Subject: Financial Management

Faculty: Dr. Sitangshu Khatua

Assignment
Chapter: Time value of money

1. Assume that it is now January 1 2003. On January 1, 2004, you will deposit Rs 1,000 into a savings
account that pays 9%.

i) If the bank compounds interest annually, how much will you have in your account on January
1, 2007?

ii) Suppose you deposited four equal payments in your account on January 1 of 2004, 2005,
2006 and 2007. Assuming a 9% interest rate, how much would each of your payments have to be for you
to obtain the same ending balance as you calculated in part (i) ?

2. Assume that it is now January 1, 2009 and you will need Rs 1 lakh on January 1, 2013. Your bank
compounds interest at a 9% annual rate.

i) How much must you deposit on January 1, 2010 to have a balance of Rs 1 lakh on January 1,
2013.

ii) If you want to make equal payments on every January 1 from 2010 to 2013 to accumulate Rs 1
lakh, how much must each of the four payments be?

3. Bank NBI pays 6% interest, compounded quarterly, on its money market account. The managers of
the bank NBI want its money market account to equal bank MBI’s effective annual rate, but interest is to
be compounded on a monthly basis. What nominal interest rate must bank MBI set?

4. Use equations and a financial calculator to find the following values :

i) An initial Rs 1000 compounded for 10 years at 9%.

ii) The present value of Rs 1000 due in 10 years at a 9% discount rate.

5. To the closest year how long will it take Rs 4000 to double if it is deposited and earns following
interest rates?

i) 9%

ii) 10%

iii) 100%
6. While Nagarjuna was a student at the University of Chennai, he borrowed Rs 120,000 in student loans
at an annual interest rate of 9.5 %. If he repays Rs 15000 per annum, how long to the nearest year will it
take him to repay the loan?

7. Which amount is worth more at 14% - Rs 1,000 in hand today or Rs 2,000 due in 6 years?

8. X Ltd invests Rs 8 lakhs to clear a tract of land and to plant some young mahogany trees. The trees will
mature in 10 years, at which time X Ltd plans to sell the forest at an expected price of Rs 80 lakhs. What
is X Ltd’s expected rate of return?

9. i) Find the present values of the following cash flow streams. The appropriate interest rate is 9%.

Year Cash Stream A(Rs) Cash Stream B (Rs)

1 1,000 3,000

2 4,000 4,000

3 4,000 4,000

4 4,000 4,000

5 3,000 1,000

ii) What is the value of each cash flow stream at 0% interest rate?

Chapter: Cost of Capital

10. The market price of a share is Rs 90 and the growth rate of dividend is 12% the earning per
share are Rs 18 you are required to find out the cost of retained earning.
11. A company has the following capital structure :

Securities Book value (Rs) After tax cost (%)

Equity capital 850,000 15

Retained earnings 225,000 10

Preferred capital 150,000 18

Debentures 1,000,000 6

Total capital 2,225,000

From the above information, find the WACC of the company.

12. Shares of a firm are selling at Rs 30 per share. The firm had paid a dividend of Rs 3 per share last
year. The estimated growth of the company is 6% per year. Determine the cost of equity capital of the
firm and the estimated market price of the share if the anticipated growth rate of the firm (a) rises to
9%, (b) falls to 3%.

13. A limited wishes to raise additional finance of Rs 1,000,000 for meeting its investment plans. It has
Rs210,000 in the from of earnings available for investment purposes. The following are the further
details

1. Debt Equity ratio 2:3

2. Cost of Debt up to Rs 200000 11% (before tax)

Cost of Debt beyond Rs 200000 15% (before tax)

3.Earnings per share Rs 3

4. Dividend pay out 60%

5. Expected growth rate in dividend 9%

6. Current market price Rs 40

7. Tax rate 50%

Find the pattern for raising the additional fund, post-tax average cost of additional debt, cost of retained
earnings, cost of equity and overall WACC (after tax).

14. S limited has the following capital structure:

Common shares (25000 shares) Rs 5,000,000

11% preference shares Rs 1,000,000

13% debentures Rs 2,000,000

Rs 8,000,000

One share of the company sells for the Rs 35. It is expected that the company will pay a dividend of Rs 3
per share next year which will grow at 6% for ever. Assuming 50% tax rate, compute the weighted
average cost of capital based on existing capital structure. If the company raises and additional Rs
2,000,000 debt by issuing 14% debentures, the expected dividend increases to Rs 4 and growth rate is
unchanged. But if the price per share falls to Rs 30, what will be the new WACC?

15. Given below is the summary of balance sheet of A limited as on 1 st January 2009.

Liabilities Amount (Rs) Assets Amount (Rs)

Share capital 250,000 Land 2,300,000

(25000 equity shares @ Rs 10 fully
paid up)
Reserves and surplus 80,000 Plant 120,000

8% redeemable debentures 50,000 Less depreciation 50,000 70,000

Current liabilities Investment 10,0000

Short term loan 30,000 Stock 10,000

Accounts payables 15,000 Cash 15,000

425,000 425,000

Calculate the firm’s WACC using balance sheet valuation. The following additional information is
provided.

1. 8% debentures were issued and are redeemable at par after five years.

2. Short term loan carries interest @ 15% p.a.

3. All interest payments are up-to-date and equity dividend is currently 10%.

4. Tax rate may be assumed at 50%.