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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

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Treasury Management- Numericals

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  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

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