Finance Answers

A company just paid an annual dividend of Rs.2. The dividend is expected to grow 30% per
year for the next two years and at a more sustainable growth rate thereafter. Two years later
the expected sales of the company are likely to be Rs.100 million and a net profit of Rs.10
million. The total Debt of the company is expected to be Rs.30 million and Total Equity of
Rs.10 million. The Company is likely to maintain a dividend pay-out ratio of 30% after 2
years and that is likely to continue forever. Find the current price of the stock which has a
beta of 1.2. The risk-free rate is 6% and the market risk premium is 6%.

Define and identify the type of Income / Expenses
- Treatment of the Income / Expenses in the Profit and Loss account, Impact of the
Income / Expenses in the Balance Sheet.
You purchased 10 shares of L& T Company last year. On 5th March 2019, the company has declared a dividend Rs 50 per share. The income is earned but not yet collected in your account during this financial year.

Doug, a resident of Australia, receives a $10,000 dividend franked to 100% ($4,285 franking credits).

He has also earned bank interest of $1,500 and has allowable deductions of $510 for the year of

income.

Required:

Calculate Doug’s net tax payable / refundable that would be assessed in relation to the year ended 30

June 2019.

The new project is likely to give a rate of return of 14% before taxes. An investment
company is willing to finance the project through a private placement of 5 crore in the
form of 10% p.a. interest bearing bonds. Apollo’s shares have historically been selling at
P/E of 10. Current earnings are Rs.2.70 and the company is in the 50% tax bracket.
The present Capital structure of the company is:
Long term debt (8%) 1,00,00,000
Common Stock (Rs.2 par value, 1 crore shares outstanding) 2,00,00,000
Retained earnings 17,00,00,000
Total capital 20,00,00,000
before tax marginal cost of the project is 10% (interest on
new loan) and the likely before tax returns from the project are higher than 10% the
company should go ahead. Discuss.
P/E declines to 9, what level of
annual earnings (before interest and taxes) must the new project generate in order to
meet the company’s objective of no change in the value of the stock price.

You recently accepted an assignment with Oxford Limited as a financial consultant. One of your first
assignments is the analysis of two proposed capital investment projects. Details of initial investments,
after-tax cash flows and average annual profits are represented below:
Year After-tax Cash flows
Initial investments
Cash flows
Average annual profits
1
2
3
4
Project A Project B
(R50 000)
R26 200
R12 200
R12 200
R5 000
R1 400
(R50 000)
R14 200
R14 200
R14 200
R14 200
R1 700
2.1. Which project has a shorter payback period? Motivate your answer by doing the relevant
calculations (answers expressed in years, months, and days)

Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.

Mr. Rahul has been saving Rs.9,500 at the beginning of every quarter for 25 years at an
average return of 14% p.a. compounded quarterly. He has to set apart Rs.15,00,000 for
his daughter’s marriage and Rs.10,00,000 for his son’s marriage from accumulated sum
after 25 years. He is saving separately for their education and he wishes to withdraw a
certain amount for the next 25 years on the remaining sum. The money accumulated will
be invested at a rate of 8% p.a. How much can he withdraw at the beginning of every
year?

A stock follows a Geometric Brownian Motion. This means its log returns are normal and the stock price will be lognormal. The annualized expected value of the log returns is 20%, and the annualized the standard deviation is 30%. The risk free rate is 5% continuously compounded and the dividend yield is 2% also continuously compounded. The initial stock price is $30.


An investor buys a weird product. It pays out the stock price in odd years and the stock price/2 in even years. This continues for 6 years. There is no cash flow in year zero, so this product produces 6 cash flows in years 1,2,3,4,5,6. On top of this in year 6 the contract pays out max(2*S(6)-60,0)
What is the fair price of this weird contract. Please explain each step in your computations. Construct a confidence interval for the price, explaining each step. Attach the output of your excel computations which illustrate exactly what you have done.