Professional Documents
Culture Documents
Unit I
“If you don’t know where you are going, it does not matter how you get there”
of time the value of the firm increases. If the share of the organization is
traded on stock exchange the good performance is reflected through the
market price of the share, which shows an upward movement. When the
market price is more a shareholder gets more value then what he has
originally invested thus his wealth increases. Therefore we can say that
the objective of financial management is to increase the value of the firm
or wealth maximization.
Objective: Maximize the Value of the Firm
Brealey & Myers: "Success is usually judged by value: Shareholders are
made better off by any decision which increases the value of their stake in
the firm... The secret of success in financial management is to increase
value."
Copeland & Weston: The most important theme is that the objective of the
firm is to maximize the wealth of its stockholders."
Brigham and Gapenski: Management's primary goal is stockholder wealth
maximization, which translates into maximizing the price of the common
stock.
The Objective in Decision Making
In traditional corporate finance, the objective in decision-making is to
maximize the value of the firm.
A narrower objective is to maximize stockholder wealth. When the stock is
traded and markets are viewed to be efficient, the objective is to
maximize the stock price.
All other goals of the firm are intermediate ones leading to firm value
maximization, or operate as constraints on firm value maximization.
Social Responsibility
Maximizing shareholder wealth does not mean that management should
ignore social responsibility, such as protecting the consumer, paying fair
wages to employees, maintaining fair hiring practices and safe working
conditions, supporting education, and becoming involved in such
environmental issues as clean air and water .It is appropriate for
management to consider the interests of stakeholders other than
shareholders. These stakeholders include creditors, employees,
customers, suppliers, communities in which a company operates, and
others. Only through attention to the legitimate concerns of the firm’s
various stakeholders can the firm attain its ultimate goal of maximizing
shareholder wealth.
Is stock price maximization the same as profit
maximization?
No, despite a generally high correlation amongst stock
price, EPS, and cash flow.
Current stock price relies upon current earnings, as well
as future earnings and cash flow.
Some actions may cause an increase in earnings, yet
cause the stock price to decrease (and vice versa).
Questions
1. Contrast the objective of maximizing earnings with that of
maximizing wealth.
2. What is financial management all about?
3. In large corporations, ownership and management are
separated. What are the main implications of this separation?
4. What are agency costs & what causes them?
14. All constituencies with a stake in the fortunes of the company are
known as __________.
a) Shareholders
b) Stakeholders
c) Creditors
d) Customers
15. Which of the following statements is not correct regarding earnings
per share (EPS) maximization as the primary goal of the firm?
a) EPS maximization ignores the firm's risk level.
b) EPS maximization does not specify the timing or duration of expected
EPS.
c) EPS maximization naturally requires all earnings to be retained.
d) EPS maximization is concerned with maximizing net income.
16. __________ is concerned with the maximization of a firm's stock price.
a) Shareholder wealth maximization
b) Profit maximization
c) Stakeholder welfare maximization
d) EPS maximization
Answers to above
1. Financial management
2. Profit maximization
3. Shareholder wealth maximization
4. Profit maximization is concerned more with maximizing net income
than the stock price.
5. Agency theory
6. Social responsibility
7. Financing
8. Team player; cross-functional capabilities
9. Investment
10. Use the income statement to determine earnings after taxes (net
income) and divide by the number of common shares outstanding.
11. Investment decision
12. Asset management
13. Asset management
14. Stakeholders
15. EPS maximization is concerned with maximizing net income.
16. Shareholder wealth maximization
The time value of money
You all instinctively know that money loses its value with time. Why does this happen?
What does a Financial Manager have to do to accommodate this loss in the value of
money with time? In this section, we will take a look at this very interesting issue.
Why should financial managers be familiar with the time value of money?
The time value of money shows mathematically how the timing of cash flows, combined
with the opportunity costs of capital, affect financial asset values. A thorough
understanding of these concepts gives a financial manager powerful tool to maximize
wealth.
Solution
Account A: FV4 = Rs 10,000 (1 + 0.05) 4 = Rs 12,155.06
Account B: FV4 = Rs 10,000 + (Rs 10,000 (0.0525)(4)] = Rs 12,100.00
Account A provides the greater future value.
Present value is simply the reciprocal of compound interest.
Another way to think of present value is to adopt a stance out on the time
line in the future and look back toward time 0 to see what was the
beginning amount.
Present Value = P0 = Fn / (1+I) n
Table A-3 shows present value factors: Note that they are all less than one. Therefore,
when multiplying a future value by these factors, the future value is
discounted down to present value. The table is used in much the same
way as the other time value of money tables. To find the present value of
a future amount, locate the appropriate number of years and the
appropriate interest rate, take the resulting factor and multiply it times
the future value.
How much would you have to deposit now to have Rs 15,000 in 8 years if
interest is 7%?
= 15000 X .582 = 8730 Rs
Consider a case in which you want to determine the value today of $
1,000 to be received five years from now. If the interest rate (i.e., discount
rate) is 4%,
Problem Suppose that you wish to have Rs 20,000 saved by the end of
five years. And suppose you deposit funds today in account that pays 4%
interest, compounded annually. How much must you deposit today to
meet your goal?
Solution Given: FV = Rs 20,000; n = 5; i = 4%
PV = Rs 20,000/(1 + 0.04) 5 = Rs 20,000/1.21665
PV = Rs 16,438.54
Q. If you want to have Rs 10,000 in 3 years and you can earn 8%, how
much would you have to deposit today?
�Rs
7938.00
�Rs 25,771
�Rs 12,597
�Rs 6,802.50
�Rs 6,843.00
Rs 3,675
�
2.You have Rs 450,000 to invest. If you think you can earn 7%, how much
could you accumulate in 10 years? ? (Pick the closest answer)
�Rs 25,415
Rs 722,610
�Rs 722,610
�
3.If a commodity costs Rs500 now and inflation is expected to go up at
the rate of 10% per year, how much will the commodity cost in 5 years?
�Rs 805.25
�Rs 3,052.55
Practice Problems
What is the balance in an account at the end of 10 years if Rs 2,500 is
deposited today and the account earns 4% interest, compounded
annually? Quarterly?
If you deposit Rs10 in an account that pays 5% interest, compounded
annually, how much will you have at the end of 10 years? 50 years? 100
years?
How much will be in an account at the end of five years the amount deposited today is Rs
10,000 and interest is 8% per year, compounded semi-annually?
Answers
1.Annual compounding: FV = Rs 2,500 (1 + 0.04) 10 = Rs 2,500 (1.4802)
= Rs 3,700.61
Quarterly compounding: FV = Rs 2,500 (1 + 0.01) 40 = Rs 2,500 (1.4889)
= Rs3,722.16
2.
10 years: FV = Rs10 (1+0.05) 10 = Rs10 (1.6289) = Rs16.29
50 years:FV = Rs10 (1 + 0.05) 50 = Rs10 (11.4674) = Rs114.67
100 years: FV = Rs10 (1 + 0.05) 100 = Rs10 (131.50) = Rs 1,315.01
3. FV = Rs 10,000 (1+0.04) 10 = Rs10,000 (1.4802) = Rs14,802.44
For example, assume you deposit Rs. 10,000 in a bank, which offers 10%
interest per annum compounded semi-annually which means that interest
is paid every six months.
Now, amount in the beginning = Rs. 10,000
Rs.
Interest @ 10% p.a. for first six = 500
Months 10000 x 21.0 =10500
Interest for second
6 months = 10500 x 21.0 = 525
Amount at the end of the year = 11,025
Instead, if the compounding is done annually, the amount at the end of
the year will be 10,000 (1 + 0.1) = Rs, 11000. This difference of Rs. 25 is
because under semi-annual compounding, the interest for first 6 moths
earns interest in the second 6 months.
The generalized formula for these shorter compounding periods is
The generalized formula for these shorter compounding periods is
FVn = PV(1+k/m) mxn
Where
FVn = future value after ‘n’ years
PV = cash flow today
K = Nominal Interest rate per annum
M = Number of times compounding is done during a year
N = Number of years for which compounding is done.
Example
Under the Vijaya Cash Certificate scheme of Vijaya Bank, deposits can be
made for periods ranging from 6 months to 10 years. Every quarter,
interest will be added on to the principal. The rate of interest applied is
9% p.a. for periods form 12 to 13 months and 10% p.a. for periods form
24 to 120 months.
An amount of Rs. 1,000 invested for 2 years will grow to
Where m = frequency of compounding during a year
= 1000 (1.025)8
= 1000 x 1.2184 = Rs. 1218
Effective vs. Nominal Rate of interest
We have seen above that the accumulation under the semi-annual
compounding scheme exceeds the accumulation under the annual
compounding scheme compounding scheme, the nominal rate of interest
is 10% per annum, under the scheme where compounding is done semi
annually, the principal amount grows at the rate of 10.25 percent per
annum. This 1025 percent is called the effective rate of interest which is
the rate of interest per annum under annual compounding that produces
the same effect as that produced by an interest rate of 10 percent under
semi – annual compounding.
The general relationship between the effective an nominal rates of
interest is as follows:
Example
Find out the effective rate of interest, if the nominal rate of interest is 12%
and is quarterly compounded? Effective rate of interest
= (1 + mk)m – 1
= (+ 412.0)4 – 1
= (1 + 0.03)4 -1 = 1.126 -1
= 0.126 = 12.6% p.a. compounded quarterly
�A-1
The Compound Sum of one rupee FVIF
�A-3 The Present Value of one rupee PVIF
IMPORTANT
The inverse of FVIF is PVIF i.e. inverse of FVIF is PVIF.
Types AnnuitiesTypes of Annuities
Ordinary AnnuityOrdinary Annuity: Payments or receipts occur at the endof each period.
Annuity DueAnnuity Due: Payments or receipts occur at the beginningof each period
ANNUITY
Till now we talked about the future value of single payment made at the
time zero (PV0). Now we will speak about annuities. An annuity is an equal
annual series of cash flows. Annuities may be equal annual deposits,
equal annual withdrawals, equal annual payments, or equal annual
receipts. The key is equal, annual cash flows. Note that the cash flows occur at
the end of the year. This makes the cash flow an ordinary annuity. If the
cash flows were at the beginning of the year, they would be an annuity
due.
Annuity = Equal Annual Series of Cash Flows
Assume annual deposits of Rs 100 deposited at end of year earning 5%
interest for three years
Year 1: Rs100 deposited at end of year = Rs100.00 Year 2: Rs100 x .05 =
Rs5.00 + Rs100 + Rs100 = Rs205.00 Year 3: Rs205 x .05 = Rs10.25 +
Rs205 + Rs100 = Rs315.25
Translating a series of cash flows into a present value is similar to
translating a single amount to the present; we discount each cash flow to
the present using the appropriate discount rate and number of discount
periods. Translating a series of cash flows into a future value is also
similar to translating a single sum: simply add up the future values of
each cash flow.
Again, there are tables for working with annuities. Future Value of Annuity
Factors is the table to be used in calculating annuities due. Basically, this
table works the same way as Table 1. Just look up the appropriate number
of periods, locate the appropriate interest, take the factor found and
multiply it by the amount of the annuity.
We use table A-2 for FVIFA For instance, on the three-year, 5% interest
annuity of Rs100 per year. Going down three years, out to 5%, the factor
of 3.152 is found. Multiply that by the annuity of Rs100 yields a future
value of Rs315.20. another example of calculating the future value of an
annuity is illustrated.
You deposit Rs 300 each year for 15 years at 6%. How much will you have
at the end of that time?
= 300 X 23.276 = 6982.8
The following exercise should aid in using tables to solve annuity
problems. Use table A-2. FVIFA
1.You deposit Rs 2,000 in recurring account each year for 5 years. If
interest on this recurring account is 4%, how much will you have at the
end of those 5 years?
�Rs 10,000
�Rs 10,832.60
�Rs 8,903.60
2.If you deposit Rs 4,500 each year into an account paying 8% interest,
how much will you have at the end of 3 years?
�Rs 13,500
�Rs 14,608.80
�Rs 11,596.95
To find the present value of an annuity, use Table A-4. Find the
appropriate factor and multiply it times the amount of the annuity to find
the present value of the annuity.
For instance
Find the present value of a 4-year, Rs 3,000 per year annuity at 6%.
Using the present value of annuity table, going down the left column for 4
yrs and to 6% the corresponding factor is 3.465
=3000 X 3.465 = 10395 Rs
FUTURE VALUE OF ANNUITY
Example
Under the Jeevan Mitra plan offered by Life insurance Corporation of India,
if a person is insured for Rs. 10,000 and if he survives the full term, then
the maturity benefits will be the basic sum of Rs. 10,000 assured plus
bonus which accrues on the basic sum assured. The minimum and
maximum age to propose for a policy is 18 and 50 years respectively.
Let us take two examples, one of a person aged 20 and another a person
who is 40 years old to illustrate this scheme.
The person aged 20, enters the plan for a policy of Rs. 10,000. The term
of policy is 25 years and the annual premium is Rs. 41.65. The person
aged 40, also proposes for the policy of Rs. 10,000 and for 25 years and
the annual premium he has to pay comes to Rs. 57. What is the rate of
returns enjoyed by these two persons?
Solution:
Rate of Return enjoyed by the person of 20 years of age
Premium = Rs. 41.65 per annum
Term of policy = 25 years
Maturity value = Rs. 1,000 + bonus which can be neglected as it is a
Fixed amount and does not vary with the term of policy.
We know that the premium amount when multiplied by FVIFA factor will
give us the value at maturity.
i.e., P X (1 X k)* FVIFA (k,n) = MV
Where
P = Annual premium
n = Term of policy in years
k = Rate of return
MV = Maturity Value
Therefore 41.65 x (1 + k) FVIFA (k, 25) = 10,000
(1 + k) FVIFA (k, 25) =240.01
From the table A.2 at the end of the book, we can find that
(1 + 0.14) FVIFA (14,25) = 207.33
i.e., (1.14) FVIFA (15,25)
= 1.15 X 212.793
= 244.71
By Interpolation
K = 14% + (15% - 14%) x 33.20771.24433.20701.240−−
= 14% + 1% X 38.3768.32
= 14% + 0.87% = 14.87%
Rate of return enjoyed by the person aged 40
Premium = Rs. 57 per annum
Term of policy = 25 years
Maturity value = Rs. 10,000
Therefore 57 X ( 1 + k) FVIFA (k,25) = 10,000
(1 + k) FVIFA (k, 25) = 175.87
i.e., (1.13) (155.62) = 175.87
i.e., k. = 13% (appr.)
Here we find that the rate of return enjoyed by the 20-year-old person is
greater than that of the 40-year-old person by about 2% in spite of the
latter paying a higher amount of annual premium for the same period of
25 years and for the same maturity value of Rs. 10,000. This is due to the
coverage for the greater risk in the case of the 40 year old person.
Now that we are familiar with the computation of future value, we will get
into the mechanics of computation of present value.
SINKING FUND FACTOR
Here is the equation
FVA = A −+kKn1)1(
We can rewrite it as
A = FVA −+1)1(nKK
The expression −+1)1(nKK is called the sinking Fund factor. It
represents the amount that has to be invested at the end of every year
for a period of “n” years at the rate of interest “k”, in order to accumulate
Re. 1 at the end of the period.
ALWAYS REMEMBER
It must also be noted that PVIFA (k, n) is not the inverse of FVIFA
(k, n,)although PVIF (k, n) is the inverse of FVIF (k, n).
01046.0121255.0=
The initial deposit can now be calculated as below:
()()+−+=nnkkkAPVAn111
+−+=1212)01046.01(01046.01)01046.01(100
=01185.0133.0100
1122.22.11100Rsx==
Example
The annuity deposit scheme of SBI provides for fixed monthly income for
suitable periods of the depositor’s choice. An initial deposit has to be
made for a minimum period of 36 months. After the first month of the
deposit, the depositor receives monthly installments depending on the
number of months he has chosen as annuity period. The rate of interest is
11% p.a., which is compounded at quarterly intervals.
If an initial deposit of Rs. 4,549 is made for an annuity period of 60
months, the value of the monthly annuity can be calculated as below:
Firstly, the effective rate of interest per annum has to be calculated.
11−+=mmkr
= %46.111411.14=−+0
After calculating the effective rate of interest per annum, the effective
rate of interest per month has to be calculated which is nothing but
00955.0121146.0=
The monthly annuity can now be calculated as
PVAn = A +−+nnkkK)1(1)1(
4549 = A −+6060)00955.1(00955.01)00955.01(
4549 = A X 0169.07688.0
A = Rs. 100
Example
A loan of Rs. 1,00,000 is to be repaid in five equal annual installments. If
the loan carries a rate of interest of 14% p.a. the amount of each
installment can be calculated as below:
If R is defined as the equated annual installment, we are given that
R X PVIFA (14.5) = Rs. 1,00,000
There fore R = )5.14(000,00,1.PVIFARs
= 433,3000,00,1.Rs
= Rs. 29,129
Notes:
We have introduced in this example the application of the inverse of the PVIFA factor,
which is called the capital recovery factor. The application of the capital recovery factor
helps in answering questions like:
KEEP IN MIND *Inverse of FVIFA factor is Sinking Fund Factor
*Inverse of PVIFA factor is Capital Recovery Factor
�What
should be the amount that must be paid annually to liquidate a
loan over a specified period at a given rate of interest?
�How much can be withdrawn periodically for a certain length of time, if
a given amount is invested today?
2. In this example, the amount of Rs. 29,129 represents the sum of the
principal and interest components. To get an idea of the break-up of each
installment between the principal and interest components, the loan-
repayment schedule is given below.
c) S = [P (1+ nmmi])
d) S= P (mnmi)1+(
e) None of the above.
(A) A = Rs 52,660
(B) A = Rs 62,660
(C) A = Rs 72,660
(D) A = Rs 82,760
29. ACB Inc. has invested Rs1.5 million in new technology. The entire
investment was financed with a loan bearing interest of 15% compounded
annually. The new technology will increase the net cash flow per unit of
product sold by Rs250. Assuming that the same number of units will be
sold each year over the six year life (assume end of year sales) of the
technology, how many units have to be sold each year to recover the
Rs1.5 million investment and interest on the loan?
(A) X = Rs 1,285 units per year
(B) X = Rs 1,385 units per year
(C) X = Rs 1,485 units per year
(D) X = Rs 1,585 units per year
30. You have Rs 10,000 to invest and you expect it to double in 8 years.
Using the Rule of 72, what compound annual interest rate do you have to
earn on your investment.
(A) i = 11%
(B) i = 8%
(C) i = 10%
(D) i = 9%
ANSWERS TO ABOVE
Question 1: 'b' is the correct answer! Simple interest: I = iPN = (0.06)(Rs
750)(8) = Rs 360; Compound interest: I = P[(1+ i)^N - 1] = Rs
750[(1.06)^8 - 1] = Rs 445.39
Question 2: Rs 'a' is the correct answer. Compound interest: F = Rs
1,500(1 + 0.05)^2 = Rs 1653.75; Simple interest: F = Rs 1,500(1 +
0.07(2)) = Rs 1710
Question 3: Rs 'd' is the correct answer.: P = Rs 4,000/(1 + 0.07)^2 = Rs
3493.75
Question 4: Rs 'd' is the correct answer.: F = Rs 6,000(1 + 0.1)^3 = Rs
7986
Question 5: Rs 'b' is the correct answer.: F = Rs 9,000(1 + 0.09)^9 = Rs
19547.04
Question 6: Rs 'a' is the correct answer.: P = Rs 17,000/(1 + 0.11)^7 =
Rs 8188.19
Question 7: Rs 'c' is the correct answer.: P = Rs 4,000/(1 + 0.07)^4 = Rs
3051.58
Question 8: Rs 'b' is the correct answer.: F = Rs 3,000(1 + 0.07)^3 = Rs
3675.13
Question 9: 'd' is the correct answer!: P = [Rs 1,000/(1 + 0.09)^2 ] + [Rs
1,500/(1 + 0.09)^3 ] + [Rs 3,000/(1 + 0.09)^4 ] + [Rs 5,000/(1 +
0.09)^5 ] = Rs 7374.89
Question 10: Rs 'a' is the correct answer.: F = Rs 300(1 + 0.03)^10 + Rs
500(1 + 0.03)^8 + Rs 700(1 + 0.03)^6 = Rs 1872.40
Question 11: 'd' is the correct answer.: P = Rs 1500(P/F,7%,3) + Rs
3000(P/F,7%,6) + Rs 5000(P/F,7%,8) = Rs 6133.35
Question 12: 'b' is the correct answer!: F = Rs 750(F/A,8%,7) = Rs
6692.10
Question 13: 'c' is the correct answer!: A = Rs 13,000(A/F,8%,20) = Rs
284.70
Question 14: 'b' is the correct answer.: F = F1 + F2 = Rs 250(F/A,5%,5)
+ Rs 200(F/G,5%,5) = Rs 250(F/A,5%,5) + Rs 200(A/G,5%,5)(F/A,5%,5) =
Rs 3483.89
Question 15: 'c' is the correct answer.: F = Rs 800(F/A,10%,5) - Rs
100(F/G,10%,5) = Rs 800(F/A,10%,5) - Rs 100(P/G,10%,5)(F/P,10%,5) =
Rs 3778.99
Question 16: 'd' is the correct answer.: A = Rs 15,000 - Rs
300(A/G,9%,10) = Rs 13,860.66
Question 17: 'c' is the correct answer: g = -10% and P = Rs
300,000(P/A1, -10%, 15%,7) = Rs 984,228.58
Question 18: 'c' is the correct answer.: P = Rs 75(P/A,8%,2) + Rs
100(P/A,8%,2)(P/F,8%,2) + Rs 200(P/F,8%,5) = Rs 422.75
Question 19: 'd' is the correct answer: P (Inflow at t=0) = Rs 400 + Rs
400(P/A, 12%, 4) + Rs 500(P/A, 12%, 3)(P/F, 12%, 4) = Rs 2,378.14 P
(Inflow at t=1) = Rs 2,378.14(F/P,12%,1) = Rs 2,663.52 = P (Outflow at
t=1) Outflow series: A at t=2, A at t=3, ..., A at t=9. A = P (A/P, 12%,8) =
2,663.52 (A/P, 12%,8) = Rs 536.17 Note: N=8 since between t=2 and t=9
there are only 8 consecutive cash outflow of Rs A
Question 20: 'c' is the correct answer.: F = [500 + 1000(P/A,10%,5)] x
(F/P,10%,5)
Question 21: 'a' is the correct answer!: P = [ Rs 30(P/G,12%,3) + Rs
30(P/A,12%,3)](P/F,12%,2) - Rs 30(P/F,12%,1) - Rs 30(P/A,12%,7)
(P/F,12%,5) P = [ Rs 30(2.2208) + Rs 30(2.4018)](0.7972) - Rs 30(0.8929)
- Rs 30(4.5638)(0.5674) P = Rs 110.55 - Rs 26.79 - Rs 77.68 = Rs 6.08
Question 22: 'b' is the correct answer.: P = Rs 150(P/A,12%,5) + Rs
50(P/F,12%,1) + Rs 250(P/F,12%,3) + Rs 250(P/F,12%,5) = Rs 540.72 +
Rs 44.65 + Rs 177.95 + Rs 141.85 = Rs 905.17 P = Rs 100(P/F,12%,1) +
X(P/A,12%,2)(P/F,12%,1) - Rs 200(P/F,12%,4) + X(P/F,12%,5) Rs 905.17 =
Rs 89.29 + 1.5091X - Rs 127.10 + 0.5674X X = Rs 454.12
Question 23: 'd' is the correct answer.: Computing the equivalent worth
at n = 4, X = Rs 7000(F/A,7%,4) + Rs 7000(P/A,7%,6) = Rs 64,446
Question 24: 'b' and 'c' are both correct answers!: (2) P = A +
A(P/A,7%,5); F = A(F/A,7%,5) + A(F/P,7%,5) or (3) P = A + A(P/A,7%,5); F
= A(F/A,7%,6)
Question 25: 'a' is the correct answer.: P0 = -Rs 20 + [ Rs 20(P/G,10%,4)
+ Rs 20(P/A,10%,4)](P/F,10%,1) = -Rs 20 + [Rs 20(4.3781) + Rs
20(3.1699)]0.9091 = Rs 117.24 A = Rs 117.24(F/P,10%,1)(A/P,10%,4) =
Rs 117.24(1.1)(0.3155) = Rs 40.49
Question 26: 'b' is the correct answer!: P = Rs 10,000(P/A,8%,5)
(P/F,8%,5) = Rs 27,174
Question 27: 'a' is the correct answer!: Team A; P = Rs 500,000 + Rs
1,500,00(P/F,15%,1) + Rs 2,000,000(P/F,15%,2) + Rs
2,000,000(P/F,15%,3) = Rs 4,631,6000 Team B; P = Rs 350,000 + Rs
400,000(P/F,15%,1) + Rs 2,000,000(P/F,15%,2) + Rs
3,500,000(P/F,15%,3) = Rs 4,511,230
Question 28: 'b' is the correct answer.: Rs 200,000 = A1(P/A1,10%,9%,5)
Rs 200,000 = A1[(1 - (1 + g)^N(1 + i)^(-N))/(i - g)] Rs 200,000 = A1[(1 -
(1 + 0.1)^5(1 + 0.09)^(-5))/(0.09 - 0.10)] A1 = Rs 42,798 The fifth
payment = Rs 42,798(1 + 0.1)^4 = Rs 62,660
Question 29: 'd' is the correct answer.: Rs 1,500,000 = Rs
250X(P/A,15%,6) Rs 6000 = X(3.7845) X = Rs 1,585 units/year
Question 30: 'd' is the correct answer.: Rule of 72: 72/i = N to double
Therefore, i = 72/N = 72/8 = 9%
Some more practice problems
1.Complete the following, solving for the present value, PV:
Num
Futur Inter Prese
ber
Case e estra ntval
ofper
value te ue
iods
Rs
A 5% 5
10,000
Rs
B 4% 20
563,000
C Rs 5,000 5.5% 3
To estimate an asset’s value, one estimates the cash flow for each period t
(CFt), the life of the asset (n), and the appropriate discount rate (k)
Throughout the course, we discuss how to estimate the inputs and how
financial management is used to improve them and thus maximize a firm’s
value.
Factors that Affect the Level and Riskiness of Cash Flows
Decisions made by financial managers:
Investment decisions
Financing decisions (the relative use of debt financing)
Dividend policy decisions
The external environment