PRACTICE QUESTIONS

Financial Management (MBA234) from Unit 1 and Unit 2

1. Ms. Anita has recently started her first job with a monthly salary of ₹ 80000. She
dreams of buying her first car, but her savings aren't sufficient to cover the cost
outright. After visiting her bank, she secured a car loan of ₹ 600000, which requires
a 10% down payment. The bank offered her the remaining loan amount at an
interest rate of 9% per annum for a period of 5 years.
Ms.Anita is curious to know:
a) The outstanding principal balance at the end of the 2nd year assuming she makes
monthly payments.
b) How much would her monthly payment be if the bank recalculates based on
semi-annual compounding?

2. Mr. Rajesh recently secured a job with a salary of ₹ 120000 per month. After a few
years, he plans to purchase a flat worth ₹ 1000000. However, his current savings
are insufficient, so he approached a bank for a loan of ₹ 750000, with an interest
rate of 8% per annum for 10 years.
a) Calculate the outstanding loan balance at the end of the 5th year, assuming
annual payments.
b) If Rajesh opts for quarterly payments instead, what would his revised installment
amount be?
3. Kumar Enterprises is looking to raise capital for an expansion project. The
company's equity currently trades at ₹ 60 per share, and it pays a dividend of ₹
2.25. The dividend growth rate is 6%, and the company can issue debt at 7%. The
capital structure consists of 50% equity and 50% debt.
a) Calculate the cost of each capital component.
b) Compute the WACC for Kumar Enterprises.
c) How does WACC impact a company's ability to pursue investment opportunities?

4. Ravi, 40, has started planning for his retirement, aiming to retire at 55. He wants to
withdraw ₹ 300000 per year for 25 years after retirement. He expects his portfolio
to grow at 11% per year until he retires.
a) How much should Ravi have saved by age 55 to withdraw ₹ 300000 each year for
25 years?
b) What annual savings should he make over the next 15 years to meet his
retirement goals, assuming 11% annual compounding?
5. Dixit Limited is raising funds for an expansion. Its stock currently trades at ₹ 55,
with a dividend of ₹ 3.00 and a 7% growth rate. The company can issue debt at 9%,
and its target capital structure includes 80% equity and 20% debt.
a) Determine the cost of debt and equity for Dixit Limited.
b) Calculate the WACC.
 c) Discuss how the WACC influences the company's financial strategy and future
investments.
6. Vikas, at 48 years old, is preparing for retirement at 62. He expects to need ₹
600000 annually for 20 years post-retirement and believes his investments will
grow at 9%.
a) How much will Vikas need by the age of 62 to support his retirement
withdrawals?
b) How much should he save annually over the next 14 years to meet this target,
assuming a 9% growth rate?
7. Wellington Corporation is assessing its capital structure to fund a major acquisition.
The company can issue debt at 6%, while the current stock price stands at ₹ 75 per
share with a dividend of ₹ 3.75 and a 5% growth rate. The target capital structure
consists of 60% equity and 40% debt.
a) Calculate the cost of debt and equity.
b) Determine the WACC for Wellington Corporation.
c) Discuss how WACC affects investment decisions in capital budgeting.

8. At 50 years old, Maria plans to retire at 65. She currently earns ₹ 300000 annually
and aims to save enough to withdraw ₹ 400000 per year for 20 years post-
retirement. She believes her investments will grow at 10% per year before
retirement.
a) How much should Maria have saved by age 65 to achieve her post-retirement goal?
b) What amount should she save each year over the next 15 years if her portfolio
compounds at 10% per annum?
9. Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD)
that pays 3.5% interest, compounded annually. How much will you have when the
CD matures?
10. Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the
going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth
today?
11. Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20.
What was the growth rate in earnings per share (EPS) over the 10-year period?
12. You want to buy a new sports car 3 years from now, and you plan to save $4,200 per
year, beginning one year from today. You will deposit your savings in an account
that pays 5.2% interest. How much will you have just after you make the 3rd
deposit, 3 years from now?
13. What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate
interest rate is 5.5%?
14. Your aunt is about to retire, and she wants to sell some of her stock and buy an
annuity that will provide her with income of $50,000 per year for 30 years,
beginning a year from today. The going rate on such annuities is 7.25%. How much
would it cost her to buy such an annuity today?
15. What’s the present value of a perpetuity that pays $250 per year if the appropriate
interest rate is 5%?
16. What’s the rate of return you would earn if you paid $950 for a perpetuity that pays
$85 per year?
17. Suppose you inherited $275,000 and invested it at 8.25% per year. How much could
you withdraw at the end of each of the next 20 years?
18. Your uncle has $375,000 and wants to retire. He expects to live for another 25 years
and to earn 7.5% on his invested funds. How much could he withdraw at the end of
each of the next 25 years and end up with zero in the account?