Class no 1
1.A company’s share is currently selling for Tk. 80. The next expected dividend is Tk. 8, and
dividends are expected to grow at 6% per year.
Q: Calculate the cost of equity. Answer:16%
2.A firm issues new equity shares at Tk. 100 each, with flotation costs of Tk. 5 per share. The
next dividend is expected to be Tk. 8, and the growth rate is 5%.
Q:Compute the cost of new equity capital. Answer:13.42%
[Link] the following data:
• Risk-free rate = 5%
• Expected market return = 12%
• Beta of the company = 1.3
Q: Find the cost of equity using CAPM.
4. A company’s equity share sells for Tk. 50 and pays a constant dividend of Tk. 5 per share
annually.
Q:Determine the cost of equity.
5.A company plans to issue new equity shares. The expected dividend next year is Tk. 8, and
dividends are expected to grow at 6% per year indefinitely.
The current market price is Tk. 100 per share, but flotation cost is estimated at 8% of the issue
price.
Q:Compute the cost of new equity
6.A company’s beta is 1.25. The risk-free rate is currently 6%, and the expected market return is
12%.
However, analysts expect that the market risk premium will fall by 1% in the coming year, and
the risk-free rate will rise by 0.5%.
(a) Find the current cost of equity.
(b) Estimate the new cost of equity next year if the forecasts hold true.
Bond
1. A company issues 5-year bonds with a face value of Tk. 1,000 at a price of Tk. 950.
The coupon rate is 10%, payable annually. Compute the before-tax cost of debt (YTM).
2. A firm issues a 10-year, Tk. 1,000 bond at Tk. 900 with a coupon rate of 12%.
The company’s tax rate is 30%. Find the after-tax cost of debt.
3. A 6-year, Tk. 1,000 par value bond carrying 10% interest is issued at Tk. 940.
Flotation cost is Tk. 20 per bond, and redemption will occur at par.
The firm’s tax rate is 25%. Calculate the after-tax cost of debt.
4. A 7-year bond with a face value of Tk. 1,000 is issued at Tk. 1,050.
The coupon rate is 9% per annum, and the tax rate is 30%. Determine the after-tax YTM cost of
debt.
5. A company issues Tk. 1,000 face value bonds at Tk. 920 with a 12% coupon rate.
The firm’s tax rate is 35%. Find the after-tax cost of debt
6. A firm issues 10% debentures of Tk. 1,000 each at Tk. 950 with Tk. 10 flotation cost per bond.
The tax rate is 30%. Compute the after-tax cost of debt
P/S Math
1.A company issues Tk. 100 par value preferred shares with a dividend rate of 12%. The shares
are currently selling at Tk. 110. Calculate the cost of preferred stock
2. A 9% preferred stock with a par value of Tk. 100 is currently selling for Tk. 120. Compute the
cost of preferred stock.
3. A company issues 10% preferred shares at Tk. 90 per share. Each share will be redeemed at
Tk. 100 after 5 years. Calculate the cost of preferred stock.
Class No-02
1.A company has the following capital structure:
• Debt: Tk. 400,000 (Cost of debt before tax = 10%)
• Preferred Stock: Tk. 100,000 (Cost = 12%)
• Equity: Tk. 500,000 (Cost = 15%)
• Corporate tax rate = 30%
Required: Calculate the Weighted Average Cost of Capital (WACC)
2. A firm has:
• Bonds (Debt): Tk. 600,000, interest rate 9%
• Equity: Tk. 900,000, cost of equity 14%
• Tax rate = 25%
Required:Find the firm’s after-tax WACC.
[Link] capital structure of XYZ Ltd. is as follows:
• Ordinary shares: Tk. 800,000, cost of equity = 16%
• Preference shares: Tk. 200,000, cost = 10%
• Long-term debt: Tk. 500,000, cost = 8%
• Corporate tax rate = 35%
Required:Compute the WACC.
4. ABC Company’s current share price is Tk. 50.
Last dividend paid (D₀) = Tk. 4.
Expected dividend growth rate (g) = 6%.
Cost of debt = 9%, Debt = Tk. 400,000, Equity = Tk. 600,000, Tax = 30%.
Required:1. Calculate cost of equity (using Dividend Growth Model).
2. Then compute the WACC.
5. ABC Ltd. has paid a dividend of Tk. 4 per share last year (D₀).
The expected dividend growth rate is 5% per year.
The current market price of the share is Tk. 50.
The company has:
• Debt = Tk. 500,000 at 9% interest
• Equity = Tk. 700,000
• Tax rate = 30%
Required:
1. Calculate the cost of equity (Ke) using the Dividend Growth Model.
2. Compute the WACC.
6. A company’s bonds have a face value of Tk. 1,000, 10% coupon rate, and 10 years to maturity.
The current market price of the bond is Tk. 950.
Corporate tax rate = 35%.
The company also has:
• 50% debt and 50% equity in its capital structure.
• Cost of equity = 13%.
Required:
1. Estimate the before-tax cost of debt
2. Find the after-tax cost of debt.
3. Calculate the WACC.
7. XYZ Ltd. has the following information:
• Risk-free rate (Rf) = 6%
• Market return (Rm) = 12%
• Beta (β) = 1.3
• Debt = Tk. 400,000 (cost = 9%)
• Equity = Tk. 600,000
• Tax rate = 25%
Required:
1. Compute Cost of Equity
2. Calculate the WACC.
8. The company has the following capital structure:
• Equity = Tk. 800,000, cost = 15%
• Preference shares = Tk. 200,000, cost = 10%
• Bonds = Tk. 500,000, 8% coupon, selling at 95% of face value, 10 years to maturity
• Tax rate = 30%
Required:
1. Calculate the after-tax cost of debt using the bond yield approximation formula.
2. Compute the WACC.
9. DEF Ltd. expects a dividend next year of Tk. 6 per share.
Current share price = Tk. 60.
Growth rate = 8%.
Retained earnings = Tk. 300,000 (same cost as equity).
Debt = Tk. 400,000, interest rate 9%.
Personal Tax rate = 25%.
Required:
1. Find cost of equity (Ke).
2. Calculate after-tax cost of debt.
3. Determine WACC.
Class no:03(capital Budgeting)
XYZ Co. has two projects which requires equal investment of Tk. 4,00,000. The expected Cash
Inflows are given bellow:
year project X project Y
1 1,50,000 2,50,000
2 1,80,000 1,30,000
3 2,00,000 1,00,000
The project will have a Scrap value of Tk 1,00,[Link] cost of capital is 10%, and Tax Rate 20%.
Requirements:
1. Compute the PBP & ARR
2. Compute NPV and IRR
3. Determine which project should be selected & why?
Assignment On:Capital Budgeting Questions
Section A: Payback Period (PBP)
Question 1: Basic Payback Period
ABC Ltd. is considering an investment of Tk. 250,000 in a new machine. The expected
cash inflows are as follows:
Year | Cash Inflow (Tk.)
1 | 50,000
2 | 75,000
3 | 80,000
4 | 70,000
5 | 60,000
Requirement:(a) Determine the payback period of the project.
(b) If the company’s maximum acceptable payback period is 4 years, should the project
be accepted?
Question 2: Uneven Cash Flow and Partial Recovery
A project requires an initial investment of Tk. 180,000. It is expected to generate the
following cash inflows:
Year | Cash Inflow (Tk.)
1 | 40,000
2 | 50,000
3 | 60,000
4 | 50,000
5 | 40,000
Requirement:
Calculate the exact payback period (including fractions of a year) and interpret the result.
Section B: Net Present Value (NPV)
Question 3: Basic NPV Calculation
A project costs Tk. 400,000 and is expected to produce annual cash inflows of Tk.
120,000 for 5 years. The cost of capital is 10%.
Requirement:
(a) Compute the NPV of the project using discount factors.
(b) Should the project be accepted?
Question 4: NPV with Uneven Cash Flow
A new investment requires Tk. 500,000. The project will generate the following cash
inflows:
Year | Cash Inflow (Tk.)
1 | 100,000
2 | 150,000
3 | 200,000
4 | 150,000
5 | 100,000
If the required rate of return is 12%,
Requirement:
(a) Compute the NPV.
(b) Comment on the project’s feasibility.
Question 5: NPV with Salvage Value
A firm invests Tk. 600,000 in equipment that has a life of 5 years and a salvage value of
Tk. 100,000. The annual cash inflow is Tk. 170,000, and the cost of capital is 10%.
Requirement:
Calculate the NPV and interpret the decision.
Section C: Internal Rate of Return (IRR)
Question 6: IRR by Trial and Error
An initial investment of Tk. 200,000 generates cash inflows of Tk. 60,000, Tk. 80,000,
Tk. 90,000, and Tk. 70,000 over the next four years.
Requirement:
(a) Compute the NPV at 10% and 15%.
(b) Estimate the IRR using interpolation.
(c) Should the project be accepted if the cost of capital is 12%?
Question 7: Comparing NPV and IRR
A project requires Tk. 300,000 and generates cash inflows of Tk. 100,000 per year for 4
years.
Requirement:
(a) Calculate the NPV at 10%.
(b) Calculate the IRR approximately.
(c) Interpret your findings and explain which method (NPV or IRR) is more reliable.
Section D: Mutually Exclusive Projects
Question 8: Project A vs. Project B
Two projects require equal investments of Tk. 400,000. The expected cash inflows are as
follows:
Year | Project A (Tk.) | Project B (Tk.)
1 | 150,000 | 250,000
2 | 150,000 | 200,000
3 | 150,000 | 100,000
The cost of capital is 10%.
Requirement:
(a) Compute the Payback Period of each project.
(b) Compute the NPV of each project.
(c) Determine which project should be selected based on each criterion and explain the
possible conflict between NPV and PBP methods.
Question 9: NPV vs IRR Conflict
Two projects, X and Y, are mutually exclusive. The company’s cost of capital is 12%.
Year | Project X (Tk.) | Project Y (Tk.)
0 | (400,000) | (400,000)
1 | 250,000 | 50,000
2 | 150,000 | 150,000
3 | 100,000 | 250,000
4 | 50,000 | 350,000
Requirement:
(a) Compute the NPV of both projects at 12%.
(b) Estimate the IRR of each project.
(c) Explain which project should be selected under each method and which criterion is
more suitable for mutually exclusive projects.
Question 10: Advanced Capital Budgeting Decision
A company has Tk. 600,000 to invest and is evaluating two mutually exclusive projects.
Year | Project M (Tk.) | Project N (Tk.)
0 | (600,000) | (600,000)
1 | 200,000 | 300,000
2 | 200,000 | 200,000
3 | 200,000 | 150,000
4 | 150,000 | 100,000
The company’s required rate of return is 10%.
Requirement:
(a) Calculate the PBP, NPV, and IRR for each project.
(b) Which project should be chosen and why?
(c) Discuss how qualitative factors could influence the final decision beyond these
calculations.
Last class(Dividend Policy)
Company A has the following information:
EPS (Earnings Per Share): Tk 8 (E)
Dividend Per Share: Tk 4 (D)
Internal rate of Return (r): 12%
Cost of equity (k): 10%
Requirement:
Find the Market Price of the Share using Walter's Model.
Question:A company is expected to pay a dividend of Tk. 5 next year.
The expected growth rate of dividends is 6%, and the cost of equity is 12%.
Find out the market price per share using Gordon’s Growth Model.
Q2 :If the company increases its dividend to Tk. 6 while keeping growth (6%) and cost of equity
(12%) constant, what will be the new price?
Leverage math example 13-12:***
Cables Inc., a computer cable manufacturer, expects sales of 20,000 units at $5 per unit in the
coming year and must meet the following obligations: variable operating costs of $2 per unit,
fixed operating costs of $10,000, interest of $20,000, and preferred stock dividends of $12,000.
The firm is in the 40% tax bracket and has 5,000 shares of common stock outstanding.
Table 12.7 presents the levels of earnings per share associated with the expected sales of
20,000 units and with sales of 30,000 units. The table illustrates that as a result of a 50%
increase in sales (from 20,000 to 30,000 units), the firm would experience a 300% increase in
earnings per share (from $1.20 to $4.80). Although it is not shown in the table, a 50% decrease
in sales would, conversely, result in a 300% decrease in earnings per share. The linear nature of
the leverage relationship accounts for the fact that sales changes of equal magnitude in
opposite directions result in EPS changes of equal magnitude in the corresponding direction. At
this point, it should be clear that whenever a firm has fixed costs—operating or financial—in its
structure, total leverage will exist.