Module 3: Time value of money and related concepts

Solution for practice questions (3 and 5 marks)

Question #01

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Suppose you gets a loan of Rs. 500,000 at 12% simple interest rate for 10 years from a

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bank. What will be total interest you will pay to bank and what will be the total payable
amount? 3 marks

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Solution

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Simple Interest=P×i×n

Simple Interest= 500,000*0.12*10

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Amount of Simple Interest= Rs. 600,000

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Total amount = Rs 500000+ Rs. 600000 = Rs. 1100000

Question #02
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What will be the present value of Rs. 10,000 to be received after 5 years, if interest rat is
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12% compounded semi-annually. 3 marks

Solution:
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PV = FV / (1 + r/n)n*t
where n = number of compounding period per time period
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t= the time period

PV = 10000 / (1 + 0.12/2)2*5
PV = 10000 / (1.06)10
C

PV = 10000/ 1.79
PV = Rs. 5,586.59
ic
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Question #03

What will be present value of Rs. 70,000 to be received after 4 years. Assume an interest
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rate of 10% compounded monthly. 3 marks

PV = FV / (1 + r/n) n*t
Ac

PV =70000 / (1 + 10/12)12*4
PV = 70000 / (1.0083)48
PV = 70000/ 1.49
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PV = Rs. 46,979.87
 Question #04

What will be the Future value of Rs. 10,000 after 5 years, if interest rat is 12%
compounded quarterly. 3 marks

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Solution:

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FV = PV*(1 + r/n)n*t
FV = 10000 *(1 + 0.12/4)4*5

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FV = 10000 / (1.03)20
FV = 10000/ 1.81
FV = Rs. 5,524.86

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Question #05 (5 marks)

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Calculate and compare present values of following two investment plans and decide
which will be feasible for you and why?

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Plan A: Rs. 50,000 to be received after 10 years, if interest rat is 10% compounded
semi-annually. nt
Plan A: Rs. 50,000 to be received after 10 years, if interest rat is 10% compounded
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annually.

Solution:
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Plan A
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PV = FV/(1 + i/n)n*t
PV = 50000/(1 + 0.10/2)2*10
C

PV = 50000/2.65
ic

PV = Rs. 18,867.92
em

Plan B
PV = FV/(1 + i)t
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PV = 50000/(1.10) 10
PV = 50000/2.59
Ac

PV = Rs. 19,305.01
Plan B is more suitable because present value is more than plan A.
VU

Question #06

Calculate Present Value of the following series of cash flows if discount rate is 15%.
5 marks
 Year Cash flow (Rs.)

1 100,000
2 -70,000
3 250,000

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4 -180,000

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PV = CF1/(1+r)1 + CF2/(1+r)2+ CF3/(1+r)3 + CF4/(1+r)4

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PV=100000/(1.15) -70000/(1.15)2 +250000/(1.15)3 -180000/(1.15)4
PV=100000/1.15 -70000/1.3225+250000/1.520875-180000/1.749

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PV= 86956.52 -52930.05671+ 164379.0581-102915.5842
PV= Rs. 95489.93

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Question #07

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Option1: Deposit Rs. 500,000 today at 10% annual rate compounded semi-annually.

Option 2: Deposit Rs. 350,000 today at 12% rate compounded annually.

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Required:
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a) Calculate the future value of both options if investment is made for 5 years. 4 marks
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b) Which option will you prefer and why? 1 mark

Solution:
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Option 1
C

FV = PV (1 + i/n)n*t
FV = 500000*(1+0.10/2)2*5
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FV = 500000*1.63
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FV = Rs. 814,447.3
Option 2
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FV = 350000*(1+0.12)5
Ac

FV = 350,000*(1.76)
FV =Rs. 616,819.58
Option 1 is preferable because its future value is higher than option 2
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 Question #08

What will be future value of an ordinary annuity if annual payment is Rs. 5000 for 10 years at
an annual interest rate of 8%.

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3 marks

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FV = R*[(1+r)^n - 1]/r
FV = 5000*[(1.08)^10 - 1]/0.08

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FV = 5000*[14.49]

22
FV = Rs. 72,432.81

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Question #09

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What will be future value of annuity due if annual payment is Rs. 8000 for 5 years at an
annual interest rate of 10%.

3 marks nt
FV = R*[(1+r)^n - 1]/r *(1+r)
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FV = 8000*[(1.10)^5 - 1]/0.10 *(1.10)
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FV = 8000*[6.72]
FV = Rs. 53,724.88
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C

Question #10
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Calculate the present value of an ordinary annuity if:

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Annual payment: Rs. 3000

Number of years: 10
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Interest rate: 15% per annum

PV = R x [1-(1+r)-n ] /r
Ac

PV = 3000 x [1-(1.15)-10] /0.15

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PV = 3000 x 5.02

PV = Rs. 15,060
 Question #11

Calculate the present value of an annuity due if:

Annual payment: Rs. 3500

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Number of years: 5

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Interest rate: 10% per annum

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PV = R[1-(1+r)-n+1]/r + R

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PV = 3500[1-(1.10)-5+1]/.10 + 3500

PV = 3500[0.317]/0.10 + 3500

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PV = Rs. 14,595

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Question #12 nt
What will be present value of a perpetuity of Rs. 2000 per year at 12% annual interest rate?
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3 marks
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PV = R/r
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PV = 2000/.12
C

PV = Rs. 16,666.66
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 Module 4: Valuation of Securities

Practice questions (3 and 5 marks)

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Question #01: Calculate intrinsic value of 5-year bond issued at face value of Rs. 5000

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with a 15% coupon rate. Suppose the discounting rate is 12% per annum. (5 Marks)

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Solution:

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Bond value = Coupon [1- (1+r)-n]/r + MV/(1+r)n

Coupon= 5000*0.15 = 750

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Bond value = 750 x [1-(1.12)-5]/0.12 + 5000/ (1.12)5

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Bond Value = 2703.58+2837.13

Bond Value = Rs. 5540.712

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Question #02: What will be intrinsic value of a bond with following details:
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Face value of bond = Rs. 1000
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Coupon rate = 12% per annum

Maturity of bond = 10 years

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Required rate of return= 15%

C

Marks: 5
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Solution:
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Bond value = Coupon [1- (1+r)-n]/r + MV/(1+r)n

Coupon= 1000*0.12 = Rs.120

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Bond value = 120 x [1-(1.15)-10]/0.15 + 1000/ (1.15)10

Bond Value = 602.25+247.18

Ac

Bond Value = Rs. 849.43

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Question #03: What will be the book value of Ahmed Textile’s shares if:
Total assets of the company= Rs. 6,500,000
Total liabilities of the company = Rs. 380,0000
Total number of shares outstanding= 500,000
 Marks: 5
Solution:
Book value of stock= Total Assets – Total Liabilities / Total shares Outstanding

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Book value of stock= (6500000 - 3800000) / 500000

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Book value of stock= Rs. 5.4 per share

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Question #04: What will be intrinsic value of a Zero-coupon bond issued with a face value of Rs.

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1000 for 10 years? Assume the discount rate is 15% per annum? (3 marks)

Solution:

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V = MV/(1+r)n

V = 1000/(1.15)10

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V = Rs. 247.18

Question #05: What will be market conversion price if:

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Conversion ratio = 6
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Purchase price of preferred shares = Rs. 50

Also calculate gain or loss on conversion of preferred shares into common shares:
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1. If common shares are selling at Rs. 10 per share

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2. If common shares are selling at Rs. 7 per share

Marks: 5
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Solution:
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Market conversion price = Purchase Price of the PS/Conversion Ratio

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Market conversion price = 50/6 = Rs. 8.33

Gain or loss on conversion of preferred shares into common shares:

Ac

1. If common shares are selling at Rs. 10 per share

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If the common share price is Rs. 10, profit on conversion = Rs. 10-8.33 = Rs. 1.67

2. If common shares are selling at Rs. 7 per share

If the common share price is Rs. 7, loss on conversion = Rs. 7-8.33 = Rs. -1.33
 Question #06: What will be intrinsic value of Noor Chemical’s shares which currently pays a
dividend of Rs. 5 per share which grows at a constant growth rate of 10% and required rate of
return is 12%? (5 marks)
Solution:

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P= D1/ (r-g)

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D1 = Do (1+g) = 5 * 1.10 = Rs. 5.5

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P= 5.5/ (0.12-0.10)
P= Rs. 275

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Question #07: Calculate intrinsic value of preferred shares offering a fixed dividend of Rs. 5 per
share, the expected return is 18% and the shares are currently selling at Rs. 30 per share in the market.
Also identify whether shares are undervalued or overvalued. (3 marks)

03
Solution:
PV = D1 / rPE
PV 5/0.18
PV = Rs. 27.77
nt
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Shares are overvalued because intrinsic value (Rs. 27.77) is less than market price (Rs. 30)
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 Module 5- Practice Questions

Question #01

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Use following information to calculate current and quick ratio:

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Current Assets Rs. 500,000

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Inventory Rs. 50,000

Prepaid expenses Rs. 30,000

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Account payables Rs. 80,000

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Current Liabilities Rs. 350,000

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Current ratio = Current Assets / Current Liabilities
Current ratio = 500,000 / 350000
Current ratio = 1.43 times
nt
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Quick Ratio = Quick Assets / Current Liabilities
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Quick Assets = Current Assets - Inventory - Prepaid Expenses = 500000 - 50000 - 30000 =
Rs. 420,000
on

Quick Ratio = 420000 / 350000= 1.2 times

C

Question #02 (5 Marks)

ic

What will be the firm's gross working capital and net working capital if following
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information is available to you?

Particular Amount (Rs.)

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Accounts Payables 150,000

Accounts Receivable 250,000

Ac

Plant and Machinery 65,00,000

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Cash and Cash Equivalents 200,000

Inventory 150,000

Long-Term Debt 450,000

 Marketable Securities 350,000

Short-term debt 260,000

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Solution:

Gross Working Capital (Current Assets) = Account Receivable+ Cash and cash equivalents+

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Marketable securities +Inventory

Gross Working Capital=250,000+200,000+350000+150,000

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Gross working capital=950,000

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Net working Capital= Current Assets – Current Liabilities

Current Liabilities = Accounts Payable+ Short term debt

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Current Liabilities =150000+260000

Current Liabilities =410,000 nt

Net Working Capital= Current Assets –Current Liabilities
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Net Working Capital=950000-410,000
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Net working capital= Rs. 540,000

on

Question #03 (3 Marks)

C

Calculate Receivables Turnover in Days if:

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Credit sales = Rs. 565,000

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Average Accounts receivables = Rs. 50,000

Average Inventory = Rs. 80,000

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Number of days in Year = 360

Solution:
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Receivables Turnover in Days = Credit sales / Average Accounts receivables

Receivables Turnover = 565000 / 50000 = 11.3 times

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Receivables Turnover in Days = number of days in year /Receivables turnover

Receivables Turnover in Days = 360 /11.3 = 31.85 Days

 Question #04 (5 Marks)

Using given information, calculate trade cycle, assume 360 days in a year.

Item Amount in Rs.

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Average Accounts Receivable 50,000
Average Inventory 70,000

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Average Accounts Payables 60,000
Cash Sales 300,000

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Cost of Goods Sold 350,000
Credit Sales 500,000

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Trade Cycle = Receivable Turnover Days + Inventory Turnover Days

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Receivable Turnover (RT): Credit Sales/Average Receivables

Receivable Turnover = 500000/50000 =10 times

Receivable Turnover Days = 360/10= 36 Days

nt
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Inventory Turnover (IT) =Cost of Goods Sold /Average Inventory

Inventory Turnover =350000/70000=5times

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Inventory Turnover days = 360/5= 72 Days

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Trade cycle = Receivable Turnover Days + Inventory Turnover Days

C

Trade cycle = 36+72

Trade cycle =108 Days

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Question #05 (3 marks)

Calculate Interest Coverage Ratio from following information:

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Earning before interest and taxes = Rs. 550,000

Ac

Net profit = Rs. 243,750

Tax rate = 35%

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Interest charges = Rs. 175,000

Solution:
ICR = EBIT/ Interest
 ICR = 550000/ 175000

ICR = 3.14 times

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Question #06 (5 marks)

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Calculate Cash Conversion Cycle from given information:

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Accounts Balances (in
Rs.)
Credit Sales 500,000

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Cash Sales 300,000
Average Accounts Receivable 50,000

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Average Inventory 50,000
Average Account Payables 25,000
Cost of Goods Sold 300,000

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Credit Purchases 250,000
Number of Days in Year 360

Solution:
nt
lta
Cash conversion cycle = (Receivable Turnover Days+ Inventory Turnover Days - Payable
Turnover Days
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Receivable Turnover Days= Average Receivables/ Credit Sales*360

on

Receivable Turnover Days =50000/500000*360= 36 Days

C

Inventory Turnover Days = Average Inventory/ Cost of Goods Sold *360

Inventory Turnover Days = 50000/300000*360 =60 Days

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Payable Turnover Days= Average Payables/ Credit Purchases*360

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Payable Turnover Days=25000/250000*360= 36 Days

Cash conversion cycle = Receivable Turnover Days+ Inventory Turnover Days -Payable
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Turnover Days
Ac

Cash conversion cycle = 36+60 -36

Cash conversion cycle = 60 days

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Question #7 (3 Marks)
Calculate debt to equity ratio of a company with following information:
 Long term debt = Rs. 500,000

Equity = Rs. 250,000

Total Assets = Rs. 15,00,000

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Solution:

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Debt to equity Ratio = Long term debt / Equity

Debt to equity Ratio = 500000 / 250000

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Debt to equity Ratio = 2 times

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Question #08 (5 Marks)

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Following information has been extracted from financial statements of Alpha Textiles:

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Sales = Rs. 200,000
Gross Profit = Rs. 35,000
Income Tax Rate = 35%
nt
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Profit before interest and tax = Rs. 15000

Profit after tax = Rs. 9,000

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Total Assets = Rs. 450,000

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Equity= Rs. 150,000

Calculate:
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1. Gross profit margin

2. Net profit Margin
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3. ROA
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Solution:

Gross Profit Margin = Gross Profit/Sales

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Gross Profit Margin = 35000/200000

Gross Profit Margin = 17.5%
Ac

Net Profit Margin = Net profit/Sales

Net Profit Margin = 9000/200000

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Net Profit Margin = 4.5%

Return on Assets= Net profit /Total Assets

Return on Assets= 9000 /450000
 Return on Assets= 2%

Question # 9 (3 Marks)

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Calculate EPS, and DPS from following information:

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Net Profit = Rs. 350,000

Number of shares outstanding = 100,000

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Dividend payout ratio= 10% of net profit

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Solution:

EPS = Net profit / Number of shares outstanding

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EPS = 350000 / 100000

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EPS = Rs. 3.5 per share
DPS = Dividend / Number of shares outstanding
Dividend = 10% of net profit
nt
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Dividend = 10% of 350000 = 35000

DPS = 35000 / 100000

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DPS = Rs. 0.35 per share

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Question # 10 (3 Marks)
C

What will be Return on Capital Employed if:

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Investment = Rs. 500,000

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Profit before Tax = Rs. 50,000

Long term debt = Rs. 600,000

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Interest = Rs. 15,000

Ac

Solution:

Return on Capital Employed = (Profit before Tax +Interest)/Total Investment

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Return on Capital Employed =(50000+15000)/500000 =0.13

Return on Capital Employed= 13%

 Practice Questions- Module 6

4
Question #01

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Calculate net cash flow from operating activities using following information:
Net Profit = Rs. 200,000

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Depreciation = 40,000
Increase in account receivables = 15000
Decrease in inventory = 10000

22
Solution:

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Particulars Rs.

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Net profit 200,000
Add: Depreciation 40,000
Less: Increase in Account receivables
nt (15000)
Add: Decrease in Inventory 10000
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Net cash inflow from operating activities 235000
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Question #02
on

Using following information to calculate net cash flow from operating activity:
C

Net Profit = Rs. 150,000

Depreciation= Rs. 25,000

ic

Increase in Inventory = 19,000

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Increase in account payables = 10,000

Increase in accrued expenses = 6,000

ad
Ac

Solution:

Particulars Rs.
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Net profit 150,000

Add: Depreciation 25,000
Less: Increase in Inventory (19,000)
Add: Increase in account payables 10,000
 Add: Increase in accrued expenses 6,000

Net cash inflow from operating activities 172,000

4
Question #03

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Following information is available for Ahmed Sugar Mills:

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Particulars Rs.
Purchase of building 400,000

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Sale of equipment 650,000
Increase in account receivables 30,000

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Purchase of bonds 200,000

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Decrease in accounts payables 25,000

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Based on above information, calculate the net cash generated from investing activities.
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Solution:
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Particulars Rs.
Purchase of building (400,000)
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Sale of equipment 650000

C

Purchase of bonds (200,000)

ic

Net cash inflow from investing activities 50,000

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Question #04
Based on given information, calculate net cash flow from financing activities
ad

Particulars Rs.
Ac

Issuance of bonds 300,000

Increase in inventory 25,000
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Purchase of treasury stock 100,000

Increase in accrued expenses 5,000
Purchase of land 1,000,000
 Payment of long-term debt 250,000
Dividend paid 15000
Issuance of common shares 350,000

4
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Solution:

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Particulars Rs.

22
Issuance of bonds 300,000
Payment of long-term debt (250000)

22
Purchase of treasury stock (100,000)
Dividend paid (15000)

03
Net cash outflow from financing activities (65000)

nt
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