1. Treasury Management- Numericals KAMAL K JINDAL

2. Problem 1 The following information is available about an equity share The following information is available about an equity share Price at the beginning of the year : Rs 60 Price at the beginning of the year : Rs 60 Price at the end of the year : Rs 66 Price at the end of the year : Rs 66 Dividend paid :Rs 2.40 towards the end to the year Dividend paid :Rs 2.40 towards the end to the year The current yield on this share is The current yield on this share is A] 4% A] 4% B] 10% B] 10% C] 14% C] 14% D] none of these D] none of these

3. Problem 1…Solution The answer is A The answer is A The current yield is The current yield is =Annual Income/beginning price =Annual Income/beginning price 2.40/60=0.04 or 4% 2.40/60=0.04 or 4%

4. Problem 2 The following information is available about an equity share The following information is available about an equity share Price at the beginning of the year : Rs 60 Price at the beginning of the year : Rs 60 Price at the end of the year : Rs 66 Price at the end of the year : Rs 66 Dividend paid :Rs 2.40 towards the end to the year Dividend paid :Rs 2.40 towards the end to the year The capital gains on this share is The capital gains on this share is A] 4% A] 4% B] 10% B] 10% C] 14% C] 14% D] none of these D] none of these

5. Problem 2…solution The answer is B The answer is B Capital gains/loss is Capital gains/loss is =[ending price-beginning price]/beginning price =[ending price-beginning price]/beginning price [66-60]/60 =0.10 or 10% [66-60]/60 =0.10 or 10%

6. Problem 3 The following information is available about an equity share The following information is available about an equity share Price at the beginning of the year : Rs 60 Price at the beginning of the year : Rs 60 Price at the end of the year : Rs 66 Price at the end of the year : Rs 66 Dividend paid :Rs 2.40 towards the end to the year Dividend paid :Rs 2.40 towards the end to the year The rate of return on this share is The rate of return on this share is A] 4% A] 4% B] 10% B] 10% C] 14% C] 14% D] none of these D] none of these

7. Problem 3…solution The answer is C The answer is C Annual Income+ [ending price-beginning price] Annual Income+ [ending price-beginning price] ROR = --------------------------------------------------------------- ROR = --------------------------------------------------------------- beginning price beginning price = 2.40+[66-60]/60 =0.14 or 14% = 2.40+[66-60]/60 =0.14 or 14%

8. Problem 4 A Rs 1000 bond matures in 20 years and offers a 9% coupon rate. A Rs 1000 bond matures in 20 years and offers a 9% coupon rate. The required rate of return is 11% The required rate of return is 11% The present value annuity factor [PVAF] for 11% and 20 payments is 7.963 The present value annuity factor [PVAF] for 11% and 20 payments is 7.963 The present value factor for 11% and 20 years is 0.124 The present value factor for 11% and 20 years is 0.124 The bond’s intrinsic value is The bond’s intrinsic value is The answer is The answer is A] Rs 800 A] Rs 800 B] Rs 900 B] Rs 900 C] 1100 C] 1100 D] none of these D] none of these

9. Problem 4..solution The answer is D The answer is D A Rs 1000 bond matures in 20 years and offers a 9% coupon rate.The required rate of return is 11%The present value annuity factor [PVAF] for 11% and 20 payments is 7.963The present value factor[PVF] for 11% and 20 years is 0.124Compute the bond’s intrinsic value A Rs 1000 bond matures in 20 years and offers a 9% coupon rate.The required rate of return is 11%The present value annuity factor [PVAF] for 11% and 20 payments is 7.963The present value factor[PVF] for 11% and 20 years is 0.124Compute the bond’s intrinsic value The present value of the interest payments is obtained by PVAF [ 11% 20 years ] The present value of the interest payments is obtained by PVAF [ 11% 20 years ] PV=interest*PVAF[ 11% 20 years ] PV=interest*PVAF[ 11% 20 years ] = Rs 90*7.963=Rs 719.67 = Rs 90*7.963=Rs 719.67 The PV of the Rs 100 principal repayment is obtained by using PVF [11% 20 years] The PV of the Rs 100 principal repayment is obtained by using PVF [11% 20 years] PV =amount*PVF [11% 20 years]] PV =amount*PVF [11% 20 years]] =Rs 1000*0.124 =Rs 124 =Rs 1000*0.124 =Rs 124 Bond’s intrinsic value is Rs 840.67 i.e. [Rs 716.67+Rs 124] Bond’s intrinsic value is Rs 840.67 i.e. [Rs 716.67+Rs 124] Since discount rate exceed the coupon rate, the bond’s intrinsic value is less than its face value Since discount rate exceed the coupon rate, the bond’s intrinsic value is less than its face value

10. Problem 5 A Rs 5000 bond with a 10% coupon rate matures in 8 years and currently sell at 97% A Rs 5000 bond with a 10% coupon rate matures in 8 years and currently sell at 97% The investor expects a return not less than 11% The investor expects a return not less than 11% PVAF[11% 8 years] is 5.146 and PVF[11% 8 years] is 0.434 PVAF[11% 8 years] is 5.146 and PVF[11% 8 years] is 0.434 Is this bond a desirable investment for the investor? Is this bond a desirable investment for the investor? The answer is The answer is A] Yes A] Yes B] No B] No C] It depend upon the Issuer’s standing C] It depend upon the Issuer’s standing D] None of these D] None of these

11. Problem 5..solution The answer is B The answer is B The present value of the Bond is The present value of the Bond is PV=interest*PVAF +Face value*PVF PV=interest*PVAF +Face value*PVF = Rs 500*5.146 +Rs5000*0.434 = Rs 500*5.146 +Rs5000*0.434 = Rs 4743 = Rs 4743 Current price =Rs 5000*97% = Rs 4850 Current price =Rs 5000*97% = Rs 4850 Since the bond is available at a price higher than its present value of returns, the investment in bond is not desirable Since the bond is available at a price higher than its present value of returns, the investment in bond is not desirable

12. Problem 6 Vikas industries seek your advice to price their Debenture Issue so as to provide yield of 16% to investors. Other details are : Vikas industries seek your advice to price their Debenture Issue so as to provide yield of 16% to investors. Other details are : Face value :Rs 100 Face value :Rs 100 Term to maturity : 7 years Term to maturity : 7 years Coupon rate years 1-2 8%p.a. years 3-4 12%p.a. Years 5-7 15%p.a. Coupon rate years 1-2 8%p.a. years 3-4 12%p.a. Years 5-7 15%p.a. Redemption : 5% premium Redemption : 5% premium PVF for year 1 to 7 are 0.862, 0.743,0.641,0.552,0.476,0.410 and 0.354 respectively PVF for year 1 to 7 are 0.862, 0.743,0.641,0.552,0.476,0.410 and 0.354 respectively R & D inform you that current rate of interest on similar debenture is 15% R & D inform you that current rate of interest on similar debenture is 15% The answer is The answer is A] Rs 80.93 A] Rs 80.93 B] Rs 81.50 B] Rs 81.50 C] Rs 82 C] Rs 82 D] Rs 82.93 D] Rs 82.93

13. Problem 6..solution The interest payments over the debenture term and their present values are The interest payments over the debenture term and their present values are The PV of redemption value Rs 105[Rs 100+Rs 5] @ 16% is Rs 105*0.354 =Rs 37.17 The PV of redemption value Rs 105[Rs 100+Rs 5] @ 16% is Rs 105*0.354 =Rs 37.17 PV of the Debenture is Rs 45.75+Rs 37.17=Rs 82.93 PV of the Debenture is Rs 45.75+Rs 37.17=Rs 82.93 The company can be advised to issue debenture at this value in order to yield a return of 16% to the investors The company can be advised to issue debenture at this value in order to yield a return of 16% to the investors yearintt pvf@ 16% pv 18.8626.896 28.7435.944 312.6417.692 412.5526.624 515.4767.140 615.4106.150 715.3545.310 45.75

14. Problem 7 You are approached for investment advice by an investor.He has been offered shares in the negotiated deal @ Rs 60 by a company’s promoter, the following information is made available You are approached for investment advice by an investor.He has been offered shares in the negotiated deal @ Rs 60 by a company’s promoter, the following information is made available Share capital [Rs 20 each] Rs 50,00,000 Share capital [Rs 20 each] Rs 50,00,000 Reserve and surplus Rs 5,00,000 Reserve and surplus Rs 5,00,000 15% secured loans Rs 25,00,000 15% secured loans Rs 25,00,000 12.5% unsecured loans Rs 10,00,000 12.5% unsecured loans Rs 10,00,000 Fixed assets Rs 30,00,000 Fixed assets Rs 30,00,000 Investments Rs 5,00,000 Investments Rs 5,00,000 Operating profit Rs 25,00,000 Operating profit Rs 25,00,000 Tax rate 50% Tax rate 50% P/E Ratio 12.5 P/E Ratio 12.5 The answer is The answer is A] buy A] buy B] buy @ Rs 55 per share B] buy @ Rs 55 per share C] buy @ Rs 50 per share C] buy @ Rs 50 per share D] do not buy D] do not buy

15. Solution Value =EPS xP/E ratio Value =EPS xP/E ratio P/E is already given as 12.5 P/E is already given as 12.5 EPS can be calculated as under : EPS can be calculated as under : Operating profit i.e.EBIT Rs 25,00,000 less intt on 15% loan 3,75,000 less intt on loan 1,25,000 Operating profit i.e.EBIT Rs 25,00,000 less intt on 15% loan 3,75,000 less intt on loan 1,25,000 Profit before tax i.e.EBT Rs 20,00,000 Profit before tax i.e.EBT Rs 20,00,000 Less Tax @ 50% Rs 10,00,000 Less Tax @ 50% Rs 10,00,000 Profit after tax i.e.E Rs 10,00,000 Profit after tax i.e.E Rs 10,00,000 Equity shares[Rs50,00,000/20] 2,50,000 Equity shares[Rs50,00,000/20] 2,50,000 EPS [10,00,000/2,50,000] 4 EPS [10,00,000/2,50,000] 4 Value of the share =EPS xPE=12.5 x4 =Rs 50 Value of the share =EPS xPE=12.5 x4 =Rs 50 The answer is C The answer is C

16. Problem 8 Vivek Ltd currently has 100,000 shares in issue. It just paid dividend @Rs 15 per share and expects to maintain this dividend for the next 3 years but will then demonstrate perpetual growth of 10% p.a. The required rate of return of the equity investor is estimated to be 18% Vivek Ltd currently has 100,000 shares in issue. It just paid dividend @Rs 15 per share and expects to maintain this dividend for the next 3 years but will then demonstrate perpetual growth of 10% p.a. The required rate of return of the equity investor is estimated to be 18% The company has an investment opportunity which will involve a capital outlay in each of the next 2 years which will bring benefits in next 3 years as per details below.. The company has policy of not using debt finance The company is not willing to issue fresh equity due to depressed capital market The company has an investment opportunity which will involve a capital outlay in each of the next 2 years which will bring benefits in next 3 years as per details below.. The company has policy of not using debt finance The company is not willing to issue fresh equity due to depressed capital market Finnacial implications of are year cash flow[Rs in 000s] 1 -1000 2 -1000 3 100 4 1300 5 3100 Finnacial implications of are year cash flow[Rs in 000s] 1 -1000 2 -1000 3 100 4 1300 5 3100 The company is thinking of reducing the dividend payout in next 2 years if the investment is acceoted. However, it wll be able to maintain growth in dividend@10% because of other operations The company is thinking of reducing the dividend payout in next 2 years if the investment is acceoted. However, it wll be able to maintain growth in dividend@10% because of other operations The company seek your advice whether investment will lead to share holder value maximisation The company seek your advice whether investment will lead to share holder value maximisation

17. solution [A] When the investment proposal is not accepted [A] When the investment proposal is not accepted The present value of dividend for the next 3 years: dividend per year Rs 15 PVAF[18%,3 years] 2.174 The present value of dividend for the next 3 years: dividend per year Rs 15 PVAF[18%,3 years] 2.174 PV of dividends Rs 32.61 PV of dividends Rs 32.61 SHARE PRICE at the end of 3 years SHARE PRICE at the end of 3 years D[1+g]/k-g D[1+g]/k-g 15[1+0.10]/0.18-0.10=Rs206.25 15[1+0.10]/0.18-0.10=Rs206.25 Pv of this amount @18% for 3 years Rs 206.25 x0.609=Rs125.61 Pv of this amount @18% for 3 years Rs 206.25 x0.609=Rs125.61 Present market price is [Rs125.61+Rs 32.61]=Rs 158.22 Present market price is [Rs125.61+Rs 32.61]=Rs 158.22 [B] [B]

18. Solution..contd If the investment proposal is accepted If the investment proposal is accepted Pv of dividends=54.29 Pv of dividends=54.29 The share price D[1+g]/k-g The share price D[1+g]/k-g 18.20[1+.10]/.18-.10 =Rs 250 18.20[1+.10]/.18-.10 =Rs 250 PV of this amount@18% for 5 years PV of this amount@18% for 5 years RS 250 x 0.437=Rs 109.25 RS 250 x 0.437=Rs 109.25 Market price =54.29+109.25=Rs 163.54 Market price =54.29+109.25=Rs 163.54 yrOD CDCDCDCD NDNDNDNDPVFPV 115-105.8474.24 215-105.7183.59 315116.6099.74 416.513 29. 5.51615.22 518.231 49. 2.43721.50