1 / 18

Treasury Management- Numericals

Treasury Management- Numericals. KAMAL K JINDAL. Problem 1. The following information is available about an equity share Price at the beginning of the year : Rs 60 Price at the end of the year : Rs 66

Download Presentation

Treasury Management- Numericals

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Treasury Management-Numericals KAMAL K JINDAL

  2. Problem 1 • The following information is available about an equity share • Price at the beginning of the year : Rs 60 • Price at the end of the year : Rs 66 • Dividend paid :Rs 2.40 towards the end to the year • The current yield on this share is • A] 4% • B] 10% • C] 14% • D] none of these

  3. Problem 1…Solution • The answer is A • The current yield is • =Annual Income/beginning price • 2.40/60=0.04 or 4%

  4. Problem 2 • The following information is available about an equity share • Price at the beginning of the year : Rs 60 • Price at the end of the year : Rs 66 • Dividend paid :Rs 2.40 towards the end to the year • The capital gains on this share is • A] 4% • B] 10% • C] 14% • D] none of these

  5. Problem 2…solution • The answer is B • Capital gains/loss is • =[ending price-beginning price]/beginning price • [66-60]/60 =0.10 or 10%

  6. Problem 3 • The following information is available about an equity share • Price at the beginning of the year : Rs 60 • Price at the end of the year : Rs 66 • Dividend paid :Rs 2.40 towards the end to the year • The rate of return on this share is • A] 4% • B] 10% • C] 14% • D] none of these

  7. Problem 3…solution • The answer is C • Annual Income+ [ending price-beginning price] • ROR = --------------------------------------------------------------- • beginning price • = 2.40+[66-60]/60 =0.14 or 14%

  8. Problem 4 • A Rs 1000 bond matures in 20 years and offers a 9% coupon rate. • The required rate of return is 11% • The present value annuity factor [PVAF] for 11% and 20 payments is 7.963 • The present value factor for 11% and 20 years is 0.124 • The bond’s intrinsic value is • The answer is • A] Rs 800 • B] Rs 900 • C] 1100 • D] none of these

  9. Problem 4..solution • The answer is D • A Rs 1000 bond matures in 20 years and offers a 9% coupon rate.The required rate of return is 11%The present value annuity factor [PVAF] for 11% and 20 payments is 7.963The present value factor[PVF] for 11% and 20 years is 0.124Compute the bond’s intrinsic value • The present value of the interest payments is obtained by PVAF [11% 20 years] • PV=interest*PVAF[11% 20 years] • = Rs 90*7.963=Rs 719.67 • The PV of the Rs 100 principal repayment is obtained by using PVF [11% 20 years] • PV =amount*PVF [11% 20 years]] • =Rs 1000*0.124 =Rs 124 • Bond’s intrinsic value is Rs 840.67 i.e. [Rs 716.67+Rs 124] • Since discount rate exceed the coupon rate, the bond’s intrinsic value is less than its face value

  10. Problem 5 • A Rs 5000 bond with a 10% coupon rate matures in 8 years and currently sell at 97% • The investor expects a return not less than 11% • PVAF[11% 8 years] is 5.146 and PVF[11% 8 years] is 0.434 • Is this bond a desirable investment for the investor? • The answer is • A] Yes • B] No • C] It depend upon the Issuer’s standing • D] None of these

  11. Problem 5..solution • The answer is B • The present value of the Bond is • PV=interest*PVAF +Face value*PVF • = Rs 500*5.146 +Rs5000*0.434 • = Rs 4743 • Current price =Rs 5000*97% = Rs 4850 • Since the bond is available at a price higher than its present value of returns, the investment in bond is not desirable

  12. Problem 6 • Vikas industries seek your advice to price their Debenture Issue so as to provide yield of 16% to investors. Other details are : • Face value :Rs 100 • Term to maturity : 7 years • Coupon rate years 1-2 8%p.a. years 3-4 12%p.a. Years 5-7 15%p.a. • Redemption : 5% premium • PVF for year 1 to 7 are 0.862, 0.743,0.641,0.552,0.476,0.410 and 0.354 respectively • R & D inform you that current rate of interest on similar debenture is 15% • The answer is • A] Rs 80.93 • B] Rs 81.50 • C] Rs 82 • D] Rs 82.93

  13. Problem 6..solution • The interest payments over the debenture term and their present values are • The PV of redemption value Rs 105[Rs 100+Rs 5] @ 16% is Rs 105*0.354 =Rs 37.17 • PV of the Debenture is Rs 45.75+Rs 37.17=Rs 82.93 • The company can be advised to issue debenture at this value in order to yield a return of 16% to the investors

  14. Problem 7 • You are approached for investment advice by an investor .He has been offered shares in the negotiated deal @ Rs 60 by a company’s promoter, the following information is made available • Share capital [Rs 20 each] Rs 50,00,000 • Reserve and surplus Rs 5,00,000 • 15% secured loans Rs 25,00,000 • 12.5% unsecured loans Rs 10,00,000 • Fixed assets Rs 30,00,000 • Investments Rs 5,00,000 • Operating profit Rs 25,00,000 • Tax rate 50% • P/E Ratio 12.5 • The answer is • A] buy • B] buy @ Rs 55 per share • C] buy @ Rs 50 per share • D] do not buy

  15. Solution • Value =EPS xP/E ratio • P/E is already given as 12.5 • EPS can be calculated as under : • Operating profit i.e.EBIT Rs 25,00,000 less intt on 15% loan 3,75,000 less intt on loan 1,25,000 • Profit before tax i.e.EBT Rs 20,00,000 • Less Tax @ 50% Rs 10,00,000 • Profit after tax i.e.E Rs 10,00,000 • Equity shares[Rs50,00,000/20] 2,50,000 • EPS [10,00,000/2,50,000] 4 • Value of the share =EPS xPE=12.5 x4 =Rs 50 • The answer is C

  16. Problem 8 • Vivek Ltd currently has 100,000 shares in issue. It just paid dividend @Rs 15 per share and expects to maintain this dividend for the next 3 years but will then demonstrate perpetual growth of 10% p.a. The required rate of return of the equity investor is estimated to be 18% • The company has an investment opportunity which will involve a capital outlay in each of the next 2 years which will bring benefits in next 3 years as per details below. . The company has policy of not using debt finance The company is not willing to issue fresh equity due to depressed capital market • Finnacial implications of are year cash flow[Rs in 000s] 1 -1000 2 -1000 3 100 4 1300 5 3100 • The company is thinking of reducing the dividend payout in next 2 years if the investment is acceoted. However, it wll be able to maintain growth in dividend@10% because of other operations • The company seek your advice whether investment will lead to share holder value maximisation

  17. solution • [A] When the investment proposal is not accepted • The present value of dividend for the next 3 years: dividend per year Rs 15 PVAF[18%,3 years] 2.174 • PV of dividends Rs 32.61 • SHARE PRICE at the end of 3 years • D[1+g]/k-g • 15[1+0.10]/0.18-0.10=Rs206.25 • Pv of this amount @18% for 3 years Rs 206.25 x0.609=Rs125.61 • Present market price is [Rs125.61+Rs 32.61]=Rs 158.22 • [B]

  18. Solution..contd • If the investment proposal is accepted • Pv of dividends=54.29 • The share price D[1+g]/k-g • 18.20[1+.10]/.18-.10 =Rs 250 • PV of this amount@18% for 5 years • RS 250 x 0.437=Rs 109.25 • Market price =54.29+109.25=Rs 163.54

More Related