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    Arif Melsing
    The document contains examples and solutions for various finance concepts: 1) Time value of money calculation to determine amount needed to be invested today at 9% to buy a car costing Rs. 68,500 in two years. 2) Calculation of holding period return of 2.4% for a bond purchased and later sold after receiving coupon payments. 3) Valuation of a bond selling for Rs. 1,293.61 using present value of cash flows discounted at the yield to maturity of 8%. 4) Calculation of cost of equity as 8.4% or 15.2% for a stock using the CAPM and dividend discount models. 5) Incomplete example of business valuation of two

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    Untitled Document

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    The document contains examples and solutions for various finance concepts: 1) Time value of money calculation to determine amount needed to be invested today at 9% to buy a car costing Rs. 68,500 in two years. 2) Calculation of holding period return of 2.4% for a bond purchased and later sold after receiving coupon payments. 3) Valuation of a bond selling for Rs. 1,293.61 using present value of cash flows discounted at the yield to maturity of 8%. 4) Calculation of cost of equity as 8.4% or 15.2% for a stock using the CAPM and dividend discount models. 5) Incomplete example of business valuation of two

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    The document contains examples and solutions for various finance concepts: 1) Time value of money calculation to determine amount needed to be invested today at 9% to buy a car costing Rs. 68,500 in two years. 2) Calculation of holding period return of 2.4% for a bond purchased and later sold after receiving coupon payments. 3) Valuation of a bond selling for Rs. 1,293.61 using present value of cash flows discounted at the yield to maturity of 8%. 4) Calculation of cost of equity as 8.4% or 15.2% for a stock using the CAPM and dividend discount models. 5) Incomplete example of business valuation of two

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    36 views5 pages

    Untitled Document

    Uploaded by

    Arif Melsing
    The document contains examples and solutions for various finance concepts: 1) Time value of money calculation to determine amount needed to be invested today at 9% to buy a car costing Rs. 68,500 in two years. 2) Calculation of holding period return of 2.4% for a bond purchased and later sold after receiving coupon payments. 3) Valuation of a bond selling for Rs. 1,293.61 using present value of cash flows discounted at the yield to maturity of 8%. 4) Calculation of cost of equity as 8.4% or 15.2% for a stock using the CAPM and dividend discount models. 5) Incomplete example of business valuation of two

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    of 5

    1)Time Value of Money: You would like to buy a new automobile. You have Rs.

    50,000, but the


    car costs Rs. 68,500. If
    you can earn 9%, how much do you have to invest today to buy the car in two years? Do you
    have enough? Assume the price will stay the same.

    Solution:-

    Present value=$68500*Present value of discounting factor(rate%,time period)

    =$68500/1.09^3

    =$68500*0.77218348

    which is equal to

    =$52896 (Approx)

    2) Holding Period Return: A person has purchased a bond on June 21, 2018, at a price of Rs.
    125. The bond has a face value of Rs. 100 and a coupon of 8% p.a. payable half-yearly on June
    30 and December 31 of each year. He sold the bond on September 12, 2020, at a price of Rs.
    108. Calculate the holding period of the bond.

    Calculation of holding period return

    sr Particular Amount (In Rs)

    1 Interest received on 4
    30-06-2018
    (Rs 100 x 8% x 1/2)

    2 Interest received on 4
    31-12-2018
    (Rs 100 x 8% x 1/2)

    3 Interest received on 4
    30-06-2019
    (Rs 100 x 8% x 1/2)

    4 Interest received on 4
    31-12-2019
    (Rs 100 x 8% x 1/2)
    5 Interest received on 4
    30-06-2020
    (Rs 100 x 8% x 1/2)

    6 Sale value of bond on 108


    September 12 2020

    7 Total cash inflow (A) 128

    8 Purchase price of bond on 125


    21-06-2018 (Cashoutflow)
    (B)

    10 Holding period return 2.4%


    [(A-B)/B*100]

    3) Bond Valuation: Ton Co. issued a bond with 15 years to maturity with a face value of
    Rs.1000. The bond has an annual coupon of Rs. 90. Similar bonds have a yield to maturity of 8
    percent. What would this bond sell for?

    N = 15
    FV = 1000
    Annual coupon = 90 or 9%
    YTM = 8%

    Bond sell price = 1293.61

    Period PV PMT Interest FV

    1 1,000.00 80.00 $90.00 1,010.00

    2 1,010.00 80.00 90.90 1,020.90

    3 1,020.90 80.00 91.88 1,032.78

    4 1,032.78 80.00 92.95 1,045.73

    5 1,045.73 80.00 94.12 1,059.85

    6 1,059.85 80.00 95.39 1,075.23

    7 1,075.23 80.00 96.77 1,092.00


    8 1,092.00 80.00 98.28 1,110.28

    9 1,110.28 80.00 99.93 1,130.21

    10 1,130.21 80.00 101.72 1,151.93

    11 1,151.93 80.00 103.67 1,175.60

    12 1,175.60 80.00 105.80 1,201.41

    13 1,201.41 80.00 108.13 1,229.53

    14 1,229.53 80.00 110.66 1,260.19

    15 1,260.19 80.00 113.42 1,293.61

    4. Cost of Equity: Suppose stock in Air Freight has a beta of 1.2. The market risk premium is 8
    percent, and the risk-free rate is 6 percent. Alpha’s last dividend was Rs. 2 per share, and the
    dividend is expected to grow at 8 percent indefinitely. The stock currently sells for Rs. 30. What
    is Alpha’s cost of equity capital?

    Calculation of Cost of Equity capital of Alpha Air Freight:

    Formula used in the Capital asset pricing model (CAPM) is

    Cost of Equity capital = Risk-free rate + [ Beta * ( Market Risk Premium - Risk-free rate)]

    Given,

    Beta = 1.2

    Market risk premium = 8%

    Risk free rate = 6%

    Dividend per share = $2

    Expected growth rate of dividend = 8%

    Market price per share = $30

    Cost of equity capital = 6% + [ 1.2 * ( 8% - 6%)] (by using above formula)


    = 6+2.4

    = 8.4

    Calculation of Cost of Equity by using Dividend Discount Model :

    Cost of equity capital = (Dividend per share for next year / Current year market price of share ) +
    Growth rate of dividend

    Dividend per share in next year = Dividend in current period * (1 + Growth rate)

    = 2 * ( 1+ 8%)

    = 2.16

    Cost of Equity Capital = (2.16 /30) + 8% (by using above formula)

    = 15.2

    5)Business Valuation: Refer to the attached excel sheet on the historical data for BPL & Vijay
    Motors and answer the following.

    1. Use the DCF method to find the Intrinsic value of BPL & Vijay Motors Ltd.
    2. State your opinion on which company would be a better investment proposition and why?
    Note: Assume the corporate tax rate at 34%. The shares outstanding for BPL as on March 2021
    were 30.3 crores, while that of Vijai Motors was 50.85 crores.

    Given data is incomplete and free cash flow statement is given for one company. Also it
    is not mentioned that the given free cash flow statement is of which company.
    Furthermore the data is given of maruti suzuki india but we have to find the intrinsic
    value of Vijai Motors and BPL.

    6. CAPM: Suppose the risk-free rate is 4 percent, the market risk premium is 7 percent, and a
    particular stock has a beta of 1.3. Based on the CAPM, what is the expected return on this
    stock? What would the expected return be if the beta were to double?

    risk-free rate (Rf) 4 percent


    market risk premium (Market Risk Premium = 7 percent
    Rm – Rf)

    Market expected return Rf + (Rm – Rf)B

    Beta 1.3

    Expected market return

    Rf + (Rm – Rf)B
    4(7)1.3
    36.4%

    If the beta were to double

    Rf + (Rm – Rf)B
    4(7)2.6
    72.8%

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