ACC501 - Business Finance

Assignment No 1

Question # 1
Premium leather is a leading manufacturer of leather products. Premium leather is
currently expanding its product line by introducing new products in the market. The
management of the company is optimistic that this expansion will result in a growth in
revenues. The management of the company estimates that the company would be able to
pay a dividend of Rs. 2.5 per share a year from today, and during the next four years, the
dividend will grow at the rate of 17 percent per year (g1= 17%). After that, the growth rate
will remain 12 percent (g2=12%) per year indefinitely. You are required to calculate the
present value of the company’s stock if the required rate of return is 16 percent (16%).

Solution: -
Here’s the Formula.
[D1/(1+R1)] + [D2/(1+R)2] + [D3/(1+R)3] + [D4/(1+R)4] + [P4/(1+R)4]

Now, we have to find D1 D2 and so on.

D1 =D0 *(1+R)1 =2.5*(1.17)1 = 2.92

D2 =D0 *(1+R)2 =2.5 * (1.17)2 = 3.42
D3 = D0 *(1+R)3 =2.5*(1.17)3 = 4.00
D4 =D0 *(1+R)4 = 2.5*(1.17)4 = 4.68

P4 =D4* (1+g2)/(R-g2) =4.68*(1.12) / (0.16-0.12) =131.04

P0 =[D1/(1+R)1] + [D2/(1+R)2] + [D3/(1+R)3] + [D4/(1+R)4] + [P4/(1+R)4]

Putting the values

=2.92 / (1.16)1+ 3.42 / (1.16) 2 + 4.00(1.16) 3 + 4.68 / (1.16) 4 + 131.04 / (1.16)4 2.92 /
1.16+3.42 / 1.35+4.00 / 1.56] + 4.68 / 1.81+131.04 / 1.81
=2.52 + 2.54 + 2.57 + 2.59 + 72.39
=82.61

Question # 2
Beta Corporation wants to start a new project, and the company has estimated expected
revenue of Rs. 70,000 per year from the project. The running cost of the project will be Rs.
40,000 per year (ignore taxes). The tenure of the project will be 6 years, and the plant,
property, and equipment will be worth Rs. 6,000 as salvage value at the time of winding up
the business. The initial investment of the project will be Rs. 90,000 and the required rate
of return on this project will be 12%. You are required to calculate the feasibility of the
project by calculating NPV.
Solution: -

As we know in this case NPV = Initial Investment + Present Value

Cash Flow equal to revenue cost

Put the values
=70,000 - 40,000 = 30,000
Present value= OF* [(1-1/+R) n)] / R+ Salvage value / (1+R) n
PTV
= 30.000*[(1-1/ (1+12)6] /.12+6 ,000 / (1+.12)6
= 30.000*(1-.5032)/.12+3039. 78
= 123,342,2+3039.78 =126,382
NPV = Initial Investment + Present Value
= - 90,000 + 126,382 = 36,382

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