ACC501 – Business Finance

Practice Questions (SOLUTION)

(Lesson # 1 – 18)
1. The following data is available for ZT Corporation for the year ended 31 December 2023.
You are required to prepare the Balance Sheet of this corporation:
• Short-term debt of Rs. 40,000
• Long-term debt of Rs. 500,000
• Current assets of Rs. 240,000
• Net fixed assets of Rs. 650,000

Solution:
ZT Corporation
Balance Sheet
As on December 31, 2023
Assets (Rs.) Liabilities & Equity (Rs.)
Current Assets 240,000 Short-term debt 40,000

Net Fixed Assets 650,000 Long-term debt 500,000

Shareholder’s equity 350,000

Total Assets 890,000 Total Liab. & Equity 890,000

2. Calculate the Shareholder’s Equity of the ZT Company, if the company has:

Items Rs.
(in millions)
Cash and equivalents 425
Accounts payable 290
Notes payable 287
Inventories 329
Property, plant, & equipment 1470
Long term debts 578

Solution:

Total Assets = 425 + 329 + 1470 = 2,224

Total Liabilities = 290 + 287 + 578 = 1,155

Accounting Equation:
Total Assets = Total Liabilities + Shareholders’ Equity

Shareholders’ Equity = Total Assets – Total Liabilities

= 2,224 – 1,155
Shareholders’ Equity = Rs. 1,069 million
3. Ali Corporation has a taxable income of Rs. 85,000. What will be the Total Tax for this
Corporation? Use the following schedule for tax calculations.

Taxable Income Tax Rate (%)

Rs. 0 - 50,000 15
50,001 - 75,000 25
75,001 - 100,000 34
100,001- 335,000 39

Solution:

Rs. 50,000 x 15% = Rs. 7,500

(Rs. 50,001 – 75,000) x 25% = Rs. 6,250

(Rs. 75,001 – 85,000) x 34% = Rs. 3,400

Total Tax = Rs. 17,150

4. From the following information of Alfa Corporation, calculate the “Operating Cash Flow”:
Particulars Rs.
Sales 13,500
Cost of Goods Sold 6,400
Deprecation 12,00
Interest Expense 680
Tax 150

Solution:

Operating Cash Flow = Sales – Cost of Goods Sold + Depreciation – Tax

= 13,500 – 6,400 + 12,00 - 150
= Rs. 8,150

5. What would be the Net Capital Spending if Alfa Corporation had fixed assets of Rs.
100,000 at the start of the accounting year whereas, at the end of the same accounting
period, the value of these assets is Rs. 150,000 while the depreciation is of Rs. 20,000 as
per the yearly income statement.

Solution:

Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation
= 150,000 – 100,000 + 20,000
Net Capital Spending = Rs. 70,000
6. You are required to calculate Cash Flow to the Creditors and Cash Flow to the Stockholders
from the following financial data:
Cash Flows Rs. (‘000)
Operating cash flow 330
Capital spending 150
Additions to net working capital 25
Interest paid 45
Retirement of debt 116
Proceeds from new debt sales 76
Dividends paid 52
Repurchase of Stock 12
Proceeds from new stock issue 45

Solution:

Cash Flow to Creditors Rs.

Interest -45
Retirement of debt -116
Debt service -161
Proceeds from new debt sales 76
Total -85
Cash Flow to Stockholders Rs.
Dividends -52
Repurchase of Stock -12
Cash to Stockholders -64
Proceeds from new stock issue 45
Total -19

7. From the given information of Alfa Corporation, you are required to calculate the Cash
Flow from the firm’s assets and the Cash Flow to the investors:
Cash Flows Rs. (‘000)
Operating cash flow 325
Debt 95
Capital spending 179
Equity 27
Additions to net working capital 32

Solution:

ABC Firm
Financial Cash Flow
For the Year
Cash Received from Firm’s Assets Rs. (‘000)
Operating cash flow 325
Capital spending -179
 Additions to net working capital -32
Total 114
Total Cash Flow of Investors
Debt 95
Equity 27
Total 122

8. From the given information, prepare the Cash Flow Statement of Alfa Corporation by
estimating cash flows from operations, investments, and financing:
Cash flows Rs. (in '000)
Net Income 8,500
Acquisition of fixed assets 19,700
Proceeds from long-term debt sales 8,500
Dividends Paid 4,200
Sales of fixed assets 2,400
Increase in accounts receivable 2,300

Solution:

Alfa CORPORATION
Statement of Cash Flows
Operations Rs. (in '000')
Net Income 8,500.00
Accounts Receivable (2,300.00)
Total Cash Flow from Operations 6,200.00
Investing Activities
Acquisition of fixed assets (19,700.00)
Sales of fixed assets 2,400.00
Total Cash Flow from Investing Activities (17,300.00)
Financing Activities
Proceeds from long-term debt sales 8,500.00
Dividends (4,200.00)
Total Cash Flow from Financing 4,300.00
Change in Cash (on the balance sheet) (6,800.00)
9. From the following data pertaining to XYZ Corporation, you are required to calculate the
Current Ratio along with complete calculations:
Items Rs.
Cash 450,000
Accounts receivable 525,000
Accounts payable 830,000
Land and Machinery 620,000
Inventory 310,000
Notes payable 120,000

Solution:

Current assets = Cash + Accounts receivable + inventory

Current assets = 450,000 + 525,000 + 310,000
Current assets = Rs. 1,285,000
Current Liabilities = Accounts payable + Notes payable
Current Liabilities = 830,000 + 120,000
Current Liabilities = 950,000
Current ratio = Current assets / Current liabilities
Current ratio = 1,285,000 / 950,000
Current ratio = 1.35 times

10. The following data represents the assets side of a corporation. You are required to convert
this data into a common size (standardized) statement.
Rs.
Particulars
(Million)
Current Assets
Cash 92
Receivables 178
Inventories 390
Total Current Assets 660
Fixed Assets
Plant and Machinery 2820
Total Assets 3480

Solution:
Rs. (Million)
Current Assets
Cash 2.64%
Receivables 5.11%
Inventories 11.20%
Total Current Assets 18.97%
Fixed Assets
Plant and Machinery 81.03%
Total Assets 100%
11. From the following data of a company, calculate the Current Ratio and Quick Ratio:
Items Rs.
Net profit 42,500
Cost of goods sold 365,000
Sales 525,000
Cash 63,000
Accounts payable 162,000
Accounts receivable 173,000
Net fixed assets 752,000
Inventory 87,000
Accruals 145,000
Bank loan and short-term loan 63,000
Common stock 165,000
Long term debt 425,000
Retained earnings 145,000

Solution:

Current Assets = 323,000

Current liabilities = 370,000

Current Ratio = Current Assets/Current Liabilities

= 323,000/ 370,000
Current Ratio = 0.87 times

Quick Ratio = (Current Assets – Inventory)/ Current Liabilities

= (323,000 – 87,000) / 370,000
= 236,000/ 370,000
Quick Ratio = 0.64 times

Working
Current Assets Rs.
Cash 63,000
Accounts receivable 173,000
Inventory 87,000
Total 323,000

Current Liabilities Rs.

Accounts payable 162,000
Accruals 145,000
Bank loans and short-term loan 63,000
Total 370,000
12. You are required to calculate “Receivables Turnover” and “Average Collection Period”
from the given data:
Items Rs. (‘000)
Accounts receivable 1,850
Inventory 6,550
Accounts payable 1,700
Sales 13,500
Net profit 3,500

Solution:

Receivables Turnover = Sales/Accounts Receivables

= 13500/1850
Receivables Turnover = 7.29 times

Average Collection Period = 365/Receivables Turnover

= 365/7.29
Average Collection Period = 50.06 or 50 days

13. From the following information, you are required to calculate the Total Debt Ratio:
Items Rs.
Current Assets 500,000
Land 200,000
Building 100,000
Machinery 400,000
Total Equity 1,000,000

Solution:

Total Assets = Current assets + Land + building + Machinery

= 500,000 + 200,000 + 100,000 + 400,000
Total Assets = Rs. 1,200,000

Total Debt Ratio = Total assets - Total Equity / Total assets

= 1,200,000 – 1,000,000 / 1,200,000
Total Debt Ratio = 0.166 times

14. From the given information of Alfa Corporation, calculate its Debt Ratio, Equity Ratio and
Debt-to-Equity (D/E) Ratio:
Items Rs.
Cash 25,000
Accounts receivable 160,000
Inventory 50,000
Net fixed assets 640,000
Accounts payable 84,000
Accruals 110,000
 Bank loan and short-term loan 64,000
Long term debt 260,000
Common stock 140,000
Retained earnings 130,000
Sales 430,000
Cost of goods sold 220,000
Net profit 32,000

Solution:

Total Asset = Rs. 875,000

Total Debt = Rs. 518,000

Total Debt Ratio = Total Debt/Total Asset

= 518,000/ 875,000
Total Debt Ratio = 0.592 or 59.2%

Total Equity Ratio = Total Equity/Total Asset

= (875,000 – 518,000) / 875000
Total Equity Ratio = 0.408 or 40.8%

Total Equity Ratio can also be calculated as follows:

Total Equity Raio = 1 – Total Debt Ratio
= 1 – 0.592
= 0.408 or 40.8%

Debt-Equity Ratio = Total Debt / Total Equity

= 518,000 / (875,000 – 518,000)
Debt-Equity Ratio = 1.45 times

Working for Total Assets & Total Debt

Cash 25,000
Accounts receivable 160,000
Inventory 50,000
Net fixed assets 640,000
Total Assets 875,000

Accounts payable 84,000

Accruals 110,000
Bank loan and short-term loan 64,000
Long-term debt 260,000
Total Debt 518,000
15. From the given information calculate the following ratios of Alfa Corporation:
• Interest Coverage Ratio
• Cash Coverage Ratio
• Inventory turnover Ratio
• Day’s sales in Inventory
• Receivables turnover
Alfa Corporation.
Income Statement
Particulars Rs. (‘000)
Net Sales 4,222
Cost of Goods Sold (2,355)
Depreciation (374)
Earnings before interest and taxes 1,493
Interest (240)
Taxable Income 1,253
Taxes (277)
Net Income 976
Dividends 488
Retained Earnings 488
Additional Information
The inventory of the firm is worth Rs. 512,000 while accounts receivable are Rs. 280,000.

Solution:

Interest Coverage Ratio = EBIT / Interest

= 1493 / 240
Interest Coverage Ratio = 6.2 times

Cash Coverage Ratio = (EBIT + Depreciation) / Interest

= (1,493+374) / 240
Cash Coverage Ratio = 7.8 times

Inventory turnover Ratio Cost of Goods Sold / Inventory

= 2355 / 512
Inventory turnover Ratio = 4.6 times

Day’s sales in Inventory = 365 Days / Inventory Turnover

= 365 / 4.6
Day’s sales in Inventory = 79.3 days

Receivables turnover Sales / Accounts Receivables

= 4222 / 280
Receivables turnover = 15.1 times
16. From the data given below, compute “Earning per Share” and “Price-Earnings Ratio”:
Items Rs.
(in Millions)
Current Assets 470
Net Fixed Assets 550
Outstanding shares 65
Sales 830
Net Income 615
Market price per share 65
Solution:

Earnings per Share (EPS) = Net Income / Outstanding shares

= 615 / 65
Earnings per Share (EPS) = Rs. 9.46 per share

Price-Earnings Ratio = Price per share / Earnings per share

= 65 / 9.46
Price-Earnings Ratio = 6.87 times

17. From the given information, estimate the figures of total assets and total equity to further
calculate Return on Assets (ROA) and Return on Equity (ROE):
Items Rs.
Cash 30,000
Accounts receivable 89,000
Inventory 90,000
Net fixed assets 680,000
Accounts payable 155,000
Accruals 125,000
Bank loan and short-term loan 60,000
Long term debt 250,000
Common stock 250,000
Retained earnings 100,000
Sales 530,000
Cost of goods sold 360,000
Net profit 45,000

Solution:

Total Assets = Rs. 889,000

Total Equity = Rs. 350,000

Return on Assets (ROA) = Net income / Total asset

= 45,000 / 889,000
Return on Assets (ROA) = 0.051 or 5.1%

Return on Equity (ROE) = Net income/Total equity

= 45,000 / 350,000
Return on Equity (ROE) = 0.129 or 12.9%
 Alternate formula for calculating ROE:
Return on Equity (ROE) = ROA* (1+ Debt-Equity Ratio)
= 5.06 * (1 + 1.54)
= 5.06 * 2.54
Return on Equity (ROE) = 0.129 or 12.9%

Working for Total Assets, Total Equity & Debt-Equity Ratio

Cash 30,000
Accounts receivable 89,000
Inventory 90,000
Net fixed assets 680,000
Total Assets 889,000

Common stock 250,000

Retained earnings 100,000
Total Equity 350,000

D/E Ratio = Total Debt / Total Equity

= (Total Assets – Total Equity) / Total Equity
= (889,000 – 350,000) / 350,000
D/E Ratio = 1.54 times

18. A company has a dividend payout ratio of 25%. Calculate its retention ratio and the amount
disbursed as dividends to shareholders if the net income of the company is Rs. 500 million.

Solution:

Retention Ratio = 1 – Dividend Payout Ratio

= 1 – 25%
Retention Ratio = 75%

Dividends = 500 million * 0.25 [500,000,000 x 25 / 100]

Dividends = Rs.125 million [Rs. 125,000,000]

19. The following data pertains to XYZ Company:

Particulars Rs. (millions) Particulars Rs. (millions)
Gross Income 380 Cash Dividends 150
Net Income 200 Retained Earnings 50

You are required to calculate “Dividend Payout Ratio” and “Retention Ratio”.
Solution:

Dividend Payout Ratio = (Cash Dividends / Net Income) * 100

= (150 / 200) *100
Dividend Payout Ratio = 75%

Retention Ratio = (Retained Earnings / Net Income) *100

= (50 / 200) *100
Retention Ratio = 25%

Or,
Retention Ratio = 1 – Dividend Payout Ratio
= 1 – 0.75
Retention Ratio = 0.25 or 25%

20. Calculate the maximum sustainable rate of growth for a firm with an ROE (Return on
Equity) of 15 percent and dividend payout ratio of 35 percent.

Solution:

Retention Ratio = b = 1 – Payout Ratio

= 1 – 35%
= 65%

Sustainable Growth Rate = (ROE x b) / 1 – (ROE x b)

= (0.15 x 0.65) / 1 – (0.15 x 0.65)
= 0.0975 / 0.9025
Sustainable Growth Rate = 0.1080 or 10.80%

21. By using the given information of a firm, calculate its Return of Equity (ROE) using
DuPont analysis technique:
Items Rs.
Cash 4,665
Accounts Receivable 5,250
Inventory 5,160
Net Plant and Equipment 35,400
Common Stock and Paid in surplus 9,900
Retained Earning 16,500
Net Income 9,900
Sales Revenue 34,500

Solution:

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = (Net Income/Revenues) x (Revenues/Total Assets) x (Total Assets/Shareholders' Equity)
 Profit Margin = Net Income / Revenue
= 9,900 / 34,500
Profit Margin = 0.2870 or 28.70%
Total Asset Turnover = Revenue / Total Assets
= 34,500 / 50,475
Total Asset Turnover = 0.6835 or 68.35%
Financial Leverage = Total Assets / Shareholders’ Equity
= 50,475 / 26,400
Financial Leverage = 1.91
ROE = 0.2870 * 0.6835 * 1.91
ROE = 0.3747 or 37.47 %

Working:
Total Assets = 4,665 + 5,250 + 5,160 + 35,400 = 50,475
Shareholders’ Equity = 9,900 + 16,500 = Rs. 26,400

22. Mr. Abid is planning to invest Rs. 500,000 at a simple interest rate of 8% for 5 years.
Calculate how much amount he would have after three years.

Solution:

Future Value = Present Value (1+rt)

= 500,000 (1+0.08*5)
= 500,000 (1+0.4)
= 500,000 (1.4)
FV = Rs. 700,000

23. Mr. Shakir is planning to invest Rs. 500,000 at a compound interest rate of 8% for 5 years.
Calculate how much amount he would have after three years.

Solution:

Future Value = Present Value (1+r)^t

= 500,000 (1+0.08)^5
= 500,000 (1.08)^5
= 500,000 (1.4693)
FV = Rs. 734,650

24. Mr. Nadeem plans to invest Rs. 1,000,000 for 5 years in a bank. Based on the information
provided below, suggest to him the best option for investment.
Annual Type of
Bank
Interest Rate Interest
Bank A 8.0% Simple Interest
Bank B 7.5% Compound Interest
Solution:

Bank A:
Future Value = Present Value (1+rt)
= 1,000,000 (1+ 0.08*5)
= 1,000,000 (1+ 0.40)
= 1,000,000 (1.40)
FV = Rs. 1,400,000

Bank B:
Future Value = Present Value (1+r)^t
= 1,000,000 (1+0.075)^5
= 1,000,000 (1.075)^5
= 1,000,000 (1.4356)
FV = Rs. 1,435,600

Though the rate offered by Bank B is lower than that of Bank A, but it is compounding in
nature, hence giving a higher return. So, Mr. Nadeem should invest his money in Bank B.

25. Mr. Anwar invested Rs.50,000 in a 12%, 60-day certificate of deposit, what will be the total
proceeds at the end of certificate of deposit period?

Solution:

FV = Present Value + (PV*R*T)

= 50,000 + (50,000*0.12*60/365)
= 50,000 + 986
FV = Rs. 50,986

26. If you anticipate a need of Rs. 600,000 for a vacation in two years and you can earn 8%
interest on your savings, how much should you invest today to cover the cost of your
vacation?

Solution:

Present Value = Future Value/ (1+Interest Rate)n

= 600,000 / (1+0.08)^2
= 600,000 / 1.1664
PV = Rs. 514,403

27. Suppose you are 20 years old now and can invest money at 12%. Your aim is to get Rs. 1,000,000
at the age of 40. Calculate the amount you should invest today.

Solution:

Present Value = Future Value / (1+r)^t

 = 1,000,000 / (1+0.12)^20
= 1,000,000 / (1.12)^20
= 1,000,000 / 9.6463
PV = Rs. 103,667

28. Suppose that you will receive Rs. 500,000 after 15 years from an investment into the bank.
You are now required to calculate the:
• Present value of the investment if you invest your money at 6 percent
compounded annually?
• Present value of your investment if you invest the same amount at 9 percent
compounded annually?

Solution:

Present Value @ 6%:

PV = FV / (1+r)t
= 500,000 / (1.06)15
= 500,000 / 2.3966
PV = Rs. 208,629

Present Value @ 9%:

PV = FV / (1+r)t
= 500,000 / (1.09)15
= 500,000 / 3.6425
PV = Rs. 137,268

29. Mr. Aqib needs Rs. 1,500,000 to buy a new vehicle. If he has Rs. 600,000 now to invest at
12 percent compounded annually, how long will it take to have the amount for buying new
vehicle?

Solution:

FV = PV ( 1 + r )t
1,500,000 = 600,000/ (1+ 0.12)t
(1 + 0.12)t = 1,500,000 / 600,000
(1.12)t = 2.5
log 1.12t = log 2.5 … [taking log on both sides]
t . log 1.12 = log 2.5 … [power rule for logarithms]
t = log 2.5 / log 1.12
t = 0.3979 / 0.0492
t = 8 years

30. Mr. Aqdas has Rs. 300,000 to invest today and he requires Rs. 500,000 after 5 years for his
child’s admission in a school. What interest rate he must earn on his investment to meet the
cost of school admission.
Solution:

FV = PV ( 1 + r )t
500,000 = 300,000 / (1+ r)5
(1 + r)5 = 500,000 / 300,000
(1 + r)5 = 1.67
1+r = 1.1080 … [taking power 1/3 on both sides]
r = 1.1080 – 1
r = 0.1080 or 10.80%

31. Considering the following year-end cash flows, calculate the present value if the discount
rate is 12%:
Years 1 2 3 4 5
Cash Flow (Rs.) 100,000 150,000 120,000 210,000 180,000

Solution:

PV = [(100,000 / 1.12)] + [150,000 / (1.12)2] + [120,000 / (1.12)3]

+ [210,000 / (1.12)4] + [180,000 / (1.12)5]

= (100,000 / 1.12) + (150,000 / 1.2544) + (120,000 / 1.4049)

+ (210,000 / 1.5735) + (180,000 / 1.7623]

= 89,286 + 119,579 + 85,415 + 133,460 + 102,139

PV = Rs. 529,879

32. Mr. Hassan plans to buy a new car for Rs. 2,000,000. The local bank will provide him a
loan at 10% per year (0.83% per month) for 5 years (60 months). How much will each
monthly payment be?

Solution:

PVA = PMT * [1 – 1 / (1 + r)t ] / r

2,000,000 = PMT x [ ( 1 - 1/(1.0083)60 ] / 0.0083

2,000,000 = PMT x 47.1090

PMT = 2,000,000 / 47.1090

PMT = Rs. 42,455 per month

33. Mr. Saeed wants to renovate his house after 5 years and requires Rs. 1,000,000 at that time.
He can earn 12% compounded annually if he decides to deposit an equal amount every year
for a period of 5 years. Find out the amount of each deposit.
Solution:

FVA = PMT * [(1+r)t – 1 ] / r

1,000,000 = PMT * [(1.12)5 – 1 ] / 0.12

1,000,000 = PMT * 6.3528

PMT = 1,000,000 / 6.3528

PMT = 157,411

34. An annuity with a cash inflow of Rs. 10,000 for each of the six (6) years assumes that
interest payments occur at the beginning of each year. What will be the future value of the
annuity after 5 years if it can earn 10 percent annually?

Solution:

FVAORDINARY = PMT x [(1 + r)t – 1 / r]

= 10,000 x [(1.10)6 – 1) / 0.10}]

= 10,000 x 7.7156

FVAORDINARY = Rs. 77,156

This is the value of ordinary annuity, but the question statements says that the
payments occur at the beginning of each year. So, it is a case of Annuity due.

FVADUE = FVAORDINARY * (1 + r)

= 77,156 * 1.10

FVADUE = Rs. 84,872

35. Determine the effective interest rate, compounded quarterly, equivalent to 15% annually.

Solution:

Effective Annual Rate = [ (1 + Quoted Rate / m)^m ] – 1

= [ (1 + 0.15 / 4)^4] – 1
= [ (1.0375)^4 ] – 1
= 1.1587 – 1
Effective Annual Rate = 0.1587 or 15.87%

36. A bank offers a 26% annual percentage rate (APR) on its consumer loan. The bank requires
you to make payments each month. What is the interest rate you actually pay?
Solution:

Effective Annual Rate =(1 + Quoted Rate / m )m – 1

= (1 + 0.26/12)12 – 1
= 1.2933– 1
EAR = 29.33%

37. A person intends to save up money for the future. Two banks provide following savings
account options. which banks provide a good choice for more effective interest rates.
• Bank A offers 22.5% rate compounded quarterly.
• Bank B offers 23 % rate compounded semi-annually.

Solution:
Bank A:
Effective Annual Rate = {1+ (i/m)} m -1
Effective Annual Rate =(1 + 0.225/4)4 – 1
Effective Annual Rate =(1 + 0.05625)4 – 1
Effective Annual Rate =1.2447-1
EAR = 24.47%

Bank B:
Effective annual interest rate = {1+ (i/m)} m -1
Effective Annual Rate =(1 + 0.23/2)2 – 1
Effective Annual Rate =(1 + 0.115)4 – 1
Effective Annual Rate=1. 1.2432 -1
EAR = 24.32%

Bank A is good because it has higher effective annual interest rate.

38. Let's say you are thinking about making an investment that will yield Rs 15,000 per year
for the next eight years. What is the cash flow series' present value if your opportunity rate
is 9%?

Solution:

PV = C × (1− {(1 / 1+r)t )} / r

PV = 15,000 × (1− {1/(1+0.09)8)} / 0.09
PV = 15,000 ×(1− {1 / 1.9925}) / 0.09
PV =15,000 ×(1−0.50187) / .09
PV = 15,000 × (0.49813) / 0.09=
PV= Rs. 83021.66

39. A bond having a 11% coupon rate and ten years to maturity is issued by a corporation. The
bond has a face value of 50,000 rupees. Determine the coupon's present value if the market
interest rate is 10%.
Solution:

Coupon payment = 50,000*11/100

= Rs. 5,500

PV of Coupon Payments = 5,500*(1-1/1.110)/0.1

= 5,500 * 6.14456
PV of Coupon Payments = Rs.33,795

40. Assume that a Company releases a 9-year bond with a face value of Rs. 10,000 and a
coupon rate of 8%. Given the current state of the market, what is the bond's current worth
assuming a 14% necessary rate of return is justified?

Solution:

Coupon payment = C = 10,000* 8% = Rs. 800

Value of Bond = C x [1-1/ (1+r) t]/r + F/ (1+r) t
=800 x [1-1/ (1+0.14)9]/0.14 + 10,000/ (1+0.14)9
= 800 x [4.9464] + 3075.07
= 3957.12+ 3075.07
Value of Bond = Rs.7,032.19

41. The face value of the bond issued by ABC Corporation is Rs. 2000. It provides Rs. 200 as
annual coupon for next 20 years. Determine the present value of the coupon payment if the
market demands a 10% rate of return on comparable bonds.

Solution:

Coupons payment PV = 200 x [1 - (1/1.1020)]/.10

= 200 x 8.5136
Coupons payment PV = 1,702.72

42. Bonds from SNT Inc. have a face value of Rs. 1200. The bonds mature in 12 years, with an
annual coupon of Rs. 100. For comparable bonds, the market requires a return of 10%.
Determine the bond's value and specify if it is a premium or discount bond.

Solution:

Present Value of the face value

= 1200 x [1/(1.10)12 ] = 1200 x 0.3186 = Rs. 382.35

Present Value of the coupon payments

= 100 x [1 - (1/(1.10)12)]/0.10 = 100 x 6.8187 = Rs. 681.37

Value of each bond = Rs. 382.35 + Rs. 681.37

Value of each bond = Rs. 1,064.22

As Bond Value >Face Value, so it would be a premium bond.