Question 1

Kalim Limited is considering the following investments to invest its surplus funds. The
company can only invest in 1 project:

Project Investment Return Time

A 1,245,000 1,344,600 5 Months
B 1,650,000 1,798,500 8 Months
C 1,754,000 1,964,480 6 Months
D 1,354,500 1,544,130 12 Months

Required
Select 1 best project for investment.

Solution (Ret-Invs) (Incm/Invs)

Project Investment Return Income HPY Annualized Yield
A 1,245,000 1,344,600 99,600 8.00% 19.20% (8%/5x12)
B 1,650,000 1,798,500 148,500 9.00% 13.50% (9%/8x12)
C 1,754,000 1,964,480 210,480 12.00% 24.00% (12%/6x12)
D 1,354,500 1,544,130 189,630 14.00% 14.00% (14%/12x12)

Question 2
Haaj Limited has obtained a loan of Rs 250,000 at an interest rate of 16% p.a. and wishes to
investment this amount in projects which at least covers the interest cost in annual term.
Following investment opportunities are available:

Project Investment Return Time

W 125,000 136,250 6 Months
X 70,000 77,700 12 Months
Y 26,000 28,080 4 Months
Z 29,000 34,800 8 Months

Required
Pick all investable projects.
(Ret-Invs) (Incm/Invs)
Project Investment Return Income HPY Annualized Yield
W 125,000 136,250 11,250 9.00% 18.00% (9%/6x12)
X 70,000 77,700 7,700 11.00% 11.00% (11%/12x12)
Y 26,000 28,080 2,080 8.00% 24.00% (8%/4x12)
Z 29,000 34,800 5,800 20.00% 30.00% (20%/8x12)

The company should invest in all projects except X which is not providing the
minimum return of 16%
Question 1

Jasim Limited has the following capital structure:

Equity Liabilities
Share Capital 210,000 Long term Debt 450,000
Share Premium 112,000 Bank OD 146,500
Retained earnings 450,000 Trade Creditors 85,000
Revaluation Reserves 105,000 681,500
877,000

1. Cost of equity is assessed to be 18%.

2. Cost of debt is 11.5%
3. Cost of bank OD is 15%

Required
Calculate WACC for the company

Solution

Amount Rate Cost

Equity 877,000 18.0% 157,860
Debt 450,000 11.5% 51,750
ST Debt 146,500 15.0% 21,975
1,473,500 231,585
WACC 15.717%

Question 2

Juman Limited has the following credentials:

Capital employed 650,000

Debt to Equity ratio 30/70
Cost of debt 12%
Premium for equity 5%

Required
Calculate WACC

Solution

Capital Employed 650,000

30% Debt 195,000
70% Equity 455,000
 Amount Rate Cost
Equity 455,000 17.0% 77,350
Debt 195,000 12.0% 23,400
650,000 100,750
WACC 15.500%

Question 3

Rank the following as per risk (from lower to Higher)

Shares of a good company

Shares of a lwe performing company
AAA rate corporate Bonds
Junk Bonds
Government Securities
BBB rated bonds

Solution

Government Securities
AAA rate corporate Bonds
BBB rated bonds
Junk Bonds
Shares of a good company
Shares of a lwe performing company
Question 1

Following is the capital structure of Subhan Limited:

Equity
Share capital 460,000
Reserves 840,000

Long term debt 625,000

Market value of equity is 1.6 times of book value.

Market value of debt is 124% of book value

Cost of debt is 9% and equity premium over interest is 10%.

Required
Calculate WACC of the company

Solution
Book Value Market Value
Equity 1,300,000 1.60 2,080,000
Debt 625,000 1.24 775,000
2,855,000
WACC
M. Value Rate Cost
Equity 2,080,000 19% 395,200
Debt 775,000 9% 69,750
2,855,000 464,950
WACC 16.285%

Question 2
Following is the balance sheet extracts of Illusion Limited at 31 Dec 2022:

Property plant and equipment 750,000

Other long term assets 250,000
Current Assets 360,000
Current Liabilities (160,000)

1. Long term Debt is 1/3rd of the capital employed.

2. Market value of equity is 1.5 times the book value and market value of debt is 90% of book value.
3. Cost of equity is 16% which is 7% in premium to cost of debt.

Required
Calculate WACC of the company
Solution

Total Assets 1,360,000

Current Liabilities (160,000)
Capital Employed (Book Value) 1,200,000

Equity (2/3rd) 800,000

Debt (1/3rd) 400,000

Market Value
B. Value Factor M. Value
Equity 800,000 1.50 1,200,000
Debt 400,000 0.90 360,000
1,560,000

WACC
M.Value Rate Cost
Equity 1,200,000 16% 192,000
Debt 360,000 9% 32,400
1,560,000 224,400
WACC 14.385%
Question 1

Dividend history of Kamal Limited:

Year Dividend / Share (Rs)

2018 16.00
2019 16.96
2020 17.98
2021 19.06
2022 20.20

Cost of equity is 18%. Calculate Market Value per share

Solution

First Dividend 16.00

Current yr Dividend 20.20
Time 4 Years
Growth rate 6.000% FD(1+g)^4=20.2(CY Div)

Market Value 178.43

Question 2
Following data pertain to three companies:

Co. A Co. B Co. C

Earnings per share 60 80 140
Retention ratio 60% 40% 20%
ROE 20% 15% 16%
MV per share 336.00 508.80 555.69

Required
Calculate Ke for all companies

Solution

Growth rate
Retention Ratio (b) 60% 40% 20%
ROE ® 20% 15% 16%
Growth rate (bxr) 12.00% 6.00% 3.20%

Cost of Equity
Dividend / share 24.00 48.00 112.00
MV per share 336.00 508.80 555.69
Growth rate 12.00% 6.00% 3.20%
Ke 20.00% 16.00% 24.00%
Question 3

Opening Equity of Zamil Limited 68,000

Profit earned 16,320
Dividend paid (11,424)
Closing equity 72,896

Required
calculate Ke of the company if market value of the company is Rs 95,676

Solution
Opening equity 68,000
Profit earned 16,320
ROE (profit/Opening equity) 24.00%

Retention %
Profit earned 16,320
Dividend 11,424
Retained profit 4,896
Retention % 30.00%

Growth rate 7.200%

Market Value 95,676

Ke 20% 11,424 (1+7.2%)/(ke-7.2%) = 95,676

 5

Question 1
J Limited K Limited
Opening Net Assets 450,000 360,000
Profit 81,000 86,400
Dividend (56,700) (43,200)
Closing Net Assets 474,300 403,200

Cost of Equity 20% 25%

Required
Calculate the market value of both companies

Question 2

Dividend history of Aphlahum Limited is as under:

Year Dividend
2001 45.20
2002 48.82
2003 53.21
2004 58.53
2005 63.80

MV per share is Rs 650

Required
Calculate Cost of equity

Question 3

Gulab Limited has start business with a unique product and is

expecting rapid growth in profits and dividends in near future. The
company's dividend are expected to be:

Dividend for year 1 40 per share

Growth rate for first 5 years 18%
Growth rate beyond 5 years 6%
Cost of equity 15%

Required
Calculate the market value of the company (shares issued 80,000)
 5Solution

Solution 1
J Limited K Limited
Profit 81,000 86,400
Opening Net Assets 450,000 360,000
ROE(Profit/op NA) ('r) 18% 24%
Dividend 56,700 43,200
Payout ratio 70% 50%
Retention Ratio (b) 30% 50%

Growth rate (r x b) 5.40% 12.00%

Ke 20% 25%
Market Value 409,327 372,185

Solution 2

Growth model
Lastest Diviend 63.80
Oldest dividend 45.20
Time 4
Growth rate 9.00%
MV per share 650

Cost of equity 19.70%

Solution 3

Yr Dividend PV at 15%
1 40.00 34.78
2 47.20 35.69
3 55.70 36.62
4 65.72 37.58
5 77.55 38.56
PV of first 5 years 183.23

PV previous dividends 913.38 7.55x(1+6%)/(15%-6%)

Further PV 454.11

Total PV 637.34
Question 1

Sumair Limited has been paying dividend to its ordinary shareholders in the following manner:

2022 2021 2020 2019 2018

Earning per share 24.7765 23.3730 22.3606 21.0000 20.0000
Dividend per share 17.3435 16.8286 15.8760 15.1200 14.0000

Following is the capital structure of the company at 31 December 2022:

Share Capital (Rs 10 per share) 160,000

Retained earnings 1,536,000
Total Equity 1,696,000

The company's share is trading at a price earnings multiple of 7.03.

Changes in business arrangement

The company is changing the business sector due to which the following changes will be observed:

1. Dividend for the next year shall increase to Rs 20 / share.

2. Growth rate in dividends will be reduce to 7%
3. Cost of equity will be increased by 2% (Old+2%)

Required
1. Calculate growth rate in dividends using:
a) Dividend history
b) Gordon's model
2. Calculate cost of equity (current situation)
2. Calculate the impact of the above measures on the market value of the company.

Solution

Growth rate through dividend history Growth rate using Gordon's function

Dividend in 2018 14.0000 Retention ratio

Dividend in 2022 17.3435 Earnings per share 24.7765
Time in between 4 years Dividend per share 17.3435
Growth rate 5.500% Retention per share 7.4329
% of profit 30.0000%
Since growth rate calculated
using dividend history is more Return on Equity
reliable we will take it for Profit total 396,424 (24.7765x16,000)
further calculations Opening Equity 1,577,073 (Closing+Div-Profit)
ROE 25.137%

Growth rate (bxr) 7.541%

Cost of Equity

Market Value per share

PE multiple 7.0300
EPS 24.7765
MV per share 174.1787

Cost of equity 16.00% 17.3435(1+5.5%)/174.1787 + 5.5%

Impact of changes in business arrangements

Next year dividend 20.00 Rs per share

Growth rate new 7.00%
New Ke 18.00%

Market value per share 181.82

Total market value 2,909,091 16,000x181.82

Comparison
Previous market value 2,786,860 16,000 x 174.1787
New Market Value 2,909,091
Increase 122,231

Conclusion
New business arrangement is profitable for the company
 7

Question 1

Linovo Limited is operating in computer industry for quite sometime now. The company is
considered the most risky company of the sector because of heavy investments in research
and development which sometime result in success and seldom result in failure and loss of
huge investments.

Cost of equity of HO Limited is 16%. Shareholders of Linovo limited charges a premium of

2.5%. The company paid a dividend of Rs 24 per share in the last year and Rs 25.32 per share in
the current year. The dividend is expected to grow in the same manner.

Required
Calculate the market value of the company if the copmany has in issue a share capital of
65,800 shares

Question 2
Mishqat Limited is considering to obtain some loan and wishes to calculate the impact of it on
the market value of equity (per share)

Before After
Loan Loan
Expected Dividend per share 40.00 48.00
Growth rate 4.00% 5.00%
Ke 16.00% 17.50%

Required
Calcualte the impact on market value per share
 Sol 7

Solution 1

Growth rate in dividends

Current dividend 25.32

Last dividend 24.00
Growth rate 5.50%

Cost of Equity (Ke) 18.50%

MV per share 205.48

Total Shares 65,800.00
Total MV 13,520,685

Solution 2

Dividend 40.00 48.00

Growth rate 4.00% 5.00%
Ke 16.00% 17.50%
MV per share 346.67 403.20
 8

Question
Following data pertains to a bond issued some time ago by Brain Limited:

Face Value of the bond 100

Coupon rate 12%
Remaining term 3 Years

Case 1
Calculate the market value of the bond assuming
- Market rate is 15%
- No taxes are applicable
- Redemption value will be Rs 105

Case 2
Calculate the market value of the bond assuming
- Market rate is 11% post tax
- Tax rate applicable is 25%
- Redemption value will be Rs 100

Case 3
Calculate the market value of the bond assuming
- Market rate is 10% post tax
- Tax rate applicable is 40%
- Redemption value will be Rs 105

Case 4
Calculate the Cost of Debt (Mkts rate) of the bond assuming
- Market Value is Rs 96
- No Tax is applicable
- Redemption value will be Rs 100

Case 5
Calculate the Cost of Debt (Mkts rate) of the bond assuming
- Market Value is Rs 102
- Tax rate applicable is 25%
- Redemption value will be Rs 100

Case 6
Calculate the Cost of Debt (Mkts rate) of the bond assuming
- Market Value is Rs 104
- Tax rate applicable is 40%
- Redemption value will be Rs 110
 Sol 8

Solution

Case 1
1.00 2.00 3.00
Interest 12.00 12.00 12.00
Redemption Value 105.00
Net Cash flows 12.00 12.00 117.00
PV at 15% 10.43 9.07 76.93
Market Value 96.44

Case 2
1.00 2.00 3.00
Interest 12.00 12.00 12.00
Tax savings (3.00) (3.00) (3.00)
Redemption Value 100.00
Net Cash flows 9.00 9.00 109.00
PV at 11% 8.11 7.30 79.70
Market Value 95.11

Case 3
1.00 2.00 3.00
Interest 12.00 12.00 12.00
Tax savings (4.80) (4.80) (4.80)
Redemption Value 105.00
Net Cash flows 7.20 7.20 112.20
PV at 10% 6.55 5.95 84.30
Market Value 96.79

Case 4
- 1.00 2.00 3.00
Market Value (96.00)
Interest 12.00 12.00 12.00
Redemption Value 100.00
Net Cash flows (96.00) 12.00 12.00 112.00 NPV
PV at 10% (96.00) 10.91 9.92 84.15 8.97
PV at 15% (96.00) 10.43 9.07 73.64 (2.85)

a 10% b 15%
A 8.97 B (2.85)

Irr 13.79%
 Sol 8

Case 5
- 1.00 2.00 3.00
Market Value (102.00)
Interest 12.00 12.00 12.00
Tax (3.00) (3.00) (3.00)
Redemption Value 100.00
Net Cash flows (102.00) 9.00 9.00 109.00 NPV
PV at 6% (102.00) 8.49 8.01 91.52 6.02
PV at 10% (102.00) 8.18 7.44 81.89 (4.49)

a 6% b 10%
A 6.02 B (4.49)

Irr 8.29%

Case 6
- 1.00 2.00 3.00
Market Value (104.00)
Interest 12.00 12.00 12.00
Tax (4.80) (4.80) (4.80)
Redemption Value 110.00
Net Cash flows (104.00) 7.20 7.20 117.20 NPV
PV at 6% (104.00) 6.79 6.41 98.40 7.60
PV at 10% (104.00) 6.55 5.95 88.05 (3.45)

a 6% b 10%
A 7.60 B (3.45)

Irr 8.75%
Question 1
Following is the capital structure of Jamal and company as at December 2021:

Share Capital (65,000 shares) 650,000

Retained earnings 945,000
8% Redeemable Debentures 720,000
10% Redeemable Debentures 480,000

Other information
1. Price earning multiple of the company is 7.
2. Dividend history for the last 5 years:

2021 2020 2019 2018 2017

Dividend / Share 2.5526 2.4310 2.3153 2.2050 2.1000

3. The company pays 70% of earnings as dividend.

4. 8% Redeemable Debentures are traded at 102 and are redeemable in 2024
5. 10% Redeemable debentures has a market interest rate of 6% post tax and are due
to redeem at the end of 2025
6. Tax rate applicable to the company is 30%

Required
Calculate WACC for the company

Solution

Sources Mkt Value Rate Cost

Equity 1,659,166 15.5000% 257,171
8% Bonds 734,400 4.9518% 36,366
10% Bonds 496,633 6.0000% 29,798
2,890,199 11.187% 323,335

Equity

Market Value per share

Dividend for 2021 2.5526
Payout rate 70%
EPS (2.5526/70%) 3.6465
PE Multiple 7.00
Market Value per share 25.53 9x3.6465
Total Market Value 1,659,166 65,000 x 25.53

Growth rate
Dividend 2021 2.5526
Dividend 2017 2.1000
Time 4 Years
Growth rate 5.000%
Cost of Equity (Ke)
Market Value per share 25.53
Dividend 2.5526
Growth rate 5.0000%
Ke 15.500%

Debt - 8% Redeemable Debt

Market value per bond is given so we have to calculate Kd (through IRR)

- 1 2 3
Market Value (102.00)
Interest 8.00 8.00 8.00
Tax savings (2.40) (2.40) (2.40)
Redemption 100.00
Net Cash flows (102.00) 5.60 5.60 105.60
NPV@ 10% (102.00) 5.09 4.63 79.34 (12.94)
NPV@ 4% (102.00) 5.38 5.18 93.88 2.44

IRR a 4.00% A 2.44

b 10.00% B (12.94)

IRR 4.952%

Market Value (Total) 734,400.00 720,000 x 1.02

10% Debentures

Cost of Debt (Kd - market rate) is given so we have to find out the market value

1.00 2.00 3.00 4.00

Interest 10.00 10.00 10.00 10.00
Tax savings (3.00) (3.00) (3.00) (3.00)
Redemption 100.00
7.00 7.00 7.00 107.00
NPV 6.60 6.23 5.88 84.75
NPV 103.47

Market Value total 496,633

Market rate 6.00%