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    Case Study FM

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    asde
    Shyam Lal is facing problems making profits and paying back bank loan instalments. He should consider issuing equity shares instead of taking on more term loans. This is because equity shares allow flexibility in dividend payments depending on profits, whereas loan interest is fixed. He needs to evaluate investment options based on expected returns and whether returns will cover loan interest to make a profit. When deciding, he should consider the time value of money using an appropriate discount rate like his cost of equity.

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    Case Study FM

    Uploaded by

    asde
    32 views4 pages
    Shyam Lal is facing problems making profits and paying back bank loan instalments. He should consider issuing equity shares instead of taking on more term loans. This is because equity shares allow flexibility in dividend payments depending on profits, whereas loan interest is fixed. He needs to evaluate investment options based on expected returns and whether returns will cover loan interest to make a profit. When deciding, he should consider the time value of money using an appropriate discount rate like his cost of equity.

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    CASE STUDY FM

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    Shyam Lal is facing problems making profits and paying back bank loan instalments. He should consider issuing equity shares instead of taking on more term loans. This is because equity shares allow flexibility in dividend payments depending on profits, whereas loan interest is fixed. He needs to evaluate investment options based on expected returns and whether returns will cover loan interest to make a profit. When deciding, he should consider the time value of money using an appropriate discount rate like his cost of equity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    32 views4 pages

    Case Study FM

    Uploaded by

    asde
    Shyam Lal is facing problems making profits and paying back bank loan instalments. He should consider issuing equity shares instead of taking on more term loans. This is because equity shares allow flexibility in dividend payments depending on profits, whereas loan interest is fixed. He needs to evaluate investment options based on expected returns and whether returns will cover loan interest to make a profit. When deciding, he should consider the time value of money using an appropriate discount rate like his cost of equity.

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    of 4

    CASE STUDY

    FINANCIAL MANAGEMENT

    SHYAM LAL AND ASSOSSIATES

    Submitted by,
    Aghil Ramesh
    Alex Onachan
    Ajith K A
    Don P Benny
    Kuriakose Jacob
    1. What is the nature of problems being faced by Shyam Lal?
    What are the key characteristics of the options he is
    examining? How should he decide?

    Shyam Lal's problem is that:


    • he is making less profits and
    • must pay bank loan instalments.
    What he should have done is that opt for issue of shares. It is because the liability in
    taking loan is fixed regardless of whether profit is there or not and in equity shares, he
    can pay less dividend but in case of debentures the interest is fixed. In short, he is
    running the company entirely on term loan rather than on issuing equity shares.
    The expected return on investment is one of the most important characteristics of the
    options in which he is investing. He must determine whether the future returns he
    receives make a profit based on the investment he made today. In addition, he must
    determine whether the interest on his investment will cover the loan instalment.
    He should make a decision based on which option provides the best return on
    investment based on current inflation values, and he should make enough profit to
    repay the term loan interest while still profiting.

    2. Why do you think he should consider the time value of


    money and what do you mean by time value of money?

    Time Value of Money


    One of the most basic financial management theories is the time value of money, which
    asserts that "the worth of money you have now is greater than a solid guarantee to get
    the same amount of money at a later period."
    The concept of temporal value of money (TVM) states that money accessible now is
    worth more than money available later due to its potential earning power. One of the
    most fundamental notions in finance is the concept of risk.
    Money has a temporal value, which is one of the most fundamental ideas in finance.
    The larger benefit of obtaining money now rather than later is known as the time value
    of money. It is based on a predilection for certain times. This is a fundamental financial
    principle. A sum of money held in one's hand is more valuable than a sum to be paid
    later.

    Reasons to consider Time value of money:


    Risk and Uncertainty
    We have control over the outflow of cash because we make payments to parties. Future
    cash inflows cannot be predicted. Cash inflows are determined by our creditor, bank,
    and so on. Because an individual or company is unsure about future cash receipts, it
    prefers to receive cash now.

    Inflation:
    In an inflationary economy, today's money has greater purchasing power than
    tomorrow's money. To put it another way, a rupee today has more real purchasing
    power than a rupee a year ago.

    Investment opportunities:
    An investor can profitably use a rupee received today to obtain a higher value tomorrow
    or after a certain period of time. Thus, the fundamental principle underlying the concept
    of time value of money is that money received today is worth more than money
    received later in time. This is because he may be able to buy more goods with this
    money today than he will be able to get for the same amount in a year.

    3. Explain the concept of present value and future value?

    An annuity's present value is the current value of all future income generated by that
    investment. In more practical terms, it is the amount of money that must be invested
    today in order to generate a certain income later on.
    The present value calculation, which uses the interest rate, desired payment amount,
    and number of payments, discounts the value of future payments to determine the
    contribution required to achieve and maintain fixed payments for a specified time
    period.
    The total amount of money that will be accumulated by making consistent investments
    over a set period of time, compounded with interest, is referred to as the future value
    of an annuity.

    4. For this purpose, what discount rate should he use?

    In this case, Net Present Value (NPV) is used because we are investing today to receive a
    return in the future, and the return should be favorable.
    The present value of cash inflows less the present value of cash outflows yields the net
    present value (NPV). It is used in capital budgeting to determine the viability of a long-
    term project. A positive NPV indicates better returns and, as a result, a profitable
    project, whereas a negative NPV indicates cash outflows and, as a result, an investment
    option that should be avoided. NPV takes into account the Time Value of Money. It
    compares the current value of a rupee to the future value of the same rupee, taking
    inflation and returns into account. The cost of equity is the discount rate used to
    calculate this. Cash flows to equity holders are taken into account.

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