Finance Assignment

Submitted By:Binny Grover (Roll No. 15)

Question 1: Perpetual Bonds Answer:Perpetual bonds are the bonds which have no maturity date. They are nonredeemable but pay a steady interest forever. Their cash flows are therefore perpetual, that is where the name comes from. Perpetual bonds have the qualities of both bonds and equities. Like bonds, they pay periodical interest to investors. And like equity shares, they do not have any maturity. This is the reason they are also called as hybrid These types of bonds are not that popular, but they provide a good way for Banks and other companies to raise money. They pay a higher rate than other bonds with a similar credit profile. In Perpetual bonds, the investor cannot ask for his money back unless the issuer decides to payback investors and redeems the bonds. Most of these types of bonds are callable, but only after 5 years of the date of issue of the bonds A perpetual bond can be transferred from one person to another.. . Perpetual Bonds carry bigger risk for the investors, Because RBI has put a rule that perpetual bonds will stop providing the returns if the issuing banks CRAR fall below the regulatory requirements. The payment of perpetual bonds is similar to stock dividend payments - as they both offer some sort of return for an indefinite period of time. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some constant discount rate. The discount rate denominator reduces the real value of the fixed coupon amounts over time, eventually making this value equal to zero. So, perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price. Perpetual Bonds are an attractive option to long-term investors such as provident funds and insurance companies.

In India, They qualify for Tier I capital as they have no maturity date. Example:Indian Overseas Bank and UCO Bank. IOB in March 2006 raised Rs 200 crore through an issue of `perpetual bonds,' the first bank to use this means of funding. These bonds carry an interest rate of 9.3 per cent, payable every half year. Darashaw & Co, aMumbai-based securities firm, had invested Rs 200 crore in Indian Overseas Bank(IOB), picking up the entire offering of perpetual bonds issued. UCO Bank raised capital to the tune of Rs. 230 crore. In both cases, the bulk of the subscribers were insurers and provident funds.

Question 2: Beta Value Answer:When an investor, Invests in a stock, He is calculates the risk involved in the investment. More the volatile a stock is, Greater is the risk involved in investing in that stock. Beta value is a tool that helps the investors calculate and measure these factors of a stock, namely the market risk and the volatility of the stock. It measures the volatility of that particular stock with respect to the market as a whole. For example: Let A limited has a Beta value of 0.8, this means that this stock has a responsiveness/volatility which is 80% of the market as a whole, So if the market grows by 10%, Chances are that this stock will grow by only 8%. Where as if the Beta Value of A Limited was 1.2, it means that the stock of company A has a responsiveness/volatility which is 20% higher than the potential return of the market as a whole. So, If the market falls by 10%, Chances are that this stock will fall by 12%. It helps the investors in making the choice between various stock to invest in, depending the risk they are willing to take. Regression analysis or past record can be used to calculate the beta value. Beta value can be: a) -ve Beta: This means the stock is negatively correlated to the market as a whole, So if the market falls then the stock rises. But this is very rare case in which the beta value is negative.

b) 0 Beta: This means that the value of stock remains constant and does not change with the market this is again a very rare case. c) 0-1 Beta: This means that the stocks price moves slowly as compared to the market. These stock are considered as low risk low gain type of stocks. d) 1 Beta: This means that if a stock has the beta value of 1 then it is in perfect correlation with the market so if the market falls by 3% the stock also falls by 3%. e)Greater than 1 Beta: This means that if a stock has beta value greater than one then the stock changes more with the market, Normally new startup companies have beta greater than one. These stocks represent high risk high return investments.

Question 3: Free float Capitalisation/Factor Answer:The total shares of a firm comprises of two types of shares, free floating shares and Locked shares. Total Shares = Free Floating Shares + Locked shares. Free Float shares are the open market shares that are available for anyone to trade.These shares are used for calculating the sensex. Locked shares are the ones which are not freely available for trading in the open market. These are the shares held by the promoters of the company or the government. Example:Suppose there is a company A Limited, It has 10lac shares, But out of these 10lacs, 3 lacs shares are held by the officers, Promoters of the company, Only 7 lac shares are available for trading in the open market. This means that the float of A Limited is 7lacs shares.

Now when we calculate the total market capital of a company Total Market Capital of the company = Share Price ( Total shares) Which means:Total Market Capital of the company = Share Price (Free Floating Shares + Locked shares )

Now for our example of A Limited, Let the share price be rs 5. This means:Total Market Capital of A limited = 5 x (7 lac + 3 lac) = 5 x 10 lac = 50lacs

Now, We can calculate the free float Capitalisation also, Which is the amount required to buy all the shares of a particular company trading in open market. This is given by:Free Float Capitalisation = Free Float Factor x Total Market Capital Free Float Factor = Free Float Shares/Total Shares For or example in A Limited Free Float factor = 7/10 =0.7 And Free Float Capitalisation = 0.7 x 50Lacs = 35Lacs So, We can say 35 Lacs worth of shares of A limited are trading in the open market. For Index Construction, This Free Float Market Capitalisation is considered.

Question 5: EVA Economic Value Added Answer:Companies measure their performance and publish them, For investors and shareholders. These reports help Investors and shareholders to make decision regarding their investments in the company. So we can now understand the importance of these reports and the measure used to calculate the performance, for the company. Normally the measure used for performance calculation was Residual Income. Which means that the company creates wealth only if it generates surplus after taking into account the cost of the capital invested by it. That is if the company has money left after all the investments, It is creating wealth. EVA or Economic Value added is also a measure to calculate performance. It is quite similar to the Residual Income Concept. It does not give any extra information to the shareholders of Investors. The Edge EVA has over Residual Income concept is the way it uses Cash flow and the Cost of Capital It factors the cost of the capital into the operating profit (After Tax). EVA = (Rate of return - cost of capital) x capital Invested Or it can be written as: EVA = ( R- C(c) ) x C(i) Where, R = Rate of Return C(c) = Cost of Capital C(i) = Capital Invested.

Now, If we solve the equation further, EVA = R.C(i) C(c).C(i) Now, R.C(i) = Net operating profit after tax, Also known as NOPAT,

So, We can write EVA as:EVA = NOPAT C(c) . C(i) EVA is a better measure of performance as compared to other measures, because EVA makes managers responsible for the decisions they make, as EVA is greatly influenced by them and Managers have more control over EVA than others. Moreover, EVA is a much easier concept of profitability and it can be translated into day-to-day operations. EVA was first used by Stern Stewart and Company, Thus it is a registered trademark of Stern Stewart and Co.