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Principles of Finance
BBA (Hon's) 1st Year
Department of Accounting and Finance
for the Students of the National University
Time
Value of Money
Problem No #01
At a 10% compound interest rate, after how many years an
initial of Tk. 10,000 will grow to Tk. 18,000?
Problem No #02
Taking a loan of 9,000 from a bank, a man was not able to
pay it till the end of 4 years. Then the bank demanded Tk 11,250 from him. How
much percent of interest compounded yearly on the demand money he was
paid?
Problem No #03
You invest a single amount of Tk 12,000 for 5 years at
10%. At the end of 5 years, you take the proceeds and invest them for 12 years
at 15%. How much will you have after 17 years?
Problem No #04
What will be the Compounded Value after 5 years at a bank
A/C having Tk. 5,00,000, if compounded at 12.50% interest bi-monthly and
quarterly?
Problem No #05
Your father has offered you a choice one of the two
following alternatives:
a) Tk. 1,00,000 now.
b)
Tk. 2,40,000 at the end of 8 years.
Assume
you could earn 10% annually. Which alternative should you choose and why?
Problem
No #06
The
cost of the new machine will be Tk. 1,00,000 after 12 years. In that time, the
old machine can be sold for Tk. 5,000 as salvage value. What amount should be
retained out of profits at the end of each year to accumulate at C. I at 5% per
annum?
Problem
No #07
What
is the rate of return on an investment of TK 10,606 if the company will receive
Tk 2,000 each year for the next 10 years?
Problem
No #08
Exactly
10 years from now Mr. Talat will start receiving a pension of Tk 3,000 a year.
The payment will continue for 16 years. How much is the pension worth now?
Assume the interest rate is 10%.
Problem
No #09
Mr.
Afnan borrows Tk. 60,000 at 12% interest and promises to pay off the loan in 20
annual installments beginning at the end of the first year. What is the annual
payment necessary?
Problem
No #10
You
are planning to borrow Tk. 1,00,000 at 12% interest per annum from Pubali Bank
Ltd to buy a luxurious car for your company. You have to repay the loan in each
installment quarterly over the next 4 years. How much should be paid in each
installment?
Problem
No #11
You
wish to retire after 18 years, at which time you want to have accumulated
enough money to receive an annuity of Tk. 14,000 a year for 20 years of
retirement. During the period before retirement, you can earn 11% annually
while after retirement you can earn 8% on your money. What annual contributions
to the retirement fund will allow you to receive the annuity of Tk. 14,000
annually?
Problem
No #12
Your
father has promised to give you the. 1,00,000 in cash on your 25th birthday.
Today is your 16th birthday. He wants to know three things:
(a)
If he decides to make annual payments into a fund after one year, how much will
have to be if the fund pays 8 percent?
(b)
If he decides to invest a lump sum in the account after one year and left it
compound annually, how much the lump sum be?
(c)
If the payments are made at the beginning of the year, how much is the value of
the annuity?
Problem
No #13
You
are considering the purchase of an apartment at Gulshan costing Tk. 50,00,000.
You have three offers, (1) Pay full in cash. (11) Pay 25% of the cost in cash
immediately and pay Tk. 6,60,000 each year for the next 10 years. (ii) Pay 50%
of the cost in cash and take a loan of Tk 25,00,000 from BHBFC at 15% interest
to be repaid in equal monthly installments over the next 20 years. Assume 12%
opportunity cost. Which offer should you accept?
Problem
No #14
Calculate
the effective interest rate for Tk 1,000 invested for 5 years at 8% interest
compounded quarterly
Short
Term Finance
Problem No #15
A trader buys goods amounting to Tk. 50,000 on
credit; the terms of credit are 3/10, Net 30. Required:
(a) The
cost of trade credit.
(b) The amount payable on the 10th day.
(c) The amount payable on the 30th day.
Problem No #16
A firm
sells goods for Tk 20,00,000 on credit
(i) If
credit term is 2/10, Net 30 and 30% of the customers accept cash discount, how
much of the profit will the business have to avoid before Tax?
(ii) If the credit term is 1/20, Net 40 and 50% of the customers accept a cash
discount, what will happen?
Problem No #17
A Commercial Paper with a face value of Tk. 5,000 each
sold for Tk. 4,800 for 180 days. The flotation Cost is Tk 40. Calculate Effective
Interest Rate.
Problem No #18
Haque
Company's monthly credit Sales are Tk. 1,50,000 and the average collection
period is 72 days. The Company is considering factoring in its receivables. A
factor has agreed to advance up to 75% of the face value at 15% interest p.a.
The factor will also charge a 2% Commission, Factoring would save the company's
0.5% bad debt loss and administration cost of Tk. 1000 per month. Calculate the Cost of A/R Factoring
Problem
No #19
R and
Z Company Ltd wants Tk. 40,00,000 as Working Capital. Three following
alternative modes of financing are available:
(i)
Forgo the cash discount granted on the basis of "3/15, Net 45" and pay on
the final due date.
(ii)
Borrow Tk. 50,00,000 at 14% interest maintaining a 15% Compensating Balance,
interest payments are made in advance.
(iii)
Issue Tk. 44,00,000 of six months Commercial Paper to Net Tk. 40,00,000.
Further assuming that the firm would prefer the flexibility of Bank Financing
provided the additional cost of this flexibility was no more than 2.5% p.a.
Which alternative should the Company select and why?
Problem
No #20
The
Barnes Corporation has just acquired a large account. As a result, it needs an
additional Tk. 75,000 in working capital immediately. It has been determined
that are three possible sources of funds:
(i)
The Company buys about Tk 50,000 of materials per month on 3/30, Net 90. (ii)
The firm's bank will lend Tk. 1,00,000 at 13 percent. A 10 percent compensating
balance will be required, which otherwise would not be maintained by the
company.
(iii)
A factor will buy the company's Receivables (Tk. 1,00,000 per month), which
have a collection period of 60 days. The factor will advance up to 75 percent
of the face value of the receivables at 12% on an annual basis. The factor will
also charge a 2 percent fee on all receivables purchased. It has been estimated
that the factor's services will have saved the company a credit department
expense and bad debt expense of Tk. 1,500 per month. On the basis of annual
percentage cost, which alternative should Barnes select?
Problem
No #21
The
credit terms for each of the three suppliers are shown in the following table:
(i)
Determine the approximate cost of giving up the cash discount from each
supplier.
(ii)
Assuming the firm needs short-term financing, indicate whether it would be
better to give up the cash discount or take the cash discount offer and borrow
from a bank at 15% p. a. Evaluate each supplier separately using your findings
in part (i).
(ii)
What impact, if any, would the fact that the firm could stretch its Account
Payable (Net period only) by 20 days from supplier Z have on your answer in
part
(iii)
relative to this supplier?
Problem
No #22
The
credit terms for some alternatives are given below:
(i) Determine the cost of the foregoing cash
discount for each alternative.
(ii) The firm has another option to raise a short-term
bank loan @ 13% interest, should the firm accept the cash discount offer or
not.
(iii) What would be the decision in
(iv) if Account Payable is stretched by 30 days.
Mid Term Finance
Problem
No #23
Mr. Hasan has
taken a loan of Tk. 1,00,000 for 5 years at 14% interest from Surma Bank. The
loan will be repaid in equal installments over the next 5 years. Prepare the
loan repayment schedule under:
(a) Balloon Payment Method
(b) Capital Recovery Method
Problem No #24
Mr. Amin
is thinking of installing a machine. For that purpose, he wants to take a loan
from a commercial bank at 13% interest. The cost of the machine is Tk.
6,00,000. The loan is payable at 6 equal annual installments beginning at the
end of the first year.
(a) What will be the amount of loan installment? (b) Show the Loan Amortization
Schedule.
Capital
Structure Decision
Problem No #25
The Protein
Company's expected annual net operating income (EBIT) is Tk. 50,000. The company
has a 10% debt of Tk. 2,00,000. The equity capitalization rate (Ke) of the
company is 12.50%. The number of shares of the company is 2400. Required:
(i) Find out the Total value of the firm (V).
(ii) Find out the Ko of the firm.
(iii) Determine the market price per share.
(iv) Determine the EPS.
Problem No #26
In
considering the most desirable Capital Structure of XY Ltd. The following debt
and equity capital (after-tax) have been made at various investment plans. You
are required to determine the optimum debt-equity mix for the company by
calculating the composite cost of capital.
Problem No #27
Shamim Company
at present has 2,00,000 Common Stock of Tk. 100 each. The Company is planning
to expand its capacity that will require Additional Capital of Tk. 20,00,000.
There are three alternative methods of financing.
(i)Issuing Common Stock at Tk. 100 per share.
(ii)Issuing 11% Debenture.
(iii)Issuing 10% Preferred Stock. The expected
Earnings Before Interest and Taxes (EBIT) are Tk. 15,00,000 and the corporate
tax rate is 40%. Show the effect of these three alternatives on earnings per
share (EPS)
Problem
No #28
The Capital Structure of IDLC is given below:
Taka
12%
Debenture
12,00,000
10% Preferred Stock
10,00,000
Common Stock (Tk. 100 per) 8,00,000
The Company needs additional financing of Tk. 12,00,000.
This can be financed in the following ways:
(i) Fully by
Common Stock of Tk. 100 each;
(ii) Fully by 12% Debenture;
(iii) Fully by 13% Preferred Stock. If the Company's expected EBIT is Tk.
8,00,000 and the corporate tax rate is 25% Required:
a) Which alternative method of financing should be selected and why?
b) Calculate the Indifference Point of EBIT of an alternative method
(i) and method (ii).
Problem No #29
The Capital
Structure of ABC Ltd is as follows:
The company needs Additional Capital of Tk. 50,00,000. It can finance the
following ways:
(i) Issue Common Stock of Tk. 100 each.
(ii) Issue 10% Debenture.
(iii) Issue 12% Preferred Stock.
(iv) Issue Common Stock of Tk. 100 each by 60% and the remaining 40% by 10%
Debenture. If
expected EBIT is Tk. 20,00,000. Tax rate 50%. Calculate EPS and suggest which
is the
best and why? Also, calculate the indifference EBIT and EPS between alternative
(i) and (ii).
Capital Budgeting
Problem No #30
Consider the
following information of a project:
You are
required to find out the NPV at 12% and give your opinion about the project
accept and reject decision.
Problem No #31
Your Company
is considering investing in a project for which the capital outlay is Tk 2,00,000.
Depreciation should be charged at 20% per annum. The corporate tax rate is 25%.
Estimated cash flows before depreciation are given below:
Compute the
following:
(1)
Payback Period
(2) Internal Rate of Return (IRR)
(3) Net Present Value (NPV) assuming 15% discount rate
(4) Rate of Return on Original Investment
(5) Surplus Life
Problem No #32
The initial
investment of a project is Tk. 1,20,000, the life of the project is 5 years,
Cash inflows in 1st year, 2nd year, 3rd year, 4th year, and 5th year are Tk.
50,000; 48,000; 30,000; 42,000 and 20,000 respectively. The cost of capital is
15%.
a) Calculate the Internal Rate of Return (IRR)
b) Should the project be accepted?
Problem No #33
The initial
investment of the project is Tk. 5,00,000. The expected annual equal cash
inflows over the next 5 years of life are Tk. 1,50,000. The corporate tax rate
is 40%. Calculate PBP, PBR, and NPV assuming the discounting factor is 12%.
Problem No #34
You are a
financial analyst of Tamanna Electronics Company. The director of capital
budgeting has asked you to analyze two proposed capital investments for Project
A and B. Each project has a cost of Tk. 10000 and the cost of capital for each
project is 12%. The projects expected net cash flows are as follows:
Expected net cash flow
(1) Calculate each PayBack period, NPV and
PI.
(ii) Which project(s) should be accepted if they are independent?
(iii) Which project(s) should be accepted if they are mutually exclusive?
Problem No #35
The details of
the investment proposals of Rubina Company are given below:
Details
Amount
Initial cash outlay
Tk 1,00,000
Expected life
5 years
Scrap value
Tk 10,000
Working capital
Tk 20,000
Cash flows before tax (CFBT):
Year
CFBT
1
26,000
2
30,000
3
32,000
4
35,000
5
40,000
The Company's cost of capital is 10% and tax rate is 45%. The project will be
depreciated on a straight line basis.
Compute the following:
(1) Pay Back Period
(2) Internal Rate of Return(IRR)
(3) Net Present Value(NPV)
(4) Rate of Return on Original Investment.
(5) The rate of return on Average Investment.
Risk and Return
Problem No #36
RFL Co
Ltd has a beta of 1.60. The risk-free rate of return is 8% and the risk premium
is 6%. Determine the cost of common stock of RFL Co Ltd using CAPM.
Problem No #37
The risk-free
rate of return is 10%, the market rate of return is 16% with a Standard
Deviation of 25%. The following information is available for mutual funds, all
assumed to be efficient:
Mutual funds
Standard Deviation
DBH
16
ICB
18
NBL
10
You are required to calculate:
(i) The slope of CML.
(ii) The expected rate of return for each mutual fund.
Problem No #38
You have the
following information of two stocks:
You are
required to calculate:
(i) Expected Return of the above two stocks.
(ii) Standard Deviation of two stocks.
(iii) Portfolio Standard Deviation of X and Y assuming those two are equally
weighted.
Problem No #39
Securities X
and Y have the following distribution of Expected Return:
An
investor seeks your opinion as to which security he should invest in? Give your
opinion on the basis of Coefficient of Variation.
Problem No #40
Given the
following data:
Expected return for the market = 12% percent.
Standard deviation of market return = 21 percent, Risk free rate = 8 percent.
Correlation co-efficient between
Stock A and the market = 0.8
Stock B and the market = 0.6
Standard
deviation for stock A = 25 percent
Standard deviation for stock B = 30 percent
(a) Calculate the beta for Stock A and Stock B.
(b) Calculate the required return for each stock.
Problem No #41
You are considering two securities with the
relevant information given below:
Calculate
the Portfolio Expected Return and Portfolio Standard Deviation of the
securities, if r=-0.60.
Problem No #42
Four Securities have the following Expected Returns:
A = 12%, B= 20%, C= 15%, D=10%
Calculate the expected return for a portfolio consisting
of all four securities under the following conditions:
(i) The portfolio weights are equal.
(ii) The portfolio weights are 10% in A, with the
remainder equally divided among the other three stocks.
(iii) The portfolio weights are 10% in each A and B, with
the remainder equally in each C and D.
Problem No
#43
A
firm's Risk-Free Rate is 7%. The rate of return on the market is 13% and a beta
is 0.65. What is the Expected Return based on the CAPM? If another stock has an
Expected Return is 25%, What will it's be in beta?
Problem No
#44
Assume both
portfolios A and B are well-diversified, that E(R) of A=0.135 and E(R) of B =
0.148. If the economy has only one factor and Beta of A = 1.0, While Beta of B
= 1.2. Which must be the risk-free rate?
Problem No
#45
At present,
Suppose the Risk-Free Rate is 12% and the expected return on the market
portfolio is 16%. The expected returns for four stocks enlisted together with
their expected beta:
On the basis
of these expectations which stocks are overvalued and undervalued?
Bond and Stock Valuation
Problem No #46
Determine
the value of the Bond of Rubina Co from the following information:
Coupon Rate = 10%; Face Value = Tk 1,000
Discount Rate = 15%; Maturity Period = 12 years.
Problem No
#47
Following
are the information relating to a Bond:
Face value
Tk 2,000, Coupon rate 13%, Discount rate 15%, Maturity period 7 Years.
What will be the price of the Bond if interest is paid
Yearly (ii) Bi-Monthly?
Problem No
#48
A 9%, 12
years Bond of Tk 5000 has been issued @ 5% discount and redeemed @ 3% premium.
If the flotation cost is 2% of face value, then Calculate its approximate
YTM
Problem No
#49
An investor
recently purchased a bond with Tk 21,000 face value, 12.50% coupon rate, and 5
years remaining to maturity. The investor paid Tk 21,500 for the bond. If the
bond can be called two years from now at a price of Tk 22,160. What is YTC?
Problem No #50
SB Ltd has a 14% debenture with a face value of Tk.
100 that matures at par in 15 years. The debenture is callable in five years at
Tk. 114. It currently sells for Tk. 105. Calculate the bond's Yield to Maturity
and Yield to Call.
Problem No #51
Mr. Hannan intends to buy a share and will hold it for
one year. He expects the share to pay a dividend of Tk 2 next year and would
sell the share at an expected price of Tk 22 at the end of the year. If Mr
Hannans' required rate of return (Ke) is 15%, how much should he pay for the
share today?
Problem No #52
Singer Bangladesh Ltd. is expected to pay a dividend of
Tk 5 per share next year. The dividends are expected to grow constantly at a
rate of 8 percent. If the required rate of return is 12%, find out the present
value of the share.
Problem No #53
Twaseen Motors is currently selling for Tk. 100 per share
and pays Tk. 5 as dividends. Investors require a 15% return on this stock. What
is the expected growth rate of dividends?
Problem No #54
ABC Company currently has an EPS of Tk. 40 and
dividend payout ratio is 40%. An investor required 14% on this kind of
investment. The growth rate is 8%. What is the value of ABC's Share?
Problem No #55
ABC Automobile Ltd's most recent annual dividend is Tk.
18 per share and the firm's required rate of return is 12%. Find the market
value of the share when:
(a) Dividends are expected to grow at an annual rate of
0% forever.
(b) Dividends are expected to grow at 10% annually for
the first three years and 6% annually
for the next 3 years, after which they are expected to
grow at 5% per year to infinity.
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