FM Type Wise Practical Mcqs

INDEX
CAPITAL BUDGETING .............................................................................................................................................................. 2

CAPITAL STRUCTURE ............................................................................................................................................................. 14
COST OF CAPITAL .................................................................................................................................................................. 21
DIVIDEND POLICY .................................................................................................................................................................. 29
WORKING CAPITAL ............................................................................................................................................................... 33
SECURITY ANALYSIS & PORTFOLIO MANAGEMENT ............................................................................................................. 43
NOTE:
AS PER ME, THIS IS SUFFICIENT FOR REVISING
PRACTICAL QUESTIONS BEFORE EXAMS, HENCE, I
AM PROVIDING THIS. NO NEED TO ASK OR CONFIRM
WHETHER THIS IS SUFFICIENT OR NOT.
1|Page Think CMA FMSM, Think Amit Talda Sir

CAPITAL BUDGETING
SIMPLE INTEREST
YouTube Video Link : https://youtu.be/jri_JC6MyVc?t=99
` 2,000 is deposited in a bank for 2 years at simple interest of 6%. How much will be the balance at the end of 2 years?
Note: Use simple interest rate method.
(a) ` 2,000
(b) ` 2,240
(c) ` 2,420
(d) ` 2,640
WORKING:
Required balance is given by
𝐹𝑉𝑛 = 𝑃𝑜 + 𝑃𝑜 (𝑖)(𝑛) = 2,000 + 2,000(0.06)(2) = 2,000 + 240 = 2,240.
COMPOUND INTEREST
` 2,000 is invested at annual rate of interest of 10%. What is the amount after 2 years if the compounding is done annually?
(a) ` 2,420.00
(b) ` 2,431.00
(c) ` 2,440.58
(d) ` 2,442.70
WORKING:
The annual compounding is given by:
10
𝐹𝑉 = 𝑃(1 + 𝑖)𝑛 , 𝑛 𝑏𝑒𝑖𝑛𝑔 2, 𝑖 𝑏𝑒𝑖𝑛𝑔 = 0.1 𝑎𝑛𝑑 𝑃 𝑏𝑒𝑖𝑛𝑔 2,000
100
2,000 (1.1)2 = 2,000 × 1.21 = 2,420
` 2,000 is invested at annual rate of interest of 10%. What is the amount after 2 years if the compounding is done semi
annually?
(a) ` 2,420.00
(b) ` 2,431.00
(c) ` 2,440.58
(d) ` 2,442.70
WORKING:
𝐹𝑜𝑟 𝑆𝑒𝑚𝑖𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔, 𝑛 = 2 × 2 = 4, 𝑖 = 0.1/2 = 0.05
𝐹𝑉4 = 2,000 (1 + 0.05)4 = 2,000 × 1.2155 = 2,431
` 2,000 is invested at annual rate of internet of 10%. What is the amount after 2 years if the compounding is done monthly?
(a) ` 2,420.00
(b) ` 2,431.00
(c) ` 2,440.58
(d) ` 2,442.70
WORKING:
𝐹𝑜𝑟 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔, 𝑛 = 12 × 2 = 24, 𝑖 = 0.1/12 = 0.00833
𝐹𝑉24 = 2,000(1.00833)24 = 2,000 × 1.22029 = 2,440.58
FUTURE VALUE OF SINGLE CASH FLOW


What will be the maturity value of a sum of ` 18,000 invested today at the rate of 5% p.a. for 10 years?
(a) ` 29,360
(b) ` 28,320
(c) ` 29,320
(d) ` 35,220
WORKING:
FV of Single Cash Flow
𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
= 18000(1 + 0.05)10
= 29,320/−
PRESENT VALUE & FUTURE VALUE OF SINGLE CASH FLOW

A sum of ` 50,000 is invested @ 12% p.a. for 6 years. What will be the present value of its maturity value, assuming a
required rate of return of 10%?
(a) ` 86,000
(b) ` 98,700
(c) ` 55,667
(d) ` 56,504
WORKING:
𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑉(1 + 𝑖)𝑛
= 50000(1 + 0.12)6
= 50000 × 1.974
= 98700
𝑃𝑉 = 𝑀𝑉 × 𝑃𝑉𝐹 @ 10% 𝑓𝑜𝑟 6𝑡ℎ 𝑦𝑟

= 98700 × 0.564
= 55667/−
What is the present value of the maturity value of ` 10,000 which has been given on 15% interest for five years while
required rate of return is 10% ? (FV @ 15% after 5 years is 2.01136, FV @ 10% after 5 years is 1.61051)
(a) ` 12,488.94
(b) ` 12.494.88
(c) ` 21.494.88
(d) ` 21.488.94
WORKING:
𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 = 10,000(1 + 0.15)2
= 20,113.6/−
𝐹𝑉
𝑃𝑉 =
(1 + 0.1)5
20113.6
=
1.61051
= 12488.94
The present value of ` 1,000 to be received after one year at the rate of 8% per annum is ` 926, if discounted half yearly, the
present value would be:
(a) ` 924.55
(b) ` 930.00
(c) ` 600.96
(d) ` 934.00

WORKING:
1
𝑃𝑉𝐹 =
𝑟 2
(1 + 2)
1
=
0.08 2
(1 + 2 )
= 0.92455
𝑃𝑉 = 1000 × 0.92455
= 924.55/−
PRESENT VALUE OF ANNUITY

……………….. is the present value of an asset, if the annual cash inflow is ` 1,000 per year for next 5 years and the
discount rate is 15%.
(a) ` 2,500
(b) ` 3,500
(c) ` 3,352
(d) ` 2,481
WORKING:
𝑃𝑉 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 = 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 × 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐹𝑎𝑐𝑡𝑜𝑟
= 1000 × 3.352
= 3352/−
Determine the present value of ` 700 each paid at the end of each of the next 6 years. Assume an 8% interest.
(a) ` 3,263.10
(b) ` 3,632.01
(c) ` 3,326.01
(d) ` 3,236.10
WORKING:
As the present value of an annuity of ` 700 has to be computed. The present value factor of an
annuity of ` 1 at 8 per cent for 6 years is 4.623. Therefore, the present value of an annuity of `
700 will be: 4.623 × ` 700 = ` 3,236.10
FUTURE VALUE OF ANNUITY

A person is required to pay four equal annual payments of ` 4,000 each in his Deposit account that pays 10 per cent interest
per year. Find out the future value of annuity at the end of 4 years.
WORKING:
(1+𝑖)𝑛 −1 (1+0.10)4 −1
𝐹𝑉𝐴 = 𝐴 ( 𝑖
) = ` 4,000 ( 0.10
) = ` 4,000 × 4.641 = ` 18,564
Future Value of Annuity at the end of 4 years = ` 18,564
Find the amount of an annuity if payment of ` 500 is made annually for 7 years at interest rate of 14% compounded
annually.
(a) ` 5,356.25
(b) ` 5,563.52
(c) ` 5,365.25

(d) ` 5,635.52
WORKING:
R = 500, n = 7, i = 0.14
𝐹𝑉𝐴 = 500 × 𝐹𝑉𝐼𝐹𝐴(7,0.14) = 500 × 10.7304915 = 5,365.25
A person is required to pay 4 equal annual payments of ` 5,000 each in his deposit account that pays 8% interest per year.
Find out the future value of annuity at the end of 4 years.
(a) 22,535
(b) 25,553
(c) 23,355
(d) 23,255
WORKING:
𝑛
(1 + 𝑖)𝑛 − 1
𝐹𝑉𝐴 = 𝑅 [ ]
𝑖
= 5,000 (4.507)
= 22,535
NOMINAL YIELD
YouTube Video Link : https://youtu.be/E_GMmSRm3jc?t=98
The effective rate of interest for a sum of money compounded quarterly is 12.55%. What is its nominal yield?
(a) 12.05%
(b) 12.25%
(c) 12.15%
(d) 12%
WORKING:
𝑖
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒 = (1 + )4 − 1
4
𝑖
0.1255 = (1 + )4 − 1
4
𝑖
1.1255 = (1 + )4
4
𝑇𝑎𝑘𝑒 4𝑡ℎ 𝑅𝑜𝑜𝑡 𝑜𝑛 𝐵𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠.
𝑖
1.0299 = 1 +
4
𝑖 = (1.0299 − 1) × 4
𝑖 = 12%
Given that the effective rate of interest is 9.31% p.a., what is the nominal rate of interest p.a., if compounding is carried out
quarterly?
(a) 9.25%
(b) 8.5%
(c) 9%
(d) 9.20%
WORKING:

𝑖
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 = (1 + )𝑛 − 1
𝑛
𝑖
0.0931 = (1 + )4 − 1
4
𝑖
1.0931 = (1 + )4
4
𝑇𝑎𝑘𝑒 4𝑡ℎ 𝑅𝑜𝑜𝑡 𝑜𝑛 𝐵𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠.
𝑖
1.0225 = 1 +
4
𝑖 = (1.0225 − 1) × 4
𝑖 = 9%
PERPETUITY
Ramu wants to retire and receive ` 3,000 a month. He wants to pass this monthly payment to future generations after his
death. He can earn an interest of 8% compounded annually. How much will he need to set aside to achieve his perpetuity
goal?
(a) ` 4,94,775
(b) ` 4,49,775
(c) ` 4,49,577
(d) ` 4,47,975
WORKING:
R = 3,000
i = 0.08/12 or 0.00667
Substituting these values in the above formula, we get
3,000
𝑃𝑉𝐴 = = 4,49,775
0.00667
If an investment of ` 3,00,000 pays ` 25,000 p.a. in perpetuity, what is the Net Present Value, if the interest rate is 9%?
(a) ` – 22222
(b) ` + 22222
(c) ` + 24736
(d) ` + 27250
WORKING:
25000
𝑃𝑉 𝑜𝑓 𝐼𝑛𝑓𝑙𝑜𝑤 = = 2,77,778/−
9%
𝑁𝑃𝑉 = 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤 − 𝑂𝑢𝑡𝑓𝑙𝑜𝑤
= 2,77,778 − 3,00,000
= −22,222/−
SINKING FUND
ABCL Company has issued debentures of ` 50 lakhs to be repaid after 7 years. How much should the company invest in a
sinking fund earning 12 percent per annum in order to be able to repay debentures?
WORKING:
AVERAGE RATE OF RETURN

Following data in respect of two machines namely ‘A’ and ‘B’ are detailed below Depreciation has been charged on straight
line basis and estimated life of both machines is five years.
Item Machine A Machine B
Cost 56,125 56,125
Net income after depreciation and taxes:
1st Year 3,375 11,375
2nd Year 5,375 9,375
3rd Year 7,375 7,375
4th Year 9,375 5,375
5th Year 11,375 3,375
Find the average rate of return on Machine A & B.
WORKING:
PAYBACK PERIOD
MNP Ltd. is considering purchasing of an Asset costing ` 80,000 and having a useful life of 4 years. During the first 2 years,
the net incremental after-tax cash flows are ` 25,000 per annum and for the last two years ` 20,000 per annum. What is the
Payback period for this investment?
(a) 3.2 years
(b) 3.5 years
(c) 4.0 years

(d) Cannot be determined from this information
WORKING:
25,000 + 25,000 + 20,000 + 20,000
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝐹𝐴𝑇 =
4
= 22,500
𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝑎𝑦 𝐵𝑎𝑐𝑘 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝐹𝐴𝑇
80,000
=
22,500
= 3.5 𝑦𝑟𝑠.
NET PRESENT VALUE METHOD

YouTube Video Link : https://youtu.be/Bz1WC1QXt9g?t=247
Firm A is considering a project A. The project involves cash outlay of ` 50,000 (t = 0), working capital outlay of ` 20,000 (t =
2), and is expected to generate Cash Flow After Tax (CFAT) of ` 12,000 per annum for 5 years excluding working capital
release back and terminal value of 20%. What would be your advice to the company using Net Present Value approach, if its
cost of capital is 10%.
(a) Accept the project.
(b) Either Accept or Reject it as NPV is zero.
(c) Reject the project.
(d) Information incomplete.
WORKING:
𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤 = 50000 + (20000 + 0.826%)
= 66520/−
PV of Cash Inflow
𝑃𝑉 𝑜𝑓 𝐶𝐹𝐴𝑇 = 12000 × 3.791

= 45492
𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒 (𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙)(5𝑡ℎ 𝑦𝑟 𝑒𝑛𝑑) = 50000 × 20% × 0.621

= 6210/−
𝑃𝑉 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (5𝑡ℎ 𝑦𝑟 𝑒𝑛𝑑) = 20000 × 0.621

= 12420
𝑇𝑜𝑡𝑎𝑙 𝐶𝐼 = 45492 + 6210 + 12420

= 64122
𝑁𝑃𝑉 = 𝐶𝐼 − 𝐶𝑂
= 64122 − 66520
= −2398
𝑅𝑒𝑗𝑒𝑐𝑡 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡.
COMPUTE the net present value for a project with a net investment of ` 1,00,000 and net cash flows year one is ` 55,000; for
year two is ` 80,000 and for year three is ` 15,000. Further, the company’s cost of capital is 10%?
[PVIF @ 10% for three years are 0.909, 0.826 and 0.751]
ANSWER:

Year Net Cash Flows PVIF @ 10% Discounted Cash Flows
0 (1,00,000) 1.000 (1,00,000)
1 55,000 0.909 49,995
2 80,000 0.826 66,080
3 15,000 0.751 11,265
Net Present Value 27,340
Recommendation: Since the net present value of the project is positive, the company should accept the
project.
INTERNAL RATE OF RETURN

A company proposes to install machine involving a capital cost of ` 3,60,000. The life of the machine is 5 years and its
salvage value at the end of the life is nil. The machine will produce the net operating income after depreciation of ` 68,000
per annum. The company's tax rate is 45%.
The Net Present Value factors for 5 years are as under:

Discounting rate 14 15 16 17 18
Cumulative 3.43 3.35 3.27 3.20 3.13
You are required to CALCULATE the internal rate of return of the proposal.
WORKING:
Computation of Cash inflow per annum (`)
Net operating income per annum 68,000
Less: Tax @ 45% (30,600)
Profit after tax 37,400
Add: Depreciation (3,60,000/5 years) 72,000
Cash inflow 1,09,400
The IRR of the investment can be found as follows:

𝑁𝑃𝑉 = −𝑅𝑠. 3,60,000 + 𝑅𝑠. 1,09,400 (𝑃𝑉𝐴𝐹5 , 𝑟) = 0
𝑅𝑠. 3,60,000
𝑜𝑟 𝑃𝑉𝐴𝐹5 , 𝑟 (𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑎𝑐𝑡𝑜𝑟) = = 3.29
𝑅𝑠. 1,09,400
Computation of Internal Rate of Return

Discounting Rate 15% 16%
Cumulative factor 3.35 3.27
PV of Infl ws 3,66,490 3,57,738
(` 1,09,400 × 3.35) (` 1,09,400 × 3.27)
Initial outlay (`) 3,60,000 3,60,000
NPV (`) 6,490 (2,262)
6,490
𝐼𝑅𝑅 = 15 + [ ] = 15 + 0.74 = 15.74%.
6,490 + 2,262
ABC project has the following cash inflows for 4 years as ` 34,444; ` 39,877; ` 25,000; and ` 52,800 respectively. The initial
Investment is ` 1,04,000. Find the correct statement from the following:
Present value of an annuity of rupee one on various discounting factor in 4th year is:
9% 3.2397
13% 2.9745
15% 2.8550
16% 2.7982
17% 2.7432
18% 2.6901
(a) The IRR is less than 9%.

(b) The IRR is greater than or equal to 9%, but less than 13%.
(c) The IRR is greater than 16%, but less than 18%.
(d) The IRR is greater than or equal to 17%.
WORKING:
NPV @ 16%:-
34,444 0.862 29,691

39,877 0.743 29,629
25,000 0.641 16,025
52,800 0.552 29,146
1,04,491
NPV @ 17%:-
34,444 0.855 29,450
39,877 0.731 29,150
25,000 0.624 15,600
52,800 0.534 28,195
1,02,395
𝑆𝑜, 𝐴𝑛𝑠𝑤𝑒𝑟 𝑖𝑠 𝑔𝑟𝑒𝑎𝑡𝑒𝑟 𝑡ℎ𝑎𝑛 16% 𝑏𝑢𝑡 𝑙𝑒𝑠𝑠 𝑡ℎ𝑎𝑛 18%.
A Ltd. is evaluating a project involving an outlay of ` 10,00,000 resulting in an annual cash inflow of ` 2,50,000 for 6 years.
Assuming salvage value of the project is zero; DETERMINE the IRR of the project.
ANSWER:
First of all we shall find an approximation of the payback period:
10,00,000
=4
2,50,000
Now we shall search this figure in the PVAF table corresponding to 6-year row.
The value 4 lies between values 4.111 and 3.998 correspondingly discounting rates 12% and 13%
respectively.
NPV @ 12%
𝑁𝑃𝑉12% = (10,00,000) + 4.111 × 2,50,000 = 27,750
𝑁𝑃𝑉13% = (10,00,000) + 3.998 × 2,50,000 = 500
The internal rate of return is, thus, more than 12% but less than 13%. The exact rate can be obtained by
interpolation:
27,750
𝐼𝑅𝑅 = 12% + × (13% − 12%)
27,750 − (500)
27,750
= 12% + = 12.98%
28,250
IRR = 12.98%
CALCULATE the internal rate of return of an investment of ` 1,36,000 which yields the following cash inflows:
Year Cash Inflows (in `)
1 30,000
2 40,000
3 60,000
4 30,000
5 20,000
ANSWER:
Let us discount cash flows by 10%.
Year Cash Inflows (`) Discounting factor at 10% Present Value (`)
1 30,000 0.909 27,270
2 40,000 0.826 33,040
3 60,000 0.751 45,060
4 30,000 0.683 20,490
5 20,000 0.621 12,420
Total present value 1,38,280
10 | P a g e Think CMA FMSM, Think Amit Talda Sir
The present value at 10% comes to ` 1,38,280, which is more than the initial investment. Therefore, a
higher discount rate is suggested, say, 12%.
Year Cash Inflows (`) Discounting factor Present Value (`)
at 12%
1 30,000 0.893 26,790
2 40,000 0.797 31,880
3 60,000 0.712 42,720
4 30,000 0.636 19,080
5 20,000 0.567 11,340
Total present value 1,31,810
The internal rate of return is, thus, more than 10% but less than 12%. The exact rate can be obtained by
interpolation:
𝑅𝑠. 1,38,280 − 𝑅𝑠. 1,36,000
𝐼𝑅𝑅 = [10 + ( )] × 2
𝑅𝑠. 1,38,280 − 𝑅𝑠. 1,31,810
2,280
= 10 + ( × 2) = 10 + 0.70
6,470
= IRR = 10.70%
A company proposes to install machine involving a capital cost of ` 3,60,000. The life of the machine is 5 years and its
salvage value at the end of the life is nil. The machine will produce the net operating income after depreciation of ` 68,000
per annum. The company's tax rate is 45%.
The Net Present Value factors for 5 years are as under:

Discounting rate 14 15 16 17 18
Cumulative 3.43 3.35 3.27 3.20 3.13
You are required to CALCULATE the internal rate of return of the proposal.
ANSWER:
Computation of Cash inflow per annum (`)
Net operating income per annum 68,000
Less: Tax @ 45% (30,600)
Profit after tax 37,400
Add: Depreciation (3,60,000/5 years) 72,000
Cash inflow 1,09,400
The IRR of the investment can be found as follows:

𝑁𝑃𝑉 = −𝑅𝑠. 3,60,000 + 𝑅𝑠. 1,09,400 (𝑃𝑉𝐴𝐹5 , 𝑟) = 0
𝑅𝑠. 3,60,000
𝑜𝑟 𝑃𝑉𝐴𝐹5 , 𝑟 (𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑎𝑐𝑡𝑜𝑟) = = 3.29
𝑅𝑠. 1,09,400
Computation of Internal Rate of Return
Discounting Rate 15% 16%
Cumulative factor 3.35 3.27
PV of Inflows 3,66,490 3,57,738
(` 1,09,400 × 3.35) (` 1,09,400 × 3.27)
Initial outlay (`) 3,60,000 3,60,000
NPV (`) 6,490 (2,262)
6,490
𝐼𝑅𝑅 = 15 + [ ] = 15 + 0.74 = 15.74%.
6,490 + 2,262
PROFITABILITY INDEX
Suppose we have three projects involving discounted cash outflow of ` 5,50,000, ` 75,000 and ` 1,00,20,000 respectively.
Suppose further that the sum of discounted cash inflows for these projects are ` 6,50,000, ` 95,000 and ` 1,00,30,000
respectively. CALCULATE the desirability factors/Profitability Index for the three projects.

ANSWER:
The desirability factors for the three projects would be as follows:
𝑅𝑠. 6,50,000
1. = 1.18
𝑅𝑠. 5,50,000
𝑅𝑠. 95,000
2. = 1.27
𝑅𝑠. 75,000
𝑅𝑠. 1,00,30,000
3. = 1.001
𝑅𝑠. 1,00,20,000
EXPECTED NPV (PROBABILITY)

A firm expects an NPV of ` 8,000 if the economy is exceptionally strong (30% probability), an NPV of ` 4,000 if the economy
is normal (40% probability), and an NPV of ` 2,000 if the economy is exceptionally weak (30% probability). Expected Net
present value is ……………. .
(a) 5,200
(b) 6,000
(c) 5,000
(d) 4,600
ANSWER:
NPV Probability Expected NPV
8,000 0.3 2,400
4,000 0.4 1,600
2,000 0.3 600
4,600
A company is considering two mutually exclusive projects X and Y. Project X costs ` 3,00,000 and Project Y ` 3,60,000. You
have been given below the net present value, probability distribution for each project:
Project X Project Y
NPV Estimate Probability NPV Estimate Probability
(`) (`)
30,000 0.1 30,000 0.2
60,000 0.4 60,000 0.3
1,20,000 0.4 1,20,000 0.3
1,50,000 0.1 1,50,00O 0.2
(i)Compute the expected net present value of Projects X and Y.

(ii)Compute the risk attached to each project i.e., Standard Deviation of each probability distribution.
(iii)Which project do you consider more risky and why?
WORKING:
Project – X (Amount in `)
NPV Probability Expected NPV Deviation Square of Square of
Estimates 90,000 – (1) Deviation Deviation x
Probability
(1) (2) (3) = (1) × (2) (4) (𝟓) = (𝟒)𝟐 (6) = (5) × (2)
30,000 0.1 3,000 -60,000 36,00,000,000 36,00,00,000
60,000 0.4 24,000 -30,000 9,00,000,000 9,00,00,000
1,20,000 0.4 48,000 30,000 9,00,000,000 9,00,00,000
1,50,000 0.1 15,000 60,000 36,00,000,000 36,00,00,000

Expected 0,000 14,40,000,000
NPV
Project – Y (Amount in `)
NPV Probability Expected NPV Deviation Square of Square of
Estimates 90,000 – (1) Deviation Deviation x

Probability
(1) (2) (3) = (1) × (2) (4) (𝟓) = (𝟒)𝟐 (6) = (5) × (2)
30,000 0.2 6,000 -60, 00 36,00,000,000 72,00,00,000
60,000 0.3 18,000 -30,000 9,00,000,000 27,00,00,000
1,20,000 0.3 36,000 30,000 9,00,000,000 27,00,00,000
1,50,000 0.2 30,000 60,000 36,00,000,000 72,00,00,000
Expected 90,000 19,80,000,000
NPV
(i)The expected net present value of Projects X and Y is ` 90,000 each.
(𝑖𝑖)𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 = ∑√𝑆𝑞𝑢𝑎𝑟𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑥 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑋: 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 = √14,40,000,000 = 37,947
𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑌: 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 = √19,80,000,00 = 44,497
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
(𝑖𝑖𝑖)𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑛𝑒𝑡 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒
37,947
𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑋: 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 = = 0.42
90,000
44,497
𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑌: 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 = = 0.4944 𝑜𝑟 0.50
90,000
Project Y is riskier since it has a higher coefficient of variation.

CAPITAL STRUCTURE
NET INCOME APPROACH
YouTube Video Link (THEORY) : https://youtu.be/vn4N-I5Y_fk?t=64
YouTube Video Link (QUESTION) : https://youtu.be/vn4N-I5Y_fk?t=1366
Calculate the value of the firm MNP Ltd. according to the Net Income Approach. The company expects a net operating income
of ` 80,000. It has ` 2,00,000, 8% Debentures. The equity capitalization rate of the company is 10%. (Ignore the Income
Tax).
(a) ` 8,40,000
(b) ` 8,60,000
(c) ` 8,80,000
(d) ` 8,90,000
WORKING:
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 = 2,00,000
𝑁𝑂𝐼 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 =
𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
80,000 − (2,00,000 × 8%)

=
10%
64,000
=
10%
= 6,40,000
𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

= 2,00,000 + 6,40,000
= 8,40,000
EBIT of R Ltd. is ` 5,00,000. The company has 10%, ` 20,00,000 debentures. The equity capitalization rate i.e. 𝐾𝑒 is 16%.
Calculate market value of firm as per Net Income (NI) Approach. Ignore taxation.
(a) ` 20,00,000
(b) ` 38,75,000
(c) ` 38,57,000
(d) ` 20,75,000
WORKING:
Market Value Of Debt = 20,00,000
Market Value Of Equity = EBT/Ke = [5,00,000 – (20,00,000*10%)]/16% = 3,00,000/16%
= 18,75,000
Total Market Value = Market Value Of Debt + Market Value Of Equity

= 20,00,000+18,75,000
= 38,75,000
NET OPERATING INCOME APPROACH

YouTube Video Link : https://youtu.be/vn4N-I5Y_fk?t=1746
ABC Ltd. expects a net operating income of ` 1,00,000. It has ` 5,00,000, 6% Debentures. The overall capitalization is 10%.
Calculate cost of equity according to the Net Operating Income Approach.
(a) 14%
(b) 21%
(c) 18%
(d) 21.8%

WORKING:
𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
𝑂𝑣𝑒𝑟𝑎𝑙𝑙 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 =
𝑂𝑣𝑒𝑟𝑎𝑙𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
1,00,000
=
10%
= 10,00,000
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡

= 10,00,000 − 5,00,000
= 5,00,000
𝐸𝐵𝑇
𝐾𝑒 =
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 × 100
1,00,000 − (5,00,000 × 6%)

= × 100
5,00,000
70,000
= × 100
5,00,000
= 14%
A firm has EBIT of ` 50,000. Market value of debt is ` 80,000 and overall capitalization rate is 20%. Market value of equity
under NOI Approach is:
(a) ` 1,70,000
(b) ` 2,50,000
(c) ` 30,000
(d) ` 1,30,000
WORKING:
𝐸𝐵𝐼𝑇
𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 =
𝐾𝑂
50,000
=
20%
= 2,50,000
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡

= 2,50,000 − 80,000
= 1,70,000/−
MM APPROACH
YouTube Video Link : https://youtu.be/vn4N-I5Y_fk?t=2163
A company PQR Ltd. has EBIT of ` 2,00,000. Expected return on its Investment @ of 12%. What is the total value of the firm
according to Miller-Modigliani theory?
(a) ` 16,66,667
(b) ` 17,85,714
(c) ` 20,00,000
(d) ` 22,40,000
WORKING:
𝐸𝐵𝐼𝑇
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 (𝑀. 𝑀. ) =
𝐸𝑅
2,00,000
=
12%
= 16,66,667
OPERATING LEVERAGE
YouTube Video Link (THEORY) : https://youtu.be/TL-SSZb-Loo?t=80
YouTube Video Link (QUESTION) : https://youtu.be/TL-SSZb-Loo?t=994
X company has sales of ` 12,00,000, Variable Cost is 50% and fixed cost ` 2,50,000. Operating leverage of the company is:
(a) 1.33
(b) 1.67
(c) 1.71
(d) 2
WORKING:
Sales 12,00,000
(-) VC @ 50% 6,00,000
Contribution 6,00,000
(-) FC (2,50,000)
EBIT 3,50,000
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐸𝐵𝐼𝑇
6,00,000
=
3,50,000
= 1.71 𝑡𝑖𝑚𝑒𝑠
FINANCIAL LEVERAGE
YouTube Video Link : https://youtu.be/TL-SSZb-Loo?t=1245
A firm provides the following information:

Sold 2,00,000 units @ ` 30 per unit; Variable cost ` 15 per unit, fixed cost ` 10,00,000 and debt of ` 10,00,000 at 10% rate
of interest. Calculate the degree of Financial leverage.
(a) 1.5
(b) 0.66
(c) 1.053
(d) Insufficient information
WORKING:
Sales (2,00,000 × 30) 60,00,000
VC (2,00,000 × 15) (30,00,000)
(-) FC (10,00,000)
EBIT 20,00,000
(-) Interest (10,00,000 × 10%) (1,00,000)
EBT 19,00,000
𝐸𝐵𝐼𝑇
𝐹𝐿 =
𝐸𝐵𝑇
20,00,000
=
19,00,000

= 1.053 𝑡𝑖𝑚𝑒𝑠
COMBINED LEVERAGE
A firm’s details are as under :

Sales (@ 100 per unit) ` 2 ,00,000
Variable Cost 50%
Fixed Cost ` 10,00,000
It has borrowed ` 10,00,000 @ 10% p.a. and its equity share capital is ` 10,00,000 ` 100 each)
CALCULATE :
(a) Operating Leverage
(b) Financial Leverage
(c) Combined Leverage
WORKING:
`
Sales 24,00,000
Less : Variable cost 12,00,000
Less : Fixed cost 10,00,000
EBIT 2,00,000
Less : Interest 1,00,000
EBT 1,00,000
Less : Tax (50%) 50,000
EAT 50,000
No. of equity shares 10,000
EPS 5
12,00,000
(𝑎)𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = = 6 𝑡𝑖𝑚𝑒𝑠
2,00,000
2,00,000
(𝑏)𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = = 2 𝑡𝑖𝑚𝑒𝑠
1,00,000
(𝑐)𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = 𝑂𝐿 × 𝐹𝐿 = 6 × 2 = 12 𝑡𝑖𝑚𝑒𝑠.
LEVERAGE REVERSE QUESTIONS

A firm has a Degree of Operating Leverage (DOI) of 5 and Degree of Financial Leverage (DFL) of 4. The interest burden is ` 300
Lakhs, variable cost as a % to sales is 75%, and the effective tax rate is 45%. Its fixed cost is:
(a) ` 1600 Lakhs
(b) ` 1450 Lakhs
(c) ` 1500 Lakhs
(d) ` 1700 Lakhs
WORKING:
𝐸𝐵𝐼𝑇
𝐹𝐿 =
𝐸𝐵𝑇
𝐸𝐵𝐼𝑇
𝐹𝐿 =
𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐸𝐵𝐼𝑇
4=
𝐸𝐵𝐼𝑇 − 300

4 𝐸𝐵𝐼𝑇 − 1200 = 𝐸𝐵𝐼𝑇
3 𝐸𝐵𝐼𝑇 = 1200
𝐸𝐵𝐼𝑇 = 400
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝐹𝐿 =
𝐸𝐵𝐼𝑇
𝐶
5=
400
𝐶 = 2000
𝐹𝐶 = 𝐶 − 𝐸𝐵𝐼𝑇
𝐹𝐶 = 2000 − 400 = 1600
OTHERS
MNC expects its sales to increase by 10% from the current year level of ` 5 million. With a Net Profit Margin of 8% and a
payout ratio of 30%, what financing for the next year will be available from internal sources?
(a) ` 4,40,000
(b) ` 3,08,000
(c) ` 0.4 million
(d) ` 0.404 million
WORKING:
𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑙 𝑆𝑜𝑢𝑟𝑐𝑒𝑠 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 = 𝑆𝑎𝑙𝑒𝑠 × 𝑁𝑃% × (1 − 𝑝𝑎𝑦𝑜𝑢𝑡)
= (50,00,000 + 10%) × 8% × (1 − 0.3)
= 55,00,000 × 8% × 0.7%
= 3,08,000/−
The Capital Structure of Neel Ltd. is as under:

Equity + Reserves & Surplus 200 Lakhs
10% Preference Shares 50 Lakhs
12% Term Loans 150 Lakhs
What should be the approx. Earnings before Interest and Taxes (EBIT) so that Earnings Per Share (EPS) is 0 (Nil)? Assume Tax
Rate 35%.
(a) ` 23.00 Lakhs
(b) ` 24.75 Lakhs
(c) ` 25.69 Lakhs
(d) ` 29.30 Lakhs
WORKING:
Reverse Working:
EPS = 0
+ Pref. Dividend (50 × 10%) = 5
PAT = 5
PBT = 7.69
5
( )
100% − 35%
+ Interest (150 × 12%) = 18
= 25.69
ABC Limited books of accounts show profit from operation (EBDIT) at ` 500 Lakhs, it paid 12% on a debt of ` 1,000 Lakhs,
Depreciation is ` 100 Lakhs and Tax 35%. Profit after Tax will be:
(a) ` 184 Lakhs
(b) ` 182 Lakhs
(c) ` 178 Lakhs

(d) ` 180 Lakhs
WORKING:
EBIT = 500
(-) Depreciation = (100)
(-) Interest (1000 × 12%) = (120)
EBT = 280
(-) Tax @ 35% = (98)
PAT = 182 Lakhs
A firm’s details are as under :

Sales (@ 100 per unit) ` 24,00,000
Variable Cost 50%
Fixed Cost ` 10,00,000
It has borrowed ` 10,00,000 @ 10% p.a. and its equity share capital is ` 10,00,000 ` 100 each)
CALCULATE :
(a) Operating Leverage
(b) Financial Leverage
(c) Combined Leverage
(d) Return on Investment
(e) If the sales increases by ` 6,00,000; what will be new EBIT?
ANSWER:
`
Sales 24,00,000
Less : Variable cost 12,00,000
Less : Fixed cost 10,00,000
EBIT 2,00,000
Less : Interest 1,00,000
EBIT 1,00,000
Less : Tax (50%) 50,000
EAT 50,000
No. of equity shares 10,000
EPS 5
12,00,000
(𝑎)𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = = 6 𝑡𝑖𝑚𝑒𝑠
2,00,000
2,00,000
(𝑏)𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = = 2 𝑡𝑖𝑚𝑒𝑠
1,00,000
(𝑐)𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = 𝑂𝐿 × 𝐹𝐿 = 6 × 2 = 12 𝑡𝑖𝑚𝑒𝑠.
50,000
(𝑑)𝑅. 𝑂. 𝐼 = × 100 = 5%
10,00,000
𝐸𝐴𝑇 − 𝑃𝑟𝑒𝑓. 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝐻𝑒𝑟𝑒 𝑅𝑂𝐼 𝑖𝑠 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑎𝑠 𝑅𝑂𝐸 𝑖. 𝑒. =
𝐸𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑓𝑢𝑛𝑑
Or
We can assume there is no reserves & surplus and no other funding, Then investment = ESC + Debt =
10,00,000+ 10,00,000 = 20,00,000
𝐸𝐵𝐼𝑇
𝑅. 𝑂. 𝐼 =
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
2,00,000
𝑅. 𝑂. 𝐼 =
20,00,000
R. O. I = 10%
(e) Operating Leverage = 6
∆𝐸𝐵𝐼𝑇
6=
0.25
6×1
∆𝐸𝐵𝐼𝑇 = = 1.5
4
Increase in EBIT = ` 2,00,000 × 1.5 = ` 3,00,000
New EBIT = 5,00,000

COST OF CAPITAL
COST OF DEBT
YouTube Video Link (FORMULAE) : https://youtu.be/X_xsogqD_78?t=160
YouTube Video Link (QUESTION) : https://youtu.be/X_xsogqD_78?t=468
A Ltd. issues ` 50,000 8% debentures at a discount of 5%. The tax rate is 50%. The cost of debt capital is:
(a) 5.42%
(b) 5.1%
(c) 4.42%
(d) 4.21%
WORKING:
𝐼(𝑙 − 𝑡)
𝐾𝑑 = × 100
𝑁𝑃
8(1 − 0.5)
= × 100
100 − 5%
= 4.21%
Parag Ltd. issued 14% bonds of ` 100 each at 98%. Corporate tax rate is 34%. Issue expense per bond was ` 1.5. Cost of
Debt = ?
(a) 9.24%
(b) 9.38%
(c) 9.58%
(d) 9.12%
WORKING:
14 (1 − 0.34)
𝐾𝑑 = = 0.0958 𝑖. 𝑒. 9.58%
100 − 2 − 1.5
A Company issues ` 75,00,000 12% Debentures of ` 100 each. Debentures are redeemable after the expiry of fixed period of
7 years at par. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10%
discount.
(a) 9.72%
(b) 7.80%
(c) 9.27%
(d) 8.46%
WORKING:
𝑆𝑣 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝐹𝑙𝑜𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
= 100 − 0 − 10
= 90
100 − 90
[12 (1 − 0.35) + ( 7 )]
𝐾𝑑 =
100 + 90
( 2 )
7.8 + 1.43
=
95
𝐾𝑑 = 0.0972 𝑖. 𝑒. 9.72%
A Company issues ` 48,50,000 12% Debentures of ` 100 each. Debentures are redeemable at par after the expiry of fixed
period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10%
premium.
(a) 6.77%
(b) 6.07%
(c) 7.60%
(d) 6.88%
WORKING:
𝑆𝑣 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 + 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
= 100 + 10
= 110
100 − 110
[12 (1 − 0.35) + ( 7
)]
𝐾𝑑 =
100 + 110
( )
2
7.8 − 1.43
=
105
𝐾𝑑 = 0.0607 𝑖. 𝑒. 6.07%
PQR Ltd. keeps a perpetual fixed amount of debenture with coupon rate of 16% in its books. Debenture sells at par (face value
` 100) in the market and company pays 40% tax. What is the cost of debenture, if sold at 10% premium in the market?
(a) 8.82%
(b) 8.72%
(c) 8.27%
(d) 9.10%
WORKING:
𝐼(𝑙 − 𝑡)
𝑘𝑑 = × 100
𝑁𝑃
100 × 16%(1 − 0.4)
= × 100
(100 + 10%)
9.6
= × 100
110
= 8.72%
COST OF PREFERENCE SHARES

YouTube Video Link : https://youtu.be/X_xsogqD_78?t=1537
Varun Ltd. is issuing 1 Lakh 12% Irredeemable preference shares of the face value of ` 100 each. If the floatation cost is ` 2
per share, what is the cost of these Preference Shares?
(a) 12.00%
(b) 12.14%
(c) 12.24%
(d) 12.34%
WORKING:
𝑃𝐷
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑆 = × 100
𝑁𝑃
(100 × 12%)
= × 100
100 − 2
12
= × 100
98
= 12.24%
A company issues ` 10,000 10% Preference Shares of ` 100 each redeemable after 10 years at a premium of 5%. The cost of
issue is ` 2 per share. The cost of preference capital is:
(a) 10.14%
(b) 10.34%
(c) 10.74%
(d) 10.54%
WORKING:
(𝑅𝑉 − 𝑁𝑃)
𝐷+ 𝑛
𝐾𝑃 = × 100
𝑅𝑉 + 𝑁𝑃
2
(105 − 98)
10 + 10
= × 100
105 + 98
( 2 )
= 10.54%
Y Ltd. issues preference shares of face value ` 500 each carrying 14% dividend and it realizes ` 480 per share. The shares are
repayable after 12 years at 2% premium. Corporate tax rate is 25%. Issue expenses per share was ` 2.5.
(a) 14.25%
(b) 15.92%
(c) 14.73%
(d) 14.02%
WORKING:
𝑅 −𝑆
[𝐷𝑝 + ( 𝑣 𝑁 𝑣 )]
𝐾𝑝 =
𝑅 +𝑆
( 𝑣 2 𝑣)
510 − 477.5
[70 + ( 12
)]
𝐾𝑝 =
510 + 477.5
( 2 )
72.71
=
493.75
𝐾𝑝 = 0.1473 𝑖. 𝑒. 14.73%
PWA Ltd. has ` 100, 10.5% preference shares amounting to ` 100 Million. The preferred stock of the company is redeemable
after 5 years is currently selling at ` 98.15 per preference share. The beta of the company is ` 1.7158. The applicable income
tax rate for the company is 35%. 𝐾𝑝 = ?
(a) 10%
(b) 11%
(c) 12%
(d) 13%
WORKING:
100 − 98.15
[10.5 + ( )]
𝐾𝑝 = 5
100 + 98.15
( )
2
10.87
=
99.075

= 0.1097 𝑖. 𝑒. 10.97% 𝑠𝑎𝑦 11%
COST OF EQUITY
A company has currently 2,000 equity shares of ` 100 each and its earnings are ` 20,000. Its current market price is ` 110
and the growth rate of EPS is expected to be 5%, The cost of equity is …………… .
(a) 10.94%
(b) 9.55%
(c) 9.95%
(d) 11.60%
WORKING:
𝐸1
𝐾𝑒 =
𝑃0
20,000/2,000(1 + 5%)
=
110
10(1.05)
= × 100
110
= 9.54%
Number of existing equity share = 8 crore, Market value of existing share = ` 55, Net earnings = ` 80 crore. Cost of equity
on basis of Earning-price Ratio approach is:
(a) 5.55%
(b) 5.15%
(c) 18.18%
(d) 18.02%
WORKING:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 1
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦(𝑃/𝐸) = × 100 𝑂𝑅
𝑀𝑃 𝑃/𝐸
80/8
= × 100
55
10
= × 100
55
= 18.18%
ANT Corporation common stock has a beta, (𝛽), of 1.5. The risk-free rate is 8%, and the market return is 12%. Determine the
cost of equity shares using the CAPM.
(a) 14%
(b) 11%
(c) 12%
(d) 13%
WORKING:
𝐾𝑒 (𝐶𝐴𝑃𝑀) = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 )
= 8% + 1.5(12% − 8%)
= 14%
Cost of common stock is 16% and bond yield is 9% then bond risk premium would be –
(a) 0.07%
(b) 7%

(c) 0.7%
(d) 25%
WORKING:
Cost of Equity = Yield on Bond + Risk Premium
Risk Premium = Cost of Equity – Yield
Risk Premium = 16% - 9%
Risk Premium = 7%
COST OF RETAINED EARNINGS

The liability side of Shivanee Ltd.’s Balance Sheet shows Equity capital ` 25 Lakhs and Retained Earnings ` 50 Lakhs. Face
value of its share is ` 100 each and market value is ` 300 each. If the investors expect a Rate of Return of 18%, and if the
cost of floatation of issuing fresh Equity is 5%, what is the Cost of Retained Earnings?
(a) 17.50%
(b) 18.00%
(c) 9.00%
(d) 8.75%
WORKING:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
∴ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛
∴ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 18%
WEIGHTED AVERAGE COST OF CAPITAL

YouTube Video Link (FORMULAE) : https://youtu.be/IfK2mNj9C_M?t=65
YouTube Video Link (QUESTION) : https://youtu.be/IfK2mNj9C_M?t=390
Compute the average cost of capital by using market value as weights from the following information:
Net Operating Income ` 2,00,000, Total Investment ` 10,00,000, if the firm uses 5% debenture of ` 4,00,000 and equity
capitalization rate is 11%.
(a) 20%
(b) 9.9%
(c) 9.82%
(d) 11%
WORKING:
2,00,000 − (4,00,000 × 5%)
𝑀𝑉 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 =
11%
= 16,36,363/−
Source Cost MV Weight Cost × Weight

Equity 11% 16,36,363 0.80 8.8%
Debt 5% 4,00,000 0.20 1%
20,36,363 9.82%
ABC Ltd. has the following capital structure:

Equity share capital ` 10,00,000, 10% preference share capital ` 5,00,000, 8% Debentures ` 15,00,000. Cost of equity is
estimated to be 15%. Calculate the Weighted Average Cost of Capital, assuming tax rate is 50%.
(a) 6.67%
(b) 8.67%
(c) 9.67%
(d) 7.67%
WORKING:
Source Amt. Cost Weight Cost × Weight
ESC 10,00,000 15% 0.333 5%
PSC 5,00,000 10% 0.167 1.67%
Debenture 15,00,000 8% (1 – 0.5) = 4% 0.5 2%
30,00,000 8.67%
MNP Ltd. has a target capital structure of 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Its cost
of equity is 15 percent, the cost of preferred stock is 7 percent, and the cost of debt is 10 percent. The relevant tax rate is 40
percent. What is its WACC?
(a) 11.3%
(b) 11.5%
(c) 11.7%
(d) 12.1%
WORKING:
Source Weight Cost (after tax) 𝑾𝒆𝒊𝒈𝒉𝒕 × Cost
Common Stock 0.6 15% 9%
Preferred Stock 0.1 7% 0.7%
Debt 0.3 10% (1-0.4) = 6% 1.8%
11.5%
From the following details calculate the WACC:

Capital Market 𝐾0
Value `
Equity shares 4,00,00,000 18.5%
Preference shares 20,80,000 14.29%
Debentures 67,50,000 10.95%
(a) 17.28%
(b) 16.52%
(c) 16.34%
(d) 17.93%
WORKING:
Capital Market Value Proportion Cost (%) Cost * Prop. (%)
Equity Shares 4,00,00,000 81.92% 18.5 15.16
Preference Shares 20,80,000 4.26% 14.29 0.61
Debentures 67,50,000 13.82% 10.95 1.51
4,88,30,000 100% 17.28
MARGINAL COST OF CAPITAL

YouTube Video Link : https://youtu.be/IfK2mNj9C_M?t=1720
Workout the marginal cost of capital from the following data of a New Proposed Project:
` in Cost
lakhs %
Equity 1,000 18
Retained Earning 250 18
Preference Capital 500 12
Debt 750 16
(a) 15.20%
(b) 14.20%
(c) 16.20%
(d) 18.20%
WORKING:
Capital Amount Proportion Cost Cost *
(%) Prop.
Equity 1,000 40% 18 7.20%
Retained Earning 250 10% 18 1.80%
Preference 500 20% 12 2.40%
Capital
Debt 750 30% 16 4.80%
2500 100% 16.20%
Ganesh Ltd. requires amount of ` 5,00,000 to finance a project. It was decided to raise such finance by issue of debentures.
Cost of debt is 10% (before tax) up to ` 2,00,000 and 13% (before tax) beyond that. Tax rate is 30%. What is the average
marginal cost of capital of new finance of ` 5,00,000?
(a) 7.37%
(b) 11.5%
(c) 8.26%
(d) 9.12%
WORKING:
Cost of 10% Debt:
𝐾𝑑 = 𝐼 (1 − 𝑡)
= 10 (1 – 0.3)
= 7%
Cost of 13% Debt:

𝐾𝑑 𝐼 (1 − 𝑡)
= 13 (1 – 0.3)
= 9.1%
Capital Amount Prop Cost (%) Cost * Prop

10% Debt 2,00,000 40% 7 2.80%
13% Debt 3,00,000 60% 9.1 5.46%
5,00,000 100% 8.26%
Calculate the marginal cost of capital (MCC) for the firm if it raises ` 750 million for a new project. The firm plans to have a
target debt to value ratio of 20%. The beta of new project is 1.4375. The debt capital will be raised through term loans. It will
carry interest rate of 9.5% for the first ` 100 million and 10% for the next ` 50 million.
The current market price per equity share is ` 60. The prevailing default risk free interest rate on 10-year GOI treasury bonds
is 5.5%. The average market risk premium is 8%. Assume Tax Rate = 35%
(a) 14.86%
(b) 12.22%
(c) 13.04%
(d) 15.95%
WORKING:
Cost of equity – CAPM Method:
𝐾𝑒 = 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 )
= 5.5 + 1.4375 × 8
= 17%
Cost of 9.5% debt:

𝐾𝑑 = 𝐼 (1 − 𝑡)
= 9.5 (1 − 0.35)
= 6.175%
Cost of 10% debt:

𝐾𝑑 = 𝐼 (1 − 𝑡)
= 10 (1 − 0.35)
= 6.5%

ABC Ltd. needs additional finance of ` 750 million with debt to value ratio of 80%. This finance
will be raised as follows:
Capital % ` in million
Equity 80% 600
Debt: 20%
- 9.5% Debt 100
- 10% Debt 50
- 750
Equity 600 80% 17 13.60%

9.5% Debt 100 13.33% 6.175 0.82%
10% Debt 50 6.67% 6.5 0.44%
750 100% 14.86%

DIVIDEND POLICY
WALTER MODEL
YouTube Video Link (THEORY) : https://youtu.be/Qpan0VJGWmQ?t=147
YouTube Video Link (QUESTION) : https://youtu.be/Qpan0VJGWmQ?t=808
What should be the optimum dividend payout ratio, when r = 15% & Ke = 12%.
(a) 100%
(b) 50%
(c) 0%
(d) None
WORKING:
As r > Ke, Company should retain all earnings and Optimum Dividend Payout will be 0%
From the following information find the market value per share as per Walter’s model:
Earnings of the Company ` 5,00,000, Dividend Payout ratio 60%, No. of shares outstanding 1,00,000, Equity capitalization
rate is 12% and Rate of return on investment is 15%.
(a) 45.83
(b) 48.53
(c) 49.27
(d) 47.19
WORKING:
0.15
(5 × 60%) + (5 − 3) ×
𝑃= 0.12
0.12
3 + 2.5
=
0.12
= 45.83
The earning per share of a company is ` 10. It has an internal rate of return of 15% and the capitalization rate of the same
risk class is 12.5%. If Walter’s model is used, what should be the price of a share at optimum payout?
(a) 92
(b) 94
(c) 96
(d) 98
WORKING:
𝐴𝑠 𝑟 > 𝑘 𝑜𝑝𝑡𝑖𝑚𝑢𝑚 𝑝𝑎𝑦𝑜𝑢𝑡 𝑖𝑠 0%
𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 = 100%
𝑔 = 𝑏𝑟
= 15% × 1
= 15%
𝑟
𝐷 + (𝐸 − 𝐷) 𝐾
𝑒
𝑃=
𝐾𝑒
0.15
0 + (10 − 0)
= 0.125
0.125
12
=
0.125
= 96

The following information pertains to M/s XY Ltd.
Earnings of the Company ` 5,00,000
Dividend Payout ratio 60%
No. of shares outstanding 1,00,000
Equity capitalization rate 12%
Rate of return on investment 15%
(i) What would be the market value per share as per Walter’s model?
(ii) What is the optimum dividend payout ratio according to Walter’s model and the market value of Company’s share at that
payout ratio?
WORKING:
(a) M/s XY Ltd.
(i) Walter’s model is given by
𝐷 + (𝐸 − 𝐷)(𝑟/𝐾𝑒 )
𝑃=
𝐾𝑒
Where,
P = Market price per share.
E = Earnings per share = ` 5
D = Dividend per share = ` 3
r = Return earned on investment = 15%
𝐾𝑒 = Cost of equity capital = 12%
0.15 0.15
3 + (5 − 3) × 3+2×
𝑃= 0.12 = 0.12
0.12 0.12
= ` 45.83
(ii) According to Walter’s model when the return on investment is more than the cost of equity capital, the
price per share increases as the dividend pay-out ratio decreases. Hence, the optimum dividend pay-out
ratio in this case is nil.
So, at a pay-out ratio of zero, the market value of the company’s share will be:
0.15
0 + (5 − 0)
0.12 = 𝑅𝑠. 52.08
0.12
GORDON MODEL
YouTube Video Link : https://youtu.be/Qpan0VJGWmQ?t=1793
If the company’s Dividend pay-out ratio is 60% & ROI is 16%, what should be the growth rate:
(a) 5%
(b) 7%
(c) 6.4%
(d) 9.6%
WORKING:
G = ROI × Retention Ratio
G = 16% × (1 – 0.6)
G = 6.4%
Determine the market price of a share of XYZ Ltd. as per Gordon’s Model, given equity capitalization rate = 11%, Expected
Earning = ` 20, rate of return on investment = 10% and retention ratio = 30%.
(a) ` 165
(b) ` 175
(c) ` 185
(d) ` 195
WORKING:

𝐷1
𝑃=
𝐾𝑒 − 𝑔
20 × (1 − 30%)
=
11% − (10% × 0.3)
14
=
8%
= 175
If a firm declared 25% dividend on share of Face Value of ` 10, its growth rate is 5%, and if the rate of capitalization is 12%,
its expected price would be ` ……………….. .
(a) 31.25
(b) 33.50
(c) 36.00
(d) 37.50
WORKING:
Dividend Growth Model
𝐷1
𝑃0 =
𝐾𝑒 − 𝑔
(10 × 25%) + 5%
=
12% − 5%
2.625
=
7%
= 37.5/−
The following information is collected from the annual reports of J Ltd:

Profit before tax ` 2.50 crore
Tax rate 40 percent
Retention ratio 40 percent
Number of outstanding shares 50,00,000
Equity capitalization rate 12 percent
Rate of return on investment 15 percent
What should be the market price per share according to Gordon's model of dividend policy?
WORKING:
𝐸(1 − 𝑏)
𝑃0 =
𝐾 − 𝑏𝑟
𝑃0 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

E = Earnings per share (` 1.50 crore/50,00,000) = ` 3
K = Cost of Capital =12%
b = Retention Ratio (%) = 40%
r = IRR = 15%
br = Growth Rate (0.40 × 15%) = 6%
3(1 − 0.40)
𝑃0 =
0.12 − 0.06
1.80 𝑅𝑠. 1.80
= =
0.12 − 0.06 0.06
= ` 30.00
The cost of capital of a firm is 12% and its expected Earnings Per Share at the end of the year is ` 20. Its existing payout
ratio is 25%. The company is planning to increase its payout ratio to 50%. What will be the effect of this change on the
market price of equity shares (MPS) of the company as per Gordon’s model, if the reinvestment rate of the company is 15%?
(a) It will increase by ` 444
(b) It will decrease by ` 444
(c) It will increase by ` 222
(d) It will decrease by ` 222
WORKING:
At 25% Pay-out:
G = retention ratio * reinvestment rate
= 75% * 15%
= 11.25%
𝐷1
𝑃𝑜 =
𝐾𝑒 − 𝑔
20 ∗ 25%
𝑃𝑜 =
12% − 11.25%
= 666/−
50% Pay-out:
G = retention ratio * reinvestment rate
= 50% * 15%
= 7.5%
𝐷1
𝑃𝑜 =
𝐾𝑒 − 𝑔
20 ∗ 50%
𝑃𝑜 =
12% − 7.5%
= 222/−
Change = Decline of 444/-
MM APPROACH
YouTube Video Link (FORMULAE) : https://youtu.be/Qpan0VJGWmQ?t=2918
YouTube Video Link (QUESTION) : https://youtu.be/Qpan0VJGWmQ?t=3089
A Company Ltd., has 50,000 shares outstanding. The current market price of the shares is ` 50 each. The company expects the
net profit of ` 1 ,00,000 during the year and it belongs to a risk class for which the appropriate capitalization rate has been
estimated to be 25%. The company is considering dividend of ` 10 per share for the current year. What will be the price of the
share at the end of the year, if the dividend is not paid?
(a) ` 60.5
(b) ` 62.5
(c) ` 72.5
(d) ` 52.5
𝐷1 − 𝑃1
𝑃0 =
1 + 𝐾𝑒
0 − 𝑃1
50 =
1 + 0.25
𝑃1 = 62.5

WORKING CAPITAL
WORKING CAPITAL
YouTube Video Link (FORMULAE) : https://youtu.be/naLM5Q2KuIY?t=143
YouTube Video Link (QUESTION) : https://youtu.be/naLM5Q2KuIY?t=188
Calculate the working capital from the following data:

Particulars `
Raw Material Stock 11,70,000
WIP Stock 9,58,750
Finished Goods Stock 26,65,000
Debtors 55,12,000
Cash & Bank 6,00,000
Creditors 17,55,000
Outstanding expenses 14,95,000
(a) 76,75,550
(b) 76,55,750
(c) 75,65,750
(d) 77,55,650
WORKING:
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 11,70,000 + 9,58,750 + 26,65,000 + 55,12,000 + 6,00,000 − 17,55,000 − 14,95,000
= 76,55,750
AVERAGE COLLECTION PERIOD

YouTube Video Link : https://youtu.be/naLM5Q2KuIY?t=461
Consider the following factors – Gross operating cycle – 80 days; Net operating cycle – 55 days; Raw material holding period
– 40 days, Conversion period – 2 days; Finished goods holding period – 20 days; Average collection period will be:
(a) 87 days
(b) 37 days
(c) 18 days
(d) 62 days
WORKING:
𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 = 𝑅 + 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝐹 + 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑
80 = 40 + 2 + 20 + 𝐶
𝐶 = 18 𝑑𝑎𝑦𝑠
Consider the following data and compute the total sales amount:
(i) Closing balance of receivables : ` 30 lakhs
(ii) Opening balance of receivables : ` 20 lakhs
(iii) Average collection period : 25 days
(iv) Credit sales are 73% of sales (assume 365 days in a year)
(a) ` 365 lakhs
(b) ` 500 lakhs
(c) ` 550 lakhs
(d) ` 730 lakhs
WORKING:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑏𝑡𝑜𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠/365
(30 + 20)
25 = 2
𝐶𝑆/365
25
25 =
𝐶𝑆/365
𝐶𝑆
25 = 25 ×
365
𝐶𝑆 = 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒 = 73% × 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒 =
73%
365
=
73%
= 500 𝐿𝑎𝑘ℎ𝑠
Debtors velocity = 3 months

Sales = ` 25,00,000
Bills receivable & Bills payable were ` 60,000 and ` 36,667 respectively.
Sundry debtors = ?
(a) ` 6,25,000
(b) ` 5,25,000
(c) ` 5,65,000
(d) ` 6,65,000
WORKING:
𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝐷𝑒𝑏𝑡𝑜𝑟𝑠 𝑣𝑒𝑙𝑜𝑐𝑖𝑡𝑦 = × 12
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝑥
3= × 12
25,00,000
x = Account Receivable = 6,25,000.

Debtors + Bills Receivable = Account Receivable
x + 60,000 = 6,25,000
x = Debtors = 5,65,000
LIQUID RATIO
Current ratio is 4:1. Net Working Capital is ` 30,000. Find the amount of Liquid assets if value of stock is ` 8,000.
(a) ` 10,000
(b) ` 40,000
(c) ` 32,000
(d) ` 2,000
WORKING:
𝐶𝐴
𝐶𝑅 =
𝐶𝐿
𝐶𝐴
4=
𝐶𝐿
𝐶𝐴 = 4 𝐶𝐿 _______________(1)
𝑁𝑊𝐶 = 𝐶𝐴 − 𝐶𝐿

30000 = 4𝐶𝐿 − 𝐶𝐿
𝐶𝐿 = 10000
𝐶𝐴 = 4 × 10000
= 40000
𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡 = 𝐶𝐴 − 𝑆𝑡𝑜𝑐𝑘

= 40000 − 8000
= 32000
CURRENT RATIO
Current assets are twice the current liabilities. If the net working capital is ` 60,000, current assets would be:
(a) ` 60,000
(b) ` 1,00,000
(c) ` 1,20,000
(d) ` 1,10,000
WORKING:
𝐶𝐴 = 2 𝐶𝐿 ___________(1)
𝑁𝑊𝐶 = 𝐶𝐴 − 𝐶𝐿
60,000 = 𝐶𝐴 − 𝐶𝐿 __________(2)
𝑃𝑢𝑡𝑡𝑖𝑛𝑔 𝐸𝑔. (1)𝑖𝑛 (2); 𝑤𝑒 𝑔𝑒𝑡
60,000 = 2 𝐶𝐿 − 𝐶𝐿
𝐶𝐿 = 60,000
𝐶𝐴 = 2 𝐶𝐿
= 2 × 60,000
𝐶𝐿 = 1,20,000
S Ltd. gives the following information:

Net working capital ` 2,80,000
Current ratio 2.4
Liquid ratio 1.6
Current Assets = ?
(a) ` 2,00,000
(b) ` 2,80,000
(c) ` 4,80,000
(d) ` 3,60,000
WORKING:
𝑥
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑦
𝑥
2.4 =
𝑦
2.4y = x
Working Capital = CA – CL
2,80,000 = 2.4y – y
2,80,000 = 1.4y
Y = 2,00,000
𝑥 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 2,00,000 × 2.4 = 4,80,000
CREDITORS PAYMENT PERIOD

Creditors velocity = 2 months.

Cost of goods sold = ` 20,00,000
Opening stock = ` 9,90,000
Closing stock = ` 10,10,000
Bills receivable & Bills payable were ` 60,000 and ` 36,667 respectively.
Creditors = ?
(a) ` 3,36,667
(b) ` 3,66,333
(c) ` 3,30,367
(d) ` 3,00,000
WORKING:
Opening stock + Purchase – Closing stock = Cost of goods sold
9,90,000 + x – 10,10,000= 20,00,000
x = Purchase = 20,20,000
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 𝑉𝑒𝑙𝑜𝑐𝑖𝑡𝑦 = × 12
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
𝑥
2= × 12
20,20,000
x = Accounts Payable = 3,36,667

Creditors + Bills Payable = Account Payable
x + 36,667 = 3,36,667
x = Creditors = 3,00,000
STOCK TURNOVER OR STOCK VELOCITY

Gross profit ratio = 20%.

Stock velocity = 6 month
Gross profit for the year ended amounts to ` 5,00,000. Stock at the end of the year is ` 20,000 more than what it was at the
beginning of the year.
Closing stock = ?
(a) ` 10,00,000
(b) ` 9,90,000
(c) ` 10,10,000
(d) ` 10,20,000
WORKING:
Sales 25,00,000
(-) Gross profit 20% (5,00,000)
Cost of goods sold 20,00,000
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘
𝑆𝑡𝑜𝑐𝑘 𝑣𝑒𝑙𝑜𝑐𝑖𝑡𝑦 = × 12
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑥
6= × 12
20,00,000

x = Average Stock = 10,00,000
Let Opening stock be = x
Closing stock = x + 20,000
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 =
2
𝑥 + (𝑥 + 20,000)
10,00,000 =
2
20,00,000 = 2x + 20,000
19,80,000 = 2x
x = Opening stock = 9,90,000
Closing stock = 9,90,000 + 20,000 = 10,10,000
OPERATING CYCLE METHOD

What will be the operating cycle period if raw materials are in store for 2 months, processing time 2 ½ months finished goods
remain in store for 15 days, debtors are allowed 60 days’ credit and credit received from suppliers of raw material is 1
month:
(a) 7 months
(b) 6 months
(c) 6 ½ months
(d) 5 months
WORKING:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 = 𝑅 + 𝑊𝐼𝑃 + 𝐹𝐺 + 𝐷𝑒𝑏𝑡𝑜𝑟 − 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟
= 2 + 2.5 + 0.5 + 2 − 1
= 6 𝑚𝑜𝑛𝑡ℎ𝑠
Operating cycle days of Ramji Ltd. is 167 days. Other details are as follows:
Raw material stock velocity 79 days
Debtors collection period 70 days
WIP conversion period 36 days
Finished goods conversion period 29 days
Creditors payment period = ?
(a) 47 days
(b) 94 days
(c) 52 days
(d) 59 days
WORKING:
Let the creditors payment period be ‘x’.
79 + 70 + 36 + 29 – x = 167
- x = - 47
x = Creditors payment period = 47 days
If raw material consumed is ` 8,42,000; cost of production is ` 14,25,000; Stock of raw material & WIP is ` 1,24,000 and `
72,000 respectively then Raw Material Conversion period will be –
Note: 1 Year = 365 days
(a) 54 days
(b) 18 days
(c) 29 days
(d) 49 days

WORKING:
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑆𝑡𝑜𝑐𝑘 1,24,000
𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 = × 365 = × 365 = 54 𝑑𝑎𝑦𝑠
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑑 8,42,000
TANDON COMMITTEE
YouTube Video Link (3 METHOD) : https://youtu.be/naLM5Q2KuIY?t=3127
If Current Assets are ` 1,09,05,750 and Current Liabilities are ` 32,50,000 then maximum permissible bank finance as per
first method of Tandon Committee norms is –
(a) ` 57,41,813
(b) ` 49,29,313
(c) ` 52,29,813
(d) ` 49,41,813
WORKING:
Maximum permissible bank finance as per Tandon Committee norms:
Method 1 : 75% of (Current Assets – Current Liabilities)
= 0.75 × (1,09,05,750 − 32,50,000)
= 57,41,813
If Current Assets are ` 1,09,05,750 and Current Liabilities are ` 32,50,000 then maximum permissible Bank Finance as per
Second Method of Tandon Committee norms is –
(a) ` 57,41,813
(b) ` 49,29,313
(c) ` 52,29,813
(d) ` 49,41,813
WORKING:
Maximum permissible bank finance as per Tandon Committee norms:
Method 2: 75% of Current Assets – Current Liabilities
= (0.75 × 1,09,05,750) − 32,50,000
= 49,29,313
Current Assets & Current Liabilities of Deelip Ltd. are 9,60,000 and 3,60,000 respectively. Maximum permissible bank finance
as per Tandon Committee norms is 3,15,000. What are the core current assets of Deelip Ltd.?
(a) ` 60,000
(b) ` 45,000
(c) ` 30,000
(d) ` 90,000
WORKING:
3,15,000 = [75% 𝑜𝑓 (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑜𝑟𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠)] − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
3,15,000 = [0.75 × (9,60,000 − 𝑥)] − 3,60,000
3,15,000 = 7,20,000 − 0.75𝑥 − 3,60,000
−45,000 = −0.75𝑥
x = Core Current Assets = 60,000
NET WORKING CAPITAL

The Net Working Capital (NWC) of a firm is ` 14 Lakhs. It purchased ` 30 Lakhs worth of raw materials on credit, issued 7%
debentures for ` 20 Lakhs, and purchased a machine for ` 18 Lakhs for cash. The new NWC of the firm will be:

(a) ` 12 Lakhs
(b) ` 16 Lakhs
(c) ` 15 Lakhs
(d) ` 10 Lakhs
WORKING:
Effect on NWC
(𝑖)𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑜𝑓 𝑅𝑀 𝑜𝑛 𝐶𝑟𝑒𝑑𝑖𝑡 = 𝑛𝑜 𝑒𝑓𝑓𝑒𝑐𝑡
(𝑖𝑖)𝐼𝑠𝑠𝑢𝑒𝑑 𝐷𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒 = 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑁𝑊𝐶 𝑏𝑦 20 𝐿𝑎𝑘ℎ𝑠
(𝑖𝑖𝑖)𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝑓𝑜𝑟 𝐶𝑎𝑠ℎ = 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑁𝑊𝐶 𝑏𝑦 18 𝐿𝑎𝑘ℎ𝑠
Net Effect Increase 2 Lakhs
+Opening 14 Lakhs
=Closing 16 Lakhs
EOQ
YouTube Video Link (THEORY) : https://youtu.be/naLM5Q2KuIY?t=3802
Monthly demand for a raw material is 150 units. Ordering cost per order is ` 8 and annual carrying cost per unit is ` 2.
Economic Order Quantity (EOQ) under the above circumstances will be:
(a) 90
(b) 120
(c) 150
(d) 180
WORKING:
2×𝐴×𝑂
𝐸𝑂𝑄 = √
𝐶
2 × (150 × 12) × 8
=√
2
= √14400
= 120 𝑈𝑛𝑖𝑡𝑠
The following details are available in respect of a firm: Annual requirement of inventory 20,000 units. Cost per unit (other
than carrying and ordering cost) is ` 10, Carrying cost are likely to be 10% per year, Cost of placing an order is ` 500 per
order. The economic ordering quantity is:
(a) 4472 Units
(b) 4274 Units
(c) 5270 Units
(d) 4760 Units
WORKING:
2 × 20,000 × 500
𝐸𝑂𝑄 = √
10 × 10%
= 4,472 𝑈𝑛𝑖𝑡𝑠
DU PONT ANALYSIS

JP Limited has earned 10% return on total assets of ` 18,00,000 and has a net profit ratio of 8%. Find out sales of the
company.
(a) ` 14,40,000
(b) ` 25,00,000
(c) ` 27,50,000
(d) ` 22,50,000
WORKING:
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇. 𝐴 × 𝑅𝑒𝑡𝑢𝑟𝑛
= 18,00,000 × 10%
= 1,80,000
𝑁𝑃
𝑁𝑃% =
𝑆𝑎𝑙𝑒𝑠
1,80,000
8% =
𝑆𝑎𝑙𝑒𝑠
𝑆𝑎𝑙𝑒𝑠 = 22,50,000
BAUMOL MODEL
The annual cash requirement of A Ltd. is ` 25 lakh. Cost of conversion of marketable securities per lot is ` 2,500. The
company can earn 5% annual yield on its securities. What will be the economic lot size according to the Baumol Model?
(a) ` 1,00,000
(b) ` 2,50,000
(c) ` 5,00,000
(d) ` 4,75,000
WORKING:
2 × 25,00,000 × 2,500
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐿𝑜𝑡 𝑆𝑖𝑧𝑒 = √
5%
= 5,00,000
MIX QUESTIONS
YouTube Video Link (THEORY) : https://youtu.be/naLM5Q2KuIY?t=4798
Ace Ltd. manufactures a product and the following particulars are collected for the year ended March, 2013:
- Monthly demand (units) 250
- Cost of placing an order (`) 100
- Annual carrying cost (` per unit) 15
- Normal usage (units per week) 50
- Minimum usage (units per week) 25
- Maximum usage (units per week) 75
- Re-order period (weeks) 4–6
You are required to calculate:

(i) Re-order quantity
(ii) Re-order level
(iii) Minimum level
(iv) Maximum level
(v) Average stock level.
ANSWER:

2𝑈 × 𝑃
(𝑖)𝑅𝑒 − 𝑜𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = √
𝑆
Where, U = Annual consumption (units) during the year
P = Cost of placing an order
S = Annual carrying cost per unit
2 × 2,600 × 𝑅𝑠. 100
=√ = 186 𝑢𝑛𝑖𝑡𝑠 (𝑎𝑝𝑝𝑟𝑜𝑥. )
𝑅𝑠. 15
Note: Since normal usage is 50 units per week the annual consumption of the year is = 52 weeks x 50 =
2,600 units.
(ii) Re-order level = Maximum Re-order period or Maximum delivery period x Maximum usage = 6 weeks ×
75 = 450 units.
(iii) Minimum level = Re-order level – (Normal usage x Average delivery period or Normal re-order period)
= 450 units – (50 units x 5 weeks) = 200 units.
(iv) Maximum level = (Re-order level + Re-order quantity) - (Minimum usage x Minimum delivery period or
Minimum re-order period)
= (450 units + 186 units) – (25 units x 4 weeks) = 536 units.
(v) Average stock level = [(Maximum level + Minimum level) ] ÷ 2

536 𝑢𝑛𝑖𝑡𝑠 + 200 𝑢𝑛𝑖𝑡𝑠
= 368 𝑢𝑛𝑖𝑡𝑠.
2
Or Average stock level = Minimum level + 1/2 Reorder quantity
= 200 units + 1/2 x 186 = 293 units.
Materials X and Y are used as follows:

Minimum usage − 50 units each per week
Maximum usage − 150 units each per week
Normal usage − 100 units each per week
Ordering quantities X = 600 units
Y = 1,000 units
Delivery period X = 4 − 6 weeks
Y = 2 − 4 weeks
Calculate for each material (i) Maximum level (ii) Minimum level and (iii) Ordering level.
ANSWER:
Material X
Ordering level = Maximum usage x Maximum delivery period
= 150 × 6
= 900 units.
Minimum level = Ordering level - (Normal usage x Normal delivery period)

= 900 − (100 × 5)
= 400 units
Maximum level = (Ordering level + Ordering quantity) −

(Minimum usage x Minimum delivery period)
= 900 + 600 − (50 × 4)
= 1,500 − 200
= 1,300 units
Material Y
Ordering Level = Maximum usage x Maximum delivery period
= 150 × 4 = 600 units
Minimum Level = Ordering level − (Normal usage x Normal delivery

period)
= 600 − (100 × 3) = 300 units.

Maximum Level = (Ordinary level + Ordering quantity) - (Minimum usage x Minimum delivery period)
= 600 + 1,000 − (50 × 2)
= 1,600 − 100 = 1,500 units.
Normal delivery period has been computed as follows:

4+6
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑋 = = 5 𝑤𝑒𝑒𝑘𝑠
2
2+4
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑋 = = 3 𝑤𝑒𝑒𝑘𝑠
2

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT
EXPECTED RETURN OF PORTFOLIO/ SECURITY
YouTube Video Link : https://youtu.be/WKkTiNexcec?t=265
If the risk free rate of interest is 11% and expected return on market portfolio is 18%, ascertain expected return of the portfolio
if 𝛽 of portfolio is 0.90.
(a) 17.1%
(b) 17.2%
(c) 17.3%
(d) 18.1%
WORKING:
𝐸𝑅𝑝 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 )
= 11% + 0.9(18% − 11%)
= 17.3%
Mr. A is planning to buy a security and is in a dilemma regarding price to be paid. For this he is relying on the required rate of
return on the security. Help him out to calculate the aforesaid rate (%), if you are informed that security’s standard deviation is
6%, correlation coefficient of the security with the market is 0.6, and market standard deviation is 5%. You may assume that
return from risk-free security in the market is 8%, and return on market portfolio is 12%.
(a) 10.68%
(b) 10.88%
(c) 10.58%
(d) 10.78%
WORKING:
𝑆𝐷 𝑜𝑓 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦
𝛽 = 𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝐶𝑜 − 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 ×
𝑆𝐷 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡
6%
= 0.6 ×
5%
= 0.72
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 )
= 8% + 0.72(12% − 8%)
= 10.88%
PORTFOLIO BETA
When a portfolio comprises investment in three shares (Share A – 40%, Share B – 25% and Share C – 35%) whose beta factors
are 1.3, 1.6 and 1.2, respectively, the portfolio beta is:
(a) 1.34
(b) 1.43
(c) 1.24
(d) 1.42
WORKING:
Portfolio Beta = (1.3 * 40%) + (1.6 * 25%) + (1.2 * 35%)
Portfolio Beta = 0.52 + 0.4 + 0.42
Portfolio Beta = 1.34

CAPM
Given: risk free rate of return = 5%, Market Return = 10%, cost of equity = 15%, value of beta is:
(a) 1.9
(b) 1.8
(c) 2.0
(d) 2.2
WORKING:
Cost of Equity = Risk free rate of return + Beta(Market return – Risk free rate)
Beta = (Cost of Equity – Risk free rate)/(Market return – Risk free rate)
Beta = (15% - 5%) / (10% - 5%)
Beta = 10%/ 5%
Beta = 2.0
The standard deviation of market returns is 15. The return of stock X is 25%. The riskless rate of interest is 5%. The risk
premium of the X stock is:
(a) 1.33
(b) 5
(c) 15
(d) 20
WORKING:
𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑅𝑖𝑠𝑘𝑙𝑒𝑠𝑠 𝑟𝑒𝑡𝑢𝑟𝑛 + 𝑅𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 25% − 5%
= 20%
The Company’s beta is 1.40 Times. The market return is 14%. The risk free rate is 10%. Calculate expected return based on
CAPM.
(a) 10%
(b) 14%
(c) 15.6%
(d) 18%
WORKING:
Expected Return of Portfolio = Rf + B(Rm – Rf)
= 10% + 1.4 (14% - 10%)
= 15.60%
RISK PENALTY (MARKOWITZ MODEL)

If the standard deviation of a portfolio return is 15% and risk tolerance level for the investor is 40. What will be the risk penalty
for the investor?
(a) 4.5%
(b) 2.67%
(c) 6.32%
(d) 5.625%
WORKING:
𝑅𝑖𝑠𝑘 𝑆𝑞𝑢𝑎𝑟𝑒𝑑 (𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒)
𝑅𝑖𝑠𝑘 𝑃𝑒𝑛𝑎𝑙𝑡𝑦 =
𝑅𝑖𝑠𝑘 𝑇𝑜𝑙𝑎𝑟𝑎𝑛𝑐𝑒
152
=
40
225
=
40
= 5.625%
HOLDING PERIOD RETURN

An investor purchases an 8% bond having a face value of ` 1,000 and maturity of 5 years for ` 900. A year later he sells it for `
960 in the market. The holding period gain of the investor is:
(a) 8.88%
(b) 14.00%
(c) 14.58%
(d) 15.55%
WORKING:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 + 𝑃𝑟𝑖𝑐𝑒 𝑅𝑖𝑠𝑒
𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = × 100
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
(1000 × 8%) + (960 − 900)
= × 100
900
80 + 60
= × 100
900
= 15.55%

The price of a share is ` 100 today. It grows to ` 125 at the end of the 1st year, ` 187.5 at the end of the 2nd year and ` 243.75
at the end of the 3rd year. What is the average rate of return?
(a) 35.5%
(b) 35%
(c) 34.5%
(d) 34%
WORKING:
125 − 100
1𝑠𝑡 𝑦𝑟 = × 100 = 25%
100
187.5 − 125
2𝑛𝑑 𝑦𝑟 = × 100 = 50%
125
243.75 − 187.5
3𝑟𝑑 𝑦𝑟 = × 100 = 30%
187.5
25% + 50% + 30%

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 =
3
= 35%
ECONOMIC VALUE ADDED

You made a ` 1,50,000 capital investment in your company. Your operating profit, after taxes, is ` 50,000. The opportunity cost
of that investment is 12%. Calculate Economic Value Added.
(a) ` 50,000
(b) ` 18,000
(c) ` 32,000
(d) ` 25,000
WORKING:
EVA = NOPAT – COST OF CAPITAL
EVA = 50,000– (1,50,000 * 12%)
EVA = 50,000 – 18,000
EVA = 32,000
SHARPE RATIO
YouTube Video Link (THEORY) : https://youtu.be/WKkTiNexcec?t=2761
YouTube Video Link (QUESTION) : https://youtu.be/WKkTiNexcec?t=2887
A Portfolio Manager has invested in Blue Chip Funds which gives 19% return with a standard deviation of 3.5%.
Calculate Sharpe Ratio if
(a) Risk Free Return is 7%,
(b) Return on Sensex is 18% with a standard deviation of 4%.


FM Type Wise Practical Mcqs

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INDEX

CAPITAL BUDGETING .............................................................................................................................................................. 2

1|Page Think CMA FMSM, Think Amit Talda Sir

𝐹𝑉𝑛 = 𝑃𝑜 + 𝑃𝑜 (𝑖)(𝑛) = 2,000 + 2,000(0.06)(2) = 2,000 + 240 = 2,240.

2,000 (1.1)2 = 2,000 × 1.21 = 2,420

FUTURE VALUE OF SINGLE CASH FLOW

2|Page Think CMA FMSM, Think Amit Talda Sir

PRESENT VALUE & FUTURE VALUE OF SINGLE CASH FLOW

𝑃𝑉 = 𝑀𝑉 × 𝑃𝑉𝐹 @ 10% 𝑓𝑜𝑟 6𝑡ℎ 𝑦𝑟

3|Page Think CMA FMSM, Think Amit Talda Sir

PRESENT VALUE OF ANNUITY

FUTURE VALUE OF ANNUITY

Future Value of Annuity at the end of 4 years = ` 18,564

4|Page Think CMA FMSM, Think Amit Talda Sir

𝐹𝑉𝐴 = 500 × 𝐹𝑉𝐼𝐹𝐴(7,0.14) = 500 × 10.7304915 = 5,365.25

5|Page Think CMA FMSM, Think Amit Talda Sir

𝑇𝑎𝑘𝑒 4𝑡ℎ 𝑅𝑜𝑜𝑡 𝑜𝑛 𝐵𝑜𝑡ℎ 𝑠𝑖𝑑𝑒𝑠.

𝑁𝑃𝑉 = 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤 − 𝑂𝑢𝑡𝑓𝑙𝑜𝑤

AVERAGE RATE OF RETURN

Find the average rate of return on Machine A & B.

7|Page Think CMA FMSM, Think Amit Talda Sir

NET PRESENT VALUE METHOD

𝑃𝑉 𝑜𝑓 𝐶𝐹𝐴𝑇 = 12000 × 3.791

𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒 (𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙)(5𝑡ℎ 𝑦𝑟 𝑒𝑛𝑑) = 50000 × 20% × 0.621

𝑃𝑉 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (5𝑡ℎ 𝑦𝑟 𝑒𝑛𝑑) = 20000 × 0.621

𝑇𝑜𝑡𝑎𝑙 𝐶𝐼 = 45492 + 6210 + 12420

𝑅𝑒𝑗𝑒𝑐𝑡 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡.

8|Page Think CMA FMSM, Think Amit Talda Sir

INTERNAL RATE OF RETURN

The Net Present Value factors for 5 years are as under:

The IRR of the investment can be found as follows:

Computation of Internal Rate of Return

(a) The IRR is less than 9%.

34,444 0.862 29,691

𝑆𝑜, 𝐴𝑛𝑠𝑤𝑒𝑟 𝑖𝑠 𝑔𝑟𝑒𝑎𝑡𝑒𝑟 𝑡ℎ𝑎𝑛 16% 𝑏𝑢𝑡 𝑙𝑒𝑠𝑠 𝑡ℎ𝑎𝑛 18%.

The Net Present Value factors for 5 years are as under:

The IRR of the investment can be found as follows:

11 | P a g e Think CMA FMSM, Think Amit Talda Sir

EXPECTED NPV (PROBABILITY)

(i)Compute the expected net present value of Projects X and Y.

60,000 0.4 24,000 -30,000 9,00,000,000 9,00,00,000

1,20,000 0.4 48,000 30,000 9,00,000,000 9,00,00,000

1,50,000 0.1 15,000 60,000 36,00,000,000 36,00,00,000

12 | P a g e Think CMA FMSM, Think Amit Talda Sir

(i)The expected net present value of Projects X and Y is ` 90,000 each.

(𝑖𝑖)𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 = ∑√𝑆𝑞𝑢𝑎𝑟𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑥 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦

𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑋: 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 = √14,40,000,000 = 37,947

𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑌: 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 = √19,80,000,00 = 44,497

Project Y is riskier since it has a higher coefficient of variation.

13 | P a g e Think CMA FMSM, Think Amit Talda Sir

80,000 − (2,00,000 × 8%)

𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

Total Market Value = Market Value Of Debt + Market Value Of Equity

NET OPERATING INCOME APPROACH

14 | P a g e Think CMA FMSM, Think Amit Talda Sir

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡

1,00,000 − (5,00,000 × 6%)

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡

A firm provides the following information:

16 | P a g e Think CMA FMSM, Think Amit Talda Sir

A firm’s details are as under :

(𝑐)𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = 𝑂𝐿 × 𝐹𝐿 = 6 × 2 = 12 𝑡𝑖𝑚𝑒𝑠.

LEVERAGE REVERSE QUESTIONS