Strategy

Firms exist to create value to customer

1 Simple Intrest
2 Compund intrest
3 APR = (Periodic interest rate) * (Number of such periods in a year)
4 EAR = (1 + APR/N)N - 1 15.865%
5 Principal invested = cash flow/rate of intrest
6 Anuity/Future value by starting payment and ending payment 12.683%
7 PMT
8

2593.7424601
 Ordinary aunity formula
PV ₹ -21,042.00 where Rate
nper
Pmt
200 FV
Type
 9%
2
Since its out flow, its negitive
25000
0 Since the payment is timed at the end of the period
APR 30% 12%
EAR 34.49% 12.55%

Annuity
Ordinary aunity formula
FV at year 3 ₹ 6,275.44 where Rate
nper
Pmt
FV
Type

Using annuity due formula

FV at year 3 ₹ -85,228.23 where Rate
nper
Pmt
PV
Type

Annuity
Ordinary annuity formula
FV at year 3 ₹ 73,476.86 where Rate
nper
Pmt
PV
Type

Formula for PV Annuity

(C/r)-(C/r)*[1/(1+r)^N]
Where
C-Periodic cash flow.
r-Periodic interest rate.
N-Number of periods

Example of an amortizing loan

Laon amount 200,000
Period 1 year
interest rate 12%
EMI
Monthly installment rate-APR/no of months
1.00%
Using the PMT Formula PMT ₹ -17,770

₹ -213,237.09
C 17,769.76

Period beginning principal (BP) EMI Interest

1 200,000 ₹ -17,770 2,000
2 184,230 ₹ -17,770 1,842
3 168,303 ₹ -17,770 1,683
4 152,216 ₹ -17,770 1,522
5 135,968 ₹ -17,770 1,360
6 119,558 ₹ -17,770 1,196
7 102,984 ₹ -17,770 1,030
8 86,244 ₹ -17,770 862
9 69,337 ₹ -17,770 693
10 52,261 ₹ -17,770 523
11 35,013 ₹ -17,770 350
12 17,594 ₹ -17,770 176
13 0 ₹ -17,770 0
14 ₹ -17,770 -

Example of an amortizing loan

Laon amount 500,000
Period 5 year
interest rate 12%
EMI
Monthly installment rate-APR/no of months
1.00%

Using the PMT Formula PMT ₹ -138,705

₹ -1,664,458.39
C 138,704.87

Period beginning principal (BP) EMI Interest

1 500,000 ₹ -138,705 60,000
2 421,295 ₹ -138,705 50,555
 3 333,146 ₹ -138,705 39,977
4 234,418 ₹ -138,705 28,130
5 123,844 ₹ -138,705 14,861
6 - ₹ -138,705 #VALUE!
7 #VALUE! ₹ -138,705 #VALUE!
8 #VALUE! ₹ -138,705 #VALUE!
9 #VALUE! ₹ -138,705 #VALUE!
10 #VALUE! ₹ -138,705 #VALUE!
11 #VALUE! ₹ -17,770 #VALUE!
12 #VALUE! ₹ -17,770 #VALUE!
 100000 8% 1000000 8% 10
146932.80768 463193.5

25000 9% 2
21042

3%
4
-1500 Since its out flow, its negitive

0 Since the payment is timed at the end of the period

8%
5
Since its out flow, its negitive
500000
0 Since the payment is timed at the beginning of the period

0.00666666666666667
60
-1000 Since its out flow, its negitive
0
0 Since the payment is timed at the end of the period

PV C/r(1-1/(1+r)^N)
Where Rate 1%
Nper 12
PV 200,000

Principal Repaid (PR) Ending Principal(EP) Column1

15,770 184,230 Where
15,927 168,303 Where EMI 17769.76
16,087 152,216 Interest 1%*BP
16,248 135,968 PR EMI-Interest
16,410 119,558 EP BP-PR
16,574 102,984
16,740 86,244
16,907 69,337
17,076 52,261
17,247 35,013
17,420 17,594
17,594 0
17,770
17,770

Where Rate 12%

Nper 5
PV 500,000

Principal Repaid (PR) Ending Principal(EP) Column1

78,705 421,295 Where
88,149 333,146
 98,727 234,418
110,575 123,844
123,844 -
#VALUE! #VALUE!
#VALUE! #VALUE!
#VALUE! #VALUE!
#VALUE! #VALUE!
#VALUE! #VALUE!
#VALUE! #VALUE!
#VALUE! #VALUE!
EMI-Interest
Future Value at 60 10,000,000 Interest ra 8% No of peri 35

Using PMT formula in excel

PMT= ₹ -58,032.65 Where rate 8%
nper 35
PV 0
FV 10,000,000

Using PMT formula in excel

FV ₹ 10,000,000.00 Where rate 0.08
nper 35
PV -58032.645607
PV 0

Using PMT formula in excel

PV ₹ 676,345.43 Where rate 0.08
nper 35
PV -58032.645607
FV 0

Using PMT formula in excel

FV ₹ 10,000,000.00 Where rate 0.08
nper 35
pmt 0
PV ₹ -676,345.43

Using PMT formula in excel

FV ₹ 734,768.56 Where rate 0.00666666667
nper 60
pmt -10000
PV ₹ 0.00

Using PMT formula in excel

PMT ₹ -21,459.39 Where rate 12%
nper 15
pmt 0
PV ₹ 800,000.00
 Bond and equity
Present value of anuity stream
Present value of anuity stream (c/r)*(1-1/(1+r)^N)
Periodic cash flow C-4.12 412
Discount Rate r-4.12% 0.041
Principle amount P-10000 10000
Number of periods N-20 20

Present value of anuity stream 5,540.2

Present value of the face value repaid in

10 years P/(1+r)N 4,459.8

Present value of bond= Prest value of anuity stream + Present value of the face value repaid in 10 years
Present value of bond 10,000.00

Value/price of bond inversly propotional to market intrest rates

Treasury Bill/Zero Coupon Bonds

In Zero Coupon bonds, doesnot pay any coupon
A 91 Day treasury bill with face value of RS 100 is selling for Rs 98

Bond yield equivalent of this T Bill ((F-P)/P)/t

8.19%
F-Face Value
P-Price Paid
t-Time is represented as fraction of a year

8.45%

Corporate coupon bond

of Rs. 10,000. Investors in the bond Zero Coupon Bond

can purchase
Investors the bond for Rs. 6,000.
will not
receive any coupon but ADB Company will pay Rs. 10,000 to the bond holders on maturity.
PV (1+r)^N=FV
ADB Company
r- yeild to maturity
Bond period 5 years
Face Vale 10,000
Investors in the bond can ppurchase the bond at

6000*(1+x)^5=10000
 Price -6000 PV
face Value 10000 FV
no of years 5 nper
Coupon 0 pmt

Rate (NPER,PMT,PV,FV)
Yeild to maturity 10.76%

Future value -10000.0000000001

Yield to maturity for coupon bond

Consider a 3 year bond with a face value of RS 1000 and coupon rate of 6% paid semi annually. If the bond is tra

Face Value Rs 1000 1000

Coupon rate -semi anually 6% 3%

Bond trading at Rs 975

Yield to maturity of the bond

Coupon value 60 30

Bond semi annual yeild meturity value YMT

975=(30/y)*(1-1/(1+y)6)+1000/(1+y)6

Price -975 PV
Face Value Coupon rate 1000 FV
Coupon rate 6%
Yearly payment 60
Semi Annual Payment 30 pmt
No of years 3
Frequency 2 Per year
No. of period 6 nper

Semianual yeild 3.47%

Annual Yield (YTM) 6.94%
Here YTM (6.94%) >Coupon rate (6%)
Thus Market price Rs 975 < face value Rs 1000

Risk of investing in Bonds

Credit Risk
Interest Rate Risk
Inflation Rate Risk

Ratings
 Standard and Poor's
Moody's

Dividend Discount Model

Equation for the stock price

P0 =(D1+P1)/(1+re)
re =D1/P0+(P1-P0)/P0
Re= Dividend Yeild + Capital gains rate
The sum of Dividend yeild and the capital gains rate is called Total Return of the stock

Brush Stock limited shares are expected to pay a dividend of RS 5, in the coming year and is forecast to trade at
Brush stroke price today P0 100

Expected divident yeild and capital gain if we purchase share at 100

Dividend yeild =D1/Po 5.0%
Capital gain 10%
Expectes return 15.00%
Expected future dividend
Cash that can be obtained by selling stock

Brush stroke price today P0 100

Brush Stock limited shares are expected to pay a dividend of RS 5, in

for 2 years
P0=D1/(1+re)+(D2+P2)/(1+re)^2
D1 Dividend in period 1
D2 Dividend in period 2
P2 Price at wich stock can be sold at the end of year 2

P2=D3/(1+re)+(D4+P4)/(1+re)^2
P0= D1/(1+re)+D2/(1+re)^2+D3/(1+re)^3+(D4+P4)/(1+re)^4

P0= D1/(1+re)+D2/(1+re)^2+…..+DN/(1+re)^N+PN/(1+re)^N

ƩN=1, N=∞ DN=(1+re)^N

Thus price of the stock is equal to the present value of the expected
Consider an investor who purchases a share at Rs. 500 a

Dividend yeild =D1/Po 3.0%

Capital gain 5%
Expectes return 8.00%

Dividend Discount Model with Constant G

 Constant growth rate is g
D1=D0*(1+g)
D1-Dividend in period 1
D2=D1*(1+g)=D0*(1+g)^2
DN=D0*(1+g)^N

Present Value of the dividends

Pv=D1/(1+re)+D2/(1+re)^2…
P0=D0*(1+g)/(1+re)+D0*(1+g)^2/(1+re)^2+--

As long as Growth rate g <re(Discount rate)

Pv of the dividends =P0=D1/(re-g)

Mangatech lrd. Is expected to pay a dividend os Rs 2in the coming ye

Pv of the dividends D1/(re-g)

20
re=(D1+P0)/g
dividend yield +growth rate
Total return =dividend yield +Capital gains rate
With costent divident rate capital gains rate =growth rate of dividend

Mangatech lrd. Stock is currently trading at RS 100. per share. Magn

Total return = dividend yield + expected growth

15.00%

Find the value of dividend at year 1 given that the current stock price

P0=100
g=5.5%
re=15%
D1 9.5

Stock Price and Return on Investment

Dividend at time t =earnings per share at t*Dividend payout ratio at

Change in earning = new investment * return on new investment

New investment =earnings * retention rate

Higher the payout rate, lower the retention rate

Substituting equation 2 in 1

Earning growth =change in earnings /Earnings =retention rate * Retu

that is, it pays out all its earnings.
The opportunity cost of investing in ABC is 10%.
What is the value of ABC stock?
D 50
re 10%
Value of ABC stock P0 Da/re 500
further investments and
the return
and on equity
what will be the is 20%. of this on
impact
the value of the share?

Return on investment is 20%

Investment per share Rs 20
Addition earning per share due to new project =20%*20
4

PV 518.1818

What if return on invetment is only 5%

ROI-5% Additional earning per share due to new p

1
PV 490.9091

Multiples Based Valuation

Price-Earnings Ratio
Price-Book Ratio
Plasticity is a firm
If the average manufacturing
PE of and selling
comparable firms is 22.5,plastic furniture. It has e
estimate the value of Plasticity’s share? What are the assumptions u

Per share value 10

Average Price earning of
comparable firm is 22.5
Value of plasticity share 225
Price to book ratio Stock price/book value per share of the st
Book value of the firm assets -liability =equity share capital
Price to book ratio is price paid for 1 rupee/dollar of equity capital

Medilogic has a book value per share of Rs. 20. Comparable firms in
have
Let uson averagethe
estimate a price-to-book ratiousing
value for a share of 1.3.
the comparable price to b
ratio method.

Value of Medilogic price to book ratio of competitor method

26
 500000 41200

4120

734.664

value repaid in 10 years

the bond at Rs 6000

 -905
1000
12
0

0.84%

semi annually. If the bond is trading at Rs 975, what is the yield to maturity of the bond

Price -1025 PV Price

Face Value Coupon rate 1000 FV Face Value Coupon
Coupon rate 6% Coupon rate
Yearly payment 60 Yearly payment
Semi Annual Payment 30 pmt Semi Annual Payme
No of years 3 No of years
Frequency 2 Per year Frequency
No. of period 6 nper No. of period

Semianual yeild 2.55% Annual Yield (YTM)

Annual Yield (YTM) 5.09%
Here YTM (5.09%) <Coupon rate (6%) Here YTM (7.34%) >Coupon rate (
Thus Market price Rs 1025> face value Rs 1000 Thus Market price Rs 905< face va
 year and is forecast to trade at Rs 110 at the end of year1.The expected return from investment of similar risk 15%. What price would

ted to pay a dividend of RS 5, in the coming year and is forecast to trade at Rs 110 at the end of year1.The expected return from invest

end of year 2

e present value of the expected future dividends

hases a share at Rs. 500 and receives a dividend of Rs. 15 and sells the share at Rs. 525 one year later. What is

del with Constant Growth

dividend os Rs 2in the coming year, the firm dividends are expected to grow at a rate of 10%annually forever. Given the risk of the stoc

ns rate =growth rate of dividends

ding at RS 100. per share. Magna is expected to pay a dividend of Rs 5 in the comming year and its is expected to grow at 10%. What is

iven that the current stock price is Rs. 100 per share and dividends are expected to grow at a constant rate of 5.5% in the foreseeable

n on Investment

e at t*Dividend payout ratio at t

* return on new investment 1

/Earnings =retention rate * Return on new investment

w project =20%*20

l earning per share due to new project =20*5%

sselling
is 22.5,plastic furniture. It has earnings per share of Rs. 10.
e? What are the assumptions underlying this estimate? Using the PE ratio

e/book value per share of the stock

bility =equity share capital
rupee/dollar of equity capital

of Rs. 20. Comparable firms in the same industry

ousing
of 1.3.
the comparable price to book

o of competitor method
 -905 PV Price -92 PV
1000 PV Face Value Coupon rate 100 FV
6.13% Coupon rate 6%
61.25 Yearly payment 8
30.625 pmt
12 No of years 15
1 Per year Frequency 1 Per year
12 nper No. of period 15 nper

7.34% Annual YTM 8.99%

M (7.34%) >Coupon rate (6.125%) Here YTM (6.94%) >Coupon rate (6%)
arket price Rs 905< face value Rs 1000 Thus Market price Rs 975 < face value Rs 1000
isk 15%. What price would you pay for brush share today?

xpected return from investment of similar risk 15%. What price would you pay for brush share today?

one year later. What is the total return of the stock?

r. Given the risk of the stock the required return on equity is 20% what is the present value of the expected stream of dividends

ed to grow at 10%. What is the expecetd return of the stock

of 5.5% in the foreseeable future. The required return is 15%.

ream of dividends
Present value of anuity stream
Periodic cash flow
Discount Rate
Principle amount
Number of periods

Present value of anuity stream

Present value of the face value repaid in 10 years

Present value of bond= Prest value of anuity stream + Present value of the face value repaid in 10 years
Present value of bond

What is the value of a corporate bond with 5 year maturity paying 7.5% annual coupon. The face value

Face value of the bond

ANual coupon rate
Annual coupon

Opartunity cost APR

Presnt value of the anuity stream-(c/r)*(1-1/(1+r)^N)

Present value of the face value repaid in year 5 -P(1+r)^N)

Tom is planning to buy a bond having a face value of $100. The current market price of the bond is $92

Face Value
Current Market price of bond
Coupon payment
No of years

Yeild to maturity

Yeild to maturity

The EPS of Dominica Inc. is Rs. 120. If the average Price-Earnings ratio of comparable firms is 39.2, es

4704
Bond yield equivalent of this T Bill

Venus Airlines will pay a $8 dividend next year on its stock, which is currently selling at $100 per share. What is the market

Total return = dividend yield + expected growth

13.00%
 Bond and equity
Present value of anuity stream
(c/r)*(1-1/(1+r)^N)
C-6.5 750
r 0.075
P-10000 1000
N-20 5 500000 41200

4120
3,034.4

734.664
P/(1+r)N 696.6

3,730.97

he face value of the bond is Rs.1000. The opportunity cost of bonds of similar risk is 6.5%. What is the value of th

1000 FV
7.50%
75 1300
5 npr
6.50%

311.676
729.8808
1041.557

he bond is $92. The coupon payment is $8 payable annually with a 15 year maturity. Calculate the Yield to maturit

100 FV
-92 PV
8 pmt
15 NPR
#NAME? 20
0.5000% 2.00%
Rate (NPER,PMT,PV,FV)
8.99%

8.99%

rms is 39.2, estimate the value of Dominica's share

 ((F-P)/P)/t

hat is the market's required return on this investment if the dividend is expected to grow at 5% forever?
What is the value of the bond?

ate the Yield to maturity for the bond. (HINT: USE EXCEL)
 Net Present Value (NPV)
...and generates cash flows of Rs. 30 million for 5 years.

The appropriate discount rate given the opportunity cost is 10%.

Time 0 1 2 3 4
Cash flow -100 30 30 30 30
Discount rate 10% 10% 10% 10% 10%

PV of cash flow NPV -100 27.3 24.8 22.5 20.5

NPV 13.7
NPV (using the formula) 13.72

An investment would cost $200,000 and provide annual cash inflows of $31,250 for 6 years. If the oppo

Time 0 1 2 3 4
Cash flow -200,000 31,250 31,250 31,250 31,250
Discount rate 10% 10% 10% 10% 10%

PV of cash flow NPV -200000 28409.1 25826.4 23478.6 21344.2

NPV -63898.1
NPV (using the formula) -63,898.10

IRR
of Rs. 110.
What is the IRR of this project?

NPV =100+110(1+r)
NPV=0
r=10%
IRR is >Oportunity cost then accepet the project
IRR is <Oportunity cost then reject the project
Hurdle rateannual
generates = costcash
of the capital
flows of Rs. 30 million for
5 years.
The opportunity cost or hurdle rate is 10%.
What is the IRR of this project?

Time of cash flow

Time 0 1 2 3 4
Cash flow -100 30 30 30 30
IRR 15.2%

NPV=-100+30(1+r)+30/(1+r)^2+30/(1+r)^3+30/(1+r)^4+30/(1+r)^5
0=-100+30(1+r)+30/(1+r)^2+30/(1+r)^3+30/(1+r)^4+30/(1+r)^5
Discount rate NPV
0% ₹ 50.00
1% ₹ 45.60
2% ₹ 41.40 NPV Schedu
3% ₹ 37.39 ₹60.00
4% ₹ 33.55
5% ₹ 29.88 ₹50.00
6% ₹ 26.37
₹40.00
7% ₹ 23.01
8% ₹ 19.78 ₹30.00
9% ₹ 16.69
₹20.00
10% ₹ 13.72
11% ₹ 10.88 ₹10.00
12% ₹ 8.14
13% ₹ 5.52 ₹0.00
0% 2% 4% 6% 8% 10%
14% ₹ 2.99
( ₹10.00)
15% ₹ 0.56
16% ₹ -1.77
17% ₹ -4.02
18% ₹ -6.18

A project costs $120,000 and is expected to generate cash inflows of $56,000, $45,000 and $ 46,000 a

Time of cash flow

Time 0 1 2 3
Cash flow -120000 56000 45000 46000
IRR 11.3%

The timing of the cash flows for this expansion

project is given here.

Time 0 1 2
Cash flow -30 90 -65
IRR 21.1%

Discount rate NPV

0% ₹ -5.00
1% ₹ -4.61
2% ₹ -4.24
3% ₹ -3.89
4% ₹ -3.56
5% ₹ -3.24
6% ₹ -2.94
7% ₹ -2.66
8% ₹ -2.39
 9% ₹ -2.14
10% ₹ -1.90
11% ₹ -1.67
12% ₹ -1.46
13% ₹ -1.26
14% ₹ -1.07
15% ₹ -0.89
16% ₹ -0.72
17% ₹ -0.56
18% ₹ -0.41
19% ₹ -0.27
20% ₹ -0.14
21% ₹ -0.02
22% ₹ 0.10
23% ₹ 0.21
24% ₹ 0.31
25% ₹ 0.40
26% ₹ 0.49
27% ₹ 0.57
28% ₹ 0.64
29% ₹ 0.71
30% ₹ 0.77
31% ₹ 0.83
32% ₹ 0.88
33% ₹ 0.92
34% ₹ 0.96
35% ₹ 1.00
36% ₹ 1.03
37% ₹ 1.06
38% ₹ 1.09
39% ₹ 1.11
40% ₹ 1.12
41% ₹ 1.14
42% ₹ 1.14
43% ₹ 1.15
44% ₹ 1.15
45% ₹ 1.15
46% ₹ 1.15
47% ₹ 1.14
48% ₹ 1.14
49% ₹ 1.12
50% ₹ 1.11
51% ₹ 1.10
52% ₹ 1.08
53% ₹ 1.06
54% ₹ 1.03
55% ₹ 1.01
56% ₹ 0.98
57% ₹ 0.95
58% ₹ 0.92
 59% ₹ 0.89
60% ₹ 0.86
61% ₹ 0.82
62% ₹ 0.79
63% ₹ 0.75
64% ₹ 0.71
65% ₹ 0.67
66% ₹ 0.63
67% ₹ 0.59
68% ₹ 0.54
69% ₹ 0.50
70% ₹ 0.45
71% ₹ 0.40
72% ₹ 0.35
73% ₹ 0.31
74% ₹ 0.25
75% ₹ 0.20
76% ₹ 0.15
77% ₹ 0.10
78% ₹ 0.05
79% ₹ -0.01
80% ₹ -0.06
81% ₹ -0.12
82% ₹ -0.17

Profitability Index

A company is considering an investment proposal to buy a new asset at a cost of $50,000. The estimat
Year Cash in flow NPV
Year 1 $ 12,000
Year 2 $ 14,000
Year 3 $ 15,000
Year 4 $ 20,000
Year 5 $ 10,000

Time of cash flow

Time 0 1 2 3 4
Cash flow -50000 12000 14000 15000 20000
Discount 10% 10% 10% 10% 10%
PV of cash flow from NPV -50000 10909 11570 11270 13660
NPV 3618.54319439183 -0.072
NPV Formula 3,618.54
-0.2181818 -0.231405 -0.2253944 -0.2732054
Discount rate NPV
10% ₹ -46,710.42

Project A has an IRR of 12%. Project B has an IRR of 14%. If the cost of capital is 10%, then which pro
Use the discussion forum to identify the project which has the higher Net Present Value (NPV).

Project A IRR 12%

Project B IRR 14%
Cost of capital is 10%

Year Project A Project B

0 -3000 -4000
1 1000 1500
2 1000 1800
3 2500 2000
If the discount rate is 15%, which project should we invest in?

0 1 2 3
Project A -3000 1000 1000 2500
PROJECT B -4000 1500 1800 2000
15% -3000 869.565217 756.143667 1643.79058
15% -4000 1304.34783 1361.0586 1315.03246

Project Initial Investment NPV

P 200 22 0.11
Q 180 26 0.14444444
R 185 38 0.20540541
S 380 10 0.02631579

The project with highest Profitability Index is

-150000 60000 60000 60000

9.70%
Rainbow Co. Ltd is considering a project that calls for an initial investment of $100,000. The expected n

-100000 12500 12500 12500 12500

4.277%
 5
30
10%

18.6

50 for 6 years. If the opportunity cost of capital is 10%, calculate the NPV for the investment.

5 6
31,250 31,250
10% 10%

19403.8 17639.8

5
30
 NPV Schedule

4% 6% 8% 10% 12% 14% 16% 18% 20%

$45,000 and $ 46,000 at the end of each year for the next 3 years. Calculate the project’s IRR.
t of $50,000. The estimated cash inflows are as follows:

5
10000
10%
6209

-0.12418426

al is 10%, then which project has a higher NPV ?

ent Value (NPV).

4
19.538%
15%
269.4994658
-19.5611079

100,000. The expected net cash inflows from the project are $12,500 for each of 10 years. Calculate the IRR of th

12500 12500 12500 12500 12500 12500

ect’s IRR.
ears. Calculate the IRR of the project.
Sporty Skates have a yearly sales rev
depreciation of $110 million and a tax rate of 30%. Calculate the operating cash flow for the year. (Operating Cash Flow = P

Revenue 500
Cost of goods -230
Selling and administrative -30
Depritiation -110
Gross Margin 130
Taxis -39 30%
PAT 91
PATD 201

PQR ltd. reported $20 million profit after tax, $2 million of capital expenditure, $5 million change in work
Calculate the free cash flow available to the firm.

PAT 20
Capital Expendature -2
Change in working capital -5
Depreciation 2
Free Cash flow available 15
the year. (Operating Cash Flow = Profit after Tax + Depreciation)

re, $5 million change in working capital and depreciation of $2 million for a given year.
 The project's cost of capital=
weighted average
the firm has costits
financed ofassets
capital or WACC.
with a mix of debt and equity.
Cost of funds =weighted average cost of (debt funds and equity capcital)

Cost of Equity rE
Capital asset pricing model
The return to a stock be related to the measure of the market risk of the stock.
Divident discount model
P0 =D1/(1+rE)+D2/(1+rE)^2+D3/(1+rE)^3+….
D0*(1+g)/(1+rE)+D0*(1+g)^2/(1+rE)^2+D0*(1+g)^3/(1+rE)^3+…
Weighted average cost of capital
WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
Cost of Equity capital rE
Cost of debt capital rD
Market value of equity E
Market value of net debt D
Margina corporate tax rate t

Interest paid on debt, which is rDxD can be deducted from taxable income
Corporate tax saved due to debt =rD *D*t
After tax, cost of debt =(rDxD)-(rDxDxt)= rD *D*(1-t)
Electrica Ltd., a firm that is listed on the stock
Proble 1 exchange
is 15% andhas
themarket value
corporate taxofrate
equity of Rs. 500 million and debt of Rs. 200 million The cost of debt is 8%,
is 30%.
What is Electrica’s cost of capital?

E 500 Million
D 200 Million
Cost of debt rD 8%
Cost of equity rE 15%
Corporate tax 30%
Total Capital 700

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC 12.31%

Proble 2 For a company XYZ Ltd. the cost of debt is 8%, the cost of equity is 15.2%, the corporate tax r

rD 8%
rE 15.20%
Corporate tax t 30%
Debt to euity ratio 1.5

WACC?
D 1.5E
WACC 9.440%

Problem 3 What is the market capitalization rate for the company ABCD Ltd. whose expected dividend next year i
expected growth rate of dividend per annum is 5% and the current market price of the share is Rs. 87.
 Market Capitalization rate?
(D1/P0)+g
Dividend yield +Growth rate
Where g (Growth rate )<rE (Discount rate)
10.747%
Problem 4 The firm, Bolta Ltd, manufactures high precision specialized nuts and bolts that are customized for the needs of
Special bolts are needed that will not be affected by the temperature difference as the spacecraft goes up to th
It is expected
Current plans that the demand
foresee requirements will specialized
for these be about 3 million
nuts forunits
only in year 1, which will increase by 15% for 2 year
5 years.
The price per bolt in year 1 is expected to be $ 50 which will increase by 8% each year to account for inflation
Variable cost is 50% of sales. Fixed cost is $ 6 million in year 1 which will increase by the inflation rate of 8% eac
In order to develop these new bolts, Bolta will have to upfront invest $ 20 million in research and development.
At the end of 5 years, the plant and machinery can be sold and it is expected that the salvage value after tax is $
The capital investment is depreciated equally over the 5 year life of the project.
Working capital requirement is estimated to be 20% of sales and needs to be made in the previous year, i.e., wo
Further, the firm plans to fund this project with a mix of debt and equity in the total capital in the proportion of
Cost of debt is 10% and cost of equity is estimated to be 30%.The corporate tax rate is 30%. This is obtained fro
Weighted Averge cost of capital for bolt
Forcast for inceremental investment
Years 0 1 2 3
Demand 3.0 3.5 4.0
Per bolt cost 50 54 58.32
Slaes Cost 150 186 231

Variable cost 75 93 116

Fixed Cost 6.0 6.5 7.0
Investment in Research 20
Depretiation 30 30 30
PBIAT -20.0 39.0 56.7 78.7
Corporate Tax -6.0 11.7 17.0 23.6
PAT -14.0 27.3 39.7 55.1
Capital expendature -150.0
Net working capital for sale sup 30.0 37.3 46.3 42.5

Plant and machinery

Working Capital Required for Sales
Slaveage Value

Total Investmemt
Debit
Equity
Cost of debit is 10%
Cost of equity is 30%

Balance
Corporate tax
PAT

E 240 Million
D 160 Million
 Cost of debt rD 10%
Cost of equity rE 30%
Propoertion of debt in total cap 40%
Propoertion of Equity in total ca 60%
Corporate tax 30%
After tax cost of borrowing 7%
Total Capital 400

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC 20.80%
We will estimate the free cash flows for Bolta and evaluate whether to go ahead with the project.

We
You will
mightestimate the free
have come cash
across flowsOperating
a term for Bolta and evaluate
Cash Flow in whether to go ahead with the project.
many finance
books.
Operating Cash Flow = Profit after Tax + Depreciation

Forcast for inceremental cash flow

Years 0 1 2 3

PAT -14.0 27.3 39.7 55.1

Depretiation 0 30 30 30
Capital Expendature -150 0 0 0
Increment in net working -30.0 -7.3 -9.0 3.8
capital
Free cash flow -194 50.0 60.7 88.9
WACC 21%
NPV ₹ 32.33
IRR 27%
You have been asked by the President of Jay Earth Moving Company, headquartered in Bangalore, to evaluate t
Problem The earth mover's basic price is Rs. 50 million.
Assume that the depreciation for the mover is 33% of the beginning book value.
The depreciation schedule is given below:
Year 0 1 2 3
Beginning book value 50 33.5 22.4
Depreciation 16.5 11.1 7.4
Ending book value 33.5 22.4 15.0
That is, in the first year the depreciation will be 33% of the value of the asset at the beginning of the period. Sin
Its beginning book value in year 1 is Rs. 50 million. Depreciation will be 33% of the beginning book value for tha
So ending book value is Rs. 33.5 million in year 1. This becomes the beginning book value in year 2. Depreciation
The mover will be sold after 3 years for Rs. 15.04 million which is equal to the book value at the end of year 3.
The new earth mover will require an increase in net working capital (spare parts inventory) of Rs. 4 million, whic
Revenue each year from the earthmover will be Rs. 40 million and operating costs (excluding depreciation) is Rs
JEM's tax rate is 30%.

JAY EARTH MOVING COMPANY

Year 0 1
Year 0 1 2 3
 Revenue 40 40 40
Operating costs 6 6 6
Depreciation 16.5 11.06 7.41
PBT 17.5 22.95 26.59
Tax (30%) 5.25 6.88 7.98
PAT 12.25 16.06 18.62
Operating cash flow 28.75 27.12 26.03
Net working capital (NWC) 4 4 4 4
Investment in NWC -4 0 0 4
Capital expenditure -50 15.04
Cash flow -54 28.75 27.12 45.07
WACC 10%
NPV 28.41

Problem Maram & Company Case:

They are contemplating the introduction of a new line which will require investment of Rs. 20 million in plant an
In the first year, revenue is expected to be Rs. 10 million followed by an increase of 30% each year for the next
There
Maramiswill
a fixed
havecost of Rs. 2inmillion
to invest working each yearequal
capital and the variable
to 20% costrevenue
of sales of production
at the comes to 60%
beginning of sales
of each year.revenu
You may assume that the entire working
The applicable tax rate for Maram is 33%. capital investment is recovered at the end of the project.
Maram has a Weighted Average Cost of Capital of 10%.

MARAM & COMPANY

Item 2016 2017 2018 2019
Investment -20
Revenue 10 13 16.9
Fixed cost 2 2 2
Variable Cost 6 7.8 10.1
Depreciation 4 4 4
Profit before Interest and Taxes -2.00 -0.80 0.76
Corporate Tax (33%) -0.66 -0.26 0.25
Unlevered Profit after Tax -1.34 -0.54 0.51
Operation cash flow 2.66 3.46 4.51
Net Working Capital 2 2.6 3.38 2.704
Investment in Net Working Capit -2 -0.6 -0.78 0.68
Free Cash Flow -22 2.06 2.68 5.2
WACC 10%
NPV -8.05

120 64
#NAME?
x 4/5 y
x+y=135
0.111111111111111 y 75
0.0833333333333333 x 60
0.972222222222222 0.0277777777778
0.25
 72
3.5 juice and mixtur 1.3333333333
24
x 8
56 42 1.3333333333
 ost of debt is 8%,

%, the corporate tax rate is 30% and the debt to equity ratio is 1.5. The WACC for XYZ Ltd. is:

ed dividend next year is Rs. 5,

share is Rs. 87.
 omized for the needs of specific applications. It has received an enquiry from the Spaceways Company to supply high precision bolts th
spacecraft goes up to the outer atmosphere and on its decent back to the ground.
crease by 15% for 2 years up to year 3, and then decrease by 15% for another 2 years.
o account for inflation
inflation rate of 8% each year.
earch and development. Also capital expenditure on plant and machinery for the new project is expected to be $ 150 million. Both the
alvage value after tax is $ 30 million.

he previous year, i.e., working capital required for sales in year t has to be made in year t-1.
pital in the proportion of 40% debt and 60% equity.
30%. This is obtained from the cost of equity of other firms that are suppliers to firms like Spaceways.

4 5
3.4 2.9 17
62.9856 68.024448 293
212 195 975

106 97 -488
7.6 8.2 -35.2
-20
30 30
68.6 59.3
20.6 17.8
48.1 41.5
30.0
39.0 -

-150
-195
30 -120 -24

400
40% of total investment
60% of total investment

-858
257.3285756026
-600
 4 5

48.1 41.5
30 30
0 30
3.5 39.0
81.5 140.5

Bangalore, to evaluate the proposed acquisition of a new earthmover.

inning of the period. Since the earth mover is purchased for Rs. 50 million,
nning book value for that year. The ending book value for year 1 is beginning book value minus the depreciation.
e in year 2. Depreciation in year 2 is 33% of beginning book value in year 2.
e at the end of year 3.
ory) of Rs. 4 million, which has to be made in year 0 itself.
uding depreciation) is Rs. 6 million.
 Rs. 20 million in plant and machinery, which would have to be incurred by the end of December 2016. Production, and the resultant re
% each year for the next 2 years, and then decline by 20% each year for the next 2 years, after which the line will be discontinued.
sning
to 60% of sales
of each year.revenue.Depreciation is straight line over the 5 year period.The value of plant and machinery at the end of 5 years ca
he project.

2020 2021

13.52 10.82
2 2
8.11 6.5
4 4
-0.59 -1.67 -0.59
-0.20 -0.55
-0.40 -1.12 2.00 -0.60 -0.78 0.68 0.54 2.16
3.60 2.88
2.1632 0
0.54 2.16
4.1 5.04
960
960/n X

960/(n-4) =X+40
960+40*960/n
960n-960n-40*960*n-960*4-960*40*4
157440
4.1
ply high precision bolts that are needed for their new spacecraft designed to take passengers for a flight over the earth to the limit of e

e $ 150 million. Both the research and development costs and the investment in plant and machinery will have to be done one year be
tion, and the resultant revenue and costs will start immediately.
ll be discontinued.
at the end of 5 years can be assumed to be zero.
the earth to the limit of earth’s atmosphere of 100 kms and back, hopefully alive and safe.

ve to be done one year before commercial production.

 The project's cost of capital=
weighted average
the firm has costits
financed ofassets
capital or WACC.
with a mix of debt and equity.
Cost of funds =weighted average cost of (debt funds and equity capcital)

Cost of Equity rE
Capital asset pricing model
The return to a stock be related to the measure of the market risk of the stock.
Divident discount model
P0 =D1/(1+rE)+D2/(1+rE)^2+D3/(1+rE)^3+….
D0*(1+g)/(1+rE)+D0*(1+g)^2/(1+rE)^2+D0*(1+g)^3/(1+rE)^3+…
Weighted average cost of capital
WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
Cost of Equity capital
Cost of debt capital
Market value of equity
Market value of net debt
Margina corporate tax rate

Interest paid on debt, which is rDxD can be deducted from taxable income
Corporate tax saved due to debt =rD *D*t
After tax, cost of debt =(rDxD)-(rDxDxt)= rD *D*(1-t)
Electrica Ltd., a firm that is listed on the stock
Proble 1 exchange
is 15% andhas
themarket value
corporate taxofrate
equity of Rs. 500 million and debt of Rs. 200 million The cost of debt is 8%,
is 30%.
What is Electrica’s cost of capital?

E
D
Cost of debt rD
Cost of equity rE
Corporate tax
Total Capital

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC

Proble 2 For a company XYZ Ltd. the cost of debt is 8%, the cost of equity is 15.2%, the corporate tax r

rD
rE
Corporate tax t
Debt to euity ratio

WACC?
D
WACC

Problem 3 What is the market capitalization rate for the company ABCD Ltd. whose expected dividend next year i
expected growth rate of dividend per annum is 5% and the current market price of the share is Rs. 87.
 Market Capitalization rate?
(D1/P0)+g
Dividend yield +Growth rate
Where g (Growth rate )<rE (Discount rate)
10.747%

Marsh Ltd, is a manufacturer of marshmallows. It is setting up a new capacity to increase

production. The sales revenue expected from this new capacity is $500,000 in year 1. In
year 2, sales revenue is expected to increase by 20% and in year 3, sales revenue is will
fall to 50% of year 2 revenue. Year 3 will be the last year of production as the equipment is
expected to fully wear out by then. Operating expenses (excluding depreciation) will be
40% of sales revenue. Marsh will have to incur capital expenditure of $300,000 in year 0 to
set up the plant, equipment, etc. Depreciation is $100,000 each year for 3 years. The asset
is fully depreciated in year 3 and it has no salvage value. Corporate tax rate is 30%. Marsh
plans to borrow $ 100,000 at an interest rate of 10% per annum to finance part of the
investment. Net working capital is estimated to be 10% of sales revenue and the
investment in net working capital needs to be made in the previous year. For example, $
50,000 is needed to be invested in net working capital in year 0 so as to be able to achieve
the sales of $ 500,000 in year 1. The cost of equity is 20% and the weighted average cost
Problem 4 of capital is 17.97%. What is the unlevered profit after tax in year 3?

Forcast for inceremental investment

Years
Demand
Per bolt cost
Revenue
Operating expansie
Capital expandature
Working capital
Interst on investment
Depretiation
PBIAT
Corporate Tax
PAT
Capital expendature
Net working capital for sale support

PAT
Depretiation
Capital Expendature
Increment in net working capital
Free cash flow
Debit
Equity
Cost of debit is 10%
Cost of equity is 30%

Balance
Corporate tax
PAT

E
 D
Cost of debt rD
Cost of equity rE
Propoertion of debt in total capitalD/(D+E)
Propoertion of Equity in total capital E/(D+E)
Corporate tax
After tax cost of borrowing
Total Capital

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC
We will estimate the free cash flows for Bolta and evaluate whether to go ahead with the project.

We
You will
mightestimate the free
have come cash
across flowsOperating
a term for Bolta and evaluate
Cash Flow in whether to go ahead with the project.
many finance
books.
Operating Cash Flow = Profit after Tax + Depreciation

Forcast for inceremental cash flow

Years

PAT
Depretiation
Capital Expendature

Increment in net working capital

Free cash flow
WACC
NPV
IRR
You have been asked by the President of Jay Earth Moving Company, headquartered in Bangalore, to evaluate t
Problem The earth mover's basic price is Rs. 50 million.
Assume that the depreciation for the mover is 33% of the beginning book value.
The depreciation schedule is given below:
Year
Beginning book value
Depreciation
Ending book value
That is, in the first year the depreciation will be 33% of the value of the asset at the beginning of the period. Sin
Its beginning book value in year 1 is Rs. 50 million. Depreciation will be 33% of the beginning book value for tha
So ending book value is Rs. 33.5 million in year 1. This becomes the beginning book value in year 2. Depreciation
The mover will be sold after 3 years for Rs. 15.04 million which is equal to the book value at the end of year 3.
The new earth mover will require an increase in net working capital (spare parts inventory) of Rs. 4 million, whic
Revenue each year from the earthmover will be Rs. 40 million and operating costs (excluding depreciation) is Rs
JEM's tax rate is 30%.

JAY EARTH MOVING COMPANY

Year 0 1
 Year
Revenue
Operating costs
Depreciation
PBT
Tax (30%)
PAT
Operating cash flow
Net working capital (NWC)
Investment in NWC
Capital expenditure
Cash flow
WACC
NPV

Problem Maram & Company Case:

They are contemplating the introduction of a new line which will require investment of Rs. 20 million in plant an
In the first year, revenue is expected to be Rs. 10 million followed by an increase of 30% each year for the next
There
Maramiswill
a fixed
havecost of Rs. 2inmillion
to invest working each yearequal
capital and the variable
to 20% costrevenue
of sales of production
at the comes to 60%
beginning of sales
of each year.revenu
You may assume
The applicable taxthat
ratethe
forentire
Maram working
is 33%.capital investment is recovered at the end of the project.
Maram has a Weighted Average Cost of Capital of 10%.

Item
Investment
Revenue
Fixed cost
Variable Cost
Depreciation
Profit before Interest and Taxes
Corporate Tax (33%)
Unlevered Profit after Tax
Operation cash flow
Net Working Capital
Investment in Net Working Capital
Free Cash Flow
WACC
NPV

#NAME?

0.111111111111111
0.0833333333333333
0.972222222222222
 rE
rD
E
D
t

. 200 million The cost of debt is 8%,

500 Million
200 Million
8%
15%
30%
700

12.31%

equity is 15.2%, the corporate tax rate is 30% and the debt to equity ratio is 1.5. The WACC for XYZ Ltd. is:

8%
15.20%
30%
1.5

1.5E
9.440%

d. whose expected dividend next year is Rs. 5,

arket price of the share is Rs. 87.
 0 1 2 3

500,000 600,000 300,000

200,000 240,000 120,000

50,000 60,000 30,000

100000 100000 100000

-50,000.0 140,000.0 230,000.0 80,000.0
-15,000.0 42,000.0 69,000.0 24,000.0
-35,000.0 98,000.0 161,000.0 56,000.0
-300,000.0
100,000.0 120,000.0 60,000.0 -

-35,000.0 98,000.0 161,000.0 56,000.0

0 100000 100000 100000
-300,000.0 0 0 0
-50,000 -10,000 30,000 30,000
-385,000.0 188,000.0 291,000.0 186,000.0
40% of total investment
60% of total investment

-120
36
-84

90 Million
 60 Million
10%
30%
40%
60%
30%
7%
150

20.80%
o go ahead with the project.

o go ahead with the project.

0 1 2 3 4 5

-14.0 27.3 39.7 55.1 48.1 41.5

0 30 30 30 30 30
-150 0 0 0 0 30
-100,000.0 -20,000.0 60,000.0 60,000.0 - -
-100164 -19942.7 60069.7 60085.1 78.1 101.5
21%
₹ -41,347.17
0%
headquartered in Bangalore, to evaluate the proposed acquisition of a new earthmover.

0 1 2 3
50 33.5 22.4
16.5 11.1 7.4
33.5 22.4 15.0
e asset at the beginning of the period. Since the earth mover is purchased for Rs. 50 million,
e 33% of the beginning book value for that year. The ending book value for year 1 is beginning book value minus the depreciation.
eginning book value in year 2. Depreciation in year 2 is 33% of beginning book value in year 2.
al to the book value at the end of year 3.
pare parts inventory) of Rs. 4 million, which has to be made in year 0 itself.
erating costs (excluding depreciation) is Rs. 6 million.

ANY
 0 1 2 3
40 40 40
6 6 6
16.5 11.06 7.41
17.5 22.95 26.59
5.25 6.88 7.98
12.25 16.06 18.62
28.75 27.12 26.03
4 4 4 4
-4 0 0 4
-50 15.04
-54 28.75 27.12 45.07
10%
28.41

ire investment of Rs. 20 million in plant and machinery, which would have to be incurred by the end of December 2016. Production, a
an increase of 30% each year for the next 2 years, and then decline by 20% each year for the next 2 years, after which the line will be d
production
enue at the comes to 60%
beginning of sales
of each year.revenue.Depreciation is straight line over the 5 year period.The value of plant and machinery at the
ed at the end of the project.

MARAM & COMPANY

2016 2017 2018 2019 2020 2021
-20
10 13 16.9 13.52 10.82
2 2 2 2 2
6 7.8 10.1 8.11 6.5
4 4 4 4 4
-2.00 -0.80 0.76 -0.59 -1.67
-0.66 -0.26 0.25 -0.20 -0.55
-1.34 -0.54 0.51 -0.40 -1.12
2.66 3.46 4.51 3.60 2.88
2 2.6 3.38 2.704 2.1632 0
-2 -0.6 -0.78 0.68 0.54 2.16
-22 2.06 2.68 5.2 4.1 5.04
10%
-8.05

120 64

x 4/5 y
x+y=135
y 75
x 60
0.0277777777778
 0.25

72
3.5 juice and mixtur 1.3333333333
24
x 8
56 42 1.3333333333
WACC for XYZ Ltd. is:
 -150
-
30 -120 -24

150
40% of total investment
total investment
alue minus the depreciation.
of December 2016. Production, and the resultant revenue and costs will start immediately.
ars, after which the line will be discontinued.
ue of plant and machinery at the end of 5 years can be assumed to be zero.

-0.59

2.00 -0.60 -0.78 0.68 0.54 2.16

960
960/n X

960/(n-4) =X+40
960+40*960/n
960n-960n-40*960*n-960*4-960*40*4
157440
4.1
 Simple Intrest
Compund intrest
APR = (Periodic interest rate) * (Number of such periods in a year)
EAR = (1 + APR/N)N - 1 15.865%
Principal invested = cash flow/rate of intrest
Anuity/Future value by starting payment and ending payment 12.683%
PMT

Ordinary aunity formula

PV ₹ -21,042.00 where Rate 9%
nper 2
Pmt
FV 25000
Type 0

Annuity
Ordinary aunity formula
FV at year ₹ 739,667.02 where Rate 1%
nper 60
Pmt -10000
FV
Type 1

Using annuity due formula

₹ -48,733.88 where Rate 7%
nper 8
Pmt 0
PV 500000
Type 0
Perpetuity
C=P*r C-Cash Flow, P-Principal Invested, r-Return earned on the invested a
Formula for PV Annuity 200
Annuity

PV (C/r)-(C/r)*[1/(1+r)^N]
Where
C-Periodic cash flow.
r-Periodic interest rate.
N-Number of periods

Example of an amortizing loan

Laon amount 200,000
Period 1 year
interest rate 12%
EMI
Monthly installment rate-APR/no of months
 1.00%
Using the PMT Formula PMT ₹ 98,605

₹ 1,183,260
C -119,855.03

Future Value at 60 10,000,000 Interest rate

Using PMT formula in excel

PMT= ₹ -58,032.65 Where rate
nper
PV
PV 676,345.43 FV

Higher the discount rate, lower the present value

Bonds & Stock

Coupon Rate= Annual Coupon /Face Value

Coupon Rate= (Coupon * no of coupon payments per year) /Face Value

The present value of anuity streams.

(C/r)*(1-1/(1+r)^N) 5540.185335
where C is the periodic cash flow,
r is the discount rate, and
N is the number of periods.

Present value of face vlaue 4459.814665

Presnt value of Bond 10000

Value of of bond fall if interest rate increase, coupon rate & Face value will not change, only discount rate wil
Value of bond is inversily proportional to market intreast rate

Bond yield equivalent of this T Bill ((F-P)/P)/t

8.19% 12.82%
F-Face Value
P-Price Paid
t-Time is represented as fraction of a year
of Rs. 10,000. Investors in the bond
can purchase
Investors the bond for Rs. 6,000.
will not
receive any coupon but ADB Company will pay Rs. 10,000 to the bond holders on maturity.
PV (1+r)^N=FV

ADB Company
 r- yeild to maturity
Bond period 5 years
Face Vale 10,000
Investors in the bond can ppurchase the bond at

6000*(1+x)^5=10000

Price -6000 PV
face Value 10000 FV
no of years 5 nper
Coupon 0 pmt

Rate (NPER,PMT,PV,FV)
Yeild to maturity 10.76%

Problem Consider a 3 year bond with a face value of RS 1000 and coupon rate of 6% paid semi annually. If the bond is tra
Face value 1000
semi annual coupon 0.03
Coupon rate 30

Current value of the market -975

Current Value =presnt value of anuity + Present value of the face value
Current Value =(C/r)*(1-1/(1+r)^N) + (C/(1+r)^N)
975=(1000/r)*(1-1/(1+r)^3)+(1000/(1+r)^3)
Yield to meturity -YTM

Price -975 PV
Face Value Coupon rate 1000 FV
Coupon rate 6%
Yearly payment 60
Semi Annual Payment 30 pmt
No of years 3
Frequency 2 Per year
No. of period 6 nper

Semi annual yeild 3.47%

Yeild to meaturity > Coupon Rate

Market price < Face value

P0 =(D1+P1)/(1+re)
re =D1/P0+(P1-P0)/P0
Re= Dividend Yeild + Capital gains rate

P0= D1/(1+re)+D2/(1+re)^2+…..+DN/(1+re)^N+PN/(1+re)^N
 DN=D0/(1+G)^N
As long as Growth rate g <re(Discount rate)

Pv of the dividends =P0=D1/(re-g)

Net Present Value (NPV)

...and generates cash flows of Rs. 30 million for 5 years.

The appropriate discount rate given the opportunity cost is 10%.

Time 0 1 2 3
Cash flow -100 30 30 30
Discount r 10% 10% 10% 10%

PV of cash -100 27.3 24.8 22.5

NPV 13.7
NPV (using 13.72

Time of cash flow

Time 0 1 2 3
Cash flow -100 30 30 30
IRR 15.2%

E 500 Million
D 200 Million
Cost of debt rD 8%
Cost of equity rE 15%
Corporate tax 30%
Total Capital 700

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC 12.31%

Where g growth rate <discount rate rE

Maket capitalization rate =D1/P0+g
Cost of equity of the firm =market capitalization rate
 21041.999831664

Since its out flow, its negitive

Since the payment is timed at the end of the period

Since its out flow, its negitive

Since the payment is timed at the end of the period

Since its out flow, its negitive

Since the payment is timed at the beginning of the period

ed, r-Return earned on the invested amount

1% 12%

400000 0.235851 12719.89 500000 0.432573

 Where Rate 5% 167
Nper 4 177
PV 0 344 24
FV -425,000

8% No of periods 35

8%
35
0
10,000,000

will not change, only discount rate will change it will effect value bond

ders on maturity.
chase the bond at Rs 6000

-905
1000
12
0

0.84%

% paid semi annually. If the bond is trading at Rs 975, what is the yield to maturity of the bond

Price -92 PV
Face Value Cou 100 FV
Coupon rate
Yearly paymen 8

No of years 15
Frequency Per year
No. of period nper

Semi annual ye 8.99%

 4 5 Time 0 1 2
30 30 Cash flow -300 60 120
10% 10% Discount r 10% 10% 10%
NPV 19.01
IRR 13%
20.5 18.6
Time 0 1 2
Cash flow -450 180 200
Discount r 10% 10% 10%
NPV 14.16
4 5 IRR 12%
30 30

E E Million E 60% Million

D 1.5E Million D 40% Million
Cost of debt rD 8% Cost of deb 10%
Cost of equity 15% Cost of equ 30%
Corporate tax 30% Corporate 30%
Total Capital 2.5E Total Capital

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t) WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC 9.44% WACC 20.80%
138704.9
 3
220
10%

3
180
10%
 Simple Intrest
Compund intrest
APR = (Periodic interest rate) * (Number of such periods in a year)
EAR = (1 + APR/N)N - 1 15.865%
Principal invested = cash flow/rate of intrest
Anuity/Future value by starting payment and ending payment 12.683%
PMT

Ordinary aunity formula

PV ₹ -274,591,155.70 where Rate 6%
nper 25
Pmt 0
FV 1250000000
Type 0

Annuity
Ordinary aunity formula
FV at year ₹ 739,667.02 where Rate 1%
nper 60
Pmt -10000
FV
Type 1

Using annuity due formula

₹ -48,733.88 where Rate 7%
nper 8
Pmt 0
PV 500000
Type 0
Perpetuity
C=P*r C-Cash Flow, P-Principal Invested, r-Return earned on the invested a
Formula for PV Annuity 200
Annuity

PV (C/r)-(C/r)*[1/(1+r)^N]
Where
C-Periodic cash flow.
r-Periodic interest rate.
N-Number of periods

Example of an amortizing loan

Laon amount 200,000
Period 1 year
interest rate 12%
EMI
Monthly installment rate-APR/no of months
 1.00%
Using the PMT Formula PMT ₹ 98,605

₹ 1,183,260
C -119,855.03

Future Value at 60 10,000,000 Interest rate

Using PMT formula in excel

PMT= ₹ -32,426.57 Where rate
nper
PV
PV 3,971,137.59 FV

Higher the discount rate, lower the present value

Bonds & Stock

Coupon Rate= Annual Coupon /Face Value

Coupon Rate= (Coupon * no of coupon payments per year) /Face Value

The present value of anuity streams.

(C/r)*(1-1/(1+r)^N) 5540.185335
where C is the periodic cash flow,
r is the discount rate, and
N is the number of periods.

Present value of face vlaue 4459.814665

Presnt value of Bond 10000

Value of of bond fall if interest rate increase, coupon rate & Face value will not change, only discount rate wil
Value of bond is inversily proportional to market intreast rate

Bond yield equivalent of this T Bill ((F-P)/P)/t

8.19% 12.82%
F-Face Value
P-Price Paid
t-Time is represented as fraction of a year
of Rs. 10,000. Investors in the bond
can purchase
Investors the bond for Rs. 6,000.
will not
receive any coupon but ADB Company will pay Rs. 10,000 to the bond holders on maturity.
PV (1+r)^N=FV

ADB Company
 r- yeild to maturity
Bond period 5 years
Face Vale 10,000
Investors in the bond can ppurchase the bond at

6000*(1+x)^5=10000

Price -6000 PV
face Value 10000 FV
no of years 5 nper
Coupon 0 pmt

Rate (NPER,PMT,PV,FV)
Yeild to maturity 10.76%

Problem Consider a 3 year bond with a face value of RS 1000 and coupon rate of 6% paid semi annually. If the bond is tra
Face value 1000
semi annual coupon 0.03
Coupon rate 30

Current value of the market -975

Current Value =presnt value of anuity + Present value of the face value
Current Value =(C/r)*(1-1/(1+r)^N) + (C/(1+r)^N)
975=(1000/r)*(1-1/(1+r)^3)+(1000/(1+r)^3)
Yield to meturity -YTM

Price -975 PV
Face Value Coupon rate 1000 FV
Coupon rate 6%
Yearly payment 60
Semi Annual Payment 30 pmt
No of years 3
Frequency 2 Per year
No. of period 6 nper

Semi annual yeild 3.47%

Yeild to meaturity > Coupon Rate

Market price < Face value

P0 =(D1+P1)/(1+re)
re =D1/P0+(P1-P0)/P0
Re= Dividend Yeild + Capital gains rate

P0= D1/(1+re)+D2/(1+re)^2+…..+DN/(1+re)^N+PN/(1+re)^N
 DN=D0/(1+G)^N
As long as Growth rate g <re(Discount rate)

Pv of the dividends =P0=D1/(re-g)

Net Present Value (NPV)

...and generates cash flows of Rs. 30 million for 5 years.

The appropriate discount rate given the opportunity cost is 10%.

Time 0 1 2 3
Cash flow -100 30 30 30
Discount r 10% 10% 10% 10%

PV of cash -100 27.3 24.8 22.5

NPV 13.7
NPV (using 13.72

Time of cash flow

Time 0 1 2 3
Cash flow -100 30 30 30
IRR 15.2%

E 500 Million
D 200 Million
Cost of debt rD 8%
Cost of equity rE 15%
Corporate tax 30%
Total Capital 700

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC 12.31%

Where g growth rate <discount rate rE

Maket capitalization rate =D1/P0+g
Cost of equity of the firm =market capitalization rate
Capex
NPV PI
Project A 28 0.72 38.88888888889
B 40.2 1.01 39.80198019802
C 10 0.18 55.55555555556
D 59 0.73 80.82191780822
 21041.999831664

Since its out flow, its negitive

Since the payment is timed at the end of the period

Since its out flow, its negitive

Since the payment is timed at the end of the period

Since its out flow, its negitive

Since the payment is timed at the beginning of the period

ed, r-Return earned on the invested amount

1%

400000 0.235851 12719.89 500000

 Where Rate 5% 167
Nper 4 177
PV 0 344 24
FV -425,000

8% No of periods 35

1%
12
0
400,000 367,573.43

will not change, only discount rate will change it will effect value bond

ders on maturity.
chase the bond at Rs 6000

-905
1000
12
0

0.84%

% paid semi annually. If the bond is trading at Rs 975, what is the yield to maturity of the bond

Price -1800 PV
Face Value Cou 2000 FV
Coupon rate 6%
Yearly paymen 110

No of years 10
Frequency Per year
No. of period nper

Semi annual ye 6.92%

 4 5 Time 0 1
30 30 Cash flow -200 60
10% 10% Discount r 12% 10%
NPV 16.29
IRR 15%
20.5 18.6
Time 0 1
Cash flow -450 180
Discount r 10% 10%
NPV 14.16
4 5 IRR 12%
30 30

E E Million E 60% Million

D 1.5E Million D 40% Million
Cost of debt rD 8% Cost of deb 10%
Cost of equity 15% Cost of equ 30%
Corporate tax 30% Corporate 30%
Total Capital 2.5E Total Capital

WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t) WACC=[E/(E+D)]*rE+[D/(E+D)]*rD*(1-t)
WACC 9.44% WACC 20.80%

18.50%

180
 12%

0.4325731443 138704.86597
 2 3
60 60 60 60
10% 10%

2 3
200 180
10% 10%
Which of the following form of business organization is the simplest to start with?
Which form of business organization is most effective in raising huge amount of capital?
In the case of funds raised from investors in the form of ________ , there is a mandated repayment that has to be done in
the form of interest and principal.
Who looks after the raising of funds for the firm?
Cash and balance with banks is an example of:
What are the major sources of funds for a corporation?
In which form of organization do we find a separation of ownership and management?
Shareholders do not have the same information that the mangers have, resulting in __________.
Shares of a listed company are traded in which of the following?
What is the full form of IPO?
Who is the ultimate owner in a corporation?
A corporation is separately taxed from that of its shareholders. This leads to __________.
Which of the following is an example of an intangible asset?
Accounting identity:
_________________ of a firm is the total market value of the equity shares issued by the firm.
Firms issue shares to general public for the first time through _________.
What information is needed to calculate market capitalization on a given date?
Which of the following forms of business would have the highest cost related to agency problems?
Calculate the maturity value of a fixed deposit of $500 invested at 10% simple interest per annum for 5 years.
A moneylender is willing to give a farmer a small loan of Rs. 2000 at 2.5% per month for a period of 1 year. Calculate the
Effective Annual Rate. ( Round off to nearest integer)
A bank offers an auto loan at 12% APR, compounded quarterly. What is the Effective Annual Rate?
Present Value (PV) of a cash flow will be lower with higher discount rates.
Find the present value (PV) of Rs. 25,000 received after 2 years. The opportunity cost is an Effective Annual Rate of 9%.
(Round it to the nearest integer)
If the opportunity cost of a perpetual bond is 2%, what is the present value of a perpetuity that pays 4 pounds per year for
Which of the following does not have characteristics of an annuity?
Rs 1200 is deposited in a bank account at the end of each year for 3 years. The bank pays an annual interest of 7%. What
is the future value at year 3?
Asia Finances is extending a loan facility of $ 500,000 for 5 years at the rate of 12% per annum compounded annually. The
loan is paid back in the form of 5 equal installments. Find the size of each installment if the payments are made at the
end of each year? (Round off to 2 decimal places)
Mrs. Mani plans to save Rs. 10,000 every month. She deposits Rs. 10,000 at the start of every month, starting now for 5
years in a bank deposit which pays 8% per annum, with monthly compounding. What would be the value of her savings at
the end of 5 years

Donald Clinton is planning his retirement. He is 55 years old today. He would like to have Rs. 800,000 by the time he is 70.
He intends to deposit a constant sum of money over the 15 year period in a bank account at the rate of 12% per
annum.How much should Mr. Clinton invest at the end of each year for the next 15 years to obtain Rs. 800,000 when he
turns 70
Consider the case where Annual Percentage Rate (APR) is 15%. If the frequency of compounding is every 3 months, what
will be the value of Effective Annual Rate (EAR)?

Which of the following represents the future value of Rs. 1,000 invested at 10%, compounded annually, for 10 years ?
Rs.444 to be received at the end of one year has a present value of Rs.400. What is the one-year discount rate?
Mr. Akram wants Rs. 500,000 at the end of 8 years from now. Find the amount to be deposited at the end of each year, in
an account offering 7% interest compounded annually.
The discount rate to be used for calculating the present value of a stream of cash flow should be
You are considering an investment of $ 1500 annually. The first payment is made now and the last payment is made at
the end of year 3. The annual return on this investment is 3%. What is the future value at the end of year 4 of this
investment?

Milo Corp. wants to accumulate $ 500,000 for a payment that will become due in 5 years. That is , at the end of 5 years it
will have to pay this amount. It intends to make a deposit of constant amount every year for the next 5 years, starting at
the end of the first year. The deposit earns an interest of 8% annually. What is the amount that Milo Corp. should save
every year?

Find the price of a semi-annual coupon bond where annual coupon rate is 8%. The face value is Rs. 1000 and there are 5
years until maturity. The annual percentage rate on bonds of comparable risk with semi annual compounding is 16%.
A 180 day T- bill is trading in the market for Rs. 96. The face value of the T- bill is Rs. 100. What is the bond yield
equivalent for this T- bill? Assume 1 year = 360 days.
What is the other name for zero coupon bond?
What is the other name for credit risk?
Having a credit rating ensures repayment of principal and coupon by the bond issuer.
Consider an investor who purchases a share at Rs. 500 and receives a dividend of Rs. 15 and sells the share at Rs. 525 one
year later. What is the total return of the stock?
Find the value of dividend at year 1 given that the current stock price is Rs. 100 per share and dividends are expected to
grow at a constant rate of 5.5% in the foreseeable future. The required return is 15%.
Retention rate + Payout rate should be

A firm has Rs. 100,000 worth of assets and Rs. 24,000 worth of liabilities. What is the book value of equity of the firm?
If a company's Earnings per Share (EPS) is $ 50 and its current share price is $ 600, what is the Price-Earnings ratio?
The coupon rate is the annual interest or coupon paid on a bond, expressed as a percentage of the market price on the
year end.
What is the value of a corporate bond with 5 year maturity paying 7.5% annual coupon. The face value of the bond is
Rs.1000. The opportunity cost of bonds of similar risk is 6.5%. What is the value of the bond?
Tom is planning to buy a bond having a face value of $100. The current market price of the bond is $92. The coupon
payment is $8 payable annually with a 15 year maturity. Calculate the Yield to maturity for the bond.
Which of the follwing statement is correct. As the credit risk of a bond increases:
Interest rates and bond prices
The company earns a net profit of Rs. 200,000 and decides to pay a dividend of Rs. 60,000. What is the retention rate of
the company?
The EPS of Dominica Inc. is Rs. 120. If the average Price-Earnings ratio of comparable firms is 39.2, estimate the value of
Dominica's share.
Calculate the coupon rate of the bond paying $20 as coupon payments, every quarter. The bond has a face value of Rs.
1000.
Venus Airlines will pay a $8 dividend next year on its stock, which is currently selling at $100 per share. What is the
market's required return on this investment if the dividend is expected to grow at 5% forever?
Growth Tech Inc., has earned $ 40 as Earnings Per Share. It proposes to pay $10 as dividend and reinvest the remaining.
The return on investment by the firm is 20%. What is the growth rate of the firm’s earnings and dividends assuming a
constant payout ratio and return on investment?
A project requires an investment of $100 million. The project will generate cash flows of $10 million for 10 years. What
will be the payback period for the project?
Which of the following is a disadvantage of payback period?
NPV method does not take into account time value of money.
An investment would cost $200,000 and provide annual cash inflows of $31,250 for 6 years. If the opportunity cost of
capital is 10%, calculate the NPV for the investment.
A project costs $120,000 and is expected to generate cash inflows of $56,000, $45,000 and $ 46,000 at the end of each
year for the next 3 years. Calculate the project’s IRR.
The IRR of a project is that interest rate where
The sequence of –Rs.100, Rs.650, -Rs.1200, Rs.600 and Rs. 40 is a nonconventional cash flow pattern and we need to be
careful in interpreting the IRR.
For a project, from the NPV schedule, we see that the NPV is positive for discount rates between 10% and 30%. The
opportunity cost for this project is 15%. Should we invest in this project?
Profitability Index is
A company is considering an investment proposal to buy a new asset at a cost of $50,000. The estimated cash inflows are
as follows:
Sporty Skates have a yearly sales revenue of $500 million, cost of goods sold of $230 million, selling and administrative
expenses $30 million, depreciation of $110 million and a tax rate of 30%. Calculate the operating cash flow for the year.
(Operating Cash Flow = Profit after Tax + Depreciation)
Unlevered profit after tax is the profit earned assuming that the firm
PQR ltd. reported $20 million profit after tax, $2 million of capital expenditure, $5 million change in working capital and
depreciation of $2 million for a given year. Calculate the free cash flow available to the firm.

Pharma Ltd. has been trying to decide whether or not to invest in any of the new medicines it has developed. One of the
arguments in favor of making the investment is that so much money has been spent on their development that it would
be a waste of money not to invest and manufacture the new medicines. What is the major problem with this argument?
For a company XYZ Ltd. the cost of debt is 8%, the cost of equity is 15.2%, the corporate tax rate is 30% and the debt to
equity ratio is 1.5. The WACC for XYZ Ltd. is:
The projects cost of capital =weighted average cost of capital
For a company XYZ Ltd. the cost of debt is 8%, the cost of equity is 15.2%, the corporate tax rate is 30% and the debt to equity ratio is
1.5. The WACC for XYZ Ltd. is:
What is the market capitalization rate for the company ABCD Ltd. whose expected dividend next year is Rs. 5, expected growth rate of
dividend per annum is 5% and the current market price of the share is Rs. 87.

200
350
550
690

Mana Pharma is 100% equity financed and is expected to earn $ 100 per share as profit in the coming year. Currently the
firm earns a return on investment of 20% and has a retention ratio of 50% of earnings. The cost of equity of Mana Pharma
is 15%. Mana Pharma is faced with a new investment opportunity which requires a one-time investment of $ 30 per share
in year 1. This new project will generate a return of 5% on invested capital each year forever. The opportunity cost of this
project is also 15%. Mana Pharma’s management will continue to invest in the older product as scheduled and the
investment in the new project will be funded through a cut in dividend of $30. What is the value of Mana Pharma’s stock
price today with this new project?

Mana Pharma fund

Expectd profit earn
Form capital
Ernings
Retention rate
cost of quity is
new investment
New project returns
Opportunity cost of the project
 Sole proprietorship
Corporation

Debt
Finance Manager
Current Asset
Debt and equity
Corporation
Information asymmetry
Stock exchange
Initial public offering
Share holders
Value added taxation
All of the above (brand name, patents, customer database
Total Assets = Total Liability + Equity
Market capitalization
IPO
Share price and number of shares outstanding
Corporation
750 Compund interest 805.255

34.49%
12.55%
1

21042.0
per year foreve 200
Consols

3857.88

138,704.87

Rs 739667

-21,459

15.9%

2593.7424601
11%

-48,734
Opportunity cost
 ₹ 6,464

₹ -85,228.23

731.596744042342

8.33%
Discount Bond
Default risk
0

8.00%

9.50
equal to 1

76000
12

1041.56

8.99%
The YTM increases and price of the bond falls
Move in opposite direction

70%

4704

8%

13.00%

10
It does not take into account the time value of money and cash flows arising beyond the payback period.
0

-63,898.10

11.3% -120000 56000 45000 46000

The NPV of the project is zero. 1 2

1 -50000 12000 14000

yes 10% 10909 11570

NPV / Investments

0.218182 0.231405

201 0.047603 0.053548

Is 0% debt financed.

15

It includes sunk costs in the decision.

9.44%

10.75%

35 0.18
25 0.07
80 0.15
70 0.10

100% equity
100 per share
x
x*120%
X*12/5%
15%
30 per share
31.5
15%
 3 4 5

15000 20000 10000

11270 13660 6209

0.225394 0.273205 0.124184

0.050803 0.074641 0.015422