acceptance oI
bill.
O$eller Iorced to meet delivery
schedule because oI expiry date.
OOpening charges
OTransit period interest
ONegotiation charges
ONeed bank lines to open LC.
O $tamp duty on usance bills

21
andey
CpLlmum Cash 8alance
Optimum cosh 8o/once under certointy
8oumo/s ,ode/
Optimum cosh 8o/once under uncertointy
@he ,i//erOrr ,ode/
21
andey
8aumol's ModelAssumpLlons
1he flrm ls able Lo forecasL lLs cash needs
wlLh cerLalnLy
1he flrm's cash paymenLs occur unlformly
over a perlod of Llme
1he opporLunlLy cosL of holdlng cash ls
known and lL does noL change over Llme
1he flrm wlll lncur Lhe same LransacLlon
cosL whenever lL converLs securlLles Lo
cash
21
andey
8aumol's Model
1he flrm lncurs a ho|d|ng cost for keeplng Lhe cash balance lL ls an
opporLunlLy cosL LhaL ls Lhe reLurn foregone on Lhe markeLable
securlLles lf Lhe opporLunlLy cosL ls k Lhen Lhe flrm's holdlng cosL for
malnLalnlng an average cash balance ls as follows
1he flrm lncurs a transact|on cost whenever lL converLs lLs markeLable
securlLles Lo cash 1oLal number of LransacLlons durlng Lhe year wlll be
LoLal funds requlremenL @ dlvlded by Lhe cash balance le @$ 1he
per LransacLlon cosL ls assumed Lo be consLanL lf per LransacLlon cosL ls c
Lhen Lhe LoLal LransacLlon cosL wlll be
1he LoLal annual cosL of Lhe demand for cash wlll be
1he opLlmum cash balance & ls obLalned when Lhe LoLal cosL ls
mlnlmum 1he formula for Lhe opLlmum cash balance ls as follows
Holding cost ( / 2) k C
Transaction cost ( / ) c T C
*
2cT
C
k
=
Total cost ( / 2) ( / ) k C c T C +
21
andey
lllusLraLlon8aumol's Model
Advani Chemical Limited estimates its total cash requirement as Rs 2 crore next year. The company`s
opportunity cost oI Iunds is 15 per annum. The company will have to incur Rs 150 per transaction when
it converts its short-term securities to cash. Determine the optimum cash balance. How much is the total
annual cost oI the demand Ior the optimum cash balance? How many deposits will have to be made during
the year?
k / cT 2 C
*
=
000 , 200 Rs
15 . 0
) 000 , 000 , 20 )( 150 ( 2
C
*
= =
The annual cost will be:

30,000 Rs 15,000 15,000 (1,00,000) 0.15 (100) 150
2) (2,00,000/ 0.15 2,00,000) (2,00,000/ 150 cost Total

During the year, the company will have to make 100 deposits, i.e. converting marketable securities to
cash.
21
andey
1he MlllerCrr Model
1he MC model provldes for Lwo conLrol llmlLsLhe upper
conLrol llmlL and Lhe lower conLrol llmlL as well as a reLurn
polnL
lf Lhe flrm's cash flows flucLuaLe randomly and hlL Lhe
upper llmlL Lhen lL buys sufflclenL markeLable securlLles Lo
come back Lo a normal level of cash balance (Lhe reLurn
polnL)
Slmllarly when Lhe flrm's cash flows wander and hlL Lhe
lower llmlL lL sells sufflclenL markeLable securlLles Lo brlng
Lhe cash balance back Lo Lhe normal level (Lhe reLurn
polnL)
21
1he MlllerCrr Model
1he dlfference beLween Lhe upper llmlL and
Lhe lower llmlL depends on Lhe followlng
facLors
Lhe LransacLlon cosL (c)
Lhe lnLeresL raLe (l)
Lhe sLandard devlaLlon (9) of neL cash flows
1he formula for deLermlnlng Lhe dlsLance
beLween upper and lower conLrol llmlLs
(called ) ls as follows
1/ 3
(Upper Limit Lower Limit) (3/ 4 Transaction Cost Cash Flow Variance/ Interest Rate)
Upper Limit Lower Limit 3
Return Point Lower Limit
The net eIIect is that the Iirms hold the average the cash balance equal to:
Average C
ash Balance Lower Limit 4/3

220
andey
lnvesLlng Surplus Cash ln
MarkeLable SecurlLles
Se|ect|ng Investment Cpportun|t|es
sofety
,oturity ond
morketobi/ity
221
andey
ShorLLerm lnvesLmenL
CpporLunlLles
@reosury bi//s
commercio/ popers
certificotes of deposits
8onk deposits
lntercorporote deposits
,oney morket mutuo/ funds

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ChapLer 1

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

We obLaln a slmple formula for Lhe share valuaLlon as

llnanclal ManagemenL nlnLh LdlLlon l M

rowth Retention ratio Return on equity

$hare value PV oI dividends during Iinite super-normal growth period

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M andey

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M andey

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M andey

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M

llnanclal ManagemenL nlnLh LdlLlon l M andey

ash Balance Lower Limit 4/3

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