C

Summary otes

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapters Pg No

1 Leverage 3 14
2 Cost of Capital 15 28
3 Capital Budgeting 29 39
4 Capital Structure 40 60
5 Dividend Decision 61 75
6 Ratio Analysis 76 101
7 Management of 102 113
Working Capital

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter I Leverage
FORMULA'S
1
Leverage
LEVERAGE

Degrée of Financial Degree of operational Degree of combined

leverage leverage leverage

d Occurs due to both

049 S L dueffixed Fixed Financial Cost
g Interest Eg Rent Operational cost

2 Format
Format
Sale Xx
G Variable cost
Contribution XXX
Fixed cost XX
EBIT XXX
G Interest XX
EBT XXX
G Tax
PAT EAT XXX
G Pref Dividend XX
Distributable Profit XXX
No of shares XX
EPS XXX
CA Inter FM-ECO CA Swapnil Patni 11
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 Notes when fixed cost is zero DOL would
always be 19

Note If fixed cost increases DOL increases

Hence Leverage more Risk is more

3
Degree of Operational leverage DOL

DOL

Contribution
change in EBIT
EBIT Change in sales

4 Degree of Financial Leverage

DFL

J
EBIT Change in EBT EPS
EBT Change in EBIT

Only Interest Interest PreferenceDividend

EFFI EBIT
EBIT Int
Ifax

CA Inter FM-ECO CA Swapnil Patni 11

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 5
Degree of Combined leverage
DCL

DOL DEL contribution chainge in EBT

EBT Change in Sales

6 Return on Investment ROI

ROI
PIT
Shareholder's
Funds

7 Return of Capital Employee ROLE

ROCF

Pre Tax Post Tax

IntffPAT In PAT

8 PV Ratio

PV Ratio Contribution
sales

CA Inter FM-ECO CA Swapnil Patni 11

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 9 PE Ratio

PE Ratio ˢ

10 Earning Yield
Earning Yield i
4
11 Sales Turnover

Sales Turnover Assets Assets Turnover Ratio

4 i Revenue Sale 710

in EBIT Operating Income

5 Beta Risk
More Beta MoreLeverage MoreRisk More FixedCost

6 T 6000 6000
3000 12000

Favourable Unfavourable
DFL DFL

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter I Leverage

SUMMARY NOTES

Leverage leverage occurs due to Fixed Cost

Fixed Cost
V

Operational Financial

Rent Interest
Depreciation Preference
Insurance Premium Dividend
Salary

LEVERAGE

Degrée of Financial Degree of operational Degree of combined

leverage leverage leverage

Occurs due to fixed Occurs due to fixed Occurs due to both

Financial Cost Financial Cost Fixed Financial Cost
Eg Interest Eg Rent Operational cost

Leverage
Benefit Loss
when more sale when less sale
Sale 10,000 30,000 Sale 10,000 5000
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 let's find out DOL DFL DCL by using F formulas

Particulars case Case case

Sale 10,000 20.000 5000

G Variable Cost401 4000 8000 2000
Contribution 6000 12000 3000
G Fixed cost 2000 2000 2000
E BIT 4000 10,000 1000
G Interest 500 500 500
EBT 3500 9500 500
G Tax 501 1750 4750 250
PAT EAT 1750 4750 250
G Pref Dividend 100 100 100
Distributable Profit 1650 4650 150
No of shares 100 100 100
i EPS 16.50 46.50 1.50
iil DOL CE 1.5 1.2 3

i DFLCE.BE 1 2 1.07 3.33

gnt
1
in DCL DOL DFL 1.8 1.284 9.99

Now Let's find out DOL DFL DCL by using F2

formulas when your sales grow from 10.000 20.000
Firstly find out
i I change in sale
Chaff too
20,000 10,000 700
10,000
100

CA Inter FM-ECO CA Swapnil Patni 11

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 ii 1 change in EBIT
Chff too
10.000 9000
100
4000
1501

iii Change in EPS

Chff16.50too
46.50
100
16.50
181.81

DOL 1 Change in EBIT 1501

Change in sales 1007
DFL Change in EPS
change in EBIT
i DCL 1 Change in EPS
187 11
change in sales

Impact on leverage when sale is constant and

Fixed cost is Increasing

Particulars case I Case Case

Sale 5000 5000 5000
G Variable Cost 2000 2000 2000
Contribution 3000 3000 3000
G Fixed cost 1000 2000 0
EBIT 2000 1000 3000
DOL C 15 3 1
B
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Conclusion

Fixed cost Leverage

0
1000 5
2000 7 3

i More Fixed cost More Leverage

More Risk

Leverage can be good or bad depending upon

sales

Formulae at one place

1
Degree of Operational leverage DOL

DOL
IL TEL
Contribution change in EBIT
EBIT Change insales

CA Inter FM-ECO CA Swapnil Patni 11

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 2
Degree of Financial Leverage DFL

DFL

1174 TEL
EBIT PIL
EBT
1 Change in EPS
Change in EBIT NOVP
Only Interest D

Change in EPS PBT PAT

Interest Pref Divide Change in EBIT
nd
EBIT
EBIT Int
fly
3 Degree of Combined Leverage DCL

DCL

1174 TF2I
u

i DOL DFL Change in EBT

f change in sales
ii Contribution
EBT

CA Inter FM-ECO CA Swapnil Patni 11

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 i

4 i Revenue Sale 710

in EBIT Operating Income

5 Beta Risk
i More Beta Moreleverage MoreRisk More FixedCost

6 6000 6000
3000 12000

Favourable Unfavourable
DFL DFL

7 DOL 4 DCL 24
DFL 1
4
8 Earning Yield
Eff

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter I Leverage

SUMMARY OF QUESTIONS

Q1 Pg No 9 Nothing special about it

Q2 Pg No 10 Nothing special about it

Q 3 PgNo 11 Refer Ratio Chapter For ROI

Q4 Pg No 12

Imp Assumption we deduct only the given interest

If
in the question then DFL given in the question will not
match with our answer That's why we assume there is a
possibility ofother interest

Q5 PgNo 14 MustSolve question

Very imp to find out EBIT with the help of DFL

Q6 Pg No 15
Use Fz DCL Change in EPS
Change insales

Q7 PgNo 17
Imp to check how to use DFL to get EBT

98 PgNo 18 Nothing special about it

99 912
decline in sales will wipe out EPS

DCL Change in EPS I

change in sales
18

CA Inter FM-ECO CA Swapnil Patni 11

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Q 10 191
ILL Int isgiven then we can find out EBIT

Asset Turnover ratio

EBIT
I 5
I
Industry A 710 ratio 10
Our TIO is lower
Asset 200 T 0 ratio 10
T 0 2002

Q 28 PgNO 36
IF the post tax int rate is given we should
convert it into pre tax to calculate interest amt
for income statement

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter 2 Cost of Capital
FORMULA'S

K'd Ke Kp WAIC
cost of cost of C of Cost of Prep weighted Avg
Debentures Equity Reserve Dividend Cost of Capital

Dividend Dividend Earning Earning CAPMcapital

Riyarealised
Price Price Price Price assets price yield
Approach growth Approach growth model approach

1 Kd Cost of Debentures

Kd
Redeemable Irredeemable

corporate Tax
Kd Int 1 tax RV NP Kd Int 1 tax
NP
RV NP
2

NP Netproceeds 5125 19117443114

i NP Issued price Brokerage Floating cost Discount

CA Inter FM-ECO CA Swapnil Patni 11

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 Kr Cost of Reserve

v
ke
Taxable Non Taxable
in hands of Individual
v

k Ke 1 tax Kr Ke
d
Here tax tax
personal
Don'ttake corporate tax

3
Kp Cost of Preference Dividend

KI

Redeemable Irredeemable

Kp PD RV NP Kp PD
N NP
RV NP
2

CA Inter FM-ECO CA Swapnil Patni 11

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 4 Ke Cost of Equity

KE
Dividend Price Earning Price

Growth No Growth Growth No Growth

Ke ke ke ke
y y Es
D Next
year Dividend
Po Current Year Price
5 CAPM capital asset price model

Ke RF β Rm RF
Risk premium for 1 Beta
Rm Risk in market
β Risk
RF Risk free

6 Riya Realise Yield Approach

Ke D P1 Po
100
Po

CA Inter FM-ECO CA Swapnil Patni 11

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 7 WACC weighted Avg Cost of Capital

WAS
g
Book Value Market Value
Take Reserve
Take amt as per ietatfakpei.ve
BookValue Market Value

weight nt
Table Format Source Amount Weight Rate WACC

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter2 Cost ofCapital

SUMMARY NOTES
D
K'd ke K Kp WACC

V
I
Dividend Dividend Earning Earning CAPM crapital
Riya Realised
Price Price Price Price assetprice yieldapproach
Approach growth Approach growth model

2
KI
v v
Redeemable Irredeemable

corporate Tax
Kd Int 1 tax RV NP Kd Int 1 tax
NP
RV NP
2

NP Netproceeds 5125 19174243114

i NP Issued price Brokerage Floating cost Discount

Eg IP 100 Dis 5 Bok 2 NP 93

3 Why 1 Tax for interest

Because interest is item of P L AIC Hence helping
to save tax

CA Inter FM-ECO CA Swapnil Patni 11

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 4 Why not s tax forpreference dividend
Preference Dividend is not an item of P L All
it is an Appropriation of profit

5 RV Reedemable Value
n no ofyears

6 RV 110 Int 10
NP 90 FV 100
n 5485 Tax 50

Kd 10 1 0.5 90
1105

902110

91
7 Kd Ks Ke Kp is the cost of 1 year

8 RV NP

Allowable Non allowable

Expense expense
Revenue Expense capital Expense
Rr NP 1 tax RV NP

9 TSHOT IT 2924337 led

IGOTTI use 194T Ip

CA Inter FM-ECO CA Swapnil Patni 11

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 Eg FV 100
F cost 3
Issue at premium 10
Int 10 Tax 50

Int 1 tax
hp
10 1 50 100
110 3
10 0.5 100
107
If

Cost of Preference Dividend

107
Kp
KI
Redeemable Irredeemable

Kp PD RV NP
RV NP Kp Xp
2

11 Kr Cost of Reserve

Ke
Takable Non Taxable
in handsof Individual

K Ke 1 tax K Eke
Heretax personal tax
Don'ttake corporate tax

CA Inter FM-ECO CA Swapnil Patni 11

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 121 Tax
Tax

u v
Personal
Corporate
Individuals

Use for Use for

K Kelt Tax Int 1 tax

Let's understand
by following example
Ke 10
Corporate tax C Tax 50
Personal tax P Tax 10
Kr
K Ke s Tax
10 1 10
9

131 K

Dividend Price
Earning Price
v v v v

Growth No Growth Growth No Growth

Ke
g ke ke y ke

D Next
year Dividend
Po Current Year Price
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Hence
You are entitled to get D Not Do
You are investing to pay i.e Po

14 Eg EPS 10
DPS 5
Po 100
Ke
r u

Eff

Is

157 G Growth

G Balance ROI
Balance B Reserve
R ROI
Dividend Payout Ratio 0.6
ROI 30
G 0.4 30
12

16 CAPM Capital Assets Price Model

Ke Rf β RM RF

Eg RF Fd Rate 10 Fd Beta 0
Reliance 2β
Nifty Beta 113
RM 15
CA Inter FM-ECO CA Swapnil Patni 11
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 Feliance 10

20

17 Realised Yield Approach

Riya

Riya D P Po
Po

Eg Po 2500
P 3000
D 10
Ke 10 3000 2500
2500
104250580 700

18 WACC weighted Avg Cost of Capital

WAS
g
Book Value Market Value
Take Reserve
Take amt as per it atmdiaff.ve
BookValue Market Value

weight feint

CA Inter FM-ECO CA Swapnil Patni 11

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 197 Table Format Source Amount Weight Rate WACC
OR WACC

Eg Source Amount Weight Rate WACC

10,000 3.33
20.000
18 10.00
30.000 13.33

Kd PostTax 10

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter2 Cost ofCapital

SUMMARY OF QUESTIONS
Q1 Pg No 65
Ignore 103 consider Current Market Price

Q2 Pg No 67 Very easy dont solve

Q 3
Pg No 68 Must solve question
NP 80
Life 591 calculate Kd from POV of 2017

Q8 Pg No 69 Very easy dont solve

Q 9 Pg No 69
NP 95
IF MP and issue price is given then consider issue price
for calculation of MP
This was clearly given by ICAI module

Q5 Pg No 70
Must solve by using Formula FV PV 1 2
Unique question on zero int deep discount bonds
For detail solution refer own book Pg no 70 Module2

Q 6 Pg No 73
Must solve

Q 13 Pg No 75 Easy question on CAPM

Q 11 Pg No 75 Must Solve
Similar que no 44 Refer Raftar
This que must be solved after capital budgeting

CA Inter FM-ECO CA Swapnil Patni 11

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Q 16 Pg No 79 Don't solve

Q7 Pg No 81 Don't solve

Q 14 Pg No 81 Must Solve

Floating cost will not be deducted from IP issueprice

for calculation of kg

Ke IPD Kr Dir
so

FV Disct Floating cost Face Valu

Q4 PgNo 83

D Proposed dividend expected dividend upcoming dividend

end of the current year
Do Pays dividend of the current year past year

Be careful about point b

Q 10 PgNo 84 Veryeasy

Q 15 PgNo 85 Veryeasy

Q 24 PgNo 86 Veryeasy

Q 26 Pg No 87 In this question remember pattern of additional

Finance
In this question Personal Tax is not given that is why
Ke Kr

CA Inter FM-ECO CA Swapnil Patni 11

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Q 17 Pg No 89 Must Solve
when ke Kr while solving WACC as per market value
then in the column of source and amount convert MV
of Equity into 2parts in the ratio of equity reserve i.e
1 3 Equity 6,251000
Reserves 1875000
Eventually equity will be multiplied by equity rates
Reserves will be multiplied by reserves rates
Kindly Note
undersuch situation Ke Ka don't multiply MV of
equity directly by ke However when ke Kr are equal
then M.v of equity will be multiplied by ke without
considering reserves

CA Inter FM-ECO CA Swapnil Patni 11

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Chapter 3 Capital Budgeting
FORMULA'S

NPV PI IRR ARR EA'M MIER

Paybaik Disct Payback Divisible Incremental
period period

1 NPV Net Present Value

Year CFAT DF DCFAT

PVOF Inflow
C PV of Outflow
Net PresentValue NPV

Note
1
NPV t Accept
2 NPV Reject
3 NPV O Reject

2 PI Profitability Index
PI PV of Inflow
PV of Outflow
CA Inter FM-ECO CA Swapnil Patni 11
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 3 IRR

Step 1 Find out NPV of lowest Rate LR

Step 2 Find out NPV of Highest Rate HR

t it in Formula

IRR LR NPV OF LR HR LR
NPV OF LR C NPV of HR

4 ARR

Formula 1 Average PAT 100

Initial Investment

Formula 2 Average PAT

100
Average Investment
closing
fopening

5 EAM Equivalent Analyzed Method

PV Project A 20,000 NPV Project B 40,000

Life 2 yrs life 5 yrs
CDF 1.73 CDF 3.79

Project A ProjectB
i EAM 0 0
NI 2,9 49
EAM 11560 10554
CA Inter FM-ECO CA Swapnil Patni 11
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 6
Payback Period Discounted Payback Period

Normal Discounted
FORMAT

Year CFAT Balance Year OFAT DF DCFAT Balance

EXAMPLE
outflow 10112h Inflow 250,000

Year CFAT Balance Year OFAT DF DCFAT Balance

250,000 7501000 2 250k 0.90 225k 775000
12
2501000 5,001000 2 250k 0.82 205k 570,000
3 2501000 2100,000 3 250k 0.75 187.5k 382500
4 2501000 0
4 250k 0.68 170k 212500
5 250k 0.62 155k 57500
Payback Period 4years 6 250k 0.56 140k

140,000 365 days

57500
57500 365 150days
1401000

i Paybackperiod
Syrs 150days

7 Divisible Indivisible
Project
Divisible Indivisible

Sugar Rice TV Car AC

Tomato
CA Inter FM-ECO CA Swapnil Patni 11
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 8 Incremental

step I Incremental Outflow

Step 2 Incremental CFAT

Step 3 PV of Inflow 4 Column

Step 4 PV of Inflow PV of Outflow NPV Incremental GT

9 MIRR

MIRR FV PV 1 2

FORMATS

1 NPV

Year CFAT DF DCFAT

PVOF Inflow
Nettpietse aide Npv

CA Inter FM-ECO CA Swapnil Patni 11

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 2 Payback period

Normal
Year CFAT Balance

Discounted
AT Balance

fff
Tiscountvayback

3 NPV IRR

Options Option 2
Year At
Year
OFA't
DF Daat If
Year OFA DF DCFAT

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 3 Capital Budgeting

SUMMARY OF QUESTIONS

Q1 Pg no 128 Basic question to understand CFAT

Q2 Pg no 131 Basic question to understand ARR concept

G 3 Pgno 127 Very easy question

Invest NPV t
Don'tInvest NPVC

Q 4 Pgno 126 Very easy question

Q 5 Pgno 132Basic question to understand PI concept

Q6 Pgno 133 Basic question to understand IRR

i Find out NPV at lower rate
Ii Find out NPV at higher rate
iii 1,01 1
1 51 I
1,15
82500 162500

62500 82500

IRR
IRR 151 21
10121

IRR LR NPV OF LR HR LR
NPV OF LR C NPV of HR

CA Inter FM-ECO CA Swapnil Patni 11

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Q8 Pgno 135 Basic question to understand IRR Focus on CDF CFAT

Whenever CFAT is same for every

year then go
for CDF method instead of tabular method
PV ofinflow FAT CDF
GPVOFoutflow XXX
NPV XXX

G9 Pgno 138 Must solvequeFor MIRR

In MIRR we withdraw the funds at the end of the project

whereas in NPV calculation we assume that we withdraw profits
everyyear Remaining life
DF 1 2
costofcapital
FV PV 1 2
FV Present value of future inflow
PV Present value of outflow
8 MIRR

Q 10 Pg 141
IRR WACC Profit
IRR WACC LOSS

Q 17 Pg no 143 All in one question

Q 16 Pgno 145

Q 20 Pgno 152 Must solve question

At IRR
PV of outflow PV ofinflow

CA Inter FM-ECO CA Swapnil Patni 11

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Q 13 Pgno 154 Must solve question
Calculate Return
NPV 100
Investment

IFproject is divisible divide the amount as per Ranking given on

the basis of return
It indivisible invest in the option with highest NPV andassume
that balance amt is not utilised it was kept idle also it can be
assumed that it is invested in bank and will be added in NPV

Q 14 PgNo 156 Mustsolveto understandEAM

When life of project A project B is not same they cannot

becomposed on the basis of NPV IRR In this case we have
to use EAM
Assume every year's profit a
NPV K X CDF

Q 15 Pgno 157 All rounder question

G 42 Pg no 162 Easy question

whenever there is conflict in NPV PI PI will be choosen

Q 22 Pg no 165 Easyquestion
If outflow offunds are there in year I also then multiply the
outflow amount with respective discounting factor andsubstract
From inflow justlike outflow in zero
year

Q 23 Pgno 166 Mustsolvequestion

Choose project with highest NPV
economies of scale can be in form of outflow or inflow

CA Inter FM-ECO CA Swapnil Patni 11

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Q 29 Pgno 167 Important question

Calculate CFAT
Find PV of inflow
In PV of outflow multiply scrapvalue and sales promotion
expenditure with respective discounting factors

Q 31 Pg no 182 Unique Question

Find netcost ofnewmachine 90,000

cost mainteng
44873

10 00 91875
Cost of 8 years 134875
1 salvage value for 8ᵗʰ 6538
yr
aft
20.000
CDF
0.32690
Net cost 128335
EAG NetCost CDF

Now deduct netcost of new machine and maintenance cost of

old machine from salvage value of old machine and multiply
it with respective DF
Choose the year with highest NPV

Q 18 Pgno 184 Important For Incremental question

Find out incremental FAT

Incremental Profit
4 WDV ofevery
Incyffental Dep year
C Tax
PAT
1 Dep incremental
Incremental CFAT
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Now calculate PV of inflow and net PV of outflow
IF t npv then replace machine

IF cap gain is not ignored

WDV at end of 10ᵗʰyear 2.06.362

Sale value 3,00000
Capitalgain 93638
Tax on capitalgain 20 18727

Add Sale value in 10ᵗʰyear

less Tax on gain in 10ᵗʰyear

IF cap Loss is not ignored

WDV 206362
SaleValue 35000
CapLoss 171362
Taxsaving 20 34272

Add Sale value in 10ᵗʰyear

less Tax 10ᵗʰ
saving in year
Important note No capital gain tax in SLM method

Q30 Pg no 180 Similar to Q 18

July21 Pgno 191 Similar to Q 18

Dec21 Pg no 188 Imp adjustment

Life of Machine is notsame use EAC

Maintenance cost is paid in advance
it will not be deducted from contribution of lastyear
it will be added in outflow at zero year
CA Inter FM-ECO CA Swapnil Patni 11
so Is
May18 Pgno 193 Easy question

Ignore inflation rate and DF of inflation rate

Add working capital exp in initial investment at zero year

Q25 Pg 169 Must solve question of EAM method

Q 21 Pgno 171 Must Solve

Q 27 Pg no 173
kindly note that commission is net of taxes that is why we
are not deducting Tax Otherwise we would have taxes Whereas
in the machine we have found out CFAT after deducting taxes

Q40 Pgno 187 Similar to g 27 except outsourcing

NPV of outsourcing Buying new machine
hence outsource the work
NPV of outsource Buying
hence purchase

Q 43 Pg no 195 similar to Q 30

Q 48 Pg no 197 Must solve

Very important to see calculation of CFAT

g 52 Raftaar Mustsolve
two methods toSolve

Substract expenses while Add all expenses in PV of

calculating CFAT outflow While multiplying
with their respective DF

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 4 Capital Structure
FORMULA'S

BEIP EFS MM
Indifference
curve Approach

Arbitrage value Ke
WALL

1 Indifference Point

Indifferent 2

A
fog B A
joytions
B C

ÉF
Point Points

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 2 Break Even Point

Break Even Point

Interest Interest
Pref

3 EPS
EPS PAT
No ofshares

4 MM Approach

MM APPROACH
5 7
Tax No tax

Lev Unler Tax saved Lev Unler

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 You also need to know Following Formulae
while solving by MM Approach

Tax No tax

1 Debt 1 Debt
I2 Idled
2
Equity Total Value Debt 2
Equity Total Value Debt

3 Total value of 3 Total Value of

d d
Unler Principal ve
9M ate
ii Unlevered Y unlevered
PII Ppf
4 Ke ke
Equity itered Iity Ltered

5 5
Ko WACC Ko WACC

Kd kdwt Ke Kent Kd kdwt Ke Kewt

OR OR
Source Amt Wt Rate WACC Source Amt Wt Rate WACC

CA Inter FM-ECO CA Swapnil Patni 11

so Is
5 WALL
Use WACC use this formulae only
I when there is No tax

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 4 Capital structure

SUMMARY NOTES

1 Indifference Point
Indifference Point

Jeong foytions
A B A B C

IÉF
Point
3 Indifference
Points

Refer G 19 15 Refer G 18
Particular PlanA PlanB

EBIT N N
H Int air 8cv
EBT n Ger n 8Cr
C Tax 501
PAT 0.5N 218 0.5N 418
E NOT 60112h 20112h
EPS 0.5N 2C 0.5m Ucr
60 Lkh 202h
3N K 2418 418
2N 2018

CA Inter FM-ECO
1012 CA Swapnil Patni
so 11
Is
 i Indifference Point is an EBIT where irrespective
of capital structure EPS remains same
2 Break Even Point
It is the point where EPS O
i BEP Fixed Financial Cost

Break Even Point

Interest Interest
Preflight
For e.g BEP Int
III
Int 50k 50k
PD 20K 49
Tax 50 90

3 MM Approach
MM APPROACH
5 7
Tax No tax

Lev Unler Taxsaved Lev Unler

Leverage Having Debt also

Unleverage Only Equity
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Let's revise
by solving following question
9.22 Pg no 33
OPTION I NOTAX

Particulars A Ltd Bltd

levered unsevered

EBIT 18.00.000 18.00.000

G Int 541Wh 12 648000 0
EBT 1152000 18.00.000
4 Tax 0 0
PAT 1152000 18.00.000

Ke 25.041 18

Value 128 1cg

Notatso
Total Value Icr
Debt 54 Lakh
i
Equity 218 54112h
46 Lkh

NOW Ke 1152001 2
41
Iff 46112h

Ko Kd kdwt Ke Kent
121 000 25.041 46
5402
gg
6 68 115184

CA Inter FM-ECO
181 CA Swapnil Patni 11
so Is
 Answer Ke levered 21041
Unleverd 18

Value Levered 24
Unleverd Icv

Ko 181

OPTION 2 TAX
Particulars A Ltd Bltd
levered unsevered

EBIT 18.00.000 18.00.000

G Int 5414 121 648000 0
EBT 1152000 18.00.000
G 40 460800 720,000
Tgf 691200 10.80.000

Ke 25.04 18

Value Lev Unler Jaated

60.00.000

60112h II
5442h 40
60Lkh 21.60.000
81.60.000

Total Value 81.60.000

Debt 54.00.000
Equity 27.60.000

CA Inter FM-ECO CA Swapnil Patni 11

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 Ke 25.041
41 48 0

Ko Kd kdwt ke ke wt
1211 0.41 2504
8 40 2,7884
4.764 8.469
13
231
Answer Ke Levered 25.04
Unleverd 18

Value Levered 8160,000

Unleverd 60.00.000

Ko

Points to Remember

1 Ke 194 Futy
2 Value
If
3 Ko WACC
I
Ko Kd kdwt ke ke wt
I Source Amt Wt Rate WACC

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 4 Ke Ko When there is No Debt

Ke Ko When there is Debt

when co has debt component

4 Arbitrage
Arbitrage if company A and
occurs
company B has same EBIT but does not have
same capital structure

let's revise by solving following question

G 8 Pg No 19
Particulars leverage Unleverage
E BIT 20,000 20.000
C Interest 100000 7 7 7000 0
EBT 13000 20.000
1 Tax 0 0
PAT 73000 20,000
Ke 18 101

Debt Equity 200.0

100000 3
20
200000
18
72222 4
172.2222

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Go From Unleverage to leverage
t 17
1 Int on Debt 700 11 Dividend Loss 2000
7000 10 20,000 10 1

21 Dividend 1300
13000 10 1

3 Arbitrage 2778

Total 4778 Total 2000

Buy sell
172.222 107 2 00,000 101
17222 20.000

A e
20,000 17222

2772

superimportant note
i Lev Unler Int Loss
Unler Lev Int gain t

ii kindly note in arbitrage process don't do

Lev Unler Lev Unler Taxsaved Because if value
of Levered and unlevered becomes same then there
is No Arbitrage Gain
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 iii In the long run when value of levered
and unleverd becomes same the arbitrage
process gets over

5 EPS

let's revise by solving following question

G 12 PgNo 23

Equity Debt Eq Debt

Particulars Plan A PlanB Planc

BIT
Existing 60,001000 60.00.000 60.00.000
New 40,00 000 40,001000 40.001000
EBIT 118 Lcr 112
C1 Int 0 800,000 400.000
EBT Lcr 9200.000 9600000
C Tax 50 5042h 4600000 9800000
PAT 50112h 4600000 4800,000
KINOS
Existing 10100,000 10,001000 10100,000
new 200,000 0 50,000
50001
1250801
EPS 4.167 4.6 4.57
1 4 119 114.1
Decision Reject Accept Reject

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Kindly Note
i Don't forget to deduct Preference Dividend
From PAT

ii Don't forget to deduct existing Interest

existing PD if any
iiil No of shares Existing New

iv Also refer master que 18

6 Relevance Irrelevance

Relevance Irrelevance

MM NIA Traditional MM NOI

Approach Approach
Tax no tax

Lev Unler Tax Saved Lev Unler

7 Net Income Approach

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Net Income Approach NIA

10 Ke

ko LOW COC

71

Leverage

8 Net Operational Income

Net Operational Income NOI

ke
10
s ko
Ko Constant coe

71 Kd

Leverage

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 9 Traditional Approach

Traditional Approach

11

Ko High on i
8

Leverage

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 4 Capital structure
SUMMARY OF QUESTIONS

Q1 Pg No 7

1 Value of Company
Dft Equity

EFFI This formula should be

2
Ko WACC
used when there is nota

Q4 Pg No 8
1
Ke P

Q7 Pg No 13
Remember

1 MM approach Arbitrage
Levered to Unlevered

2 Value of company D E
i D is taken from question
i E need to be calculated
E
PEE

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 3 Lev
Effect

Add Dividend of New less Dividend of old

co Company

Add Stake Less Interest of Lev Company

OR
Add Balance cost if
acquired same
stake

Q8 Pg No 19

1
Unler Lev
t C

Add Dividend of Lev Less Dividend of Unler

Company Company

Add Interest
Add Cash stake

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 2 Note 1

Arbitrage
Lev Unler Unler Ler

option 1 option 2
r r
Full spend Stake remains
same
t
Cash Balance

Note 2
MM Approach

Arbitrage Value
Refer 9.7 9.8 Refer9.22

11
Lev Uhler lev Inter Isaafed

Principalamataxrate

G3 PgNo 15

1
Ko kdxkdwttkexke.at
2 Ko
FEI IETF
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 3 By 5 column method
Source Amt Wt Rate WACC

Q 137,1g No 20
1 Slab Rate for interest calculation
2 No of shares Equity
Market Price given in question

3 EPS
IITofshares
Q 11 Pg No 21

1 Kindly deduct P D Preference Dividend from PAT to find

out EPS

Q 12 PgNo 23
1 No of shares to be issued 50 00,000
21 faceValue Premium

Also don't forget to add New EBIT into existing EBIT

Q 14 Pg No 24

very important to check

i How to calculate New EBIT

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Find out the of EBIT of existing capital

GIF
New EBIT 40.00.000 17.33
693200
i TotalEBIT 52 00,000 693200
5893202
ii Important to check
e
iii shareprice EPS X PERatio

Q 15 Pg No 26

If only one option is given we will assume that another

option is 100 equity

G 18 PgNo 28 4 Must solve que For

EPS BEP Indifference
BEP Interest Point
111g
Q 21 Pg No 32

IF NO TAX as per MM Approach then

Unleverd Ke Unlevered K Levered K

Q 22 Pg No 33

1
Tax saved Debt amt Principalamt Tax rate
2 To understand MM Approach Tax NoTax

CA Inter FM-ECO CA Swapnil Patni 11

so Is
Q 19 Pg No 36

Point b New way of asking indifference question

which alternative would be best find out by
using indifference point

Q 31 Pg No 39

1 Must solve que For EPS

Need to read question carefully

Q 40 Pg No 47

I Must solve que

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 i

Chapters Died Policy

FORMULA'S

GORDION'S I
WALTER'S MY
APPROACH MODEL APPROACH

LINTNER'S GRAHAM
MODEL DODD MODEL

1 WALTER'S APPROACH

TMP EPS DPS

I
If
TMP Po

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 2 GORDON'S MODEL

dsQ
growth no growth

Fg
Po
Po Pet

3 MM APPROACH

steps of MM Approach

Dividend paid Dividend not paid

Step 2 Shortage of Funds

step 3 No of shares to be issued

step 4 Value

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 4 LINTNER'S MODEL

D Do EPS DPR Do AF

5 GRAHAM DODD MODEL TRADITIONAL

P M D

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 5 Dividend Policy

SUMMARY NOTES

1 GORDAN'S MODEL

Assumption When there is growth then

Ke is always greater than'g
growth rate

GORDON'S MODEL

no growth
growth
TMP TMP 1
Hq
10 10 10 10 20 10 DFR
method
Cost of Dividend I Assumption Company exists
capital Policy only for 5
years
9
Divid
4
Price
gap
Derivition
Item
6 868
Ke 1
51100 10 9 Exploration 8 do growth
si.to
151
CA Inter FM-ECO CA Swapnil Patni
so 11
Is
 Method 1 Method I

Ke 10 Divd 4 PV of Annuity 100

8
g IR screen paile is 150 then
don't buy
growthogonth

81 CA Inter CAFoundation

Method 1
AM
202 on't Buy cost of Dividend
AMP 300 AMP
capital Policy
Don'tBuy
AMP 100 Ke
Buy of Po Dfe
IMP 2
HighGt HighTMP
10022

2 WALTER'S APPROACH
DPS Dividend pershare
EPS Earning share
per
R Ke cost of Equity
Po TMP
p fEPIIst R Internal RateofReturn
TMP Therotical Market
Price

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Let's understand by solving the following
sum

Po TMP
CEPS.EE

100 19

100

14
100 18
1
100 1800
1902

3
GORDON WALTER

Considers Growth Do not considers

growth
D1 D
PU OF DI PVOF D PVOF Returnon
Baigne

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 4 MM APPROACH

Steps of MM Approach

Dividend paid Dividend not paid

ÉL
Step 2 Shortage of Funds
step 3 No of shares to be issued

step 4 Value

Let's understand by solving following sum

MMAPPROA.CI
Que Po 100
Dird 10
R 15

Dividend Paid Dividend not

paid

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Dividend Paid Dividend not
paid
1
Steps Calculate P

P 100 P 100
Dird 510 Divd O
P 105 Py 115

step 2 shortage of Funds

Dividend Paid Dividend not paid
1
Income 40.00.000 Income 40.00.000
Expansion 50.00.000 Expansion 50.00.000
Dividend 10,001000 Dividend O
10 1100.0007

Shortage 00.000 Shortage 00,000

Step 3 No of shares to be issued

Dividend Paid Dividend not paid
1
Shortage 20.00.000 Shortage 10.00.000
P 105 P 115
NOS 20100,000 NOS
1019K
19048 8696

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Step 4 Value
Dividend Paid Dividend not paid
1
Total 1100.0004 Total 1.00.000
NOS 19048 8696
1.19.048 108696

119.048 105 Market 1.08.696 115

1944,14
P
12500041

As per MM
Approach
irrespective of dividend value of
company shall remain same

Given
GYNTH
in Not given in
question question

Noneed to find G BAR

out growth again B Balance
Is Dividend Payout ratio
R Return on Investment

Example EPS 10 DPR 04

R 20
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 G BAR
1 04 20
12

Imp
G 6 201 1.2 Incorrect
G 0.6 201 12 Correct

5 Optimum Dividend Policy

I
R 20 R 10 R 101
Ke 10 Ke 25 Ke 10
R Ke Rake R Ke
Dividend 0 Dividend 100 Dividend Kuch
Bhi

6 LINTNER'S MODEL

D Do EPS DPR Do AF

Do Dividend of O
D Dividend of next Year
EPS Earnings per share
DPS Dividend Payout Ratio
AF Adjustable Factor

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 7 GRAHAM DODD MODEL Traditional

TMP M D

P Market price
M Multiplier
Dividend per share
E Earning pershare

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 5 Dividend Policy

SUMMARY OF QUESTIONS

Q1 PgNo 65

Basic question
of MM Approach

2 Pg No 66
G
Basic question of optimumDividend

Q 23 Pg No 73

Imp Optimum Dividend question can be solved only

by Walter's Model

TMI

Actual Dividend Optimum Dividend

PAT 10.00.000 R 12
NOS 50,000 Ke 10
Ke 101 R Ke
DPR 50 Dividend 0
Dividend 10
t
1 zo
EPS.FI m
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 k t
t

241

221

When company gives optimum dividend

TMP will be always higher

G5 PgNo 67

Very easy question

7 PgNo 67

Dividend on last year 0

IMP
F Rises to 8 means Growth 8
Ii Rises by 8 means Growth 5 8

Q 8 PgNo 69

Basic question to understand Graham Dodd

D M D
60 18 E PII
E 30 2 18 30
2
CA Inter FM-ECO CA Swapnil Patni 11
so Is
99 Pg No 69

Very easy question of Graham

f Dodd

Q 10 Pg No 70
Solve for Lintner's approach

D Do EPS DPR Do x AF

Q 15 Pg No 72

Solve by Graham Dodd

P M D Es
9 0.4

3 GE 9

3 GE 3E
6.6E
i 6
I
1 24 PgNo 74 Exam Que

Must solve question for Gordan Walter's Model

CA Inter FM-ECO CA Swapnil Patni 11

so Is
G 25 Pg No 75 ExamQue

Imp
i To Find Ke
ii MPS EPS X PE

Q 26 Pg No 76

Remember While calculating EPS deduct P D From

PAT then divide by NOS
i EPS
PAITI

Q 29 Pg No 79 Must solve question

Question of Intrinsic Value

Q 17 Pg No 80 Exam Que

IMP
How to find R
ii How to find ke when Pe is given
iii How to find Pe when ke is given

G 36 Pg No 85

Imp Hidden Growth

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 6 Ratio Analysis
FORMULA'S

Equity Networth owned funds

1 Proprietor's Funds

Networth Equity shareholdersfunds EquitySh Capital Pref ShCapital

Proprietor's funds owned funds Reserves surplus SecuritiesPremium

2 Equity Shareholder Funds

Equity Shareholder Funds Equity Preference

Fei Fong input TotalDebt LongTermDebt

Debenture Longterm Short Term Debt
Loan Deposits Bond

4 Debt to Total Funds Ratio Debt Ratio

Debt to Total Funds
Debt Ratio If funds

5 Equity to Total Funds Ratio Equity Ratio

Equity to Total Funds Funds

Equity Ratio to

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 6 Quick Ratio Acid Ratio Liquid Ratio

Quick Ratio AcidRatio CA stock Prepaid Exp

Liquid Ratio cL

7 Current Ratio
current ratio
L
8 Gross Working Capital Current Asset CA

9 Net Working Capital

NetWorking Capital CA CL

10 Debt Equity Ratio

LongTermDebt
Debt Equity Ratio Debt D
Equity E Equity ShCapital
PreferenceSh Capital
Reserves Surplus
Securities Premium

11 Turnover Ratio's

V
TotalAssets CurrentAssets WorkingCapital
To Ratio 10Ratio 710 Ratio
fixedassets Net Assets
TIO Ratio TIO To Ratio TIO
TA CA Tocap
TIO TIO
FA NA
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 i Total Assets TA Current Assets Fixed Assets
CA FA

Ii Fixed Assets FA Land Building Investment MIC

iii current Assets CA Stock Debtor Cash BR

iv working capital WCap Current Assets CA Current Liability CL

v COGS Sales Grossprofit

Vi Net Assets FACA CL Debts Longtermborrowings

i.e Networth Net Assets

12 Profit Ratio

GP Katio Operating Ratio Net Profit Ratio

GP Operating NP
sale ProfitRatio Of Idatio
sales

operatingProfit operatingcost
GP Sales COGS
sales sale
GP Sales COGS
cogs opexp

13 GP NP Operating profit Operating expenses

GP Sales DirectCost COGS

NP Sales other Income Direct
Cy diff
indirect non operating

Operating profit Sales Direct Exp Indirect Exp Interest Tax

Operating expenses IndirectExp Non operating expenses
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 14 Stock To Ratio

Stock To Ratio COGS

Avg Stock

15 Debtors To Ratio

Debtors To Ratio Credit sale

Avg Debtors

16 Creditors To Ratio

Creditors To Ratio Credit Purchases

Avg Creditors

17 Earning Pershare EPS

EPS Distributable Profit PAT PD

No ofshares No ofshares Equity

18 Dividend Per share DPS

DPS Total Dividend

No ofshares Equity

19 PE Ratio Profit EarningRatio

PE Ratio Market Price pershare MPS

Earning Per share EPS

20 Dividend Yield Ratio DYR

DYR Dividend
MPS

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 21 Book Value BV

BV Networth
No ofshares

227 Returns

RÉE RYA ROI ROCE

i Return on Equity ROE

ROE

PreTax PostTax
EBT
Equity EqÉy
EBT
Equity sht Pretsht Equity Prefsht
Reserves Surplus Reserves Surplus

ii Return on Assets ROA

ROA
v v v

Assets Tang e Assets Fixed sets

iii Return on Investments ROI Return on Capital Employed

ROCE

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 ROI ROLE

Pre Tax PostTax

EBIT Int I PAT

Debt Equity Debt Equity

at Capital Employeed liabilityRoute Debt Equity

b Capital Employeed Asset Route FA CATI
NetWorkingcapital
23 Debt to Total Fund

Debt toTotal Fund

fund

24 Equity to TotalFund

Equity toTotalFund
4fond

25 Average Collection Period

Average Collection Period 365

Debtor TO

Debtor TO Creditsales
Avg Debtors

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 26 Average Payment Period

Avg Payment Period Fors

a To

Creditors TO Credit Purchases

Average Creditors

27 P.V Ratio

P.V Ratio Contribution

sales

28 Capital Gearing Ratio

Capital Gearing Ratio Preference Capital Debt

Equity share funds

29 Proprietory Ratio

Proprietory Ratio Proprietary Fund

Total Assets

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 6 Ratio Analysis

SUMMARY NOTES

Firstly let's understand the balancesheet

Balancesheet
Assets
74 liability

Equity Fixed Assets

ShareCapital Investment
Reserves Land Building
Preference Plant Machinery
Long Term Debts
Current Assets
gqffmggggg.gg
Deposits Cash

Sundry Creditors
Trade Payable
OD CC

Total Liability Total Asset

Equity Networth ownedfunds Equity ShareCap Preference

Proprietor Funds share cap Resources 5 P

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Ratio
Trading
counts Numerator Ratio
Sheet Denominator

Debts LongtermDebt Debentures Longterm loans Deposits Bonds

1 Debt Assets
fatAssets TA
09
9
Marriage
Ratio
Proprietory Ratio 1
4 9Assets TA
0.1

Proprietory Ratio Debt to Total Assets

2 Current Ratio

Current Ratio Current Assets CA

Current Liability CL
5000,000
25,00000
2

Gross Working Capital Current Assets CA

Net Working Capital CurrentAssets Current Liabilities CA CL

50,00000 2500,000
25,00000

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 3 Debt Equity Ratio
LongtermDebt
Debt Equity Ratio
Effity
equityshcapital Preference
Reserves securities Premium

10times

Standard Debt Equity Ratio 2 1

Important Point to Remember

EQUITY

Equity Equity share Equity shareholder

Networth capital Funds

Equity Share Capital Equityshare Equity Preference

Reserves Surplus
capital 1017
Securities Premium EquityShCap Reserves

Pref Share capital surplus Securities Prem

Preference shares

4 Quick Ratio Acid Ratio

QuickRatio AcidRatio Current Assets Stock Prepaid Expenses
Current Liability
Current Assets Current Liability
Debtors stock Cash BR S Creditor Trade Payable OD CC
shortterm Loan Advance Proposed dividend Provision for

disposable investment Tax 015 Int

CA Inter FM-ECO CA Swapnil Patni 11
so Is
 5 Turnover Ratio
Turnover Ratio

r r
TotalAssets CurrentAssets WorkingCapital
Tlogatio fixedassets T 0 Ratio
Net Assets
TIO TIO Ratio TIO T Ratio TIO
TA CA Tocap
TIO TIO
FA NA

i Total Assets TA Current Assets Fixed Assets

CA FA

Ii Fixed Assets FA Land Building Investment MIC

iii current Assets CA Stock Debtor Cash BR

iv working capital WCap Current Assets CA Current Liability CL

v COGS Sales Grossprofit

Vi Net Assets FA CA CL Debts Longtermborrowings

i.e Networth Net Assets

Net Assets TA Debts CL

Equity 100 FA 100

Debt 150
CL 50 CA 200
300 300
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 NetAssets Networth TA CL Debt Asset Route
300 50 150
100

NetAssets Networth Equity

EqShCap Rec Pref SP liability Route
100

Cost of COGS
49
COGS Sales GP
COGS Direct cost related to production without which
product can't be produced

6045 Direct labour Direct Material OH

Given Direct Lab 100 Direct Mat 200,011 300sales 1000

i Cogs 100 200 300
600
i Gross Profit Sales COGS
1000 600
400

Profit Ratio

GP Katio Operating Ratio Net Profit Ratio

GP Operating P NP
ProfitRatio Katio sales
sale
40 Refer9.30
Refert 10
g30
i Directcost 60
Pg 142 Pg 142 i
Indirect 30

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 GP Sales COGS
GP Sales COGS

Profit

11 NI
Sales Directcost COGS Sales otherincome Directcost
indirect cost

sales sales
c operating exp
G Non operating exp Yes Frofit
0
the salary printing
market audit etc

Trading All
Particulars Amount Particulars Amount
Direct expenses 3000 Sales 10,000
Direct wages
Direct Material

Factory Rent

GrossProfit 7000
yo 10,000W

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 PELAIC
Particulars Amount Particulars Amount
Indirect Expenses 4000 Gross Profit 7000
Operatingexp
Dep
Marketing
Printing
Advt
operating Profit 3000

7000 7000

Non operating exp operating profit 3000

Indirect Tax 5
Interest 0 1000 1000
Hiiiii 1000
Net Profit 4000

5000 5000

1
GP Sales D exp COGS
operating profit Sales Direct tap
Inf p ing
3 Netprofit Sale D exp ind exp Indirect operating
indirect non operating
a
operatingexp indirect exp Non op expenses

indirect exp interest Tax

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Stock 710Ratio
COGS 5022h
Eg Avgstock
Stock T 0 Ratio COGS
Aug stock cogs
4 Augstock
10
5,894ha
4
i Avg Stock 5lakh_

Debtors T 0 Ratio

Debtors To Ratio Creditsale

Aug Debtor
Eg Creditsale 24112h 24112h
Debtor Aug 4 1h 4 Lkh
i
Debk 10

Creditor To Ratio

Creditors To Ratio Credit Purchase

Aug Creditors
g Credit
Purchase 90.00.000
Creditor TO Ratio 6

i Creditor To Ratio Credit Purchase

Aug Creditors
6 90.00.000
Avg Crediton
i Avg Creditors 15,00000

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Earning Pershare EPS
EPS Distributable Profit PAT PD
no of shares
Equity

Dividend Pershare DPS

DPS Total Dividend

No of shares
Equity

PERatio Profit Earning Ratio

PE Ratio Market price Pershare

Earning pershare Iff
Dividend Yield Ratio DYR

DYR
Dig nᵈ
Eg FV 10 MPS 3000 Divid 10

DYR 31 032

Book Value BV

BV Networth
No ofshares

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Returns
Returns

ROVE ROA ROI ROLE

ROE Return on Equity

ROE
v

PAT PD
Éf ty
Equity
jet
sht Pretsht EquityShtReserves Surplus
Reserves Surplus

g PBT 10,000 g ESC 10.000

3000 PSC 5k
54 7000 Res 20k
Pref 35k
2000
I 5000
esq.s.cat
Debt 15k
50k
ROE 7000 ROE 5000
35000 104420k
20 60

Return on Assets ROA

ROA
v v v

PAT PAT PAT

Total Assets Tangible Assets Fixed Assets

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Return on Investment ROI Return on Capital Employed
ROLE

ROI ROLE

Pre Tax PostTax

EBIT Int I PAT

Debt Equity Debt Equity

g
No Tax Tax
EBIT 501000 501000
G Int 20,000 20,000
EBT 30,000 30,000
G Tax 0 9000
PAT 30,000 21.000

Debt 11th 11th

Equity 21h 21h

ROI
f fP
1
5 820 98
ROI 16.671 13.67

Int
g BIT
Tax PAT

Debt gov equity

CA Inter FM-ECO CA Swapnil Patni 11
so Is
 What is capital employeed

BS
E FA 80
1
20 CA 90

Capital Employed Dtf 100 50 150

liability Route
Capital Employed FA CA CL 80 90 20 150
Asset Route

Debt to TotalFund

Debt to TotalFund 1 25
44 fund 4

Equity to TotalFund

Equity to TotalFund 75
44 Yeon

Investment TotalFund Capital employed

Investment TotalFund DTE

capital employed or
FA CA CL
OR
FA NetworkingCapital

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Average Collection Period

Average Collection Period

3 0

g DebtorTO 10 Year 360days

i Averagepefffection 36
1year 365360days
3 However if it is
specifically given
then consider that
Average Payment Period muchdays

Average Payment Period 3651360

Creditor TO
Eg Creditor TO 20 Year 360days

i Average Payment
Period 398
1

Working Capital
BalanceSheet
Equity
es Kr FA
ke capB

fig xp
dividend
Kd

CL Ler CA 3 Cr

WORKING CAPITAL 2 Cr

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Ratio

FixedAssets CurrettAssets
v
Laid stocks
Building Drs Debtors
Furniture cash
Technology

Working Capital CA CL

Working Capital

CA CL

Debtors cash stgok CFditor Bp

Refeycosting

Working Capital
v
v
G O
Jewellery CA Practice
COST Realestate Lawyer COS
320 Premium CarShowroom Manufacturing y
Teaching 220
D Mart

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Pavitra Rishta

Pavitra Rishta

v v
V V V V
CR w Cap CR Liquid
Ratio
CA oka CA
CL CL CA Stock
CL

Remember

Sale
C Directcost COGSwages Material OH
GP sales COGS
A OperationalCost Salary Advt Audit Printing
indirect
Profit
Operational
cost
Non operating cost Int IndirectTax
NetProfit PBT Sale Directcost Indirect Cost
t incomeTax
PAT

In this chapter don't hesitate

to take assumptions like Cl Stock Avg stock
Cr Sales Cash sales sales

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Chapter 6 Ratio Analysis

SUMMARY OF QUESTIONS
Remember

While solving
any question ofthis chapter
students are
allowed to use suitable assumptions There is a possibility of
having more than one answer for a particular question In the
examination students can use the word Alternatively this
que
can be solved likethis Students will get marks for both the
answers

Q16 PgNo 102 Very easy question

i
GPRatio 20
GP 60,000
Sales 23.00.000
otal Assets otal iabilities

Q17 PgNo 105 Very easy question

i
NCA 50,00000

Q18 PgNo107 Very easy question

i Sales 30.00.000
GP 25
COGS 22.50.000

Q19 PgNo 109 Very easy question

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Q20 PgNo110
i
Direct Cost
Sales DirectCost OpCost Non Op Cost

0.21 PgNo 112

Total Debt LongTermDebt ShortTermDebt

Q 22 PgNo114

Calculation of Operating expense Balfig

G23 PgNo116 MustSolveQuestion

Remember Equity EqShCapital Reserves Pref

G13 PgNo 118 EasyQue

FixedAsset 40.1h

Also makeTrading PSL BIS

Q 15 PgNo121 EasyQuestion

Compare theratio's of Ourcompany Industry Comment

G 2 PgNo 123 EasyQuestion

DividendYield is always calculated on MarketValue
Dividend is calculated on FaceValue

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Q3 PgNo124
COGS WorkCost

Important bifurcation of Current Assets in eg

To understand conceptually CA
22.00.000

Debtor cash stick

13.00.000 170700

FG RM
397800 331500

Q 9 PgNo126 Very easy question

Q 6 PgNo 128

Pavitra Rishta Net WCap Current Ratio

Current Ratio Liquid Ratio

Q 7 PgNo 130 MustSolveQuestion

Pavitra Rishta Net WCap Current Ratio

Current Ratio Liquid Ratio

Q8 PgNo 133 Very easy question

Q 9 PgNo135 Very easy question

Need to find out purchases by preparing Trading AIC

Assume Allpurchases Credit purchases

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Q27 PgNo 138 EasyQuestion

Q28 PgNo 140 Must SolveQuestion

Q 30 Pg No 141

Important Formulas
i Op ProfitRatio OpProfit
sales
Ii Op CostRatio st COGStopexp
Of sale
iii Int coverage Ratio
I
Q33 PgNo144
Solve ReturnonTotalAssets
using our Formula
Return on otal Assets
To Assets

While calculating current ratio

it isto be notedthat new current liability is raised in
addition to existing current liability

Q36 PgNo146

Fixed Assets toSales Ratio 1 3

Q37 PgNo 149

Remember Accumulated Depreciation

CA Inter FM-ECO CA Swapnil Patni 11

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 Chapter 7 anagement of

orking Capital

UNIT CONTENT

UNIT I Working Capital

UNIT Cash Management

UNIT Management of Inventory

Already done in costing
UNIT Management of Receivables

UNIT V Current liability creditors

UNIT I Financing of Working Capital

Current Assets

Stick Debtor Cash

Unit II unit II unit
Most of the concept of this unit will be discussed in the
separate chapter source offinance

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Unit I Working Capital
Summary of
UNIT I

Operating working cap Ratio

Cycle Calculation
Working Capital
v v
Double
Singh
ft shift

Let's summarize through the following example

Particulars Amount
a Current Assets

Stock
100 RM stock period
gf
WIP RM100 TotalRM WIPPeriod
12
Lab 50 Totallabour WIPPeriod
12
OH 50 Total 0H WIP Period
12
FG RM Wages OH ManufOH FG Period
12
Cash Asgiven
Drs RM Wages OH Manufexp sellingexp
12
Coffee
if
Current Assets Stock Cash Drs
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Particulars Amount
b Current Liability

RM Total purchase of RM Credit Period

12
Wages Total wages wages credit Period
12
OH Total OH OH credit Period
12
Current Liability RM Wages OH Tax etc

Working capital CA CL
1 Safety Margin Cont 10 w cap

Net W Capital WCap safety

2
Operating Cycle

s Is Up fetiod Pteriod prefiod

20 20 30 40 20
90

3 No of Cycle 360
Opcycle 3 4

4 Working Capital

Cash Cost Non cash Cost

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 CASH COS NON CASH COST

FG No Depreciation Depreciation
RM Wages OH ManufExp RM wages OH Manufftp.xpffod
12 xp 12

Drs RM Wages OH sellingexp RM Wages OH sellingexp

expenses
484 9 4 9 74
Penses
n
2b coffin
12
10121

Selling Price
12 4

Ip RM wife's 0519
RM wife's Ñ Dep

Remember

IF nothing is given then students can solve either by

using cash cost method or non cash cost method

It is to be noted that if no specific percentage is given take 50

For wages OH and 100 For RM

Master question for working capital calculations

Q 59 PgNo 219
Q 60 PgNo 220
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Master question for Operating cycle
Q2 Pg No 172

UNIT I

Operating working cap

Cycle Calculation Ratio
WorkingCapital

sink D 9.56
ft G 24
Q 59 Pg219 Q 58 Pg218
Q 60 Pg220

CA Inter FM-ECO CA Swapnil Patni 11

so Is
 Unit
Summary of cash

cash
William
Cash J Cash Budgets
Budget Baumol's v

compare data of
E Q 2 months

A Cash Budget Format

Particulars Jan Feb Mar

Sale
Assetside
loan

s
Other Receipts
c Outflow
Purchases
Payments to creditors
Investment properties
Wages
Salary
Dividend
Tax
Other expenses
d Closingbalance
a b c
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 1
Closing of Jan is opening of Feb and so on
2 Payment of Tax is done in March Outflowof March
3 Dividend received in Feb Inflow of Feb
4 Int of 12.000 paidquarterly per annum Outflowof3000 everyquarter
5 Maintain minimum cash Balance 520,000 accordingly find out
surplus deficit Que 6 Pg 9.44
ICAIModule
Eg Jan Feb Mar
01 Cash 40k 90k 2000
Min 20k 20k 20k
Investment 20k 70k
Borrow 22k

6 Depreciation of 60,000 is a
part of expense
Jan Feb Mar
Exp 11th 1.801h 2.506h

Outflow 40k 120k 180k

B EOQ Economic Order Quantity

EOQ
210

Q A Firm maintains a separate account for cash disbursement

Total disbursement are 51.05.000 permonth or 51260,000 per
annum Administrative transaction cost of transferring cash
to disbursement account is 20per transfer Marketable
securities yield is 8 per annum Determine optimum cash
balance according to William J Baumol model

EOG 2 1260.000 20 Ekh 25100

0.80

CA Inter FM-ECO CA Swapnil Patni 11

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 1 Annual Qty A
IF qty is given in month Qrtr then convert it into
demand of annual
Eg IF perqty 10,000
Annual 120k

2 Ordering cost order 0 20

3 Cost per unit per annum C 0.80

IF C is given in month then convert it into annual cost
Eg IF p.m cost 2 then annual cost is 24 12m 2

C Cash Budgeted Compare data of 2 months

1 Production is done 2month prior
Payment is made 1 month after prod

Dec Jan Feb

Sale 10k 20k

Prodction
Payment

Sale of Feb
Production in Dec
Payment in Jan

ReferQ.NO7
Jan Feb
OP Crs 3000 4000
11 4000
Cl Crs 2000
17 Purchase 2000 3000
Payment to Crs 1000 5000
CA Inter FM-ECO CA Swapnil Patni 11
so Is
 Unit Receivables
Summary of
Receivables

Choose the best Factoring 2110 YR 3 10

credit policy 92307 collection period
same

In this chapter we have to select the best credit policy from

POV of seller

FORMAT

particulars 30 40 50
days days days
Sale Icr 20 3er
G V cost 60 11h 1.218 1.8 Cr
F Cost 20112h 20112h 201kt
E BIT 201kt 60 12h 1 Cr
Bad Debts sale 7 21kt 1011h 301kt
Lcr 2 26 5 308 10
18Lkh 50 Lkh 70 Lkh
Int 20 1 33,334 3.11.111 5.55 555
20
f ed 1 94 201 338 44 20348 21201 38

1 Int must be calculated on cost involved

2 Cost Involved Fixedcost V cost

3 Fixed cost remains same irrespective of credit policy
CA Inter FM-ECO CA Swapnil Patni 11
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 4 Baddebts mustbe multiplied with Sales
5 Deduction of Tax will not change the decision

6 Account Receivable 10 Ratio 4

i
36,0
90 days
creditPolicy 90days of

7 Account Receivable TIO Ratio 3

120 days
3630
creditPolicy 120days of

Q 7 Pg 188 MustSolveQue

Particulars 1 10 2110

Sale 12.00.000 16.00.000

4 V Cost 78 9 36,000 12.48.000
a Cost 22 2.64.000 3.52.000
b BadDebts 18.000 32.000
12Lkh 1.5 16112h 2
c Discount 6000 25600
12114 501 11 16114 801 21
Average Collection Period 30 days 20 days
Debtor 710 Ratio 12 18
360 30 360 20
Avg Fund blocked 78,000 69,333
93 00 124 000
of
d Interest 15 11700 10.400
78000 151 69.333 151
FBT a b c d 228300 284000
Tax 30 68490 85200
PAT 70 159810 198800
CA Inter FM-ECO CA Swapnil Patni 11
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 1 No of Days 30 days 20 days

2 Cash discount should be valid for 50 80 respectively

not on entire sale

CA Inter FM-ECO CA Swapnil Patni 11

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 Unit I current
Summary of liability

1 While reading this chapter consider that we are buyer borrower

2 What is 2110 45 If we make thepayment in 10days the discount

is 2 If we make the payment between 11ᵗʰto 45ᵗʰ
daythen there is
nodiscount

3 ReferQ20 PgNo189

When to Pay

10th
On day on 415ᵗʰday

798 7100
lossof Rs 2 But we will
invest 98 25 rate for 35days
Then returnwill be 2.345
Conclusion There is a net benefit of
34paise 2.34 2
select 45ᵗʰday

4 ReferQ21 PgNo 190

2110net30 IF wemake the payment in 10 days the discount
is 2 IF wemake the payment between 11 to45days then we get
no discount
Conclusion It is advisable to takethe loan of 98Rs from the
bank for 5days the rate of 12
per annum then int should
be 16 paise Whereas the benefit is 2 bymaking payment
on 10ᵗʰday
i Net benefit 2 0.16 1.84 F
CA Inter FM-ECO CA Swapnil Patni 11
so Is
CA Inter FM-ECO CA Swapnil Patni 11
so Is