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Q.2 What are the factors that affect the financial plan of a company?
Ans. Refer 2.3 Factors affecting Financial plan Page No 31 & 32
Q.3 Show the relationship between required rate of return and coupon rate on the value of a bond.
Ans. Refer 4.2 Valuation of bonds Page No 65
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100000 − 93315
⇒ 3+
27320
6685
⇒ 3+
27320
⇒ 3 + .244 ⇒ 3.244
Q6. A company’s earnings and dividends are growing at the rate of 18% pa. The growth rate is
expected to continue for 4 years. After 4 years, from year 5 onwards, the growth rate will be 6%
forever. If the dividend per share last year was Rs. 2 and the investors required rate of return is
10% pa, what is the intrinsic price per share or the worth of one share.
Ans. n = 4 Years, growth = 6 % , Ke = 10% required rate of return, D0 = 18
The Present value of this flow of dividends will be
Pn =
(Dn+1 )
(Ke − g )
P4 = D5 / Ke − g
= D5 (1 + gn ) Ke − g
= 5(1.25) + (1 + 0.05) / (0.15 − 0.08)
4
= 15.26 / 0.07
= 16.48 / 0.07
= 235.42
The intrinsic price is 235.42
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Q.4 What is the implication of operating leverage for a firm.
Ans. Refer to 6.2 Page No 107-108
P is the market price per share, D is the dividend per Share, Ke is the cost of capital
g is the growth rate of earnings, E is earning of share = 40, r is IRR = 18 %
Dp ratio = 40 %, 50%, 60%
D [r (E − D ) Ke]
a. P= +
Ke Ke
0.4 [0.18(40 − 0.4) 0.12] 0.4 + [0.18(40 − 0.4) 0.12]
40% = + =
Ke 0.12 0.12
= Rs. 498.33
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