divya electronics

Case Study On DIVYA ELECTRONICS:

Case Study On DIVYA ELECTRONICS Presented By:- Ashutosh Mishra Garvit Ajay Kumar Aditya Prakash Ayush Jain Gyananand Galgotias Business School

DIVYA ELECTRONICS:

DIVYA ELECTRONICS Divya Electronics was promoted about twenty years by Dipankar Mitra (Executive Chairman). The firm employed a debt-equity ratio of 1.5 : 1 Dipankar Mitra and his family holds 45 million shares of Divya Electronics. PE ratio is 19.17

Balance sheet:

Balance sheet Sources of fund Rs. In million Share holder’s fund Paid up equity capital (140 million shares of Rs. 10 each) 1400 Reserves and Surplus 2600 Loan funds 2000 Total 6000 Application of funds Rs. In million Net Fixed Assets 4000 Net current Assets 2000 Total 6000

Profit and Loss Account:

Profit and Loss Account Rs in million Revenues 8000 Variable cost 4800 Contribution margin 3200 Fixed operating cost 1800 PBIT 1400 Interest 200 PBT 1200 Tax (30%) 360 PAT 840

Expansion Project:

Expansion Project The firm has an expansion project on hand that will require an outlay of Rs. 2000 million supported by external financing. Expected revenue from this project is Rs 2400 million. The variable cost will be 60% of revenues. The fixed operating cost would be Rs. 500 million.

Alternatives available:

Alternatives available Divya Electronics can make a public issue of equity shares at Rs. 106. The issue expenses, however, will be Rs. 6 per share. Divya Electronics can privately place debentures carrying an interest rate of 8 percent. Alternative 1 Alternative 2

Compute the EPS-EBIT indifference point for the two financing options. :

Compute the EPS-EBIT indifference point for the two financing options. EPS(Alternative 1)= (EBIT-I)*(1-t) No. of shares = (EBIT-200)*(1-0.3) 160 EPS(Alternative 2)= (EBIT-I)*(1-t) No. of shares = (EBIT-360)*(1-0.3) 140

Slide 8:

To calculate indifference point, we have to equate both the equations. EPS (Alternative 1) = EPS (Alternative 2) By further calculations, we get: EBIT= 148 Cr. (approximate) 148 Cr. Is the indifference point. When EBIT < 148 Cr. , option 1 i.e. of equity is better. When EBIT > 148 Cr. , option 2 i.e. of debt is better. When EBIT = 148 Cr. , both the options are equally better.

Calculate EPS for the following year under the two financing options assuming that the expansion project would be fully operational.:

Calculate EPS for the following year under the two financing options assuming that the expansion project would be fully operational. For calculating this, firstly, have to calculate PBIT of both the options. Alternative 1 Alternative 2 Revenue 10400 10400 Variable cost 6240 6240 Contribution 4160 4160 Fixed operating Cost 2300 2300

Slide 10:

Alternative 1 Alternative 2 PBIT 1860 1860 Interest 200 360 PBT 1660 1500 Tax (30%) 498 450 PAT 1162 1050 EPS 7.26 7.5 Since the PBIT of the firm is 186 Cr. which is > 148 Cr. , therefore Option 2 is best. EPS of Option 2 = 7.5

Show how the degree of total leverage will change under the two options.:

Show how the degree of total leverage will change under the two options. DTL(Degree of total Leverage)= Contribution (PBIT-I) DTL (option 1)= 4160 = 2.5 1660 DTL (option 2)= 4160 = 2.77 1500 DTL (current)= 3200 = 2.67 1200

DEGREE OF LEVERAGE::

DEGREE OF LEVERAGE: Issue of Debentures will be more risky as it have high leverage.