3) On 31st December, 2019 the Balance Sheet of Ekebana Ltd., Ellora shows the financial
position as follows:
Liabilities
Assets
Share Capital:
Plant and Machinery
1,15,000
20,000 Equity Shares of
Land and Buildings
85,000
10 each fully paid-up
2,00,000 Motor Car
69,000
General Reserve Fund
45,000 Furniture
61,000
Profit and Loss
27,000 Patents
5,000
Debentures
1,00,000 Trade Debtors
90,000
Trade Creditors
67,000 Bills Receivable
50,000
Bank (Cr.)
11,000 Cash in Hand
25,000
Bills payable
50,000
Total
5,00,000Total
5,00,000
The following additional information is also provided on 31st December, 2019.
a) The independent valuator valued the various assets as follows: Plant and Machinery
*1,30,000, Land and Buildings 1,05,000, Motor Car 45,000, Furniture ? 37,000, Patents
are worthless, Trade Debtors are estimated to realise 10% less than the book value,
Goodwill at * 24,000.
b) The net profits for the last three years indicates the financial performances as follows:
Year
Profit
₹
2017
25,350
2018
30,630
2019
34,020
c) It is the practice of the company to transfer 20% of profit to General Reserve Fund.
d) Similar companies give a yield of 10% on the market value of equity share.
You are require to calculate the Fair Value of each Equity Share.
Answers
Answer:
Aman Limited is a leading manufacturer of automotive components. It supplies to the original equipment
manufacturers as well as the replacement market. Its projects typically have a short life as it introduces
new models periodically. You have recently joined Aman Limited as a financial analyst reporting to Ravi
Sharma, the CFO of the company. He has provided you the following information about three projects. A,
B, and C that are being considered by the Executive Committee of Aman Limited: Project A is an
extension of an existing line. Its cash flow will decrease over time. Project B involves a new product.
Building its market will take some time and hence its cash flow will increase over time. Project C is
concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost initially which will be followed
by a huge benefit for one year. However, in the year following that some cost will be incurred to raze the
pavilion. The expected net cash flows of the three projects are as follows
Ravi Sharma believes that all the three projects have risk characteristics similar to the average risk of the
firm and hence the firm's cost of capital, viz. 12 percent, will apply to them.
You have been asked to prepare a report for the executive committee, covering the following:
(a) What is payback period and discounted payback period? Find the payback period and the
discounted payback period of Projects A and B.
(b) What is net present value (NPV)? What are the properties of NPV? Calculate the NPV of projects
A, B, and C.
(c) What is internal rate of return (IRR)? What are the problems with IRR? Calculate the IRR for
Projects A, B, and C.
(d) What is modified internal rate of return (MIRR)? What are the pros and cons of MIRR vis-a-vis
IRR and NPV? Calculate the MIRR for Projects A, B, and C assuming that the intermediate cash
flows can be reinvested at 12 percent rate of return.
Explanation:
Aman Limited is a leading manufacturer of automotive components. It supplies to the original equipment
manufacturers as well as the replacement market. Its projects typically have a short life as it introduces
new models periodically. You have recently joined Aman Limited as a financial analyst reporting to Ravi
Sharma, the CFO of the company. He has provided you the following information about three projects. A,
B, and C that are being considered by the Executive Committee of Aman Limited: Project A is an
extension of an existing line. Its cash flow will decrease over time. Project B involves a new product.
Building its market will take some time and hence its cash flow will increase over time. Project C is
concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost initially which will be followed
by a huge benefit for one year. However, in the year following that some cost will be incurred to raze the
pavilion. The expected net cash flows of the three projects are as follows
Ravi Sharma believes that all the three projects have risk characteristics similar to the average risk of the
firm and hence the firm's cost of capital, viz. 12 percent, will apply to them.
You have been asked to prepare a report for the executive committee, covering the following:
(a) What is payback period and discounted payback period? Find the payback period and the
discounted payback period of Projects A and B.
(b) What is net present value (NPV)? What are the properties of NPV? Calculate the NPV of projects
A, B, and C.
(c) What is internal rate of return (IRR)? What are the problems with IRR? Calculate the IRR for
Projects A, B, and C.
(d) What is modified internal rate of return (MIRR)? What are the pros and cons of MIRR vis-a-vis
IRR and NPV? Calculate the MIRR for Projects A, B, and C assuming that the intermediate cash
flows can be reinvested at 12 percent rate of return.