Q) Your father has promised to give you Rs 100000/- in cash on your 25th birthday .

Today is your 16th

birthday.
(a) If he decides to make annual payments into fund after one year , how much will each have to be if
the fund pays 8%.
(b) If he decides to invest a lump sum in the account after one year & let it compound annually, how
much will be the lump sum
(c) If the payments are made in the beginning of the year , how much will be the value of annuity.

Q) Progressive Ltd. has a Equity share capital of Rs 10,00,000 ( share of Rs100/- each). It also has
10,00,000 of 10% debentures. Sales increased by 20 percent from 1,00,000 to 1,20,000 units and the
selling price is Rs 10 per unit, variable cost amounts to Rs 6 per unit and fixed expenses amount to Rs
2,00,000. Income is taxed at the rate of 50%
Calculate the following:
a) The increase in percentage earning per share
b) The degree of financial leverage at 1,00,000 units and 1,20,000 units
c) The degree of operating leverage at 1,00,000 units and 1,20,000 units
Give your observations on the behavior of operating & financial leverages in relation to increase in
production from 1,00,000 units to 1,20,000 units
Q) The managing director of a company decides that his company will not pay any dividends till he
survives. His current life expectancy is 20 years . After that time it is expected that company could pay
dividends of Rs 30 per share indefinitely. At present the firm could afford to pay Rs 5 per share forever.
The required rate of this company’s shareholders is 10%.
What is the current value of the share? What is the cost to each shareholder of the managing director’s
policy?

Q) Strong Enterprises Ltd. is a manufacturer of high quality running shoes. Ms Dazlling, President, is
considering computerizing the company’s ordering, inventory and billing procedures. She estimates that
the annual savings from computerization include a reduction of ten clerical employees with annual
salaries of Rs 15000 each, Rs 8000 from reduced production delays caused by raw materials inventory
problems, Rs 12000 from lost sales due to inventory stockouts, and Rs 3000 associated with timely
billing procedures. The purchase price of system is Rs 2,00,000 and installation costs are Rs 50000. These
outlays will be depreciated on straight line basis to a zero book salvage value which is also its market
value at the end of five years.
Operation of the new system requires two computer specialists with annual salaries of Rs 40000 per
person.
Also annual maintenance and operating cash expenses of Rs 12000 are estimated to be required. The
company’s tax rate is 40 % and its required rate of return for this project is 12%.
You are required to:
a) Find the projects initial cash outlay
b) Find the projects operating and terminal value cash flows over its 5 year life
c) Evaluate the project using NPV method
d) Evaluate the project using PI method
e) Calculate the projects pay back period

Q) A company proposes to sell ten year debentures of Rs 10000 each. The company would repay Rs
1000 at the end of every year and will pay interest annually at 15% on the outstanding amount.
Determine the present value of the debenture issue if the capitalization rate is 16%.

Q) Exactly ten years from now Sri Chand will start receiving a pension of Rs 3000/- a year .The payment
will continue for sixteen years . How much is the pension worth now, if rate of interest is 10%.
Will the net present value of a project always drop when the discount rate is increased? If not, when
might the NPV go up as the discount rate is increased?

Q) XYZ Corporation has $500 million on zero-coupon debt outstanding, due in five years. The firm had
earning before interest and taxes of $40 million in the most recent years(the tax rate is 40%). These
earnings are expected to grow 5% a year in perpetuity, and the firm paid no dividend. The firm had a
cost of equity of 12% and a cost of capital 10%. The annualised standard deviation in firm value of
comparable firms is 12.5%.The five year bond rate is 5%. (ROC = Cost of capital)
Questions:
1. Estimate cost of capital
2. Estimate the value of equity, using an option pricing model
3. Estimate the market value of debt and the appropriate interest rate on the debt

Q) Zed Ltd has just paid a dividend of Rs.13 per share. As a part of its major reorganization of its
operations, it has stated that it does not intend to pay any dividend for the next two years. In three
year’s time it will commence paying dividend at Rs.10 per share and the Directors have indicated that
they expect to achieve dividend growth at 12% p.a. thereafter. If the reorganization does not take place
dividend will be paid in the next two years and the expected dividend growth will remain at the present
level of 6% p.a. the firm’s cost of equity is 18% (i.e., the return expected by the equity investors) and will
be unaffected by the reorganisation.
Calculate the value of firm’s shares in both the situations.

Q) XYZ Ltd., has the following book value capital structure:

Equity capital (in shares of Rs. 10 each,
fully paid – at par) Rs. 15 Crores
11% Preference Capital (in shares of Rs. 100 each,
fully paid up – at par) Rs. 1 Crores
Retained Earnings Rs. 20 Crores
13.5% Debentures (of Rs. 100 each) Rs. 10 Crores
15% Term Loans Rs. 12.5 Crores
The next expected dividend on equity shares per share is Rs. 3.60; the dividend per share is expected to
grow at the rate of 7%. The market price per share is Rs. 40.
Preference stock, redeemable after ten years, is currently selling at Rs. 75 per share.
Debenture, redeemable after six years, are selling at Rs. 80 per debenture.
The Income-tax rate for the company is 40%.
(i) Required:
Calculate the weighted average cost of capital using:
(a) book value proportions; and
(b) market value proportions.
(ii) Define the weighted marginal cost of capital schedule for the company, if it raises Rs. 10 crores next
year, given the following information:
(a) The amount will be raised by equity and debt in equal proportions;
(b) The company expects to retain Rs. 1.5 crores earnings next year;
(c) The additional issue of equity shares will results in the net price per share being fixed at Rs. 32;
(d) The debt capital raised by way of term loans will cost 15% for the first Rs. 2.5 crores and 16% for
the next Rs. 2.5 crores.

Q) The following information is available from the Balance Sheet of a company :

Rs.
Equity Share Capital - 20,000 shares of Rs. 10 each 2,00,000
Reserves & Surplus 1,30,000
8% Debentures 1,70,000
The rate of tax for the company is 50%. Current level of Equity Dividend is 12%.
Calculate the weighted average cost of capital using the above figures.

Q) Santosh & Co. is considering setting up a new unit. The following data has been compiled by the
company for the purpose of determining the acceptability of the proposal for setting up the new unit.
i) Land cost
a) To be paid at the time of purchase 2,00,000
b) 1st, 2nd and 3rd annual installment 1,00,000
ii) Factory Building
a) Initial payment on signing of contract 2,00,000
b) At the end of year 2 10,00,000
c) Balance at the end of year 3 8,00,000
iii) Plant Cost
To be paid at the beginning of
- Year 4 15,00,000
- Year 5 5,00,000
iv) Margin for working capital (at the end of year 5) Rs. 4,00,000
v) Operation will begin in the 6th year and will continue for 10 year up to 15. Assume that revenue and
costs occur at the end of each year.
vi) Building and plant will be depreciated on straight line method (ignore salvage value) over the 10
yearscstarting from year 6, as under :
Building @ 5%
Plant @ 10%
vii) Building are expected to be sold for Rs. 6,00,000 and land for Rs. 8,00,000 at the end
viii) Plant will have a salvage value of Rs. 2,00,000.
ix) Cost of capital is 12%.
x) Other operating data :
Annual sales 30,00,000
Variable Costs 12,00,000
Fixed costs (excluding depreciation) 8,00,000
Tax rate 50%
Advise whether the company should accept the project or reject it on the basis of NPV of the project.
(ignore tax on capital gains/losses).

Q) A firm is considering the following project:

Cash Flows (Rs) for five years

a) Calculate the NPV for the project if the cost of capital is 10%. What is the project’s IRR?
b) Re-compute the project’s NPV assuming a cost of capital of 10% for years 1 and 2, 12% for years 3
and 4 and 13% for year 5. Can the IRR method be used for accepting or rejecting the project under
these conditions of changing cost of capital over time? Why or why not?

Q) An Indian state savings bond can be converted to Rs 1000 at maturity 6 years from purchase. If the
state bonds are to be competitive with Indian Savings Bonds, which pay 8% annual interest
(compounded annually), at what price must the state sell its bonds? Assume no cash payments on
savings bonds prior to redemption.

Q) You can deposit Rs. 10,000 into an account paying 9% annual interest either today or exactly 10 years
from today. How much better off will you be at the end of 40 years if you decide to make the initial
deposit today rather than 10 years from today?

Q) Delta Ltd. has fixed operating costs of Rs. 380,000, variable operating costs of Rs. 16 per unit, and a
selling price of Rs. 63.50 per unit.
(a) Calculate the operating breakeven point in units.
(b) Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, respectively.
(c) With 10,000 units as a base, what are the percentage changes in units sold and EBIT as sales move
from the base to the other sales levels used in part b?
(d) Use the percentages computed in part c to determine the degree of operating leverage (DOL).
Q) Gamma Printing is considering the purchase of a new printing press. The total installed cost of the
press is Rs. 2.2 million. This outlay would be partially offset by the sale of an existing press. The old press
has zero book value, cost Rs.1 million 10 years ago, and can be sold currently for Rs. 1.2 million before
taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to
increase by Rs. 1.6 million, but product costs (excluding depreciation) will represent 50% of sales. The
new press will not affect the firm’s net working capital requirements. Depreciation charges of the new
press will be Rs. 440,000 in year 1; Rs. 704,000 in year 2; Rs. 418,000 in year 3; Rs. 264,000 in both year
4 and year 5; and Rs. 110, 000 in year 6. The firm is subject to a 40% tax rate on both ordinary income
and capital gains. Gamma Printing’s cost of capital is 11%. (Note: Assume that both the old and the new
press will have terminal values of Rs. 0 at the end of year 6.)
Questions
a. Determine the initial investment required by the new press.
b. Determine the operating cash inflows attributable to the new press.
c. Determine the payback period.
d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed
new press.
(PVIF11%,1 = 0.901; PVIF11%,2 0.812; PVIF11%,3 = 0.731; PVIF11%,4 =0.659; PVIF11%,5 =0.593;
PVIF11%,6 = 0.535)

Q) The risk free return is 8 percent and the expected return on market portfolio is 12 percent. If the
required return on a stock is 15 percent, what is its beta?

Q) A Rs. 100 par value bond, bearing a coupon rate of 12 percent will mature after 7 years. What is the
value of the bond if discount rate is 10%?

Q) Rohit deposits Rs 200,000 in a bank account which pays 10 percent interest. How much can he
withdraw annually for a period of 15 years?

Q) A Rs 100 par value bond bears a coupon rate of 14 percent and matures after 5 years. Interest is
payable semi-annually. Compute the value of the bond if the required rate of return is 16 percent.

Q) A 12 –payment annuity of Rs 10,000 will begin 8 years hence. (The first payment occurs at the end of
8 years.)What is the present value of this annuity if the discount rate is 14 percent?
Q) An oil company proposes to install a pipeline for transport of crude oil from wells to refinery.
Investment and operating costs of the pipeline vary for different sizes of pipes (Diameter) the following
details have been collected:

Q) Estimated life of the installation is 10 years. Tax rate is 50%.

A) Calculate the net saving after tax, and the cash flow generation; from these recommend the largest
pipeline to be installed if the company desires a 15% after tax return. Also indicate the proposal that
has the shortest payback. Assume the company follows straight line method of depreciation and there
is no salvage value of pipeline after 10 years.
B) Why is Net Present Value method of evaluation superior in evaluating Capital Expenditure Decisions?

Q) A company is currently paying a dividend of Rs 2.00 per share.The dividend is expected to grow
at a 15% annual rate for three years ,then at 10% for the next three years, after which it is expected to
grow at a 5% rate forever
a) What is the present value of the share if the capitalization rate is 9%
b) If the share is held for three years , what shall be its present value ?

Q) Equipment A has a cost of Rs 75000 and net cash flow of Rs 20000 per year for six years .A substitute
equipment B would cost Rs 50000 and generate net cash flow of Rs 14000 per year for six years . The
required rate of return of both equipments is 11% . Calculate the IRR and NPV for the equipments.
Which equipment should be accepted and why

Q) A finance company advertises that it will pay a lump sum of Rs44650 at the end of 5 years to
investors who deposit annually Rs 6000 for 5 years. What is the interest rate implicit in this offer?

Q) A company’s bonds have a par value of Rs 100, maturity in seven years, and carry a coupon rate of
12% payable semi-annually. If the appropriate discount rate is 16%, what price should the bond
command in the market place?
Q) Current market price of share of A Ltd. is Rs 134/- . Company is currently paying the dividened of Rs
3.5 per share , dividend is expected to grow at 15 % over the next six years and then at the rate of 8 %
perpetually. Calculate the cost of equity capital.

Q) XYZ Ltd has borrowed Rs. 5,00,000 to be repaid in five equal annual payments (interest and principle
both). The rate of interest is 16%. Compute the amount of each payment.

Q) A company is considering raising Rs. 100 Lakh by one of the two alternative methods, viz. 14%
institutional term loan and 13% non convertible debentures. The term loan option would attract no
major incidental cost. The debentures would have to be issued at a discount of 2.5% and would involve
Rs. One lakh as cost of issue. Advice the company as to the better option based on effective cost of
capital in each case. Assume a tax rate of 35%.

Q) The bonds of Alert Ltd currently sell at Rs. 115.They have 11% coupon rate of interest and Rs. 100 par
value. The interest is paid annually and the bonds have 18 years to maturity. Compute the yield to
maturity of bond. Compare the computed yield to maturity with the coupon interest rate. How do you
explain the difference between the current price and the par value of the bond?

Q) An investor is 50 years of age today. He will retire at the age of 60. In order to receive Rs. 2,00,000
annually for 10 years after retirement, how much amount should he have at the time of retirement?
Assume the required rate of return is 10 percent.

Q) The required rate of return of investors is 15 Per cent. ABC Ltd. Declared and paid annual dividend of
Rs. 4 per share . It is expected to grow @20 per cent for the next 2 years and at 10 per cent thereafter .
Compute the price at which the share should sell?

Q) A share is selling for Rs 50 on which a dividend of Rs. 3 per share is expected at the end of the year.
The expected market price after the dividend declaration is expected to be Rs. 60. Compute:
• The return on investment in shares
• Dividend yield
• Capital gain yield

Q) Calculate the explicit cost of debt for each of the following situations:
a) Debentures are sold at par and floatation cost is 5% of issue price
b) Debentures are sold at premium of 10% and floatation cost is 5% of issue price
c) Debentures are sold at discount of 5% and floatation cost is 5% of issue price
Assume: (1) coupon rate of interest on debentures is 10%
(2) maturity period is 10 years
(3) face value of debentures is Rs100
(4) tax rate is 35%

Q) The government is proposing to sell a 5 year bond of Rs 1000/- at 8%interest per annum. The bond
amount will be amortized equally over its life. If an investor has a minimum required rate of return of
7%,what is the bonds present value for him?

Q) A firm purchases machinery for Rs800000/- by making a down payment of Rs 150000/- and
remainder in equal installments of Rs 150000/- for six years. What is the rate of interest to the firm?
Following is the data regarding the six securities:

1. Which of the securities should be selected if :-

a) Investor is conservative
b) Investor is aggressive
2. Assuming perfect correlation, analyse whether it is preferable to invest 75% in security A and 25%
in security C.

Q) Ram enterprise has a beta of 1.5 and risk free return is 7 percent and the expected return on the
market portfolio is 14 percent. The company presently pays a dividend of Rs 2.50 per share and
investors expect growth a growth in dividend of 12 percent per annum for many years to come.
(a) Compute the required rate of return on the equity according to CAPM.
(b) What is the present market price of the equity share assuming the computed return as required
return?
Q) Amar is considering the purchase of a bond currently selling at Rs. 878.50. The bond has four years
to maturity, face value of Rs. 1,000 and 8% coupon rate. The next annual interest payment is due
after one year from today. The required rate of return is 10%.

a. Calculate the intrinsic value (present value) of the bond. Should Amar buy the bond?
b. Calculate the yield to maturity of the bond.

Q) A company is currently paying a dividend of Rs 2.00 per share.The dividend is expected to grow at a
15% annual rate for three years ,then at 10% for the next three years, after which it is expected to
grow at a 5% rate forever

a) What is the present value of the share if the capitalization rate is 9%

b) If the share is held for three years , what shall be its present value ?
.

Q) Assume that you have half your money invested in T, the media company, and the other
half invested in U, the consumer product giant. The expected returns and standard deviations on the
two investments are summarized below:

T U
Expected Return 14% 18%
Standard Deviation 25% 40%

Q) Estimate the variance of the portfolio as a function of the correlation coefficient (Start with –1 and
increase the correlation to +1 in 0.2 increments).

Q) The following table gives an analyst’s expected return on two stocks

What are the betas of the two stocks? What is the expected return on each stock if the market return is
equally likely to be 8% and 24%?
Q) The rates of return on stock A and market portfolio for 6 periods are given below.

Period Return on stock A(%) Return of market portfolio (%)

1 10 12
2 15 14
3 18 13
4 14 10
5 16 9
6 16 13

What is the Beta for stock A?

Q) For the first four years Donal Firm is assumed to grow at a rate of 10 per cent. After four years the
growth rate of dividend is assumed to decline linearly to 6 percent. After 7 years, the firm is assumed to
grow at a rate of 6 per cent infinitely. The next year dividend is Rs. 2 and the required rate of return is 14
per cent. Find out the value of the stock.

Q) Ram Enterprise has a beta of 1.5 and risk free return is 7 per cent and the expected return on the
market portfolio is 14 per cent. The company presently pays a dividend of Rs 2.50 per share and
investors expect a growth in dividend of 12 per cent per annum for many years to come.

Answer the following:

(a) What is the required rate of return on the equity according to CAPM?
(b) What is the present market price of the equity share, assuming the computed return as
required return?

Q) The following are the returns of Securities of X and Y are given below :

Probability Security X Security Y

0.50 4 0
0.40 2 3
 0.10 0 3

Calculate the Return and Risk of each Security and give your preference.

Q) The following are the returns of Securities of X and Y are given below :

Mr. Arvind is looking for some investment in security. He has requested his investment consultant Mr.
Ganesh to help on this issue.
Calculate the Return and Risk of each Security and give your preference.

Q) Mr. Verma has invested in two stocks X and Y . Stock X and Y have yielded the following returns in
past two years.

a ) What is the expected return on portfolio made up of 60% of X and 40% of Y?

b ) Calculate the Standard deviation of each stock.
c ) What is the Co- Variance and coefficient of correlation between stock X and Y?
d) What is the portfolio risk of Portfolio made up of 60% of X and 40% of Y?

Q) The market price of a Rs. 1000 par value bond carrying a coupan rate of 14 percent and maturing
after five years is Rs. 1050. What is the yield to maturity (YTM) on this bond?

Q) The equity stock of Rax Limited is currently selling for Rs. 30 per share. The dividend expected next
year is Rs. 2.00. The investors’ required rate of return on this stock is 15 per cent. If the constant growth
model applies to Rax Limited, what is the expected growth rate?

Q) The following table gives an analyst’s expected return on two stocks

What are the betas of the two stocks? What is the expected return on each stock if the market return is
equally likely to be 8% and 24%?

Q) Two mutually exclusive projects have the following expected cash flows:

(a) Calculate the IRR for each project.

(b) Calculate the NPV for each project, assuming the firm’s WACC is 12%.
(c) Which project should be adopted? Why?