Loan Amt 50

Period 4 Yearly Installment

IR 0.15 ₹ -15.229

Year Total Amt Principal Amt Formula P Amnt Interest Amt Formula I Amt Total
0 50
1 ₹ -15.229 ₹ -10.013 ₹ -7.500 ₹ -17.513
2 ₹ -15.229 ₹ -11.515 ₹ -5.998 ₹ -17.513
3 ₹ -15.229 ₹ -13.243 ₹ -4.271 ₹ -17.513
4 ₹ -15.229 ₹ -15.229 ₹ -2.284 ₹ -17.513
Question 1
ABC investment bank introduced a new financial instrument Genzyme.
Investors expect Genzyme to provide zero net cashflows for the next 5 years.
In the 6th year, Genzyme is expected to have cashflows of Rs 100 million,
which is then expected to grow at a constant rate of 5% forever. If investors
require a 10% rate of return, what is the current value of Genzyme? (Assume
all cashflows occur at the end of the year.)
Answer
Value of Genzyme at time =5
Value of Genzyme at time =0

Question 2
Find Future value in 10 years of Rs1,000 invested, APR 9 %
a. Compounded annually?
b. Compounded monthly?
a
b
Question 3
A prestigious investment bank designed a new security that pays quarterly
Rs 10 in perpetuity. The first dividend occurs one quarter from today. What
is the price of the security if the APR is 10 percent, compounded quarterly?
Answer
Price
Question 4
Bond P is a premium bond with a 9 percent coupon paid annually has a YTM
of 7 percent, and five years to maturity. What is the price bond P is face
value
Answeris Rs.100?
Price

Question 5
Bond P pays 9 percent coupon annually has a YTM of 9 percent, and five years to maturity.
i. If interest rates remain unchanged, what is the expected capital gains/loss yield over
ii. If interest rates remain unchanged, what is the expected interest yield over the next

Price
Capital gains/loss yield
interest yield

Question 6
Fijisawa, Inc., is considering a major expansion of its top-selling product line and has estima
NPV

Question 7
Apco Inc., is considering a major expansion and has estimated the following cash flows assoc

IRR

Question 8
Indicate the effect (net change in value) on this period’s (free) cashflow of a change in ea
i. Cash operating expenses.
ii. Depreciation.
iii. Interest paid.
iv. Accounts payable.
Answer

Cash operating expenses.

Depreciation.

Interest paid.

Accounts receivable.

Question 9
Consider the following cash flows on two mutually exclusive projects with similar risk for the
Year
0
1
2
IRR

Answer box on the following page

Project to be accepted
Reasons

Questions 10 - 12
As part of its planning for the coming Christmas season, Criswell Motorsports is considering

Question 10
What is the initial cash outlay (time 0) associated with this project?

FCFF at time 0

Question 11
What are the annual net cash flows associated with this project for Years 1 through 3?
FCFF at time 1 to 3

Question 12

What is the terminal cash flow in Year 4?

FCFF at time 4

Question 13
A company is considering the following investment opportunities. (1 + 1 mark)
Investment
Initial cost (Rs. millions)
Expected Life
NPV @ 15%

IRR

a. If the company can raise large amounts of money at an annual cost of 15%, and if the inv
b. If the company has a fixed capital budget of Rs.7 million, and if the investments are inde
Answer
Question a
Question b

Question 14
What is the effective return per annum if a bank compounds 10% interest 24 times in 6 year
Answer
Effective interest rate per annum is

Question 15
You have borrowed Rs. 5616 @ 3% per annum. You would like to repay this amount in 8 equ
Answer
Equated Annual Installment is

Question 16
A person pays Rs.10000 every year for five years for 8% to receive some amount at the end o
Answer
Maturity amount is

Question 17
An insurance policy requires paying 10000 annually for ten years. At the end of the 20th yea
Answer
Rate of Return earned

Question 18
An insurance policy requires paying 10000 annually for ten years. At the end of the 20th yea
Answer
Value of the policy is

Question 19
The market value of a bond, with a face value of 100 and a maturity period of 5 years, chang
Answer
Change in YTM
Question 20
An 8%, 100 face value five-year bond trades at par in the market. The YTM is expected to inc
Answer
Percentage change in price

Question 21
What would be the price of the 10% ten-year bond at the end of 5th year if YTM is 9%?
Answer
Bond price is

Question 22
What would be the percent change in the price of a share if a firm announces that it plans to
Answer
Percentage change in stock price

Question 23
A share with an EPS of Rs.15 currently trades at Rs.200. Its DPR is 50%, and the discount r
Answer
Implied ROI is

Question 24
A firm plans to take up a new project X. The project requires an initial investment of Rs. 100
Answer
Increase in firm value is

Question 25
Suppose you can save $100 per year at the end of each year for 10 years and earn 5.45% int
Answer
Maturity amount is

Question 26
You want to go to Europe 5 years from now, and you can save $3,100 per year, immediately
Answer
Value at the end of 5 years is

Question 27
Haig Aircraft is considering a project which has an up-front cost paid today at t = 0. The pro
Answer
Initial investment is

Question 28
Your firm is considering two mutually exclusive projects, code-named A and B, that would ea
Project A
Year 1
Year 2
Year 3
What is the value lost by choosing the project with higher IRR over the project with higher N
Answer
Value lost is

Question 29
What is the PI of an investment proposal with an initial cash outlay of $100,000 and a net pr
Answer box on the following page
Profitability index is

Question 30
Bing Services is now in the final year of a project. The equipment originally cost $20,000, of
Answer
After tax salvage value is

Question 31
Easy Payment is planning to house its new project in a building its owns, free and clear, and
Answer
Project’s NPV is

Question 32
Consider the following two bonds with $1000 face value:

Compute the change in market values of each of the bonds when the rates decrease from 13
Answer
Bond A’s

Question 33
Cassel Corp. bonds pay an annual coupon rate of 10% on face value of $1,000. If these bond
Answer
Required rate of return is

Question 34
Suppose you paid $2,500 for a zero coupon bond with a face value of $1,00,000 and a matur
Answer
Rate of return earned is

Question 35
Wald Inc's stock has a required rate of return of 10%, and it sells for Rs.40 per share. Wald's
Answer
Expected dividend is

Question 36
The last dividend paid by Attot Labs was $1.00. Abbot’s growth rate is expected to be a cons
Answer
Price of stock
 ₹ 62.09
₹ 62.09

₹ -15,192.93
₹ 2,367.36 ₹ -10,344.34
₹ 2,451.36

PMT 10
APR 10%
Compounded Qtrly EAIR 10.38%
PV ₹ -9.06

five years to maturity. What is the price bond P is face value is Rs.100? (1 + 1 mark)
tal gains/loss yield over the next year for bond P?
rest yield over the next year for bond D?

uct line and has estimated the following cash flows associated with the expansion. The initial outlay w
 Decisi
on
(accep
Value
t
/reject
)

lowing cash flows associated with the expansion. The initial outlay will be Rs20,00,000, and the proje
Decisi
on
(accep
Value
t
/reject
)

hflow of a change in each of the items listed here. Assume a Rs100 increase in each case and a 30 pe

Impact on CASHFLOW

with similar risk for the Bahamas Recreation Corporation (BRC). BRC require an annual return of 15
Deepwater Fishing New Submarine Ride
-200,000 ###
50,000 ###
250,000 ###
 25% 23%

torsports is considering whether to expand its product line that currently consists of skateboards to in

ears 1 through 3?

+ 1 mark)
A B C
Rs.7.0 Rs.4.0 Rs.3.0
10 yrs 10 yrs 10 yrs
Rs.300, Rs.200,
Rs.380,000
000 000
20% 30% 40%

st of 15%, and if the investments are mutually exclusive, which should it undertake?
e investments are independent of one another, which should it undertake?
erest 24 times in 6 years

ay this amount in 8 equated annual installments. How much would be your Equated Annual Installme

me amount at the end of the term. How much would he get by the end of the 10 th year if he deposits

the end of the 20th year, you will get Rs.500000 as the maturity amount. How much rate of return wo

the end of the 20th year, you will get Rs.500000 as the maturity amount. What would be the value of

eriod of 5 years, changes from 60 to 65; find the change in YTM

e YTM is expected to increase by 1% one year from now. Find the percent change in the price.

ar if YTM is 9%?

nounces that it plans to increase its DPR from 25% to 50% from the third year onwards? Assume the

0%, and the discount rate is 20%. Find the implicit ROI of the firm.

l investment of Rs. 100000 and yields Rs. 25000 future free cash flows for the next ten years. If the fi

ars and earn 5.45% interest per year. However, you cannot start saving for four years. How much wi

per year, immediately making the first deposit. You plan to deposit the funds in a mutual fund which

today at t = 0. The project will generate positive cash flows of Rs. 60,000 a year at the end of each o
 A and B, that would each require an initial cash outflow of $10,000. They would generate the followi
Project B
$5,000 $3,000
4,000 4,000
3,000 6,000
he project with higher NPV?

$100,000 and a net present value of $50,000?

ginally cost $20,000, of which 75% has been depreciated. Bing can sell the used equipment today for

wns, free and clear, and it would sell it for $100,000 (whenever it intends) after taxes if it decides not

Bond A: 10-year, 10% coupon bond

Bond B: 10-year, zero-coupon bond
rates decrease from 13.5% to 12%.

f $1,000. If these bonds are trading at $ 975.75, what is the required rate of return by the market?
$1,00,000 and a maturity of 25 years. What is the return earned by holding the bond till maturity?

Rs.40 per share. Wald's dividend is expected to grow at a constant rate of 7% per year. What is the e

s expected to be a constant 8% for three years, after which the growth rate is expected to be 10%. In
nsion. The initial outlay will be Rs10,00,000, and the project will generate cash flows of Rs 1,780,000
20,00,000, and the project will generate cash flows of Rs 3,00,000 per year for 10 years. The appropr

n each case and a 30 percent tax rate. (2 marks)

e an annual return of 15 percent. Which project should you choose? Why? (1 + 1 mark)
sists of skateboards to include gas-powered skateboards. The company feels it can sell 3,000 of these
quated Annual Installment?

10 th year if he deposits that amount for another five years from the maturity at the same interest rate

w much rate of return would you get if you invested in this policy Answer box on the following pag

at would be the value of this policy in the 15th year at the implicit rate of return?
nge in the price.

r onwards? Assume the current dividend to be Rs. 10, ROE be 10% and discount rate be 15%

e next ten years. If the firm's capital cost is 12%, how much increase in firm value is expected if they

our years. How much will you have at the end of 14 years?

s in a mutual fund which you expect to return 8.5% per year. Under these conditions, how much will y

year at the end of each of the next five years. The project’s NPV is Rs. 75,000 and the cost of capital
uld generate the following incremental, after-tax, operating cash flows:

sed equipment today for $6,000, and its tax rate is 40%. What is the equipment’s net after-tax salvag

er taxes if it decides not to open the new office. The equipment costing $65,000 would be fully depre

return by the market?

 he bond till maturity?

% per year. What is the expected year-end dividend, D1?

s expected to be 10%. Investo9rs require a return of 16% on stocks like Attot. What should the price o
flows of Rs 1,780,000 per year for 10 years. The appropriate discount rate is 10 percent. Calculate th
10 years. The appropriate discount rate is 10 percent. Calculate the IRR.
can sell 3,000 of these per year for 4 years (after which time this project is expected to shut down, w
the same interest rate?

on the following page

nt rate be 15%

ue is expected if they take up this project?

tions, how much will you have at the end of 5 years from now?

and the cost of capital is 10 percent. What is the initial investment to be made in this project?
nt’s net after-tax salvage value for use in a capital budgeting analysis?

0 would be fully depreciated by SLM over the project's 3-year life. If the new working capital require
What should the price of Attot’s stock be?
0 percent. Calculate the NPV.
ected to shut down, with solar-powered skateboards taking over). Each gas-powered skateboard wou
in this project?
orking capital required is $18,000 which stays constant over the project life is recovered fully in the
wered skateboard would have variable costs of Rs 100 and sell for Rs. 500; annual fixed costs associa
recovered fully in the end. If the annual revenues are $150,000 and operating costs excluding deprec
ual fixed costs associated with production would be Rs 600,000. In addition, there would be a Rs. 200
costs excluding depreciation amounts to $25,000 what is the project's NPV? Tax rate = 35% and cost
ere would be a Rs. 2000,000 initial expenditures associated with the purchase of new production equi
x rate = 35% and cost of capital is 12%.
of new production equipment. It is assumed that the straight-line method would be used (for tax purp
be used (for tax purpose) to depreciate this initial expenditure down to zero over 4 years. Working c
ver 4 years. Working capital investment at time zero is Rs.100,000 and estimated selling price of the
ed selling price of the machinery is Rs.250,000 Finally, the firm’s marginal tax rate is 30 percent.
rate is 30 percent.