Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition

Copyright © 2014 by McGraw Hill Education (India) Private Limited

Chapter 8
TIME VALUE OF MONEY
1. Your firm borrows Rs.15,000,000 at an interest rate of 12% per year and the loan is to be
repaid in 5 equal installments payable at the end of each of the next 5 years.

(i) What is the annual installment payable? 4161119

(ii) What proportion of the installment payable at the end of year 3,
represents the principal repayment portion? 2961787

2. If the interest rate is 13 percent, what is the doubling period as per the rule of 69?

3. Your company is taking a loan of 1,000,000, carrying an interest rate of 15 percent. The
loan will be amortised in five equal installments. What fraction of the installment at the
end of second year will represent principal repayment?

4. Calculate the value 10 years hence of a deposit of Rs.20,000 made today if the interest
rate is (a) 4 percent, (b) 6 percent, (c) 8 percent, and (d) 9 percent.

5. If you deposit Rs.2,000 today at 6 percent rate of interest in how many years (roughly)
will this amount grow to Rs.32,000 ? Work this problem using the rule of 72–do not use
tables.

6. A finance company offers to give Rs.20,000 after 14 years in return for Rs.5,000
deposited today. Using the rule of 69, figure out the approximate interest rate offered.

7. Someone offers to give Rs.80,000 to you after 18 years in return for Rs.10,000
deposited today. Using the rule of 69, figure out the approximate interest rate offered.

8. You can save Rs.5,000 a year for 3 years, and Rs.7,000 a year for 7 years thereafter.
What will these savings cumulate to at the end of 10 years, if the rate of interest is 8
percent?

9. You plan to go abroad for higher studies after working for the next five years and
understand that an amount of Rs.2,000,000 will be needed for this purpose at that time.
You have decided to accumulate this amount by investing a fixed amount at the end of
each year in a safe scheme offering a rate of interest at 10 percent. What amount should
you invest every year to achieve the target amount?

10. At the time of his retirement, Rahul is given a choice between two alternatives: (a) an
annual pension of Rs.120,000 as long as he lives, and (b) a lump sum amount of
Rs.1,000,000. If Rahul expects to live for 20 years and the interest rate is expected to
be 10 percent throughout , which option appears more attractive
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

11. A leading bank has chosen you as the winner of its quiz competition and asked you to
choose from one of the following alternatives for the prize: (a) Rs. 60,000 in cash
immediately or (b) an annual payment of Rs. 10,000 for the next 10 years. If the interest
rate you can look forward to for a safe investment is 9 percent, which option would you
choose?

12. What is the present value of an income stream which provides Rs.30,000 at the end of
year one, Rs.50,000 at the end of year three , and Rs.100,000 during each of the years 4
through 10, if the discount rate is 9 percent ?

13. What is the present value of an income stream which provides Rs.1,000 a year for the
first three years and Rs.5,000 a year forever thereafter, if the discount rate is 12
percent?

14. Mr. Ganapathi will retire from service in five years .How much should he deposit now to
earn an annual income of Rs.240,000 forever beginning from the end of 6 years from
now ? The deposit earns 12 percent per year.

15. What is the present value of the following cash flow streams?

End of year Stream X Stream Y Stream Z

1 500 750 600
2 550 700 600
3 600 650 600
4 650 600 600
5 700 550 600
6 750 500 600
The discount rate is 18 percent.

16. Suppose you deposit Rs.200,000 with an investment company which pays 12 percent
interest with compounding done once in every two months, how much will this deposit
grow to in 10 years?

17. What is the difference between the effective rate of interest and stated rate of interest in
the following cases:

Case A: Stated rate of interest is 8 percent and the frequency of compounding is six
times a year.
Case B: Stated rate of interest is 10 percent and the frequency of compounding is four
times a year.
Case C: Stated rate of interest is 12 percent and the frequency of compounding is
twelve times a year.

18. You have a choice between Rs.200,000 now and Rs.600,000 after 8 years. Which would
you choose? What does your preference indicate?

19. Ravikiran deposits Rs.500,000 in a bank now. The interest rate is 9 percent and
compounding is done quarterly. What will the deposit grow to after 5 years? If the
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

inflation rate is 3 percent per year, what will be the value of the deposit after 5 years in
terms of the current rupee?

20. A person requires Rs.100,000 at the beginning of each year from 2015 to 2019. Towards
this, how much should he deposit (in equal amounts) at the end of each year from 2007
to 2011, if the interest rate is 10 percent.

21. What is the present value of Rs.120, 000 receivable annually for 20 years if the first
receipt occurs after 8 years and the discount rate is 12 percent.

22. After eight years Mr. Tiwari will receive a pension of Rs.10,000 per month for 20 years.
How much can Mr. Tiwari borrow now at 12 percent interest so that the borrowed
amount can be paid with 40 percent of the pension amount? The interest will be
accumulated till the first pension amount becomes receivable.

23. Metro Corporation has to retire Rs.20 million of debentures each at the end of 6, 7, and 8
years from now. How much should the firm deposit in a sinking fund account annually for
5 years, in order to meet the debenture retirement need? The net interest rate earned is
10 percent.

24. Anurag Limited borrows Rs.2,000,000 at an interest rate of 12 percent. The loan is to be
repaid in 5 equal annual installments payable at the end of each of the next 5 years.
Prepare the loan amortisation schedule.

Chapter 9
VALUATION OF SECURITIES
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

1. A Rs. 1000 par value bond, bearing a coupon rate of 12 % payable semi-annually will
mature after 5 years.

(i) If the required rate of return on the bond is 16 % p.a., what is its value?

(ii) If the bond is currently selling at Rs. 965, what is the approximate YTM per
annum?

2. The equity stock of Rajni Ltd. is currently selling for Rs. 280 per share. The expected
dividend a year from now is Rs. 20.00. The investors’ required rate of return on the stock
is 25%. If the constant growth model applies to Rajni Ltd. what is the expected growth
rate?

3. The equity stock of I-LABS Ltd is currently selling for Rs.465 per share. The expected
dividend a year from now is Rs.10.00. The investors’ required rate of return on the
stock is 20%. If the constant growth model applies to I-LABS Ltd what is the expected
growth rate?

4. The market price of a Rs.1000 par value bond carrying a coupon rate of 12 percent and
maturing after 5 years is Rs.1050.

What is the approximate YTM?

5. The market price of a Rs.1000 bond carrying a coupon rate of 9 percent and maturing
after 5 years is Rs.1050.

What is the approximate YTM?

6. The current dividend on an equity share of Monik Limited is Rs.8.00. Assume that the
dividend is expected to grow at a rate of 12 percent per year forever from now

7. A Rs.1, 000 par value bond, bearing a coupon rate of 7% will mature after 3 years.

(i) If the required rate of return on the bond is 10%, what is its value?
(ii) If the bond is currently selling at Rs.985, what is the approximate YTM?

8. Sigma’s target capital structure has 50 percent equity, 10 percent preference, and 40
percent debt. Sigma’s debt has a pre-tax cost of 8 percent. Sigma’s preference capital
consists of Rs.100 par, 9 percent, annual dividend, preference shares with a residual
maturity of 6 years. The market price of these shares is Rs.108. Sigma’s equity stock is
currently selling at Rs.60 per share. Its last dividend was Rs.2.40 per share and the
dividend per share is expected to grow at 10 percent per year in future. Sigma’s tax rate
is 30 percent.
(i) What is Sigma’s cost of preference? (Use the approximate yield formula)
(ii) What is Sigma’s required return on equity using the dividend discount model?
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

9. Sloppy Limited is facing gloomy prospects. The earnings and dividends are expected to
decline at the rate of 5 percent. The previous dividend was Rs.2.00. If the current market
price is Rs.10.00, what rate of return do investors expect from the stock of Sloppy
Limited?
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

Chapter 11
TECHNIQUES OF CAPITAL BUDGETING

1. Modern Pharmaceuticals is evaluating a project whose expected cash flows are as

follows:

Year Cash flow

0 -530,000
1 150,000
2 180,000
3 240,000
4 250,000

The cost of capital for Modern Pharmaceuticals is 15 percent.

(i) What is the NPV of the project?

(ii) What is the IRR of the project?
(iii) What is the BCR of the project?

2. Megatronics Limited is evaluating a project whose expected cash flows are as follows:

Year Cash flow

0 -500,000
1 100,000
2 200,000
3 300,000
4 100,000

(i) What is the NPV of the project if the cost of capital is 10 percent?
(ii) What is the IRR of the project?
(iii) What is the BCR?

3. You are evaluating a project whose expected cash flows are as follows :

Year Cash flow

0 -1,000,000
1 200,000
2 300,000
3 400,000
4 500,000

What is the NPV of the project (in '000s) if the discount rate is 10 percent for year 1
and rises thereafter by 2 percent every year?
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

4. Your company is considering two projects, M and N. Each of which requires an initial
outlay of Rs.240 million. The expected cash inflows from these projects are:

Year Project M Project N

1 85 100
2 120 110
3 180 120
4 100 90

What is the discounted payback period for each of the projects if the cost of
capital is 15 percent?

5. Shimla Municipality is considering two diiferent snowplows. The Gunning plow has an
economic life of 12 years, whereas the coulter plow has an economic life of 9 years. The
Gunning plow costs Rs.2.5 million and is expected to have a salvage value of Rs.0.8
million at the end of 12 years. The Coulter plow costs Rs.1.5 million and is expected to
have a salvage value of Rs.0.5 million after 9 years. The operating and maintenance
costs for the Gunning plow are expected to be Rs.0.25 million per year and the same
costs for the Coulter plow are expected to be Rs.0.32 million per year. The plows have
identical capacity. Whichever plow is chosen, Shimla Municipality will continue to replace
it with essentially the same machine indefinitely. If the discount rate is 12 percent, which
plow should be selected? Ignore taxes.

6. Sulabh International is evaluating a project whose expected cash flows are as follows:

Year Cash flow

0 (1,000,000)
1 100,000
2 200,000
3 300,000
4 600,000
5 300,000

(i) What is the NPV of the project, if the discount rate is 14 percent for the entire
period?
(ii) What is the NPV of the project if the discount rate is 12 percent for year 1 and rises
every year by 1 percent?

7. The cash flow streams for four alternative investments, A, B, C and D, are :

Year A B C D
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

0 (2,00,000) (3,00,000) (2,10,000) (3,20,000)

1 40,000 40,000 80,000 2,00,000
2 40,000 40,000 60,000 20,000
3 40,000 40,000 80,000 -
4 40,000 40,000 60,000 -
5 40,000 40,000 80,000 -
6 40,000 30,000 60,000 -
7 40,000 30,000 40,000 -
8 40,000 20,000 40,000 -
9 40,000 20,000 40,000 200,000
10 40,000 20,000 40,000 50,000

Calculate the payback period, net present value, internal rate of return, and benefit cost
ratio for the four alternatives and choose the best among them.

8. What is the internal rate of return of an investment which involves a current outlay of
Rs.300,000 and results in an annual cash inflow of Rs.60,000 for 7 years ?

9. If an equipment costs Rs.500,000 and lasts 8 years, what should be the minimum annual
cash inflow before it is worthwhile to purchase the equipment ? Assume that the cost of
capital is 10 percent.

10. Phoenix Company is considering two mutually exclusive investments, Project P and
Project Q. The expected cash flows of these projects are as follows :

Year Project P Project Q

0 (1,000) (1,600)
1 (1,200) 200
2 (600) 400
3 (250) 600
4 2,000 800
5 4,000 100

(i) What is the IRR of each project?

(ii) Which project would you choose if the cost of capital is 10 percent? 20 percent?

11. Your company is considering two mutually exclusive projects, A and B. Project A involves
an outlay of Rs.100 million which will generate an expected cash inflow of Rs.25 million
per year for 6 years. Project B calls for an outlay of Rs.50 million which will produce an
expected cash inflow of Rs.13 million per year for 6 years. The company's cost of capital
is 12 percent.

a. Calculate the NPV and IRR of each project

b. What is the NPV and IRR of the differential project (the project that reflects the
difference between Project B and Project A)
12. Your company is considering two projects, Project M and Project N, each of which
requires an initial outlay of Rs.50 million. The expected cash inflows from these projects
are :

Year Project M Project N

1 11 38
 Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited

2 19 22
3 32 18
4 37 10

(i) What is the payback period for each of the projects?

(ii) What is the discounted payback period for each of the projects if the cost of capital is
12 percent?
(iii) If the two projects are independent and the cost of capital is 12 percent, which
project(s) should the firm invest in?
(iv) If the two projects are mutually exclusive and the cost of capital is 10 percent, which
project should the firm invest in?
(v) If the two projects are mutually exclusive and the cost of capital is 15 percent, which
project should the firm invest in?
Prasanna Chandra: Fundamentals of Financial Management, 6 th Edition
Copyright © 2014 by McGraw Hill Education (India) Private Limited