PROBLEMS ON TIME VALUE OF MONEY

1. Calculate the value of 5 years hence a deposit of Rs. 1,000 made today if the interest
rate is 8%, 10%, 12% and 15%.
2. Suppose you deposit Rs. 1,000 annually in a bank for 5 years and your deposits earn a
compound interest rate of 10 per cent. what will be the value of this series of deposits
at the end of 5 years? Assuming that each deposit occurs at the end of the year and
beginning of the year.
3. Fifteen annual payments of Rs. 5,000 are made into a deposit account that pays 14 per
cent interest per year. What is the future value of this annuity at the end of 15 years?
4. If you invest Rs. 5,000 today at a compound interest of 9 per cent, what will be its future
value after 75 years.
5. Mr. X want to buy a house after 5 years when it is expected to cost Rs.2 million. How
much should he save annually if your savings earn a compound return of 12 per cent?
6. A finance company advertises that it will pay a lumpsum of Rs. 44,650 at the end of the
five years to investors who deposit annually Rs. 6,000 for 5 years. What is the interest
rate implicit in this offer?
7. You can save Rs. 2,000 a year for 5 years, and Rs. 3,000 a year for 10 years thereafter.
What will these savings cumulate to at the end of 15 years, if the rate of interest is 10%.
8. Mr. Vinay plans to send his son for higher studies abroad after 10 years. He expects the
cost of these studies to be Rs. 10,00,000. How much should he save annually to have a
sum of Rs. 10,00,000 at the end of 10 years, if the interest rate is 12 per cent.
9. An Investor deposits Rs. 100 in a bank account for 5 years at 8% rate of interest. Find
out the amount which he will have in his account if interest is compounded annually,
semi-annually and quarterly.
10. A 12 year payment annuity of Rs. 10,000 will begin 8 years hence (the first payment
occurs at the end of 8 years). What is the present value of this annuity if the discount
rate is 14 per cent?
11. What is the present value of the following cash streams if the discount rate is 14%?
Year
0
1
2
3
4
Cash flow 5,000 6,000 8,000 9,000 8,000
12. Mahesh deposits Rs. 2,00,000 in a bank account which pays 10 per cent interest. How
much can he withdraw annually for a period of 15 years?
13. Shyam borrows Rs.80,000 for a musical system at a monthly interest of 1.25 per cent.
the loan is to be repaid in 12 equal monthly instalments, payable at the end of each
month. Prepare the loan amortization schedule.
14. As a winner of a competition, you can choose one of the following prizes:
a. Rs. 5,00,000 now
b. Rs. 1,00,000 at the end of 6 years
c. Rs.60,000 a year for ever
d. Rs. 1,00,000 per year for 10 years
e. Rs. 35,000 per year and rising thereafter by 5 per cent per year forever.
If the interest rate is 10 per cent, which prize has the highest present value.
15. What is the present value of Rs. 10,00,000 receivable 60 years from now, if the discount
rate is 10 per cent?
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16. Calculate the following:

a. If you deposit Rs. 8,000 today at 8% rate of interest, in how many years will this
amount double, under rule 72 and 69?
b. Mr. X will invest Rs. 5,000 at the end of each year for 6 years. Calculate its future
value if interest rate is 12% p.a.
c. An employee is about to retire. His employer has offered him two post
retirement options: an annual pension of Rs. 10,000 as long as he lives and a
lumpsum payment of Rs. 60,000 if employee expects to live for 15 years and rate
of interest is 15%. Which alternative should be select?
17. Calculate the following:
a. Compute the future values of an investment of Rs.10,000 compounded semiannually for a period of 10 years at 10% p.a.
b. A company has issued debentures of Rs. 50 lakhs to be repaid after 7 years. How
much the company should invest in a sinking fund earning 12% in order to be
able to repay debentures?
c. A bank has offered to you an annuity of Rs. 1,800 for 10 years if you invest Rs.
12,000 today. What is the rate of return would you earn?
18. Calculate the following:
a. ABC ltd., has Rs. 10 crore bonds outstanding. Bank deposit earns 10% p.a. the
bonds will be redeemed after 15 years for which purpose the company wishes to
create a sinking fund. How much amount should be deposited to the sinking
fund each year so that ABC ltd would have in the sinking fund 10 crore to retire
its entire issue of bonds.
b. A 12% payment annuity of Rs. 10,000 will begin 8 years hence (the first payment
occurs at the end of 8 years). What is the present value of this annuity if the
discount rate is 4%.
19. Calculate the following:
a. Assume that a deposit is to be made at year zero into an account that will earn
8% compounded annually. It is desired to with draw Rs. 5,000 three years from
now and Rs. 7,000 six years from now. What is the size of year zero deposit that
will produce these future payments?
b. Find out the present value of an investment which is expected to give a return of
Rs. 2,500 p.a. indefinitely and the rate of interest is 12% p.a.
c. A finance company makes an offer to deposit a sum of Rs. 1,100 and then
receive a return of Rs. 80 p.a. perpetually. Should this offer be accepted if the
rate of interest is 8%? Will the decision change if the rate of interest is 5%.
20. If the rate of interest is 12% p.a., what are the doubling period as per rule of 72 and the
rule of 69?
21. Calculate the following:
a. XYZ ltd., has borrowed Rs. 5,00,000 to be repaid in five equal annual installments
(interest and principal). The interest rate is 16% p.a. compute the amount of
cash payment.

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b. The earnings of ABC ltd., was Rs 3 per share in year 1. It increased over a 10 year
period to Rs. 4.02. compute the rate of growth or compound annual rate of
growth of the EPS.
c. Compute present value of a perpetuity of Rs. 100 per year, if the discount rate is
10%.
22. Calculate the following:
a. A borrower offers 16% nominal rate of interest with quarterly compounding.
What is the effective rate of interest?
b. What is the present value of Rs. 10,00,000 receivable 30 years from now, if the
discount rate is 10%?
c. Arun deposits Rs. 2,00,000 in a bank account which pays 10% interest. How
much can he withdraw annually for a period of 15 years?
23. Calculate the following:
a. If you deposit Rs. 10,000 today at 10% rate if interest, in how many years will this
amount double?
b. Compute the future value of an initial Rs. 1,000 compounded annually for 10
years at 10%, and
c. An investor has two options to choose from the following:
i. Rs. 6,000 after I year, and
ii. Rs. 9,000 after 4 years.
Assume the discount rate of 20%, which alternative should he opt for?
24. Find out present values of the following:
a. Rs. 1500 receivable in 7 years at a discount rate of 15%.
b. An annuity of Rs.1000, starting immediately and lasting until 9 th year at a
discount rate of 20%.
c. An annuity of Rs. 7600 starting after 1 year for 6 years at an interest rate of 12%.
d. Operating expenditures of Rs. 100000 per year which are assumed to be incurred
continuously rate of interest is 12%.
25. Calculate the following:
a. A borrower offer 16% nominal rate of interest with quarterly compounding.
What is the effective rate of interest?
b. A finance company advertises that it will pay a lump sum of Rs. 44,650 at the end
of five years to investors who deposit annually Rs. 6,000 for 5 years. What is the
interest rate implicit in this offer?
c. Mahesh deposits Rs. 2,00,000 in a bank account which pays 10 per cent interest.
How much can he withdraw annually for a period of 15 years.
26. Calculate the following:
a. A bank finance a car purchase up to Rs. 2,50,000 at 12% interest per annum, for
a period of 5 years. How much equated monthly installments can be fixed in this
case?
b. An executive is about to retire at the age of 60. His employer has offered him
two post retirement options: (a) 20,00,000 lumpsum, (b) 2,50,000 for 10 years.
Assuming 10% interest, which is a better option?
c. Mr. Raja requires Rs. 10 lakhs after 5 years. He considers the following 2 options:
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i. To invest a single amount of 10% rate,

ii. To invest annually at a rate of 10% compounded annually. How much he
need to invest in both the cases?
27. Calculate the following:
a. A bank finance a car purchase up to Rs. 2,50,000 at 12% per annum, for a period
of 5 years. How much equated monthly installments can be fixed in this case?
b. An executive is about to retire at the age of 60. His employer has offered him
two post retirements options:
i. 20,00,000 lumpsum
ii. 2,50,000 for 10 years. Assuming 10% interest, which is a better option?
c. Mr. Raja requires Rs. 10 lakhs after 5 years. He considers the following 2 options.
i. To invest a single amount of 10% rate,
ii. To invest annually at a rate of 10% compounded annually. How much he
need to invest in both the cases?
28. An investor has an opportunity of receiving Rs. 1,000, Rs. 1,500, Rs. 800, Rs, 1,100 and
Rs. 400 respectively at the end of one through five years. Find out the present value of
this stream of uneven cash flows, if the investors required rate of return is 8 per cent.
29. If the discount rate is 10 per cent, compute the present value of the cash flow streams
detailed below: (a) Rs.100 at the end of year 1; (b) Rs. 100 at the end of year 4; (c) Rs.
100 at the end of year 3 and 5; (d) Rs. 100 for the next 10 years.
30. ABC Ltd has borrowed Rs. 30,00,000 from Canbank Home Finance Ltd to finance the
purchase of a house for 15 years. The rate of interest on such loans is 24 per cent per
annum. Compute the amount of annual payment/installment.
31. XYZ Ltd has borrowed Rs. 5, 00, 000 to be repaid in five equal annual payments (interest
and principal). The rate of interest is 6 per cent. Compute the amount of each payment.
32. Shyam borrows Rs.80,000 for a musical system at a monthly interest of 1.2 per cent. The
loan is to be repaid in 12 equal installments, payable at the end of each month. Prepare
the amortization schedule.
33. A firm purchases a machinery for Rs. 8,00,000 by making a down payment of Rs.
1,50,000 and remainder in equal installments of Rs. 1,50,000 for six years. What is the
rate of interest of the firm?

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PROBLEMS ON COST OF CAPITAL

1. A company declared a dividend of Rs. 2 per share, market price per share is Rs. 20,
income tax rate is 60 per cent and expected brokerage is to be 2 per cent. Compute the
cost of retained earnings
2. ABC Companys cost of equity is 14 per cent, the average tax rate of an individual
shareholder is 40 per cent and it is expected to spend 2 per cent on brokerage cost that
shareholders will have to pay while investing their dividends in alternative securities.
What is the cost of retained earnings?
3. Life style garment manufacturing company has a net earnings of Rs, 20,00,000 and all of
its shareholders are in the tax bracket of 50 per cent. The management estimates that
under present conditions stockholders required rate of return is 10 per cent. 3 per cent
is the expected brokerage to be paid if stockholders want to invest in alternative
securities. Compute the cost of retained earnings.
4. BPL companys equity share is currently selling at Rs. 350.75 and it is currently paying a
dividend of Rs. 5.25 per share. The dividend is expected to grow at a 15 per cent per
annum for one year. Income tax rate is 40 per cent and brokerage is 2 per cent.
Calculate cost of retained earnings.
5. Company has earnings available to ordinary shareholders Rs. 5,00,000. It has equity
capital of Rs. 50,00,000 face value of Rs. 100 each. The companys share is selling at Rs.
200. Compute the cost of equity (assuming 100 per cent dividend payout ratio.
6. Company is currently earning Rs. 10,00,000 and its share is selling at a market price of
Rs. 160. The firm has 2,00,000 shares outstanding and has no debt. The earnings of the
firm are expected to remain stable and it has a payout ratio of 100 per cent. What is K e?
If firms payout ratio is assumed to be 70 per cent and that it earns 15 per cent of return
on its investment opportunities, then what would be the firms Ke.
7. The shares of a company are selling at Rs. 20 per share. The firm had paid dividend at
Rs. 2 per share last year. The estimated growth of the company is approximately 5 per
cent per year.
a. Determine the cost of equity capital of the company.
b. Determine the estimated market price of the equity shares if the anticipated
growth rate of the firm rises to 8% and falls to 3%.
8. Equity share of a paper manufacturing company is currently selling at Rs. 100. It wants
to finance its capital expenditure of Rs. 1,00,000 either by retaining earnings or selling
new shares. If company seeks to sell shares, the issue price will be Rs. 95. The expected
dividend for the next year is Rs. 4.75 and it is expected to grow at 6% perpetually.
Calculate the cost of equity capital.
9. From the following dividends record of a company compute the expected growth rate:
Year
1 2 3 4 5 6 7 8
Dividend per share 21 22 23 24 25 26 27 28

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10. Mr. A an investor purchases an equity share of a growing company for Rs. 210. He
expects the company to pay dividends of Rs. 10.50, Rs. 11,025 and Rs. 11.575 in years 1,
2 and 3 respectively. He expects to sell the shares at a price of Rs. 243. 10 at the end of
three years. Determine dividend growth rate, current dividend yield and required rate of
return on Mr. As equity investment.
11. The capital ltd., wishes to calculate its cost of equity capital using the CAPM model.
Companys analyst found that its risk free rate of return equals 12%, beta equals 1.7 and
the return on market portfolio equals 14.5%.
12. Calculate the required rate of return on four equity stocks with the beta values shown
against them:
Stock A
B
C
D
Beta 0.90 1.10 1.60 1.90
The risk free rate is 20% and rate of return on the market portfolio is 32%.
13. An investor supplied you the following information and requested to you to calculate:
a. Expected rate of return of market portfolio
b. Expected returns on each security, using CAPM
Year-end
Beta risk
Investment in company Initial price
Dividends
market price
factor
Paper
20
2
55
0.70
A
Steel
30
2
65
0.80
Chemical
40
2
140
0.60
B
GOI Bonds
1,000
140
1,005
0.99
Risk free returns are 10 per cent.
14. Om Sai Enterprises issued 9 per cent preference share (irredeemable) four years ago.
The preference share that has a face value of Rs.100 is currently selling at Rs. 93. What
is the cost of preference share with 8 per cent dividend tax?
15. A company is considering the most desirable capital structure, the following estimates
of the debt and equity capital (after tax) have been made at various levels of debtequity mix.
Debt as a % of
Cost of
Cost of
capital
debt
equity
0
6.0
13
10
6.0
13
20
6.0
13.5
30
6.5
14
40
7.0
15
50
7.5
17
Determine the optimal debt-equity mix for the company by calculating the overall cost
of capital

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16. AB Ltd estimates the cost of equity and debt components of its capital for different
levels of debt : equity mix as follows:
Debt as a % of
Cost of
Cost of
capital
debt
equity
0
12
16
20
12
16
40
16
20
Suggest the best debt : equity mix for the company. Tax rate if 50 per cent.
17. A firm finances all its investments by 40 per cent debt and 60 per cent equity. The
estimated required rate of return on equity is 20 per cent after-taxes and that of the
debt is 8 per cent after taxes. The firm is considering an investment proposal costing Rs.
40,000 with an expected return that will last forever. What amount (in rupees) must the
proposal yield per year so that the market price of the share does not change? Show
calculations to prove your point.
18. A company has 1,00,000 shares of Rs. 100 at par, of preference shares, outstanding at
9.75 per cent dividend rate. The current market price of the preference share is Rs. 80.
What is its cost?
19. The shares of a chemical company are selling at Rs. 20 per share. The firm has paid
dividend at Rs. 2 per share last year. The estimated growth of the company is
approximately 5 per cent per year.
a. Determine the cost of equity capital of the company.
b. Determine the estimated market price of the equity shares if the anticipated
growth rate of the firm rises to 8 per cent and falls to 3 per cent.
20. A company has on its books the following amounts and specific cost of each type of
capital:
Sources of capital
Book value
Market value
Specific costs (%)
Debt
4,00,000
3,80,000
5
Preference
1,00,000
1,10,000
8
EQUITY
12,00,000 (equity)
Equity share capital 6,00,000
15
Retained earnings
2,00,000
13
21. Aries limited wishes to raise additional finance of Rs. 10 lakhs for meeting its investment
plans. It has Rs. 2,10,000 in the form of retained earnings available for investment
purposes. The following are the further details:
a. Debt-equity mix: 30:70
b. Cost of debt: upto Rs. 1,80,000, 10 per cent (before tax); beyond Rs. 1,80,000, 12
per cent (before tax).
c. Earnings per share: R.4
d. Dividend payout, 50 per cent of earnings
e. Expected growth rate in dividend, 10 per cent
f. Current market price per share Rs. 44
g. Tax rate 35 per cent.
You are required:
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To determine the pattern for raising the additional finance, assuming the
firm intends to maintain existing debt/equity mix.
To determine the post-tax average cost of additional debt.
To determine the cost of retained earnings and cost of equity
Compute the overall weighted average after tax cost of additional finance.
22. As a financial analyst of a large electronics company, you are required to determine the
weighted average cost of capital of the company using (a) book value weights and (b)
market value weights. The following information is available for your perusal:
The companys present book value capital structure is:
Debentures (Rs. 100 per debenture)
Rs. 8,00,000
Preference shares (Rs. 100 per share)
Rs. 2,00,000
Equity shares (Rs. 10 per share)
Rs. 10,00,000
Total capital
Rs. 20,00,000
All these securities are traded in the capital markets. Recent prices are: debentures Rs.
110 per debenture, Preference shares Rs. 120 per share and equity shares Rs. 22 per
share.
Anticipated external financing opportunities are:
Rs. 100 per debenture redeemable at par; 10 year maturity, 11 per cent coupon
rate, 4 per cent floatation cost, sale price Rs. 100.
Rs. 100 preference shares redeemable at par; 10 year maturity, 12 per cent
dividend rate, 5 per cent floatation costs, sale price Rs. 100
Equity shares: Rs. 2 per share floatation costs, sale price Rs. 22.
In addition, the dividend expected on the equity share at the end of the year is
Rs. 2 per share; the anticipated growth rate in dividends is 7 per cent and the
firm has the practice of paying all its earnings in the form of dividends. The
corporate tax rate is 35 per cent.
23. Rao Corporation has a target capital structure of 60 per cent equity and 40 per cent
debt. Its cost of equity is 18 per cent and its pre-tax rate of debt is 13 per cent. if the
relevant tax rate is 35 per cent, what is WACC?
24. The capital structure of Adamus Ltd in book value terms is as follows:
a. Equity capital (20 million shares, Rs. 10 par)
Rs. 200 million
b. 12%, Preference capital (Rs. 100 each)
Rs. 50 million
c. Retained earnings
Rs. 350 million
d. Debentures 14% (Rs. 100 each)
Rs. 120 million
e. Term loans, 13%
Rs. 80 million
Total
Rs. 800 million
The next expected dividend per share is Rs. 2.00. The dividend per share is
expected to grow at the rate of 12 per cent. The market price per share is Rs. 50.00.
Preference stock, redeemable after 10 years, is currently selling for Rs. 85 per share.
Debentures, redeemable after 5 years, are selling for Rs.90.00 per debenture. The tax
rate for the company is 30 per cent. calculate the average cost of capital.

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25. Susheel Corporation has the following book value capital structure:
Equity capital (Rs. 10 each)
Rs. 100 million
11%, preference capital (Rs. 100 each)
Rs. 10 million
Retained earnings
Rs. 120 million
13.5%, Debentures (Rs. 100 each)
Rs. 50 million
Term loans at 12%
Rs. 80 million
Total
Rs. 360 million
The next expected dividend per share is Rs. 1.50. The dividend per share is expected to
grow at the rate of 7 per cent. The market price per share is Rs. 20.00. Preference stock,
redeemable after 10 years, is currently selling for Rs. 75.00 per share. Debentures,
redeemable after 6 years, are selling for Rs. 80.00 per debenture. The tax rate for the
company is 50 per cent.
Calculate the WACC using book value and market value proportions.
26. From the following information of Excel Ltd., determine the WACC using (a) book value
weights and (b) market value weights. How are they different? Can you think of a
situation where the WACC would be the same using either of the weights?
Sources of finance
Book value Market value Cost (%)
Equity capital
3,00,000
6,00,000
15
Retained earnings
1,00,000
13
Preference capital
50,000
60,000
8
Debt capital
2,00,000
1,90,000
6
Total
6,50,000
8,50,000
27. A firms after tax cost of capital of the specific sources is as follows:
a. Cost of debt
8%
b. Cost of preference 14%
c. Cost of equity funds 17%
d. The following is the capital structure:
Debt capital
Rs. 3,00,000
Preference capital
Rs. 2,00,000
Equity capital
Rs. 5,00,000
Total capital
Rs. 10,00,000
e. Calculate the weighted average cost of capital using book value weights.
28. You are required to determine the weighted average cost of capital of ABC Ltd., using (i)
book value weights and (ii) market value weights. The following information is available
for your perusal:
Sources of capital
Book value
Market value
Equity
5,00,000
7,50,000
Long-term debt
4,00,000
3,75,000
Short-term debt
1,00,000
1,00,000
Total
10,00,000
12,25,000
29. A paper company has the following specific cost of capitals along with the indicated
book and market value weights
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Source of capital
Cost (%) Book value weights Market value weights
Long-term debt
5
30
25
Preference shares
10
20
17
Equity shares
12
40
46
Retained earnings
12
10
12
a. Calculate the weighted average cost of capital using book value and market
value weights. Which of them do you consider better and why?
30. XYZ Ltd., has the following book value capital structure:
(Rs. in crores)
Particulars
Amount
Equity capital (Rs. 10 each fully paid)
15
12% preference shares (Rs. 100 each fully paid)
1
Retained earnings
20
11.5% debentures (Rs. 100 each)
10
11% term loans
12.5
The next expected dividend on equity shares per share is Rs. 3.60; the dividend per
share is expected to grow at the rate of 7%. The market price per share is Rs. 40.
Preference stock, redeemable after ten years, is currently selling at Rs. 75 per
share. Debentures redeemable after 6 years are selling at Rs. 80 per debenture. The
income-tax rate for the company is 40 per cent.
you are required to calculate:
a. WACC using book value weights
b. Market value proportions
31. Determine the weighted marginal cost of capital schedule for the company, if it raises
Rs. 10 crore next year, given the following information:
a. The amount will be raised by equity and debt in equal proportions
b. The company expected to retain Rs. 1.5 crore earnings next year.
c. The additional issue of equity shares will result in the net price per share being
fixed at Rs. 32. Dividend per share is expected to grow at the rate of 7%.
Opportunity cost for the company is 16%.
d. The debt capital raised by way of term loans will cost 12 per cent for the first Rs.
2.5 crore and 13 per cent for the next Rs. 2.5 crore.
32. The following information is available for you perusal:
Companys present book values structure is as follows:
Debentures (Rs. 100 per debenture)
Rs. 7,00,000
Preference shares (Rs. 100 per share)
Rs. 3,00,000
Equity shares (Rs. 10 each)
Rs. 10,00,000
All these securities are traded in the capital market and their recent prices are:
Debentures Rs. 110 each,; preference share Rs. 120 each; and equity share Rs. 22
each. Anticipated external financing opportunities are:
a. Rs. 100, redeemable debentures at face value after 8 years, 13 per cent interest
rate, 4% floatation cost.
b. 14% redeemable preference shares (5 years), it involves a floatation cost of 5 per
cent and the sales price Rs. 100
c. Equity share: Rs. 2 per share brokerage; Rs. 22 per share selling price
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In addition, the dividend expected as the equity share at the end of the year is Rs. 2 per
share. The anticipated growth rate in dividends is 6 per cent and the firm has the
practice of paying all its earnings in the form of dividends. The corporate tax rate is 35%.
You are required to determine the WACC using book value and market value
methods

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