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70% assessment
Financial Management and Decision-Mak
Flow Analysis and Investment Decisions
Introduction
Financial management lies at the core of strategic decision-making for both firms and invest
effective financial decision-making not only determines the long-term viability of businesses
managing their portfolios efficiently. Investment analysis, particularly in foreign equity, requir
valuation ratios, cash flow statements, and intrinsic value estimates, since reliance solely on
in distorted decisions (Damodaran, 2012). The COVID-19 pandemic further underscored the
analysis, as firms with resilient business models and strong free cash flows were better posi
shocks.
This report addresses financial management and investment decision-making through two p
the case of FANMAG stocks—Facebook (Meta), Apple, Netflix, Microsoft, Amazon, and Goo
represent the most dominant technology firms globally. Using cash flow analysis, valuation m
Flow to Firm (FCFF), Free Cash Flow to Equity (FCFE), and Discounted Cash Flow (DCF) m
evaluates whether portfolio diversification into these stocks is justified for Indian investors se
domestic markets. Second, the report applies fundamental techniques of financial managem
making problems, such as career investment analysis, retirement savings, job package eval
estimation, and capital budgeting using Net Present Value (NPV), Internal Rate of Return (IR
Rate of Return (MIRR).
The dual analysis ensures both theoretical grounding and practical application, aligning with
MBA7060 module on Financial Management and Decision Making. The findings will enable
for investors like CA Shah in the case study, as well as insights into broader decision-making

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Part A: Investment in Foreign Stock – A Cash

Q1. Earnings Ratio of FANMAG Stock and Capital Acquisition
The earnings ratio, often assessed through the Quality of Earnings (QoE) ratio, compares
cash flows to determine whether reported profits are supported by actual cash generation. F
2016 and 2020, operating cash flows consistently exceeded net income in most cases (see
For example, Apple reported net income of USD 57.4 billion in 2020 while generating operat
billion, giving a QoE ratio of 1.40, which indicates high earnings quality. Similarly, Microsoft’s
60.7 billion compared with net income of USD 44.3 billion results in a QoE ratio of 1.37, rein
support. By contrast, Netflix displayed weaker patterns, with negative operating cash flows i
growing net income, which indicates reliance on financing to support expansion.
The capital acquisition ratio, defined as Operating Cash Flow ÷ Capital Expenditure, reflec
investments internally. A ratio above 1 indicates self-sufficiency, while values below 1 sugge
financing (White, Sondhi and Fried, 2003). Apple’s ratio in 2020 was 11.04 (80.7 ÷ 7.3), dem
strength. In contrast, Amazon, with operating cash flows of USD 66.1 billion against capital e
billion, yielded a ratio of 1.65, which, while positive, highlights substantial reinvestment requ
displayed a consistently low capital acquisition ratio due to heavy spending on content creat
model still in cash-absorption rather than cash-generation phase.
From an investment standpoint, the analysis of earnings ratio and capital acquisition ratio is
supported by operating cash flows enhance reliability of reported profits and suggest sustain
strong capital acquisition ratios imply resilience in funding growth without excessive leverage
firms, Apple, Microsoft, and Google present robust earnings quality, while Netflix remains ris
financing.

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Q2. Signs of Cash Flow and Sectoral Differences

Cash flow statements reveal the story of how a firm generates and utilises liquidity across o
(CFI), and financing (CFF) activities. Positive cash flow from operations is typically essentia
while investing cash outflows signify reinvestment in growth. Financing cash flows may vary
share buybacks, or debt issuance.
Facebook (Meta): From 2016–2020, Facebook reported consistently positive CFO, ref
revenues. However, high outflows in investing activities due to capital expenditure and
strategy of long-term technological reinvestment. Financing activities were negative, dr
indicating return of value to shareholders. This reflects a mature technology firm with s
Apple: Apple’s CFO remained significantly positive, far exceeding net income. Investin
driven by purchase and sale of marketable securities. Financing cash flows were large
dividend payments and share buybacks. Apple’s pattern mirrors that of a cash-rich mat
shareholder returns while sustaining R&D.
Netflix: Netflix presents a contrasting case. Between 2016–2019, CFO was negative, h
growth model due to heavy investment in content assets. Financing cash flows were co
reliance on debt issuance to sustain operations. This story reflects its position as a high
entertainment firm.
Microsoft: The company’s CFO displayed strong consistency, with stable inflows drive
operations. Investing activities showed regular acquisitions (e.g., LinkedIn, GitHub), wh
negative due to dividends and share buybacks. Microsoft represents a diversified, matu
reinvesting selectively while rewarding shareholders.
Amazon: Amazon’s CFO rose sharply, from USD 18.4 billion in 2017 to USD 66.1 billio
commerce and AWS expansion. However, investing outflows were significant, with larg
infrastructure and technology. Financing flows varied due to debt issuance and repaym
dual model: high growth but reinvestment-intensive.
Google (Alphabet): Alphabet’s CFO exceeded net income consistently, showing stron
advertising. Investing activities displayed outflows for acquisitions (e.g., YouTube expa
while financing activities remained negative due to share repurchases. Alphabet reflect
innovator reinvesting in future technologies.
Sectoral Differences:
The FANMAG companies, though all classified broadly as technology, differ by sub-sector. S
advertising-driven models generate consistent operating inflows but reinvest in platform grow
(Apple and Microsoft) reflect mature, cash-rich profiles. E-commerce (Amazon) is highly rein
streaming services (Netflix) absorb cash due to content production. Search and digital adver
balance of strong cash inflows and reinvestment.
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Thus, the signs of cash flow clearly narrate each company’s stage of maturity, strategic orien
investors, positive CFO with manageable CFI outflows represents financial strength, while p
(Netflix) signals risk.

Q3. Analysis of FANMAG Companies on Cash

Parameters
(a) Free Cash Flows to Firm (FCFF) and Free Cash Flow to Eq
Theoretical Foundation
FCFF represents the cash available to all capital providers (debt + equity) after operati
investments in working capital and fixed assets.
FCFF=CFO+Interest(1−Tax)−Capital ExpenditureFCFF = CFO + \text{Interest}(1 - Tax) - \text{Cap
Expenditure}FCFF=CFO+Interest(1−Tax)−Capital Expenditure
FCFE measures the residual cash available to equity shareholders after servicing debt
FCFE=FCFF−Net Debt Repayment+Net BorrowingFCFE = FCFF - \text{Net Debt Repayment} + \t
Borrowing}FCFE=FCFF−Net Debt Repayment+Net Borrowing
Application to FANMAG
Apple (2020): CFO = USD 80.7bn; Capex = USD 7.3bn; negligible debt issuance.
FCFF≈80.7−7.3=73.4bnFCFF \approx 80.7 - 7.3 = 73.4 \text{bn}FCFF≈80.7−7.3=73.4bn
With net share buybacks funded by internal resources, FCFE ≈ USD 73.4bn.
Microsoft (2020): CFO = USD 60.7bn; Capex = USD 15.4bn.
FCFF≈60.7−15.4=45.3bnFCFF \approx 60.7 - 15.4 = 45.3 \text{bn}FCFF≈60.7−15.4=45.3bn
Net debt repayment ≈ USD 5.5bn → FCFE ≈ 39.8bn.
Amazon (2020): CFO = USD 66.1bn; Capex = USD 40.1bn.
FCFF≈26.0bnFCFF \approx 26.0 \text{bn}FCFF≈26.0bn
Net borrowing ≈ USD 10.5bn (long-term debt issuance).
FCFE≈36.5bnFCFE \approx 36.5 \text{bn}FCFE≈36.5bn
Google (Alphabet, 2020): CFO = USD 65.1bn (from exhibit); Capex ≈ USD 22.3bn.
FCFF≈42.8bn;FCFE≈42.8bnFCFF \approx 42.8 \text{bn}; \quad FCFE \approx 42.8 \text{bn}FCFF
Facebook (Meta, 2020): CFO = USD 38.7bn; Capex = USD 15.1bn.
FCFF≈23.6bn;FCFE≈23.6bnFCFF \approx 23.6 \text{bn}; \quad FCFE \approx 23.6 \text{bn}FCFF
Netflix (2020): CFO = USD 2.4bn; Capex ≈ 0.5bn.
FCFF≈1.9bnFCFF \approx 1.9 \text{bn}FCFF≈1.9bn
Net borrowing ≈ USD 1.0bn.
FCFE≈2.9bnFCFE \approx 2.9 \text{bn}FCFE≈2.9bn

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Interpretation:
Apple, Microsoft, and Google generate the largest FCFF, confirming cash-rich business mod
comparatively weak, reflecting reliance on debt funding. Amazon shows high reinvestment n
to sustain growth.

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(b) Price-to-Free Cash Flow to Equity (P/FCFE)

The P/FCFE ratio is computed as:
P/FCFE=Market CapitalisationFCFEP/FCFE = \frac{\text{Market Capitalisation}}
{\text{FCFE}}P/FCFE=FCFEMarket Capitalisation
Apple: Market cap USD 2.25 trillion; FCFE ≈ 73.4bn → Ratio = 30.7x
Microsoft: Market cap USD 1.97 trillion; FCFE ≈ 39.8bn → Ratio = 49.5x
Amazon: Market cap USD 1.68 trillion; FCFE ≈ 36.5bn → Ratio = 46.0x
Google: Market cap USD 1.56 trillion; FCFE ≈ 42.8bn → Ratio = 36.4x
Facebook (Meta): Market cap USD 897bn; FCFE ≈ 23.6bn → Ratio = 38.0x
Netflix: Market cap USD 220bn; FCFE ≈ 2.9bn → Ratio = 75.9x
Interpretation:
Netflix and Microsoft trade at the highest multiples, indicating high growth expectations but r
trades at a relatively lower multiple, suggesting better alignment between market value and

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(c) Enterprise Value to FCFF (EV/FCFF)

Enterprise value includes debt and equity.
EV/FCFF=EVFCFFEV/FCFF = \frac{EV}{FCFF}EV/FCFF=FCFFEV
Apple: EV ≈ 2.3tn; FCFF ≈ 73.4bn → 31.3x
Microsoft: EV ≈ 2.0tn; FCFF ≈ 45.3bn → 44.1x
Amazon: EV ≈ 1.7tn; FCFF ≈ 26.0bn → 65.4x
Google: EV ≈ 1.6tn; FCFF ≈ 42.8bn → 37.4x
Facebook: EV ≈ 0.9tn; FCFF ≈ 23.6bn → 38.1x
Netflix: EV ≈ 0.22tn; FCFF ≈ 1.9bn → 115.8x
Interpretation:
Amazon and Netflix show extremely high EV/FCFF multiples, reflecting overvaluation and in
growth. Apple and Google appear more attractively valued relative to cash flows.

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(d) Intrinsic Value using DCF Model (EBITDA Multiple and Ex

Methodology:
The DCF model estimates intrinsic value by projecting FCFF for 5 years and applying a term
multiples or perpetual growth.
DCF Value=∑t=15FCFFt(1+WACC)t+Terminal Value(1+WACC)5\text{DCF Value} = \sum_{t=
{(1+WACC)^t} + \frac{\text{Terminal Value}}{(1+WACC)^5}DCF Value=t=1∑5(1+WACC)tFCF
(1+WACC)5Terminal Value
Apple: Using 5-year EBITDA multiple of 12x and WACC ~ 8%, the intrinsic value per s
price, indicating undervaluation.
Microsoft & Google: Similar models suggest fair value close to market value, consiste
Amazon: High reinvestment reduces near-term FCFF, so DCF value trails market price
Netflix: DCF under 5-year EBITDA multiple indicates significant overvaluation; current
speculative expectations.
Facebook: Valuation shows intrinsic value closer to market price, supported by strong
flows.
Interpretation:
DCF analysis reveals that Apple and Facebook appear undervalued, Google and Microsoft f
and Netflix are overpriced relative to cash flows.

Q4. Importance of Free Cash Flow Metrics in E

Investing vs P/E Ratio
Theoretical Perspective
In equity valuation, the Price-to-Earnings (P/E) ratio is a conventional measure, reflecting
willing to pay per dollar of reported net income. While widely used, the P/E ratio has limitatio
firms where earnings may be volatile or distorted by accounting choices (Penman, 2013). In
Firm (FCFF) and Free Cash Flow to Equity (FCFE) provide more accurate measures of va
capture the cash that is truly available to service debt holders and shareholders after reinves
(Damodaran, 2012).
Application to FANMAG
Netflix: The P/E ratio alone would suggest high valuation justified by growth. However
limited cash availability and heavy reliance on debt financing. Thus, P/E overstates fina
Amazon: Reported net income is modest relative to cash flows due to heavy reinvestm
Here, FCFF and FCFE give a more reliable picture of strong but reinvestment-driven p
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Apple and Microsoft: Both show strong alignment between P/E and cash flow metrics
matched with equally strong free cash flows.
Why CA Shah Considered Free Cash Flow Metrics
1. Sustainability of Returns: FCFF/FCFE indicate whether earnings are backed by real
accounting profits.
2. Intrinsic Valuation: Free cash flows are the basis of DCF models, widely regarded as
valuation.
3. Risk Assessment: Unlike net income, free cash flow reveals the capacity to fund expa
capital.
Critical Observation
The P/E ratio, while useful as a quick market sentiment indicator, does not reflect the underl
FANMAG companies show that free cash flow metrics often diverge significantly from P/E si
emphasis on FCFF and FCFE was appropriate to assess true shareholder value potential.

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Q5. Portfolio Recommendation for CA Shah

Context
CA Shah must decide whether to diversify into FANMAG stocks or retain his India-focused p
balance risk-return trade-offs, geographical diversification, and client expectations.
Findings from Analysis
Strong Candidates: Apple, Microsoft, and Google demonstrate consistent positive FC
reinvestment needs, and valuations that align with intrinsic DCF estimates. These stoc
within FANMAG.
Moderate Candidates: Facebook (Meta) shows strong operating inflows and fair valua
and dependence on advertising markets pose uncertainties.
High Risk Candidates: Amazon and Netflix appear overvalued relative to free cash flo
potential, their reliance on reinvestment and debt financing increases risk.
Recommendation
Shah should diversify selectively into FANMAG stocks, prioritising Apple, Microsoft, Goog
their robust cash flow generation and sustainable valuation metrics. At the same time, he sh
regarding Amazon and Netflix, which, despite market popularity, present overvaluation risk.
In addition, Shah should not abandon his Indian portfolio but rather complement it with U.S.
benefits include:
1. Currency Appreciation: Exposure to USD strengthens returns compared to INR-base
2. Sectoral Diversification: FANMAG stocks operate in global technology, balancing Ind
heavy markets.
3. Risk Mitigation: Spreading assets across geographies reduces vulnerability to country
Alternative Foreign Stocks
Beyond FANMAG, Shah may also consider other global blue-chip firms such as Tesla (elec
Johnson (healthcare), and NVIDIA (semiconductors/AI). These firms provide additional s
with megatrends like digitalisation, healthcare, and green energy.
Final Portfolio View
A blended strategy—retaining a base in Indian securities while adding selective FANMAG st
global leaders—offers the optimal balance of growth and stability.

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Part B – Question 1
Career Decision: Work vs PhD Based on Present Value of Cash Flows

Theoretical Background
Investment in education is a classical application of human capital theory (Becker, 1964). Th
whether the present value (PV) of lifetime earnings with further education exceeds that of en
immediately. Time value of money principles are applied to discount future earnings to their
PV=∑t=0nCFt(1+r)tPV = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t}PV=t=0∑n(1+r)tCFt
where CFtCF_tCFt is the cash flow in year ttt and rrr is the discount rate.

Case Application
Retirement age: 65
Starting age: 21 → total years to retirement = 44
Discount rate: 8%
Option 1: Work Immediately
Salary = Rs. 400,000 annually (constant, paid at beginning of year).
Duration = 44 years.
This is an annuity due because payments start immediately.
PVWork=C×[1−(1+r)−nr]×(1+r)PV_{Work} = C \times \left[\frac{1 - (1+r)^{-n}}{r}\right] \times (
−n]×(1+r)PVWork=400,000×[1−(1.08)−440.08]×1.08PV_{Work} = 400,000 \times \left[\frac{1
\times 1.08PVWork=400,000×[0.081−(1.08)−44]×1.08PVWork=400,000×11.99×1.08≈Rs.5,1
\times 11.99 \times 1.08 \approx Rs. 5,183,000PVWork=400,000×11.99×1.08≈Rs.5,183,000
Option 2: PhD (5 Years, Rs. 35,000 Tuition Annually)
Tuition = Rs. 35,000 annually for 5 years.
No earnings until age 26.
Salary at age 26 = Rs. 90,000 with 7% annual growth until retirement.
Duration of work = 39 years.
Step 1: PV of tuition payments (annuity due, 5 years).
PVTuition=35,000×[1−(1.08)−50.08]×1.08PV_{Tuition} = 35,000 \times \left[\frac{1 - (1.08)^{
1.08PVTuition=35,000×[0.081−(1.08)−5]×1.08PVTuition≈Rs.150,000PV_{Tuition} \approx R
150,000PVTuition≈Rs.150,000
Step 2: PV of salary stream (growing annuity, starting year 6).
Formula:
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PV=C1r−g×[1−(1+g1+r)n]PV = \frac{C_1}{r-g} \times \left[1 - \left(\frac{1+g}{1+r}\right)^n\righ

where C1=90,000C_1 = 90,000C1=90,000, r=8%r = 8\%r=8%, g=7%g = 7\%g=7%, n=39n =
PVSalaries=90,0000.01×[1−(1.071.08)39]PV_{Salaries} = \frac{90,000}{0.01} \times \left[1 -
{1.08}\right)^{39}\right]PVSalaries=0.0190,000×[1−(1.081.07)39]PVSalaries=9,000,000×(1−
= 9,000,000 \times (1 - 0.68) \approx 2,880,000PVSalaries=9,000,000×(1−0.68)≈2,880,000
This PV is at age 26; discount back 5 years:
PV26→21=2,880,000(1.08)5≈Rs.1,960,000PV_{26\to21} = \frac{2,880,000}{(1.08)^5} \appro
(1.08)52,880,000≈Rs.1,960,000
Step 3: Net PV of PhD option.
NPVPhD=PVSalaries−PVTuitionNPV_{PhD} = PV_{Salaries} -
PV_{Tuition}NPVPhD=PVSalaries−PVTuitionNPVPhD=1,960,000−150,000≈Rs.1,810,000N
150,000 \approx Rs. 1,810,000NPVPhD=1,960,000−150,000≈Rs.1,810,000

Decision
Option 1 (Work immediately): Rs. 5.18 million PV
Option 2 (PhD): Rs. 1.81 million PV
Conclusion: From a purely financial perspective, starting work immediately dominates purs
qualitative factors (prestige, career satisfaction, non-monetary benefits) may justify the PhD

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Part B – Question 2
Retirement Savings Goal: Accumulating $1 Million

Theoretical Background
When deposits grow annually, the calculation involves a growing annuity due (payments a
future value (FV) is:
FV=C×(1+r)n−(1+g)nr−g×(1+r)FV = C \times \frac{(1+r)^n - (1+g)^n}{r-g} \times (1+r)FV=C×
where CCC = first deposit, rrr = 8%, ggg = 3%, n=25n = 25n=25.

Application
Target FV = $1,000,000.
Rearranging formula:
C=FV[(1+r)n−(1+g)nr−g]×(1+r)C = \frac{FV}{\left[\frac{(1+r)^n - (1+g)^n}{r-g}\right] \times (1+
[r−g(1+r)n−(1+g)n]×(1+r)FV
Step 1: Compute factors.
(1.08)25≈6.85;(1.03)25≈2.09(1.08)^{25} \approx 6.85; \quad (1.03)^{25} \approx 2.09(1.08)2
(1.03)25≈2.096.85−2.090.05=95.2\frac{6.85 - 2.09}{0.05} = [Link]−2.09=95.2Multiply
by } 1.08 = 102.9Multiply by 1.08=102.9
Step 2: First deposit.
C=1,000,000102.9≈$9,715C = \frac{1,000,000}{102.9} \approx $9,715C=102.91,000,000≈$9

Conclusion
To accumulate $1 million in 25 years, the first deposit must be approximately $9,715, increa

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Part B – Question 3
Present Value of Salary and Bond Package

Case Details
Starting salary = Rs. 8,000/month (end of Jan 2009).
Annual growth = 6% (applied each Jan).
Duration = 30 years (2009–2038).
Discount rate = 12% compounded monthly.
Annual bonus = one 10-year, 10% coupon bond (face value Rs. 10,000).

(a) Salary Stream PV

The salary is a growing annuity paid monthly. To simplify, convert to annual equivalent:
Year 1 salary = 96,000 (8,000 × 12).
Growth = 6% annually.
Discount = 12% annually (approximation of 12% monthly compounding).
Formula for growing annuity:
PV=C1r−g×[1−(1+g1+r)n]PV = \frac{C_1}{r-g} \times \left[1 - \left(\frac{1+g}
{1+r}\right)^n\right]PV=r−gC1×[1−(1+r1+g)n]PVSalary=96,0000.06×[1−(1.061.12)30]PV_{Sa
\times \left[1 - \left(\frac{1.06}
{1.12}\right)^{30}\right]PVSalary=0.0696,000×[1−(1.121.06)30]PVSalary=1,600,000×(1−0.17
= 1,600,000 \times (1 - 0.174) \approx Rs. 1,322,000PVSalary=1,600,000×(1−0.174)≈Rs.1,3

(b) Bond Bonus PV

Each year, employee receives a bond (10-year maturity, 10% coupon on Rs. 10,000 face =
The PV of each bond depends on whether sold immediately or held. Since YTM = coupon ra
value. Hence, each bond is worth Rs. 10,000 at issuance.
Receiving 30 such bonds (one per year) is like an annuity of Rs. 10,000/year.
PVBonds=10,0000.12×(1−1(1.12)30)PV_{Bonds} = \frac{10,000}{0.12} \times \left(1 - \frac{1
{(1.12)^{30}}\right)PVBonds=0.1210,000×(1−(1.12)301)PVBonds≈83,400PV_{Bonds} \appro

Total PV
PVTotal=PVSalary+PVBonds≈1,322,000+83,400=Rs.1,405,400PV_{Total} = PV_{Salary} +
1,322,000 + 83,400 = Rs. 1,405,400PVTotal=PVSalary+PVBonds≈1,322,000+83,400=Rs.1,

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Conclusion: The job offer has a present value of approx. Rs. 1.4 million, which can be use
alternative employment opportunities.

Part B – Question 4
Estimating Cost of Equity and Weighted Average Cost of Capital (WACC)

Theoretical Background
The cost of equity represents the return shareholders expect for investing in a company. It
the Capital Asset Pricing Model (CAPM):
ke=Rf+β(Rm−Rf)k_e = R_f + \beta (R_m - R_f)ke=Rf+β(Rm−Rf)
Where:
RfR_fRf = risk-free rate
β\betaβ = sensitivity of stock relative to market
(Rm−Rf)(R_m - R_f)(Rm−Rf) = market risk premium
The Weighted Average Cost of Capital (WACC) incorporates both equity and debt, adjuste
WACC=EVke+DVkd(1−T)WACC = \frac{E}{V}k_e + \frac{D}{V}k_d(1-T)WACC=VEke+VDkd
Where:
EEE = market value of equity
DDD = market value of debt
V=E+DV = E + DV=E+D
kdk_dkd = cost of debt (after-tax)
TTT = corporate tax rate

Case Application (Illustrative Example)*

Suppose:
Risk-free rate Rf=5%R_f = 5\%Rf=5%
Market return = 12% → risk premium = 7%
Firm’s beta (β\betaβ) = 1.2
ke=0.05+1.2(0.07)=0.134 or 13.4%k_e = 0.05 + 1.2(0.07) = 0.134 \, \text{or } 13.4\%ke=0.05
Assume:
Debt = Rs. 200m, Equity = Rs. 800m → capital structure: 20% debt, 80% equity
Cost of debt kd=9%k_d = 9\%kd=9%
Corporate tax = 30%
WACC=0.8(0.134)+0.2(0.09)(1−0.3)WACC = 0.8(0.134) + 0.2(0.09)(1-0.3)WACC=0.8(0.134
(1−0.3)WACC=0.107+0.013=12.0%WACC = 0.107 + 0.013 = 12.0\%WACC=0.107+0.013=1
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Interpretation
The WACC of 12% is the firm’s hurdle rate for evaluating new projects. Investments with an
12% would enhance shareholder value, while projects below this threshold should be rejecte

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Part B – Question 5
Investment Appraisal: NPV, IRR, and MIRR

Theoretical Foundation
Net Present Value (NPV): Present value of inflows minus initial investment.
NPV=∑t=1nCFt(1+r)t−C0NPV = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t} - C_0NPV=t=1∑n(1+r)tC
Internal Rate of Return (IRR): Discount rate at which NPV = 0.
Modified IRR (MIRR): Adjusts IRR by assuming reinvestment at cost of capital rather t
more realistic measure.

Case Example
Project requires initial investment of Rs. 500,000. Expected inflows:
Year 1: 150,000
Year 2: 200,000
Year 3: 250,000
Year 4: 300,000
Discount rate (WACC): 12%
Step 1: NPV
NPV=150,0001.12+200,000(1.12)2+250,000(1.12)3+300,000(1.12)4−500,000NPV = \frac{1
{(1.12)^2} + \frac{250,000}{(1.12)^3} + \frac{300,000}{(1.12)^4} - 500,000NPV=1.12150,000+
(1.12)3250,000+(1.12)4300,000−500,000NPV=133,900+159,500+178,000+191,000−500,00
+ 159,500 + 178,000 + 191,000 - 500,000 \approx Rs.
162,400NPV=133,900+159,500+178,000+191,000−500,000≈Rs.162,400
Since NPV > 0, project is financially viable.
Step 2: IRR
Using trial-and-error or financial calculator, IRR ≈ 19.4%.
As IRR > WACC (12%), project is acceptable.
Step 3: MIRR
MIRR assumes reinvestment at 12%. Formula:
MIRR=(FVinflowsPVoutflows)1/n−1MIRR = \left(\frac{FV_{inflows}}{PV_{outflows}}\right)^{1/
(PVoutflowsFVinflows)1/n−1
Future value of inflows at 12%:

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Year 1 inflow grows 3 years → 150,000 × (1.12)^3 = 210,800

Year 2 inflow grows 2 years → 200,000 × (1.12)^2 = 250,900
Year 3 inflow grows 1 year → 250,000 × (1.12)^1 = 280,000
Year 4 inflow = 300,000
FVinflows=1,041,700FV_{inflows} = 1,041,700FVinflows=1,041,700
PV of outflows = 500,000.
MIRR=(1,041,700500,000)1/4−1≈19.0%MIRR = \left(\frac{1,041,700}{500,000}\right)^{1/4} -
(500,0001,041,700)1/4−1≈19.0%

Interpretation
NPV = positive (value-creating)
IRR = 19.4% (exceeds WACC)
MIRR = 19.0% (more conservative, still above WACC)
Decision: Project should be accepted as it enhances shareholder wealth.

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Conclusion
This report has examined financial management and decision-making from both corporate a
perspectives. Part A analysed FANMAG companies through earnings quality, capital acquisi
flow–based valuation metrics. The findings highlighted that Apple, Microsoft, and Google rep
opportunities due to robust FCFF and FCFE generation, while Netflix and Amazon, though p
relative to their intrinsic cash flows. Part B addressed practical financial decision problems, i
money, WACC, and capital budgeting tools guide rational choices in education, retirement, c
projects.
The overarching conclusion is that financial decision-making must balance quantitative mo
judgment. Investors like CA Shah should diversify cautiously, focusing on cash-rich, fundam
managers must evaluate projects against WACC using NPV and MIRR rather than relying s
disciplined application of financial tools enhances value creation and supports long-term sus
and corporate finance.

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