Time value of money –

1. Gary has Rs. 10,000 today and she wants to find the future value of the amount is
invested for 10 years at 10% interest rate compounded annually.
2. Gary invests Rs. 10,000 every year for 10 years at 10% interest rate. What will she get at
the end of investment horizon.
3. calculate the present value if we are told that the discount rate is 10% and future value
10 years from now is Rs. 50,000.
4. Mr X deposits Rs 5000, 10,000, 15000, 20000 and 25000 every year for 5 years. Calculate
worth of his investment if rate of interest is 8%.

Cost of capital –

1. What is the WACC for a firm with 45% debt and 55% equity that pays 12% on its
debt, 20% on its equity, and has a 40% tax rate? (Do not round intermediate
calculations.)
2. Calculate the cost of capital when X Ltd. issues 12% Debentures of face value Rs. 100
each and realizes Rs. 95 per Debenture. The Debentures are redeemable after 10 years
at a premium of 10%. Tax rate 50%.
3. Y. Ltd. issues 14% preference shares of face value Rs. 100 each Rs. 92 per share. The
shares are repayable after 12 years at par. Calculate cost of preference capital.

4. The following information is available from the Balance Sheet of a company. Calculate
bookvalue cost of capital.

Source Cost Capital

Equity shares 18% 4,00,000
Preference shares 10% 3,00,000
Debentures 8% 2,00,000
Reserves 18% 1,00,000

5. The following is the capital structure and individual after tax cost of each source of ABC
ltd. Calculate Book value overall cost or weighted average cost of capital.

Source Book value Capital Market value Cost

capital
Debentures 3,00,000 3,30,000 4%
Preference shares 2,00,000 2,20,000 6%
Equity shares 4,00,000 17%
Retained earnings 1,00,000 8,00,000 -
Total 10,00,000 13,50,000
 Capital budgeting and practice question-

1. Consider two proposals A and B with initial investment of Rs. 1,50,000. Evaluate them using
discounted payback and NPV method as per the cash inflow given as under – (discount rate
12%)
YEAR Cash Inflow A Cash Inflow B

1 42,000 42,000

2 48,000 45,000

3 70,000 40,000

4 80,000 50,000

5 20,000 1,00,000

PVF @ 12% for five years respectively are-

0.893, 0.797, 0.712, 0.636 and 0.5676

Leverage Practice questions –

1. A company produces and sells 10,000 shirts. The selling price per shirt is Rs. 500. The
contribution per shirt is Rs. 200. Fixed operating cost is Rs. 2,50,000. Calculate EBIT and
operating leverage.
2. Calculate EBIT and degree of operating leverage for each of the following firms –
Particulars FIRM A FIRM B FIRM C FIRM D
Sales price per 20 32 50 70
unir
Variable cost 6 16 20 50
per unit
Fixed cost 60,000 40,000 1,00,000 Nil
Units sold 5000 5000 5000 5000

3. The earnings before interest and taxes of a firm is Rs 1,00,000. If it has raised funds through
debenture 0r Rs 2,00,000 @ 10% interest rate and number of shares outstanding are 10,000
then calculate EPS and degree of financial leverage if EBIT changes to Rs. 1,50,000.
Corporate tax rate is 50%.

EOQ and Baumols cash model practice questions –

1. What is the most economical number of units to order? How many orders need to be
placed.
Annual requirement = 48,000 units
Ordering cost = Rs. 9 per order
Carrying cost = 15% of per-unit cost
Per unit cost = Rs. 4 per unit
2.
A manufacturing company places a semi-annual order of 24,000 units at a price of Rs. 20 per
unit. Its carrying cost is 15% and the order cost is Rs. 12 per order.
What is the most economical order quantity? How many orders need to be placed?
3. A company generates Rs. 10,000 per month excess cash, which it intends to invest in short-
term securities. The interest rate it can expect to earn on its investment is 5% pa. The
transaction costs associated with each separate investment of funds is constant at Rs.50.

(a)What is the optimum amount of cash to be invested in each transaction?

(b)How many transactions will arise each year?
(c)What is the cost of making those transactions pa