Practice Questions

1. Calculate the doubling period as per the rule of 69, if the interest rate is 12 percent.

2. Suppose you deposit Rs 10000 with an investment company which pays 16 percent

interest with quarterly compounding. How much will this deposit grow to in 5 years?

3. A 12 payment annuity of Rs 10,000 will begin 8 years hence.(The first payment occurs

at the end of 8 years). What is the present value of this annuity if the discount rate is 14

percent?

4. Suppose someone offers you the following contract . If you deposit Rs 20,000 with him,

he promises to pay Rs 4,000 annually for 10 years. What interest rate would you earn

on this deposit?

5. Mr. X deposits Rs 1,00,000 in a bank which pays 10 percent interest. How much can he

withdraw annually for a period of 30 years. Assume that at the end of 30 years the

amount deposited will whittle down to zero.

6. An investor will receive Rs 10000, Rs 15000, Rs 8000, Rs 11000 and Rs 4000

respectively at the end of each of 5 years. Find out the present value of this stream of

uneven cash flows, if the investor’s interest rate is 8%.

7. Raju plans to send his son for higher studies abroad after 10 years. He expects the cost

of these studies to be Rs 1000,000. How much should he save annually to have a sum of

Rs 1000,000 at the end of 10 years, if the interest rate is 12 percent?

8. A finance company advertises that it will pay a lump sum of Rs 8000 at the end of 6

years to investors who deposit annually Rs 1000 for 6 years. What interest rate is

implicit in this offer?

9. Suppose a firm borrows Rs 1,000,000 at an interest rate of 15 percent and the loan is to

be repaid in 5 equal instalments payable at the end of each of the next 5 years. Prepare

the loan amortization schedule.

 10. Ravi deposits Rs 200,000 in a bank account which pays 10 percent interest. How much

can he withdraw annually for a period of 15 years?

11. How much should be deposited at the beginning of each year for 10 years in order to

provide a sum of Rs 50,000 at the end of 10 years? The interest rate is 10 % p.a.

12. Mr. Nebraska receives a provident fund of Rs 1,00,000 . He deposits it in a bank which

pays 10 percent interest . If he withdraws Rs 20,000 annually, how long can he do so?

13. A firm has contracted to purchase an item on a fixed payment plan of Rs 10,000 per

year for 10 years. Payments are to be made at the beginning of each year . The firm

earns profits at the rate of 10 percent per year. What is the present value of the cash

flow of payment for an interest rate of 1 percent per annum?

14. A bank offers an interest rate of 8 percent on deposits made with it. If the compounding

is done on a weekly basis, what is the effective interest rate?

15. You can save Rs 2000 a year for 5 years and Rs 3000 a year for 10 years thereafter.

What will these savings accumulate to at the end of 15 years, if the rate of interest is 10

percent?

16. The capital structure of ABC Ltd in book value terms is:

Equity Capital (20 million shares; Rs 10 par) Rs 200 million

Preference capital,10 percent(100,000 shares, Rs 10 million
Rs 100 par)
Retained earnings Rs 200 million
Debentures 15 percent(1,000,000 debentures, Rs 100 million
Rs 100 par)
Term Loans, 13 percent Rs 60 million
Rs 570 million

The next expected dividend per share is Rs 1. The dividend per share is expected to grow at the
rate of 8 percent. The market price per share is Rs 30. Preference share redeemable after 10
years is currently selling for Rs 85 per share. Debentures redeemable after 5 years are selling
for Rs 90 per debenture. The tax rate for the company is 30 percent. Calculate the average cost
of capital.

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17. A company issued 10 year bonds with the face value of Rs 100 at a coupon rate of
interest of 12%. The tax rate applicable is 30%. Calculate the cost of debt when the
bonds are issued at a discount of 15% and a premium of 15%.The current market price
is Rs 105 . Tax rate is 35 percent.

18. Calculate the firm’s WACC if the beta of the firm is 1.2. The market risk premium is 10
percent and the risk free rate is 10 percent. The firm has a debt equity ratio of 1:3. Its
pre-tax cost of debt is 12 percent and the tax rate is 35 percent.

19. WACC of Unix Ltd is 30 percent and its tax rate is 35 percent. Pre-tax cost of debt is 15
percent and the debt-equity ratio is 1:2.If the risk free rate is 10 percent and the market
risk premium is 12 percent, calculate the beta of the firm.

20. HLL has provided the following information and requested you to calculate WACC
using book-value weights and

Source of Finance Amount (Rs.) After tax cost (%)

Equity capital 20,00,000 14
Preference capital 10,00,000 11
Debentures 9,00,000 9

21. ABC Ltd has issued a 10% coupon bond with a par value of Rs 1000 which will mature
after 4 years. If the current interest rate in the market is 10% , at what price would you
suggest an investor to buy the bond? If the interest rates in the market fall by 1%, what
will be the fair price of the bond?

22. Two bonds(A and B) have a face value of Rs 1000, coupon rate of 10% and will mature
after 4 years. Bond A pays interest semi-annually and Bond B pays interest quarterly.
Calculate the intrinsic value of both the bonds if market interest rate is 10%.

23. ABC Ltd had issued 10% percent bonds at par value of Rs 1000. The bonds are to
mature 5 years hence at 3 percent premium. What is the maximum price you would be
willing to pay for these bonds if the required yield is 11%?

24. The current dividend on an equity share of ABC Ltd is Rs 2. ABC is expected to enjoy
an above normal growth rate of 18% for 6 years. Thereafter the growth rate will fall and
stabilise at 12%. Equity investors require a return of 16%, what is the intrinsic value of
the equity share?

25. The salient features of the bonds of Saranya Capital Services Ltd, are as follows :Face
value Rs 100, Current market price Rs 114, Coupon rate 12 percent, Maturity period 5
years. YTM of the bonds is____ Also show the relationship bond prices and yield
graphically.

26. Aryan is exploring investment in the debt market. He has shortlisted the following two
investment options: (i) 14% debenture of par value Rs 1000 and market price of Rs
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1050 maturing after 5 years at par and (ii) A zero coupon bond with face value Rs
10,000 being issued at the rate of Rs 4500 for a tenure of 8 years. As a financial
advisor, you are required to suggest Aryan as to which is a better investment, assuming
the same level of risk in both. Support your argument with calculations