PROBLEMS OF ALL MODULES

TIME VALUE OF MONEY

1. As a winner of a competition, you can choose one of the following prizes:
i. ₹ 15,00,000 now.
ii. ₹ 20,00,000 at the end of 6th year.
iii. ₹ 1,20,000 a year forever.
iv. ₹ 2,00,000 per year for 10 years.
If the interest rate is 10%, which prize has the highest present value?
2. Mr. Ramesh is working in an SME. He needs ₹ 2,00,000 for his expenses, for that he
has approached a financial institution where they are asking him to pay an interest of
15% p.a. He is planning to repay the loan in 12 monthly instalments. Since you are an
expert in loan disbursement, he wants you to help him know how much he must pay
in an installment. He is also interested in knowing in every instalment what the
portion of principal and interest amount is.

3. Suppose a firm borrows Rs 10,00,000 at an interest rate of 15%. The loan is to be

repaid in 5 equal installments payable at the end of each of the 5 years. You are
required to prepare an amortization schedule.

4. Mr. Anirudh wants to make the following financial decisions and needs your help: i.
He wants to know the future value of ₹50,000 invested today for 5 years at 8%
compounded annually. ii. He expects to receive ₹20,000 every year for the next 5
years. What is the present value of this annuity if the discount rate is 10% per annum?
iii. He expects to receive ₹1,00,000 after 3 years. What is the present value of this
amount if the interest rate is 9% per annum compounded annually?

5. Mr. John has taken a loan from Axis Bank Ltd., for 5 years at 10% interest for an
amount of Rs. 8,00,000. Determine the loan installment of Mr. John and prepare the
amortization schedule if the loan is due at the end of each year.

6. Careers vs Higher Studies – A financial decision: You are a 22-year-old recent

graduate and are faced with a major life decision. You have two options:
Option A: Start working immediately. You have received a job offer with a starting
salary of Rs. 6,00,000 per annum, which will increase by 10% every year for the next
5 years. You plan to save 30% of your salary each year and invest it in a fixed deposit
earning 8% annually (compounded annually).
Option B: Pursue an MBA. You decide to pursue an MBA that will cost Rs.
10,00,000 in total, paid upfront. During the 2 years’ course, you will have no income.
After graduation, you expect a starting salary of Rs. 12,00,000 per annum, with a 12%
annual increment for the next 3 years. You will save 30% of your salary and invest it
in the same fixed deposit at 8% compounded annually.
Assumptions for both options:
1. All savings are invested at the end of each year.
2. The investment earns 8% interest compounded annually.
3. You are comparing both options over a 5-year time horizon.
4. You are ignoring tax and inflation for simplicity.
Requirement: Recommend which option is best based on the time value of money.
 WORKING CAPITAL MANAGEMENT
1. A cost sheet of a company provides the following particulars:
Elements of cost Amount per unit (₹)
Materials 40
Direct Labor 15
Overheads 30
Total cost 85
Profit 15
Selling price 100
The following further particulars are available:
i. Raw materials are in stock on an average for one month.
ii. Raw materials are in process (completion stage, 50%) on an average for
half a month.
iii. Finished goods are in stock on an average for one month.
iv. Credit allowed by suppliers is one month.
v. Lag in payment of wages is 1 ½ weeks.
vi. Lag in payment of overheads is one month.
vii. 1/4th output is sold against cash.
viii. Cash in hand and at bank is expected to be ₹ 25000.
ix. Credit allowed to customers two months.
You are required to prepare a statement showing the working capital
needed to finance Level of activities of 1,04,000 units of production.

2. Foods Ltd is presently operating at 60% level, producing 36000 packets of snack foods
and proposes to increases its capacity utilization in the coming year by 33.33% over the
existing level of production. The following data has been supplied.
Unit cost structure of the product @ current level,
Raw materials Rs.4
Wages (variable) Rs.2
Overheads (Variable) Rs.2
Fixed overhead Rs.1
Profit Rs.3
Selling Price Rs. 12
RM will remain in stores for one month before being issued for production material
will remain in process for further 1 month. Suppliers grant 3 month credit to the
company.
Finished goods remain in godown for 1 month; Debtors are allowed credit for 2 months.
Average time lag in wages and overhead payments is one month and these expenses
accrue evenly throughout the production cycle. No increases either on cost of inputs are
selling price.
Prepare a projected profitability statement and the statement showing WCR at the new
level assuming that a minimum cash balance of Rs.19500 has to be maintained

3. A proforma cost sheet provides the following particulars: Materials (Rs 80), Direct
(Rs 30), Overhead (Rs 60), Total cost (Rs 170), Profit (Rs 30), and Selling (Rs 200).
You are required to prepare a statement showing the working capital needed to
 finance the level of 1,04,000 units of production activities. Assume that production is
carried on evenly throughout the year. Wages and overheads are assumed to be a
period of 4 weeks, which is equivalent to 1 month. The following information is also
available:

o Raw materials are in stock for an average of one month.

o Raw materials are in process for an average of half a month.
o Finished goods are in stock for an average of one month.
o The lag in payment of wages is 1.5 weeks.
o One-fifth of output is sold against cash.
o Lag in payment of overheads is one month.
o Cash in hand and cash at the bank is expected to be Rs 25,000.
o Credit allowed to customers is 2 months.
o Credit given by suppliers is one month.

4. From the following information of XYZ Ltd., calculate: i. Operating Cycle ii. Cash
Cycle Given: * Raw Material Holding Period - 25 days * WIP (Work-in-progress)
Period - 20 days * Finished Goods Holding Period - 30 days * Debtors Collection
Period - 40 days * Creditors Payment Period - 35 days

5. The cost sheet of PQR Ltd. provides the following data:

Cost/Unit
Particulars (Rs.)
Raw materials 50
Direct labour 20
Overhead (including depreciation
Rs.10) 40
Total cost 110
Add: Profit 20
Selling Price 130
Additional information:
▪ Raw materials are in stock for one month.
▪ Average material in work-in-progress is half a month.
▪ Credit allowed by suppliers is one month.
▪ Average time lag in payment of wages is 15 days.
▪ Average time lag in payment of overheads is 30 days.
▪ 25% of output is sold against cash
▪ Cash balance expected is ₹1,00,000.
▪ Finished goods remain in the warehouse for one month.
▪ Output per year = 54,000 units.
▪ Production is carried on evenly throughout the year.

6. Adani Enterprises Ltd. manufactures furniture and usually holds inventory worth Rs.
5 lakhs and has receivables of Rs. 3 lakhs. It also has short-term payables worth Rs. 2
lakhs. Identify the types of working capital involved and calculate the net working
capital.
 7. GLF Ltd. takes 40 days to convert raw materials into finished goods, 20 days to sell
them, and 30 days to collect receivables. It gets 25 days credit from suppliers.
Calculate the operating cycle and explain its relevance.

COST OF CAPITAL
Find the following:
1.
a. A 7 years, ₹ 100 debentures of a firm can be sold for a net price of ₹ 97.75. The
coupon rate of interest is 15% Per annum & the bond will be redeemed at 5%
premium on maturity. Compute the after tax cost of debt if the Tax rate is 55%.
b. A 7 years, ₹ 100 preference share of a firm can be sold for a net price of ₹ 97.75.
The coupon rate of dividend is 15% Per annum & the preferred stock will be
redeemed at 6% premium on maturity. Determine the cost of preference shares.

2. The PQR Company has the following capital structure in 31st March 2022.
Ordinary shares (2, 00, 000 shares) ₹ 40, 00,000
10% preference shares ₹ 10, 00,000
14% debentures ₹ 30, 00,000
The shares of the company sales for ₹ 20. It is expected that company will pay next
year a dividend of ₹ 2 per shares which will grow at 7% forever. Assume 50% tax
rate. You are required to:
I. Compute a WACC based on the existing capital structure.
II. Compute the new WACC if the company raises an additional of ₹
20,00,000 debt by issuing 15% debentures this would result in
increasing the expected dividend ₹ 3 and leave the growth rate
unchanged, but the price of the share will fall to ₹ 15 per share.

3. A company has 20,000 10% Preference shares of Rs 100 each. The cost of issue is Rs
2 per share. Calculate the cost of preference share capital if these shares are issued at:

• Par
• 10% premium
• 5% discount.

4. A company issues Rs 50,00,000, 10% debentures at a discount of 5%. The debentures

are redeemable after 5 years at par. The cost of flotation amounts to Rs 1,50,000. The
tax rate is 50%. Calculate the cost of debt capital.

5. A company has the following amounts and specific costs of each type of capital on its
books:

Source Book Value Market Value Specific Cost

Debt 400000 380000 5
Pref. Share 100000 110000 8
Equity Share 600000 15
1200000
Retained Earnings 200000 13
Total 1300000 1690000
 Determine the WACC (Weighted Average Cost of Capital) using a) book
value weights and b) market value weights.

6. XYZ limited has the following capital structure

• Equity share capital------------30,00,000.00

• Retained Earnings -------------10,00,000.00
• Preference Share---------------10,00,000.00
• Debt -----------------------------20,00,000.00
The cost of each component are as follows
• Cost of equity ---------------------------15%
• Cost of preference Share--------------12%
• Cost of Debt (before Tax)------------10%
• Corporate Tax -------------------------30%
You are required to calculate the Weighted average Cost of capital by using book
value weights

7. An investor is evaluating the expected return on a stock using the CAPM model. The
following data is available: * Risk-free rate (Rf): 6% * Expected market return (Rm):
14% * Beta (β) of the stock: 1.5 You are required to: i. Calculate the expected return
using the CAPM formula.

CAPITAL STRUCTURE
1. A company has sales of ₹ 5,00,000, variable cost of ₹ 3,00,000, fixed cost of ₹
1,00,000 and long term loans of ₹ 4,00,000 at 10% rate of interest. Calculate the
operating, financial and combined leverage.

2. A company capital structure consists of ₹ 50,00,000 in equity (₹ 100 per share). The
company’s Earnings Before Interest & Taxes was ₹ 9, 00,000. The income tax rate is
50%. the company requires a sum of ₹ 25,00,000 to finance its expansion program for
which the following alternatives are available to it:
I) Issue of 25,000 equity shares at premium of ₹ 100 per shares
II) Issue of 10% preference share
III) Issue of 8% debentures
Which of the three financing alternatives would you recommend and why?
3. A firm has sales of Rs 15,00,000, variable costs of Rs 9,00,000, fixed costs of Rs
2,00,000, and debt capital charges of Rs 18,00,000 at a 10% rate of interest. Calculate
the following leverages:

• Operating Leverage
• Financial Leverage
• Combined Leverage.

4. India Ltd. is capitalized with Rs 10,00,000 divided into 1,00,000 equity shares of Rs
10 each. The management desires to raise another Rs 10,00,000 to finance a major
expansion program. There are 4 possible financing plans:
 1. All shares
2. All debentures carrying 8% interest
3. Rs 5,00,000 in equity shares and Rs 5,00,000 in 10% preference shares
4. Rs 5,00,000 in equity shares and Rs 5,00,000 in debentures. You are required
to calculate the EPS if the EBAT is Rs 4,80,000.
5. The tax rate is 50%
5. A firm is evaluating two financing plans for raising ₹10,00,000 for a new project:
Plan A - Equity Financing:
The entire amount raised through equity shares; the face value of the share is
Rs. 10, Issue price is ₹20 per share.
Plan B - Debt -Equity mix
₹5,00,000 raised through equity at Rs. 20 per share
5,00,000 raised through debt at 12% interest.
Other information: Expected EBIT = ₹2,00,000 Tax rate = 40%
You are required to: i. Calculate Earnings Per Share under both plans. ii.
Suggest which plan is better based on EBIT-EPS analysis

6. ABC Ltd. provides the following financial information for the year ended March 31,
2025: Net Operating Profit (EBIT): ₹6,00,000, Interest on Debt: ₹1,50,000, Net Profit
After Tax (PAT): ₹3,15,000, Total Assets: ₹25,00,000 Total Debt: ₹10,00,000,
Equity Share Capital: ₹10,00,000 , Reserves & Surplus: ₹5,00,000 , Tax Rate: 30%
You are required to: i. Calculate ROE (Return on Investment) ii. Calculate ROE
(Return on Equity) iii. Interpret the relationship between ROI and ROE based on the
above data.

CAPITAL BUDGETING
1. A company has to make a choice between 2 projects namely project A & B. The initial
capital outlay of two projects are Rs. 1,35,000 & Rs. 2,40,000 respectively for A & B.
the opportunity cost of capital is 16%. The annual incomes are as under:
Year Project A Project B Discounting factor @ 16%
1 - 60,000 0.862
2 30,000 84,000 0.743
3 1,20,000 96,000 0.641
4 84,000 1,02,000 0.552
5 84,000 90,000 0.476
You are required to calculate for each project.
i. Discounted payback period
ii. Profitability index
iii. Net present value

2. Sulabh International is evaluating a project whose expected cash flow are as follows:
Year 0 1 2 3 4 5
Cash flow (10,00,000) 1,00,000 2,00,000 3,00,000 6,00,000 3,00,000
What is the NPV & IRR of the Project if the discount rate is 12%?

3. A company is considering an investment proposal to install a new milling facility at a

cost of Rs 50,000. The facility has a life expectancy of 5 years without any salvage
value. The tax rate is 35%. Assume the firm uses the Straight Line Method (SLM) of
 depreciation, and the same is allowed for tax purposes. The estimated cash flows
before depreciation and tax (CF-BT) are as follows:

• Year 1: 10,000
• Year 2: 10,692
• Year 3: 12,769
• Year 4: 13,462
• Year 5: 20,000

Compute the following: Payback period,

ARR,
NPV at a 10% discount rate,
Profitability index @10%

4. ABC Ltd. is evaluating two mutually exclusive investment proposals - Project A and
Project B. Both require an initial investment of ₹10,00,000 and have a life of 5 years.
The expected net cash inflows (after tax and depreciation) for both projects are as
follows:

Year Project A (₹) Project B (₹)

1 2,50,000 4,00,000
2 2,50,000 3,50,000
3 2,50,000 3,00,000
4 2,50,000 2,00,000
5 2,50,000 1,50,000
The company uses 10% as its cost of capital. You are required to: Calculate the
following for each project: *
Payback Period (PP)
Net Present Value (NPV)
Profitability Index (PI)
IRR

5. After conducting a survey that cost ₹2,00,000, X Ltd. decided to undertake a project for
placing a new product on the market. The company's cut-off rate is 12 per cent. It was
estimated that the project would cost ₹40,00,000 in plant and machinery in addition to
working capital of ₹10,00,000. The scrap value of plant and machinery at the end of 5
years was estimated at ₹5,00,000. After providing for depreciation on a straight-line
basis, profits after tax were estimated as follows:
Year PAT
1 3,00,000
2 8,00,000
3 13,00,000
4 5,00,000
5 4,00,000