(a) Using the following information, complete the Balance Sheet given below : Total Debt to Net worth – 0·5 : 1 Turnover of total…

(a) Balance sheet from ratios (20 marks)

Net worth = Common stock + Retained earnings = ₹9,00,000 + ₹13,50,000 = ₹22,50,000.

1. Total debt = 0.5 × net worth = ₹11,25,000. Here the only liability is Notes and Accounts Payable, so it is ₹11,25,000, all current.
2. Total liabilities and equity = ₹11,25,000 + ₹22,50,000 = ₹33,75,000, so Total assets = ₹33,75,000.
3. Sales = total asset turnover 2 × ₹33,75,000 = ₹67,50,000 (all on credit).
4. Cost of goods sold = 80% × ₹67,50,000 = ₹54,00,000 (gross profit 20% = ₹13,50,000).
5. Accounts receivable = sales × 30/360 = ₹67,50,000 ÷ 12 = ₹5,62,500.
6. Inventory = cost of goods sold ÷ 3 = ₹18,00,000.
7. Acid-test ratio: (Cash + Accounts receivable) ÷ current liabilities = 0.8, so Cash + Accounts receivable = 0.8 × ₹11,25,000 = ₹9,00,000, and Cash = ₹9,00,000 - ₹5,62,500 = ₹3,37,500.
8. Equipment = total assets - cash - receivables - inventory = ₹33,75,000 - ₹3,37,500 - ₹5,62,500 - ₹18,00,000 = ₹6,75,000.

Balance sheet:

Liabilities and Equity: Notes and Accounts Payable ₹11,25,000; Common Stock ₹9,00,000; Retained Earnings ₹13,50,000; Total ₹33,75,000.

Assets: Cash ₹3,37,500; Accounts Receivable ₹5,62,500; Inventory ₹18,00,000; Equipment ₹6,75,000; Total ₹33,75,000.

Check: the current ratio is (3,37,500 + 5,62,500 + 18,00,000) ÷ 11,25,000 = 2.4, and the two totals agree.

(b) Net present value (15 marks)

Depreciation by straight line, with no salvage = ₹400 lakh ÷ 5 = ₹80 lakh a year. Cash inflow after tax = (EBDT - depreciation) × (1 - 0.40) + depreciation. All figures are in ₹ lakh.

Year 1: EBDT 185; profit before tax 105; tax 42; profit after tax 63; cash flow after tax 143. Year 2: EBDT 190; profit before tax 110; tax 44; profit after tax 66; cash flow after tax 146. Year 3: EBDT 190; profit before tax 110; tax 44; profit after tax 66; cash flow after tax 146. Year 4: EBDT 195; profit before tax 115; tax 46; profit after tax 69; cash flow after tax 149. Year 5: EBDT 175; profit before tax 95; tax 38; profit after tax 57; cash flow after tax 137.

Present values at 14%:

• Year 1: 143 × 0.877 = 125.41
• Year 2: 146 × 0.769 = 112.27
• Year 3: 146 × 0.675 = 98.55
• Year 4: 149 × 0.592 = 88.21
• Year 5: 137 × 0.519 = 71.10 Total present value of inflows = ₹495.55 lakh.

NPV = ₹495.55 lakh - ₹400 lakh = ₹95.55 lakh.

Advice: the NPV is positive, so the project earns more than the 14% cost of capital and adds about ₹95.55 lakh to shareholder wealth. Management should accept it, subject to the reliability of the cash-flow estimates and to a sensitivity check.

(c) Venture capital financing in India (15 marks)

Process (8). Venture capital is long-term risk capital, provided mainly as equity to unlisted, high-growth start-ups and small firms with promising technology or a business model. In India venture capital funds are registered as Category I Alternative Investment Funds under the SEBI (AIF) Regulations, 2012, with money raised from institutional and high-net-worth investors and invested by a fund manager. The steps are:

1. Deal origination: proposals come through business plans, networks, incubators and referrals.
2. Screening: quick filters on the entrepreneur, technology, market size and fit with the fund's stage and sector.
3. Due diligence: detailed appraisal of the team, product, market, financials and legal position.
4. Deal structuring: valuation, choice of instrument, stake, board seat, protective covenants, anti-dilution and exit terms in a term sheet and shareholders' agreement.
5. Post-investment support: tranches of funding against milestones, board participation, strategic guidance, hiring and follow-on funding.
6. Exit: the fund realises its return through an IPO, a trade sale, a buyback by promoters, or a secondary sale to another investor, generally within 4 to 7 years. The stage of financing varies: seed, start-up or early stage, expansion or growth, bridge and pre-IPO.

Instruments (7):

• Equity shares: the ownership stake, giving the highest return and risk.
• Convertible preference shares (CCPS): a preferential dividend and liquidation right, converting into equity at set terms; the most common instrument.
• Convertible debentures or notes: debt that converts into equity on a trigger, such as a later funding round or a valuation milestone.
• Warrants and options: the right to buy shares later at a fixed price, which helps in structuring incentives.
• Conditionally convertible and mezzanine instruments, and quasi-equity, which combine debt and equity features.
• Venture debt: loans to firms at a later stage, with low dilution, often carrying warrants. The choice depends on the stage, risk and control sought by the investor and the needs of the firm.