4.XYZ Ltd. Is selling three products in brand names X Y and Z.

The details
regarding unit costs and selling prices are as under :
X
Y

Materials
12

6
16

Labour
8

8
20

Other variable costs

20
14

Selling Price
50
96

36

The monthly Fixed Expenditure is Rs.540000.Sales volume for

the months of October2014 are 20000,for each of X,Y, and
Z.The sales volume of X,Y and Z during the month of
November2014 are 40000,26000 and 10,000 respectively.
Find out the monthly profits and if your computation brings
out that higher profit was earned in the month having lower
sales volume ,justify your answer giving reasons.
ANSWER. STA TEMENT OF CONTRIBUTION PER UNIT AND P/V
RATIO
Product
X

Materials
12

6
16

Labour
8
Variable Costs
20
Marginal Cost
40

8
20
6
14
20
50

Selling Price
50

36
96

Unit Contribution
10

16
46

P/V Ratio
16x100/36

10x100/50

46x100/96

CONTRIBUTIONx100/SALES
20%
47.92%
STATEMENT

44.4%

OF MONTHLY PROFITS

OCTOBER 2014
Contributionfrom X
320000

20000x16

Y 20000x10
Z 20000x46
Total

200000

920000

60000

--------------

Fixed Expenses
PROFIT

1440000

540000
------------- 900000

NOVEMBER 2014
Contribution from
X 40000x16

Y 26000x10
Z 10000x46
TOTAL 76000
Fixed Expenses
PROFIT

=
=

640000
260000
460000
-------------

1360000
540000
820000

Higher profit has been earned during October when the sales volume was
comparatively on lower sidethan November2014
Reason:- During October 2014 the sales volume has been on lower side but sales
volume of Z which has got highest P/V Ratiowas more than November2014 .The

contribution of Z alone was 920000during October in comparison to 460000 during

November2014 .thus contribution of this product alone has surpassed the effect of
other two products. This has resulted in overall high profits during October 2014.
VALUATION

OF

SHARES

AND

BONDS

OBJECTIVES:Efficient Capital Market - The knowledge of capital market and having complete
information about its functioning will assist the Finance Managre to take suitable
decisions regarding capital structure and investment of available funds with the
organization in the market.It is obvious that some securities are of high market
value while some are having low market value. He will have to be appraised with
the factors affecting capital market .And taking the same into consideration the
investment and financing activities can be designed suitably.It will facilitate the
exploitation of relevant va
riables in the favour of the organization to
maximize the value of the firm.
Financial Assets:The assets are of different types viz. Tangible Assets and Intangible
Assets. Again another classification may be Fixed Assets ,Current Assets and
Fictitous Assets.
By the term Financial assets we mean Shares ,Debentures ,Bonds other securities,
sale deeds of properties, lease deeds ,agreements, hypothetication documents
Insurance papers etc.
CONCEPTS OF VALUE
Book Value of asset=Acquisition value-Scrap Value.
Book value of Debt=Outstanding amount appearing in the books of accounts.
Book Value Of SHARES
ASSETS-LIABILITIES= Net worth
Book value of Shares=Net Worth/No. of Shares.It is also called historical value of
share.
Replacement value of share:-It is the sumtotal of amount which will have to be
spent for replacing an asset .It does not take into account intangible assets.The
total amount earned per share in this fashion will be replacement value of the firm.
LIQUIDATION VALUE: Liquidation value is the amount which will be realized if an
asset is sold out in the market.It also does not take into account the value of
intangible assets.total amount realized by disposing of all the assetswhen divided
by number of shares will give liquidation value of one share.

GOING CONCERN VALUE: If an organisation is in running condition amount which

will be required to be paid for acquiring the same is called going concern value of
the firm .
Market Value : it depends upon the current market price of share .The total value of
the firm will be the product of market value per sharex number of shares
VALUATION OF BOND
The essentials of a bond are--Face value-The value of one bond which has been prescribed in the bond certificate.
Interest Rate (Coupon Rate)---The rate of interest payable per year to the bond
holderis the coupon rate.
Maturity: It refers to the period for which bond has been issued.The bond will be
encashed on after the maturity period.Inthis case nothing will be deducted at the
time of payment of maturity value.
Redemption valueThis refers to the amount which will be realided at the time of
maturity.
Market ValueIt is the value of the bond on which it is available in the market.It can
be moreor less than the face value of the bond.It mat even be equal to the face
value.
In INDIA bonds are often known as Debentures.
Bonds/Debentures are of two types Secured and Non secured Bond /Debenture.
BOND Value and Yields:- Government bonds are normally risk free or are having low
risk.But the interest rate /yield is on lower side.
Bonds issued by Government companies/Public sector undertakings are having
higher interst ratesbut carry moderate risk because the y may not giveredemption
value on the date of maturity.even the interest payment may also be delayed.
Bonds issued by private sector companies offer higher rate of interest than these
two but carry higher risk because the payment of interest and redemption value is
uncertain .Thus ,Higher risk---Higher rate of return;Low risk low rate of return
;Moderate risk moderate rate of return.
A bond holder receives an annual interest payment.Additionally he receives
maturity value .
At the time of deciding the market value of the bond we take into consideration the
net present value of the bond on these two scores i.e.NPV of allthe annual/halfyearly
interest payments+ the NPV of maturity value.

IF NPV of these taken together is more than the Market value of the firm than it is
said that it is overvalued and can be purchased above face value.If these two taken
together are equal to the the market value then theinvestor will be indifferent.If
these taken together are less than market valuethe bond is said to be undervalued
and is worhe purchase at less than face value.
VALUE OF BOND
It depends upon (a)expected cash flows (b)Estimate of required rate of return
(c)coupon payments and (d)redeemable payment
If the bond is not encashed or retired prematurily,
P =SIGMA(N,T=1) C/(1+r)t +M/(1+r)t
square,t=3 means cube and so on;

t denotes the index i.e .t=2means

Here,p=Value (in Rupees),n=years, r=interest rate , C=Annual coupon payment

and M=Maturity value
Or,P=CxPVIFA (r,n) +MxPVIF (r,n)
Example: A Rs.100 par value bond bearing a coupon rate of 12% will mature after 5
years. What is the value of the bond when the discount rate is 15%. (Given
Present value interest factor for annuity i.e.PVIFA(15%,5 year )=3.352 and Present
value interest factor i.e.PVIF (15%, 5 years)=0.497
Ans. HereC=12,

M=100, PVIFA=3.352, PVIF=0.497

Value of the bond P=RS.12(PVIFA 15%,5 years)+Rs.100 (PVIF 15%, 5 years )

=12x3.352

+100x0.497

=40.224+49.70

=89.92

Ans. Rs.89.92
Exercise for practice: Calculate the value of the bond of face value Rs.1000 whose
coupon rate of interest is 12%. Maturity Value 10 years,and required yield is 13%
Given :PVIFA 13%, 10 years =5.426 and PVIF 13%,10 years =0.295
946.12

Ans. Rs

Book Value of bond with Semi Annual

Interest
------------------------------------------------------In this case C will be treated as C/2, n will be treated as 2n
become r/2

(half years) r will

P =Sigma (t=1 to 2n), C/2/(1+r/2)to the power (t) +M /(1+r/2) raised to the
power(2n)
=C/2(PVIFA r/2, 2n ) +M (PVIF r/2,2n)
Example:Calculate the value of Rs 100 Bond having 12%coupon rate ,8years
maturity when required rate of return is 14% and interest is paid half yearly.
Answer:P=Sigma t=1 to 2x8 12/2/(1+16/2)raised to the power 16 +100/(1+16/2)
raised to the power 16.
=6(PVIFA 7%, 16 years ) +100 (PVIF 7% ,16 years)
=Given PVIFA 7%,16 =9.447

and PVIF 7%, 16 =0.339

P=6x9.447 +100x0.339 =Rs. 56.68+rs.33.90

=Rs.90.58

Exercise for practice:A Rs.100 par value bond bears a coupon rate of 14% and
matures after 5 years. Interest is payable semiannually .Compute the value of the
bond if required rate of return is 16% .Given :PVIFA 8%,10 years =6.710 ,PVIF
8%, 10 years =0.463
Ans.93.27(Rs.)
RELATIONSHIP between Coupon rate ,required yield and price:Price is inversely
proportional to the yield. Cash flow increases and thus price increases.As the yield
increases NPV of cash flow decreases.
Example: A Bond carrying coupon rate of 14% issued 3 years ago for Rs.1000 (at
par )by S.Bros.The original maturity period of the bond is 10 years. The interest
rate has fallen in last 3 years and investors now expect 10% return.Calculate the
value of the bond.
Given :M=1000
C=1000x14%=140

N=10-3=7 years
R =10%
P =Present value of the firm

P=Sigma(t=1 raised upto 7) (140/(1+0.10)raised to the power 7

+1000(1+0.10)raised to the power 7
=140(PVIFA 10% ,7 years)

+1000 (PVIF 10%. 7 years)

=140x4.868 +1000x0.513 =Rs.681.52+Rs.513 =Rs.1194.12

The investor will get Rs.1000 bonds for interest earning Rs.100. here the interest
receivable is Rs.140. Therefore he will agree to pay more.the upper limit will be
RS.1194.12WHEN THE YIELD WILL BE 10%.i.e.by investing Rs.1194.12 his yield will
be 10%of this amount.
Example; In the same case if the interest rate has moved up and the investors
expect 18% the value of the bond will be calculated as follows:

M =1000

N=7 years R=18%

C=140

P= Sigma (t=1 raised upto 7) (140/(1+0.18)raised to the power 7) +1000 /

(1+0.18)raised to the power 7
=140 (PVIFA18%,7 years) +1000(PVIF 18%,7 years)
=140x3.812 +1000x0.314 =Rs 533.68+Rs.314 =Rs.847.68
The investor can at best go upto Rs.847.68 wherein the interest @14 % will be
equal to expected rate of return of18%.
Coupon Rate =Required Yield=Price at Par.
Coupon Rate more than required yield=Premium
Coupon Rate less than required yield =Discount
If we plot the prices at different cases on Y axis and the yield percentage on X axis
the we will get a CONVEX CURVE.