- Grid A

- Financial Apprasial on new projects and strategies

- Captical Budgeting process

- Identify the need ( expension / investment in new technology / replacement of
- Identify the alternative options which can fulfill the needs
- Gather the data regarding options identified
- Analyise the best option ( The salabus )
- Discussion in Captical budgeting committee
- Follow up's of results

- Basic Techniques
- Payback preoid method
- Accounting rate of return methord

- Advance Techniques
- NPV
- IRR
- MIRR
- Adjusted Present Value

- Pay Back preoid Method

- Time preoid that project will take to pay back the investment

- Even annual cash flow

Pay back preoi = initial Investment
Annual cash benefit

- Un Even Cash flow

- Illustration 02 ( Page 15 )

Cumm Cash Flow

Investment (90) (90)
Year 01 40 (50)
Year 02 30 (20)
Year 03 20 -
Year 04 20
Year 05 20
Year 05 Residu 4

- Pay back is 3 years

- Illustration 03, Solve your self

- If flaxibility is given then move towards easy side

 - In payback preoid Cash flows = Accounting profit + deprec

- Illustration 04, Solve your self

- Bail Out Payback

- Pay back preoid by taking innto account the exist rute.

- Illustration 05, Solve your self

- Advantages and dis-adantages of pay back preoid

- Accounting rate of return

- Can be calculated using initial captical or average employed

- Working Captical
- Curret asets less current liabilities

- Captical employed = Equity + Long term finances

- Illustration 06,

Year Acc Profit

1 25.00
2 37.00
3 29.00
4 45.00
5 15.00

- ARR Based on initial Cap employed

- ARR 15%

- ARR Based on Average Cap employed

- ARR 25%

- Average profit ( W-01 )

- Average profit 30.20

- Initial Investment ( W-02 )

- Initial Cap Employed = Initial Cap + Working Cap

- Average investment ( W-03 )

- Initial Cap Employed = ( ( Initial Cap + residual Value ) / 2 ) +

- Illustration 07 ( Solve your self )

- Advantages of ARR
- Time Value of Money
- Factors affecting the time value of money are as follows
- Inflation
- Opportunity to invest
- Uncertanity

- Discounting
- Carries future value to present value

- Example 01

- Investmet 10,000
- Intrest rate 10%

- Compounding 16,105

- Example 03

- Cash flow 10000

- Intrest rate 8%

- Present Value 7,350

- Net present Vaue

- Class Example 01

Time Line Cash flow PVF @ 10%

0 (90) 1.000
1 40 0.909
2 30 0.826
3 20 0.751
4 20 0.683
5 24 0.621
- Net present value

- The above project is benifical for the company , as the net pres

- Class example 02

Time Line Cash flow PVF @ 10%

0 (20) 1.000
1 10 0.909
2 8 0.826
3 6 0.751
4 4 0.683
 5 6 0.621
- Net present value

- The above project is benifical for the company , as the net pres

- Mutually Exclusive projects

- The projects that cannot be done similtanously i.e. at the same

- Internal Rate of Return ( IRR )

- The rate of return on which the net preent value of project is zero

NPV @ LR
- IRR farmoula = LR +
NPV @ LR - NPV @ HR

- Class Example 03

Time line Cash flow DF @ 15%

0 (90.00) 1.000
1 40.00 0.870
2 30.00 0.756
3 20.00 0.658
4 20.00 0.572
5 24.00 0.497
- Net Present Value

- IRR 17.22%

- Class Example 04

Time line Cash flow DF @ 10%

0 (20.00) 1.000
1 10.00 0.909
2 8.00 0.826
3 6.00 0.751
4 4.00 0.683
5 6.00 0.621
- Net Present Value

- IRR 23.42%

- Class example 05

Time line Cash flow DF @ 5%

0 (500.00) 1.000
1 80.00 0.952
 2 120.00 0.907
3 170.00 0.864
4 125.00 0.823
5 175.00 0.784

- IRR 10.59%

- As cost of captical as given in the question is 12

- Specilized Cash flow discounting

- Annuity Factor

- Types of Annuity
- Normal Annuity
- Delayed Annuity
- Advance Annuity

- Illustration 13
Cash flow Preoid

Option A 1,000 Time Line 1 - 5

Option B 1,000 Time Line 0 - 4

Option C 1,000 Time Line 4 - 8

- Class Practice
Cash flow Preoid

Option 3 18,000 Time Line 0 - 18

Option 2 6,000 Time Line 1 - 12

Option 1 4,000 Time Line 4 - 15

Option 4 80,000 Time Line 6 - 20

- Perpatuity
- Even cash flow
- Cash flow will continue till foreseable future
- After same interval

- Types of Perpatuity
- Normal Perpatuity
- Delayed Perpatuity
- Advance Perpatuity

- Discounting with different discount rate

- Illustration 19 , Solve your self

- Discounting with non annual cash fows

- Adjust the discount rate to match with the frequency of cash flows

- Concept of sinking fund

- The amount invested today , so that the amount become equle to the amount

- Illustration 22

- Amount requried in future

- Annual rate of intrest
- Time preoid

- Solution
- Calculate the PV 2,779,161
- Annuity Factor 6.71

- Amount requried 414,182

- Identifying relevent cash flows

- Material
- Labour
- Over heads

- Illustration 24 ( Page 35 )

- Marerial A
- New stock
- Scrap value
- Relevent cost
- Material B
- Relevent cost
- Material C
- Relevent cost higher of
Scrap value 12,000
Alternate use 20,000
- Material D
- Relevent cost , Saving in disposal cost
 - Skilled labour
- Relevent cost
- Sami skiled labour
- Relevent cost of 2000 hrs
- Relevent cost of 500 hrs
- Un Skilled Labour
- Relevent cost

- Total

- Illustration No 25 ( page 37 )
- Do it your self

- Assumptions in DCF techniques ( Page 38 )

- Discounted payback preoid ( Page 37 )

- Illustration 26 ( Page 39 )

- Time line 0

- Initial investment (1,000)

- Net operating cash flows ( W-01 ) -

- Net project cash flows (1,000)

- Discount Factor @ 8% 1.00

- Present value (1,000.00)

- Net present value 186.66

- Discount Factor @ 20% 1.000

- Present value (1,000.00)

- Net present value (96.03)

- Internal Rate of return 15.92%

- A requirement
- Cummulative Value (1,000)
- Pay back preoid 3.02
 - requirement D
- Cummulative Value (1,000.00)
- Discounted pay back preoid 3.45

- Working 01

- Time line 0

- Annual sales volume -

- Contribution ( 25-8-10) -

- Contribution -
- Annual Fixed Cost -

- Net operating cash flows -

- Requirement F

- Initial Cap investment

- Net operating cash flows

- Net present value

- Re investment Assumption of IRR ( page 40 )

- Modified internal rate of return ( MIRR )

- Exam Note

- Money cash flow --------------------------------->> Inflation adjusted cash flows

- Real Cash flows --------------------------------->> Cash flown in todays prices

- Coversion farmoula ----------------------->> MCF = RCF *( 1 + I ) ^n

- In order to discount money cash flows , we need to use inflated adjusted rate

- Illustration 30 ( Page 44 )
- Real
Preoid Cash Flow
 - Investment 0 (50,000)
- Return 1-4 20,000

- W-01 ) Real rate

( 1+ 15% ) = ( 1+r)*(1+5.5%)

- Nominal

Time line 0

- Initial Investment (50,000.00)

- Annual Cash flows

- Cash flows (50,000.00)

- Disc Fact @ 15% 1.000

- Present value (50,000.00)

- Net present value 14,787.66

- Illustration 31

- Real
Preoid Cash Flow

- Investment 0 (1,700)
- Return 1 100
- Return 2 200
- Return 3-10 300

- W-01 ) Real rate

( 1+ 11.24% ) = ( 1+r)*(1+3%)

- Illustration 32

Time line 0 1

- Initial Capex (7,000)

- Annual Wage saving 1,100
- Material Saving 420

- Net cash flows (7,000) 1,520

- Disc Fact @ 15% 1.000 0.870
 - Present value (7,000.00) 1,321.74

- NPV (1,080.64)

- Conversion of intrest rate

( 1+ m ) = ( 1+8.5%)*(1+6%)

- Dealing with Working captical expanditure

- Illustration 33 , DIY
- Illustration 34 , DIY

- Taxation in DCF technique

- Illustration 35 , DIY

- Taxation in DCF technique

- Illustration 36

- Depreciation Schedule

- Year 1 2 3

- Cost 5,000 3,750 2,813

- Dep (1,250) (938) (703)

- WDV 3,750 2,813 2,109

- Gain or Loss calculation

- Sales proceeds 4,000
- WDV 1,187

- Gain 2,813

- Illustration 37

Time line 0 1

- Capex (90,000)
- Operating cash flows 45,000
- Taxation ( Working 01 )
 - Cash flows (90,000) 45,000
- Disc Fac @ 12% 1.000 0.893

- Present value (90,000) 40,179

- Net present value 1,704

- Working 01 , Taxation

- Time line 1 2

- Operating cash flow 45,000 60,000

- Tax Depreciation (22,500) (16,875)
- Loss 0 (35,625)
- Taxable profit 22,500 7,500
- Tax @ 30% 6,750 2,250

- Working 02 Depreciation

- Depreciation Schedule

- Year 1 2

- Cost 90,000 67,500

- Dep (22,500) (16,875)

- WDV 67,500 50,625

- Gain / Loss
- WDV 50,625
- Sale proceeds 15,000

- Loss 35,625

- Illustration 38

- Time Lline 0 1

- Capex (40,000) -
- Annual cost saving - 14,000
- Taxation - 3,000

- Cash Flows (40,000) 17,000

- Disc Fact @ 8% 1.000 0.926

- Present Value (40,000) 15,741

- Net Present Value 11,013

- Working 01 Taxation

- Time line 0 1

- Cash flows - 14,000

- Tax depreciation (10,000) (7,500)
- Gain on disposal - -

- Profits (10,000) 6,500

- Tax @ 30% 3,000 (1,950)

- Working 02 - Tax depreciation

- Depreciation Schedule

- Year 0 1 2

- Cost 40,000 30,000 22,500

- Dep (10,000) (7,500) (5,625)

- WDV 30,000 22,500 16,875

- Working 03 , Gain / Loss

- WDV 9,492
- Sale proceeds 15,000

- Gain / Loss 5,508

- Illustration 39

- Time line 0 1

- Capex (4,500) -
- Working captical (w01) (300) (120)
- Net operating CF (w02) - 1,857
- Taxation (w02) - -
- Cash flows (4,800) 1,737
- Disc Fact @ 15% 1.000 0.870

- Present Value (4,800) 1,510

- Net present value 1,440

- Cash flows (4,800) 1,737

- Disc Fact @ 20% 1.000 0.833

- Present Value (4,800) 1,448

- Net present value 766

- IRR Calculation 25.69%

- Working 01 , Working Cap ( Rs in 000 )

Year 0 1

- Cashfllow 300 400

- Infaltion 1.00 1.05

- Inflated CF 300 420

- Change (300) (120)

- Working 02 , Operating cash flows ( Rs in 000 )

Year 0 1

Inflation @ 5% 1.00 1.05

Inflation @ 10 1.00 1.10

Revenue - 3,675
Marteial - (589)
Labour - (1,177)
Overheads - (53)

Cash flow - 1,857

Tax Dep - (1,125)
Loss - -

- Tax profit - 732

Tax @ 35% - (256.20)
 - Working 03 , Tax Depreciation ( Rs in 000 )

Year 1 2

Investmrnt 4,500 3,375

Depreciation (1,125) (844)

- WDV 3,375 2,531

- Disposal
WDV
Sale proceeds

- Loss

- Kohat Limited ( Quesrtion 01 ) , Page 74

RS in B

- Time Line 0 1

Capex (15.00) -
Net operatig cash fows (w01) - 5.00
Taxation (w01) - (0.60)

- Cash flows (15.00) 4.40

Disc Factor @ 18% 1.00 0.85

- Present Value (15.00) 3.73

- Net present Value (2.86)

- Working 01 ( RS In Billions )

- Time Line 1 2

Revenue @ 5% 8.00 8.40

Operating costs (W-02) (2.00) (2.21)
Wages (W02) (1.00) (1.12)

- Cash flows 5.00 5.08

- Tax depreciation (3.00) (2.40)
- Loss on Disposal - -

- Profit 2.00 2.68

- Tax @ 30% (0.60) (0.80)
 - Working 02

PV*(1+r)^n = FV 10.33%

PV*(1+r)^n = FV 11.73%

- Working 03 Tax depreciation ( RS in billion )

Year 1 2

Cost 15.00 12.00

Dep (3.00) (2.40)

WDV 12.00 9.60

- Sale perceeds

WDV 4.92
Sale proceeds 3

Loss 1.92

- Working 04 , Cost of captical

Cost of Cap 17.66%

- Illustration 40 ( Page 49 )

Time line 1 2

Capex (209,000) -
Net operating cash flow (w01) 20,700 99,475
Taxation - 11,043

Cash flows (188,300) 110,518

Disc Fac @ 20% 0.833 0.694

Present Vaue (156,917) 76,748

 Net present value 1,690

- Working 01 , Net operating cash flow

Time line 1 2

Revenue - 42.35
Material - (9.68)
Labour - (7.93)
Variable OH - (4.84)

Contribution per unit - 19.90

Units - 5,000.00

Annual Contribution - 99,475.00

Over haule - -
Redudency cost 20,700.00 -

- Net operating cash flows 20,700.00 99,475.00

- Taxable Depreciation (52,250.00) (39,187.50)
- Loss - -

Profit / ( Loss ) (31,550.00) 60,287.50

- Tax @ 35% 11,042.50 (21,100.63)

- Working 02 , Tax Depreciation

Year 1 2

Cost 209,000 156,750

Depreciation (52,250) (39,188)

WDV 156,750 117,563

- Disposal proceeds

WDV
Sale proceeds

Loss

- Asset Replacement Decision

- Which of the two assets from the available options we should purchase
 - After how many years we shall replace the asset

- Illustration 41

Cash flows
Time Line
R S

0 (120) (60)
1 (20) (40)
2 (20) (35)
3 (10) -

- Net present Value (170) (135)

- Annuity Factor

- EAC

- So option R is more feasiable

- Illustration 42

Cash Flows
Time Line
Rep After 1 YeaRep After 2 Year

0 (12,000) (12,000)
1 9,000 (1,500)
2 7,500
3

- Net present Value (3,000) (6,000)

- Annuity Factor

- EAC

- Iillustration 43 , A - Part

Cash Flows
Time Line
Rep After 1 YeaRep After 2 Year

0 (25,000) (25,000)
1 7,500 (7,500)
2 - -
3 - -
4 - -
 - Net present Value (17,500) (32,500)
- Annuity Factor

- EAC

- Iillustration 43 , B - Part

- Option 01 , Replace now

Preoid Cash flow Disc Fac

0 8,500 1.00
1 (17,625) 10.00

- Option 02 , Replace after 1 Year

Preoid Cash flow Disc Fac

1 (4,000) 0.91
2 (17,625) 9.09

- Option 03 , Replace after 2 Year

Preoid Cash flow Disc Fac

1 (9,000) 0.91
2 (9,500) 0.83
3 (17,625) 8.26

- Option 04 , Replace after 3 Year

Preoid Cash flow Disc Fac

1 (9,000) 0.91
2 (12,000) 0.83
3 (15,000) 0.75
4 (17,625) 7.51
- Asset Replacement decision involving Inflation

- Question No 2 ( CDN ) Page 76

- Option No 01 , Replace after two years ( Rs in 000 )

Time line 0 1 2

- Cost of Machine ( @ 10% ) (3,200) - (3,872)

- Maintaince Cost ( @ 15% ) - (150) (324)
- Residual Value ( @ 8% ) - - 1,493

- Net Cash Flows (3,200) (150) (2,703)

- Disc Fac @ 18% 1.000 0.847 0.718

- Present Value (3,200) (127) (1,941)

- Net Present Vaue (6,699)

- Option No 02 , Replace after three years ( Rs in 000 )

Time line 0 1 2

- Cost of Machine ( @ 10% ) (3,200) - -

- Maintaince Cost ( @ 15% ) - (150) (324)
- Residual Value ( @ 8% ) - - -

- Net Cash Flows (3,200) (150) (324)

- Disc Fac @ 18% 1.000 0.847 0.718

- Present Value (3,200) (127) (233)

- Net Present Vaue (6,392)

- Three years replacement cycle is best

- Investment decision under captical rationaing ( Page 52 )

- Illustration 44 ( Page 54 ) , RS IN ( 000 )

- Projects - Initial Invest - NPV -PI - Ranking

C 40 20 0.50 1
D 100 35 0.35 3
E 50 24 0.48 2
F 60 18 0.30 4

- Part A
 - Invest all available funds in the order of ranking

- Project - Invest - NPV

C 40.00 20.00
E 50.00 24.00
D @ 10% 10.00 3.50
100.00 47.50

- Part B
- Invest all available funds in the order of ranking

- Project - Invest - NPV

C 40.00 20.00
D @ 60% 60.00 21.00

100.00 41.00

- Part C
- Using hit and trial method prepare possible invest combination to achive highe

- Project - Invest - NPV

C 40.00 20.00
E 50.00 24.00

90.00 44.00

- Project - Invest - NPV

C 40.00 20.00
F 60.00 18.00

100.00 38.00

- Part D

- Project - Invest - NPV

C 40.00 20.00
F 60.00 18.00

100.00 38.00

- Question No 3 ( Page 76 ) , Amount in Million

- Part A

- Projects - Initial Invest - NPV -PI - Ranking

 A 150 18 0.120 4
B 200 34 0.170 1
C 250 24 0.096 6
D 225 24 0.107 5
E 60 9 0.150 2
F 100 14 0.140 3

- Available Funds = 500 Million

- Projects - Initial Invest - NPV - Projects

B 200.00 34.00 B
E @ 120% 72.00 10.80 E @ 120%
F 100.00 14.00 A
D @ 57% 128.00 13.68 F @ 78%
500 72.48

- Part B

- Time line 0 1 2

F @ 22% (22.00) 6.60 6.60

C @ 120% (300.00) 108.00 108.00
D @ 120% (264.00) 120.00 120.00

- Cash Flow (586.00) 234.60 234.60

- Disc Fac @ 5% 1.000 0.952 0.907

- Present Value (586.00) 223.43 212.79

- Net Present value 139.12

- Cash Flow (586.00) 234.60 234.60

- Disc Fac @ 20% 1.000 0.833 0.694

- Present Value (586.00) 195.50 162.92

- Net Present value (46.83)

- IRR 16.22%

- illustration 45 ( page 45 ) , Amount in million

Cash Fow time lline Present Value Factor @

- Project
0 1 2 0
Sodium (20.00) (30.00) 80.00 1.000
Megnesium (40.00) 5.00 55.00 1.000
 Alliminum (50.00) (25.00) 115.00 1.000
Silicon (40.00) (5.00) 75.00 1.000
Phosphorus (30.00) (20.00) 80.00 1.000

- Requirement (180.00) (75.00)

- Available 200.00 50.00

- Funds already available 50.00

- Funds produced by project Magnesium 5.00
- Total available 55.00

Project - Investment - NPV

Silicon (5.00) 7.92
Phosphorus (20.00) 8.89
Sodium (30.00) 10.56
(55.00) 27.36

'- Multi preoid Captical rationaling

- Illustration 46 ( Page 56 )

- Question no 04 ( Mars Investment ) , Page 79

- Investment decisions under Risk and Uncettanity ( Page 58 )

- Sensitivity Analysis

- Method 01
- We shall be told regading the change in one variabe and will be requried to re calculate the NPV
- Illustration 47 , Review on book

- Method 02
- How much change in the variable , that will bring the NPV of the project to Zero.

- Illustration 49 ( page 61 )

Description Year Cash Flow Disc Fac @ 15%

- Initial investment 0 (500,000) 1.00

 - Residual Value 3 80,000 0.658
- Revenue 1-3 600,000 2.283
- Variable Cost 1-3 (350,000) 2.283
- Incremental FC 1-3 (40,000) 2.283

- NPV of the project

- IRR 18.69%

- Sensivity Analysis
- Initial investment 6.41%
- Scrap Vaue 60.89%
- Selling price 2.34%
- Variable Cost 4.01%
- Annual Fixed Cost 35.08%
- Sales Volume 5.61%
- Cost of Captical 3.69%
- Project Life 5.61%

- Discounted pay back

- Time Line 0 1 2

- Investment (500,000)
- Revenue 600,000 600,000
- Variable Cost (350,000) (350,000)
- Annual FC (40,000) (40,000)

- Cash Flow (500,000) 210,000 210,000

- Disc Factor 1.000 0.870 0.756

- Present value (500,000) 182,609 158,790

Cash Flow
- Disc Pay back
- Investment (500,000)
- Year 1 182,609
- Year 2 158,790
- Year 3 190,680

- Pay Back 2.83

- Illustration 50 ( page 61 )

- Part A

Description Year Cash flow Disc Fac @ 8%

 Initial Invest 0 (2,000,000) 1
Annual Contribution 1-5 975,000 3.993
Tax @ 33% 1-5 (321,750) 3.993

- Net present Value

- IRR 19.15%

Working 01 , Annnual Contribution

Sale price 20.00

Material (8.00)
Labour (2.00)
Overhead (1.50)
Distribution (2.00)

Contribution 6.50

Sales Volume 150,000

Annual Contribution 975,000

Working 02 , Cost of Cap

(1+M)=(1+r)*(1+I) = (1.14)=(1+r)*(1.055)

- Part B

- Sensitivity Analysis

- Price 7.581%

Price at wich NPV will be zero 18.48

- Volume 23.33%

Volume at wich NPV will be zero 115,012

- Question 05 ( page 81 )

- Part A

- Option No 1 , Continue Import , ( Amount in Million )

Time Line 0 1 2
 Sales ( LY* 1.05*1.10) 769.23 888.46 1,026.17
Cost of Sales (660.00) (727.65) (802.23)

Net operating Cash Flows 160.81 223.94

Taxation
@ 25% (40.20) (55.98)
@ 1% (8.88) (10.26)
@ Import (42.57) (46.93)
Higher of the 3 (42.57) (55.98)

Net Cash Flows 118.24 167.95

Disc Fact @ 15% 1 0.870 0.756

Present Value 102.821 126.998

Net Present Value 735.713

- Working 01 - Cost

CIF ( RS / KG ) 60
Import Duty @ 10% 6
Landed Cost 66
Sales Tax 11.22
77.22
With holding tax 3.861
Total 81.081

- Option No 2 , New Plant , ( Amount in Million )

Time Line 0 1 2

Initial Captical (1,500.00)

Net operating cash flows 410.97 531.15
Taxation (9.31) (11.26)

Net operating cash flows (1,500.00) 401.66 519.89

Disc Factor @ 15% 1.000 0.870 0.756

Present value (1,500.00) 349.27 393.11

Net present value 611.87

Working 02 ( Operating cash flows )

Time Line 0 1 2

Sales 769.23 930.77 1,126.23

 Material (256.41) (296.15) (342.06)
Labour (100.00) (115.50) (133.40)
Variable OH (50.00) (57.75) (66.70)
Fixed Cost -48 (50.40) (52.92)

Net Operating cash flows 410.97 531.15

Taxable Depreciation (825.00) (67.50)
Gain on disposal - -

Taxable Profit / ( Loss ) (414.03) 463.65

loss C/F - (414.03)

Taxable Profit - 49.61

Tax @ 25% - (12.40)

Tax @ 1% (9.31) (11.26)
Higher of above (9.31) (12.40)
Adjustment of excess tax - 1.14

Tax Payment (9.31) (11.26)

Working 04 Tax Depreciation , Amount In Million

Time Line 1 2 3

Cost / NBV 1,500.00 675.00 607.50

initial Allowance (750.00) - -
Dep (75.00) (67.50) (60.75)

WDV 675.00 607.50 546.75

Working 04 Gain On Disposal

WDV 442.87
Sale Proceeds 450.00

Gain 7.13

- Expected values ( Page 65 )

- Illustration 51 , DIY

- Decision Tree ( Page 64 )

- Decision point ---------------------->> From Squre

- Outcome point ---------------------->> From Circle
- Illustration 52 , Page 65

- Illustration 53 , Page 66

- Past peper , Question No 6 , Page 85

- Value of perfact Information ( Page 67 )

- Lease or Buy Decisions i.e. lease vs Borrow and buy ( Page 69 )

- Financing Decisions regarding lessee

- Illustration 54
- Lease option , Amount in million

Description Year CF Disc Fac @ 20%

Lease rental 0 - 4 (1.70) 3.589

Tax saving on rental 2 - 6 0.51 2.771
Cost Savings 1 - 5 2.40 2.991
Tax on cost saving 2 - 6 (0.72) 2.492

- Net present value

- Buy option , Amount in million

Time line 1 2 3

Loan Repayment - - -
Intrest repayment (0.77) (0.77) (0.77)
Net operating cash flows 2.40 2.40 2.40
Taxation - (0.01) (0.13)

Net Cash flows 1.63 1.62 1.50

Disc Fac @ 20% 0.833 0.694 0.579

Present Value 1.36 1.13 0.87

Net Present Value 2.05

Working 01 , Tax Expense

Time line 1 2 3

Annual Cost Saving 2.40 2.40 2.40

Tax Depreciation (1.60) (1.20) (0.90)
 Loss on disposal - - -
Intrest cost (0.77) (0.77) (0.77)

Taxable profit/( loss ) 0.03 0.43 0.73

Tax Exp / ( Saving ) (0.01) (0.13) (0.22)

Working 02 Tax Depreciation

Time line 1 2 3

Cost / WDV 6.40 4.80 3.60

Depreciation (1.60) (1.20) (0.90)

WDV 4.80 3.60 2.70

Loss on dispsal
NBV 1.52
Sale proceeds -

Loss (1.52)

- Illustration NO 55 , Lease and buy

- Lease decision

Description Year Cash flow Disc Factor @ 10

lease rental 0-3 (36,000) 3.487

Tax Savings 2-4 11,880 2.882

Net present value

Cost of captical 10.05

- Borrow And Buy

Time line 0 1 2

Repayment of Loan - (42,032) (42,032)

Tax Saving on loan ( w2*33%) - - 5,940
Residual Value - - -
Tax Saving on dep (W03) - - 9,900
Tax Saving on Loss (W03) - - -
Net Cash Flow - (42,031.52) (26,191.52)
Disc Factor @ 10% 1.000 0.909 0.826

Present Va;ue - (38,210) (21,646)

Net Present Value

Working 01 , Equal annual instalment calculation

Loan 120,000
Annuity factor 2.855

Annual Instalment 42,032

- Working 02 Intrest payment

Year B/F Loan Intrest Principal

Y - 01 120,000 18,000 24,032
Y - 02 95,968 14,395 27,636
Y - 03 68,332 10,250 31,782
Y - 04 36,551 5,483 36,551

- Working 03 . Tax Depreciation

Time line 1 2

Cost 120,000 90,000

Dep @ 25% (30,000) (22,500)

WDV 90,000 67,500

Tax Savings On Dep 9,900 7,425

- Loss on Disposal

Sale Proceeds (37,969)

WDV 10,000

Loss (27,969)

Tax Saving On Loss 9,230

- Illustration 56

- Part A
- Option A -- Purchasing the outright machine

Time line 0 1 2

Initial Investmet (360,000) - -

Residual Value - - -
Tax Saving on Dep ( W01 ) - 27,000 20,250
Tax Saving on loss ( W01 ) - - -
Maintaince Cost - (15,000) (15,000)
Tax Savings on M.Cost - - 4,500

Net Cash Flows (360,000) 12,000 9,750

Disc Factor @ 10% 1.000 0.909 0.826

Present value (360,000) 10,909 8,058

Net present value (302,956)

Working 01 , Tax Depreciation

Time Line 0 1 2

Cost 360,000 270,000 202,500

Dep (90,000) (67,500) (50,625)

WDV 270,000 202,500 151,875

Tax Sav 27,000 20,250 15,188

Loss On Disposal

Sale Proceeds 20,000

WDV 85,430

Loss (65,430)

Tax Savings 19,629

- Option B -- Finance Lease

Time Line 0 1 2

Lease Rental - (135,000) (135,000)

Tax Saving on Rental - - 40,500
Maintaince Cost - (15,000) (15,000)
Tax Saving on M.Cost - - 4,500
 Net Cash Flow - (150,000) (105,000)
Disc Factor 1.00 0.909 0.826

Present Value - (136,364) (86,777)

Net Ptesent Value (345,804)

- Option C -- Operating Lease

Time Line 0 1 2

Lease Rental (140,000) (140,000) (140,000)

Tax Saving on Rental 42,000 42,000

Net Cash Flow (140,000) (98,000) (98,000)

Disc Factor 1.00 0.909 0.826

Present Value (140,000) (89,091) (80,992)

Net Ptesent Value (355,025)

- Part B

Projects Purchase Outright Fiance lase

NPV (302,956) (345,804)
Loss on NPV (72,000) (28,000)
Net present value (374,956) (373,804)

Question No 07 ( page 87 ) Mohani Limited

- Lease option ( amount in RS )

Description Year Cash Fow D.F (Cost of Cap )

Secqurity Deposit 0 (320,000) 1.000
Lease Rental 0-4 (860,000) 3.914
Tax Saving on Lease Rental 1-5 301,000 3.433
Residual Value 5 400,000 0.519
Net Present Value

- Buy Option ( amount in RS )

Time Line 0 1 2

Repayment ( P + I ) - (866) (866)

Tax Saving on Intrest - 123 103
Insurance (96) (96) (96)
Tax Saving on Insurance - 34 34
Tax Savinng on Dep - 616 50
Tax Savinng on Loss - - -
Residual Value - - -

Net Cash Flows (96) (189) (774)

Disc Factors @ 14% 1.000 0.877 0.769

Present Value (96) (166) (596)

Net Preent Value (1,981)

(96) (189) (774)

Working 01 ( Annual Instalment Calculation )

Loan Amount 3,200

Annuity factor 3.696

Instalment 866

Working 02 , Repayment Schedule

Year B/F Installment Intrest

1 3,200 866 352

2 2,686 866 295
3 2,116 866 233
4 1,483 866 163
5 780 866 86

Working 03 , Tax Depreciation

Time Line 1 2 3

Cost 3,200 1,440 1,296

Initail Allow (1,600) - -
Dep (160) (144) (130)

WDV 1,440 1,296 1,166

Tax Saving 616 50 45

Sale Proceeds

Net Book Value 945

Sale proceeds 400

Loss (545)

Tax Saving on Loss 191

- Investment Decision ---- Lessor Point ov View

- Questiion No 08 , DS Leasing Compnay , Page 88

- Part A , Purchase on borrowed funds

Time line 0 1 2

Principal Re payment - (5.00) (5.00)

Intrest payment - (3.20) (2.40)
Tax Saving on intrest - - 1.12
Residual Value - - -
Tax Saving on Depreciation - 2.28 0.47
Tax Saving on Loss - - -

Net cash Flows - (5.92) (5.81)

Disc Fac @ 16% 1.000 0.862 0.743

Present Value - (5.11) (4.32)

Net Present Value (12.98)

Working 01 , Depreciation

Year 0 1 2

Cost 20.00 13.50 12.15

Initial Allow (5.00) - -
Depreciation (1.50) (1.35) (1.22)

WDV 13.50 12.15 10.94

Tax Saving 2.28 0.47 0.43

- Loss On disposal

WDV (9.84)
Residual Value 2.00

Loaa (7.84)

Tax Savings 2.74

- Assuming annual lease rental is R , thus income and related tax flows will be as under

Description Year Cssh Flow Disc Factor Present Value

 Lease Rental 0-3 R 3.174 3.174 R
Tax Payment 1-4 (0.35 R) 2.690 (0.9415 R)

- Net Cash Flow 2.2325 R

- At Break even
2.2325 R = 12.98

R = 5.81

- Extension in above

- Use Above cash flows and if Annual lase rental oppered is 6 Million calculate NPV

Time Line 0 1 2

Net cash Flows - (5.92) (5.81)

Lease Rental - 6.00 6.00
Tax On lease rental - - (2.10)

Net Adjusted Cash Flow - 0.08 (1.91)

Disc Fac 1.000 0.862 0.743

Present Value - 0.06 (1.42)

Net Present Value (1.26)

- Part B
- Lease Option

Time Line 0 1 2

Lease Rental (7.00) (7.00) (7.00)

Tax Saving on Rental - 2.45 2.45

Net Cash Flows (7.00) (4.55) (4.55)

Disc Fac @ 20% 1.000 0.833 0.694

Present Value (7.00) (3.79) (3.16)

Net Present Value (15.40)

- Buy And Borrow

 Time Line 0 1 2

Loan Repayment - (7.43) (7.43)

Tax Saving on intrest - - 1.26
Residual Value - - -
Tax Saving on Dep - 2.28 0.47
Tax Saving on loss - - -
M.Cost - (0.60) (0.60)
Tax Saving on M.Cost - - 0.21

Net Cash Flows - (5.76) (6.09)

Disc Factor @ 20% 1.000 0.833 0.694

Present Value - (4.80) (4.23)

Net Present Value (13.65)

- Working 02 , Annual Instalmnt

Principal 20.00
Annuity Fac 2.69

Annual Instalment 7.43

- Working 03 Repayment Schedule s

Year B/F Principal Intrest

1 20.00 3.83 3.60

2 16.17 4.53 2.91
3 11.64 5.34 2.10
4 6.30 6.30 1.13

- Question No 09 ( page 91 )

- Overhaule and Operate ( Amount in 000 )

Description Year Cash Flow D.F @ 8% P.V

Overhaule 0 (2,200) 1.000 (2,200)

Rental 1 -- 2 4,700 1.783 8,380
Operating Cost 1 -- 2 (1,100) 1.783 (1,961)
Residual Value 2 788 0.857 675

Net Present Value 4,894

Annuity Factor 1.783
EAC 2,745

- Discount Rate
 (1.17)=(1+R)*(1.08)

R = 8%

- Replace And Operate

Description Year Cash Flow Disc Fac @ 8% PV

Initial Investment 0 (5,250) 1.000 (5,250)

Rental 1-3 4,700 2.577 12,112
Disposal Proceed 0 945 1.000 945
Operating Cost 1-3 (1,000) 2.577 (2,577)
Residual Value 3 1,313 0.794 1,042

Net present Value 6,272

Annuity Factor 2.577
EAC 2,434

- Question no 31 ( page 133 )

- Part A -------- Overhaule Option , Amount in Million

Time Line 0 1 2

Overhaule Cost (35.00) - -

Residual Value - - -
Tax Saving on Dep - 1.69 1.52
Tax Saving on Loss on Disposal - - -
Maintaince Cost ( Post Tax) - (7.35) (7.72)

Net Cash Flows (35.00) (5.66) (6.19)

Disc Factor @ 15% 1.00 0.870 0.756

Present Value (35.00) (4.92) (4.68)

Net Present Value (48.10)

Working 01 , Depreciation

Year 1 2

NBV of old machine 21.48

Overhauing cost 35.00

WDV 56.48 50.83

Dep (5.65) (5.08)
 WDV 50.83 45.75

Tax Saving 1.69 1.52

- Gain on sale
Sale proceeds 11.49
Net book value (33.35)

Loss on disposal (21.86)

Tax Saving on loss 6.56

- Part A -------- Replace Option , Amount in Million

Time Line 0 1 2

Capex Initial (61.25) - -

Disposal of old machine 11.90 - -
Residual Value - - -
Tax Saving on depreciation - 5.97 1.24
Tax Saving on disp of new mach - - -
Tax impact of Disposal - 2.87 -
Maintaince Cost ( Post Tax ) - (4.59) (4.82)

Net Cash Flows (49.35) 4.25 (3.58)

Disc Factor @ 15% 1.000 0.870 0.756

Present Value (49.35) 3.70 (2.71)

Net Cash Flows (40.82)

- Working 02 Tax Depreciation

Time Line 1 2 3

Cost 61.25 41.34 37.21

Initia Depreciation (15.31) - -

Depreciation (4.59) (4.13) (3.72)

WDV 41.34 37.21 33.49

Tax Savings 5.97 1.24 1.12

Sale Proceeds
 Residual Value 27.13
Sale Proceeds 31.27

Gain on Sale 4.14

Tax (1.24)

- Working 03 Gain loss calculation of old machne

Residual value 11.90

WDV 21.48

Loss onn disposal (9.58)

Tax Saving on loss 2.87

- Part B -------- Maintaince Cost , Amount in Million

- NPV of Replace Option 40.82

- NPV of Overhaule Option 48.10

PV of Post tax Option ( Overhaule ) 26.86

PV of Post tax Option ( Replace ) 16.79

Sensitivity Analysis 72%

- Working 04
Time Line 1 2 3

Maintaince Cost Overhaule 7.35 7.72 8.10

Disc Factor 0.870 0.756 0.658

Present Value 6.391 5.836 5.328

Net Present Value 26.86

Time Line 1 2 3

Maintaince Cost Repace 4.59 4.82 5.06

Disc Factor 0.870 0.756 0.658

Present Value 3.995 3.647 3.330

Net Present Value 16.79

- Part B -------- Doller Rate , Amount in Million

 - NPV of Replace Option 40.82
- NPV of Overhaule Option 48.10

NPV of Doller option 38.43

Sensitivity Analysis 19%

Working 05

Time Line 0 1 2

Initial Invstment (61.25) - -

Rsidual Value - - -
Tax Saving on disposal - - -
Tax Saving on Dep - 5.97 1.24

Net Cash Flows (61.25) 5.97 1.24

Disc Fact 1.000 0.870 0.756

Present Value (61.25) 5.19 0.94

Net Present Value (38.43)

- Question no 33 ( Page 139 )

- Amount in RS Million

Time Line 0 1 2

Initia Capex (50.00) - -

Working Captical Cash Flow (100.00) - (8.00)
Sales - 200.00 400.00
Material Cost
AB - 5 - (60.00) (129.60)
CD - 7 - (24.00) (56.70)
EF - 2 - (2.00) (12.96)
Labour Cost
Skilled - (40.18) (88.19)
Un skilled - (8.00) (17.28)
Variable OH - (21.60) (46.66)

Net Cash Flow (150.00) 44.22 40.61

Disc Factor @ 16% 1.000 0.862 0.743

Present Value (150.00) 38.12 30.18

Net Present Value 12.04

- Working 01 , Sales

Year 1 2 3

Units 40.00 80.00 50.00

Price 5.00 5.00 5.00

Sales 200.00 400.00 250.00

- Working 02 , Material Cost

- AB - 05
Yaer 1 2

Requirement Cost 120.00 240.00

In Stock (100.00) -
Material to be purchased 20.00 240.00
Purchase Price 0.50 0.54
Total Relevent cost 10.00 129.60
In Stick ( Rev Cost ) 50.00 -

Total Cost 60.00 129.60

- CD - 07
Yaer 1 2

Requirement Cost 80.00 160.00

In Stock (80.00) (10.00)
Material to be purchased - 150.00
Purchase Price ( In stock ) 0.30 0.32
Purchase Price ( New ) 0.33 0.36
Total Relevent cost - 53.46
In Stick ( rev Cost ) 24.00 3.24

Total Cost 24.00 56.70

- EF - 2
Yaer 1 2

Requirement Cost 40.00 80.00

In Stock (40.00) -
Material to be purchased - 80.00
Purchase Price ( In stock ) 0.05 0.05
Purchase Price ( New ) 0.15 0.16
Total Relevent cost - 12.96
In Stick ( rev Cost ) 2.00 -

Total Cost 2.00 12.96

 - Working 03 Skilled Labour

Years 1 2

Total requirement 240.00 480.00

Available Hours (14.00) (18.00)

Hours To be hired 226.00 462.00

Rate of additional time 0.175 0.189

Cost of additional Time 39.55 87.32

Rate of Idle Hrs 0.05 0.05

Cost of Idle Hrs 0.63 0.87

Total Cost 40.18 88.19

- Question no 34 ( Page 142 ) , Amout in Million

- NPV calculation

Time Line 0 1 2

Workig Captical (10.40) (11.23) (12.11)

Capex (125.00) - -
Net operatin Cash Flows - 16.40 54.71
Taxation 4.51 (13.43)

Net Cash Flows (135.40) 9.68 29.17

Disc Fac @ 13% 1.000 0.885 0.783

Present Value (135.40) 8.56 22.84

Net Present Value 104.70

- Working 01 , Net operating Cash Flows , Rs In Million

Time Line 1 2

Annual Sales % age ( A ) 20% 40%

Inflation factor ( B ) 1.04 1.08
Existing Sales ( C ) 500.00 500.00
 Sales Revenue ( D = A*B*C ) 104.00 216.32
Variable Cost ( D * 65% ) (67.60) (140.61)
Fixed Cost ( Ly * 105% ) (20.00) (21.00)

Net operating cash Flows 16.40 54.71

Tax Dep ( W-1.1) (32.50) (6.75)
Loss On Disp ( W-1.2 ) - -

Taxable Profit (16.10) 47.96

Tax saving /( Payment ) 4.51 (13.43)

- Tax Depreciato ( W-1.1 )

Year 1 2 3

Cost 100.00 67.50 60.75

Initial Allow (25.00) - -
Dep (7.50) (6.75) (6.08)

WDV 67.50 60.75 54.68

- Disposal ( W-1.2 )

Sales proceeds -
WDV 44.29

Loss On disposal (44.29)

- Workng 02 , Working Captical Cash Flow , Amount in Million

Year 0 1 2

Work Cap - 104.00 216.32

Requirement - 10.40 21.63

Investment (10.40) (11.23) (12.11)

- MIRR Calculation

- PV of return 240.10
- PV of Investment (135.40)
- Preiod = n = 5
- Cost of Cap 13%

- MIRR 26.70%
 Lecture 02

echnology / replacement of old assets / others )

nvestment

initial Investment
Annual cash benefit

Cash Flow

ards easy side

ccounting profit + depreciation

ng term finances

+ Working Cap 200

ap + residual Value ) / 2 ) + Working Cap 120

 Lecture 03

PV
(90.00)
36.36
24.79
15.03
13.66
14.90
14.75

e company , as the net present value is positive

PV
(20.00)
9.09
6.61
4.51
2.73
 3.73
6.67

e company , as the net present value is positive

miltanously i.e. at the same time

project is zero

NPV @ LR
* ( HR - LR )
PV @ LR - NPV @ HR

PV DF @ 20% PV
(90.00) 1.000 (90.00)
34.78 0.833 33.33
22.68 0.694 20.83
13.15 0.579 11.57
11.44 0.482 9.65
11.93 0.402 9.65
3.98 (4.97)

PV DF @ 20% PV
(20.00) 1.000 (20.00)
9.09 0.833 8.33
6.61 0.694 5.56
4.51 0.579 3.47
2.73 0.482 1.93
3.73 0.402 2.41
6.67 1.70

PV DF @ 20% PV
(500.00) 1.000 (500.00)
76.19 0.833 66.67
 108.84 0.694 83.33
146.85 0.579 98.38
102.84 0.482 60.28
137.12 0.402 70.33
71.84 (121.01)

given in the question is 12% , so the project is not feasible

AF @ 10% PV

3.791 3,791

4.170 4,170

2.847041 2,847

AF @ 30% PV

4.304 77,472

6.492 38,952

3.331 13,325

8.138 651,034

Lecture 04
cy of cash flows

ecome equle to the amount requried at the end of poreoid

6,000,000
8%
10 Years

30,000
6,500
36,500

33,000

20,000

(10,000)
 36,000

-
15,000

20,000

150,500

Lecture 05

1 2 3 4
RS in ( 000 )

- - - -
260 330 400 470

260 330 400 470

0.926 0.857 0.794 0.735

240.74 282.92 317.53 345.46

0.833 0.694 0.579 0.482

216.67 229.17 231.48 226.66

(740) (410) (10) 460

 (759.26) (476.34) (158.80) 186.66

1 2 3 4
RS in ( 000 )

50 60 70 80
7 7 7 7

350.00 420.00 490.00 560.00

(90.00) (90.00) (90.00) (90.00)

260 330 400 470

Preoid Cash Flows DCF @ 8% PV

0 (1,000.00) 1.000 (1,000.00)

1-4 365.00 3.312 1,208.88

208.88

Lecture 06

tion adjusted cash flows

flown in todays prices

CF *( 1 + I ) ^n

use inflated adjusted rate of return , while calcuating real cash flows , we shall use real discount rate

Disc Factor PV
 1.000 (50,000)
3.240 64,800
14,800

9%

1 2 3 4

21,100.00 22,260.50 23,484.83 24,776.49

21,100.00 22,260.50 23,484.83 24,776.49

0.870 0.756 0.658 0.572

18,347.83 16,832.14 15,441.66 14,166.04

Disc Factor PV

1.000 (1,700.00)
0.926 92.59
0.857 171.47
4.925 1,477.55

41.61

8%

2 3 4 5

1,210 1,331 1,464 1,611

441 463 486 511

1,651 1,794 1,950 2,121

0.756 0.658 0.572 0.497
1,248.39 1,179.62 1,115.09 1,054.52

15%

Lecture 07

4 5

2,109 1,582
(527) (396)

1,582 1,187

2 3

15,000
60,000
(6,750) (2,250)
53,250 12,750
0.797 0.712

42,451 9,075

2 3 4 5

- - 15,000 -
14,000 14,000 14,000 -
(1,950) (2,513) (2,934) (4,903)

12,050 11,488 26,066 (4,903)

 0.857 0.794 0.735 0.681

10,331 9,119 19,159 (3,337)

2 3 4

14,000 14,000 14,000

(5,625) (4,219) (3,164)
- - 5,508

8,375 9,781 16,344

(2,513) (2,934) (4,903)

3 4

16,875 12,656
(4,219) (3,164)

12,656 9,492

Rs In ( 000 )

2 3 4 5 6

- - - - -
(131) (143) (156) 851 -
2,569 2,449 2,244 2,314
(256) (604) (636) (619) (311)
 2,182 1,702 1,452 2,546 (311)
0.756 0.658 0.572 0.497 0.432

1,650 1,119 830 1,266 (135)

2,182 1,702 1,452 2,546 (311)

0.694 0.579 0.482 0.402 0.335

1,515 985 700 1,023 (104)

2 3 4 5

500 600 700 0

1.10 1.16 1.22 1.28

551 695 851 -

(131) (143) (156) 851

2 3 4 5

1.10 1.16 1.22 1.28

1.21 1.33 1.46 1.61

5,402 6,159 6,977 6,790

(908) (1,198) (1,537) (1,449)
(1,815) (2,396) (3,075) (2,899)
(110) (116) (122) (128)

2,569 2,449 2,244 2,314

(844) (633) (475) -
- - - (1,424)

1,726 1,816 1,769 890

(604.01) (635.70) (619.13) (311.49)
 3 4

2,531 1,898
(633) (475)

1,898 1,424

1,424
-

(1,424)

RS in Billion

2 3 4 5

- - - (3.00)
5.08 5.14 5.18 5.20
(0.80) (0.97) (1.09) (0.62)

4.27 4.17 4.09 1.58

0.72 0.61 0.52 0.44

3.07 2.54 2.11 0.69

3 4 5

8.82 9.26 9.72

(2.43) (2.69) (2.96)
(1.25) (1.39) (1.56)

5.14 5.18 5.20

(1.92) (1.54) (1.23)
- - (1.92)

3.22 3.64 2.06

(0.97) (1.09) (0.62)
 PPI

CPI

3 4 5

9.60 7.68 6.14

(1.92) (1.54) (1.23)

7.68 6.14 4.92

Lecture 08

3 4 5 6 7

- - - - -
27,579 100,160 62,434 67,169 -
(21,101) 634 (27,341) (16,066) (6,150)

6,478 100,794 35,093 51,103 (6,150)

0.579 0.482 0.402 0.335 0.279

3,749 48,608 14,103 17,114 (1,716)

 3 4 5 6

46.59 51.24 56.37 62.00

(10.65) (11.71) (12.88) (14.17)
(9.13) (10.49) (12.07) (13.88)
(5.32) (5.86) (6.44) (7.09)

21.49 23.18 24.97 26.87

5,000.00 5,000.00 2,500.00 2,500.00

107,438.75 115,901.31 62,433.97 67,168.85

(79,860.00) - - -
- (15,741.06) - -

27,578.75 100,160.26 62,433.97 67,168.85

(29,390.63) (22,042.97) (16,532.23) (12,399.17)
- - - (37,197.51)

(1,811.87) 78,117.29 45,901.74 17,572.17

634.16 (27,341.05) (16,065.61) (6,150.26)

3 4 5 6

117,563 88,172 66,129 49,597

(29,391) (22,043) (16,532) (12,399)

88,172 66,129 49,597 37,198

37,197.51
-

(37,197.51)

we should purchase
 PV Factor @ Present Value
10% R S

1.000 (120) (60)

0.909 (18) (36)
0.826 (17) (29)
0.751 (8) -

(162) (125)
2.487 1.736

(65) (72)

h Flows Disc Factor @ Present Value

Rep After 3 Yea 15% Rep After 1 Year Rep After 2 YeaRep After 3 Year

(12,000) 1.00 (12,000) (12,000) (12,000)

(1,500) 0.87 7,826 (1,304) (1,304)
(2,700) 0.76 - 5,671 (2,042)
7,000 0.66 - - 4,603

(9,200) (4,174) (7,633) (10,743)

0.870 1.626 2.283

(4,798) (4,695) (4,706)

Cash Flows Disc Factor @ Present Value

Rep After 3 YeaRep After 4 Year 10% Rep After 1 YeaRep After 2 YeaRep After 3 Yea

(25,000) (25,000) 1.00 (25,000) (25,000) (25,000)

(7,500) (7,500) 0.91 6,818 (6,818) (6,818)
(10,000) (10,000) 0.83 - - (8,264)
(5,000) (12,500) 0.75 - - (3,757)
- (12,500) 0.68 - - -
 (47,500) (67,500) (18,182) (31,818) (43,839)
0.909 1.736 2.487

(20,002) (18,328) (17,627)

NPV

8,500
(176,250)

(167,750)

NPV

(3,636)
(160,227)

(163,864)

NPV

(8,182)
(7,851)
(145,661)

(161,694)

NPV

(8,182)
(9,917)
(11,270)
(132,419)

(161,788)

Lecture 09
 3 4 5 6

- (4,685) - -
(198) (429) (261) (567)
- 1,741 - 2,031

(198) (3,372) (261) 1,464

0.609 0.516 0.437 0.370

(120) (1,739) (114) 542

3 4 5 6

(4,259) - - -
(730) (227) (493) (1,110)
882 - - 1,111

(4,107) (227) (493) 1

0.609 0.516 0.437 0.370

(2,500) (117) (215) 0

 - Project - Invest - NPV
E 50.00 24.00
D @ 50% 10.00 17.50

60.00 41.50

combination to achive highest NPV with in available funds

- Project - Invest - NPV

D 100.00 35.00

100.00 35.00

- Project - Invest - NPV

D 100.00 35.00

100.00 35.00
 - Initial Invest - NPV
200.00 34.00
72.00 10.80
150.00 18.00
78.00 10.92
500 73.72

3 4 5

6.60 6.60 6.60

84.00 60.00 60.00
120.00 - -

210.60 66.60 66.60

0.864 0.823 0.784

181.92 54.79 52.18

210.60 66.60 66.60

0.579 0.482 0.402

121.88 32.12 26.77

Present Value Factor @ 20% Present Value Net Present

1 2 0 1 2 Value
0.833 0.694 (20.00) (25.00) 55.56 10.56
0.833 0.694 (40.00) 4.17 38.19 2.36
 0.833 0.694 (50.00) (20.83) 79.86 9.03
0.833 0.694 (40.00) (4.17) 52.08 7.92
0.833 0.694 (30.00) (16.67) 55.56 8.89

Project - Investment - NPV

Alliminum (25.00) 9.03
Phosphorus (20.00) 8.89
Sodium (10.00) 3.52
(55.00) 27.36

Lecture 10

Lecture 11

uried to re calculate the NPV of the project.

ject to Zero.

PV Disc Fac @ 20% PV

(500,000) 1 (500,000)
 52,601 0.579 46,296
1,369,800 2.106 1,263,600
(799,050) 2.106 (737,100)
(91,320) 2.106 (84,240)

32,031 (11,444)

80,000
600,000
(350,000)
(40,000)

290,000
0.658

190,680

Cumm Cash flow

(500,000)
(317,391)
(158,601)
32,079

Present Value Disc Fac @ 8% Present Value

 (2,000,000) 1 (2,000,000)
3,893,175 2.991 2,916,225
(1,284,748) 2.991 (962,354)

608,427 (46,129)

=(1+r)*(1.055) = 8%

Lecture 12

3 4 5
1,185.23 1,368.94 1,581.13
(884.46) (975.12) (1,075.07)

300.77 393.82 506.06

(75.19) (98.45) (126.51)

(11.85) (13.69) (15.81)
(51.74) (57.04) (62.89)
(75.19) (98.45) (126.51)

225.58 295.36 379.54

0.658 0.572 0.497

148.319 168.876 188.699

3 4 5

450.00
680.98 867.31 1,098.56
(146.89) (203.16) (264.12)

534.09 664.15 1,284.44

0.658 0.572 0.497

351.17 379.73 638.59

3 4 5

1,362.74 1,648.91 1,995.19

(395.08) (456.31) (527.04)
(154.08) (177.96) (205.55)
(77.04) (88.98) (102.77)
(55.57) (58.34) (61.26)

680.98 867.31 1,098.56

(60.75) (54.68) (49.21)
- - 7.13

620.23 812.64 1,056.49

620.23 812.64 1,056.49

(155.06) (203.16) (264.12)

(13.63) (16.49) (19.95)
(155.06) (203.16) (264.12)
8.17 - -

(146.89) (203.16) (264.12)

4 5

546.75 492.08
- -
(54.68) (49.21)

492.08 442.87
 Lecture 13

PV

(6.10)
1.41
7.18
(1.79)

0.70

4 5 6

- (6.40) -
(0.77) (0.77) -
2.40 2.40 -
(0.22) (0.29) 0.12

1.41 (5.06) 0.12

0.482 0.402 0.335

0.68 (2.03) 0.04

4 5 6

2.40 2.40
(0.68) (0.51)
 - (1.52)
(0.77) (0.77)

0.96 (0.39)

(0.29) 0.12

4 5

2.70 2.03
(0.68) (0.51)

2.03 1.52

Lecture 14

Present Value

(125,532)
34,233

(91,299)

3 4 5

(42,032) (42,032) -
4,750 3,382 1,809
- 10,000 -
7,425 5,569 4,177
- - 9,230
(29,856.08) (23,080.33) 15,215.50
0.751 0.683 0.621

(22,431) (15,764) 9,448

(88,604)

C/F
95,968
68,332
36,551
(0)

3 4

67,500 50,625
(16,875) (12,656)

50,625 37,969

5,569 4,177
 3 4 5

- - -
- 20,000 -
15,188 11,391 8,543
- - 19,629
(15,000) (15,000) -
4,500 4,500 4,500

4,688 20,891 32,672

0.751 0.683 0.621

3,522 14,269 20,287

3 4 5

151,875 113,906
(37,969) (28,477)

113,906 85,430

11,391 8,543

3 4 5

(135,000) (135,000) -
40,500 40,500 40,500
(15,000) (15,000) -
4,500 4,500 4,500
 (105,000) (105,000) 45,000
0.751 0.683 0.621

(78,888) (71,716) 27,941

3 4

(140,000)
42,000 42,000

(98,000) 42,000
0.751 0.683

(73,629) 28,687

Operating Lease
(355,025)
-
(355,025)

Present Valiue
(320,000)
(3,366,040)
1,033,333
207,747
(2,444,960)

3 4 5

(866) (866) (866)

81 57 30
(96) (96) -
34 34 34
 45 41 37
- - 191
- - 400

(801) (830) (175)

0.675 0.592 0.519

(541) (492) (91)

(801) (830) (175)

Principal C/F Tax Saving on Int

514 2,686 123

570 2,116 103
633 1,483 81
703 780 57
780 0 30

4 5

1,166 1,050
- -
(117) (105)

1,050 945
41 37
 Lecture 15

3 4 5

(5.00) (5.00) -
(1.60) (0.80) -
0.84 0.56 0.28
- 2.00 -
0.43 0.38
- - 2.74

(5.33) (2.86) 3.02

0.641 0.552 0.476

(3.42) (1.58) 1.44

10.94
-
(1.09)

9.84

0.38

s will be as under
alculate NPV

3 4 5

(5.33) (2.86) 3.02

6.00 6.00 -
(2.10) (2.10) (2.10)

(1.43) 1.04 0.92

0.641 0.552 0.476

(0.92) 0.58 0.44

3 4

(7.00) -
2.45 2.45

(4.55) 2.45
0.579 0.482

(2.63) 1.18
3 4 5

(7.43) (7.43) -
1.02 0.73 0.40
- 2.00 -
0.43 0.38 -
- - 2.74
(0.60) (0.60) -
0.21 0.21 0.21

(6.38) (4.71) 3.35

0.579 0.482 0.402

(3.69) (2.27) 1.35

C/F Tax Saving

16.17 1.26
11.64 1.02
6.30 0.73
(0.00) 0.40
 Lecture 16

3 4 5

- - -
- - 11.49
1.37 1.24 1.11
- - 6.56
(8.10) (8.51) (8.93)

(6.73) (7.27) 10.22

0.658 0.572 0.497

(4.43) (4.16) 5.08

3 4 5

45.75 41.17 37.06

(4.57) (4.12) (3.71)
 41.17 37.06 33.35

1.37 1.24 1.11

3 4 5

- - -
- - -
- - 31.27
1.12 1.00 0.90
- - (1.24)
- - -
(5.06) (5.32) (5.58)

(3.95) (4.31) 25.35

0.658 0.572 0.497

(2.60) (2.47) 12.60

4 5

33.49 30.14

- -
(3.35) (3.01)

30.14 27.13

1.00 0.90
4 5

8.51 8.93
0.572 0.497

4.865 4.442

4 5

5.32 5.58
0.572 0.497

3.040 2.776
3 4 5

- - -
- - 31.27
- - (1.24)
1.12 1.00 0.90

1.12 1.00 30.93

0.658 0.572 0.497

0.73 0.57 15.38

25.00
108.00
250.00

(87.48)
(38.49)
(8.75)

(58.81)
(11.66)
(31.49)

146.31
0.641

93.74
3

150.00
-
150.00
0.583
87.48
-

87.48

100.00
-
100.00
0.35
0.385
38.49
-

38.49

50.00
-
50.00
0.06
0.175
8.75
-

8.75
3

300.00
(16.00)

284.00
0.204

57.97

0.05
0.84

58.81

Lecture 17

3 4 5

(13.05) (14.04) 60.83

- - -
96.06 140.63 188.60
(25.20) (37.84) (39.03)

57.82 88.74 210.41

0.693 0.613 0.543

40.07 54.43 114.20

3 4 5

60% 80% 100%

1.12 1.17 1.22
500.00 500.00 500.00
 337.46 467.94 608.33
(219.35) (304.16) (395.41)
(22.05) (23.15) (24.31)

96.06 140.63 188.60

(6.08) (5.47) (4.92)
- - (44.29)

89.99 135.16 139.40

(25.20) (37.84) (39.03)

4 5

54.68 49.21
- -
(5.47) (4.92)

49.21 44.29

3 4 5

337.46 467.94 608.33

33.75 46.79 60.83

(13.05) (14.04) 60.83

ue
Rep After 4 Year

(25,000)
(6,818)
(8,264)
(9,391)
(8,538)
(58,012)
3.170

(18,300)
Profitability
Ranking
Index
(0.35) 4.00
(0.36) 3.00
(1.58) 1.00
(0.44) 2.00
 L
Chapter 03 ( Page 162 )

- Debt is a cheap source of finance

- Generally long term finance is more expensive then short term finance

- Equity Finance
- Interally generated funds
- New issue of shares
- Right issue

- Chapter 03 , Source of finance

- Right issue
- Theroitical Ex Right Price

- Ilustration 01

- Illustration 05

TERP 0.70

Value of right 0.20

Impact on weath of Mr - B

Option 01 Option 02

Before right issue

Shares 800 800
Cash 250 -

Net Wealth before Issue 1,050 800

After right issue

Shares 1,050 700
Cash - 100

Increase / Decrease - -

- Share Re purchase ( Page 167 )

- Long term Finance ( Page 168 )

- Typre of debentures ( Page 169 )

- Attempt Question No 01 , 02 , 03 , 04
 Lecture 17

Lecture 18

Option 03 Option 04

800 800
100 -

900 800

840 700
60 -

- (100)
- Steps involved in calculating cost of cap ( Page 187 )

- Market value of equity Number of shares in issue * Mearket price

- Market value of irredambe shares Number of debt certificate in issue * Mearket price

- Market value of preference shares

- Irredemeable preference Shares

- Illustration 2 --- A

- Part A
Return of debt investor 12.50%
Intrest 10
Market Value 80

- Part B

Cost of Debt ( Kd ) 12.50%

Intrest 8
Market Value 64

- Part C
Cost of Debt ( Kd ) 7.98%
Intrest 6.70
Market Value 84.00

Debt Investor requried rate of return ( Pre tax 11.90%

- Part D
Current value 91.7
Intrest 10%
Nominal Value 100
Tax Rate 33%

Time line 0 1 2

Cash Flow (91.70) 6.70 6.70

Disc Fac @ 5% 1.000 0.952 0.907

 Present Value (91.70) 6.38 6.08

NPV 12.93

Disc Fac @ 10 1.000 0.909 0.826

Present Value (91.70) 6.09 5.54

NPV 0.09

IRR = 10% ( Post tax cost of captical of redemea

Exam Note
In Case of convertible instrument , we shall take the higher value upon redempton

- Part E
Current value 106
Intrest 8%
Nominal Value 100
Tax Rate 30%
Conversion option 3.5 per share

Time Line 0 1 2

Cash flow (106.00) 8.00 8.00

Tax Saving - - (2.40)
Conversion val - - -

N.Cash Flow (106.00) 8.00 5.60

Disc Fac @ 5% 1.000 0.952 0.907

PV (106.00) 7.62 5.08
NPV 30.50

Disc Fac @ 10 1.000 0.909 0.826

PV (106.00) 7.27 4.63
NPV 13.65

IRR = 14.05% ( Post tax cost of captical of redemea

Conversion value 140

Redemption Value 100

- Illustration 2 --- B
Part A
Intrest rate 12%
Current Value 4500
Nominal Value 5000

Return of debt provider 13.33%

- Part B
Intrest rate 6.50%
Current Value 6400
Nominal Vaue 5000

Cost of Debt 5.00%

- Part C
Intrest rate 15.00%
Current Value 90
Nominal Vaue 100
Tax Rate 30%

Post tax cost of Debt 7.78%

- Part D
Intrest rate 12.00%
Current Value 950
Nominal Vaue 1000
Tax Rate 33%

Time Line 0 1 2

Cash Flow (950.00) 80.40 80.40

Dac Fac @ 10% 1.000 0.909 0.826

PV (950.00) 73.09 66.45

NPV (12.13)

Dac Fac @ 20% 1.000 0.833 0.694

PV (950.00) 67.00 55.83

NPV (259.61)
 IRR = 9.51%

- Part E
Intrest rate 11.50%
Current Value 1200
Nominal Vaue 1000
Tax Rate 30%
Conversion option 40 Shares

Time Line 0 1 2

Outflow (1,200.00) - -
Inflow - - -
Intrest - 115.00 115.00
Tax Sav - - (34.50)

Cash Flow (1,200.00) 115.00 80.50

Disc @ 10% 1.000 0.909 0.826

PV (1,200.00) 104.55 66.53

NPV 119.94

Disc @ 20% 1.000 0.833 0.694

PV (1,200.00) 95.83 55.90

NPV (161.83)

IRR = 14.26% Post tax Cost of Debt

- Bank Loan

- Zero coupon Bonds

Year 2020
Nominal value 100
Issue price @ 50% of par value
Tenure 10 Years
Tax Rate 30%

( A ) -- Requried rate of return of investor

( B ) -- Post tax Kd
 - A ---------------- Pre Tax Kd

Pre tax Kd (((Nominal value )/(issue value ))^1/

- B ---------------- Post Tax Kd (((Nominal value )/(issue value ))^1/

In the above case in 2021 , now thw above bond is being teaded @ 60

Post tax Kd (((Nominal value )/(issue value ))^1/N)-1*(1-tax)

Cost of equity

Divident valuation model

- Constant rate of divident ( page 195 )

- Divident growing at constant rate ( Page 195 )

- Historic growth model

Illustration 07 ( Page 196 )

Current div 2.2

5 years back div 1.2

Growth 12.88%

Illustration 08 ( Page 196 )

Growth 12.29%

- Retained Earining Model

Illustration 09 ( Page 197 )

Calculating the growth rate

G=B*R

Growth 9.75%
 Calculating Ke

Ke = 21.21%

Illustration 10

Part ( i ) Ke 22.73%

Part ( ii ) Ke + growth 24.50%

Part ( iii ) Ke + growth 25.91%

Part ( iv ) Ke + growth 25.43%

Part ( v ) Ke + growth 19.65%

Illustration 11
Illustration 12
Illustration 13
Illustration 14
Illustration 15

Illustration 16

Part A

Cost of Equity
Growth 4.88%

Ke 20.22%

Part B

Time Line 0 1 2 3

Cash Fow (79.00) 4.02 4.02 4.02

Disc @ 5% 1.000 0.952 0.907 0.864

PV (79.00) 3.83 3.65 3.47

NPV 17.52

Disc @ 15% 1.000 0.870 0.756 0.658

 PV (79.00) 3.50 3.04 2.64

NPV (19.69)

IRR 9.71%

Part C ( amount in million )

Sources of finance
Market value Cost

Equity 27.5 18%

Debt 3.2 10.05%

30.7

WACC 17.17% - Inveters requried rate of return

- Culculating Ke Ke + G

- Culcuating Kd Intrest * ( 1- Tax )/ Market valu

- Asumptions for using WACC

- Page 199

- Portfolio Theory , ( Page 199 )

- Page 200 Expected returns

Portfolio is the collection of risk which is used to improve te risk

- Standard Deviation
It measures the dispersion of data arounf its mean

Culculation of Standard Deviation using Data A

Prob Return P*R R - Mean of R(R - Mean of R)^2

20% 25.00 5.00 8.00 64.00
50% 18.00 9.00 1.00 1.00
30% 10.00 3.00 (7.00) 49.00
17.00 Variance
Standard Dvation

Culculation of Standard Deviation using Data B

 Prob Return P*R R - Mean of R(R - Mean of R)^2
20% 5.00 1.00 (12.00) 144.00
50% 14.00 7.00 (3.00) 9.00
30% 30.00 9.00 13.00 169.00
17.00 Variance
Standard Dev

- Portfolio Question using Data A & B

Prob Return P*R R - Mean of R(R - Mean of R)^2

20% 15.00 3.00 (2.00) 4.00
50% 16.00 8.00 (1.00) 1.00
30% 20.00 6.00 3.00 9.00
17.00 Variance
Standard Dev

- Co - Relaton
It measures the strength of the two variables with respect to each other
it ranges between +1 to -1

- Farmoula of Coefficient of co relation

Prob (C) P * R (A) P * R (B) A*B*C

20% 8.00 (12.00) (19.20)
50% 1.00 (3.00) (1.50)
30% (7.00) 13.00 (27.30)

2.00 (2.00) (48.00)

Co relation coeifficent -99%

- Risk of the portfolio

Data of above example continous

Using farmoula on page 203

Investment A : B = 50 : 50
( Portfolio Risk )^2 3.99
Portfolio Risk 2.00

Investment A : B = 70 : 30
 ( Portfolio Risk )^2 1.12
Portfolio Risk 1.06

- Illustration 19

Portfolio Risk Return Co of variation

M+A 16.81% 15.50% 108%

L+A 21.03% 17.00% 124%

M+L 17.12% 12.50% 137%

Working
Investment M : A = 50 : 50
( Portfolio Risk )^2 0.03
Portfolio Risk 0.1681

Investment A : L = 50 : 50
( Portfolio Risk )^2 0.04
Portfolio Risk 0.210

Investment M : A = 50 : 50
( Portfolio Risk )^2 0.03
Portfolio Risk 0.1712

- Farmoula for Risk of three asset portfolio

Using farmoula on page 205

- Illustration 20

Risk of portfolio 0.03059001 17.49%

Return of portfolio 23.33%

- Systematic And Un systematic Risk

- CAPM ( page 207 )

- Calculation of Beta Factor

- Alpha Value

- Example ( Page 209 )

- Stocks Shares --------------- X

- Culcuating Alpha Value

Alpha Value = Expected Retur ------------
Alpha Value = 9.50% ------------
Alpha Value = -1.92%

- Calculation of Beta

Beta = 1.07

- Stocks Shares --------------- Y

- Culcuating Alpha Value

Alpha Value = Expected Retur ------------
Alpha Value = 12.00% ------------
Alpha Value = -0.02%

- Calculation of Beta

Beta = 1.18

- Bond --------------- P

- Culcuating Alpha Value

Alpha Value = Expected Retur ------------
Alpha Value = 6.40% ------------
Alpha Value = 0.40%

- Calculation of Beta

Beta = 0.83

- Bond --------------- Q

- Culcuating Alpha Value

Alpha Value = Expected Retur ------------
Alpha Value = 6.40% ------------
Alpha Value = -0.30%

- Calculation of Beta

Beta = 1.42
- Illustration 22 ( Page 211 ) -------- Part - A

- Portfolio Theory

Risk of portfolio
Co officient of variation =
Return of the portfolio

Portfolio Risk Return Co oficient of variation

E+G 8.06% 17.50 0.4607%

E+M 8.76% 19.00 0.4611%
G+M 8.29% 16.50 0.5022%

- Working 01 , Risk of portfolio

E+G 9.00%
E+M 9.50%
G+M 8.50%

- Illustration 22 ( Page 211 ) -------- Part - B

Portfolio Exp Ret Beta CAPM

E+G 17.50% 1.20 18.40%

E+M 19.00% 1.28 18.93%
G+M 16.50% 0.88 16.13%

Question no 01 ------------- Part A , Page 242

Shares Beta CAPM

A 0.93 19.20%
B 1.33 24.00%
C 1.16 21.87%
D 0.84 18.13%
E 1.24 22.93%

Question no 01 ------------- Part B-i , Page 242

Rs In Million
 Shares CAPM Return Div Yield Cap Gain EXP Initial Inv
A 19.20% 3.50% 15.70% 15
B 24.00% 3.00% 21.00% 18
C 21.87% 2.50% 19.37% 22
D 18.13% 8.00% 10.13% 25
E 22.93% 5.00% 17.93% 20

100.00

Question no 01 ------------- Part B-ii , Page 242

Beta of the portfolio

Shares Beta Weight W.Avg Beta

A 0.93 14.89% 0.14
B 1.33 18.69% 0.25
C 1.16 22.54% 0.26
D 0.84 23.63% 0.20
E 1.24 20.24% 0.25

1.10

Question no 01 ------------- Part B-iii , Page 242

CAPM @ 31/12/2016 21.20%

- Question no 28 , Page 287 , Part A

Shares Beta CAPM Exp Return Alpha Value

A 0.10 14.91% 19.50% 4.59%
B 0.81 13.25% 20.00% 6.75%
C 0.89 14.03% 22.00% 7.97%

- Question no 28 , Page 287 , Part B

New Beta of the company 1.19

New Expected Return 16.71%

Current Return of WPL 17.25%

- Treynore ratio
 Page 211

- Sharp Ratio
Page 212

- Question No 31 ( Page 293 )

A B

Initial Investment A 16.08 79.37

Closing Investmet B 21.13 98.19

Expected Return C=(B-A)/A 31.40% 23.71%

CAPM Return D 38.80% 14.74%

Alpha Value E= C - D -7.40% 8.97%

The mutual fund B is give best one as gives the hightest Al[pha value

Working 01

- Calculation of Beta

A 1.44
B 0.29
C 0.71

- From Sharp Ratio , Calculating Standard Daviation of A

Stand Div -- A 36.29%

Stand Div -- B 5.46%
Stand Div -- C 12.52%

- Illustration 23

Calculating Ke using DVM model 16.00%

Calculating Ke using CAPM model 16.00%

- Illustration 24

Divident growth rate 9.92%

- Illustration 25

Sources Ratio Cost WACC

Debt 2.00 7.00% 0.02
Equity 5.00 13.76% 0.10
7 11.83%

- llustration 26

Yield = Pre Tax Cost of debt = ( Inrest ) / Market value 6.45%

Post tax Cost of Debt = = ( Inrest * ( 1 - Tax ) ) / Market value

MV of Debt = 248.00 Million

- Illustration 27

Time line 0 1 2 3

Cash flow (90.00) 5.60 5.60 105.60

Disc @ 5% 1.000 0.952 0.907 0.864

PV (90.00) 5.33 5.08 91.22
NPV 11.63

Disc @ 10% 1.000 0.909 0.826 0.751

PV (90.00) 5.09 4.63 79.34
NPV (0.94)

IRR = 9.61%

- Illustration 28 , 30 , 31

- Illustration 29

Textile Business

Sources Cost MV WACC

Debt 7.50% 40 3.00%
Equity 17.00% 60 10.20%
100 13.20%
- Theory from page 211 to page 222

- Illustration 32

Description Curret Revised

Weight Average Cost of Captical 14.54% 13.65%
Market Worth 37.56 39.31

Working 01

Current WACC
Source Cost MV
Debt 3.58% 7.50
Eqyuty 17.28% 30.06

Tital Market Worth 37.56

Working 02

MVg = MVu -- DT

Current Market Worth

Increase in market worth

New Market Worth of the company

Debt
Old 7.50
New 5.00

Equity

Kd

Working 03
WACCg = WACCu X (1 -- ( DT/ ( D+E ))

Step 01 , Using currnt WACC and Current Gearing calcukate WACCu

WACCg = WACCu X (1 -- ( DT/ ( D+E ))

14.54 = WACCu * ( 1 - ( 7.50*0.35)/(37.35))

WACCu 15.36%
 Step 02 , Using WACCu from step 01 % revised gearing determin revised

WACCg = WACCu X (1 -- ( DT/ ( D+E ))

WACCg = 15.36 * ( 1 - (12.50*0.35)/(39.31))

WACCu 13.65%

Illustration 33

Current Cost of Caltical

Source Cost MV WACC

Debt 5.36% 50.00 0.27%
Eqyuty 13.60% 960.00 12.93%
Tital Market Worth 1,010.00 13.19%

Working 01
Cost of Debt 5.36%
Matrket Value Of Debt 50

Market Value of Equity 960

Current Value Of The business 1,010.00

Reduction in value due to tax shield reduction (1.50)
increase in value of business 15.00

Value of business 1,023.50

Less ; Value of debt -50

Residual Equity 973.50

# of Shares in issue 300.00

Share price 3.25

Expected Cost of Captical

WACCg = WACCu X (1 -- ( DT/ ( D+E ))

Step 01 , Using currnt WACC and Current Gearing calcukate WACCu

 WACCg = WACCu X (1 -- ( DT/ ( D+E ))

13.19 = WACCu * ( 1 - ( 50*0.33)/(1010))

WACCu 13.40%

Step 02 , Using WACCu from step 01 % revised gearing determin revised

WACCg = WACCu X (1 -- ( DT/ ( D+E ))

WACCg = 13.40 * ( 1 - (50*0.30)/(1023.5))

WACCu 13.20%

Illustration 34

Keg 25%
Kd (PT) 8%
D:E 2:5
Tax 30%

Keu ??

Keg = Keu + ( Keu -- Kd ) * (D*(1-T)/(E))

Keu = 22.03%

Determining Kd Kd 11.43

Illustration 36

WACC Calcuation

Sources Cost MV WACC

Debt 7.50% 40 3.00%

Equity 15.88% 60 9.53%

12.53%

- Calcukation Ke

Using CAPM Model 15.88%

 Step 01 -- Calculating Beta Asset from Equity beta of cement Sector

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Asset = 0.754

Step 02 -- Regair aset beta using orignal debt and equity ratios

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Equity = 1.11

Illustration 37

WACC Calcuation

Sources Cost MV WACC

Debt 7.70% 2 2.20%

Equity 18.55% 5 13.25%

15.45%

- Calcukation Ke

Using CAPM Model 18.55%

Step 01 -- Calculating Beta Asset from Equity beta of water bed Sector

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Asset = 1.18

Step 02 -- Regair aset beta using orignal debt and equity ratios

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Equity = 1.51

Illustratration 41
 WACC Calcuation

Sources Cost MV WACC

Debt 7.00% 1 2.33%

Equity 24.79% 2 16.53%

18.86%

- Calcukation Ke

Using CAPM Model 24.79%

Step 01 -- Convertingasset beta to Equity Beta

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Equity = 1.89

Illustration 41

Calculating Current WACC

Sources Cost MV WACC

Loan Notes 7.50% 82.50 0.31%

Bank Loan 6.30% 250.00 0.78%
Equity 14.80% 1,692.00 12.37%

2,024.50 13.45%

- Calcukation Ke

Using CAPM Model 14.80%

- Loan Notes

Time Line 0 1 2

MV (110.00)
Intrest 9.80 9.80
Redemption

NCF -110 9.8 9.8

Disc @ 5% 1.00 0.95 0.91

PV (110.00) 9.33 8.89
 NPV 10.78

Disc @ 10% 1.00 0.91 0.83

PV (110.00) 8.91 8.10

NPV (10.76)

IRR = 7.50%

Calculation of Risk adjustd WACC

Sources Cost MV WACC

Loan Notes 7.50% 82.50 0.31%
Bank Loan 6.30% 250.00 0.78%
Equity 16.04% 1,692.00 13.40%

2024.5 14.49%

Calculation of Risk Adjusted Ke

Using CAPM Model 16.04%

Step 01 -- Calculating Beta Asset from Equity beta of water bed S

Beta Asset = Beta Equity * ( equity / Equity + ( De

Beta Asset = 1.22

Step 02 -- Regair aset beta using orignal debt and equity ratios

Beta Asset = Beta Equity * ( equity / Equity + ( De

Beta Equity = 1.39

Illustration no 42

Sources Cost MV Average

Equity 12.07% 55 6.64%
Debt 4.90% 45 2.20%
8.84%
- Calculation of Ke

Using CAPM Model 12.07%

Step 01 -- Calculating Beta Asset from Equity beta of global Sector

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Asset = 1.2

Step 02 -- Calculating Asset Beta of Ship building

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Beta Asset = 1.76

Step 03 -- Calculating Weight average Equation

Beta Asset ( global ) = ( beta asset ( ship building ) * weight )+(

Beta Asset ( oil rig ) = 0.64

Step 04 -- Calculating Equity beta for global oil rig

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-tax )))

Equity Beta 1.01

End of WAC
 Lecture 19

issue * Mearket price

ficate in issue * Mearket price

106.70

0.864
 92.17

0.751
80.17

tax cost of captical of redemeable / Convertible debt instrument )

e higher value upon redempton

3 4

8.00 -
(2.40) (2.40)
140.00 -

145.60 (2.40)

0.864 0.823
125.77 (1.97)

0.751 0.683
109.39 (1.64)

tax cost of captical of redemeable / Convertible debt instrument )

3 4

80.40 1,080.40

0.751 0.683
60.41 737.93

0.579 0.482
46.53 521.03
 Shares 1480
Debentures 1100

3 4

- -
1,480.00 -
115.00 -
(34.50) (34.50)

1,560.50 (34.50)

0.751 0.683
1,172.43 (23.56)

0.579 0.482
903.07 (16.64)

ax Cost of Debt
minal value )/(issue value ))^1/N)-1 7%

minal value )/(issue value ))^1/N)-1*(1-tax) 4.9%

sue value ))^1/N)-1*(1-tax) 4.09%

Lecture 20
 4 5 6

4.02 4.02 106.02

0.823 0.784 0.746

3.31 3.15 79.11

0.572 0.497 0.432

 2.30 2.00 45.84

eters requried rate of return

18%

10.05%

P*(R - Mean of R)^2

12.80
0.50
14.70
28%
5.29%
P*(R - Mean of R)^2
28.80
4.50
50.70
84%
9.16%

P*(R - Mean of R)^2

0.80
0.50
2.70
4%
2%

Lecture 21
CAPM returm
11.42%

CAPM returm
12.02%

CAPM returm
6.00%

CAPM returm
6.70%
 Lecture 22

cient of variation

Best one

Alpha Value

-0.90%
0.08%
0.38% Best one

Rs In Million
Ine @ 31/12/16 Weight
17.36 14.895%
21.78 18.693%
26.26 22.538%
27.53 23.631%
23.59 20.243%

116.52
 C

95.36
121.49

27.40%

21.61%

5.79%

htest Al[pha value

 4.52%

Cement Business

Sources Cost MV WACC

Debt 7.50% 40 3.00%
Equity 18.20% 60 10.92%
100 13.92%

Lecture 23
 Lecture 23

Effect
-0.89%
1.75

WACC
0.71%
13.83%

14.54%

37.56
1.75

39.31

12.5

26.81

3.58%

alcukate WACCu
ring determin revised WACCg

alcukate WACCu
ring determin revised WACCg

Lecture 24
a of cement Sector

y / Equity + ( Debt * ( 1-tax )))

equity ratios

y / Equity + ( Debt * ( 1-tax )))

a of water bed Sector

y / Equity + ( Debt * ( 1-tax )))

equity ratios

y / Equity + ( Debt * ( 1-tax )))

y / Equity + ( Debt * ( 1-tax )))

3 4 5

9.80 9.80 9.80

100.00

9.8 9.8 109.8

0.86 0.82 0.78

8.47 8.06 86.03
 0.75 0.68 0.62
7.36 6.69 68.18

om Equity beta of water bed Sector

Equity * ( equity / Equity + ( Debt * ( 1-tax )))

rignal debt and equity ratios

Equity * ( equity / Equity + ( Debt * ( 1-tax )))

a of global Sector

y / Equity + ( Debt * ( 1-tax )))

y / Equity + ( Debt * ( 1-tax )))

et ( ship building ) * weight )+( beta asset ( Oil rig ) * weight )

y / Equity + ( Debt * ( 1-tax )))

End of WACC - Move to APV Sheet

- Use Un geared beta i.e. Beta Asset for calcuation of APV

- Illustration 43

Sources Cost MV weight average

Debt 2.80% 1 0.93%
Equity 9.94% 2 6.62%
WACC 7.56%

Calculation of Risk Adjusted Ke

Using CAPM Model 9.94%

Step 01 -- Calculating Beta Asset from Equity beta of sausage Business Sector

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-ta

Beta Asset = 0.628

Step 02 -- Regair aset beta using orignal debt and equity ratios

Beta Asset = Beta Equity * ( equity / Equity + ( Debt * ( 1-ta

Beta Equity = 0.848

- Illustration 44

Calculating Keu 8.40%

Using CAPM Model = Rf+(Beta Asset*(Rm%-Rf))

- Illustration 45 , Rs In Milion

NPV

Base Case NPV 65.96

Issues Costs (26.53)
Tax Saving on issued Cost 1.96 Discount using risk free rate
Tax Saving on on intrest payment 26.80 Discount using risk free rate

Adjusted Net present Value 68.18

Time Line 0 1 2

Capex (800.00) - -
Net oprating cash Flows - 450.00 450.00
Taxes - (82.50) (99.00)

Net cash flows (800.00) 367.50 351.00

Disc Factor 1.000 0.862 0.743

Present Value (800.00) 316.81 260.85

Base Case NPV 65.96

Working 01 , Taxes

Time Line 1 2 3

NCF 450 450 450

Dep (200.00) (150.00) (112.50)
Loss - - (337.50)
Profit 250 300 0
Tax @ 33% (82.50) (99.00) -

Woking 2 Tax Dep

Time Line 1 2 3

Cost 800.00 600.00 450.00

Dep (200.00) (150.00) (112.50)
WDV 600.00 450.00 337.50

- Loss on Disposal

WDV 337.50
SP -

Loss (337.50)

Working 03 Keu Calculation

Beta Equity 1.19

Debt : Equity 30 : 70

Asset Beta of Snow board = 0.92

 Using CAPM Model = Rf+(Beta Asset*(Rm%-Rf))

Approx

- Illustration 45 , Rs In Milion , Continued …................

- Financing Stucture

Debt 40% 320

Equity 60% 480

- Working 01 --- Issued Costs ---- Adjustments

Sources Raise Amount received Issue Cost
Debt 326.53 320 6.53
Equity 500.00 480 20.00
26.53

- Working 02 --- Intrest ---- Adjustments

Loan Amount 326.53

Year Intrest PV Fac @ 10%

Intrest -- Y-01 32.65 0.909
Intrest -- Y-02 32.65 0.826
Intrest -- Y-03 32.65 0.751

- Illustration 46 , Rs In Milion

Adjusted Net present Value Adjustments

Sr No Adjustments NPV ( M )

1 Issued Costs -
2 Tax Saving oon issued Cost -
3 Tax Saving on intrest Payment 11.56
4 Intrest Saving due to subsidized loan 6.49
5 Tax Saving lost due to subsidized loan (1.86)
6 Tax Saving on sapre Debt capisity 4.95

Adjusted Net present Value 21.15

 Sources of Finance

5 Year Bonds @ 8% 100

5 Year RD: @ 3% 30

- Working 01 ---- Tax Saving on intrest payment

Year Intrest Payment PV

Annual Intrest - Year 01 2.67 0.95

Annual Intrest - Year 02 2.67 0.91
Annual Intrest - Year 03 2.67 0.86
Annual Intrest - Year 04 2.67 0.82
Annual Intrest - Year 05 2.67 0.78

Npv Of Tax Savings

- Working 02 ---- Intrest saving due tu subsidy

Year Intrest Payment PV

Annual Intrest - Year 01 1.50 0.95
Annual Intrest - Year 02 1.50 0.91
Annual Intrest - Year 03 1.50 0.86
Annual Intrest - Year 04 1.50 0.82
Annual Intrest - Year 05 1.50 0.78

Npv

- Working 03 ---- Tax Saving on spare debt Capisity

Spare Debt = Total borrowing - Actual Borrowing * Tax Rate * PV Factor

Year Intrest Payment PV

Annual Intrest - Year 01 1.20 0.91
Annual Intrest - Year 02 1.20 0.86
Annual Intrest - Year 03 1.20 0.82
Annual Intrest - Year 04 1.20 0.78
Annual Intrest - Year 05 1.20 0.75

NPV

- Illustration 47

SR No Description NPV
1 Base Case NPV (1,566,299)
2 Issued Costs (467,172)
3 Tax Saving on issued Cost 14,029
4 Tax Saving on intrest Payment 1,288,336
 5 Intrest Saving due to subsidized loan 375,765
Adjusted Net present value (355,341)

- Calcuation of Base Case NPV

Time Line 0 1 2
Initial Inv (25,000,000) - -
Cash flow - 5,000,000 5,000,000
Tax - (1,500,000) (1,500,000)
Residual Value - - -

Net Cash Flow (25,000,000) 3,500,000 3,500,000

Disc Fac @ 10% 1.00 0.91 0.83

Present value (25,000,000) 3,181,818 2,892,562

Net present value (1,566,299)

Working 1.1 , Disc Factor

Beta Asset = Keu = Rf + ( Rm - Rf ) * Beta A

Working 1.2 , Asset Beta

Step 01 -- Calculating Beta Asset

Beta Asset = Beta Equity * ( equity / Equity

Beta Asset = 0.706

Working 02
Sources Amount
Retained Earnning 6,000,000
Right issue 10,000,000
Comercial Loan @ 8% 5,000,000
subsidized Loan @ 6% 4,000,000
25,000,000

Working 03 ------- Issued Cost

Debt 50,505
Equity 416,667

Issued Cost 467,172

Working 04 ------- Tax Saving on Issued Cost

 Debt 14,029

Working 05 ------- Tax Saving on Intrest payment

Year Intrest Tax Saving

1 640,000 192,000
2 640,000 192,000
3 640,000 192,000
4 640,000 192,000
5 640,000 192,000
6 640,000 192,000
7 640,000 192,000
8 640,000 192,000
9 640,000 192,000
10 640,000 192,000

Working 06 ------- Intrest saving on subsidized loan

Year Intrest Disc Fac @ 8%

1 80,000 0.926
2 80,000 0.857
3 80,000 0.794
4 80,000 0.735
5 80,000 0.681
6 80,000 0.630
7 80,000 0.583
8 80,000 0.540
9 80,000 0.500
10 80,000 0.463

NPV

Post Tax NPV

- Illustration 48

SR No Description NPV

1 Base Case NPV (342,485)

2 Issued Costs (61,856)
3 Tax Saving on intrest Cost 411,837
4 Intrest Saving due to subsidized loan 480,400
5 Tax Saving lost on subisidized loan (128,699)
 Adjusted Net present value 359,197

- Calculation of Base Case NPV

Time line 0 1

Initial Capex (10,000,000) -

Residual Value - -
Net Cash Flows - 4,500,000
Taxes - -
Net Cash Flows (10,000,000) 4,500,000
Disc @ 17% 1.000 0.855

Present value (10,000,000) 3,846,154

Net present value (342,485)

Working 01 , Taxes

Time Line 1 2 3

Cash Flow 4,500,000 4,500,000 4,500,000

Dep (2,500,000) (1,875,000) (1,406,250)
Loss on disp - - (3,218,750)

Net Cash Flow 2,000,000 2,625,000 (125,000)

Tax Savings (600,000) (787,500) 37,500

Working 1.1 , Depreciation

Time line 1 2

Cost 10,000,000 7,500,000

Dep (2,500,000) (1,875,000)
WDV 7,500,000 5,625,000

Working 1,2 , Disposal proceeds

WDV 4,218,750
SP 1,000,000

Loss (3,218,750)

Working 02 , Detrminatinng of Keu

 Keu = 16.9%

Using farmoula for asset beta

Asset Beta = 0.7

Working 03 , Financing stucture

Subisidized Loan 5,000,000

Right issue 2,000,000
Retained Earnings 3,000,000

Total Financing 10,000,000

Working 04 , Issue cost on Right issue

Issue Cost 61,856

Working 05 , Tax Saving on intrest

Intrest Cost 411,837

Working 06 , Intrest saving on subsidy

Intrest Savings 480,400

Tax Saving on subsidized loan 128,699

- Question No 29 , VTL ( page 289 )

Time Line 0 1 2

Mobilization advance 375.00 (37.50) (93.75)

Initial Capex (250.00) - -
Net operating cash flows - (233.00) 82.00
Ret Money ( W-01 Prog Bil * 5%) - (7.50) (18.75)
Taxation - - -

Net Cash flows 125.00 (278.00) (30.50)

Disc Fac ( 9%+(0.7*6%)) = 13% 1.000 0.885 0.783
Present value 125.00 (246.02) (23.89)

Base Case NPV (1.65) = (1,650,000)

Issue Cost (2,525,253)
Tax Saving on issued cost 695,024
Tax Saving on Term loan 24,545,455
Tax Saving on Intrest cost of running finance -

Adjusted Present Value 21,065,226

Working 01 , Net opertaing cash flows

Time line 1 2

Progress Billings 150.00 375.00

Marerial (280.00) (140.00)
Sub contracting cost - (50.00)
Other Direct Cost (103.00) (103.00)

Net operating cash flows (233.00) 82.00

Tax depreciation (125.00) -
Initial Allowance (12.50) (11.25)

Profit / ( Loss ) (370.50) 70.75

Loss B/F - (370.50)

Loss C/F (370.50) (299.75)

Tax @ 30% - -

W -- 1.1 Dep

Time line 1 2

Cost 250.00 112.50

I.Allow (125.00) -
Dep (12.50) (11.25)

WDV 112.50 101.25

Working 02 , Running finance

Time Line 1 2

Cash in Hand- b/f 375.00 71.75

Net Cash Fow (278.00) (30.50)
Intrest on Term Loan (25.25) (25.25)

Cash in hand C/f 71.75 15.99

 Lecture 24

ausage Business Sector

/ Equity + ( Debt * ( 1-tax )))

/ Equity + ( Debt * ( 1-tax )))

8.40%

unt using risk free rate ------ Working 01

unt using risk free rate ------ Working 02
 3

-
450.00
-

450.00
0.641

288.30
 15.52%

16%

Lecture 25

PV Tax Saving
29.68 9.80
26.99 8.91
24.53 8.10
81.20 26.80
 NPV

2.54
2.42
2.31
2.20
2.09

11.56

NPV PV Fac ( Tax SavTax Sav Lost

1.43 0.91 0.41
1.36 0.86 0.39
1.30 0.82 0.37
1.23 0.78 0.35
1.18 0.75 0.34

6.49 1.86

Tax Rate * PV Factor =

NPV
1.09
1.04
0.99
0.94
0.90

4.95
 3 4 5 6 7 8
- - - - - -
5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000
(1,500,000) (1,500,000) (1,500,000) (1,500,000) (1,500,000) (1,500,000)
- - - - - -

3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000

0.75 0.68 0.62 0.56 0.51 0.47

2,629,602 2,390,547 2,173,225 1,975,659 1,796,053 1,632,776

= 10%

quity * ( equity / Equity + ( Debt * ( 1-tax )))

Disc Fac @ 8% PV

0.926 177,778
0.857 164,609
0.794 152,416
0.735 141,126
0.681 130,672
0.630 120,993
0.583 112,030
0.540 103,732
0.500 96,048
0.463 88,933

1,288,336

PV

74,074
68,587
63,507
58,802
54,447
50,414
46,679
43,222
40,020
37,055

536,807

375,765
 2 3 4

- - -
- 1,000,000 -
4,500,000 4,500,000
(600,000) (787,500) 37,500.00
3,900,000 4,712,500 37,500
0.731 0.624 0.534

2,849,003 2,942,346 20,012

5,625,000
(1,406,250)
4,218,750
 Lecture 26

3 4 5

(131.25) (112.50) -
- 82.01 -
232.00 157.00 -
(26.25) (22.50) 75.00
- (21.00) -

74.50 83.01 75.00

0.693 0.613 0.543
 51.63 50.91 40.71

3 4

525.00 450.00
(140.00) (140.00)
(50.00) (50.00)
(103.00) (103.00)

232.00 157.00
- -
(10.13) (9.11)

221.88 147.89
(299.75) (77.88)

(77.88) 70.01

- (21.00)

3 4

101.25 91.13
- -
(10.13) (9.11)

91.13 82.01

3 4

15.99 65.24
74.50 83.01
(25.25) (25.25)

65.24 123.00
 9 10
- -
5,000,000 5,000,000
(1,500,000) (1,500,000)
- 5,000,000

3,500,000 8,500,000
0.42 0.39

1,484,342 3,277,118
 L

Financial Management consist of

- Investmet decision
- Financing Decision
- Divident Decision
Lecture 26
Risk management is basically netting off FCY gain / Loss

- Netting Off

Illustration 06 Amount in million Pound

---------- Recieveing Companies ---------

India HK US

India - - 0.749

HK 2.120 - 0.565

US - 1.413 -

Total Recieveables 2.120 1.413 1.315

Total paymments (0.75) (2.69) (1.41)

Net Recipts / (Payments) 1.37 (1.27) (0.10)

- Forward Rate Agrement

Illustration No 7

FCY doller payment 500,000 payable in three months

FCY Recipts Yen 100,000,000 recieveable in 4 months

Purchasing power parity

Page 532

Illustration 8

Doller / Pound ??

01) Forward rate ( Doller / Pound ) = Spot rate * ( 1 + Inflation (doller)) / ( 1 + inflatio
 Forward rate = 1.4231 Doller / Pound

02) Forward rate ( Doller / Pound ) = Spot rate * ( 1 + Inflation (doller)) / ( 1 + inflatio

Forward rate = 1.4361 Doller / Pound

03) Forward rate ( Doller / Pound ) = Spot rate * ( 1 + Inflation (doller)) / ( 1 + inflatio

Forward rate = 1.4429 Doller / Pound

04) Forward rate ( Doller / Pound ) = Spot rate * ( 1 + Inflation (doller)) / ( 1 + inflatio

Forward rate = 1.3661 Doller / Pound

Illustration 09

on 01 - July

Purchase of Dollars 96,000 Doller

Exchange rate
Spot 1.5145 Doller / Pounds
Premium 0.0095 Doller / Pounds

Excange rate 1.5050 Doller / Pounds

Purchase of dollars 63,787 Pounds

Net Recipts on spot

Surplus Rate 46,000 Dollars

Exchange rate
Spot 1.5110 Doller / Pounds

Recipts 30,443

Net payment in pounds 33,344

Money market Hedge

Ilustration 10 -------- Part 01

Payment to be made 500,000 Dollars

Step 01 --- Calculate the amount of FCY to be deposit in Bank

Amount in Dollars = X* (1+(0.045*3/12)) = 500,000

Amount in dollars 494,437

Step 02 ) Convert FCY to DCY @ spot

Amount in RS 494,437
Spot Rate ( RS / Doller ) 170.5

Amunt in Rs 84.30

Step 03 ) Borrow DCY

Amount in RS = 84.30* (1+(0.055*3/12))

Amount in RS 85.46

Ilustration 10 -------- Part 02

Rcipts to be earned 100,000,000 Yen

Step 01 --- Calculate the amount of FCY to be borrowed Bank

Amount in Yen = X* (1+(0.09*4/12)) = 100,000,000

Amount in Yen ( Million ) 97.08

Step 02 ) Convert FCY to DCY @ spot

Amount in Yen 97.08

Spot Rate ( RS / Yen ) 1.5

Amunt in Rs 145.62

Step 03 ) Deposit DCY

Amount in RS = 147.62 * (1+(0.0475*4/12))

Amount in Rs 145.93
Illustration No 12

Doller Exposure
Payment 240,000 Doller
Recipts (69,000) Doller

Net Payment 171,000 Doller

Austrilan doller
Net recipts 295,000 AUS -- Doller

- Dealing with Doller

FRA to Buy

Amount to be paid 171,000 Doller

Converio Rate 0.952 Doller / Euro

Amount in Euro 179,622 Euro

Money Market -------- Doller Liablity

Deposit Doller
Step 01 --- Calculate the amount of FCY to be deposit in Bank

Amount in Dollars = X* (1+(0.1*3/12)) = 171,00

Amount in Dollars
Buy Doller @ spot

Dollars 166,829
Spot Rate 0.983

Amoount n Euro 169,714

Boorrow Euro

Amount in Euro = 169,714X* (1+(0.1*3/12))

Amount in Euro

- Dealing in AUS Doller

FRA for four months

 Amount in Aus Doller
Conversion Ratev

Amount in Euro

Money Market Hedge ----- Aus Doller Asset

Borrow Aus Doller

Fcy to be borrowed 280,063

Sell Aus Doller @ spot

Conversion of Aus Doller to Euro

Aus Doller
Conversion Rate

Amount in Euro

Deposit Euro

Deposit the DCY for 4 Months time preoid

Currenncy Future

Illustration 14

Amount is to be Paid 650,000 Pound

Determin the cmtract

Buy Now
Sell Later

Contract Size
62,500 cntract size

No of Contracts

Amount 650,000 Pound

Contract soze 62,500 Pound

No of Cont 10 Contracts
 Contract maturity date
Match future maturity

On payment date

Close future Hedge and calculate gain/(Loss)

Buy 1.4960 Doller / Pound

Sell 1.5120 Doller / Pound

Gain 0.0160 Doller / Pound

No of Contracts 10
Contract Size 62,500 Pound

Net Gain 10,000 Doller

Settle Liability @ Spot Rate

Amount to be paid 650,000

Conversion Rate 1.5130

Net Amount to be paid 983,450

Gain on Future (10,000)

Net Cost 973,450

Hedge Efficience

Hedge Efficiency = Gain in Future / Loss Spot Market

Illustration - 15

Determin the future

Sell now
Buy now

No of Contracts
Amount 455,000 Sterling
Contract Size 62,500 Sterling

No of Contracts 7 Contracts

Maturity of Future
 December Maturity future

Case -- A

Future Contact to be close out

Sell now 1.4380 Doller / Sterling

Buy now (1.4810) Doller / Sterling

Loss (0.0430) Doller / Sterling

No of contracts 7
Amount 62,500 Sterling

Net Loss (18,813) Doller

Settlemet of recipts At Spot Rate

Amount received 455,000

Exchange Rate 1.49

Net Recipts 677,950

Loss inn Future (18,813)

Net Recipts 659,137

Illustration No 16

Determin the future

Sell now
Buy now

No of Contracts
Amount 400,000 Sterling
Contract Size 62,500 Sterling

No of Contracts 6 Contracts

Maturity of Future
March Maturity future @ 1.8600 Doller/Sterling

Close out Future Contact

 Sell now 1.8600 Doller/Sterling
Buy now (1.8420) Doller/Sterling

Gain 0.0180 Doller/Sterling

No of Cont 6
Size 62,500 Sterling

Net Gain 6,750 Doller

Settlement @ Spot Rate

Amount to be received 400000

Spot rate 1.845

Net recipts 738,000

Gain on Future 6,750

Net Recipts 744,750

Calculation of Effective Rate 1.8619

Illustration No 18

Determin the future

Sell now
Buy now

No of Contracts
Amount 640,000 Doller
Conv . Rat 1.2800 Doller / Euro

Net Amount 500,000 Euro

Contract Size 125,000 Euro

No of Contracts 4.00 Contracts

Maturity of Future
May Maturity future

Close out Future Contract

Sell Now 1.2800 Doller / Euro

Buy Later (1.2690) Doller / Euro

Gain 0.0110 Doller / Euro

 No of Contracts 4
Size 125,000 Euro

Net Gain 5,500 Doller

Settle the contract @ Spot

Amount to be paid 640,000

Spot Rate 1.2710

Net Amount 503,541

Gain in futuresv@ Spot (4,327)

Net Euro payments 499,213

Illustration No 17

Scanerio -------- 01

Determin the future

Sell now
Buy now

No of Contracts
Amount 168,000 Sterling
Contract Size 25,000 Sterling

No of Contracts 7.00 Contracts

Maturity of Future
September Maturity future

Close out Furure Contract

Sell 1.7498 Deller / Sterling

Buy (1.7154) Deller / Sterling

Gain 0.0344 Deller / Sterling

No of Contracts 7
Contract Size 25,000 Steling

Net Gain 6,020 Doller

 Settlement @ Spot

Amount 168,000 Sterling

Conversion Rate 1.7110 Doller / Sterling

Net Amount 287,448 Doller

Gain in Future 6,020 Doller

Net Proeeds 293,468 Doller

Working 01 ------- Estimating Closing future price

on 1-June Spot 1.7498

Future 1.7410

Baises 0.0088

on 1-August Outstanding Bases 0.0044

on 1-August Spot Rate 1.7110

Adj of Baises 0.0044
Future Rate 1.7154

Scanerio -------- 02

Contract
Buy now
Sell Later

Maturity
December Future Contract

No of Contracts

Amount to be hedged 244,500

Future rate 1.7570

Amont 139,158
Contract Size 25,000

No of Contracts 6.00

Close out Future Contract

Buy Now 1.7570 Doller / Sterling

Sell Later 1.6897 Doller / Sterling
 Loss on future (0.07) Doller / Sterling

No of Contracts 6
Size 25,000 Sterling

Loss (10,093) Doller

Purchase @ Spot 1.969 Doller / Sterling

Loss on Future (5,126) Sterling

Settlement of liability @ Spot

Spot Rate 1.688 Doller / Sterling

Paymet to be made 244,500 Doller

Net payment 144,846 Steling

Loss on Future 5,126 Steling

Net Payment 149,972 Steling

Working 02 ------- Estimating Closing future price

on 1-June Spot 1.7450

Future 1.7570

Baises 0.0120

on 1-December Outstanding Bases 0.0017

on 1-August Spot Rate 1.6880

Adj of Baises 0.0017
Future Rate 1.6897

Solve Illustration no 19 ( Page 540 )

Currencty Options

Future

Buy now
FCY Payment---------------->>> ---------------->>>
Sell Later

Sell Later
FCY Recipt ---------------->>> ---------------->>>
Buy now
Currency Options

Illustration 20 , Page 544

Setting up Hedge

Call Option shall be taken

Settlement date ----- June

No of Contracts 17 Contracts

Checking Best strike price

Strike Price Premiunm

OP---01 1.65 0.1185

OP---02 1.70 0.0625
OP---03 1.75 0.0395

Calculation of Premium

Premium 0.0625
No of Contracts 17
Contract Size 12,500

Premium to be paid 13,281

On settlement date / Payment date

Strike price VS Spot price

1.70 VS 1.8450

Option will be exercised

Buy 17 Contracts of 12,500

Buy 4,000 Pound @ Spot
Option premium
Illustration 21 , Page 544

Set up option Hedge

Call option
June Contract maturity

No of Contracts
Amount 355,000 Pound
Size 25,000 Pound

No of Cont 14

Calculation of Strike price

Exercese price Premium Strike Price

Doller / pound Doller / pound Doller / pound

Call option 1.4500 0.0895 1.5395

Call option 1.5000 0.0680 1.5680

Calculation of Pemium

No of Contracts 14
Size 25,000 Pound
Premiun 0.0895 Doller / pound

Net Premium Cost 31,325 Doller

On 30 June

Strike price 1.4000

Spot 1.4850

Amount Ex rate
Pound Doller / pound

Purchase of Pounds 350,000 1.4500

Purchase of Pounds @ spot 5,000 1.4810
Option premium Paid

Net Sterling payment

Illustration 22

Spots etc ----------- From Illustration 21

 Setting up Hedge

Put option
September option Maturity

No of Contracts 12

Slecton of Best price

Exercise price Premium Total

Doller/Pound Doller/Pound Doller/Pound

Put option 1.4500 0.1415 1.3085

Put option 1.5000 0.0800 1.4200

Option premium

No of Contracts 12
Contract Size 25,000 Pound
Premiun 0.0800 Doller/Pound

Option premiun to be paid 24,000 Doller

On Maturity

Spot Rate 1.5250 Doller/Pound

Option Rate 1.5000 Doller/Pound

Sell All pounds @ spot rate

Pounds 449,875 Doller

Option premium (24,000) Doller

Net Doller Recipts 425,875 Doller

Illustation 23 , Page 545

Setting up Hedge

Put option of Pound

Settlemet date of June

Calculation of Best Price

S.Price Premium Total

Doller/Pound Doller/Pound Doller/Pound
Put 1.45 0.1020 1.3480
Put 1.50 0.1240 1.3760

No of Contracts

Amount 350,000 Doller

Conversion Rate 1.50 Doller/Pound

Amount 233,333 Pound

Contract Size 25,000 Pound

No of Contracts 9 Contracts

Calculation of Option premium

No of Contracts 9 Contract
Contract price 25,000 Pound
Premium Amount 0.1240 Doller/Pound

Premium to be paid 27,900 Doller

Conversion Rate 1.5190 Doller/Pound

Amunt to be paid 18,367 Pound

On Settlement Date , 30 June

Spot rate 1.4810 Doller / Pound

Strike price 1.5000 Doller / Pound

Exercise option in the following way

Option Contracts 9
Contract size 25,000 Pound

Amount 225,000 Pound

Conversion Rate 1.50 Doller/Pound

Amount 337,500 Doller

Short $ to be pur from spot Rate 1.4810 Doller / Pound

No of pounds needed 8,440 Pounds

Dollars 12,500 Dollars

Net Doller Payment 350,000 Dollars

Cost of Buying 350,000 Dollars 251,808 Pounds

Illustration 24

Continue from illustration 23

Setting upmHedge

Using call option

Maturity of September contracts

Slecting best strike price

Exercise price Premiun Total

Doller/Pound Doller/Pound Doller/Pound

Call Option 1.4500 0.1415 1.5915

Call Option 1.5000 0.0800 1.5800

Calcuation of No of Contracts

Amount to be hedged 275000

Conversion Rate 1.5000
Amount 183,333
Contract sixe 25,000

No of Contract 7.00

Calculation of Option premium

Premium 0.0800
No of Contracts 7
Contract Size 25000

Premun to be paid 14000

Spot rate 1.519

Amount 9,217

On Maturity Date

Strike price 1.5000 Doller/Pound

Spot price 1.5285 Doller/Pound

Exercising Option

Option contracts 7
Option contracts Size 25,000
 Net Pounds 175,000

Exercise Price 1.5000

Amount 262,500

Purchaseing of Remining $$
Spot Rate 1.5285
Pounds 8,178

Total Dollars 12,500

Net Proceeds in Pounds 173,961

Past Papers ( Question No 01 ) ----------- Solution

FRA
Buyy Yen 175 Million in Three month forward @ 1.9493

Amount 175
Conversion Rate 1.9498

Amount 341.215

Money Market Hedge

Yen Deposit 173.69 Million Yen

Convert Yen at Spot

Amount of Yen 173.69

Conversion Rate 1.9339

Amount 335.90

Borrow Rupees 342.62 Milion Rs

Currency Futures

Setting Up Hedge

Buy Now
Settlement Date 31-Oct

Price 1.9421
 No of Contracts 1750

Margin on Futures 1,750,000

Calculating the closing out hedge

Sell 1.9493
Buy (1.9421)

Gain 0.0072

No of Cntracts 1,750
Cont Size 0

Net Gain 1.26

Purchasing Yen @ spot

Amount 175
Conversion Rate 1.9493

Amount 341.13
Gain on Future (1.26)
Intrest Cost on margin (0.04)

Amount 339.83

Option Contract

Setting up Hedge

Call option ------- Buy

Settlement date ------ 31-Oct

No Of Cont 700 Contracts

Slecting the best option

Strike Price Premium
Rs/Yen Rs/Yen

Op--01 1.90 0.0355

Op--02 1.91 0.0232
Op--03 1.92 0.0115

Calculation of Premium

Amount of premium 0.0115

No of Contract 700
 Size 0.25

Option premium paid 2.01

On 31/Oct ---------- Maturity Date

Spot Rate 1.9493

Option Price 1.9200

Exercise of Option

Purchase of Yen 1.9200

Amount 175

Total Amount 336.00

Premium + Intrest cost 2.05

Total Amount 338.05

Currency SWAP
Page 546

Illustration 26
Part A ) Today we shall brrow Down land Doller And we shall buy 750 Million Erics

Amount 750.00
Spot Rate 30.00

Converted Currency 25.00

FRA to sell Ericks 1200 Milion @ 33 Ericks/Down $$

Proceeds After 1 Years

Proceeds 1200
Conversion Rate 33

Amount 36.36
Repaymment of principal + Intres (28.50)

Net profit 7.86

 Part B ) Forex SWAP + FRA

Borrow D$ @ 14% for SWAP ----------- Rate 27 E / D$$

FRA ------->> 1200M --- 750M = 450M

After 1 Year
Re SWAP ------------ 750 Milion Ericks Paid
SWAP fee @ 1%

Proceeds From FRA

Amount 450
Exc Rate 33

Net proceeds from the project

Repaymet ( Principal + Intrest )

Net Proceeds

Illustration 27

Part A ) There is no SWAP option

Borrow Pound @ 10% to buy KD 100 Million

Pound to be borrowed
Amount Requried 100
Exchange Rate 22

Amount 4.55

After 1 ---- Year

Proceeds reciweved ( Million KD ) 130

Less Repayment ( 4.55*1.1)

Profit / ( Loss )

Part B ) There is a SWAP option

Borrow pound @ 10% to buy 100 Million KD

 Amount requried 100
Exchange Rate (SWAP) 20

Amount needed 5

After 1 ---- Year

Proceeds reciweved ( Million KD ) 130

Re SWAP ------------- KD 100 Million
Re SWAP ------------- KD 11 Million ---- Fee

Remaining Amount ( 130 -- 100 -- 11 = 19 M-KD ) Sell @ Spot

Total Proceeds
Repayment of Loan ( 5*1.1)

Net profit
 Lecture 34

Amount in Million

85.45 RS

173 RS

flation (doller)) / ( 1 + inflation (Pound))

 ( 1 Year )

flation (doller)) / ( 1 + inflation (Pound))

( 6 Month )

flation (doller)) / ( 1 + inflation (Pound))

( 3 Months)

flation (doller)) / ( 1 + inflation (Pound))

( 1 Months)

er / Pounds
er / Pounds

er / Pounds

er / Pounds
To be bught @ spot rate

Rs In million

RS in Million

To be bught @ spot rate

Rs In million

RS in Million
 Lecture 35

CY to be deposit in Bank

X* (1+(0.1*3/12)) = 171,000

166,829

Doller
Doler / Euro

Euro

9,714X* (1+(0.1*3/12))

175,230
 295,000 AUS
1.951 Euro/Aus

575,545 Aus Doller

Aus Doller

280,063 Aus
1.8890 Euro / Aus

529,039 Euro

549,318 Euro
Pound
Doller / Pound

Doller
Doller

Doller
 Case -- B

Future Contact to be close out

er / Sterling Sell now 1.4380

er / Sterling Buy now (1.3965)

er / Sterling Gain 0.0415

No of contracts 7
Amount 62,500

Net Loss 18,156

Settlemet of recipts At Spot Rate

Sterling Amount received

Doller / Sterling Exchange Rate

Doller Net Recipts

Doller Gain in Future

Doller Net Recipts

Sterling
Doller / Sterling

Doller
Doller

Doller

Doller / Sterling
Doller
Doller / Euro

Euro
Euro

Lecture 36
er / Sterling

Doller / Sterling
Doller / Sterling

Doller / Sterling

Doller / Sterling

Doller / Sterling
Doller / Sterling
Doller / Sterling

Doller
Doller / Sterling

Sterling
Sterling

Contracts

er / Sterling
er / Sterling
er / Sterling

er / Sterling

er / Sterling

Doller / Sterling
Doller / Sterling

Doller / Sterling

Doller / Sterling

Doller / Sterling
Doller / Sterling
Doller / Sterling

Option

Call Option Lowest Price

Put Option Hightest Price

 Lecture 37

Exercise price

1.7685
1.7625 Best option
1.7895

Doller / Pound

Pound

Dollars

Amount Exercise price Total

Pound Doller / Pound Doller

212,500 1.7000 361,250 Doller

4,000 1.8450 7,380 Doller
13,281 Doller

381,911 Doller
 Best option

Option shall be exercised

Net Amount
Doller

507,500
7,405
31,325

546,230
 Best option

option shall not be exercised

Best Price
 Best price

Dollars
Doler/Pound
Pound
pound

Contract

Doler/Pound

Pound

Doller
Doller/Pound

Pound

Option shall be exercises

Pound
Pound

Doller/Pound
Doller

Doller/Pound
Pounds

Dollars

Pounds

Million Yen
Rs / Yen

Million Rs

Million Yen
RS / Yen

Million Rs

Rs / Yen
Contracts

Rupees

Rs/Yen
Rs/Yen

Rs/Yen

Yen

Million RS

Million Yen
RS / Yen

Million RS
Million Rs
Million Rs

Million RS

Total
Rs/Yen

1.9355
1.9332
1.9315 Best Option

Rs/Yen
 Yen

Rs

Rs/Yen Option shall be exercised

Rs/Yen

Rs/Yen
Million Yen

Million RS
Million RS

Million RS

Lecture 38

buy 750 Million Erics

Million Erics
Eircks/Down$

Million Down doller

icks/Down $$

Million ericks
Eircks/Down$

Million Down$$
Million Down$$

Million Down$$
Rate 27 E / D$$ 27.78 Million D$$

E 450M sell @ 33 E/D$

27.78 Million D$$

(0.28) Million D$$

Milion E
E/D$$ 13.64 Million D$$

41.14 Million D$$

(31.67) Million D$$

9.47 Million D$$

Million KD
KD/Pound

Million Pound

EX-- Rate -- 01EX-- Rate --- 02

KD/Pound KD/Pound
25 30

5.20 4.33 Million Pound

5.01 5.01 Million Pound

0.20 (0.67) Million Pound

 Million KD
KD/Pound

Million KD

EX-- Rate -- 01EX-- Rate --- 02

KD/Pound KD/Pound
25 30

5.00 5.00 Million Pound

= 19 M-KD ) Sell @ Spot 0.76 0.63 Million Pound

5.76 5.63 Million Pound

(5.50) (5.50) Million Pound

0.26 0.13 Million Pound

Doller / Sterling
Doller / Sterling

Doller / Sterling

Sterling

Doller

455,000 Sterling
1.41 Doller / Sterling

641,550 Doller
18,156 Doller

659,706 Doller
 L

Forward rate agreement ( FRA )

Page 548

Illustration --- 28
Rs (Million)
Option A Int @ 14%

Amount to be borrowed 50.00

Actual intrest in loan 14.00% 4.67

FRA settlemet Received/(Paid) 1.10% (0.37)

Total 12.90% 4.30

Option B

Calculating PV of FRA 0.338

Illustration --- 30

Rs (Million)
Option A Int @ 14%

Amount to be borrowed 75.00

Actual intrest in deposit 14.00% 5.25

FRA settlemet Received/(Paid) -1.75% (0.66)

Total 12.25% 4.59

Option B

Calculating PV of FRA 0.62

Intrest rate gurantee ----- Option on FRA

Illustration 31
 Rs
Option A Int @ 17%

Amount to be borrowed 8,000,000

Actual intrest in loan 17.00% 340,000

FRA settlemet Received/(Paid) 2.00% (40,000)
Option premiun paid 0.10% 8,000

Total 15.00% 308,000

Intrest Rate Future

Illustration 33

Calculatin No of Contracts

Amount 9,000,000 RS
Contract size 1,000,000 RS
Actual maturity 1 Month
Contract maturity 3 Month

No of Contract 3.00 Contracts

Extra intrest to be paid

Amount 9,000,000 RS
Rate 0.25%

Amount 1,875 RS

Future Contract
Sell 96.90 %
Buy 96.65 %

Gain 0.25 %
No of Cont 3
Size 1,000,000
Maturity 0.25

Gain in future 1,875 RS

Illustration 34

Setting up Hedge

Loan future Sell intrest rate future

Contracts
Amouunt 2 Milllion
Cont Size 0.5 Milllion
Actual maturity 3 Mnths
Cont maturity 3 Mnths

No of Connt 4

Gain or Loss on future

Sell Future 94.9

Buy future 92.9

Gain 2%
Cont Size 500000
No of Cont 4
Maturity 0.25

Gain on hedge 10,000

Illustration 35

Setting up hedge

Invest Buy future

No of cont

Amount 10,000,000 RS
Cont Size 1,000,000 RS
Actual maturity 5 Mnths
Cont maturity 3 Mnths

No of Cont 17.00

Close out intrest rate future

 Buy intrest ttate future 92.50
Sell intrest rate future 93.60

Gain on future 1.1%

No of cont 17.00
Maturity 0.25
Contract size 1,000,000

Total Gain on future 46,750

Actual Transection

Amount 10,000,000
Intrest 5.80%
Tenure 0.42

Actual income 241,667

Gan on future 46,750

Total income 288,417 RS

working 01 ----- Estimating closing future price

Opening baises
Future 92.50
Spot 93.00

Difference 0.50

Out standing Baises

Baises 0.50
Life of Baises 2.5
Remaining life of baises 0.5

Remaining Baises 0.10

Calculating Closing Future

Spot 93.70
Baises (0.10)

Closing future price 93.60

Past papers
 Question no 02

Question No 30

Intrest Rate future hedge

As company neede to borrow so hedge shall be esatblished in the foollowing way

Sell Intrest rate future hedge

June maturity @ 95.25

No of Comtracts
Amount 130
Maturity 6
Contract Prize 10
Maturity 3

No of contract 26

Close out Intrest rate future

Sell Future
Buy Future

Gain on future
No of Contracts
Cintract Size
Tenure

Gain onn future

Settlinhg Actual transection

Amont borrowed
Intrest rate
Tenure

Intrest cost
Gain on future

Net intrest Cost

 Option on Intrest Rate Future

Put option shall be taken

June maturity

Calculating best price

S - Price Prmium

Opt-01 4.75 0.185

Opt-02 4.50 0.280
Opt-03 4.25 0.405

Option Premiun to be paid

Option premium
No of cont
Size
Tenure

Premiun Amount

On 1 -- June

Strike price of put option Sell

IRF price on 1 -- June Buy

Gain
No of cont
Size
Tenure

Total Gain

Net outcome

Actual intrest
Gain on intrest rate future
Premium paid

Net intrest Cost

Question No 05
 On 31-March

Recieveable 1,020,000 $$
Payable (775,000) $$

Net 245,000 $$

Forward rate Agreement

Amount 245,000 $

FRA price MYR 3.0300 MYR / $$

Premium 0.0710 MYR / $$

Net price 3.1010 MYR / $$

Net recipts 759,745 MYR

Hedge Using Money market

Hedge of doller Asset so

Borrow dollars
Culculating dollerts to be borrowed
Doller Borrow X*(1+(7.2%*3/12)) = 245,000 Doller
Doller Borrow 240,668 $$

Concert Dollars to MYR @ spot

Doller 240,668 $$
Conv Rate 3.030 MYR/$$

Amount 729,224 MYR

Deposit MYR
Deposit MYR 729,224*(1+(6.6%*3/12))
Deposit MYR 741,256 MYR

Part B
Company will create hedge in following way

Amount to be depositt so ------------- Buy future

 No of Contracts 5
Price of future 95.5

Closing out future outcome ---- Part - i

Gain in future market 75,000

Loss on spot market 56,250

Net gain 18,750

Closing out future outcome ---- Part - ii

Loss in future market 75,000

Gain on spot market 75,000

Net gain -

Question no 27

Part A
Amount to ba payable 500 Million JPY

FRA

Amount 500 Million JPY

FRA rate 0.7353 Jpy/PKr

Amount to be payable 679.99 PKR

Money merket

Hedge of doller Yen liability

depost Yen
Culculating dollerts to be borrowed
Borrow FCY X*(1+(4.7%*3/12)) = 500 milionDoller
Doller Borrow 494.07 Million Yen

Concert Dollars to MYR @ spot

FCY 494.07 Million Yen
Conv Rate 0.7874 Yen/PKr

Amount 627.47 Million Rs

Deposit MYR
 Deposit MYR 627.47*(1+(11.95%*3/12))
Deposit MYR 646 Million RS

Option Market

On one june setting up option hedge in following way

Put option of PKR shall be taken

Option maturity - August
Strike price 0.7587 JPY/PKR

No of contracts

Amount to be payable
Conversion rate( using strike price )

Amount
Contract price

No of Contracts

Option premium paid

No of Cont
Amount of contract
Premium

Premium
Conversion at spot

Amount of premium

Premiun with intrest

On settlement date

Strike price 0.7587

Spot rate 0.7181

option shall be exercised

No of Contracts
Contract size
Conv rate

Amount
 Sell excess yen @ 0.7355

Net Cost

Part B

Setting up Hedge

Sell intrest rate future

Nov settlement @ 87

No of Contracts 67.5 approx 68

Case 01
Sell 87.00
Buy 85.25

Gain 1.75

No of Cont 68
Size 10 Million RS
Tenure 0.5

Total Gain 5.95 Million Rs

Loss on spot (5.06) Million Rs

Net outcome 0.89 Million

Question No 29

No Hedge
Spot Rate Probability Exp Spot rate
BDT/PKR BDT/PKR

0.545 20% 0.109

0.565 30% 0.169
0.585 25% 0.146
0.605 25% 0.151

Total 0.576
amount to be converted 20

Exp recipts 34.72

Under FRA
Sell BDT

Spot Rate 0.584 Bdt/Pkr

Premium 0.032 Bdt/Pkr

FRA rate 0.552 Bdt/Pkr

Amount 20 Million BTD

Net recipts 36.23 Million Btd

Money market

Hedge of FCY Yen asset

Borrow FCY
Culculating FCY to be borrowed
Borrow FCY X*(1+(3.2%*6/12)) = 20 milion
Doller Borrow 19.68 Million Btd

Convert FCY to DCY

FCY 19.68 Million Btd
Conv Rate 0.5840 BTD/PKR

Amount 33.70 Million Rs

Deposit DCY
Deposit DCY 33.70*(1+(3.70%*6/12))
Deposit DCY 34.32 Million RS

OTC -- Option

We shall buy Put Option

Premium 125,000 Rs
Prem + intrest 127,875

On 31/Dec

Strike Price 0.555 BDT/PKR Option shall be exercied

Spot Rate 0.576 BDT/PKR

Option Recipts

Recipts 36.036 Million Rs

 Premium (0.128) Million Rs

Net recipts 35.908 Million Rs

Currency SWAP

Illustration 37
Pound Doller Joint Borrowing Cost

Fluff 10% LIBOR +1% Libor + 14%

Frog 13% LIBOR +2% Libor + 12%

Net Benefit 2%

Fluff ------ Share 1.50%

Frog ------ Share 0.50%

Calculation of Effective SWAP rate

Fluff

Intrest Cost with out SWAP Libor + 1%

SWAP Benefit 1.50%

Net Benefit LIBOR - 0.5%

Intrest Rate SWAP

Illustration no 38

Fixed Floating Joint cost

A ltd 11% KIBOR + 1.5% KiBOR + 15.5%

B Ltd 14% KIBOR + 2.5% KIBOR + 13.5%

SWAP benefit 2%
 A Ltd B ltd

Intrest cost with out SWAP KIBOR + 1.5% 14%

SWAP benefit 1% 1%

Effective intrest rate with SWAP KIBOR + 0.5% 13%

Illustration no 39

Part A
Fixed Floating Joint cost

X ltd 6% KIBOR + 0.8% KiBOR + 5.8%

Y Ltd 5% KIBOR + 0.5% KIBOR + 6.5%

SWAP benefit 0.70%

X Ltd Y ltd

Intrest cost with out SWAP 6% KIBOR + 0.5%

SWAP benefit 0.35% 0.35%

Effective intrest rate with SWAP 5.65% Kibor + 0.15%

Part B X --- Ltd Y --- Ltd

Actual Intrest paymet to the bank 8.80% 5%

Loan 50.00 50.00

Actual Intrest cost 4.40 2.50

(Recipts)/Payment under SWAP (1.58) 1.58

Effective intrest cost 2.82 4.08

Illustration no 40

Fixed Floating Joint cost

X ltd 9.25% KIBOR + 1.5% KiBOR + 9%

Y Ltd 7.50% KIBOR + 0.5% Kibor + 9.75

SWAP benefit 0.75%

 Benefit Commission
Share of X 0.25% 0.10%
Share of Y 0.50% 0.10%

X Ltd Y ltd

Intrest cost with out SWAP 9.25% KIBOR + 0.5%

SWAP benefit 0.15% 0.40%

Effective intrest rate with SWAP 9.10% Kibor + 0.10%

Question No 6
Do it your self

Illustration no 41

Fixed Floating Joint cost

X ltd 7.25% KIBOR + 1.25% KiBOR + 9.25%

Y Ltd 8.00% KIBOR + 1.5% Kibor + 8.75

SWAP benefit 0.50%

X Ltd Y Ltd

Company borrow 7.25% KIBOR + 1.5%

Kibor (Kbor)
SWAP arrengement
6.27% 6.30%

Effectice Int Cost K + 0.98% 7.80%

Int cot in no SWAP KIBOR + 1.25% 8.00%

Net Benefit 0.27% 0.20%

Question 32 ---------------- For SWAP revision

Question 23 ---------------- For SWAP revision

Question nO 7
Do it Your Self
Question No 8
Do it Your Self

For Cross rate

Division in cross
Mltiplication stright

Index Futures

Illustration 42

Calculating the portfolio Beta

Company Shares Face Value Value Equity Beta

D 600,000 1.20 720,000 0.85

L 400,000 0.80 320,000 1.25
S 300,000 0.90 270,000 1.3
H 200,000 1.90 380,000 0.6

1,690,000

Determination of Contact sixe

Value of portfolio 1,690,000

Contract Size 42,000
Beta 0.94

No of Contracts 37.88 so approx Contracts are

Hedge Farmation shall be done be Selling the future

Ilustration 43

Company Shares Face Value Value Equity Beta

D 600,000 1.10 660,000 0.85

L 400,000 0.75 300,000 1.25
S 300,000 0.80 240,000 1.3
H 200,000 1.65 330,000 0.6

1,530,000
 Fall in the value of portfolio 160,000

Index is at 3800 so the vapue of index is 38000

Gain in future
Sell 42,000
Buy (38,000)

Gain 4,000
No of Contracts 38

Gain in future 152,000

Question NO 28
Do it your self
Lecture 38

Rs (Million)
Int @ 10%

50

10% 3.33
-2.90% 0.97

12.90% 4.30

0.909

Rs (Million)
Int @ 10%

75

10% 3.75
2.25% 0.84

12.25% 4.59

0.80
 Rs
Int @ 14%

8000000

14% 280,000

0.10% 8,000

15.00% 288,000

Lecture 38
Rs
RS
 Lecture 40

satblished in the foollowing way

Milion
mnth
Milion
mnth

Contracts

95.29
94.72 SOLVED USING famoula for etermining baises

0.57
26
10,000,000
3/12

370,500

130,000,000
5.25%
6/12

3,412,500
(370,500)

3,042,000
Total

4.935
4.780
4.655 Best Option

0.405%
26
10000000
3/12

263,250 Rs

95.75
94.72

1.03
26
10000000
3/12

669,500

3,412,500
(669,500)
263,250

3,006,250
On 30 - June

Recieveable 1,224,000 $$
Payable (1,347,000) $$

Net (123,000) $$

Forward rate Agreement

Amount (123,000) $

FRA price MYR 3.1100 MYR / $$

Premium 0.1640 MYR / $$

Net price 3.2740 MYR / $$

Net payments (402,702) MYR

Hedge of doller liability so

depost dollars
Culculating dollerts to be borrowed
Doller Borrow X*(1+(5.8%*6/12)) = 123,000 Doller
Doller Borrow 119,534 $$

Concert Dollars to MYR @ spot

Doller 119,534 $$
Conv Rate 3.110 MYR/$$

Amount 371,751 MYR

Deposit MYR
Deposit MYR 371,750*(1+(7.9%*6/12))
Deposit MYR 386,434 MYR
 MYR
MYR

MYR

MYR
MYR

MYR

= 500 milionDoller
 500 Millio Yen
0.7587 Yen / PKr

659.02 PKR
10 Million PKR

66.00 Contracts

66.00
10.00 Million RS
0.0330 Jpy/Pkr

21.78 Million JPY

0.7874 Jpy/Pkr

27.66 Rs

28.49 RS

Jpy/Pkr
Jpy/Pkr

66
10 Million RS
0.7587 Jpy/Pkr

500.742 JPY
 1.01 PKR

687.48 RS

Case 02
Sell 87.00
Buy 86.75

Gain 0.25

No of Cont 68
Size 10 Million RS
Tenure 0.5

Total Gain 0.85 Million Rs

Gain on spot 0.84 Million Rs

Net outcome 1.69 Million

BDT/PKR
Million BDT

Pkr
on shall be exercied
 No Swap

With SWAP

Frog

13%
0.50%

12.50%

Lecture 41

R + 15.5% No SWAP

OR + 13.5% Wirh Swap

 With SWAp

No SWAP

or + 0.15%

With SWAp

No SWAP
 Net benefit
0.15%
0.40%

or + 0.10%

R + 9.25% With SWAP

No SWAP
 Lecture 42

W.Avg Beta

0.36
0.24
0.21
0.13

0.94

pprox Contracts are 38

W.Avg Beta

0.33
0.22
0.18
0.12

0.86
 L

Illustrration No 44

Time line 0 1 2

Amount in FFL Million

Capex (85.00) - -
Pre Tax cash flows - 25.73 75.18
Taxation - - (11.06)

Net Cash flown in FFL (85.00) 25.73 64.12

Ex rate (W-01) (FFL/Pound) 5.50 5.71 5.93

Net cash flows remitted (poun (15.45) 4.51 10.82

Amount in Million Pounds

Management fee - 2.50 2.50

Addtitional tax (M---Fee) - - (0.875)
A-Tax (Free cash flow)----W03 - - -
Net cash flow (15.45) 7.01 12.44
Disc Fac @ 13% 1.00 0.885 0.783
Present value (15.45) 6.20 9.74

Net present Value 6.32

Working 01
Spot Inflation Fland

Year 01 5.50 0.09

Year 02 5.71 0.09
Year 03 5.93 0.09

Working 02
FFL milllion

Time line 1 2

Pre tax cash flow 40.00 90.00

Management chrges (14.28) (14.83)
Net operating cash flow 25.73 75.18
Annual Dep (28.33) (28.33)
Loss B/F - (2.61)
(Loss c/f )/Profit (2.61) 44.23
Tax @ 25% 11.06
 Working 03
Time Line 1

Free Cash Flow ( A ) -

Tax in UK [ A*(35%-25%))/Exc Rate) -

Illustration 45

Time Line 0 1 2

Amount in Million Euro

Initial Capes (55.00) (15.00)

W.Cap Cash fllow (W-04) (17.12) (15.85) (2.31)
Net op Cash flows (W-01) - 19.23 41.61
Tax ON RV - - -
Taxation (W-01) - (0.43) (6.03)

Net cash fllows (72.12) (12.05) 33.28

Conversion Rate (W-01) 1.60 1.65 1.69

Amount in Million Pounds

Net convertsed Cash flows (45.08) (7.32) 19.65

Royality (W-03) 1.00 1.80
Taxation
On Royality - - (0.35)
On C.F remitted (W-05) - - (0.11)

Net Cash flows (45.08) (6.32) 20.99

Disc Fact (W-02) 1.00 0.85 0.73

Present Value (45.08) (5.40) 15.33

Net present vLalue 16.59

Workking 01
Spot Inflation Euro Inflation Pound

Year 01 1.60 1.07 1.04

Year 02 1.65 1.07 1.04
Year 03 1.69 1.07 1.04
Year 04 1.74 1.07 1.04
 Year 05 1.79 1.07 1.04

Working 02
Ke 17% Approx
Rf 8%
Rm 15%
Beta 1.25

Working 03 Amount in Million Euro

Time Line 1 2

Units 0.05 0.09

Price 856 916

Revenue 42.80 82.43

Cash production Cost (17.12) (32.97)
Lease rental (4.80) (4.80)
Royality (1.65) (3.05)

Net cash flows 19.23 41.61

Tax Depreciation (17.50) (17.50)

Profit 1.73 24.11

Tax @ 25% (0.43) (6.03)

Working 04

Time Line 0 1

W.Cap Req 17.12 32.97

W.Cap need (17.12) (15.85)

Working 05

Time Line 1 2

Taxable profit -- W03 --- A 1.73 24.11

Ex .Rate --- B 1.65 1.69
Tax in UK ( A*10%)/B (0.11) (1.42)

Start from 40 mnts

 Lecture 42

3 4

in FFL Million

12.00 -
44.63 -
(4.07) -

52.55 -
6.15 -

8.54 -

n Million Pounds

2.50
(0.875) (0.875)
(0.75) (0.26)
9.42 (1.14)
0.693 0.613
6.53 (0.70)

Inflation Uk Forward rate

0.05 5.71
0.05 5.93
0.05 6.15

60.00
(15.38)
44.63
(28.33)
-
16.29
4.07
 2 3

44.23 16.29
0.75 0.26

Lecture 43

3 4 5 6

Amount in Million Euro

60.00 -
(2.47) (2.64) 40.39 -
44.99 48.60 52.47 -
- - (15.00)
(6.87) (7.77) (13.12) -

35.64 38.18 124.75 -

1.74 1.79 1.84

Amount in Million Pounds

20.46 21.30 67.63 -

1.80 1.80 1.80

(0.63) (0.63) (0.63) (0.63)

(1.42) (1.58) (1.73) (6.10)

20.20 20.89 67.07 (6.73)

0.62 0.53 0.46 0.39

12.61 11.15 30.59 (2.62)

Closing

1.65
1.69
1.74
1.79
 1.84

3 4 5

0.09 0.09 0.09

980 1,049 1,122

88.20 94.38 100.98

(35.28) (37.75) (40.39)
(4.80) (4.80) (4.80)
(3.14) (3.23) (3.32)

44.99 48.60 52.47

(17.50) (17.50) -

27.49 31.10 52.47

(6.87) (7.77) (13.12)

2 3 4 5

35.28 37.75 40.39 0

(2.31) (2.47) (2.64) 40.39

3 4 5

27.49 31.10 112.47

1.74 1.79 1.84
(1.58) (1.73) (6.10)