CAF 6: Managerial and Financial Analysis

Suggested Solution – Test 1

Answer # 1
(i)
Ke = d0 / P0
P0 = d0 / Ke

Market Price per share = 10/.1 = Rs. 100

(ii)
Ke = d0 / P0
P0 = d0 / Ke

Market Price per share = 50 / 0.15 = Rs. 333.33 per Share

[d0 = Total Dividend/Total Shares i.e. 500,000/10,000 = 50]

(iii)
Ke = (d1 / P0) + g
P0 = d1 / (Ke – g)
Market Price per share = 10 * (1.05)/(0.15 – 0.05) = Rs. 105

(iv)
In this question, we will first calculate market value at end of year 5, and then calculate present value as
on today.

Ke = (d1 / P0) + g
P0 = d1 / (Ke – g)
Market Price per share at end of year 5 = 10 * (1.05)/(0.15 – 0.05) = Rs. 105
Market Price per share Today = 10/1.151 + 10/1.152 + 10/1.153 + 10/1.154 +10/1.155 +105/1.155 = Rs.
85.73

Answer # 2
(i)
Ke = d0 / P0
Ke = 7.5 / 150 = 5%

(ii)
Ke = 15 / 150* = 10%.

[* Price to be taken in formula is always ex-dividend i.e. 165 – 15 = 150]

(iii)
Ke = (d1 / P0) + g
Ke = (24 * 1.05 / 120) + 0.05 = 26%.

(iv)
Ke = 1.5 / 10 = 15%.

(v)
KPS = DPS /PPS

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 CAF 6: Managerial and Financial Analysis
Suggested Solution – Test 1

KPS = 5/65 = 7.69%

Answer # 3
(i)
KD = ID (1 – T)/PD
KD = 10 (1-0.30)/100 = 7%.

(ii)
KD = ID (1 – T)/PD
KD = 10 (1-0.30)/85 = 8.24%.

(iii)
Cost of redeemable debenture is its IRR.
NPV @ 15% = 7*/ 1.151 + 7*/ 1.152 + 107*/ 1.153 – 74 = 7.734
NPV @ 20% = 7*/ 1.201 + 7*/ 1. 202 + 107*/ 1. 203 – 74 = – 1.38
[*After tax cashflow is 10 * (1 – 0.30) = 7]

IRR = Lower Rate + NPV at lower rate /(NPV at lower rate – NPV at higher rate) * (Difference in Rates)
IRR =15% + 7.734/7.734+1.38 * 5% = 19.24%

(iv)
If a redeemable instrument is issued at par and redeemed at part, its Coupon Rate (tax adjusted) will be
its cost. [No need to calculate IRR in this situation].

Cost of this redeemable debenture = 10% * (1 – 0.3) = 7%

Answer # 4

Component/Source of Cost of Weighted Average

Weight of Component
Finance Component Cost of Component

Shares (1.2 million) 14.96% (w – 1) 77.4% (i.e. 1.2 million / 1.55 million) 11.56%
Debt (0.35 million) 5.46% (w – 2) 22.6% (i.e. 0.35 million / 1.55 million) 1.23%

Weighted Average Cost of Capital (WACC) 12.79%

(w-1)
Ke = (d1 / P0) + g
Ke = 0.18 * (1.03)/1.55 + 0.3 = 14.96%

(w-2)
7.8% * (1 – 0.30) = 5.46%

(THE END)

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