(a) A company wishes to raise additional finance of ₹ 20 lakh for meeting its investment plans. It has ₹ 4,20,000 in the form of…

(a) Financing Pattern and Cost of Additional Finance Total additional finance required = ₹20,00,000. Retained earnings available = ₹4,20,000. Debt-equity mix = 30% debt and 70% equity.

Pattern for raising additional finance:

• Debt = 30% of ₹20,00,000 = ₹6,00,000.
• Equity = 70% of ₹20,00,000 = ₹14,00,000.
• Equity will consist of retained earnings ₹4,20,000 and fresh equity shares ₹14,00,000 − ₹4,20,000 = ₹9,80,000.
• Debt will be split as: first ₹3,60,000 at 10% before tax; balance ₹6,00,000 − ₹3,60,000 = ₹2,40,000 at 16% before tax.

Thus the financing pattern is: debt ₹6,00,000, fresh equity ₹9,80,000 and retained earnings ₹4,20,000.

Post-tax average cost of additional debt: After-tax cost of first slab = 10% × (1 − 0.50) = 5%. After-tax cost of second slab = 16% × (1 − 0.50) = 8%. Average post-tax cost of debt = (₹3,60,000 × 5% + ₹2,40,000 × 8%) ÷ ₹6,00,000 = (₹18,000 + ₹19,200) ÷ ₹6,00,000 = ₹37,200 ÷ ₹6,00,000 = 0.062 = 6.2%.

Cost of equity: Dividend per share, D0 = EPS × payout ratio = ₹8 × 50% = ₹4. Expected dividend, D1 = D0(1 + g) = ₹4 × 1.10 = ₹4.40. Using dividend growth model: Ke = D1 ÷ P0 + g = ₹4.40 ÷ ₹88 + 0.10 = 0.05 + 0.10 = 0.15 = 15%. (If the ₹4 dividend is read as the next dividend D1, Ke = 4/88 + 0.10 = 14.55%, and the WACC becomes 12.04%.)

Cost of retained earnings: In the absence of personal tax, brokerage or flotation cost, cost of retained earnings equals cost of equity. Kr = Ke = 15%.

Overall weighted average after-tax cost of additional finance: Since no flotation cost is given, cost of fresh equity is also taken as 15%. Weights: debt = 30%, equity including retained earnings = 70%. WACC = 0.30 × 6.2% + 0.70 × 15% = 1.86% + 10.50% = 12.36%. Alternatively, using source amounts: (₹6,00,000 × 6.2% + ₹4,20,000 × 15% + ₹9,80,000 × 15%) ÷ ₹20,00,000 = 12.36%.

(b) Cash Flow Statement (Direct Method, AS-3) Under AS-3, using the direct method (₹ in '000):

Cash flows from operating activities:

• Cash received from customers: 5,600
• Cash paid to suppliers: (4,000)
• Wages and salaries paid: (200)
• Overhead expenses paid: (400) Cash generated from operations: 1,000
• Income tax paid: (500) Net cash from operating activities: 500

Cash flows from investing activities:

• Purchase of fixed assets: (400)
• Sale of fixed assets: 200 Net cash used in investing activities: (200)

Cash flows from financing activities:

• Issue of equity shares: 600
• Repayment of bank loan: (600)
• Dividend paid: (100) Net cash used in financing activities: (100)

Net increase in cash and cash equivalents = 500 − 200 − 100 = 200. Cash and cash equivalents at beginning = 100. Cash and cash equivalents at end = 100 + 200 = 300, which agrees with the closing balance. The company has no cash equivalents.

(c) Corporate Restructuring and its Techniques Corporate restructuring means redesigning the capital structure, business portfolio, ownership pattern, organisational setup or operations of a company to improve efficiency, competitiveness, profitability, survival or shareholder value. It may be financial, organisational, operational or portfolio restructuring.

Techniques of corporate restructuring include:

• Merger or amalgamation: two or more companies combine into one entity to achieve synergies, economies of scale and tax benefits.
• Acquisition or takeover: one company purchases controlling interest in another, either friendly or hostile.
• Demerger, spin-off, split-off or hive-off: a division, subsidiary or undertaking is separated into an independent entity or transferred to another company.
• Divestiture or disinvestment: sale of a division, subsidiary, brand or asset to focus on core activities.
• Slump sale: transfer of a whole undertaking or division for a lump-sum consideration without individually valuing assets and liabilities.
• Strategic alliance and joint venture: two or more firms cooperate or form a new entity for a specific project while retaining separate identities.
• Leveraged buyout and management buyout: acquisition financed mainly by debt, often by existing management.
• Financial restructuring: debt-equity swap, refinancing, rescheduling, share buyback, rights issue, bonus issue, capital reduction or recapitalisation.
• Organisational and operational restructuring: downsizing, outsourcing, business process reengineering, voluntary retirement schemes and closure of unviable units.
• Reverse merger: a private company merges with a listed shell company to obtain listing without an IPO.

In India the legal routes are compromises and arrangements under sections 230-232 of the Companies Act, 2013 (NCLT sanction), fast-track mergers of small companies, start-ups and wholly owned subsidiaries under section 233, capital reduction under section 66, buy-back under section 68, SEBI Takeover Regulations 2011 for listed targets, CCI approval of combinations above thresholds (including the deal-value test from 2024), and resolution plans under the Insolvency and Bankruptcy Code, 2016.