IAPM Selected Numericals

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Illustration 4:
An Investor buys 75 units of a fund at
receives dividend at the rate of 10%. The ex
2010 the funds NAV was 15.25. Calculate the return on I
Solution:
The Beginning Value of Investment = 9.5 x 75
Number of Units Reinvested
Total No. of Units
End Period Value and Investment
Return on Investment
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An Investor buys 75 units of a fund at 9.5 on 1
st
January, 2010. On 30
receives dividend at the rate of 10%. The ex-dividend NAV was 10.25. On 31
15.25. Calculate the return on Investment.
The Beginning Value of Investment = 9.5 x 75
= 712.50
Number of Units Reinvested = units 31 . 7
25 . 10
75
=
= 75 + 7.31 = 82.31
End Period Value and Investment = 82.31 x 15.25
= 1,255.23
= 100 x
MV
MV MV
b
b e

= 100
50 . 712
50 . 712 23 . 1255
x
= 100
50 . 712
73 . 542
x
= 76.17%
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st
Prize
E: enthusiastic way of teaching
Shweta Coelha
College Patkar
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1
January, 2010. On 30
th
June, 2010 he
10.25. On 31
st
December,

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2
Illustration 2:
The details of three portfolios are given below. Compare these portfolios on performance using
the Sharpe, Treynor and Jensen's measures.
Portfolio Average Return Standard Deviation Beta
1 15% 0.25 1.25
2 12% 0.30 0.75
3 10% 0.20 1.10
Market Index 12% 0.25 1.00
The risk-free rate of return is 9%.
Solution:-
Sharpe Measure =
o
F
R R
Portfolio 1 = ) 1 ( .... 24
25 . 0
9 15
=
Portfolio 2 = ) 3 ( ... 10
30 . 0
9 12
=
Portfolio 3 = ) 4 ( ... 5
20 . 0
9 10
=
Market Index = ) 2 ( ... 12

25 . 0
9 12
=
As per Sharpe Measure, Portfolio 1 is better than 2, 3 and market Index.

Treynors Measure
F
R R
=
Portfolio 1 = ) 1 ( ... % 8 . 4
25 . 1
9 15
=
Portfolio 2 = ) 2 ( ... % 4
75 . 0
9 12
=
Portfolio 3 = ) 4 ( ... % 90 . 0
10 . 1
9 10
=
Market Index = ) 3 ( ... % 5 . 2

20 . 1
9 12
=
CHAPTER 4: PORTFOLIO MANAGEMENT FRAMEWORK

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As per Treynors Measure, Portfolio 1 is better than 2, 3 and market Index.
Jensens Measures :-
R = R
F
+ | (R
M
Portfolio 1 = 9 + 1.25 (12
= 9 + 3.75
= 12.75
Portfolio 2 = 9 + 0.75 (12
= 9 + 2.25
= 11.25
Portfolio 3 = 9 + 1.10 (12
= 9 + 3.3
= 12.3
Now,
Portfolio 1 = 15 12.75
Market Index = 0 (by definition)
As per Jensens Measure, Portfolio 1 is
"Contest Winner L
2) Neither an institute nor an education centre where each
and every student is differentiated, but like a house
where there are children equally treated.

asure, Portfolio 1 is better than 2, 3 and market Index.
M
R
F
)
9 + 1.25 (12 9)
12.75
9 + 0.75 (12 9)
11.25
9 + 1.10 (12 9)
12.3
12.75 = 2.25 (1)
11.25 = 0.75 (2)
= - 2.3 (3)
0 (by definition)
s Measure, Portfolio 1 is better than portfolio 2, and portfolio 3.
"What is SCOrE?" Winners . .
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where there are children equally treated.
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College Lala
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3
4
Illustration 1:
Four equal annual payments of 5,000 are made into a deposit account that pays 8
percent interest per year. What is the future value of this annuity at the end of 4 years?
Solution:
(
+
=
R
1 ) R 1 (
A FV annuity of value future The
t
A
= 5,000 x FVIFA @ 8%
= 5,000 x 4.5061
= 22530.50
Illustration 4:
A bank promises to give you 10,000 after 3 years at the rate of 10% interest. How much
should you deposit today?
Solution:
n
R
x
) 1 (
1
FV PV
+
=

3
) 10 . 0 1 (
1
000 , 10
+
= x

3
) 1 . 1 (
1
000 , 10 x =

331 . 1
1
000 , 10 x =
= 7513
OR
PVCIF = CIF x DF
= 10,000 x 0.7513
= 7513.
Illustration 21:
Krishnamurthy has inherited 1,000 a year for next 20 years. First payment being made in one
years time. However he is need of money immediately and would like to sell his income to any
buyer who would pay him the right price. Assume that the current market rate of interest is 10%.
(a) What should be the right price he should accept?
(b) How much of his income should he sell if he wants only 2,500 at present.
CHAPTER 8: - TIME VALUE OF MONEY
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(c) If you have invested in buying the income but if you had only
be your proposal.
Solution:
(a) PV = 1,000 x PVIF (10% of 20 years)
= 1,000 x 8.514
= 8514
Comment: The right price he should accept is
(b) PV
8,514 1,000
2,500 (?)
Comment: He should sell 293.63 of his income.
(c) 8,514 1,000
5,000 (?)
Comment: My proposal will be to receive minimum 587.27 of his income.
"Contest Winner L
3) SCOrE is shortcut to Success headed by the great leader
Jhabak Sir who mix up practical knowledge nicely with
syllabus wer over all
imp.

If you have invested in buying the income but if you had only 5,000 to invest what would
F (10% of 20 years)
The right price he should accept is 8514.
293.63 of his income.
proposal will be to receive minimum 587.27 of his income.
r all development of students is giv
Vaibhav A. Shirodkar
M: 9324343830
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5,000 to invest what would
nts is given
6
CHAPTER : 9 RISK AND RETURN
Illustration 3:
Given below are the likely returns in case of shares of VCC Ltd. and LCC Ltd. in the various
economic conditions. Both the shares are presently quoted at Rs. 100 per share.
Economic
Conditions
Probability
Returns of
VCC Ltd.
Returns of
LCC Ltd.
High Growth
Low Growth
Stagnation
Recession
0.3
0.4
0.2
0.1
100
110
120
140
150
130
90
60
Which of the two companies are risky investments?
Solution:-
VCC Ltd.
Economic
Condition
P R
P x R = R
) R R (
2
) R R (
2
) R R ( P
High
Growth
0.3 100 30 12 144 43.2
Low
Growth
0.4 110 44 2 4 1.6
Stagnation 0.2 120 24 8 64 12.8
Recession 0.1 140 14 28 784 78.4
112 Variance 136
Expected Return = 112%
Risk = Standard deviation = V = 136 = 11.66%
LCC Ltd.
Economic
Condition
P R
P x R = R
) R R (
2
) R R (
2
) R R ( P
High
Growth
0.3 150 45 29 841 252.30
Low
Growth
0.4 130 52 9 81 32.40
Stagnation 0.2 90 18 31 961 192.20
Recession 0.1 60 6 61 3721 372.10
121 Variance 849
Expected Return = 121%
Risk = Standard deviation = V = 849 = 29.14%
CHAPTER : 9 RISK AND RETURN
7
VCC Ltd. LCC Ltd.
Return
Risk (o)
112%
11.66%
121%
29.14%
Comment :
1. The risk in LCC is more than VCC Ltd.
2. The choice of an Investor totally depends upon the risk return profile of the Investors.
An Investor, who is willing to take risk, would invest in LCC, since the return is higher.
An Investor who is willing to take less risk, will Invest in VCC Ltd.
Illustration 8:
In January 2008, Mr. Dhimant Kapadia purchased the following 5 scrips:
Co.'s Name No. of Shares Purchase price
H Ltd.
C Ltd.
S Ltd.
F Ltd.
M Ltd.
100
100
100
100
100
250
180
80
240
260
He paid brokerage of Rs. 1,500
During the year 2008, Mr. Dhimant Kapadia received the following.
Co's Name Dividend Bonus Shares
H Ltd.
C Ltd.
S Ltd.
F Ltd.
M Ltd.
300
290
450
500
600
1:2
In January 2009, Mr. Dhimant Kapadia sold all his holdings at the following prices.
Co's Name Market Price
H Ltd. 275
C Ltd. 240
S Ltd. 108
F Ltd. 200
M Ltd. 400
He paid brokerage of Rs. 1,865.
Calculate the holding period return.
8
Solution:-
Formula :-
Holding period Return = 100 x
beginning at the Price
Dividend + beginning at the Price - Year Last of end at the Price
100 x
102500
2140 102500 134185 +
=
= 33%
W.N.1) Price at beginning:-
Name
No. of
Shares
Purchase
Price
Brokerage
Purchase Price
H Ltd.
C. Ltd.
S. Ltd.
F. Ltd.
M Ltd.
100
100
100
100
100
250
180
80
240
260
25,000
18,000
8,000
24,000
26,000
1,01,000
+ Brokerage 1,500
1,02,500
W.N. 2) Price at the end:-
Name
No. of
Shares
Purchase
Price
Amount
H. Ltd.
C. Ltd.
S. Ltd.
F. Ltd.
M. Ltd.
150
100
100
100
100
275
240
108
200
400
41,250
24,000
10,800
20,000
40,000
1,36,050
- Brokerage 1,865
1,34,185
Illustration 14:
The common stocks of Bajaj and TVS have expected returns of 15% and 20% respectively,
while the standard deviations are 20% and 40%. The excepted correlation coefficient between
the two stocks is 0.36. What is the excepted value of return and the standard deviation of a
portfolio consisting of (a) 40% Bajaj and 60% TVS? (b) 40% TVS and 60% Bajaj?
Solution:-
(a)
Bajaj TVS
Return
o
W
15
0.20
0.40
20
0.40
0.60
Correlation Co efficient between two stocks = 0.36
9
Expected Return of Portfolio = W
B
x R
B
+ W
T
R
T
= 0.40 x 15 + 0.60 x 20
= 6 + 12
= 18%
Risk of Portfolio =
BT T T B B T T B B
C x x W x x W x x W x W 2 ) ( ) ( ) ( ) (
2 2 2 2
+ +

36 . 0 40 . 0 60 . 0 20 . 0 40 . 0 2 ) 40 . 0 ( ) 60 . 0 ( ) 20 . 0 ( ) 40 . 0 (
2 2 2 2
x x x x x x x + + =

36 . 0 40 . 0 60 . 0 20 . 0 40 . 0 2 16 . 0 36 . 0 04 . 0 16 . 0 x x x x x x x + + =
014 . 0 058 . 0 006 . 0 + + =
078 . 0 =
= 0.2792
= 0.2792 x 100
= 27.92% or 0.28
(b)
Bajaj TVS
Return
W
15
0.20
0.60
20
0.40
0.40
Expected Return of Portfolio = W
B
x R
B
+ W
T
x R
T
= 0.60 x 15 + 0.40 x 20
= 9 + 8
= 17%
Risk of Portfolio () =
BT T T B B T T B B
C x x W x x W x x W x W 2 ) ( ) ( ) ( ) (
2 2 2 2
+ +
= 36 . 0 40 . 0 40 . 0 20 . 0 60 . 0 2 ) 40 . 0 ( ) 40 . 0 ( ) 20 . 0 ( ) 60 . 0 (
2 2 2 2
x x x x x x x + +
= 36 . 0 40 . 0 40 . 0 20 . 0 60 . 0 2 16 . 0 16 . 0 04 . 0 36 . 0 x x x x x x x + +
= 014 . 0 025 . 0 014 . 0 + +
= 053 . 0
= 23 . 0
= 100 x 23 . 0
= 23% or 0.23
10
RATIO ILLUSTRATION
Illustration 2:
Following information is available relating to Beena Ltd. and Meena Ltd:
( in lacs)
Beena Ltd. Meena Ltd.
Equity share capital (Rs. 10) 200 250
12% preference shares 80 100
Profit after tax 50 70
Proposed dividend 35 40
Market price per share 25 35
You are required to calculate: (i) Earning per share. (ii) P/E Ratio (iii) Dividend Payout Ratio.
(iv) Return on Equity Shares. As an analyst, advice the investor which of the two companies is
worth investing.
Solution:-
(i)
Shares Equity of . No
PD NPAT
EPS

=
20
6 . 9 50
=
= 2.02 per shares
25
12 70
=
= 2.32 per shares
EPS Signifies that the profit earned by each Equity Shareholder. A higher ratio is favorable.
Based on EPS Meena Ltd. is better than Beena Ltd.
(ii)
MPS
EPS
Ratio E / P =
02 . 2
25
=
= 12.38 times
32 . 2
35
=
= 15.086 times
P/E Ratio signifies that the market price is how many times the earning. A Lower ratio is
generally favorable. From the point of view of the Investor, Beena Ltd. is better than Meena Ltd,
based on P/E Ratio.
(iii) 100 x
EPS
DPS
Ratio Payout Dividend = 100 x
02 . 2
75 . 1
=
= 86.63%
100 x
32 . 2
6 . 1
=
= 68.97%
CHAPTER :- 10 FUNDAMENTAL AND TECHNICAL ANALYSIS
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Shares of . No
Dividend Equity Total
DPS =
Dividend Payout Ratio signifies that the dividend is how much percent of Equity earnings. A
higher Ratio is favorable, for dividend seeking Investor & Lower ratio is favorable for Capital
appreciation seeking Investor.
(iv)
NPAT
Shares Equity on Return

=
Return on Equity Signifies that the profit earned on equity Capital. A higher Ratio is favorable.
Therefore Meena is better than Beena Ltd.
Conclusion:- Based on P/E ratio, it is recommended to purchase shares of Beena Ltd.
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Dividend
75 . 1
20
35
= =
25
40
=
er Ratio is favorable, for dividend seeking Investor & Lower ratio is favorable for Capital
Beena Ltd.
100 x
Capital Equity
dividend eference Pr
100 x
200
6 . 9 50
=
= 20.2%
ifies that the profit earned on equity Capital. A higher Ratio is favorable.
Therefore Meena is better than Beena Ltd.
Based on P/E ratio, it is recommended to purchase shares of Beena Ltd.
Pooja D. Prabhu
College Patkar
M: 9324343830
11
6 . 1 =
er Ratio is favorable, for dividend seeking Investor & Lower ratio is favorable for Capital
Meena Ltd.
100 100 x
250
12 70
=
= 23.2%
ifies that the profit earned on equity Capital. A higher Ratio is favorable.
Based on P/E ratio, it is recommended to purchase shares of Beena Ltd.
12
CHAPTER :- 11 VALUATION OF DEBENTURES
Illustration 5:
A GOI bond of 1000 each has a coupon rate of 8 percent annum and maturity period is 20
years. If the current market prices is 1050, find YTM?
Solution:-
100 x
2
M R
n
M R
I
YTM
P V
P V
+
|
.
|
\
|
+
=
Where,
YTM = Yield to maturity
I = Interest
R
X
= Redemption Value
M
P
= Market Price
n = no. of years
100 x
2
M R
n
M R
I
YTM
P V
P V
+
|
.
|
\
|
+
=
100 x
2
1050 1000
20
1050 1000
80
+
|
.
|
\
|
+
=
( )
100 x
1025
5 . 2 80 +
=
100 x
1025
5 . 77
=
= 7.56%
Illustration 9:
Calculate the present value of Debenture of Mahesh ltd.
Year Coupon rate
1-2 8%
3-4 10%
5-7 12%
CHAPTER :- 11 VALUATION OF DEBENTURES
13
The face value of the debenture is 100. Debentures are redeemed at 5% premium. The required
rate of return 16%.
Solution:-
Year Interest/Cash Inflow PVIF 16% PV of Cash Inflow
1
2
3
4
5
6
7
8
8
10
10
12
12
117
0.862
0.743
0.641
0.552
0.476
0.410
0.354
6.896
5.944
6.41
5.52
5.712
4.92
41.418
(12 + 105) PV of Bond 76.82
Present Value of Bond = 76.82
14
Illustration 7 :
Sunrise Ltd. is currently paying dividend of 1.50 on its face value of 10. Earnings and
dividends are expected to grow at 5% annual rate indefinitely. Investors require 9% rate of return
on their investments. The company is considering several business strategies and wishes to
determine the effect to these strategies on the market price of its share.
(a) Continuing the present strategy will result in the expected growth rate and required rate
of return as above.
(b) Expanding sales will increase the expected dividend growth rate to 7% but will increase
the risk of the company. As a result, the investors required rate of return will increase to
12%.
(c) Integrating into retail stores will increase the dividend growth rate to 6 per cent and
increase the required rate of return to 10 per cent.
You are required to find out the best strategy from the point of view of the market price.
Solution:-
D
1
= Do (1 + g)
= 1.50 (1 + 0.05)
= 1.575
(a) V =
g ke
D
1
05 . 0 09 . 0
575 . 1
=
= 39.375 per share
b) D
1
= Do (1 + g)
= 1.50 (1 + 0.06)
= 1.605
V =
g ke
D
1

07 . 0 12 . 0
605 . 1
=
= 32.1 per share
(C) D
1
= Do (1 + g)
= 1.50 (1 + 0.06)
= 1.59
CHAPTER :- 12VALUATION OF EQUITY
15
06 . 0 10 . 0
59 . 1
= V
= 39.75 per share
Comment: Strategy C is the best since it results into highest market price.
Illustration 12:
As per the financial accounts for the last year, the company has paid dividend @ 20% . The paid
up equity capital is 6,00,000 and 10% preference share capital 1,00,000. Operating profit is
4,00,000. The tax rate is 32%. The company expects a growth rate of 5%. Compute Value per
Equity Share.
(a) Dividend Growth Approach.
(b) Dividend Approach.
(c) Earnings Growth Approach.
(d) Earning Approach.
Solution:-
D
1
= D
0
(1 + g)
=2 (1 + 0.05)
= 2.1
(a) Dividend Growth Approach:-
V =
g ke
D
1
=
05 . 0 10 . 0
1 . 2
= 42 per share
(b) Dividend Approach

Ke
D
V
1
=
10 . 0
2
=
= 20 per share
(c) Earning Growth Approach
Rs.
Operating Profit 4,00,000
(-) Interest -
NPBT 4,00,000
(-) Tax @ 32% 1,28,000
NPAT 2,72,000
16
Share Equity of . No
Dividend eferenced Pr NPAT
EPS

=
000 , 60
000 , 10 000 , 72 , 2
=
= 4.37 per share
E
1
= E
0
(1 + g)
= 4.37 (1 + 0.05)
= 4.59
V =
g ke
E
1
=
05 . 0 10 . 0
59 . 4
=
5 . 0
59 . 4
= 91.8 per share
(d) Earning Approach

Ke
E
V
1
=

10 . 0
37 . 4
=

= 43.7 per share
Note: In absence of F.V, It is taken as 10.
In absence of Ke, it is assumed 10 or any value above than growth rate.
Illustration : 17
The chemical and fertilizers ltd has been growing at the rate of 18% in the recent years This
abnormal growth rate is expected to continue for another 4 years and then likely to grow at
normal rate of 6%. Dividend paid last year was 3 per share. Find out the intrinsic value of
share if the required rate of return is 12%.
Solution:-
D
1
= D
0
(1 + g)

=3 (1 + 0.18)
= 3.54
V =
g ke
D
1

Year Dividend PVIF 12% PV of Dividend
1 3.54 0.893 3.16
17
2
3
4
4.18
4.93
5.82
0.797
0.712
0.636
3.33
3.51
3.70
(A) 13.70
g Ke
g D
P
+
=
) 1 (
4
4
06 . 0 12 . 0
) 6 . 0 1 ( 82 . 5
+
=
06 . 0
) 06 . 1 ( 82 . 5
=
= 102.82 x 0.636
= 65.39 Rs. (B)
Now,
(A + B) = 13.70 + 65.39
= 79.09
Note: When two growth are given calculate as above.
Illustration:20
The Balance Sheet of Ganesh Ltd. as on 31-3-2009 was as under:
Liabilities Rs. Assets Rs.
2,000 Equity share of Rs.100 each
General Reserve
Profit & Loss A/c
Creditors
Provision for Taxation
Provident Fund
2,00,000
50,000
25,000
45,000
20,000
17,500
Land and Building
Machinery
Investment at Cost
(Market Value Rs.37,500)
Debtors
Stock
Cash & Bank
1,25,000
75,000
45,000
50,000
37,500
25,000
Total 3,57,500 Total 3,57,500
Additional Information:
i) Land and Building & Machinery are valued at 1,37,500 and Rs. 55,000 respectively.
ii) Of the total debts 2,500 are bad.
iii) Goodwill is to be valued at 25,500.
iv) The normal dividend declared and paid by such type of companies is 15% on the paid
up capital.
v) The average rate of dividend, declared and paid up by the company is 18% on its paid-up
capital.
Calculate the fair value of an equity share of the company.
Solution :-
Calculation of N.A.V / Shares
18
Particulars
Market Value of all Real Assets
Land and Building
Machinery
Investment
Debtors
Stock
Cash and Bank
Goodwill
A greed value of outsiders Liabilities
Creditors
Prov. for Tax
Provident fund
Net assets available to all SH.
= Net assets available to all ESH
1,37,500
55,000
37,500
47,500
37,500
25,000
25,500 3,65,500
45,000
20,000
17,500 82,500
2,83,000
NAV / Share =
Shares Eq of No
ESH for assets Net
. .
=
000 , 2
000 , 83 , 2
= 141.5
Yield Value / Share = share value Paidup x
NRR
ARR
/
= 100
15
18
x
= 120
Fair Value / Share =
2
. . Yield V A N +
=
2
120 5 . 141 +
= 130.75
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Market Index = ) 2 ( ... 12

As per Sharpe Measure, Portfolio 1 is better than 2, 3 and market Index.

Market Index = ) 3 ( ... % 5 . 2

CHAPTER 4: PORTFOLIO MANAGEMENT FRAMEWORK

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