Final kick

Security Analysis and Valuation

Question 1
A company has a book value per share of ₹ 137.80. Its return on equity is 15% and it follows a
policy of retaining 60% of its earnings. If the Opportunity Cost of Capital is 18%, what is the
price of the share today? [adopt the perpetual growth model to arrive at your solution].
Question 2
MNP Ltd. has declared and paid annual dividend of ₹ 4 per share. It is expected to grow @
20% for the next two years and 10% thereafter. The required rate of return of equity
investors is 15%. Compute the current price at which equity shares should sell.
Note: Present Value Interest Factor (PVIF) @ 15%: For year 1 = 0.8696; For year 2 = 0.7561

Question 3
X Limited, just declared a dividend of ₹ 14.00 per share. Mr. B is planning to purchase the
share of X Limited, anticipating increase in growth rate from 8% to 9%, which will
continue for three years. He also expects the market price of this share to be ₹ 360.00 after
three years.
You are required to determine:
(i) the maximum amount Mr. B should pay for shares, if he requires a rate of return of 13%
per annum.
(ii) the maximum price Mr. B will be willing to pay for share, if he is of the opinion that the
9% growth can be maintained indefinitely and require 13% rate of return per annum.
(iii) the price of share at the end of three years, if 9% growth rate is achieved and assuming
other conditions remaining same as in (ii) above.
Calculate rupee amount up to two decimal points.
Year-1 Year-2 Year-3
FVIF @ 9% 1.090 1.188 1.295
FVIF @ 13% 1.130 1.277 1.443
PVIF @ 13% 0.885 0.783 0.693
Question 4
Piyush Loonker and Associates presently pay a dividend of Re. 1.00 per share and has a
share price of ₹ 20.00.
(i) If this dividend were expected to grow at a rate of 12% per annum forever, what is the
firm’s expected or required return on equity using a dividend-discount model approach?
(ii) Instead of this situation in part (i), suppose that the dividends were expected to grow at a
rate of 20% per annum for 5 years and 10% per year thereafter. Now what is the firm’s
expected, or required, return on equity?

Question 5
ABC Ltd. has been maintaining a growth rate of 10 percent in dividends. The company has
paid dividend @ ₹3 per share. The rate of return on market portfolio is 12 percent and the
risk free rate of return in the market has been observed as 8 percent. The Beta co-efficient of
company’s share is 1.5.
You are required to calculate the expected rate of return on company’s shares as per CAPM

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
model and equilibrium price per share by dividend growth model.
Question 6
A Company pays a dividend of ₹ 2.00 per share with a growth rate of 7%. The risk free rate is
9% and the market rate of return is 13%. The Company has a beta factor of 1.50. However,
due to a decision of the Finance Manager, beta is likely to increase to 1.75. Find out the
present as well as the likely value of the share after the decision.
Question 7
Shares of Voyage Ltd. are being quoted at a price-earning ratio of 8 times. The company
retains 45% of its earnings which are ₹ 5 per share.
You are required to compute
(1) The cost of equity to the company if the market expects a growth rate of 15% p.a.
(2) If the anticipated growth rate is 16% per annum, calculate the indicative market price
with the same cost of capital.
(3) If the company's cost of capital is 20% p.a. & the anticipated growth rate is 19% p.a.,
calculate the market price per share.
Question 8
A share of Tension-free Economy Ltd. is currently quoted at, a price earnings ratio of 7.5
times. The retained earnings per share being 37.5% is ₹ 3 per share. Compute:
(1) The company’s cost of equity, if investors expect annual growth rate of 12%.
(2) If anticipated growth rate is 13% p.a., calculate the indicated market price, with same
cost of capital.
(3) If the company’s cost of capital is 18% and anticipated growth rate is 15% p.a., calculate
the market price per share, assuming other conditions remain the same.
Question 9
M/s X Ltd. has paid a dividend of ₹ 2.5 per share on a face value of ₹ 10 in the financial year
ending on 31st March, 2009. The details are as follows:

Current market price of share ₹ 60

Growth rate of earnings and dividends 10%
Beta of share 0.75
Average market return 15%
Risk free rate of return 9%
Calculate the intrinsic value of the share.
Question 10
Seawell Corporation, a manufacturer of do-it-yourself hardware and housewares, reported
earnings per share of € 2.10 in 2003, on which it paid dividends per share of €0.69. Earnings
are expected to grow 15% a year from 2004 to 2008, during this period the dividend payout
ratio is expected to remain unchanged. After 2008, the earnings growth rate is expected to
drop to a stable rate of 6%, and the payout ratio is expected to increase to 65% of earnings.
The firm has a beta of 1.40 currently, and is expected to have a beta of 1.10 after 2008. The
market risk premium is 5.5%. The Treasury bond rate is 6.25%.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
(a) What is the expected price of the stock at the end of 2008?
(b) What is the value of the stock, using the two-stage dividend discount model?
Question 11
The risk free rate of return (Rf) is 9 percent. The expected rate of return on the market
portfolio Rm is 13 percent. The expected rate of growth for the dividend of Platinum
Ltd. is 7 percent.
The last dividend paid on the equity stock of firm A was ₹ 2.00. The beta of Platinum
Ltd.equity stock is 1.2.
(i) What is the equilibrium price of the equity stock of Platinum Ltd.?
(ii) How would the equilibrium price change when
The inflation premium increases by 2 percent?
The expected growth rate increases by 3 percent? The beta of Platinum Ltd. equity rises to
1.3?

Question 12
SAM Ltd. has just paid a dividend of ₹ 2 per share and it is expected to grow @ 6% p.a. After
paying dividend, the Board declared to take up a project by retaining the next three annual
dividends. It is expected that this project is of same risk as the existing projects. The results of
this project will start coming from the 4th year onward from now. The dividends will then be ₹
2.50 per share and will grow @ 7% p.a.
An investor has 1,000 shares in SAM Ltd. and wants a receipt of atleast ₹ 2,000 p.a. from this
investment.
Show that the market value of the share is affected by the decision of the Board. Also show as
to how the investor can maintain his target receipt from the investment for first 3 years and
improved income thereafter, given that the cost of capital of the firm is 8%.
Question 13
Mr. A is thinking of buying shares at ₹ 500 each having face value of ₹ 100. He is expecting a
bonus at the ratio of 1:5 during the fourth year. Annual expected dividend is 20% and the
same rate is expected to be maintained on the expanded capital base. He intends to sell the
shares at the end of seventh year at an expected price of ₹ 900 each. Incidental expenses for
purchase and sale of shares are estimated to be 5% of the market price. He expects a
minimum return of 12% per annum.
Should Mr. A buy the share? If so, what maximum price should he pay for each share?
Assume no tax on dividend income and capital gain.
Question 14
Following Financial data are available for PQR Ltd. for the year 2008:

(₹ in lakh)
8% debentures 125
10% bonds (2007) 50
Equity shares (₹ 10 each) 100
Reserves and Surplus 300

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Final kick
Total Assets 600
Assets Turnovers ratio 1.1
Effective interest rate 8%
Effective tax rate 40%
Operating margin 10%
Dividend payout ratio 16.67%
Current market Price of Share ₹14
Required rate of return of investors 15%
You are required to:
(i) Draw income statement for the year
(ii) Calculate its sustainable growth rate
(iii) Calculate the fair price of the Company's share using dividend discount model, and
(iv) What is your opinion on investment in the company's share at current price?

Question 15
XYZ company has current earnings of ₹ 3 per share with 5,00,000 shares outstanding. The
company plans to issue 40,000, 7% convertible preference shares of ₹ 50 each at par. The
preference shares are convertible into 2 shares for each preference shares held. The equity
share has a current market price of ₹ 21 per share.
(i) What is preference share’s conversion value?
(ii) What is conversion premium?
(iii) Assuming that total earnings remain the same, calculate the effect of the issue on the
basic earning per share (a) before conversion (b) after conversion.
(iv) If profits after tax increases by ₹ 1 million what will be the basic EPS (a) before
conversion and (b) on a fully diluted basis?

Question 16
ABC Limited’s shares are currently selling at ₹ 13 per share. There are 10,00,000 shares
outstanding. The firm is planning to raise ₹ 20 lakhs to Finance a new project.
Required:
What are the ex-right price of shares and the value of a right, if
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii) How does the shareholders’ wealth change from (i) to (ii)? How does right issue
increases shareholders’ wealth?
Question 17
Pragya Limited has issued 75,000 equity shares of ₹ 10 each. The current market price per
share is ₹ 24. The company has a plan to make a rights issue of one new equity share at a
price of ₹ 16 for every four share held.
You are required to:
(i) Calculate the theoretical post-rights price per share;
(ii) Calculate the theoretical value of the right alone;

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
(iii) Show the effect of the rights issue on the wealth of a shareholder, who has 1,000 shares
assuming he sells the entire rights; and
(iv) Show the effect, if the same shareholder does not take any action and ignores the issue.

Question18
The stock of the Soni plc is selling for £50 per common stock. The company then issues rights
to subscribe to one new share at £40 for each five rights held.
(a) What is the theoretical value of a right when the stock is selling rights-on?
(b) What is the theoretical value of one share of stock when it goes ex-rights?
(c) What is the theoretical value of a right when the stock sells ex-rights at £50?
(d) John Speculator has £1,000 at the time Soni plc goes ex-rights at £50 per common stock.
He feels that the price of the stock will rise to £60 by the time the rights expire. Compute his
return on his £1,000 if he (1) buys Soni plc stock at £50, or (2) buys the rights as the price
computed in part c, assuming his price expectations are valid.
Question 19
On the basis of the following information:
Current dividend (Do) = ₹ 2.50
Discount rate (k) = 10.5%
Growth rate (g) = 2%
(i) Calculate the present value of stock of ABC Ltd.
(ii) Is its stock overvalued if stock price is ₹ 35, ROE = 9% and EPS = ₹ 2.25? Show detailed
calculation.
Question 20
Given the following information:
Current Dividend ₹ 5.00
Discount Rate 10%
Growth rate 2%
(i) Calculate the present value of the stock.
(ii) Is the stock over valued if the price is ₹40, ROE = 8% and EPS = ₹ 3.00. Show your
calculations under the PE Multiple approach and Earnings Growth model.
Question 21
Capital structure of Sun Ltd., as at 31.3.2003 was as under:
(₹ in lakhs)
Equity share capital 80
8% Preference share capital 40
12% Debentures 64
Reserves 32
Sun Ltd., earns a profit of ₹ 32 lakhs annually on an average before deduction of income-tax,
which works out to 35%, and interest on debentures.
Normal return on equity shares of companies similarly placed is 9.6% provided:
(a) Profit after tax covers fixed interest and fixed dividends at least 3 times.
(b) Capital gearing ratio is 0.75.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
(c) Yield on share is calculated at 50% of profits distributed and at 5% on undistributed
profits.
Sun Ltd., has been regularly paying equity dividend of 8%. Compute the value per equity
share of the company.

Question 22
Calculate the value of share from the following information:

Profit of the company ₹ 290 crores

Equity capital of company ₹ 1,300 crores
Par value of share ₹ 40 each
Debt ratio of company (Debt/ Debt + Equity) 27%
Long run growth rate of the company 8%
Beta 0.1; risk free interest rate 8.7%
Market returns 10.3%
Capital expenditure per share ₹ 47
Depreciation per share ₹ 39
Change in Working capital ₹ 3.45 per share
Question 23
ABC Co. is considering a new sales strategy that will be valid for the next 4 years. They
want to know the value of the new strategy. Following information relating to the year
which has just ended, is available:

Income Statement ₹
Sales 20,000
Gross margin (20%) 4,000
Administration, Selling & distribution expense (10%) 2,000
PBT 2,000
Tax (30%) 600
PAT 1,400
Balance Sheet Information
Fixed Assets 8,000
Current Assets 4,000
Equity 12,000
If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The
gross margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will
remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year. The Company’s
target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 24
Following informations are available in respect of XYZ Ltd. which is expected to grow at a
higher rate for 4 years after which growth rate will stabilize at a lower level:
Base year information:
Revenue - ₹ 2,000 crores
EBIT - ₹ 300 crores
Capital expenditure - ₹ 280 crores
Depreciation - ₹200 crores
Information for high growth and stable growth period are as follows:

High Growth Stable Growth

Growth in Revenue & EBIT 20% 10%
Growth in capital expenditure 20% Capital expenditure are
and depreciation offset by depreciation
Risk free rate 10% 9%
Equity beta 1.15 1
Market risk premium 6% 5%
Pre tax cost of debt 13% 12.86%
Debt equity ratio 1:1 2:3
For all time, working capital is 25% of revenue and corporate tax rate is 30%. What is the value
of the firm?
Question 25
Following information is given in respect of WXY Ltd., which is expected to grow at a rate of
20% p.a. for the next three years, after which the growth rate will stabilize at 8% p.a. normal
level, in perpetuity.
For the year ended March 31, 2014
Revenues ₹ 7,500 Crores
Cost of Goods Sold (COGS) ₹ 3,000 Crores
Operating Expenses ₹ 2,250 Crores
Capital Expenditure ₹ 750 Crores
Depreciation (included in COGS & Operating Expenses) ₹ 600 Crores
During high growth period, revenues & Earnings before Interest & Tax (EBIT) will grow at
20% p.a. and capital expenditure net of depreciation will grow at 15% p.a.
From year 4 onwards, i.e. normal growth period revenues and EBIT will grow at 8% p.a.
and incremental capital expenditure will be offset by the depreciation. During both high
growth & normal growth period, net working capital requirement will be 25% of revenues.
The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%. Corporate Income Tax
rate will be 30%.
Required:
Estimate the value of WXY Ltd. using Free Cash Flows to Firm (FCFF) & WACC methodology.
The PVIF @ 15 % for the three years are as below:
Year t1 t2 t3
PVIF 0.8696 0.7561 0.6575

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 26
BRS Inc deals in computer and IT hardwares and peripherals. The expected revenue for the
next 8 years is as follows:
Years Sales Revenue ($ Million)
1 8
2 10
3 15
4 22
5 30
6 26
7 23
8 20
Summarized financial position as on 31 March 2012 was as follows:
$ Million
Liabilities Amount Assets Amount
Equity Stocks 12 Fixed Assets (Net) 17
12% Bonds 8 Current Assets 3
20 20
Additional Information:
Its variable expenses is 40% of sales revenue and fixed operating expenses (cash) are
estimated to be as follows:
Period Amount ($ Million)
1- 4 years 1.6
5-8 years 2

An additional advertisement and sales promotion campaign shall be launched requiring

expenditure as per following details:
Period Amount ($ Million)
1 year 0.50
2-3 years 1.50
4-6 years 3.00
7-8 years 1.00

Fixed assets are subject to depreciation at 15% as per WDV method.

The company has planned additional capital expenditures (in the beginning of each year) for
the coming 8 years as follows:
Period Amount ($ Million)
1 0.50
2 0.80
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
(a) Investment in Working Capital is estimated to be 20% of Revenue.
(b) Applicable tax rate for the company is 30%.
(c) Cost of Equity is estimated to be 16%.
(d) The Free Cash Flow of the firm is expected to grow at 5% per annuam after 8 years.

With above information you are require to determine the:

i. Value of Firm &

ii.Value of Equity

Question 27
ABC (India) Ltd., a market leader in printing industry, is planning to diversify into defense
equipment businesses that have recently been partially opened up by the GOI for private
sector. In the meanwhile, the CEO of the company wants to get his company valued by a
leading consultants, as he is not satisfied with the current market price of his scrip.
He approached consultant with a request to take up valuation of his company with the
following data for the year ended 2009:
Share Price ₹ 66 per share
Outstanding debt 1934 lakh
Number of outstanding shares 75 lakh
Net income (PAT) 17.2 lakh
EBIT 245 lakh
Interest expenses 218.125 lakh
Capital expenditure 234.4 lakh
Depreciation 234.4 lakh
Working capital 44 lakh
Growth rate 8% (from 2010 to 2014)
Growth rate 6% (beyond 2014)
Free cash flow 240.336 lakh (year 2014 onwards)
The capital expenditure is expected to be equally offset by depreciation in future and the
debt is expected to decline by 30% in 2014.
Required:
Estimate the value of the company and ascertain whether the ruling market price is
undervalued as felt by the CEO based on the foregoing data. Assume that the cost of equity is
16%, and 30% of debt repayment is made in the year 2014.

Question 28
Personal Computer Division of Distress Ltd., a computer hardware manufacturing
company has started facing financial difficulties for the last 2 to 3 years. The management
of the division headed by Mr. Smith is interested in a buyout on 1 April 2013. However, to
make this buy-out successful there is an urgent need to attract substantial funds from
venture capitalists.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Ven Cap, a European venture capitalist firm has shown its interest to finance the proposed
buy-out. Distress Ltd. is interested to sell the division for ₹ 180 crore and Mr. Smith is of
opinion that an additional amount of ₹ 85 crore shall be required to make this division viable.
The expected financing pattern shall be as follows:

Source Mode Amount (₹ Crore)

Management Equity Shares of ₹ 10 each 60.00

VenCap VC Equity Shares of ₹ 10 each 22.50
9% Debentures with attached warrant of ₹ 100 each 22.50
8% Loan 160.00
Total 265.00
The warrants can be exercised any time after 4 years from now for 10 equity shares @ ₹ 120
per share.
The loan is repayable in one go at the end of 8th year. The debentures are repayable in equal
annual installment consisting of both principal and interest amount over a period of 6 years.
Mr. Smith is of view that the proposed dividend shall not be kept more than 12.5% of
distributable profit for the first 4 years. The forecasted EBIT after the proposed buyout is as
follows:

Year 2013-14 2014-15 2015-16 2016-17

EBIT (₹ crore) 48 57 68 82
Applicable tax rate is 35% and it is expected that it shall remain unchanged at least for 5-6
years. In order to attract VenCap, Mr. Smith stated that book value of equity shall increase by
20% during above 4 years. Although, VenCap has shown their interest in investment but are
doubtful about the projections of growth in the value as per projections of Mr. Smith.
Further VenCap also demanded that warrants should be convertible in 18 shares instead of
10 as proposed by Mr. Smith.
You are required to determine whether or not the book value of equity is expected to grow by
20% per year. Further if you have been appointed by Mr. Smith as advisor then whether you
would suggest to accept the demand of VenCap of 18 shares instead of 10 or not.
Question 29
A valuation done of an established company by a well-known analyst has estimated a value of
₹ 500 lakhs, based on the expected free cash flow for next year of ₹ 20 lakhs and an
expected growth rate of 5%.
While going through the valuation procedure, you found that the analyst has made the
mistake of using the book values of debt and equity in his calculation. While you do not
know the book value weights he used, you have been provided with the following
information:
(i) Company has a cost of equity of 12%,
(ii) After tax cost of debt is 6%,
(iii) The market value of equity is three times the book value of equity, while the market
value of debt is equal to the book value of debt.
You are required to estimate the correct value of the company.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 30
The valuation of Hansel Limited has been done by an investment analyst. Based on an
expected free cash flow of ₹ 54 lakhs for the following year and an expected growth rate of 9
percent, the analyst has estimated the value of Hansel Limited to be ₹ 1800 lakhs. However,
he committed a mistake of using the book values of debt and equity.
The book value weights employed by the analyst are not known, but you know that Hansel
Limited has a cost of equity of 20 percent and post tax cost of debt of 10 percent. The value of
equity is thrice its book value, whereas the market value of its debt is nine-tenths of its book
value. What is the correct value of Hansel Ltd?

BONDS
Question 31
Nominal value of 10% bonds issued by a company is ₹100. The bonds are redeemable
at ₹ 110 at the end of year 5.Determine the value of the bond if required yield is (i) 5%, (ii)
5.1%,10% and (iv) 10.1%.
Question 32
Saranam Ltd. has issued convertible debentures with coupon rate 12%. Each debenture has
an option to convert to 20 equity shares at any time until the date of maturity. Debentures
will be redeemed at ₹ 100 on maturity of 5 years. An investor generally requires a rate of
return of 8% p.a. on a 5-year security. As an investor when will you exercise conversion for
given market prices of the equity share of (i) ₹ 4, (ii) ₹ 5 and (iii) ₹ 6.
Cumulative PV factor for 8% for 5 years : 3.993
PV factor for 8% for year 5 : 0.681
Question 33
An investors is considering the purchase of the following Bond:

Face value ₹ 100

Coupon rate 11%
Maturity 3 years
(i) If he wants a yield of 13% what is the maximum price he should be ready to pay for?
(ii) If the Bond is selling for ₹ 97.60, what would be his yield?
Question 34
Calculate Market Price of:
(i) 10% Government of India security currently quoted at ₹ 110, but yield is expected to go
up by 1%.
(ii) A bond with 7.5% coupon interest, Face Value ₹ 10,000 & term to maturity of 2 years,
presently yielding 6% . Interest payable half yearly.
Question 35
M/s Agfa Industries is planning to issue a debenture series on the following terms:

Face value ₹ 100

Term of maturity 10 years Yearly coupon rate

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Final kick
Years
1-4 9%
5-8 10%
9 - 10 14%
The current market rate on similar debentures is 15 per cent per annum. The Company
proposes to price the issue in such a manner that it can yield 16 per cent compounded rate of
return to the investors. The Company also proposes to redeem the debentures at 5 per cent
premium on maturity. Determine the issue price of the debentures.

Question 36
Based on the credit rating of bonds, Mr. Z has decided to apply the following discount rates
for valuing bonds:
Credit Rating Discount Rate
AAA 364 day T bill rate + 3% spread
AA AAA + 2% spread
A AAA + 3% spread
He is considering to invest in AA rated, ₹ 1,000 face value bond currently selling at ₹ 1,025.86.
The bond has five years to maturity and the coupon rate on the bond is 15% p.a. payable
annually. The next interest payment is due one year from today and the bond is redeemable at
par. (Assume the 364 day T-bill rate to be 9%).
You are required to calculate the intrinsic value of the bond for Mr. Z. Should he invest in the
bond? Also calculate the current yield and the Yield to Maturity (YTM) of the bond.

Question 37
ABC Ltd. issued 9%, 5 year bonds of ₹ 1,000/- each having a maturity of 3 years. The present
rate of interest is 12% for one year tenure. It is expected that Forward rate of interest for one
year tenure is going to fall by 75 basis points and further by 50 basis points for every next
year in further for the same tenure. This bond has a beta value of 1.02 and is more popular in
the market due to less credit risk.
Calculate
(i) Intrinsic value of bond
(ii) Expected price of bond in the market.

Question 38

On 31st March, 2013, the following information about Bonds is available:

Name of Security Face Value Maturity Date Coupon Coupon Date(s)

₹ Rate
Zero coupon 10,000 31st March, 2023 N.A. N.A.
T-Bill 1,00,000 20th June, 2013 N.A. N.A.
10.71% GOI 2023 100 31st March, 2023 10.71 31st March
10 % GOI 2018 100 31st March, 2018 10.00 31st March & 30th September

Calculate:
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Final kick

(i)If 10 years yield is 7.5% p.a. what price the Zero Coupon Bond would fetch on 31st
March, 2013?
(ii) What will be the annualized yield if the T-Bill is traded @ 98500?
(iii) If 10.71% GOI 2023 Bond having yield to maturity is 8%, what price would it fetch on
April 1, 2013 (after coupon payment on 31st March)?
(iv) If 10% GOI 2018 Bond having yield to maturity is 8%, what price would it fetch on April
1, 2013 (after coupon payment on 31st March)?

Question 39
(a) Consider two bonds, one with 5 years to maturity and the other with 20 years to maturity.
Both the bonds have a face value of ₹ 1,000 and coupon rate of 8% (with annual interest
payments) and both are selling at par. Assume that the yields of both the bonds fall to 6%,
whether the price of bond will increase or decrease? What percentage of this
increase/decrease comes from a change in the present value of bond’s principal amount and
what percentage of this increase/decrease comes from a change in the present value of
bond’s interest payments?
(b) Consider a bond selling at its par value of ₹ 1,000, with 6 years to maturity and a 7%
coupon rate (with annual interest payment), what is bond’s duration?
(c) If the YTM of the bond in (b) above increases to 10%, how it affects the bond’s duration?
And why?
Question 40
John inherited the following securities on his uncle’s death:

Types of Security Nos. Annual Coupon % Maturity Years Yield %

Bond A (₹ 1,000) 10 9 3 12
Bond B (₹ 1,000) 10 10 5 12
Preference shares C (₹ 100) 100 11 * 13*
Preference shares D (₹ 100) 100 12 * 13*
*likelihood of being called at a premium over par. Compute the current value of his uncle’s
portfolio.
Question 41
Pet feed plc has outstanding, a high yield Bond with following features:

Face Value £ 10,000

Coupon 10%
Maturity Period 6 Years
Special Feature Company can extend the life of Bond to 12 years.
Presently the interest rate on equivalent Bond is 8%.
(a) If an investor expects that interest will be 8%, six years from now then how much he
should pay for this bond now.
(b) Now suppose, on the basis of that expectation, he invests in the Bond, but interest rate
turns out to be 12%, six years from now, then what will be his potential loss/ gain.
BY CA PRATIK JAGATI {7002630110, 9864047095}
Final kick
Question 42
If the market price of the bond is ₹ 95; years to maturity = 6 yrs: coupon rate = 13% p.a (paid
annually) and issue price is ₹ 100. What is the yield to maturity?
Question 43
There is a 9% 5-year bond issue in the market. The issue price is ₹ 90 and the redemption
price ₹ 105. For an investor with marginal income tax rate of 30% and capital gains tax rate of
10% (assuming no indexation), what is the post-tax yield to maturity?
Question 44
XL Ispat Ltd. has made an issue of 14 per cent non-convertible debentures on January 1,
2007. These debentures have a face value of ₹ 100 and is currently traded in the market at a
price of ₹ 90.
Interest on these NCDs will be paid through post-dated cheques dated June 30 and December
31. Interest payments for the first 3 years will be paid in advance through post-dated cheques
while for the last j2 years post-dated cheques will be issued at the third year. The bond is
redeemable at par on December 31, 2011 at the end of 5 years.
Required :
(i) Estimate the current yield and YTM of the bond.
(ii) Calculate the duration of the NCD.
(iii) Assuming that intermediate coupon payments are, not available for reinvestment
calculate the realised yield on the NCD.
Question 45
MP Ltd. issued a new series of bonds on January 1, 2010. The bonds were sold at par
(₹1,000), having a coupon rate 10% p.a. and mature on 31st December, 2025. Coupon
payments are made semiannually on June 30th and December 31st each year. Assume that
you purchased an outstanding MP Ltd. bond on 1st March, 2018 when the going interest
rate was 12%.
Required:
(i) What was the YTM of MP Ltd. bonds as on January 1, 2010?
(ii) What amount you should pay to complete the transaction? Of that amount how
much should be accrued interest and how much would represent bonds basic value.
Question 46

ABC Ltd. has ₹ 300 million, 12 per cent bonds outstanding with six years remaining to
maturity. Since interest rates are falling, ABC Ltd. is contemplating of refunding these bonds
with a ₹ 300 million issue of 6 year bonds carrying a coupon rate of 10 per cent. Issue cost of
the new bond will be ₹ 6 million and the call premium is 4 per cent. ₹ 9 million being the
unamortized portion of issue cost of old bonds can be written off no sooner the old bonds are
called off. Marginal tax rate of ABC Ltd. is 30 per cent. You are required to analyse the bond
refunding decision.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 47
M/s Transindia Ltd. is contemplating calling Rs. 3 crores of 30 years, Rs. 1,000 bond issued
5 years ago with a coupon interest rate of 14 per cent. The bonds have a call price of Rs. 1,140
and had initially collected proceeds of Rs. 2.91 crores due to a discount of Rs. 30 per bond.
The initial floating cost was Rs. 3,60,000. The Company intends to sell Rs. 3 crores of 12 per
cent coupon rate, 25 years bonds to raise funds for retiring the old bonds. It proposes to sell
the new bonds at their par value of Rs. 1,000. The estimated floatation cost is Rs. 4,00,000.
The company is paying 40% tax and its after tax cost of debt is 8 per cent. As the new bonds
must first be sold and their proceeds, then used to retire old bonds, the company expects a
two months period of overlapping interest during which interest must be paid on both the
old and new bonds. What is the feasibility of refunding bonds?
Question 48
Rahul Ltd. has surplus cash of ₹ 100 lakhs and wants to distribute 27% of it to the
shareholders. The company decides to buy back shares. The Finance Manager of the
company estimates that its share price after re-purchase is likely to be 10% above the
buyback price-if the buyback route is taken. The number of shares outstanding at present is
10 lakhs and the current EPS is ₹ 3.
You are required to determine:
(i) The price at which the shares can be re-purchased, if the market capitalization of the
company should be ₹ 210 lakhs after buyback,
(ii) The number of shares that can be re-purchased, and
(iii) The impact of share re-purchase on the EPS, assuming that net income is the same.
Question 49
Abhishek Ltd. has a surplus cash of ₹90 lakhs and wants to distribute 30% of it to the
shareholders. The Company decides to buyback shares. The Finance Manager of the
Company estimates that its share price after re-purchase is likely to be 10% above the
buyback price; if the buyback route is taken. The number of shares outstanding at present is
10 lakhs and the current EPS is ₹3.
You are required to determine:
(a) The price at which the shares can be repurchased, if the market capitalization of the
company should be ₹200 lakhs after buyback.
(b) The number of shares that can be re-purchased.
(c) The impact of share re-purchase on the EPS, assuming the net income is same.
Question 50
XYZ company has current earnings of ₹ 3 per share with 5,00,000 shares outstanding. The
company plans to issue 40,000, 7% convertible preference shares of ₹ 50 each at par. The
preference shares are convertible into 2 shares for each preference shares held. The equity
share has a current market price of ₹ 21 per share.
(i) What is preference share’s conversion value?
(ii) What is conversion premium?
(iii) Assuming that total earnings remain the same, calculate the effect of the issue on the
basic earning per share (a) before conversion (b) after conversion.
(iv) If profits after tax increases by ₹ 1 million what will be the basic EPS (a) before
conversion and (b) on a fully diluted basis?

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 51
A convertible bond with a face value of ₹ 1,000 is issued at ₹ 1,350 with a coupon rate of
10.5%. The conversion rate is 14 shares per bond. The current market price of bond and
share is ₹ 1,475 and ₹ 80 respectively. What is the premium over conversion value?
Question 52
The data given below relates to a convertible bond :

Face value ₹ 250

Coupon rate 12%
No. of shares per bond 20
Market price of share ₹ 12
Straight value of bond ₹ 235
Market price of convertible bond ₹ 265
Calculate:
(i) Stock value of bond.
(ii) The percentage of downside risk.
(iii) The conversion premium
(iv) The conversion parity price of the stock.

Question 53
Pineapple Ltd has issued fully convertible 12 percent debentures of ₹ 5,000 face value,
convertible into 10 equity shares. The current market price of the debentures is ₹ 5,400. The
present market price of equity shares is ₹ 430.
Calculate:
(i) the conversion percentage premium, and
(ii) the conversion value

Question 54
GHI Ltd., AAA rated company has issued, fully convertible bonds on the following terms,
a year ago:

Face value of bond ₹ 1000

Coupon (interest rate) 8.5%
Time to Maturity (remaining) 3 years
Interest Payment Annual, at the end of year
Principal Repayment At the end of bond maturity
Conversion ratio (Number of shares per bond) 25
Current market price per share ₹ 45
Market price of convertible bond ₹ 1175
AAA rated company can issue plain vanilla bonds without conversion option at an interest
rate of 9.5%.
Required: Calculate as of today:

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
(i) Straight Value of bond.
(ii) Conversion Value of the bond.
(iii) Conversion Premium.
(iv) Percentage of downside risk.
(v) Conversion Parity Price.

T 1 2 3
PVIF0.095, t 0.9132 0.8340 0.7617
Question 55
The following data is related to 8.5% Fully Convertible (into Equity shares) Debentures issued
by JAC Ltd. at ₹ 1000.

Market Price of Debenture ₹ 900

Conversion Ratio 30
Straight Value of Debenture ₹ 700
Market Price of Equity share on the date
₹ 25of
Conversion
Expected Dividend Per Share ₹1
You are required to calculate:

(a) Conversion Value of Debenture

(b) Market Conversion Price
(c) Conversion Premium per share
(d) Ratio of Conversion Premium
(e) Premium over Straight Value of Debenture
(f) Favourable income differential per share
(g) Premium pay back period
Question 56
Tiger Ltd. is presently working with an Earning Before Interest and Taxes (EBIT) of ₹ 90
lakhs. Its present borrowings are as follows:

₹ In lakhs
12% term loan 300
Working capital borrowings:
From Bank at 15% 200
Public Deposit at 11% 100
The sales of the company are growing and to support this, the company proposes to obtain
additional borrowing of ₹ 100 lakhs expected to cost 16%.The increase in EBIT is expected to
be 15%.
Calculate the change in interest coverage ratio after the additional borrowing is effected and
comment on the arrangement made.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 57
The HLL has ₹ 8.00 crore of 10% mortgage bonds outstanding under an open-end scheme.
The scheme allows additional bonds to be issued as long as all of the following conditions are
met:
Income before tax + Bond Interest
1. Pre - tax interest coverage remains greater than 4
Bond Interest

2. Net depreciated value of mortgage assets remains twice the amount of the mortgage
debt.
3. Debt-to-equity ratio remains below 0.50.
The HLL has net income after taxes of ₹ 2 crores and a 40% tax-rate, ₹ 40 crores in equity and
₹ 30 crores in depreciated assets, covered by the mortgage.
Assuming that 50% of the proceeds of a new issue would be added to the base of mortgaged
assets and that the company has no Sinking Fund payments until next year, how much more
10% debt could be sold under each of the three conditions? Which protective covenant is
binding?
Question 58
The following data is available for a bond:

Face Value ₹ 1,000

Coupon Rate 11%
Years to Maturity 6
Redemption Value ₹ 1,000
Yield to Maturity 15%
(Round-off your answers to 3 decimals) Calculate the following in respect of the bond:
(i) Current Market Price.
(ii) Duration of the Bond.
(iii) Volatility of the Bond.
(iv) Expected market price if increase in required yield is by 100 basis points.
(v) Expected market price if decrease in required yield is by 75 basis points.

Question 59
The following data are available for a bond

Face value ₹ 1,000

Coupon Rate 16%
Years to Maturity 6
Redemption value ₹ 1,000
Yield to maturity 17%
What is the current market price, duration and volatility of this bond? Calculate the expected
market price, if increase in required yield is by 75 basis points.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 60
Mr. A will need ₹ 1,00,000 after two years for which he wants to make one time necessary
investment now. He has a choice of two types of bonds. Their details are as below:

Bond X Bond Y
Face value ₹ 1,000 ₹ 1,000
Coupon 7% payable annually 8% payable annually
Years to maturity 1 4
Current price ₹ 972.73 ₹ 936.52
Current yield 10% 10%
Advice Mr. A whether he should invest all his money in one type of bond or he should buy
both the bonds and, if so, in which quantity? Assume that there will not be any call risk or
default risk.
Question 61
Mr. A is planning for making investment in bonds of one of the two companies X Ltd. and
Y Ltd. The detail of these bonds is as follows:

Company Face Value Coupon Rate Maturity Period

X Ltd. ₹ 10,000 6% 5 Years
Y Ltd. ₹ 0,000 4% 5 Years
The current market price of X Ltd.’s bond is ₹ 10,796.80 and both bonds have same Yield To
Maturity (YTM). Since Mr. A considers duration of bonds as the basis of decision making,
you are required to calculate the duration of each bond and you decision.
Question 62
Find the current market price of a bond having face value ₹ 1,00,000 redeemable after 6 year
maturity with YTM at 16% payable annually and duration 4.3202 years. Given 1.166 = 2.4364.
Question 63
Closing values of BSE Sensex from 6th to 17th day of the month of January of the year 200X
were as follows:

Days Date Day Sensex

1 6 THU 14522
2 7 FRI 14925
3 8 SAT No Trading
4 9 SUN No Trading
5 10 MON 15222
6 11 TUE 16000
7 12 WED 16400
8 13 THU 17000
9 14 FRI No Trading
10 15 SAT No Trading
11 16 SUN No Trading
12 17 MON 18000
BY CA PRATIK JAGATI {7002630110, 9864047095}
Final kick
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30
days simple moving average of Sensex can be assumed as 15,000. The value of exponent for
30 days EMA is 0.062.
Give detailed analysis on the basis of your calculations.
Question 64
The closing value of Sensex for the month of October, 2007 is given below:

Date Closing Sensex Value

1.10.07 2800
3.10.07 2780
4.10.07 2795
5.10.07 2830
8.10.07 2760
9.10.07 2790
10.10.07 2880
11.10.07 2960
12.10.07 2990
15.10.07 3200
16.10.07 3300
17.10.07 3450
19.10.07 3360
22.10.07 3290
23.10.07 3360
24.10.07 3340
25.10.07 3290
29.10.07 3240
30.10.07 3140
31.10.07 3260
You are required to test the weak form of efficient market hypothesis by applying the run
test at 5% and 10% level of significance.
Following value can be used :
Value of t at 5% is 2.101 at 18 degrees of freedom Value of t at 10% is 1.734 at 18 degrees of
freedom Value of t at 5% is 2.086 at 20 degrees of freedom. Value of t at 10% is 1.725 at 20
degrees of freedom.
Question 65
Suppose that the current price of the shares of ABC Ltd. is ₹30 per share. The investor
estimated the intrinsic value of ABC Ltd.’s share to be ₹35 per share with required return of
8% per annum. Estimate the expected return on ABC Ltd.
Question 66
Cash flows and discount rates for each year of cash flows at different maturities have been
given as below:-

1st year 2nd year 3rd year 4th year 5th year

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick

Cash flows ₹100 ₹200 ₹300 ₹400 ₹500

Discount rates 2.0% 3.2% 3.6% 4.8% 5.0%
What is the single discount rate equates the present value of the stream of cash flows.
Question 67
Suppose you are recommended to invest $20,000 now in an asset that offers a cash flow $3000
one year from now and $23,000 two years from now. You want to estimate the IRR of the
investment.
Question 68
Risk free rate 5%,
Βeta 1.5
and, equity risk premium 4.5%
Calculate Required return on equity.
Question 69
Share of X Ltd. is expected to be sold at Rs. 36 with a dividend of Rs. 6 after one year. If
required rate of return is 20% then what will be the share price.
Question 70
The term structure of interest rates, popularly known as Yield Curve, shows how yield to
maturity is related to term to maturity for bonds that are similar in all respects, except
maturity.
Consider the following data for Government securities:
Face Value Interest Rate Maturity (years) Current Price Yield to Maturity
10,000 0 1 8,897 12.40
10,000 12.75 2 9,937 13.13
10,000 13.50 3 10,035 13.35
10,000 13.50 4 9,971 13.60
5
10,000 13.75 9,948 13.90

Another perspective on the term structure of interest rates is provided by the forward
interest rates, viz., the interest rates applicable to bonds in the future. Find forward rates
Question 71
M/s X Ltd. has paid a dividend of ₹ 2.5 per share on a face value of ₹ 10 in the financial year
ending on 31st March, 2009. The details are as follows:
Current market price of share ₹ 60
Growth rate of earnings and dividends10%
Beta of share 0.75
Average market return 15%
Risk free rate of return 9%
Calculate the intrinsic value of the share.

BY CA PRATIK JAGATI {7002630110, 9864047095}

Final kick
Question 72
Capital structure of Sun Ltd., as at 31.3.2003 was as under:
(₹ in lakhs)
Equity share capital 80
8% Preference share capital 40
12% Debentures 64
Reserves 32
Sun Ltd., earns a profit of ₹ 32 lakhs annually on an average before deduction of income-tax,
which works out to 35%, and interest on debentures.
Normal return on equity shares of companies similarly placed is 9.6% provided:
(a) Profit after tax covers fixed interest and fixed dividends at least 3 times.

(b) Capital gearing ratio is 0.75.

(c) Yield on share is calculated at 50% of profits distributed and at 5% on undistributed

profits. Sun Ltd., has been regularly paying equity dividend of 8%.
Compute the value per equity share of the company.
Question 73
Rahim Enterprises is a manufacturer and exporter of woolen garments to European
countries. Their business is expanding day by day and in the previous financial year the
company has registered a 25% growth in export business. The company is in the process of
considering a new investment project. It is an all equity financed company with 10,00,000
equity shares of face value of Rs. 50 per share. The current issue price of this share is Rs. 125
ex-divided. Annual earning are Rs. 25 per share and in the absence of new investments will
remain constant in perpetuity. All earnings are distributed at present. A new investment is
available which will cost Rs. 1,75,00,000 in one year’s time and will produce annual cash
inflows thereafter of Rs. 50,00,000. Analyse the effect of the new project on dividend
payments and the share price
Question 74
A Ltd. has issued convertible bonds, which carries a coupon rate of 14%. Each bond is
convertible into 20 equity shares of the company A Ltd. The prevailing interest rate for
similar credit rating bond is 8%. The convertible bond has 5 years maturity. It is
redeemable at par at Rs. 100. The relevant present value table is as follows.
Present values t1 t2 t3 t4 t5
PVIF0.14, t 0.877 0.769 0.675 0.592 0.519
PVIF0.08, t 0.926 0.857 0.794 0.735 0.681
You are required to estimate:
(i) current market price of the bond, assuming it being equal to its fundamental value,
(ii) minimum market price of equity share at which bond holder should exercise
conversion option; and
(iii) duration of the bond.

BY CA PRATIK JAGATI {7002630110, 9864047095}