Question 1:1

COSTOF EQUITY
We have given that:

Rf 8% Risk free rate

βE 0.708 beta of the equity of the company
RM-Rf 3% market-risk premium

Ke required return on the equity of the company

Ke = Rf + βE (RM - Rf)
Ke = 8% + 0.708 ( 3% )
Ke = 0.10124

The yield on long term Government bond is a reliable source of risk free market return. However, 364 day treas
The risk premium is market risk return rate - risk free market return. There is no information provided for marke
ity of the company

of risk free market return. However, 364 day treasury bill of RBI is also a reliable source for risk free market return rate.
return. There is no information provided for market risk return rate. So we can't comment on market premium.
Ke
Question 1:2
DGM vs CAPM
Answer: DGM
This method is more appropriate for the company which is not listed in the share market.
This method does not consider the market risk
This method purely assumes that the divident grows at a constant rate.

CAPM
This method consider the systematic market risk β.
This method also consider the risk free return and market risk return.
This method is appropriate for the market listed company.

By observation of the above, I recommend CAPM methods to HUL.

 is not listed in the share market.

constant rate.

et risk return.

ods to HUL.
Ke
Question 1:2
DGM vs CAPM
Answer: DGM
This method is more appropriate for the company which is not listed in the share market.
This method does not consider the market risk
This method purely assumes that the divident grows at a constant rate.

CAPM
This method consider the systematic market risk β.
This method also consider the risk free return and market risk return.
This method is appropriate for the market listed company.

By observation of the above, I recommend CAPM methods to HUL.

 is not listed in the share market.

constant rate.

et risk return.

ods to HUL.
Ke
Question 2:1
NPV
required rate of return is 15%
Cash flow (Rs in Million)
Project Co C1 C2 C3 C4
No. Of Year 1 2 3 4
Discounted Factor 1 0.869565 0.756144 0.657516 0.571753
P (in Million) -250 45 45 45 68
A
PV (in Million) -250 39.13043 34.02647 29.58823 38.87922

NPV of the Project is ₹ 32.16 Million

Cash flow (Rs in Million) NPV @15%
C5 C6 C7 C8 C9 C10 Calculated Derived (Excel)
5 6 7 8 9 10
0.497177 0.432328 0.375937 0.326902 0.284262 0.247184706
68 68 68 68 30 85 ₹ 32.16
33.80802 29.39828 25.56372 22.22932 8.527872 21.01070002 ₹ 32.16
*30+55+85
Question 2:2
Annual Instalment
i Interest rate 14 %
P Principal amount 200 Million
n Number of year 10 Years

P= A * ( PVIFA ) 14%,10year ( PVIFA ) 14%,10year is 5.2161

200 = A *5.2161
A= 38.343

Schedule for Loan Ammortization

Beginning Annual Principal
Year Interest
Amount Instalment Repayment
  A B C @14% D=B-C
1 200 38.34271 28 10.34271
2 189.6573 38.34271 26.55202 11.79069
3 177.8666 38.34271 24.90132 13.44138
4 164.4252 38.34271 23.01953 15.32318
5 149.102 38.34271 20.87429 17.46842
6 131.6336 38.34271 18.42871 19.914
7 111.7196 38.34271 15.64075 22.70196
8 89.01766 38.34271 12.46247 25.88024
9 63.13742 38.34271 8.839239 29.50347
10 33.63395 38.34271 4.708754 33.63395
 5.216116

38.34271

           

mmortization
Remaining
Balance
A-D
189.6572918
177.8666045
164.425221
149.1020438
131.6336217
111.7196206
89.01765929
63.13742342
33.63395453
0.00
Question 2:3
Single Annual Instalment
i Interest rate 14 %
P Principal amount 200 Million
n Number of year 10 Years

FV = PV * ( 1 + i )^n
FV = 200 * ( 1 + 14% )^10 541.4443
FV = 741.4442628237

So, the amount of single payment of interest and principal to SBI after 10 years is Rs. 741.44 Million.
s. 741.44 Million.
Question 2:4

For SBI

i Interest rate
P Principal amount
n Number of year

(PVIFA ) 3.5%, 40year

P= A * (PVIFA ) 3.5%, 40year

200 = A *21.35507
A= 200 / 21.35507
A= 9.36545747684274

Quarterly Instalment for SBI is Rs.

On quarterly basis
State bank of India
3.5 Interest Rate (%)
40 No. of Quarters
21.3550723372975 PVIFA (r, 40)
200 PVAn (Amount to borrow)
9.36545645180007 Qtrly Installments (Mn)
Quarterly Instalments
For large financial institution
For quarterly
14 % 3.5 % i
200 Million P
10 Years 40 n

21.35507

P=
200 =
A=
A=

9.365457 Million Quarterly Instalment for large finan

Large financial Institution

3.375
40
21.7753687839269
200
9.18468945277413
 PVAn = A* [ {1-(1/(1+r)^n }/r ]

For large financial institution

For quarterly 0.03375
Interest rate 13.5 % 3.375 % Interest rate 3.375 % (Quarterly)
Principal amount 200 Million Principal amount
Number of year 10 Years 40 Number of quarters 40

(PVIFA ) 3.375%, 40year 21.775369

A * (PVIFA ) 3.375%, 40year 21.7753687839269

A *21.77537
200 / 21.77537 9.18468945277413
9.184688939844

Quarterly Instalment for large financial institution is Rs. 9.18468894 Million

% (Quarterly)
Question 2:4
Borrow from
For SBI or For large financial institution