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Financial Management 562 Autumn 20001 Prepared by Mohammad MuzammilQ.3. The G.M ltd. Has non-callable, perpetual bonds outstanding. When originally issued,the perpetual bonds sold for Rs.955 per bond while today (January 1) their currentmarket price is Rs.1, 120 per bond. The company pays a semiannual interest Rs.55 perbond on June, 30 andDecember 31 each year.
As of today (January 1) what is the implied semiannual yield on these bonds?Using your answer to (a), what is the (minimal annual) yield on these bonds? The effectiveannual yield to these bonds.Current price of bond = 1.120Since the bond is perpetual bond, the current price is considered as the present value of this bond.Therefore,V = I / kWhere I is the amount paid on bond semi annually and k is the implied semi annually yield onthis bond1,120 = 55 / kk = 55 / 1,120 = 0.05 or 5 % Nominal yield per annum = 2 ( k ) = 2 ( 0.05 ) = 0.10 or 10 %Effective yield = ( 1 + nominal yield / 2 )2 – 1= ( 1 + 0.10 / 2 )2 – 1 = ( 1 + 0.05 )2 – 1 = ( 1 .05 )2 – 1= 1.1025 – 1 = 0.1025 or 10.25 %
Q.4. Complete the following balance sheet for the Range Company using the followinginformation’s.
Debt to asset = 60 %Quick ratio = 1.1Asset turnover = 5 timesFixed asset turnover = 12.037Current ratio = 2Average collection period = 16.837 daysAssume that all sales are on credit and a 360 days year.Cash Current liabilitiesReceivables Bonds payablesInventory Net worthTotal current assets Tot. liabilities and net worthPlant and equipmentTotal assets Rs.325,000Cash 28,495 J Current liabilities 95,000 EReceivable 76,005 I Bond payable 195,000 BInventory 85,500 H Total liabilities 290,000 FTotal C. assets 192,000 D Net worth 35,000 GPlant & Equip. 135,000 C
Total assets 325,000 Liabilities & net worth 325,000 A
Calculation A
Total liabilities and net worth = Total assets = 235,000
Calculation B
Debt to asset = Total debt / Total asset = Bond payable / Total asset = 0.6Bond payable = Total asset x 0.6 = 325,000 x 0.6 = 195,000
Calculation C
Asset turnover = Sales / Total asset = 5Sales = Total asset x 5 = 325,000 x 5 = 1,625,000Fixed asset turnover = Sales / Fixed assets = Sales / Plant & Equipment =12.037Plant & Equipment = Sales / 12.037 = 1,625,000 / 12.037 = 135,000
Calculation D
Current asset = Total asset -- Plant & EquipmentCurrent asset = 235,000 – 135,000 = 190,000
Calculation E
Current ratio = Current asset / Current liabilities = 2Current liabilities = Current asset / 2 = 190,000 / 2 = 95,000
Calculation F
Total liabilities = Current liabilities + Total debtTotal liabilities = Current liabilities + Bond payableTotal liabilities = 95,000 + 195,000 = 290,000
Calculation G
Net worth = Total liabilities & Net worth – Total liabilities Net worth = 325,000 – 290,000 = 35,000
Calculation H
Quick ratio = Quick asset / Current liabilities = 1.1= ( Cash + Receivable ) / 95,000Cash + Receivable = 1.1 x 95,000 = 104,500Current ratio = Current asset / Current liabilities = 2Current asset = 2 x 95,000 = 190,000Cash + Receivable + Inventory = 190,000Inventory = 190,000 – Cash + Receivable = 190,000 – 104.500 = 85,500
Calculation I
Average collection period = 360 / Receivable turnover Receivable turnover = 360 / Average collection period = 360 / 16.837 =21.38Receivable turnover = Sales / ReceivableReceivable = Sales / Receivable turnover = 1,625,000 / 21.38 = 76,005
Calculation J
Cash + Receivable = 104,500Cash = 104,500 – 76,005 = 28,495
Q.5. A chemical company is considering investing in a project that costsRs.400, 000. The estimated salvage value is zero; tax rate is 55 %. The company usesstraight line depreciation method and the proposed project has cash flows before tax asfollows:
Year 1 2 3 4 5CFBT 100,000 100,000 150,000 150,000 250,000Determine the following:Pay back periodInternal rate of return Net present value at 15 %Profitability index at 15 %End of year 1 2 3 4 5
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Fm Solved Papers
Solves papers of Financial Management MBA
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