Q1. A bond of Rs.

1000 bearing a coupon rate of 12% is redeemable at par in 10

years. Find out the value of the bond if:

i. Required rate of return is 12% or 10% or 14%

ii. Required rate of return is 14% and the maturity period is 8 years or 12
years.
iii. Required rate of return is 12% and redeemable at Rs.950 or at Rs. 1050
after 10 years.

Solution

(i) 12%

=120(PVIFA12,10) +1000(PVIF12,10)

120*5.650+1000*0.322

Q2. A bond of Rs. 10000 bearing coupon rate 12% and redeemable in 8 years at
par is bearing trade at Rs.10,600. Find out the YTM of the bond.

Q3. Consider the following information:

Expected return on market 15%
Required rate of return on stock X as per 13.2%
CAPM
Beta of stock X 0.8
Expected rate of return on stock X 15%

Is the stock underpriced or over priced?

Q4. A bond has a face value of Rs. 1000 and coupon rate of 8% Find out its value
if the required rate of return is 6% in each of the following cases.

1. The bond has a maturity life of 20 years. (1229)

2. The bond has maturity life of 5 years.(1084)

Q5. A company pays a dividend of 20% on the equity shares of face value of Rs.100
each. Find out the value of the equity share given that the dividend rate is expected
to remain same and the required rate of return of the investor is 15 %.
Q6. A company is paying a dividend of Rs. 1.50 per share. The rate of dividend is
expected to grow at 10% for the next three years and 5% thereafter infinitely. Find
out the value of the share given that the required rate of the investor is 15%.

Q7. A firm’s current EPS is Rs. 5 and is expected to grow 5% every year. The firm
maintains dividend payout ratio of 60%. An investor requiring a rate of return of
15% buys the share with the intention of keeping it for 3 years after which he
expects to sell the share at P/E ratio of 12. Find out the value of the share.

Q8.A Ltd. Is expected to pay a dividend of Rs. 1.50 with a growth rate at 7%. The
risk-free rate, Ip is 9% and the market rate of return, k m is 13% presently, the firm
has a B, beta factor of 1.50. However, due to a decision of the finance manager,
Beta is likely to increase to 1.75. Find out the present value as well as the likely
value of the share after the decision.

Q.9 A Rs.1000 bond matures in 20 years and offers a 9% interest. The required
rate of return is 11%. What is Bond’s value.

Q.10 Details on the Capital Structure of Brighton Limited are provided below. The company
wants to understand how much should be the minimum return it should generate on its
assets so that it can continue its business profitably.

5000, 8% 10 year Bonds issued 3 years ago, each having a Face Value Rs.100 Rs. 500,000
These bonds are currently trading at Rs.102 each
400, 9% preference shares issued 2 years ago, each having a Face Value Rs.400,000
Rs.1000
These are redeemable 6 years from now & currently trade at 98% of Face
Value
1000 Equity shares issued 5 years ago (Face Value Rs. 100) Rs.100,000
These shares are currently trading at Rs.156
Investors expect the company to announce a dividend of Rs.16
Investors also expected the dividends to grow at constant rate of 3%
Applicable income tax rate for Company 35%

Q11. Alchemy Limited issued a 15 year bond 3 years ago. The bond pays 9% p.a. and is
currently trading at 105% of its par value of Rs.100.
(a) What is the (i) Coupon Rate (ii) Yield to Maturity (iii) Post tax Cost of Debt for the
Company?

The company also has issued Rs.1000 par value preference shares. These carry 10% dividend
rate and are redeemable 7 years from now.
(b) If these are trading at par; what is the (i) Pre tax and (ii) Post tax Cost of Preference
Capital the Company?
If 10 year Government Securities are yielding 7.5% and the Equity Market premium is 5%;
The company’s shares are considered volatile. It has been observed that Alchemy’s shares
fall twice as much as the market falls & rise twice as much as the markets rise.
 (c) Find out the Cost of Equity for Alchemy Limited.

The company proposes to raise funds amounting to Rs.1000 crores for funding an expansion
project. It is likely to raise this amount equally from all the above 3 long term sources of
Funds.
(d) What according to you would be the Company’s average cost of raising funds?

Assume income tax at 30%?

Q12. Following information is provided:

Stock A B
Expected return 32% 27%
Beta 1.5 0.7
Returns of T- Bill is 20% and return of Sensex is 28%. Calculate the return as per
CAPM for each of the company’s stock. Plot them on SML. Identify whether they are
underpriced, overpriced or correctly priced and advise accordingly.

Q13. Returns of T- Bill is 7%. Calculate the return as per CAPM for each of the
company’s stock. Plot them on SML. Identify whether they are underpriced,
overpriced or correctly priced and advise accordingly.

Stock expected Standard Beta

Return Deviation

Infosys 24% 43% 0.7

HUL 19% 26% 0.5

Reliance 11% 39% 1.2

Industries

SBI 15% 39% 1.2

Sensex 15% 24%

14. Mr. Bansal is aged 50 today. He would retire at the age of 60. After
retirement, in order to receive Rs. 200,000 annually until the age of 72 how
much should he invest today? Assume rate of interest of 9%

15. An investor deposits Rs.10000 in a fixed deposit account for 5 years at 8%

rate of interest. Find out the amount which he will have at maturity if interest
is compounded (i) Annually (ii) Semi-Annually (iii) Quarterly (iv) Monthly (v)
Weekly (vi) Daily

16.ABC Limited has Rs.10 crores of Bonds outstanding. These Bonds are
going to be redeemed in 15 years. For this purpose, ABC Limited wishes
to set up a sinking fund. How much should be deposited in the Sinking
Fund each year so that ABC Limited has Rs.10 crores at maturity for
redeeming the bonds? Bank Deposits are earning 10% currently.
17.ABC Limited has borrowed Rs.100,000 to be repaid in equal instalments
in each of the next 3 years. The interest rate is 15%. Prepare the loan
amortisation schedule.

18.If 20 annual deposits are made into an account that pays 14% interest
p.a. What is the future value of this annuity if the deposits are made (a)
at the beginning of each year & (b) at the end of each year

19.An annuity of 10 years will pay Rs.7000 and will begin 5 years from now.
(the first payment of annuity will occur at the end of 5 years) What is the
present value of this annuity if the rate of interest is 16%.

20.Modern textiles Ltd has to redeem debentures worth Rs 1 crore by

paying Rs 30 lakh at the end of 8th year, Rs 30 lakh at the end of 9th
year and 40 lakh at the end of 10th year from now. How much
amount should the firm deposit in a sinking fund account at the end
of every year for 7 years in order to meet the aforementioned
payments? Assume interest rate earned on deposit account is 8 %
p.a.

21.An investment costs Rs 1548 and pays Rs 138 in perpetuity. If the

interest rate is 9 percent, would you buy it?

Additional Questions (from past years’ papers)

22. Mr. Manoj invests ₹700, ₹1,000, ₹1,200, ₹1,800 and ₹2,200 each year for five years
respectively. The interest charged is 5% p.a compounded annually. Calculate the
value of the investment after 5 years if investment is made at the end of each year.

23. The share of a certain stock paid a dividend of Rs.2.00 last year. The dividend is
expected to grow at a constant rate of 7 percent in the future. The required rate of
return on this stock is considered to be 14 percent. How much should this stock sell
for now? Assuming that the expected growth rate and required rate of return remain
the same, at what price should the stock sell 4 years hence?

24. XYZ Ltd. had issued bonds with a par value of Rs. 100 and a coupon rate of 12% p.a.
The bond has maturity of 30 months and pays quarterly coupons. Calculate the fair
price of the bond if the required rate of return by investors is 8%.
25. Hydraulics Ltd has an outstanding bond of coupon rate 14%. The bond was issued 5
years ago with a tenure of 8 years. Interest payments are semi annual. Face value is
Rs 100. It is currently trading at Rs 108. If similar risky bonds yield a return of 12%
would you suggest buying this bond.
26. Following details are available about stock XYZ: 25% chance that the return of the
stock will be 14%, 18% chance that the return of the stock will be 16%, 28% chance
that the return of the stock will be 18% and 29% chance that the return of the stock
will be 15%. Calculate the average return and risk of the stock and interpret your
answer.

27. You plan to invest Rs.2,000 in a fixed deposit today that pays a stated annual interest rate of 8
percent, which is expected to apply to all future years.
a) How much will you have in the account at the end of 10 years if interest is compounded as
follows?
 Annually
 Semiannually
 Monthly
b. What is the effective annual rate (EAR) for each compounding frequency in part a?
28. Suppose the required rate of return on a stock with Beta 1.2 is 18 per cent and risk-free rate is
6 per cent. According to the CAPM:
a) What is the expected rate of return on the market portfolio?
b) What is the expected return of a zero-beta security?
c) Suppose you select Stock ABC for Rs.50. The stock is expected to pay a dividend of Rs.2
next year and is expected to fetch Rs.53 when sold. The stock has a Beta of -0.5. Is the stock
fairly priced (overvalued or undervalued)?
d) A stock XYZ has Beta 1.5 and one year from now is expected to yield dividend income of
Rs.6. What is the fair price stock XYZ if its growth rate is 10 per cent.

29. Queen Ltd has an investment proposal which is expected to yield a return of 12%.
The CEO is contemplating whether to go ahead with the proposal or not. Following is
the capital structure of the firm as per book value weights. Equity capital 1.5 crore
shares of Rs 10 each, 12% Preference shares 1lakh shares of Rs 100 each, 11% term
loan of Rs 12.5 crore. 11.5% Debentures 10 lakh of Rs 100 each and Retained
earnings of Rs 20 crore. The Company is expected to declare equity dividend at the
rate of 36% next year. The company is growing at the rate of 7% p.a. and is currently
quoted at Rs 40 per share. Debentures were issued 4 years back for a tenure of 10
years and are currently trading at a rate of Rs 80. Preference shares, redeemable in
next 10 years are trading at Rs 75 per share. The income tax rate is 30%. Advise the
CEO if the investment proposal should be undertaken.
30. A Rs.100 par value bond quoting at the market at Rs.90 will mature after 5 years.
Calculate the coupon rate of the bond if the discount rate is 10%
31. Mr. Mehta was planning to purchase shares of ABC Ltd. The stock is currently
trading at Rs 12 per share. As per analysts reports the expected dividend next year
was Rs 1.50. The price per share of stock ABC Ltd a year hence is expected to have
the following probability distribution: Probability of 0.35 for price of Rs 13,
Probability of 0.4 for price of Rs 14, Probability of 0.25 for price of Rs 15. Find the
expected return from the stock for a holding period of one year.
32. BioSciences’ stock dividend has grown at 10 percent per year for as long as anyone
can remember. Investors believe that a year from now the company will pay a
dividend of Rs.3 and that dividends will continue their 10 percent growth indefinitely.
 If the market’s required return on the stock is 12 percent, what does the stock sell for
today, and how much will it sell for a year from today after the stockholders receive
their dividend?
33. Glocal Bank bonds, with current yield 11%, will mature after 8 years. The coupon
rate of these bonds is 10% and face value of the bond is Rs 1000. Calculate their
market price and the yield to maturity.
34. Following details are available about stock A: 15% chance that the return of the stock
will be 10%, 35% chance that the return of the stock will be 11.5%, 20% chance that
the return of the stock will be 14% and 30% chance that the return of the stock will be
12.5%. Calculate the average return and risk of the stock and interpret your answer
35. A loan of Rs 7,00,000 is to be paid in 5 equal annual installments. If the rate of
interest is 10% p.a compounded annually. Find the amount of each annual installment
and also prepare the loan amortization schedule.
36. ABC Limited has the following book value capital structure: Equity share capital (150 mn
shares of par value Rs 10) Rs 1500mn, Reserves & Surplus Rs 2250 mn, 10.5% preference
capital ( 1 mn shares, Rs 100 parvalue) Rs 100 mn, 9.5% debentures (1.5 mn debentures, Rs
1000 par) Rs 1500mn, 8.5% Term loan from financial institutions Rs 500 mn .The debentures
were issued 5 years ago, have 3 more years to maturity and are currently quoted at Rs 981 per
debenture. The equity stock is trading at a rate of Rs 60 per share. The yield on long term
government bonds is 5.5%. The average market risk premium is 8%. The beta of ABC Ltd is
1.18 , The preference stock of the company redeemable after 5 years is trading at Rs 98.15
per share. Calculate the weighted average cost of capital using market value weights.
37. Anurag has screened some stocks for investment basis their profits and growth.
However he is not able to decide if he should invest in these at the current market
rates. You are required to advise him regarding his selected stocks basis the available
information. Mask Ltd is currently trading at Rs 525 and expected to yield a return of
8% , has a beta of 1.1 Sanitizer Ltd which trades at Rs 65 and is expected to yield
12% return, has a beta of 1.3. Quarantine Ltd having a beta of 1.2 is trading at Rs 128
and would deliver a return of 9%. Virus Ltd currently commanding a rate of Rs1998
may deliver 7% return and has a beta of 0.7. The return on the long term Government
bonds is 3.5% and the market risk premium is 5%. You are required to help Anurag
plot the stocks on SML and advise if he should invest in his chosen stocks. Please
have appropriate calculations and interpretations to support your advice.
38. Zero Moto Corp stock will pay a dividend of Rs.132 next year. Its current price is
Rs.2462.5 per share. The beta for the stock is 1.35 and the expected return on the
market is 13.5%. If the riskless rate is 8.2%, what is the expected growth rate of Zero
Moto Corp?
39. Rajan has just won the national lottery. His award can be taken either in the form of
Rs.40,000 at the end of each of the next 25 years or as a single payment of
Rs.500,000 paid immediately.
a. If he expects to be able to earn 5 percent annually on investments over the
next 25 years (i.e. 5 percent is the appropriate discount rate), which alternative
should he select?
Would his decision in part (a) be altered if he could earn 7 percent rather than 5
percent on the investments over the next 25 years?
40. Mangalram Jewelers just issued ten-year bonds that make annual coupon payments of
5 per cent. Suppose you purchased one of these bonds at par value (Rs.1,000) when it
was issued. Right after your purchase, market interest rates increased, and the YTM
on the bond rose to 6 percent. What is the new price of you bond?
41. Following details are available about stock A: 20% chance that the return of the stock
will be 14%, 15% chance that the return of the stock will be 15%, 25% chance that
the return of the stock will be 16% and 40% chance that the return of the stock will be
17%. Calculate the average return and risk of the stock and interpret your answer.
42. A loan of Rs 10,00,000 is to be paid in 5 equal annual installments. If the rate of
interest is 11% p.a compounded annually. Find the amount of each annual installment
and also prepare the loan amortization schedule.
43. Stock of Aze Ltd is currently trading at Rs 232. The Company is expected to
experience a super normal growth rate of 30% p.a for the next 3 years owing to their
recent innovative products. Thereafter, the growth rate is expected to continue at the
rate of 20% for the next 4 years. Eventually the company may settle at a growth rate
of 10 % in the foreseeable future. Aze ltd recently paid a dividend of Rs 4 per share.
Investors require a return of 15% on the stock owing to its dynamic business. Is the
stock worth investing at current rates? Support your advice by appropriate
calculations.
44. Crown Ltd has the following book value capital structure. Equity capital (shares of Rs
10 par value each) Rs 15 crore, 12% Preference capital (Rs 100 par value each) Rs 1
crore. Retained earnings Rs 20 crore, 11.5% Debentures (Rs 100 par value each) 10
crore and 11% Term loan Rs 12.5 crore. The next year expected dividend on equity is
Rs 3.6 per share and has an expected growth rate of 7%. The market value is Rs
40/share. Preference stock, redeemable after 10 years is currently trading at Rs 75 per
share. Debentures, trading at Rs 80 are redeemable after 6 years. Corporate tax rate is
40%. Calculate the WACC as per book value weights and market value weights.