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The following bonds were issued in the market all of which have an implied yield of 8% on a face value of Rs 10000. a) Bond A matures in 6 years and pays 12% coupon rate payable semi-annually, matured at par. b) Bond B matures in 10 yrs and pays 7 % coupon payable semi-annually, matured at par. c) Bond C is a zero-coupon bond which pays no explicit interest but will give Rs 10000 on maturity after 10 years What should be the current price of each bond?

2. a) One company is predicting a growth in earnings of 15 % for 3 years, 8 % for years 4 through 6, then constant earnings for the foreseeable future. The company expects to increase its DPS, Now Rs40, in keeping with this growth pattern. Currently, the market price of the stock is Rs 550 per share. Estimate the firms cost of equity capital. b) X ltd. has an equity beta of 1.5 and a debt-to equity ratio of 2:1. The expected return on the market is 15% and the risk free rate is 6%. The before-tax cost of debt is 8%. The corporate tax rate is 35%. What X ltds weighted average cost of capital? 3. Consider the following securities: Security A B AB = 0.12

Return (%) 14 11

Standard Deviation of Return (%) 12 9


Find out the portfolio return and standard deviation for the following portfolios: i) A: 80%; B: 20% ii) A: 20%; B: 80% iii) A: 50%; B: 50% Consider a project with the following mixed stream of Cash flows Year 1 2 3 4 5 Cash flows (000Rs) 10000 9000 10000 15000 20000

d) How much would you be willing to invest for this project, assuming that you can at best earn (i) 5%, (ii) 7% on your investments? e) If you come to know that the projections for year 3 cash flow and year 5 cash flows are to be interchanged how will it change your answer? iv) Also, if you get Rs 1 million at 11% interest, will you be interested to invest the entire amount on this project? 2. Big Khan, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. The investment requires an initial outlay of Rs 50,00,000 and will generate cash inflows of Rs 9,00,000 per year for 10 years. For each of the listed required rates of return, determine the projects NPV. a. The required rate of return is 10 % b. The required rate of return is 15% c. Would the project be accepted under part (a) or (b)? What is the projects IRR?

Short questions


What is the rationale behind the NPV method? According to NPV, which franchise or franchises should be accepted if they are independent? Mutually exclusive? What is the logic behind the IRR method? Would IRRs change if the cost of capital changed? CASELET Practise from book

b. c.

A story: After death one good man goes to the after-world. He is told that he can have a choice between Heaven & Hell based on the demo. He went to Heaven and found hermits in white cloths moving around with not much activity going on. He was taken to Hell; his eyes popped up for what he saw was very close to (even better than) the best of night clubs on earth. He took no time in deciding for Hell. Next day when he was taken to Hell, he was shocked to find that two huge demons were waiting for him to be thrown into a dungeon. He asked the authorities how can this be- yesterday was so different. He got a simple reply: well- yesterday was promo this is the real product! Moral: Well, dear friends- sample is a sample only!