Untitled-29

Cost of Capital^61

any new shares in the last one year. It also means that the company would have issued

shares at a premium somewhere in the past. When these shares were issued cannot be

interpreted from the information given and no other information on that is available in

this annual report. Searching information from other resources, we come to know that

a company had issued shares at a premium of Rs 30 per share. Can you calculate, how

many new shares has the company issued? Simple calculations would tell you that the

company issued 1,041,000 shares (31,230,000 divided by 30).

Coming to the second item, we see the general reserve has an addition of Rs.7,921,724

in the last year's figure to bring the total to Rs.72,699,057. Now this addition has come

again from the same head appropriations in the profit and loss account where it says

'transfer to general reserve' and the same figure is mentioned. There was a different

amount transferred to the balance sheet last year. There is no stipulation that a particular

amount should be transferred, it only depends on the company's requirements. Why did

it not transfer more money can be traced to the fact that profits have been lower this

year as compared to last year.

The third item shows the profit and loss account heading. But most of the companies

report it under the heading 'Reserves & Surplus' as it belongs to the shareholders. Here

also the figure has remained unchanged from the last year. This means that the next

profit was appropriated fully and no extra surplus from the profit and loss account was

carried to the balance sheet this time. If you look at the profit and loss account in

Annexure I, you see an item in appropriations at the end of the profit and loss account

which says balance carried to balance sheet. This confirms that no profit was carried

to balance sheet from profit and loss account this year. For the last year, it shows the

figure of Rs.3,500,000/- which would now be a part of the figure of 8,500,000 that is

shown now.

At the end of reserves & surplus, where it shows previous year figures, the additions

work out to Rs 14,980,907 which is exactly the sum that you get when you add the two

amounts that were transferred last year to the balance sheet under their respective

heads.

A stocks rate of return

In case of shares the first component is "Dt" which is nothing but the income in cash

from dividends and the second component is the price change (appreciation and

depreciation).

( 1 i)n

Expected Future Value of the Share
(1 i)
Present Value of a Share n Dividend^ Amount
t 1 t +

+

+

=


=

This means that the price you are willing to pay for a share today is a function of the

dividends that you expect to receive and the present value of the expected future share

price.