Question 1 Part A

Data obtained for value of PSO-Stock

Current year dividend = PKR3
Growth rate = 30%
No Growth rate for year 1 to 4
Growth rate for year 5 to 7 = 30%
Growth rate there after = 2%

Solution:-
Dividend for years 1 to 4 = 3 per year
Dividend for year 5 = 3 * 1.3 => 3.9
Dividend for year 6 = 3.9 * 1.3 => 5.07
Dividend for year 7 = 5.07 * 1.3 => 6.591
Dividend for year 8 = 6.591 * 1.02 => 6.72282
Value of stock at the end of 7th year = Dividend of 8th year / (Cost of capital - Growth rate)
=>6.72282 / (11% - 2%)
=>74.698

Value of share today is the present value of cash inflows discounted at the required rate of return.
Value of share today = 3 * (1.11^-4) - 1 / 0.11 + 3.9 * 1.11^-5 + 5.07 * 1.11^-6 + 6.591* 1.11^-7
+ 74.698 * 1.11^-7
=>53.4859

Data obtained for the value Nestle Pakistan - Stock

Current year dividend = PKR10
Growth rate for 8 years= 25%
Growth rate after 8th year = 7%

Solution:-
Dividend for year 8 = Dividend of year 1 * (1+r)^7
=>10 * 1.25^7 => 47.68372
Dividend for year 9 = 47.68372 * 1.07 =>51.02158
Value of stock at the end of 8th year = Dividend of 9th year / (Cost of capital - Growth rate)
=>51.02158/ (11% - 7%)
=>1,275.5395
 Value
  Dividend of P.V factor PV Cash
grow
Year @25% Share @11% Flows
9.00900
1 10 0.9009009 9
0.8116224 10.1452
2 12.5 3 8
0.7311913 11.4248
3 15.625 8 7
0.6587309 12.8658
4 19.53125 7 4
0.5934513 14.4885
5 24.4140625 3 6
30.5175781 0.5346408 16.3159
6 3 4 4
38.1469726 0.4816584 18.3738
7 6 1 1
47.6837158 0.4816584 20.6912
8 2 1 3
1275.5 553.490
8 4 0.4339265 6
666.805
1

Value of share today = 666.805

Question 1 Part B:-

Number of stocks that can be bought = Total wealth / Cost per share
=> 30,000,000 / 170
=>176,470

Question 1 Part C:-

Change in share price if the required rate of return is 12.5%, 13.5%, 14.5%.
Value of share at the end of 8th year if required rate of return is 12.5% = 51.02158/ (12.5% -
7%) =>927.66
Value of share at the end of 8th year if required rate of return is 13.5% = 51.02158/ (13.5% -
7%) =>784.94
Value of share at the end of 8th year if required rate of return is 14.5% = 51.02158/ (14.5% -
7%) =>680.28

Value
  Dividend of P.V factor PV Cash
Year grow Share @12.5% Flows
 @25%
0.8888888 8.88888
1 10 9 9
0.7901234 9.87654
2 12.5 6 3
0.7023319 10.9739
3 15.625 6 4
0.6242950 12.1932
4 19.53125 8 6
0.5549289 13.5480
5 24.4140625 6 7
30.5175781 0.4932701 15.0534
6 3 8 1
38.1469726 0.4384623 16.7260
7 6 9 1
47.6837158 0.3897443 18.5844
8 2 4 6
0.3897443 361.550
8 927.66 4 2
Value of 467.394
share 8

Value
  Dividend of P.V factor PV Cash
grow
Year @25% Share @13.5% Flows
0.8810572 8.81057
1 10 7 3
0.7762619 9.70327
2 12.5 1 4
10.6864
3 15.625 0.6839312 2
0.6025825 11.7691
4 19.53125 5 9
0.5309097 12.9616
5 24.4140625 4 6
30.5175781 0.4677618 14.2749
6 3 8 6
38.1469726 0.4121250 15.7213
7 6 1 2
47.6837158 0.3631057 17.3142
8 2 3 3
784.9 0.3631057 285.016
8 4 3 2
Value
of 386.257
share 9
 Value
  Dividend of P.V factor PV Cash
Year grow @25% Share @14.5% Flows
0.8733624 8.73362
1 10 5 4
0.7627619 9.53452
2 12.5 6 5
0.6661676 10.4088
3 15.625 5 7
0.5818058 11.3633
4 19.53125 1 9
0.5081273 12.4054
5 24.4140625 4 5
30.5175781 0.4437793 13.5430
6 3 4 7
38.1469726 0.3875802 14.7850
7 6 1 1
47.6837158 16.1408
8 2 0.338498 4
680.2 230.273
8 8 0.338498 4
Value of 327.188
Share 2

Value of
Discount Rate share
11% 666.805
12.50% 467.395
13.50% 386.247
14.50% 327.188
 Value of share
800

700

600
Axis Title

500

400

300

200

100
10% 12% 14% 16%
Discount Rate

Question 1 Part D:-

Question 2 Part :-

Discuss different types and characteristics of debt instruments with specific reference of
Bonds
Question 2 Part A :-

Data Obtained:-
Amount Received=4000000; n=25 yrs; remaining life=25-13=12; CR=11.5%, FV= PKR
1050; Return= 14%

FV of bond= (1050*11.5%)* PVAF (n=12, r=14%) + (1050)* PVAF (n=12, r=14%)

= (120.75* 5.66+ 1050* 0.208)
=683.445+218.4 = 901.845
He should not buy MCB bonds if it is selling at 930, because FV of the bond is
901.845

Question 2 Part B:-

No. of bonds to be bought @ FV of 901.845; =40000000/901.845= 44353.51

Question 2 Part C:-

Q No. 03
 SHANNON CORPORATION
BALANCE SHEET , 2019
Assets Liabilities & Shareholder's Equity
               
Cash $ 6000 Total Current Liabilities $ 65500
Accounts Receivable $ 75000 Long term Debt $ 69500
Inventory $ 50000 Total Debt $ 135000
Total Current assets $ 131000
Fixed Assets $ 169000 Net Worth $ 165000
$
Total Assets   300,000 Total Liabilities & Equity $ 300,000

Q No. 04 Part A:

Net Present Value

As we know that:
Initial Investment= 170000
Discount rate= 10%

Project A
Year Initial Present
Formula Rate Put values in formula Calculation
s Investment Value
0.90909090
1 11,000 PV= 11000(1+0.1) ^-1 10000.00
9
0.82644628
2 24,000 PV= 24000(1+0.1) ^-2 19834.71
1
PV= FV (1+i) ^-n 10.0%
0.75131480
3 25,000 PV= 25000(1+0.1) ^-3 18782.87
1
0.68301345 259545.1
4 380,000 PV= 380000(1+0.1) ^-4
5 1
308162.6
Sum of Present Value  
9

NPV= Sum of Present Value – Initial investment

NPV= 308162.69-170000
NPV= 138162.69 (NPV is positive and project is acceptable)
Internal Rate of Return
So we choose IRR rate ra= 29 % see the result in below table.
Project A
Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
PV= FV (1+i) ^-n 29.0 0.77519379
1 11,000 PV= 11000(1+0.29) ^-1 8527.13
% 8
2 24,000 PV= 24000(1+0.29) ^-2 0.60092542 14422.21
5
 0.46583366
3 25,000 PV= 25000(1+0.29) ^-3 11645.84
3
PV= 380000(1+0.29) ^- 0.36111136 137222.3
4 380,000
4 7 2
171817.5
Sum of Present Value  
0

NPV= Sum of Present Value – Initial investment

NPV= 171817.50-170000 = 1817.50
NPVa=0 => 1817.50 ≠ 0

So we increase the rate to rb = 30% see the result in below table.

Project A
Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
0.76923076
1 11,000 PV= 11000(1+0.3) ^-1 8461.54
9
0.59171597
2 24,000 PV= 24000(1+0.3) ^-2 14201.18
6
PV= FV (1+i) ^-n 30.0%
0.45516613
3 25,000 PV= 25000(1+0.3) ^-3 11379.15
6
0.35012779 133048.5
4 380,000 PV= 380000(1+0.3) ^-4
7 6
167090.4
Sum of Present Value  
4

NPV= Sum of Present Value – Initial investment

NPV= 167090.44-170000 = -2909.56
NPVb=0 => -2909.56 ≠ 0

Now put all the value in formula.

IRR= 29% + [1817.50/ (1817.50-(-2909.56))] x (30% -29%)

IRR = 29.38%

Now put above IRR rate and find NPV.

Project A
Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
PV= FV (1+i) ^-n 29.38 0.77291698
1 11,000 PV= 11000(1+0.2938) ^-1 8502.09
% 9
0.59740067
2 24,000 PV= 24000(1+0.2938) ^-2 14337.62
1
3 25,000 PV= 25000(1+0.2938) ^-3 0.46174112 11543.53
8
 PV= 380000(1+0.2938) ^- 0.35688756 135617.2
4 380,000
4 2 7
170000.5
Sum of Present Value  
0

NPV= Sum of Present Value – Initial investment

NPV= 170000.50-170000 = 0.5
NPV=0 => 0.5 ≈ 0
Almost equal to 0 so we can say that 29.38 % is IRR rate.

Q No. 04 Part B:
Profitability Index:

Present Value/Profitability index = 308162.69/ 170000

Present Value/Profitability index = 1.81

For Project B
Q No. 04 Part A:
Net Present Value
As we know that:
Initial Investment= 18000
Discount rate= 10%
PV= FV (1+i) ^-n
Project B
Year Initial Present
Formula Rate Put values in formula Calculation
s Investment Value
0.90909090
1 10,000 PV= 10000(1+0.1) ^-1 9090.91
9
0.82644628
2 6,000 PV= 6000(1+0.1) ^-2 4958.68
PV= FV (1+i) ^- 1
10.0%
n 0.75131480
3 10,000 PV= 10000(1+0.1) ^-3 7513.15
1
0.68301345
4 8,000 PV= 8000(1+0.1) ^-4 5464.11
5
Sum of Present Value   27026.84
NPV= Sum of Present Value – Initial investment
NPV= 27026.84-18000
NPV= 9026.84 (NPV is positive and project is acceptable)

Internal Rate of Return

So we choose IRR rate ra= 32 % see the result in below table.
Project B
 Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
0.75757575
1 10,000 PV= 10000(1+0.32) ^-1 7575.76
8
0.57392102
2 6,000 PV= 6000(1+0.32) ^-2 3443.53
8
PV= FV (1+i) ^-n 32.0%
0.43478865
3 10,000 PV= 10000(1+0.32) ^-3 4347.89
8
0.32938534
4 8,000 PV= 8000(1+0.32) ^-4 2635.08
7
18002.2
Sum of Present Value  
5
NPV= Sum of Present Value – Initial investment
NPV= 18002.25-18000 = 2.25
NPVa=0 => 2.25 ≠ 0

So we increase the rate to rb = 33% see the result in below table.

Project B
Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
0.75187969
1 10,000 PV= 10000(1+0.33) ^-1 7518.80
9
0.56532308
2 6,000 PV= 6000(1+0.33) ^-2 3391.94
2
PV= FV (1+i) ^-n 33.0%
0.42505494
3 10,000 PV= 10000(1+0.33) ^-3 4250.55
9
0.31959018
4 8,000 PV= 8000(1+0.33) ^-4 2556.72
7
Sum of Present Value   17718.01

NPV= Sum of Present Value – Initial investment

NPV= 17718.01-18000 = -281.99
NPVb=0 => -281.99 ≠ 0

Now put all the value in formula.

IRR= 32% + [2.25/ (2.25-(-281.99))] x (33% -32%)
IRR= 32.007%

Now put above IRR rate and find NPV.

Project B
Initial
Year Present
Investmen Formula IRR Put values in formula Calculation
s Value
t
1 10,000 PV= FV (1+i) ^-n 32.007 PV= 10000(1+0.32007) ^- 0.75753558 7575.36
% 1 5
 0.57386016
2 6,000 PV= 6000(1+0.32007) ^-2 3443.16
3
PV= 10000(1+0.32007) ^- 0.43471949
3 10,000 4347.19
3 4
0.32931548
4 8,000 PV= 8000(1+0.32007) ^-4 2634.52
7
18000.2
Sum of Present Value  
4

NPV= Sum of Present Value – Initial investment

NPV= 18000.24-18000 = 0.24
NPV=0 => 0.24 ≈ 0
Almost equal to 0 so we can say that 32.007 % is IRR rate.
Q No. 04 Part B:

Profitability Index:

Present Value/Profitability index = 27026.84 / 18000

Present Value/Profitability index = 1.5014

For Project C
Q No. 04 Part A:
Net Present Value
As we know that:
Initial Investment= 20000
Discount rate= 10%
PV= FV (1+i) ^-n
Project C
Year Initial Present
Formula Rate Put values in formula Calculation
s Investment Value
0.90909090
1 7,000 PV= 7000(1+0.1) ^-1 6363.64
9
0.82644628
2 7,000 PV= 7000(1+0.1) ^-2 5785.12
1
PV= FV (1+i) ^-n 10.0%
0.75131480
3 7,000 PV= 7000(1+0.1) ^-3 5259.20
1
0.68301345
4 7,000 PV= 7000(1+0.1) ^-4 4781.09
5
Sum of Present Value   22189.06
NPV= Sum of Present Value – Initial investment
NPV= 22189.06-20000
NPV= 2189.06 (NPV is positive and project is acceptable)
Internal Rate of Return
 So we choose IRR rate ra= 14 % see the result in below table.

Project C
Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
PV= 7000(1+0.14) ^- 0.87719298
1 7,000 6140.35
1 2
PV= 7000(1+0.14) ^- 0.76946752
2 7,000 5386.27
2 8
PV= FV (1+i) ^-n 14.0%
PV= 7000(1+0.14) ^- 0.67497151
3 7,000 4724.80
3 6
PV= 7000(1+0.14) ^- 0.59208027
4 7,000 4144.56
4 7
Sum of Present Value   20395.99

NPV= Sum of Present Value – Initial investment

NPV= 20395.99-20000 = 395.99
NPVa=0 => 395.99 ≠ 0
So we increase the rate to rb = 15% see the result in below table.
Project C
Year Initial Present
Formula IRR Put values in formula Calculation
s Investment Value
PV= 7000(1+0.15) ^- 0.86956521
1 7,000 6086.96
1 7
PV= 7000(1+0.15) ^- 0.75614366
2 7,000 5293.01
2 7
PV= FV (1+i) ^-n 15.0%
PV= 7000(1+0.15) ^- 0.65751623
3 7,000 4602.61
3 2
PV= 7000(1+0.15) ^- 0.57175324
4 7,000 4002.27
4 6
Sum of Present Value   19984.85

NPV= Sum of Present Value – Initial investment

NPV= 19984.85-20000 = -15.15
NPVb=0 => -15.15 ≠ 0
Now put all the value in formula.
IRR= 14% + [395.99/ (395.99-(-15.15))] x (15% -14%)
IRR= 14.96%

Now put above IRR rate and find NPV.

Project C
Initial Present
Years Formula IRR Put values in formula Calculation
Investment Value
 PV= 7000(1+0.1496) ^-
1 7,000 0.86986778 6089.07
1
PV= 7000(1+0.1496) ^- 0.75666995
2 7,000 5296.69
2 5
PV= FV (1+i) ^-n 14.96 %
PV= 7000(1+0.1496) ^- 0.65820281
3 7,000 4607.42
3 4
PV= 7000(1+0.1496) ^- 0.57254942
4 7,000 4007.85
4 1
20001.0
Sum of Present Value  
3

NPV= Sum of Present Value – Initial investment

NPV= 20001.03-20000 = 1.03
NPV=0 => 1.03 ≈ 0
Almost equal to 0 so we can say that 14.96 % is IRR rate.
Q No. 04 Part B:

Profitability Index:

Present Value/Profitability index = 22189.06 / 20000

Present Value/Profitability index = 1.109

Q No. 05 Part A:

FV = pmt [((1+i) ^n-1) / i]

Pmt= $4000
‘n= 10 years
‘i= 8.5 %
FV=?
Now put all value in equation A

FV= 4000[((1+0.085) ^10-1) / 0.085]

FV= 59340.397
Annuity Due = 59340.397 x (1+0.085)

Annuity Due = 64384.331

Q No. 05 Part B:
PV= 25000
FV= 75000
‘n= 8 years
‘i (rate)=?

FV=PV (1+i) ^n
75000=25000 (1+i) ^8
I = [(75000/25000)1/8]-1
I = [(3) ^ 0.125] -1
I = 1.14720-1

I = 0.14720 or 14.720%

Q No. 05 Part C (a):

PV= Rs.500, 000

‘i= 18% = 0.18
‘n= 5 years
PV= pmt [1-((1+i) ^-n)/i]
Pmt = 500000 / [1-((1+0.18) ^-5)/0.18]
Pmt = 500000 / 3.1271
Pmt = 159888.920

Q No. 05 Part C (b):

PV= Rs.500, 000
‘i= 18% = 0.18
‘n= 2 years
PV= pmt [1-((1+i) ^-n)/i]
Pmt = 500000 / [1-((1+0.18) ^-2)/0.18]
Pmt = 500000 / 1.5656
Pmt = 319357.798

= (319357.798 x 2) -500000
= 638715.596-500000
= 138715.596