Financial Analysis

AFTERSCHOOOL – DEVELOPING CHANGE

MAKERS
CENTRE FOR SOCIAL ENTREPRENEURSHIP
PGPSE PROGRAMME –
World’ Most Comprehensive programme in social
entrepreneurship & spiritual entrepreneurship
OPEN FOR ALL FREE FOR ALL

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 Financial Analysis
Dr. T.K. Jain.
AFTERSCHOOOL
Centre for social entrepreneurship
Bikaner
M: 9414430763
tkjainbkn@yahoo.co.in
www.afterschool.tk
www.afterschoool.tk

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There are three companies A,B,C. You want
to invest in only one of these, Tax rate 50%.
Minimum dividend is 20% (all these).
Expected rate of return is 25%. Where will
you invest? (each share is of Rs. 10)

Shares A B C
capital 50 20 10

14% debentures 20 15

Loan from F.I. at18% 10 25

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SOLUTION . . .

EBIT 12.5 12.5 12.5

Interest on debenture 2.8 2.1
Interest on debt 1.8 4.5
EBT 12.5 7.9 5.9
EAT 6.25 3.95 2.95
EPS 1.25 1.975 2.95
ROE 12.5 19.75 29.5

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Solution . . .
C company is the best option.

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 Equity 10 lakh, 10% preference
shares 4 Lakh, 12% debentures 6
Lakh. Market price of share 110,
dividend 10/ Tax 50%. We want to
borrow 10 Lakhs at 14%, it will
reduce market price from 110 to 105
but dividend will increase from 10 to
12. should we go for it? Growth rate
6%
 Let us take 3 criteria 1. Debt Equity
ratio, 2. WCC, 3. EPS.
 New Debt Equity ratio = (10+6) / (10+4)

 =16/14 ( OK – it is still less than 2:1.

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Solution . . . .
 Weighted average cost of capital . . .
 It is weighted cost of all the sources of
capital.
 Cost of equity = (dividend / Market price)
+ growth rate
 =12/105 + .06 = .114+.06 = .174 (earlier
it was (.09+.06) = .15 (thus it has
increased.

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Solution . . .
 Cost of Debt.
 Debentures = .12

 Cost of loan = .14

 Preference shares = .10

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Calculation of weighted cost of
capital . .
 Let us take weights. . .
 Total equity is 10 lakh, preference is 4
lakhs, debentures is 6 lakhs and loans
are 10 lakhs. = total = 30 weightes are
 10/30 = .33 for equity, .13 for preference,
.2 for debentures, .33 for debentures. Let
us multiply these weights to the costs,
and we will get the answer.

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New wcc.

cost weight wcc

0.174 0.33 0.0574
0.12 0.2 0.024
0.14 0.33 0.0462
0.1 0.13 0.013
0.1406

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Solution. . .
 Thus this option is better as per new
option as WCC is very low and cost of
equity is also low - not very high. EPS is
also increasing. Cost of equity is less
than 20%.

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Operating income of my company is
1.86 lakhs. We pay 35% tax. Our
capital structure consists of 14%
debenture of 4 lakh and 15%
preference shares of Rs. 5 lakh and
equality shares of Rs. 4 lakh (100
each), what is my EPS?
 Step 1. (deduct interest and tax) Income (minus interest) –
tax = 1.86 ( - .56) – (.35 of 1.3) = 1.3-.455 = .845
 Step 2 : deduct preference dividend) = .845 – (preference
dividend .75) = .095 lakkhs
 Step 3 : divide by number of shares.
 9500 / 4000 = 2.3 approx.
 Interest on debenure = .14*4 = .56 lakhs.

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 Operating income of my company is
1.86 lakhs. We pay 35% tax. Our
capital structure consists of 14%
debenture of 4 lakh and 15%
preference shares of Rs. 5 lakh and
equality shares of Rs. 4 lakh (100
each), what is my DFL?
 DFL = Degree of Financial Leverage
 DFL = EBIT / (EBIT – Int. – (Dividend on
preference / 1-tax) )
 =1.86 / (1.86 - .56 – (.75/.65))
 =1.86 / (1.3 – 1.15)
 =1.86 / .15 = 12.4 (it is very risky company). Ans.

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My sales are Rs. 25 lakhs and my
fixed costs are Rs. 7.5 lakhs.
Variable expenses are 50% of sales.
What is my DOL?
 DOL = Degree of Operating Leverage.
 DOL = (Sales – Variable expenses ) / EBIT
 EBIT = (sales – all expenses) = 25 –
(7.5+12.5) = 5 lakhs
 = (25-12.5) / 5
 =12.5 / 5 = 2.5 (my business risk is not very
high – if DOL had been more, my business
risk would have been higher).
 EBIT = Earning before interest and taxes

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 I want to buy a new business, the
sales in that is 20 lakhs, fixed
expenses are 15 lakhs and variable
expenses are 12% of sales. Is the
decision to buy the business
appropriate on the business risk
criteria? (I don’t want to take high
risk)
 DOL = (sales – Variable exp) / EBIT
 = (20-2.4) / (20-(15+2.4))

 =17.6 / 2.6

 =6.76 (which is high risk)

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EBIT is 1200 lakhs, EBT is 320 lakhs
and Fixed costs are 700 lakhs. What
is DCL? What is interest coverage?
 DCL = degree of combined leverage
 It is calculated by any of two methods:
 DCL = DOL * DFL
 Or DCL = Contribution / EBT
 Contribution = Sales – variable cost
 (Sales – Variable cost ) = EBIT + Fixed
cost. = 1200 + 700 = 1900.
 1900 / 320 = 5.93 answer.
 Interest coverage = EBIT / Interest
 =1200 / (1200-320) = 1200 / 880 = 1.36 ans.

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As an investor, I have 2 options, in
which I get 6000 after 1 year in
another, I get 9000 after 4 years.
Discount rate is 10%. Which option is
better?

 6000 after one year mean 6000/ (1.1)^1

today, thus I have 5454 today.
 9000 after 4 years mean 9000/ (1.1)^4
means 6147, thus second option is
better.

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As an investor, I have 2 options, in
which I get 6000 after 1 year in
another, I get 9000 after 4 years.
Discount rate is 20%. Which option is
better?
 6000 after one year mean 6000/ (1.2)^1
today, thus I have 4999 today.
 9000 after 4 years mean 9000/ (1.2)^4
means 4340, thus 1st option is better.

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As an investor, I have 2 options, in which I
get 6000 after 2 year in another, I get 9000
after 5 years. Discount rate is 18%. Which
option is better?

 6000 after 2 year mean 6000/ (1.18)^2

today, thus I have 4316 today.
 9000 after 5 years mean 9000/ (1.18)^5
means 3933 , thus 1st option is better.

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I will need 100 crores after 5 years
from now. How much money should I
deposit in my bank account every
year? Rate : 10%
 Amt ((1+interest rate)^N – 1) / rate of
interest) = future value of amount.
 Thus Amt ((1.1)^5 -1)/.1 = 100

 Or amt (.61/.1) = 100

 Or amount = 100/6.1

 Or amount = 16.38 approximate every

year.

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My equity capital is 60 lakh, debt is
40 lakh. Beta of my stocks is 1.5,
risk premium in the market = 10%
and treasury bill is at 8%. What is my
cost of capital ?
 Treasury bill (govt. bill) have risk free
interest = so risk free rate of return is 8%.
 Market rate = risk free rate + risk premium
 CAPM = capital asset pricing model
 CAPM fomulae : Risk free rate + Beta *
(Market rate – risk free rate)
 =8 + 1.5* (18-8) =8 + 15 = 23 %.
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Risk free rate = 7.75%, Beta = 2,
Market rate = 16%. Calculate cost of
capital using CAPM?
 CAPM = capital asset pricing model
 CAPM fomulae : Risk free rate + Beta
* (Market rate – risk free rate)
 =7.75 + 2 (16-7.75)

 =24.25 answer.

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Risk free rate = 7.75%, Beta = 2, My
cost of capital = 16%. Calculate
market rate of returns using CAPM?
 CAPM fomulae : Risk free rate + Beta
* (Market rate – risk free rate)
 =16= 7.75 +2 (Market rate – 7.75)

 =16-7.75 = 2M – 15.5

 =8.25 +15.5 = 2M

 M = 11.78 answer.

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If Market rate is 14%, risk free rate
is 8.25% and my cost of capital is
18%. What is my BETA?
 CAPM fomulae cost of capital = : Risk
free rate + Beta * (Market rate – risk
free rate)
18 = 8.25 + Beta (14-8.25)
18-8.25= beta (5.75)
Beta = 9.75 / 5.75 = 1.7 answer.

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 You have invested your money in
four sectors. The average returns
are 18, 18, 24 and 16 respectively.
Your beta of these sectors are .9,
1.12, 1.5, .95. which is best sector?
Risk free return = 10 and market
return = 18%
 Expected returns = RF + Beta(RM-RF)
 =10+.9(18-10) = 10+7.2 = 17.2 so on.

 Thus we get expected returns for these

four sectors which are 17.2, 19, 22 and
17.6. Thus third sector has outperformed
in comparison to expectations (24-22 =
2)
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Solution . . . .
 We get 18% in comparison to 17.2 in the
first sector, thus it is very profitable (by
.8)
 In second sector, we get 18% but
expectation is 19%, so it is not upto the
mark. Third sector is the best performing
sector.

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I shall get 100 crore after 5 years
(from afterschooolians), what is the
value of that today? Rate = 10%
= 100 / (1+interest rate)^n
 =100/ (1.1)^5

 =100/1.61

 =62.11 approximate.

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 ABO UT A FTERSCH OOO L
Afterschoool conducts three year integrated PGPSE (after
class 12th along with IAS / CA / CS) and 18 month PGPSE
(Post Graduate Programme in Social Entrepreneurship)
along with preparation for CS / CFP / CFA /CMA / FRM. This
course is also available online also. It also conducts
workshops on social entrepreneurship in schools and
colleges all over India – start social entrepreneurship club in
your institution today with the help from afterschoool and help
us in developing society.

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Why such a programme?
 To promote people to take up entrepreneurship
and help develop the society
 To enable people to take up franchising and
other such options to start a business / social
development project
 To enable people to take up social
development as their mission
 To enable people to promote spirituality and
positive thinking in the world

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Who are our supporters?
 Afterschoolians, our past beneficiaries,
entrepreneurs and social entrepreneurs
are supporting us.
 You can also support us – not
necessarily by money – but by being
promotor of our concept and our ideas.

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About AFTERSCHOOOL PGPSE – the best
programme for developing great entrepreneurs

 Most flexible, adaptive but rigorous programme

 Available in distance learning mode
 Case study focused- latest cases
 Industry oriented practical curriculum
 Designed to make you entrepreneurs – not just
an employee
 Option to take up part time job – so earn while
you learn
 The only absolutely free course on internet
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Workshops from
AFTERSCHOOOL
 IIF, Delhi
 CIPS, Jaipur
 ICSI Hyderabad Branch
 Gyan Vihar, Jaipur
 Apex Institute of Management, Jaipur
 Aravali Institute of Management, Jodhpur
 Xavier Institute of Management,
Bhubaneshwar
 Pacific Institute, Udaipur
 Engineering College, Hyderabad

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Flexible Specialisations:
 Spiritualising business and society
 Rural development and transformation
 HRD and Education, Social Development
 NGO and voluntary work
 Investment analysis,microfinance and inclusion
 Retail sector, BPO, KPO
 Accounting & Information system (with CA / CS /CMA)
 Hospital management and Health care
 Hospitality sector and culture and heritage
 Other sectors of high growth, high technology and social
relevance

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Salient features:
 The only programme of its kind (in the whole world)
 No publicity and low profile course
 For those who want to achieve success in life – not just a
degree
 Indepth knowledge and expertise
 Professional approac: World class approach
 Strong intellectual and business capabilities
 Flexible – you may stay for a month and continue the rest of
the education by distance mode. / you may attend weekend
classes
 Scholarships for those from poor economic background
 Latest and constantly changing curriculum – keeping pace
with the time
 Placement for those who are interested
 Admissions open throughout the year
 Latest and most advanced technologies, books and study
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material
Components
 Pedagogy curriculum and approach based on IIM Ahmedabad and ISB
Hyderabad (the founder is alumnus from IIMA & ISB Hyderabad)
 Meditation, spiritualisation, and self development
 Essential softwares for business
 Business plan, Research projects
 Participation in conferences / seminars
 Workshops on leadership, team building etc.
 Written submissions of research projects/articles / papers
 Interview of entrepreneurs, writing biographies of entrepreneurs
 Editing of journals / newsletters
 Consultancy / research projects
 Assignments, communication skill workshops
 Participation in conferences and seminars
 Group discussions, mock interviews, self development diaryng
 Mind Power Training & writing workshop (by Dr. T.K.Jain)

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Pedagogy
 Case analysis,
 Articles from Harvard Business Review
 Quiz, seminars, workshops, games,
 Visits to entrepreneurs and industrial visits
 Presentations, Latest audio-visuals
 Group discussions and group projects
 Periodic self assessment
 Mentoring and counselling
 Study exchange programme (with institutions out of India)
 Rural development / Social welfare projects

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Branches
 AFTERSCHOOOL will shortly open its
branches in important cities in India
including Delhi, Kota, Mumbai, Gurgaon
and other important cities.
Afterschooolians will be responsible for
managing and developing these
branches – and for promoting social
entrepreneurs.

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Case Studies
 We want to write case studies on social
entrepreneurs, first generation
entrepreneurs, ethical entrepreneurs.
Please help us in this process. Help us
to be in touch with entrepreneurs, so that
we may develop entrepreneurs.

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Basic values at afterschoool
 Share to learn more
 Interact to develop yourself
 Fear is your worst enemy
 Make mistakes to learn
 Study & discuss in a group
 Criticism is the healthy route to mutual support
and help
 Ask fundamental questions : why, when, how
& where?
 Embrace change – and compete with yourself
only
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www.afterschoool.tk
social entrepreneurship for better
society

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