Following Financial data are available for PQR Ltd. for the year 2018: (in lakh) 8% debentures 1250 10% bonds (2017) 500 Equity shares (100 each)…

Workings: Asset turnover ratio = 1.1 Total Assets = 6000 Turnover 600lakhs × 1.1 = 6600 lakhs Effective interest rate = Interest / Libilities = 8% Liabilities = 1250 lakhs + 500 lakhs = 1750 lakh Interest = 1750 lakhs × 0.08 = 140 lakh Operating Margin = 10% Hence operating cost = (1 - 0.10) 6600lakhs = 5940 lakh Dividend Payout = 16.67% Tax rate = 40% (i) Income statement (₹ Lakhs) Sale 6600.00 Operating Exp 5940.00 EBIT 660.00 Interest 140.00 EBT 520.00 Tax @ 40% 208.00 EAT 312.00 Dividend @ 16.67% 52.00 Retained Earnings 260.00 (ii) SGR = ROE (1-b) ROE = PAT / NW and NW = 1000 lakhs + 3000 lakhs = 4000 lakhs ROE = 312 lakhs / 4000 lakhs x 100 = 7.8% SGR = 0.078(1 - 0.1667) = 6.5% or 0.078×0.8333 / (1-0.078×0.8333) = 6.95% (iii) Calculation of fair price of share using dividend discount model P 0 = D 0 (1+g) / (k e -g) Dividends = 52 lakhs / 10 lakhs = 5.20 Growth Rate = 6.5% or 6.95% Hence P 0 = 5.20(1+0.065)) / (0.15-0.065) = 5.538 / 0.085 = 65.15 or P 0 = 5.20(1+0.0695)) / (0.15-0.0695) = 5.5614 / 0.0805 = 69.09 (iv) Since the current market price of share is 140, the share is overvalued. Hence the investor should not invest in the company.