Set 1

X Y
Investment 700,000 400,000
Yeart Cash inflow
1 130,000 90,000
2 180,000 120,000
3 170,000 100,000
4 165,000 85,000
5 450,000 205,000

1 payback period for Machine X 55,000

1 130,000 130,000 0.12
2 180,000 310,000
3 170,000 480,000
4 165,000 645,000
5 450,000 4.12
2 payback period for Machine Y 5,000
1 90,000 90,000
2 120,000 210,000
3 100,000 310,000
4 85,000 395,000
5 205,000 4.02
3 What is the Net Present Value (NPV) for Machine X
cost of capital 12%
=-700000+C12/1.12+C13/(1.12)^2+C14/(1.12)^3+C15/(1.12)^4+C16/(1.12)^5
40,772
4 Net Present Value (NPV) for Machine Y
cost of capital 12%
17,540
5 Internal Rate of Return (IRR) for Machine X
X
-700,000
130,000
180,000
170,000
165,000
450,000
0.139 OR 13.9%
6 What is the Internal Rate of Return (IRR) for Machine Y
Y
-400,000
90,000
120,000
100,000
85,000
205,000
0.136 OR 13.6%
7 Profitability Index (PI) for Machine X X
cost of capital 12% Investment 700,000
PV 740,772 Yeart Cash inflow
PI = PV /Io 1.06 1 130,000
8 Profitability Index (PI) for Machine Y 2 180,000
 PV 417,540 3 170,000
PI = PV /Io 1.04 4 165,000
9 C, Option is correct 5 450,000
10 A, Option is correct

X Y
Payback period 4.12 4.02
Net Present Value 40,772 17,540
Internal Rate of Return 13.9 13.6 %
Profitability Index 1.06 1.04

BONDS: The firm has a Rs. 1,000 par value bond with an 9 percent coupon interest rate
Set 2 outstanding. The bond has 10 years remaining to its maturity date.

STOCKS: The firm’s common stock currently pays an annual dividend of Rs. 1.50 per share. The re
quired return on the common stock is 10 percent.

11 The required stated return is 9 % Interest is paid Annualy

coupon value 90
PV of Bond 1,000

12 The required stated return is 12 % Interest is paid Annualy

PV of Bond 830

13 The required stated return is 8 % Interest is paid Samiannualy

coupon value 90
PV of Bond 1,068

14 Value of common stock with Zero to infinty growth.

Value of common stock 15.00

15 Value of common stock with constant annual 5% to infinty growth.

Value of common stock 30.00

Set 3 Debentures 3,000,000 Under the prevailing market conditions, financial analysts have estimated a ris
Preferred Stock 480,000 te of return of 10% and a market rate of return of 14%. The corporation’s com
Common Stock 6,520,000 cks have a beta (β) of 1.5. Bonds carry an interest rate of 9.5%. Preferred sto
Total 10,000,000 a return of 10% p.a. and corporate tax rate is 40%

16 Debentures 3,000,000 30.00 %

Preferred Stock 480,000 4.80 %
Common Stock 6,520,000 65.20 %
Total 10,000,000 100.00

17 Debentures 3,000,000 30.00 %

Preferred Stock 480,000 4.80 %
Common Stock 6,520,000 65.20 %
Total 10,000,000 100.00

18 D, Option is correct
19 Cost of Common Stock
required return 0.16
Cost of Common Stock = rE*XE
0.10 OR 10%

20 Weighted Average Cost of capital (WACC)

Investment % of Ive.
Debentures 3,000,000 0.30000 0.95 0.5700
Preferred Stock 480,000 0.04800 0.10 0.1000
Common Stock 6,520,000 0.65200 0.10 0.1000
Total 10,000,000 1.00000

WACC 0.0000 %

BEST OF LUCK
 Y
400,000
Cash inflow
90,000
120,000
 100,000
85,000
205,000

nt coupon interest rate

e.

dend of Rs. 1.50 per share. The re

nancial analysts have estimated a risk free ra

eturn of 14%. The corporation’s common sto
n interest rate of 9.5%. Preferred stocks have
ate is 40%
0.1710
0.0048
0.0652
0.2410