Biltek Business & Fin Strategy

BILTEK’S DILEMMA BUSINESS & FINANCIAL STRATEGY-ANALYSIS IMPACT ON SHARE PRICE

The management of Biltek (a debt free electronics company) is pondering over the following exhibit which shows the ROE for the firm in the recent years.

Recent instability in the economy! a s"dden s"rge in new prod"cts la"nched by o"r firm and the competitors! the labo"r "nrest followed followed by a strike! the scarcity scarcity of raw materials which res"lted in an increase in #O$% and o"r recent entry into the foreign market which created transaction expos"re! all contrib"ted to the volatility in the ROE.& #ommented %"dip Baner'ee! #O of Biltek. B"t  am s"re that as the growth picks "p in the coming few months! all the investments made by "s will start res"lting in better ret"rns. *e may not re+"ire any additional investments for the next few years. *ith a proper cost and financial str"ct"re! we will be able to reward o"r share holders. .  Alternative  Alternative A Alternative Alternative B ,rice - - /ar.#ost 01.2 0 ixed #ost -1!111 3!431!111 5ssets -!11!111 -!11!111 Tax Rate 16 16 Situations Po!a!i"it# Units Terrible 1.12 71!111 ,oor 1.31 41!111  8ormal 1.21 911!111 $ood 1.31 971!111 Excellent 1.12 311!111

 Projected ROE – Alternative A :E;58: ,ROB. <8T% %5=E% O,.#osts EBT ,5T ROE Terrible 1.12 71!111 2!71!111 2!901!111 01!111 343!111 >.116 ,oor 1.31 41!111 0!231!111 7!241!111 -1!111 27!111 7.116  8ormal 1.21 911!111 -!11!111 0!--1!111 9!91!111 47!111 -.116 $ood 1.31 971!111 92!11!111 93!331!111 3!431!111 9!7-3!111 94.116 Excellent 1.12 311!111 94!411!111 92!11!111 >!071!111 3!327!111 3.116

Expected ROE ? 91.726  Projected ROE – Alternative B :E;58: ,ROB. <8T% %5=E% O,.#osts Terrible 1.12 71!111 2!71!111 2!71!111 ,oor 1.31 41!111 0!231!111 7!241!111  8ormal 1.21 911!111 -!11!111 0!231!111 $ood 1.31 971!111 92!11!111 91!>1!111 Excellent 1.12 311!111 94!411!111 93!331!111 Expected ROE ? 92.>16 Breakeven point@ 5@ A(,/) ? -1!111A(-012) ? 1!111 B@ A(,/) ? 3!431!111A(-0) ? 71!111

EBT 1 -1!111 9!441!111 !011!111 7!241!111

,5T ROE 1 1 27!111 7.116 9!934!111 93.116 3!431!111 >1.116 >!-4!111 3.116

#onsidering the better ROE! Biltek is planning to select 5lternative B. Biltek wo"ld like to reconsider the impact of capital str"ct"re on its b"siness. They are considering m"ltiple options as far as :ebt ratio is concerned. nfact! Biltek is planning to  borrow debt and repay the e+"ity share holders. The company is not planning for any additional f"nd raising. Biltek has c"rrently 911111 shares o"tstanding. 5t present! the companyCs share is trading at Rs.41. which is m"ch lesser than its book val"e. The company is planning to rep"rchase the shares at -A. Biltek is trying to identify the :AE where the firm will have optimal capital str"ct"re. The company is expecting the cost of debt to increase for additional leverage. Do" have the cost of debt fig"res at different  borrowings. :ebtA5ssets(6) 91 31 >1 1 21 71

nterest Rate(6) (,retax) 91.-26 99.26 93.326 9.126 97.246 31.116

Biltek is paying entire earnings as dividends this ye ar. :ividend is expected to grow at a constant rate of >6. The c"rrent risk free rate is abo"t 76 and the historical average risk  premi"m is abo"t 6. Biltek is c"rrently at an "nlevered beta of 9.2! altho"gh yo" are almost s"re that there will be a ma'or "pward change in beta with more leverage as the investors expect a higher risk for the additional leverage.