Security Analysis

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CHAPTER-8 SECURITY ANALYSIS & VALUATION
I - SECURITY ANALYSIS
Question 1
Assume that the following are the closing prices of RIL for the last 10 days to trading for
January:
Day 1 4,892
Day 2 4,760
Day 3 4741
Day 4 4695
Day 5 4620
Day 6 4712
Day 7 4638
Day 8 4889
Day 9 4864
Day 10 4990
Compute the nine days moving average on day nine and day 10.
Question 2
Mr. D. Mehta, member of technical support team at B-trade, a finance portal, thinks that
exponential moving average (EMA) is a good tool to forecast the trend in stock prices. He is
analyzing the stock of Goodwin Limited. The stock price data for the last 12 trading days
are given below:
Days Price of Goodwin Limited (Rs./share)

1 400
2 430
3 420
4 480
5 520
6 600
7 580
8 520
9 600
10 620
11 640
12 580
You are required to calculate the 100 days EMA. The 100 days Simple moving average on
the first day is 420.
CA. PAVAN KARMELE MOB. 9977223599

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Question 3
Given below are the monthly closing prices of M/s Infotech Ltd. for the year 2000.
January 1325
February 1310
March 1340
April 1355
May 1375
June 1430
July 1470
August 1495
September 1510
October 1500
November 1480
December 1430
Using the above data you are required to prepare a six month exponential moving average
(EMA) for the period of July to December of year 2000.
Question 4
Closing values of BSE Sensex from 6th to 17th day of the month of January of the year 200X
were as follows:
Days Date Day Sensex
1 6 THU 14522
2 7 FRI 14925
3 8 SAT No Trading
4 9 SUN No Trading
5 10 MON 15222
6 11 TUE 16000
7 12 WED 16400
8 13 THU 17000
9 14 FRI No Trading
10 15 SAT No Trading
11 16 SUN No Trading
12 17 MON 18000
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30
days simple moving average of Sensex can be assumed as 15,000. The value of exponent for
30 days EMA is 0.062.
Give detailed analysis on the basis of your calculations.
Question 5
The following data has been extracted from a popular stock index.
Days Value of index
1/3/2000 4100
2/3/2000 4200
3/3/2000 4350
4/3/2000 4100

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5/3/2000 3850
The 100 days simple moving average as on 29/2/2000 is 4000. You are required to
calculate the 100 days exponential moving average starting from 1/3/2000. (The value of
exponent for 100 days may be taken as 0.02)
Question 6
Consider the following price quotation relating to Ambuja Cements Ltd.
Date Open High Low Closing

12/02/2005 372.15 375.00 356.10 368.15
13/02/2005 368.15 375.50 363.00 364.35
14/02/2005 364.35 365.80 357.65 361.85
15/02/2005 361.80 379.90 362.45 377.95
16/02/2005 361.80 387.00 362.50 364.80
19/02/2005 364.80 373.90 361.25 372.10
20/02/2005 372.10 376.40 367.60 371.60
21/02/2005 371.60 370.00 341.90 343.25
22/02/2005 343.25 341.90 322.65 337.90
23/02/2005 337.90 336.50 315.55 317.75
You are required to calculate the Relative Strength Index for the above prices and explain
the significance of the index calculated, if the benchmarks for overbought and oversold
position are 70 and 30 respectively.
Question 7
Given below are the stock price of Infosys Ltd. and Wipro during a month in the year. As an
investor, employ relative strength and plot it. Decide which stock you buy.
Days of trading during the Infosys Wipro
month
3 2615.00 3650.35
4 2770.00 3942.35
5 2933.00 4257.70
6 3167.60 4484.40
7 3217.50 4500.50
10 3224 4293
11 3204 4297.50
12 3205 4050
13 3204.60 4125.05
14 3200 4107
17 3094 3985.30
18 3196 4071
19 3184.50 4020.60
20 3192.10 4075.60
21 3170 4080
24 3210 4080

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25 3210 4150
26 3230 4072
27 3200 4030
28 3179 3998
31 3255 4092.20

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II-Equity Valuation
Question 8
A company has a book value per share of Rs. 137.80. Its return on equity is 15% and it
follows a policy of retaining 60% of its earnings. If the Opportunity Cost of Capital is 18%,
what is the price of the share today? [Adopt the perpetual growth model to arrive at your
solution]. (Ans. Rs. 91.89)
Question 9
Megatron Ltd. Paid a dividend of Rs. 2.60 during the last year and the growth rate in the
dividends are expected to be 8%. The current market price of the stock is Rs. 30.00. The
Beta of the stock is 1.60 and the return on the market index is 13%. If the risk free rate of
return is 8%. How much should the price of the stock be raised in percentage terms so that
it is equilibrium? (Ans. Ke=16%, Rs. 35.10)
Question 10
Yield on Govt. Securities = 7%
Market Risk Premium = 6%
It has been found that when the market returns changes by 7.5%, the return is stock
changes by 15%. Calculate required rate of return on the stock? (Ans. 19%)
Question 11
Firm’s present market price of the share is Rs.40 and its EPS is Rs. 12. The firm is planning
to declare 45% of this as dividends. If the firm reinvests its retained earnings at the rate of
14%, what is the cost of its equity according to Gordon dividend capitalization model?
[Ans. 21.2%]
Question 12
A firm reported DPS of Rs. 24 for the year just ended. This represents a payout ratio of 80%.
The firm’s book value per share is Rs. 160. Rate of return required by shareholders is 20%
p.a. Calculate intrinsic value of the share as per Gordon model.
Question 13
Firm reported a BVPS of Rs. 80 & ROE of 17%, and it had a payout ratio= 80%. If equity
capitalization rate (Ke) is 15% p.a. Calculate value of share as per Gordon Model.
Question 14
A company has 20 lakhs shares of Rs.1 each. Four year ago it paid a dividend of Rs. 6,10,000.
It has Just paid a dividend Rs. 9,60,000 on the same capital. The current market price of
each share is Rs.6. Find cost of equity and growth rate.
[Ans. g =12%, Ke = 20.96%]
Question 15
Company’s current price of share is Rs.60 and dividend per share is Rs. 4. If its
capitalization rate is 12 percent, what is the dividend growth rate?
[Ans. 5%]

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Question 16
A share of Tension-free Economy Ltd. is currently quoted at a price earning ratio of 7.5
times. The retained earnings per share being 37.5% is Rs.3 per share. Compute:
1. The Company’s cost equity, if investors expect annual growth rate of 12%.
2. If anticipated growth rate is 13% p.a., calculate the indicated market price, with same
cost of capital.
3. If the company’s cost of capital is 18%., and anticipated growth rate is 15% p.a., calculate
the market price per share, assuming other conditions remain the same.
[Ans. 1. 20.33%; 2. Rs. 68.21 3.Rs.166.67]
Question 17
In December, 2014 Lipsa Co.'s share was sold for Rs. 146 per share. A long term earnings
growth rate of 7.5% is anticipated. Lipsa Co. is expected to pay dividend of Rs. 3.36 per
share.
(i) What rate of return an investor can expect to earn assuming that dividends are expected
to grow along with earnings at 7.5% per year in perpetuity?
(ii) It is expected that Lipsa Co. will earn about 10% on book Equity and shall retain 60% of
earnings. In this case, whether, there would be any change in growth rate and cost of Equity?
Question 18
Shares of Voyage Ltd. are being quoted at a price-earning ratio of 8 times. The company
retains 45% of its earnings which are Rs. 5 per share.
You are required to compute
(1) The cost of equity to the company if the market expects a growth rate of 15% p.a.
(2) If the anticipated growth rate is 16% per annum, calculate the indicative market price
with the same cost of capital.
(3) If the company's cost of capital is 20% p.a. & the anticipated growth rate is 19% p.a.,
calculate the market price per share.
Question 19
M/s X Ltd. has paid a dividend of Rs. 2.5 per share on a face value of Rs. 10 in the financial
year ending on 31st March, 2009. The details are as follows:
Current market price of share Rs. 60
Growth rate of earnings and dividends 10%
Beta of share 0.75
Average market returns 15%
Risk free rate of return 9%
Calculate the intrinsic value of the share
Question 20
The risk free rate of return Rf is 9 percent. The expected rate of return on the market
portfolio Rm is 13 percent. The expected rate of growth for the dividend of Platinum Ltd. is
7 percent. The last dividend paid on the equity stock of firm A was Rs. 2.00. The beta of
Platinum Ltd. equity stock is 1.2.
(i) What is the equilibrium price of the equity stock of Platinum Ltd.?
(ii) How would the equilibrium price change when

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• The inflation premium increases by 2 percent?

• The expected growth rate increases by 3 percent?
The beta of Platinum Ltd. equity rises to 1.3?
Question 21
MNP Ltd. has declared and paid annual dividend of Rs. 4 per share. It is expected to grow @
20% for the next two years and 10% thereafter. The required rate of return of equity
investors is 15%. Compute the current price at which equity shares should sell.
Note: Present Value Interest Factor (PVIF) @ 15%:
For year 1 = 0.8696;
For year 2 = 0.7561
Question 22
On the basis of the following information:
Current dividend (Do) = Rs. 2.50
Discount rate (k) = 10.5%
Growth rate (g) = 2%
(i) Calculate the present value of stock of ABC Ltd.

(ii) Is its stock overvalued if stock price is Rs. 35, ROE = 9% and EPS = Rs. 2.25? Show
detailed calculation. Under the price multiple approach and Earning growth model.
Question 23
EC Limited, a manufacture of electronic cards, is a listed company. The current stock price
of the company is Rs. 160 per share. The earnings and dividend growth prospects of the
company are disputed by different analysts. Mr. R. Ramamurthy is forecasting a growth of
7.5% for ever. However, Mr. S. Prabhu is predicting a 25% growth in dividend for the next
three years after which the growth is to decline to a level of 5% p.a. forever. The current
dividend per share is Rs.11 and stock of company’s similar risk are currently priced to
provide 14% expected return.
You are required to calculate
1) The intrinsic value of EC Limited’s share based on the projection of Mr. R.
Ramamurthy.
2) The intrinsic value of EC Limited’s share based on the projection of Mr. S. Prabhu.
3) The implied perpetual growth rate assuming that the stock is correctly priced.
Question 24
Maximum solution is expected to pay a dividend of Rs. 4 at the end of first year, a dividend
of Rs. 7 at the end of second year, a dividend of Rs. 11 at the end of third year. From fourth
year onward the dividend are expected to grow rate of 4%. If the required rate of return is
14%, compute the present value of the stock.
Question 25
Consider a common stock whose dividends are expected to grow at a 25 percent rate for 2
years, after which the growth rate is expected to fall to 5 percent. The dividend paid last

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period was Rs. 2. The investor desires a 12 per cent return. You are required to find the
value of this stock.
Question 26
Z Ltd. is foreseeing a growth rate of 12% per annum in the next two years. The growth rate
is likely to fall to 10% for the third and fourth year. After that growth rate is expected to
stabilize at 8%, If the last dividend paid was Rs.1.50 per share and the investor’s required
rate of return is 16%, find out the intrinsic value per share at 16% of Z Ltd. as of date. You
may use the following table:
Years 0 1 2 3 4 5
Discount Factor at 16% 1 0.86 0.74 0.64 0.55 0.48
[Ans. Intrinsic value per share =Rs. 22.34]
Question 27
Anurag has invested in a share whose dividend is expected to grow @ 15% for 5 years and
thereafter @ 5% till life of the company. Find out the value of the share, if current dividend
is 4 per share and investors' required rate of return is 6%.
Question 28
X Limited, just declared a dividend of Rs. 14.00 per share. Mr. B is planning to purchase the
share of X Limited, anticipating increase in growth rate from 8% to 9%, which will continue
for three years. He also expects the market price of this share to be Rs. 360.00 after three
years.
You are required to determine:
(i) the maximum amount Mr. B should pay for shares, if he requires a rate of return of 13%
per annum.
(ii) the maximum price Mr. B will be willing to pay for share, if he is of the opinion that the
9% growth can be maintained indefinitely and require 13% rate of return per annum.
(iii) the price of share at the end of three years, if 9% growth rate is achieved and assuming
other conditions remaining same as in (ii) above.
Calculate rupee amount up to two decimal points.
Year-1 Year-2 Year-3
FVIF @ 9% 1.090 1.188 1.295
FVIF @ 13% 1.130 1.277 1.443
PVIF @ 13% 0.885 0.783 0.693
Question 29
Piyush Loonker and Associates presently pay a dividend of Re. 1.00 per share and has a
share price of Rs. 20.00.
(i) If this dividend were expected to grow at a rate of 12% per annum forever, what is the
firm’s expected or required return on equity using a dividend-discount model approach?
(ii) Instead of this situation in part (i), suppose that the dividends were expected to grow at
a rate of 20% per annum for 5 years and 10% per year thereafter. Now what is the firm’s
expected, or required, return on equity?

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Question 30
The following financial data relates to XYZ Ltd. :
Year Earnings Dividend
Per Share Per Share Share Price
(Rs.) (Rs.) (Rs.)
2004 42 17 252
2005 46 18 184
2006 51 20 255
2007 55 22 275
2008 62 25 372
A firm of market analysts which specialises in the industry in which XYZ Ltd. operates has
recently re-evaluated the company’s future prospects. The analysts estimate that XYZ Ltd.’s
earnings and dividend will grow at 25% for the next three years. Thereafter, earnings are
likely to increase at a lower rate of 10%. If this reduction in earnings growth occurs, the
analysts consider that the dividend payout ratio will be increased to 50%.
XYZ Ltd. is all equity financed and has 10 lakh ordinary shares in issue. The tax rate of 33%
is not expected to change in the foreseeable future. Calculate the estimated share price; and
the P/E ratio by using dividend valuation model. For this purpose, you can assume a
constant post-tax cost of capital of 18%. (12 marks)
Question 31
Mr. A is thinking of buying shares at Rs. 500 each having face value of Rs. 100. He is
expecting a bonus at the ratio of 1:5 during the fourth year. Annual expected dividend is
20% and the same rate is expected to be maintained on the expanded capital base. He
intends to sell the shares at the end of seventh year at an expected price of Rs. 900 each.
Incidental expenses for purchase and sale of shares are estimated to be 5% of the market
price. He expects a minimum return of 12% per annum.
Should Mr. A buy the share? If so, what maximum price should he pay for each share?
Assume no tax on dividend income and capital gain.
Question 32
Seawell Corporation, a manufacturer of do-it-yourself hardware and housewares, reported
earnings per share of € 2.10 in 2003, on which it paid dividends per share of €0.69.
Earnings are expected to grow 15% a year from 2004 to 2008, during this period the
dividend payout ratio is expected to remain unchanged. After 2008, the earnings growth
rate is expected to drop to a stable rate of 6%, and the payout ratio is expected to increase
to 65% of earnings. The firm has a beta of 1.40 currently, and is expected to have a beta of
1.10 after 2008. The market risk premium is 5.5%. The Treasury bond rate is 6.25%.
(a) What is the expected price of the stock at the end of 2008?
(b) What is the value of the stock, using the two-stage dividend discount model?
Question 33
SAM Ltd. has just paid a dividend of Rs. 2 per share and it is expected to grow @ 6% p.a.
After paying dividend, the Board declared to take up a project by retaining the next three
annual dividends. It is expected that this project is of same risk as the existing projects. The

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results of this project will start coming from the 4th year onward from now. The dividends
will then be Rs. 2.50 per share and will grow @ 7% p.a.
An investor has 1,000 shares in SAM Ltd. and wants a receipt of atleast Rs. 2,000 p.a. from
this investment.
Show that the market value of the share is affected by the decision of the Board. Also show
as to how the investor can maintain his target receipt from the investment for first 3 years
and improved income thereafter, given that the cost of capital of the firm is 8%.
Question 34
XYZ Ltd. paid a dividend of Rs. 2 for the current year. The dividend is expected to grow at
40% for the next 5 years and at 15% per annum thereafter. The return on 182 days T-bills
is 11% per annum and the market return is expected to be around 18% with a variance of
24%.
The co-variance of XYZ's return with that of the market is 30%. You are required to
calculate the required rate of return and intrinsic value of the stock.
Question 35
XYZ Ltd. has been regularly paying a dividend of Rs. 20,00,000 per annum for several years
and it is expected that same dividend would continue at this level in near future. There are
10,00,000 equity shares of Rs. 10 each and the same is traded at par.
The company has an opportunity to invest Rs. 12,00,000 in one year’s time as well as
further Rs. 12,00,000 in two year’s time in a project as it is estimated that the project will
generate cash inflow of Rs.7,50,000 per annum in three year’s time which will continue
forever. This investment is possible if dividend is reduced for next two years.
Whether the company should accept the project? Also analyze the effect on the market
price of the share, if the company decides to accept the project.
ACCOUNTING VALUATION
Question 36
Capital structure of Sun Ltd., as at 31.3.2003 was as under: (Rs.lakhs)
Equity share capital 80
8% Preference share capital 40
12% Debentures 64
Reserves 32
Sun Ltd., earns a profit of Rs. 32 lakhs annually on an average before deduction of income-
tax, which works out to 35%, and interest on debentures.
Normal return on equity shares of companies similarly placed is 9.6% provided:
(a) Profit after tax covers fixed interest and fixed dividends at least 3 times.
(b) Capital gearing ratio is 0.75.
(c) Yield on share is calculated at 50% of profits distributed and at 5% on undistributed
profits.
Sun Ltd., has been regularly paying equity dividend of 8%.
(i) 1% for every time of difference for interest and fixed dividend coverage ratio.
(ii) 2% for every time of difference for capital gearing ratio.
Compute the value per equity share of the company.

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Question 37
Following Financial data are available for PQR Ltd. for the year 2008:
(Rs. in lakh)
8% debentures 125
10% bonds (2007) 50
Equity shares (Rs. 10 each) 100
Reserves and Surplus 300
Total Assets 600
Assets Turnovers ratio 1.1
Effective interest rate 8%
Effective tax rate 40%
Operating margin 10%
Dividend payout ratio 16.67%
Current market Price of Share Rs.14
Required rate of return of 15%
investors
You are required to:
(i) Draw income statement for the year
(ii) Calculate its sustainable growth rate
(iii) Calculate the fair price of the Company's share using dividend discount model, and
(iv) What is your opinion on investment in the company's share at current price?
BUY BACK DECISION

Question 38
Rahul Ltd. has surplus cash of Rs. 100 lakhs and wants to distribute 27% of it to the
shareholders. The company decides to buy back shares. The Finance Manager of the
company estimates that its share price after re-purchase is likely to be 10% above the
buyback price-if the buyback route is taken. The number of shares outstanding at present is
10 lakhs and the current EPS is Rs. 3.
(i) The price at which the shares can be re-purchased, if the market capitalization of the
company should be Rs. 210 lakhs after buyback,
(ii) The number of shares that can be re-purchased, and
(iii) The impact of share re-purchase on the EPS, assuming that net income is the same.
Question 39
Abhishek Ltd. has surplus cash of Rs. 90 lakhs and wants to distribute 30% of it to the
shareholders. The company decides to buy back shares. The Finance Manager of the
company estimates that its share price after re-purchase is likely to be 10% above the
buyback price-if the buyback route is taken. The number of shares outstanding at present is
10 lakhs and the current EPS is Rs. 3.
(i) The price at which the shares can be re-purchased, if the market capitalization of the
company should be Rs. 200 lakhs after buyback,
(ii) The number of shares that can be re-purchased, and
(iii) The impact of share re-purchase on the EPS, assuming that net income is the same.

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III-Valuation of Right Shares

Question 40
ABC Limited’s shares are currently selling at Rs. 13 per share. There are 10,00,000 shares
outstanding. The firm is planning to raise Rs. 20 lakhs to Finance a new project.
Required:
What are the ex-right price of shares and the value of a right, if
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii) How does the shareholders’ wealth change from (i) to (ii)? How does right issue
increases shareholders’ wealth?
Question 41
Pragya Limited has issued 75,000 equity shares of Rs. 10 each. The current market price
per share is Rs. 24. The company has a plan to make a rights issue of one new equity share
at a price of Rs. 16 for every four share held.
(i) Calculate the theoretical post-rights price per share;
(ii) Calculate the theoretical value of the right alone;
(iii) Show the effect of the rights issue on the wealth of a shareholder, who has 1,000 shares
assuming he sells the entire rights; and
(iv) Show the effect, if the same shareholder does not take any action and ignores the issue.
Question 42
The current price of a share of kaykay Pharmaceuticals Ltd. Is Rs. 55. The company is
planning to issue 1 right shares for every 4 equity shares. If the company target that the ex-
right value of a shares shall not fall below Rs. 52. Find the subscription price for one right
share.

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IV-Valuation of Bonds
Valuation & Bond Yield
Question 43
9%, 5 year with an issue price of Rs.90 and redemption price of Rs. 105. Income tax rate is
30% and capital gain tax is 10%. What is post tax yield to maturity?
Question 44
A Rs. 1000 face value ABC bond has a coupon rate of 6 %, with interest paid semi-annually,
and mature is 5 year. If the bond is priced to yield 8%, what is the bond’s value today?
Question 45
The KLM bond has a 8% coupon rate, with interest paid semi-annually, a maturity value of
Rs. 1000, and matures in 5 years. If the bond is priced to yield 6%, what is the bond’s
current price?
Question 46
A Deep Discount Bond (DDB) was issued by a financial institution for a maturity period of
10 years and having a par value of Rs. 25,000. Find out the value of the bond given that the
required rate of return is 16%.
Question 47
A Bond with 5 yr maturity Rs. 5000 FV Bond, which pays coupon @ 12% semi annually.
The bond will be redeemed @ premium of 5% at the end of 5 yrs. Similar Bonds in the
market are presently yielding 8%. Find out the intrinsic value.
Question 48
A bond has an 8% coupon rate (semi-annual interest), a maturity value of Rs.1,000,
matures in 5 years, and current price of Rs. 1200. What is the yield-to-maturity?
Question 49
Find out the IV of the Bond from the following information and give investment advice.
FV = 5000
CR = 14%
Maturity = 10 yrs
Market Price = 920
Yield on similar Bonds = 15%
Redemption in 4 equal annual installments at the end of 7, 8, 9 and 10th year @ premium of
10%.
Question 50
(a) A Rs. 100 perpetual bond is currently selling for Rs. 95. The coupon rate of interest is
14.5 percent and the appropriate discount rate is 16 percent. Calculate the value of the
bond. Should it be bought? What is its yield at maturity?

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(b) A company proposes to sell ten-year debentures of Rs. 10,000 each. The company
would repay Rs. 1,000 at the end of every year and will pay interest annually at 15 percent
on the outstanding amount. Determine the present value of the debenture issue if the
capitalization rate is 18 percent.
Question 51
A Deep Discount Bond (DDB) was issued by a financial institution for a maturity period of
10 years and having a par value of Rs. 25,000. Find out the value of the Bond given that the
required rate of return is 16%.
Question 52
An investors is considering the purchase of the following Bond:
Face value Rs. 100
Coupon rate 11 %
Maturity 3 years
(i) If he wants a yield of 13% what is the maximum price he should be ready to pay for?
(ii) If the Bond is selling for Rs.97.60, what would be his yield?
Question 53
Calculate Market Price of:
(i) 10% Government of India security currently quoted at 110 but yield is expected to go up
by 1 %.
(ii) A bond with 7.5% coupon interest. Face Value 10,000 & term to maturity of 2 years,
presently yielding 6% interest payable half yearly.
Question 54
If the market price of the bond is Rs. 95; years to maturity = 6 yrs: coupon rate = 13% p.a
(paid annually) and face value is Rs. 100. What is the yield to maturity?
Question 55
An Investor is considering the purchase of the following Bond:
Face value Rs. 100
Coupon rate 15%
Maturity 3 years
(i) If he wants a yield of 10% what is the maximum price he should be ready to pay for?
(ii) If the Bond is selling for Rs. 117, what would be his yield?
Question 56
What will be the yield of 16% perpetual bond with a Rs. 1000 par value, when the current
price is Rs.800, Rs.1300, or Rs. 1000?

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Question 57
Based on the credit rating of bonds, Mr. Z has decided to apply the following discount rates
for valuing bonds:
Credit Rating Discount Rate
AAA 364 T Bill rate + 3% Spread
AA AAA + 2% Spread
A AAA + 3% Spread
He is considering investing in AA rated, Rs. 1,000 face value bond currently selling at Rs.
1,025.86. The bond has five years to maturity and the coupon rate on the bond is 15% p.a.
payable annually. The next interest payment is due one year from today and the bond is
redeemable at par. (Assume the 364 day T-bill rate to be 9%).
You are required to calculate the intrinsic value of the bond for Mr. Z Should he invests in
the bond? Also calculate the current yield and the Yield to Maturity (YTM) of the bond.
Question 58
M/s. Agfa is planning to issue a debenture series on the following terms Face value Rs. 100.
Term of maturity 10 years.
Years Yearly coupon Rate.
1–4 9%
5–8 10%
9 – 10 14%
The current market rate on similar debentures is 15% p.a. The company proposes to price
the issue in such a manner that it can yield 16% compounded rate of return to the investors.
The company also proposes to redeem the debenture at 5% premium on maturity.
Determine the issue price of the debentures.
Question 59
RBI sold a 91 day T – bill of face value of Rs. 100 at an yield of 6% p.a. Issue Price
Question 60
An investment manager is studying two alternatives of investment as given below:
Alternative 1: This is a bond of Leather Product(India) Ltd., which has a maturity of 5 years
and a coupon rate of 12%. The market price of this bond is Rs. 480 and the current yield on
it is 12.5%. The bond will be redeemed at par on maturity.
Alternative 2: This is an equity share of Western Drugs & Pharmaceuticals Ltd. The
company has recently paid a dividend of Rs. 3.20 per share. It has studied that dividend
have been growing at an approximate rate of 8% p.a. over a sufficiently long period of time.
The market price of the share is Rs. 48.
The investment manager requires a rate of return 14%. You are required to find out
1) The intrinsic value of the bond.
2) The intrinsic value of the share.
3) The alternative in which investment should be made so that the investment
manager earns at least his required rate of return.

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Question 61
There is a 12% 10-year bond issue in the market. The issue price is Rs. 975 and the
redemption price Rs. 1100. For an investor with marginal income tax rate of 40% and
capital gains tax rate of 10% (assuming no indexation), what is the post-tax yield to
maturity?
Question 62
ABC Ltd. issued 9%, 5 year bonds of Rs. 1,000/- each having a maturity of 3 years. The
present rate of interest is 12% for one year tenure. It is expected that Forward rate of
interest for one year tenure is going to fall by 75 basis points and further by 50 basis points
for every next year in further for the same tenure. This bond has a beta value of 1.02 and is
more popular in the market due to less credit risk.
Calculate
(i) Intrinsic value of bond
(ii) Expected price of bond in the market
Question 63
MP Ltd. issued a new series of bonds on January 1, 2010. The bonds were sold at par
(Rs.1,000), having a coupon rate 10% p.a. and mature on 31st December, 2025. Coupon
payments are made semiannually on June 30th and December 31st each year. Assume that
you purchased an outstanding MP Ltd. bond on 1st March, 2018 when the going interest
rate was 12%.
Required:
(i) What was the YTM of MP Ltd. bond as on January 1, 2010?
(ii) What amount you should pay to complete the transaction? Of that amount how much
should be accrued interest and how much would represent bonds basic value.
Question 64
Consider a bond with the following features:
Face Value = Rs. 100000
Coupon rate = 12% payable at the end of December each year
Required return = 15% Valuation date – 1st April 2009
Redemption, i.e. Maturity date – 31.12.2015
Current Market price= 92.55%. Redemption at par on maturity.
Find out the intrinsic value, that is full price of the bond and split it into the accrued
interest and clean price components. Give your investment advice.
Question 65
FV = Rs. 1000
Maturity = 20 years
Coupon = 12%
Callable in 5 years Rs.1150
Callable in10 years at 1050
Callable in 15 years at par and redeemable in 20 years at par
Current Market price = Rs. 980
Calculate

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1) Yield to first call

2) Yield to second call
3) Yield to 1st call
4) Ytm
Question 66
Bonds A B
Face value 1000 1000
Coupon rate 12% 12%
Maturity 2 years 5 years
Compute the present value of bond if the market interest rate rises from 8%p.a. to 9% p.a.
Also determine the sensitivity in the price of each bond on account of change in market
interest rate.
Question 67
Bonds A B
Face value 1000 1000
Coupon rate 10% 15%
Maturity 5 years 5 years
Compute the present value of bond if the market interest rate rises from 10% p.a. to 11%
p.a. Also determine the sensitivity in the price of each bond on account of change in market
interest rate.
Question 68
A company invested in a 5 year bond issue of another company in 2002 carrying a coupon
rate of 10% per annum, the interest payable at half yearly rests and the principal repayable
after 5 years in 2006 end. The current market yield has fallen to 9% during 2003. The
investor company wanted to take advantage of the fall in market yield by selling the bond
to any willing buyer. Compute the value of the bond at the end of 2003. Assume par value of
each bond Rs. 1000.
Question 69
The investors of IBDI Flexi bonds are entitled to opt for two options of retirement Bonds, as
per the following terms:
Particulars Option A Option B
Face value Rs. 5000 Rs. 5000
Date of allotment January 6, 2005 January 6, 2005
Repayment of principal Nil 50% of face value
Wait period for commencement of annuity 3 years 6 years
Annuity payment for the bond Rs. 1500 Rs. 2085
No. of annuities 7 5
Date of first annuity payment January 6, 2008 January 6, 2011
Date of last annuity payment January 6, 2014 January 6, 2015

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Date of repayment of principal -- January 6, 2010

The yield to maturity is the sole criterion for choosing the option for investment.
You are required to find out the option which should be chosen for investment on the basis
of YTM.
Question 70
The debenture of Marvel Graphic Ltd. is selling at a discount of 5% from its face value. The
face value of the debenture is Rs. 100, coupon rate is 8% and the interest payments are
made at the end of every 6 months. The next interest payment will fall due at the end of 6
months from now. The debenture will be redeemed in two equal annual installments; the
first installment will be payable at the end of 5 years and 6 months from now, and the
second installment will be payable at the end of 6 years and 6 months from now. You are
required to determine the yield that you will realize if you invest in the debenture now and
hold it till its maturity.
Question 71
Ram purchased at par a bond with a face value of Rs. 1000. The bond had five years to
maturity and a 10% coupon rate. The bond was called two years later for a price of Rs.
1200, after making its second annual interest payment. Ram then reinvested Rs. 1000 in a
bond selling at its face value of Rs. 1000, with three years to maturity and 7% coupon rate.
What was Ram’s actual YTM over the five year period?
Question 72
Huge volatility in Indian Equity market in recent times due to the weak global market
sentiments on account of high crude prices and high inflation, have forced Mr. Ankit, an
Equity investor to look out for other avenues of investment. One such investment avenues
of investment available to him are fixed income securities in debt market.
However, the return that he desires by investing in this market depends on the credit risk
associated with the debt instruments.
Accordingly, he has identified the following three bonds for his investment purpose to
select one among them:
Bonds Credit Rating Required Rate of Return of Mr. Ankit
Bond A AAA 364- days T-bill rate + 2.5% spread
Bond B AA 364- days T-bill rate + 3.5% spread
Bond C A 364- days T-bill rate + 4.5% spread
Other details with respect to the above three bonds are as follows:
Bonds Current Market Coupon Rate Redemption
Price (Rs.) (%)
Bond A 1015.00 10.25 At par
Bond B 1025.00 10.75 At 7.5% premium to face value
Bond C 1085.00 11.00 At 12.5% premium to face value
The face value of each of the bonds is Rs.1000 and they have 4 years remaining to maturity.
The next coupon payments on the bonds are due after one year from today. Currently, 364-
days T-bill are trading at Rs. 93.04 each.

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Compute the value of the above bonds and suggest the bond to be selected by Mr. Ankit for
his investment purpose.
Calculate the current yield and the yield to maturity (YTM) of the bond suggested in (a)
above.
Question 73
Sushmita acquired at par a bond for Rs. 1000 that offered a 15% coupon rate. At the time of
purchase, the bond had four years to maturity. Assuming annual interest payment,
calculate Sushmita’s actual yield-to-maturity if all the interest payment were reinvested
earning 18% p.a. What would Sushmita’s realized yield-to-maturity be if all interest
payments were spent immediately upon receipt?
Question 74
John inherited the following securities on his uncle’s death:
Types of Security Nos. Annual Coupon % Maturity Years Yield %
Bond A (Rs. 1,000) 10 9 3 12
Bond B (Rs. 1,000) 10 10 5 12
Preference shares C (Rs. 100) 100 11 * 13*
Preference shares D (Rs. 100) 100 12 * 13*
*likelihood of being called at a premium over par.
Compute the current value of his uncle’s portfolio
Question 75
Pet feed plc has outstanding, a high yield Bond with following features:
Face Value £ 10,000
Coupon 10%
Maturity Period 6 Years
Special Feature Company can extend the life of
Bond to 12 years.
Presently the interest rate on equivalent Bond is 8%.
(a) If an investor expects that interest will be 8%, six years from now then how much he
should pay for this bond now.
(b) Now suppose, on the basis of that expectation, he invests in the Bond, but interest rate
turns out to be 12%, six years from now, then what will be his potential loss/ gain.
Question 76
On 31st March, 2013, the following information about Bonds is available:
Name of Face Value Maturity Date Coupon Coupon Date(s)
Security Rs. Rate
Zero coupon 10,000 31st March, N.A. N.A.
2023
T-Bill 1,00,000 20th June, N.A. N.A.
2013
10.71% GOI 100 31st March, 10.71 31st March
2023 2023

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10 % GOI 2018 100 31st March, 10.00 31st March & 30th
2018 September
Calculate:
(i) If 10 years yield is 7.5% p.a. what price the Zero Coupon Bond would fetch on 31st
March, 2013?
(ii) What will be the annualized yield if the T-Bill is traded @ 98500?
(iii) If 10.71% GOI 2023 Bond having yield to maturity is 8%, what price would it fetch on
April 1, 2013 (after coupon payment on 31st March)?
(iv) If 10% GOI 2018 Bond having yield to maturity is 8%, what price would it fetch on
April 1, 2013 (after coupon payment on 31st March)?
Conversion of Bonds & Preference Shares

Question 77
XYZ company has current earnings of Rs. 3 per share with 5,00,000 shares outstanding. The
company plans to issue 40,000, 7% convertible preference shares of Rs. 50 each at par. The
preference shares are convertible into 2 shares for each preference shares held. The equity
share has a current market price of Rs. 21 per share.
(i) What is preference share’s conversion value?
(ii) What is conversion premium?
(iii) Assuming that total earnings remain the same, calculate the effect of the issue on the
basic earning per share (a) before conversion (b) after conversion.
(iv) If profits after tax increases by Rs. 1 million what will be the basic EPS (a) before
conversion and (b) on a fully diluted basis?
Question 78
A convertible bond with a face value of Rs. 1,000 is issued at Rs. 1,350 with a coupon rate of
10.5%. The conversion rate is 14 shares per bond. The current market price of bond and
share is Rs. 1,475 and Rs. 80 respectively. What is the premium over conversion value?
Question 79
Saranam Ltd. has issued convertible debentures with coupon rate 12%. Each debenture has
an option to convert to 20 equity shares at any time until the date of maturity. Debentures
will be redeemed at Rs. 100 on maturity of 5 years. An investor generally requires a rate of
return of 8% p.a. on a 5-year security. As an investor when will you exercise conversion for
given market prices of the equity share of (i) Rs. 4, (ii) Rs. 5 and (iii) Rs. 6.
Cumulative PV factor for 8% for 5 years : 3.993
PV factor for 8% for year 5 : 0.681
Question 80
GHI Ltd., AAA rated company has issued, fully convertible bonds on the following terms, a
year ago:
Face value of bond Rs. 1000
Coupon (interest rate) 8.5%
Time to Maturity (remaining) 3 years

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Interest Payment Annual, at the end of year

Principal Repayment At the end of bond maturity
Conversion ratio (Number of shares per bond) 25
Current market price per share Rs. 45
Market price of convertible bond Rs. 1175
AAA rated company can issue plain vanilla bonds without conversion option at an interest
rate of 9.5%.
Required: Calculate as of today:
(i) Straight Value of bond.
(ii) Conversion Value of the bond.
(iii) Conversion Premium.
(iv) Percentage of downside risk.
(v) Conversion Parity Price. t 1 2 3
PVIF0.095, t 0.9132 0.8340 0.7617
Question 81
The following data is related to 8.5% Fully Convertible (into Equity shares) Debentures
issued by JAC Ltd. at Rs. 1000.
Market Price of Debenture Rs. 900
Conversion Ratio 30
Straight Value of Debenture Rs. 700
Market Price of Equity share on the date of Conversion Rs. 25
Expected Dividend Per Share Rs. 1
You are required to calculate:

(a) Conversion Value of Debenture
(b) Market Conversion Price
(c) Conversion Premium per share
(d) Ratio of Conversion Premium
(e) Premium over Straight Value of Debenture
(f) Favourable income differential per share
(g) Premium pay back period
Question 82
The data given below relates to a convertible bond :
Face value Rs. 250
Coupon rate 12%
No. of shares per bond 20
Market price of share Rs. 12
Straight value of bond Rs. 235
Market price of Rs. 265
convertible bond
Calculate:
(i) Stock value of bond.
(ii) The percentage of downside risk.
(iii) The conversion premium

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(iv) The conversion parity price of the stock.
Question 83
Pineapple Ltd has issued fully convertible 12 percent debentures of Rs. 5,000 face value,
convertible into 10 equity shares. The current market price of the debentures is Rs. 5,400.
The present market price of equity shares is Rs. 430.
Calculate:
(i) The conversion percentage premium, and
(ii) The conversion value
Bond Duration & Volatility
Question 84
The following data are available for a bond
Face value Rs. 1,000
Coupon Rate 16%
Years to Maturity 6
Redemption value Rs. 1,000
Yield to maturity 17%
What are the current market price, duration and volatility of this bond? Calculate the
expected market price, if increase in required yield is by 75 basis points.
Question 85
The following data is available for a bond:
Face Value Rs. 1,000
Coupon Rate 11%
Years to Maturity 6
Redemption Value Rs. 1,000
Yield to Maturity 15%
(Round-off your answers to 3 decimals)
Calculate the following in respect of the bond:
(i) Current Market Price.
(ii) Duration of the Bond.
(iii) Volatility of the Bond.
(iv) Expected market price if increase in required yield is by 100 basis points.
(v) Expected market price if decrease in required yield is by 75 basis points.
Question 86
(a) Consider two bonds, one with 5 years to maturity and the other with 20 years to
maturity. Both the bonds have a face value of Rs. 1,000 and coupon rate of 8% (with annual
interest payments) and both are selling at par. Assume that the yields of both the bonds fall
to 6%, whether the price of bond will increase or decrease? What percentage of this
increase/decrease comes from a change in the present value of bond’s principal amount
and what percentage of this increase/decrease comes from a change in the present value of
bond’s interest payments?

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(b) Consider a bond selling at its par value of Rs. 1,000, with 6 years to maturity and a 7%
coupon rate (with annual interest payment), what is bond’s duration?
(c) If the YTM of the bond in (b) above increases to 10%, how it affects the bond’s duration?
And why?
Question 87
XL Ispat Ltd. has made an issue of 14 per cent non-convertible debentures on January 1,
2007. These debentures have a face value of Rs. 100 and are currently traded in the market
at a price of Rs. 90.
Interest on these NCDs will be paid through post-dated cheques dated June 30 and
December 31. Interest payments for the first 3 years will be paid in advance through post-
dated cheques while for the last 2 years post-dated cheques will be issued at the third year.
The bond is redeemable at par on December 31, 2011 at the end of 5 years.
Required:
(i) Estimate the current yield and YTM of the bond.
(ii) Calculate the duration of the NCD.
(iii) Assuming that intermediate coupon payments are, not available for reinvestment
calculate the realised yield on the NCD.
Question 88
Find the current market price of a bond having face value Rs. 1,00,000 redeemable after 6
year maturity with YTM at 16% payable annually and duration 4.3202 years. Given 1.166 =
2.4364.
Question 89
Face value - Rs. 1000, Coupon Rate 8%. Years to maturity 8 years. Redemption at par YTM
= 17%. Find the current price and duration of the bond.
Question 90
A 5 yr, Rs. 1000 FV, 12% coupon bond presently yielding 14%. Compute price volatility
using interest rate shock of 50 basis point. Use Effective duration and Modified duration.
Question 91
Consider the Bond with the following feature
FV = Rs. 1000
Maturity = 5 yrs
Coupon = 15% payable semi annually
Price = Rs. 940
Calculate Price volatility of Bond i.e. Modified duration & Recalculate the price
volatility of Bond using interest rate shock of 50 basis point i.e. effective duration.

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Question 92
Coupon Rate = 12.5%
Maturity = 5 years
YTM = 15%p.a.
Current market price = Rs.94
Redeemable Value= 5% premium on face value
Determine Bond Duration.
Bond Immunizations
Question 93
Mr. A will need Rs. 1,00,000 after two years for which he wants to make one time necessary
investment now. He has a choice of two types of bonds. Their details are as below:
Bond X Bond Y
Face value Rs. 1,000 Rs. 1,000
Coupon 7% payable annually 8% payable annually
Years to maturity 1 4
Current price Rs. 972.73 Rs. 936.52
Current yield 10% 10%
Advice Mr. A whether he should invest all his money in one type of bond or he should buy
both the bonds and, if so, in which quantity? Assume that there will not be any call risk or
default risk.
Question 94
Mr. A is planning for making investment in bonds of one of the two companies X Ltd. and Y
Ltd. The detail of these bonds is as follows:
Company Face Value Coupon Rate Maturity
Period
X Ltd. Rs. 10,000 6% 5 Years
Y Ltd. Rs. 10,000 4% 5 Years
The current market price of X Ltd.’s bond is Rs. 10,796.80 and both bonds have same Yield
To Maturity (YTM). Since Mr. A considers duration of bonds as the basis of decision making,
you are required to calculate the duration of each bond and you decision.
Question 95
A pension fund has a following liability structure
Years Liability
3 100 cr
5 2600 cr
6 2400 cr
Opportunity cost = 10 % p.a
The following 2 bonds are shortlisted for investment
Bond R ---- 2 yrs ZCB ---- Presently yielding 10%

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Bond M ---- 7 yrs ZCB ---- Presently yielding 10%

Find out the proportion of funds to be invested in 2 bonds, to immunize the portfolio
against interest rate changes.
Question 96
Coupon Rate = 15%
Maturity = 10 years
YTM = 18%p.a.
Redeemable Value= at par
Determine Bond Duration and Modified Duration.
Question 97
Consider a pension fund with the following liability structure
Year Liability
2 80 lacs
3 120 Lacs
5 100 Lacs
The following 2 bonds have been shortlisted.
Bond X- Presently yield 9% & it is Zero coupon bond.
Bond Y- 6 years ZCB presently yield 9%
Find out the proportion of fund to be invested in bond for immunization.
Question 98
Coupon Rate = 10%
Maturity = 4 years
Compute YTM, duration and modified duration. Also show the impact of 1% decrease in
YTM on market price of bond.
Question 99
The following corporate bonds are considered for investment by the portfolio manager. His
aim is to immunize the liability due in 6 years. All bonds have face value of Rs. 1000.
Bonds Maturity (years) Coupon rate Duration(years)
Arvind Mills 10 8 7.35
BILT 8 9 6.15
Cipla 7 7 4.30
If the portfolio manager wishes to invest 50% in Arvind Mills, what is the proportion of
total amount that can be invested in other two bonds to immunize the portfolio?

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Bond Refunding
Question 100
M/s. Transindia Ltd. is contemplating calling As. 3 crores of 30 years, 1,000 bond issued 5
years ago with a coupon interest rate of 14 percent. The bonds have a call price of 1,140
and had initially collected proceeds of 2.91 crores due to a discount of 30 per bond. The
initial floating cost was 3,60,000. The Company intends to sell 3 crores of 12 per cent
coupon rate, 25 years bonds to raise funds for retiring the old bonds. It proposes to sell the
new bonds at their par value of 1,000. The estimated floatation cost is 4,00,000. The
company is paying 40% tax and its after cost of debt is 8 per cent. As the new bonds must
first be sold and their proceeds, then used to retire old bonds, the company expects a two
months period of overlapping interest during which interest must be paid on both the old
and new bonds.
What is the feasibility of refunding bonds?
Question 101
ABC Ltd. has Rs. 300 million, 12 per cent bonds outstanding with six years remaining to
maturity. Since interest rates are falling, ABC Ltd. is contemplating of refunding these
bonds with a Rs. 300 million issue of 6-year bonds carrying a coupon rate of 10 per cent.
Issue cost of the new bond will be As. 6 million and the call premium is 4 per cent. As. 9
million being the unamortized portion of issue cost of old bonds can be written off no
sooner the old bonds are called off. Marginal tax rate of ABC Ltd. is 30 per cent.
You are required to analyze the bond refunding decision.
Question 102
The 22% outstanding bonds of the Bharat Industries Ltd (BIL) amount to Rs.50 crore, with
a remaining maturity of 5 years. It can now issue fresh bonds of 5 year maturity at a
coupon rate of 20%. The fresh bonds will be issued at a discount of 5% which will be
written in 5 years for tax purposes. The existing bonds can be refunded at a premium (call
premium) of 5%. The unamortized portion of the issue expenses on existing bonds is Rs.
1.5 crore. They would be written off as soon as the existing bonds are called/refunded. If
the BIL is in the 35% tax bracket, would you advise it to call the bonds?

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Forward Rate
Question 103
From the following data on the govt. securities, calculate the forward rates.
Face value (Rs.) Interest rate Maturity (Year) Current price (Re.)
1,00,000 0% 1 91,500
1,00,000 10% 2 98,500
1,00,000 10.5% 3 99,000
Question 104
The following is the Yield structure of AAA rated debenture:
Period Yield (%)
3 months 8.5%
6 months 9.25 -
1 year 10.50
2 years 11.25
3 years and above 12.00
(i) Based on the expectation theory calculate the implicit one-year forward rates in year 2
and year 3.
(ii) If the interest rate increases by 50 basis points, what will be the percentage change in
the price of the bond having a maturity of 5 years? Assume that the bond is fairly priced at
the moment at Rs.1000.
Question 105
Consider the following data for government securities
Interest Maturity Current Price
Face value
(Rate %) (Years) (Rs..)
1,00,000 0 1 90,000
1,00,000 10.5 2 98,000
1,00,000 11.0 3 98,500
1,00,000 11.5 4 98,900
Calculate the forward interest rates.

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V- CORPORATE VALUATION
Question 106
ABC Company is considering acquisition of XYZ Ltd. which has 1.5 crores shares
outstanding and issued. The market price per share is Rs. 400 at present. ABC's average
cost of capital is 12%. Available information from XYZ indicates its expected cash accruals
for the next 3 years as follows:
Year Rs. Cr.
1 250
2 300
3 400
Calculate the range of valuation that ABC has to consider.
(PV factors at 12% for years 1 to 3 respectively: 0.893, 0.797 and 0.712).
Question 107
Eagle Ltd. reported a profit of Rs. 77 lakhs after 30% tax for the financial year 2011-12. An
analysis of the accounts revealed that the income included extraordinary items of Rs. 8
lakhs and an extraordinary loss of Rs.10 lakhs. The existing operations, except for the
extraordinary items, are expected to continue in the future. In addition, the results of the
launch of a new product are expected to be as follows:
Rs. In lakhs
Sales 70
Material costs 20
Labour costs 12
Fixed costs 10
(i) Calculate the value of the business, given that the capitalization rate is 14%.
(ii) Determine the market price per equity share, with Eagle Ltd.‘s share capital being
comprised of 1,00,000 13% preference shares of Rs. 100 each and 50,00,000 equity shares
of Rs. 10 each and the P/E ratio being 10 times.
Question 108
The valuation of Hansel Limited has been done by an investment analyst. Based on an
expected free cash flow of Rs. 54 lakhs for the following year and an expected growth rate
of 9 percent, the analyst has estimated the value of Hansel Limited to be Rs. 1800 lakhs.
However, he committed a mistake of using the book values of debt and equity.
The book value weights employed by the analyst are not known, but you know that Hansel
Limited has a cost of equity of 20 percent and post -tax cost of debt of 10 percent. The value
of equity is thrice its book value, whereas the market value of its debt is nine-tenths of its
book value. What is the correct value of Hansel Ltd?
Question 109
A valuation done of an established company by a well-known analyst has estimated a value
of Rs. 500 lakhs, based on the expected free cash flow for next year of Rs. 20 lakhs and an
expected growth rate of 5%.

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While going through the valuation procedure, you found that the analyst has made the
mistake of using the book values of debt and equity in his calculation. While you do not
know the book value weights he used, you have been provided with the following
information:
(i) Company has a cost of equity of 12%,
(ii) After tax cost of debt is 6%,
(iii) The market value of equity is three times the book value of equity, while the market
value of debt is equal to the book value of debt.
You are required to estimate the correct value of the company.
Question 110
ABC Co. is considering a new sales strategy that will be valid for the next 4 years. They
want to know the value of the new strategy. Following information relating to the year
which has just ended, is available:
Income Statement Rs.
Sales 20,000
Gross margin (20%) 4,000
Administration, Selling & distribution expense (10%) 2,000
PBT 2,000
Tax (30%) 600
PAT 1,400
Balance Sheet Information
Fixed Assets 8,000
Current Assets 4,000
Equity 12,000
If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The
gross margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will
remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year.
The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.
Question 111
Kanpur Shoe Ltd. is considering a new sales strategy that will be valid for the next 4 years.
They want to know the value of the new strategy. Following information relating to the
year which has just ended, is available:
Income Statement Rs.
Sales 2,00,000
Gross margin (20%) 40,000
Administration, Selling & distribution expense (10%) 20,000
PBT 20,000
Tax (30%) 6,000
PAT 1,400
Balance Sheet Information
Fixed Assets 80,000
Current Assets 40,000

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Equity 1,20,000
If it adopts the new strategy, sales will grow at the rate of 20% per year for two years and
30% from the third year. The gross margin ratio, Assets turnover ratio, the Capital
structure and the income tax rate will remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year.
The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.
Question 112
Simple Ltd. and Dimple Ltd. are planning to merge. The total values of the companies are
dependent on the fluctuating business conditions. The following information is given for
the total value (debt + equity) structure of each of the two companies.
Business Probability Simple Ltd. Rs. Dimple Ltd. Rs.
Condition Lacs Lacs
High Growth 0.20 820 1050
Medium Growth 0.60 550 825
Slow Growth 0.20 410 590
The current debt of Dimple Ltd. is Rs. 65 lacs and of Simple Ltd. is Rs. 460 lacs.
Calculate the expected value of debt and equity separately for the merged entity
Question 113
Following information are available in respect of XYZ Ltd. which is expected to grow at a
higher rate for 4 years after which growth rate will stabilize at a lower level:
Base year information: - Rs. 2,000 crores
Revenue
EBIT - Rs. 300 crores
Capital expenditure - Rs. 280 crores
Depreciation - Rs.200 crores
Information for high growth and stable growth

period are as follows:
Growth in Revenue & EBIT 20% 10%

Growth in capital expenditure and depreciation 20% Capital expenditure are offset by
depreciation
Risk free rate 10% 9%
Equity beta 1.15 1
Market risk premium 6% 5%
Pre tax cost of debt 13% 12.86%
Debt equity ratio 1:1 2:3
For all time, working capital is 25% of revenue and corporate tax rate is 30%.
What is the value of the firm?

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Question 114
Calculate the value of share from the following information:
Profit of the company Rs. 290 crores
Equity capital of company Rs. 1,300 crores
Par value of share Rs. 40 each
Debt ratio of company (Debt/ Debt + Equity) 27%
Long run growth rate of the company 8%
Beta 0.1; risk free interest rate 8.7%
Market returns 10.3%
Capital expenditure per share Rs. 47
Depreciation per share Rs. 39
Change in Working capital Rs. 3.45 per share
Question 115
Following information is given in respect of WXY Ltd., which I expected to grow at a rate of
20% p.a. for the next three years, after which the growth rate will stabilize at 8% p.a.
normal level, in perpetuity. For the year ended March 31, 2014
Revenues Rs. 7,500 Crores

Cost of Goods Sold (COGS) Rs. 3,000 Crores
Operating Expenses Rs. 2,250 Crores
Capital Expenditure Rs. 750 Crores
Depreciation (included in COGS & Rs. 600 Crores
Operating Expenses)
During high growth period, revenues & Earnings before Interest & Tax (EBIT) will grow at
20% p.a. and capital expenditure net of depreciation will grow at 15% p.a. From year 4
onwards, i.e. normal growth period revenues and EBIT will grow at 8% p.a. and
incremental capital expenditure will be offset by the depreciation. During both high growth
& normal growth period, net working capital requirement will be 25% of revenues.
The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%.
Corporate Income Tax rate will be 30%.
Required:
Estimate the value of WXY Ltd. using Free Cash Flows to Firm (FCFF) & WACC methodology.
The PVIF @ 15 % for the three years are as below:
Year t1 t2 t3
PVIF 0.8696 0.7561 0.6575
Question 116
Tiger Ltd. is presently working with an Earning Before Interest and Taxes (EBIT) of Rs. 90
lakhs. Its present borrowings are as follows:
Rs. In lakhs
12% term loan 300
Working capital borrowings:
From Bank at 15% 200
Public Deposit at 11% 100

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The sales of the company are growing and to support this, the company proposes to obtain
additional borrowing of Rs. 100 lakhs expected to cost 16%.The increase in EBIT is
expected to be 15%.
Calculate the change in interest coverage ratio after the additional borrowing is effected
and comment on the arrangement made.
Question 117
Yes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are
given below: (Rs. In lakhs)
Year 1 2 3 4 5
Yes Ltd. 175 200 320 340 350
Merged Entity 400 450 525 590 620
Earnings would have witnessed 5% constant growth rate without merger and 6% with
merger of account of economies of operation after 5 years in each case. The cost of capital
is 15%.
The number of shares outstanding in both the companies before the merger is the same
and the companies agrees to exchange ratio 0.5 shares of Yes Ltd. for each share of No Ltd.
PV factor at 15% for years 1-5 are 0.870, 0.756; 0.658, 0.572, 0.497 respectively.
(i) Compute the Value of Yes Ltd. before and after merger.
(ii) Value of Acquisition and
(iii) Gain to shareholders of Yes Ltd.
Question 118
Personal Computer Division of Distress Ltd., a computer hardware manufacturing company
has started facing financial difficulties for the last 2 to 3 years. The management of the
division headed by Mr. Smith is interested in a buyout on 1 April 2013. However, to make
this buy-out successful there is an urgent need to attract substantial funds from venture
capitalists.
Ven Cap, a European venture capitalist firm has shown its interest to finance the proposed
buy-out. Distress Ltd. is interested to sell the division for Rs. 180 crore and Mr. Smith is of
opinion that an additional amount of Rs. 85 crore shall be required to make this division
viable. The expected financing pattern shall be as follows:
Source Mode Amount (Rs. Crore)
Management Equity Shares of Rs. 10 each 60.00
VenCap VC Equity Shares of Rs. 10 each 22.50
9% Debentures with attached warrant of Rs. 100 each 22.50
8% Loan 160.00
Total 265.00
The warrants can be exercised any time after 4 years from now for 10 equity shares @ Rs.
120 per share.
The loan is repayable in one go at the end of 8th year. The debentures are repayable in
equal annual installment consisting of both principal and interest amount over a period of
6 years.

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Mr. Smith is of view that the proposed dividend shall not be kept more than 12.5% of
distributable profit for the first 4 years. The forecasted EBIT after the proposed buyout is
as follows:
EBIT (Rs. crore) 48 57 68 82
Applicable tax rate is 35% and it is expected that it shall remain unchanged at least for 5-6
years. In order to attract VenCap, Mr. Smith stated that book value of equity shall increase
by 20% during above 4 years. Although, VenCap has shown their interest in investment but
are doubtful about the projections of growth in the value as per projections of Mr. Smith.
Further VenCap also demanded that warrants should be convertible in 18 shares instead of
10 as proposed by Mr. Smith.
You are required to determine whether or not the book value of equity is expected to grow
by 20% per year. Further if you have been appointed by Mr. Smith as advisor then whether
you would suggest to accept the demand of VenCap of 18 shares instead of 10 or not.
Question 119
BRS Inc deals in computer and IT hardwares and peripherals. The expected revenue for the
next 8 years is as follows:
Years Sales Revenue ($ Million)
1 8
2 10
3 15
4 22
5 30
6 26
7 23
8 20
Summarized financial position as on 31 March 2012 was as follows:
Liabilities Amount Assets Amount
Equity Stocks 12 Fixed Assets (Net) 17
12% Bonds 8 Current Assets 3
20 20
Additional Information:
(a) Its variable expenses is 40% of sales revenue and fixed operating expenses (cash) are
estimated to be as follows:
Period Amount ($ Million)
1- 4 years 1.6
5-8 years 2
(b) An additional advertisement and sales promotion campaign shall be launched requiring
expenditure as per following details:
1 year 0.50
2-3 years 1.50
4-6 years 3.00
7-8 years 1.00
(c) Fixed assets are subject to depreciation at 15% as per WDV method

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(d) The company has planned additional capital expenditures (in the beginning of each
year) for the coming 8 years as follows:
1 0.50
2 0.80
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00
(e) Investment in Working Capital is estimated to be 20% of Revenue.
(f) Applicable tax rate for the company is 30%.
(g) Cost of Equity is estimated to be 16%.
(h) The Free Cash Flow of the firm is expected to grow at 5% per annum after 8 years.
With above information you are required to determine the:
(i) Value of Firm
(ii) Value of Equity
Question 120
ABC (India) Ltd., a market leader in printing industry, is planning to diversify into defense
equipment businesses that have recently been partially opened up by the GOI for private
sector. In the meanwhile, the CEO of the company wants to get his company valued by
leading consultants, as he is not satisfied with the current market price of his scrip.
He approached consultant with a request to take up valuation of his company with the
following data for the year ended 2009:
Share Price Rs. 66 per share
Outstanding debt 1934 lakh
Number of outstanding shares 75 lakh
Net income (PAT) 17.2 lakh
EBIT 245 lakh
Interest expenses 218.125 lakh
Capital expenditure 234.4 lakh
Depreciation 234.4 lakh
Working capital 44 lakh
Growth rate 8% (from 2010 to 2014)
Growth rate 6% (beyond 2014)
Free cash flow 240.336 lakh (year 2014 onwards)
The capital expenditure is expected to be equally offset by depreciation in future and the
debt is expected to decline by 30% in 2014.
Required:
Estimate the value of the company and ascertain whether the ruling market price is
undervalued as felt by the CEO based on the foregoing data. Assume that the cost of equity
is 16%, and 30% of debt repayment is made in the year 2014.

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Question121
A Ltd. is considering the purchase of T Ltd. The cash inflows after taxes for T Ltd. are
estimated to be Rs. 15 lakh per year in the near future. This forecast by A Ltd. includes
expected merger synergic gains. T Ltd. currently has total assets of Rs. 50 lakh with 20% of
the total assets being financed with debt funds. A Ltd’s pre-merger weighted average cost
of capital is 15%.
Based on A Ltd. pre -merger cost of capital, what is the maximum purchase price that A Ltd.
would be willing to pay to acquire T Ltd?
Assume that by acquiring T Ltd., A Ltd. will move towards an optional capital structure
such that its weighted average cost of capital will be 12% after the acquisition. Under these
conditions, what would be the maximum price A Ltd. should be willing to pay?
Assume that cash flows for T Ltd. estimated at Rs. 15 Lakh for coming year, will grow at a
rate of 20% per year for the following two years, and will be on level thereafter. Each rupee
increase Rs. 0.7 incremental investment is assets during the year of increase in cash flows.
Estimate the maximum purchase price for T Ltd. based on a 12% cost of capital.
Question 122
TAT Ltd. may acquire VSN Ltd. TAT Ltd. estimates that VSN Ltd. will provide net income
after taxes of Rs. 20 crores in the first year, Rs. 30 crores in the second year, Rs. 40 crores in
the third year, Rs. 50 crores in the each of the years from fourth to sixth years and Rs. 60
crores annually thereafter onwards. VSN requires fresh capital investment of Rs. 50 crores
at the end of first year and depreciation figure for first year will be Rs. 30 crores.
Similarly, second year fresh capital investment will be Rs. 50 crores and depreciation will
be Rs. 40 crores. Third year onward the fresh investment and depreciation will stabilize at
Rs. 40 crores each. The Aggregate required rate of return is 15%. Judge the value of
acquisition based on the above information.
Gearing of Beta
Question 123
The total market value of the equity share of O.R.E. company is Rs.60,00,000 and the total
value of the debts is Rs. 40,00,000. The treasure estimate that the beta of the stock is
currently 1.5 and that the expected risk premium on the market is 10%. The treasury bill
rate is 8%. Required:
What is the beta of the company’s existing portfolio of assets?
Estimate the company’s cost of capital and the discount rate for an expansion of the
company’s business.
Question 124
Hubbard an all equity food manufacturing firm, is about to embark upon a major
diversification in the consumer electronic industry. Its current equity beta is 1.2. whilst the
average equity Beta is 1.6. Gearing in the electronic industry average 30%debt, 70% equity
corporate debt is considered to be risk free. Rm = 25 %, Rf = 10%, Corporation tax rate = 35
%. Required:
What would be a suitable discount rate for the new investment if Hubbard were to finance
the new project in each of the following ways:

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Entirely
By 30% debt and 70% Equity
By 40% debt and 60% Equity
Question 125
XYZ an all equity company has equity beta = 0.6. P/E ratio = 5 and is priced to offer a return
of 20%. It decides to buy back half of equity shares by borrowing equal amount. Risk free
rate is 10%. Assume Tax = NIL. Calculate:
1) Beta of Equity Share after Buy Back.
2) The required rate and Risk premium of Equity share before Buy back
3) The required rate and Risk premium on Equity share after Buy back.
4) The required Return on debt.
5) The percentage increase in EPS.
6) New Price Earning Ratio.
Assuming operating profit will remain same for perpetuity.
Question 126
Excellent Ltd. is a Frozen food packaging company and is looking to diversify its activity
into the electronic business. The project it is considering has an after tax return of 18% and
Excellent Ltd. is trying to decide whether the project should be accepted or not. To help it
decide it is going to use CAPM. The company has to find a proxy beta for the project & has
following information on three companies in the electronic business:
Superior Ltd: Equity beta of 1.33. Financed by 50% debt and 50% equity.
Admirable Ltd: Admirable Ltd. has an equity beta 1.30, but it has just taken on a totally
unrelated project accounting for 20% of the company’s value, that has an asset beta 1.4.
The company financed by 40% debt & 60% equity.
Meritorious Ltd: Equity beta of 1.05. Financed by 35% debt and 65% equity.
Tax rate is 35%. If risk free return is 10% & Expected return of market is 14%, determine
whether the project should be accepted. The company plans Debt/Equity 30/70 for new
project.
Question 127
ABC, a large business house is planning to sell its wholly owned subsidiary KLM. Another
large business entity XYZ has expressed its interest in making a bid for KLM. XYZ expects
that after acquisition the annual earning of KLM will increase by 10%.
Following information, ignoring any potential synergistic benefits arising out of possible
acquisitions, are available:
(i) Profit after tax for KLM for the financial year which has just ended is estimated to be Rs.
10 crore.
(ii) KLM's after tax profit has an increasing trend of 7% each year and the same is expected
to continue.
(iii) Estimated post tax market return is 10% and risk free rate is 4%. These rates are
expected to continue.
(iv) Corporate tax rate is 30%.

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XYZ ABC Proxy entity for KLM in the same line of

business
No. of shares 100 80 --
lakhs lakhs
Current share price Rs. 287 Rs. 375
--
Dividend pay out 40% 50% 50%
Debt : Equity at market 1:2 1:3 1:4
values
P/E ratio 10 13 12
Equity beta 1 1. 1 1.1
Assume gearing level of KLM to be the same as for ABC and a debt beta of zero.
You are required to calculate:
(a) Appropriate cost of equity for KLM based on the data available for the proxy entity.
(b) A range of values for KLM both before and after any potential synergistic benefits to
XYZ of the acquisition.
Chop-Shop Approach
Question 128
Using the chop-shop approach (or Break-up value approach), assign a value for Cranberry
Ltd. whose stock is currently trading at a total market price of €4 million. For Cranberry
Ltd, the accounting data set forth three business segments: consumer wholesale, retail and
general centers. Data for the firm’s three segments are as follows:
Business Segment Segment Segment
Segment Sales Assets Operating
Income
Wholesale €225,000 €600,000 €75,000
Retail €720,000 €500,000 €150,000
General € 2,500,000 €4,000,000 €700,000
Industry data for “pure-play” firms have been compiled and are summarized as follows:
Business Capitalization/ Capitalization/ Capitalization/

Segment Sales Assets Operating
Income
Wholesale 0.85 0.7 9
Retail 1.2 0.7 8
General 0.8 0.7 4
Question 129
A Ltd. wants to value T Ltd. in accordance with Chop Shop method. T Ltd. is carrying out 3
streams of business namely telecom, real estate, toys. The market capitalization of equity
shares of T Ltd. is Rs.15,200 Cr. The other financial details of T Ltd. are as follows: (Rs. in
Cr.)
Particulars Telecom Real Estate Toys Total
Turnover 5000 4000 1000 10,000

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Assets 1250 2000 1000 4,250

Net Operating Profit after tax 1000 500 400 1,900
Industry Statistics
Market capitalization to Sales 1.65 1.40 0.7
Market capitalization to Assets 3 4 2
Market capitalization NOPAT 12 9 11
Economic Value Added
Question 130
With the help of the following information of Jatayu Limited compute the Economic Value
Added:
Capital Structure Equity capital Rs. 160 Lakhs
Reserves and Surplus Rs. 140 lakhs
10% Debentures Rs. 400 lakhs
Cost of equity 14%
Financial Leverage 1.5 times
Income Tax Rate 30%
Question 131
RST Ltd.’s current financial year's income statement reported its net income as Rs.
25,00,000. The applicable corporate income tax rate is 30%.
Following is the capital structure of RST Ltd. at the end of current financial year: Rs.
Debt (Coupon rate = 11%) 40 lakhs
Equity (Share Capital + Reserves & Surplus) 125
lakhs
Invested Capital 165
lakhs
Following data is given to estimate cost of equity capital: Rs.
Beta of RST Ltd. 1.36
Risk –free rate i.e. current yield on Govt. bonds 8.5%
Average market risk premium (i.e. Excess of return on market portfolio over 9%
risk-free rate)
Required:
(i) Estimate Weighted Average Cost of Capital (WACC) of RST Ltd.; and
(ii) Estimate Economic Value Added (EVA) of RST Ltd.
Question 132
Tender Ltd has earned a net profit of Rs. 15 lacs after tax at 30%. Interest cost charged by
financial institutions was Rs. 10 lacs. The invested capital is Rs. 95 lacs of which 55% is
debt. The company maintains a weighted average cost of capital of 13%. Required,
(a) Compute the operating income.
(b) Compute the Economic Value Added (EVA).

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(c) Tender Ltd. has 6 lac equity shares outstanding. How much dividend can the company
pay before the value of the entity starts declining?
Question 133
The following information is given for 3 companies that are identical except for their
capital structure:
Orange Grape Apple
Total invested capital 1,00,000 1,00,000 1,00,000
Debt/assets ratio 0.8 0.5 0.2
Shares outstanding 6,100 8,300 10,000
Pre tax cost of debt 16% 13% 15%
Cost of equity 26% 22% 20%
Operating Income (EBIT) 25,000 25,000 25,000
Net Income 8,970 12,350 14,950
The tax rate is uniform 35% in all cases.
(i) Compute the Weighted average cost of capital for each company.
(ii) Compute the Economic Valued Added (EVA) for each company.
(iii) Based on the EVA, which company would be considered for best investment? Give
reasons.
(iv) If the industry PE ratio is 11x, estimate the price for the share of each company.
(v) Calculate the estimated market capitalisation for each of the Companies.
Question 134
Delta Ltd.’s current financial year’s income statement reports its net income as Rs.
15,00,000. Delta’s marginal tax rate is 40% and its interest expense for the year was Rs.
15,00,000. The company has Rs. 1,00,00,000 of invested capital, of which 60% is debt. In
addition, Delta Ltd. tries to maintain a Weighted Average Cost of Capital (WACC) of 12.6%.
(i) Compute the operating income or EBIT earned by Delta Ltd. in the current year.
(ii) What is Delta Ltd.’s Economic Value Added (EVA) for the current year?
(iii) Delta Ltd. has 2,50,000 equity shares outstanding. According to the EVA you computed
in (ii), how much can Delta pay in dividend per share before the value of the company
would start to decrease? If Delta does not pay any dividends, what would you expect to
happen to the value of the company?
Question 135
The following data pertains to XYZ Inc. engaged in software consultancy business as on 31
December 2010
($ Million) Income from consultancy 935.00
EBIT 180.00
Less: Interest on Loan 18.00
EBT 162.00
Tax @ 35% 56.70
105.30

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Balance Sheet
Liabilities Amount Assets Amount
Equity Stock (10 million 100 Land and Building 200
share @ $ 10 each) Computers & Softwares 295
Reserves & Surplus 325 Current Assets:
Loans 180 Debtors 150
Current Liabilities 180 Bank 100
Cash 40
785
With the above information and following assumption you are required to compute
(a) Economic Value Added®
(b) Market Value Added.
Assuming that:
(i) WACC is 12%.
(ii) The share of company currently quoted at $ 50 each
Question 136
Herbal Gyan is a small but profitable producer of beauty cosmetics using the plant Aloe
Vera. This is not a high-tech business, but Herbal’s earnings have averaged around Rs. 12
lakh after tax, largely on the strength of its patented beauty cream for removing the
pimples.
The patent has eight years to run, and Herbal has been offered Rs. 40 lakhs for the patent
rights. Herbal’s assets include Rs. 20 lakhs of working capital and Rs. 80 lakhs of property,
plant, and equipment. The patent is not shown on Herbal’s books. Suppose Herbal’s cost of
capital is 15 percent. What is its Economic Value Added (EVA)?

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CHAPTER-9 MERGER, ACUISITION AND CORPORATE

RESTRURING
Question 1
MK Ltd. is considering acquiring NN Ltd. The following information is available:
Company Earning after No. of Equity shares Market value
Tax (Rs) per share (Rs)
MK Ltd. 60,00,000 12,00,000 200.00
NN Ltd. 18,00,000 3,00,000 160.00
Exchange of equity shares for acquisition is based on current market value as above. There
is no synergy advantage available.
1) Find the earning per shares for company MK Ltd. after merger, and
2) Find the exchange ratio so that shareholder for NN Ltd. would not be at a loss.
Question 2
K LTD. is considering acquiring N. LTD., the following information is available:
Company Profit after tax Number of Equity Market value per
Shares Share
K. Ltd. 50,00,000 10,00,000 200.00
N. Ltd. 15,00,000 2,50,000 160.00
Exchange of equity shares for acquisition is based on current market value as above. There
is no synergy advantage available:
1) Find the earning per share for company K. Ltd after merger.
2) Find the exchange ratio so that shareholders of N. Ltd. would not be at a loss.
Question 3
M Co. Ltd., is studying the possible acquisition of N Co. Ltd., by way of merger. The
Following data are available in respect of the companies.
Particulars M Co. Ltd N Co. Ltd.
Earning after tax (Rs) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per shares (Rs) 200 160
If the merger goes through by exchanges of equity and the exchange ratio is based on the
current market price, what is the new earing per share for M Co. Ltd.?
N Co Ltd .wants to be sure that the earing available to its shareholder will not be
diminished by the merger. What should be the exchange ratio in that case?
Question 4
ABC Ltd. is intending to acquire XYZ Ltd .by merger and the following information is
available in respect of the companies:
ABC Ltd XYZ Ltd
Number of equity shares 10,00,000 6,00,000
Earning after tax (Rs) 50,00,000 18,00,000
Market value per shares (Rs) 42 28

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Required:
1. What is the EPS of both Companies?
2. If the proposed merger takes place, What would be the new earning per share for
ABC Ltd.? Assume that the merger takes place by exchange of equity shares and the
exchange ratio based on the current market price.
3. What should be exchange ratio, if XYZ Ltd. wants to ensure the earning to member
are as before the merger takes place?
Question 5
The following information is provided related to the acquiring firm mark Limited and the
target Firm Mask Limited:
Firm Mark Limited Firm Mask Limited
Earing after tax (Rs) 2,000 lakhs 400 lakhs
Number of shares 200 lakhs 100 lakhs
outstanding
P/E ratio (times) 10 5
Required:
1) What is the Swap Ratio based on current market Price?
2) What is the EPS of Mark Limited after acquisition?
3) What is the expected market price per share of Mark Limited after acquisition,
assuming P/E ratio of Mark Limited remains unchanged?
4) Determine the market value of the merged firm.
5) Calculate gain/loss for shareholder of the two independent companies after
acquisition.
Question 6
A Ltd wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one
share of T Ltd.) following information is provided.
A Ltd T Ltd
Profit after tax Rs 18,00,000 Rs 3,60,000

Equity shares outstanding (Nos) 6,00,000 1,80,000
EPS Rs 3 Rs 2
PE Ratio 10 times 7 times
Market price per share Rs 30 Rs 14
Required:
1. The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.
2. What is the EPS of A Ltd. after the acquisition?
3. Determine the equivalent earnings per shares of T Ltd
4. What is the expected market price per shares of A Ltd after the acquisition,
assuming its PE multiple remains unchanged?
5. Determine the market value of the merged firm.

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Question 7
P Ltd is considering take – over of R Ltd.by the exchange of four new shares in P Ltd. For
every five share in R Ltd. The relevant financial details of the two companies prior to
merger announcement are as follows:
P Ltd R Ltd
Profit before tax 15 13.50
No. of share (Crore) 25 15
P/E Ratio 12 9
You are required determine:
(i) Market value of both the company.
(ii) Value of original shareholder
(iii) Price per share after merger.
(iv) Effect on share price of both companies if the Directors of P Ltd. expects their
own pre-merger P/E ratio to be applied to the combined earnings.
Question 8
You have been provided the following financial data of two companies:
Krishna Ltd Rama Ltd
Earning after taxes Rs 7,00,000 Rs 10,00,000
Equity share (outstanding) Rs 2,00,000 Rs 4,00,000
EPS 3.5 2.5
P/E ratio 10 times 14 times
Market price per share Rs 35 Rs 35
Company Rama Ltd. is acquiring the company Krishna Ltd .exchanging its shares on a one-
to – one basis for company Krishna Ltd. the exchange ratio is based on the market prices of
the shares of the two companies:
Required
(i) What will be the EPS subsequent merger?
(ii) What is the change in EPS for the shareholder of companies Rama Ltd. and
Krishna Ltd.?
(iii) Determine the market value of the post-merged firm.PE ratio is likely to remain
the same.
(iv) Ascertain the profit accruing to shareholder of both the companies
Question 9
XYZ Ltd., is considering merger with ABC Ltd. XYZ Ltd.’s share are currently traded at Rs 20.
It has 2,50,000 shares outstanding and its earnings after taxes (EAT) amount to Rs 5,00,000.
ABC Ltd. has 1,25,000 shares outstanding :its current market price is Rs. 10 and its EAT are
Rs 1,25,000 the merger will be effected by means of a stock swap (exchange). ABC Ltd. has
agreed to a plan under which XYZ Ltd., will offer the current market value of ABC Ltd.’s
shares:
(i) What is the pre – merger earning per share (EPs) and P/E ratio of both the
companies?

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(ii) If ABC Ltd.’ P/E ratio 6.4, what is the current market price? What is the exchange
ratio?What will XYZ Ltd.’s post – merger EPS be?
(iii) What should be the exchange ratio; if XYZ Ltd.’s pre – merger and post -merger
EPS are to be the same?
Question 10
B Ltd is a highly successful company and wishes to expand by acquiring other firms. Its
expected high growth in earnings and dividends reflected in its PE ratio of 17. The Board of
Directors of B Ltd. has been advised that if it were to take over firms with a lower PE ratio
than its Own, using a share – for share exchange, than it could increase its reported
earnings per share.
C Ltd has been suggested as a possible target for a takeover , which has PE ratio of 10 and
1,00,000 share in issue with a share price of Rs 15 B Ltd has 5,00,000 shares in issue with
a share price of Rs 12.Calculate the change in earnings per share of B Ltd. If it acquires the
whole of C Ltd. by issuing shares at its market price of Rs 12. Assume the price of B Ltd.
Shares remains constant.
Question 11
Company X is contemplating the purchase of company Y. Company X has 3,00,000 shares
having a market price of Rs 30 per share , while company Y has 2,00,000 shares selling Rs
20 per share. The EPS are Rs 4.00 and Rs 2.25 for company X and Y respectively.
Managements of both companies are discussing two alternative proposals for exchanges of
shares as indicated below:
1) In proportion to the relative earing per share of two companies.
2) 0.5 share of company X for one share of company Y(0.5 : 1)
You are required:
1) To calculate the Earning per share (EPS) after merger under two alternatives; and
2) To show the impact on EPS for the shareholders of two companies under both the
alternatives.
Question 12
Trupti Co. Ltd. promoted by a Multinational group “INTERNATIONAL INC” is listed on stock
exchange holding 84% i.e. 63 lakhs shares.
Profit after tax is Rs. 4.80 crores
Free float Market Capitalization is Rs. 19.20 crores.
As per the SEBI guideline promoters have to restrict their holding 75% to avoid delisting
from the stock exchange. Board of Directors has decided not to delist the share but to
comply with the SEBI guidelines by issuing Bonus shares to minority shareholders while
maintaining the same P/E ratio.
Calculate
1) P/E Ratio
2) Bonus Ratio
3) Market price of share before and after the issue of bonus shares.
4) Free Float Market capitalization of the company after the bonus shares.

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Question 13
The following information is provided relating to the acquiring company Efficient Ltd. and
the target Company Healthy Ltd.
Efficient Ltd. Healthy Ltd.
No. of shares (F.V. Rs 10 each) 10.00 lakhs 7.5 lakhs
Market capitalization 500.00 lakhs 750.00 lakhs
P/E ratio (times) 10.00 5.00
Reserves and surplus) 300.00 lakhs 165.00 lakhs
Promoter’s Holding (No. of share) 4.75 lakhs 5.00 lakhs
Board of Directors of both the companies have decided to give a fair deal to the
shareholders and accordingly for swap ratio the weights are decided as 40%, 25% and
35% respectively for Earning , Book value and market Price of share of each Company:
1) Calculate the swap ratio and also calculate Promoter’s holding % after acquisition.
2) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?
3) What is the expected market price per share and market capitalization of Efficient Ltd.
after acquisition, assuming P/E of firm Efficient Ltd. remains unchanged.
4) Calculate free float market capitalization of the merged firm.
Question 14
Abhiman Ltd is a subsidiary of Janam Ltd is acquiring Swabhiman Ltd. Which is also a
subsidiary of janam Ltd.
The following information is given :
Abhiman Ltd Swabhiman Ltd
% Shareholding of promoter 50% 60%
Share capital Rs 200lacs 100 lacs
Free Reserves and surplus Rs 900lacs 600 lacs
Paid up value per share Rs 100 10
Free float market capitalization Rs 500lacs 156 lacs
P/E Ratio (times) 10 4
Janam Ltd., is interested in doing justice to both companies. The following parameters have
been assigned by the board of Janam Ltd., for determining the swap ratio:
Book value 25%
Earning per share 50%
Market price 25%.
You are required to compute
(i) The swap ratio.
(ii) The book value, Earning per share and Expected Market price of Swabhiman
Ltd.,( assuming P/E Ratio of Abhiman Ltd remains the same and all assets and
liabilities of Swabhiman Ltd. are taken over at book value.)
Question 15
The following information relating to the acquiring Company Abhiman Ltdand the target
Company Abhishek Ltd. are available. Both the companies are promoted by Multinational

P a g e | 48
company. Trident Ltd. The promoter’s holding is 50% and 60% respectively in Abhiman
Ltd and Abhishek Ltd:
Abhiman Ltd Abhishek Ltd
Share Capital (Rs) 200 lakh 100 lakh
Free Reserves and surplus (RS) 800 lakh 500 lakh
Paid up value per share (Rs) 100 10
Free float market capitalization(Rs) 500 lakh 156 lakh
P/E Ratio (times) 10 4
Trident Ltd .is interested to do justice to the shareholder of both Companies. For the swap
ratio weights are assigned to different parameters by the Board of Directors as follows:
Book value 25%
EPS (Earning per share) 50%
Market Price 25%
(i) What is the swap ratio based on above weights?
(ii) What is the book value, EPS and expected Market price of Abhiman Ltd after
acquisition of Abhishek Ltd.( assuming P>E ratio of Abhiman Ltdremains
unchanged and all assets and liabilities of Abhishek Ltd. are taken over at book
value).
(iii) Calculate:
a) Promoter’s revised holding in the Abhiman Ltd.
b) Free float market capitalization.
c) Also calculate No. shares, Earning per share (EPS) and book value (B.V) if after
acquisition of Abhishek Ltd.,Abhiman Ltd., decided to:
1) Issue Bonus share in the ratio of 1 : 2 ; and
2) Split the stock (share) as Rs.5 each fully paid.
Question 16
T Ltd and E Ltd are in the same industry. The former is in negotiation for acquisition of the
latter. Important information about the two companies as per their latest financial
statement is given below:
T Ltd E Ltd.
Rs 10 Equity share outstanding 12 Lakhs 6 lakhs
Debt:
10% Debentures ( Rs Lakhs) 580 --
12.5% institutional Loan(Rs Lakhs) -- 240
Earning before interest, depreciation and tax (EBIDAT) (Rs 400.86 115.71
Lakhs)
Market Price / share(Rs) 220.00 110.00
T Ltd. plans to offer a price for E Ltd., business as whole which will be 7 times EBIDATE
reduced by outstanding debt, to be discharged by own shares at market price.
E Ltd planning to seek one share in T Ltd. For every 2 shares in E Ltd .based on the market
price. Tax rate for the two companies may be assumed as 30%
Calculate and show the following under both alternatives – T Ltd offer and E Ltd.’ plan:
(i) Net consideration payable.
(ii) No. of share to be issued by T Ltd.

P a g e | 49
(iii) EPS of T Ltd. after acquisition.

(iv) Expected market price per share of T Ltd. after acquisition.
(v) State briefly the advantage to T Ltd. from the acquisition.
(vi) Calculation (except EPS) may be rounded off to 2 decimals lakhs.
Question 17
The following information is relating to Fortune India Ltd. having two division ,viz
PharmaDividion and fast Moving Consumer Goods Division (FMCG Division). Paid up share
capital of Fortune India Ltd. is Consisting of 3,000 Lakhs equity shares of Re 1 each.
Fortune India Ltd. Decided to de-merger Pharma Division as fortune Pharma Ltd w.e.f.
1.4.2009. Details of fortune India Ltd. as on 31.3.2009 and of fortune pharma Ltd. as on
1.4.2009 are given below:
Particulars Fortune Pharma Ltd Fortune India Ltd
Rs Rs
Outside Liabilities
Secured Loans 400 lakh 3,000 lakh
Unsecured Loans 2,400 lakh 800 lakh
Currents Liabilities & Provision 1,300 lakh 21,200 lakh
Assets
Fixed Assets 7,740lakh 20,400 lakh
Investment 7,600 lakh 12,300 lakh
Current Assets 8,800 lakh 30,200 lakh
Loans & Advances 900 lakh 7,300 lakh
Deferred tax/ Misc. Expenses 60 lakh (200lakh)
Board of Directors of the company has decided to issue necessary equity shares of fortune
Pharma Ltd. of Re. 1 each, without any consideration to the shareholders of fortune India
Ltd. For that purpose following points is to be considered.
Transfer of Liabilities &Assets at Book value.
Estimated Profit for the year 2009-10 is Rs 11,400 lakh for Fortune India Ltd. & Rs 1,470
lakhs for Fortune Pharma Ltd .
Estimated Market Price of Fortune Pharma Ltd. is Rs 24.50 per share.
Average P/E Ratio of FMCG sector is 42 & Pharma sector is 25, which is to be expected for
both the companies.
Calculate:
1) The Ratio in which share of Fortune Pharma are to be issued to the shareholder of
Fortune India Ltd.
2) Expected Market Price of Fortune India Ltd.
3) Book value per share of both the Companies immediately after Demerger.
Question 18
Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL)
the Particulars of 2 companies are given below:
Particulars Reliable Industries Sunflower
Ltd Industries Ltd
Earning After Tax (EAT) Rs 20,00,000 Rs 10,00,000

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Equity share o/s 10,00,000 10,00,000

Earning per share (EPS) 2 1
P E Ratio (Times) 10 5
Required:
1) What is the market value of each Company before merger?
2) Assume that the management of RIL estimates that the shareholder of SIL will
accept an offer of one share of RIL for four shares are no synergic effects, what is the
market value of the Post- merger RIL? What is the price per share? Are the
shareholders of RIL better or worse off than they were before the merger?
3) Due to synergic effects, the management of RIL estimates that the earning will
increase by 20% what are the new post – merger EPS and price per share? Will the
shareholder be better off than be for the merger?
Question 19
AFC Ltd wishes to acquire BCD ltd. The Shares issued by the two companies are 10.000.000
and 5.00.000 respectively:
(1) Calculate the increase in the total value of BCD Ltd. resulting from the acquisition on
the basis of the following
Current expected growth rate of BCD Ltd - 7%
Expected growth rate under control of AFC ltd (without any additional capital investment
and without any change in risk of operations ) -8%
Current Market Price per share of AFC LTD - Rs 100
Current Market Price per share of BCD LTD - Rs 20
Current Dividend per share of BCD LTD -RS 0.60
(2) On the basis of aforesaid condition calculate the gain or loss to shareholder of both
the companies, if ABC Ltd were to offer one of its shares for every four shares of BCD
Ltd.
(3) Calculate the gain to the shareholder of both the companies if ABC ltd pays Rs 22 for
each share of BCD LTD assuming the P/E ratio of AFC Ltd does not change after
merger EPS of AFC Ltd is Rs 8 and that of BCD is Rs 2.50. It is Assumed that AFC Ltd
invest its cash to earn 10 %.
Question 20
BA Ltd and DA Ltd both the companies operate in the same industry. The financial
statements of both the companies for the Current financial year are as follows :
Balance sheet
Particulars BA Ltd (Rs.) DA Ltd (Rs.)
Current Assets 14,00,000 10,00,000
Fixed Assets (Net ) 10,00,000 5,00,000
Total 24,00,000 15,00,000
Equity Capital (Rs.10 each ) 10,00,000 8,00,000
Retained earnings 2,00,000
14% long term debts 5,00,000 3,00,000
Current liabilities 7,00,000 4,00,000
Total 24,00,000 15,00,000

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Income statement
BA Ltd (Rs.) DA Ltd (Rs.)
Net sales 34,50,000 17,00,000
Cost of goods sold 27,60,000 13,60,000
Gross profit 6,90,000 3,40,000
Operating expenses 2,00,000 1,00,000
Interest 70,000 42,000
Earnings before taxes 4,20,000 1,98,000
Taxes @ 50% 2,10,000 99,000
Earnings after taxes (EAT ) 2,10,000 99,000
Additional Information : No. of Equity shares 1,00,000 80,000
Dividend payment ratios (D/P) 40% 60%
Market price per share Rs 40 Rs15
Assume that both companies are in the process of negotiating a merger through an
exchange of equity shares. You have been asked to assist in establishing equitable exchange
terms and are require to:
1) Decompose the share price of both the companies into EPS & P/E components: and also
segregate their EPS figures into Return on Equity (ROE) and book value/intrinsic value per
share components.
2) Estimate future EPS growth rate for each company.
3) Based on expected operating synergies BA Ltd estimates that the intrinsic value of DA’s
equity share would be Rs.20 per share on its acquisition. You are required to develop a
range of justifiable equity share exchange ratios that can be offered by BA Ltd to the
shareholders of DA Ltd . Based on your analysis an part (1) and (2) would you expect the
negotiated terms to be closer to the upper or the lower exchange ratio limits and why ?
4) Calculate the post merger EPS based on an exchange ratio 0.4 : 1 being offered by BA Ltd
and indicate the immediate EPS accretion or dilution if any that will occur for each group of
shareholders.
5) Based on 0.4:1 exchange ratio and assuming that BA’s Ltd pre merger P?E Ratio will
continue after the merger estimate the post merger market price. Also show the resulting
accretion or dilution in pre merger market prices.
Question 21
Elrond Limited plans to acquire Doom Limited. The relevant financial details of the two
firms prior to the merger announcement are:
Elrond Limited Doom Limited
Market price per share Rs. 50 Rs. 25
Number of outstanding shares 20 lakhs 10 Lakhs
The merger is expected to generate gains, which have a present value of Rs.200 lakhs. The
exchange ratio agreed to is 0.5.
What is the true cost of the merger from the point of view of Elrond Limited?

P a g e | 52
Question 22
Cauliflower Limited is contemplating acquisition of Cabbage Limited. Cauliflower Limited
has 5 lakh shares having market value of Rs. 40 per share while Cabbage Limited has 3 lakh
shares having market value of Rs. 25 per share. The EPS for Cabbage Limited and
Cauliflower Limited are Rs. 3 per share and Rs. 5 per share respectively. The managements
of both the companies are discussing two alternatives for exchange of shares as follows:
(i) In proportion to relative earnings per share of the two companies.
(ii) 1 share of Cauliflower Limited for two shares of Cabbage Limited.
Required:
(i) Calculate the EPS after merger under both the alternatives.
(ii) Show the impact on EPS for the shareholders of the two companies under both the
alternatives.
Question 23
The CEO of a company thinks that shareholders always look for EPS. Therefore he
considers maximization of EPS as his company's objective. His company's current Net
Profits are Rs. 80.00 lakhs and P/E multiple is 10.5. He wants to buy another firm which
has current income of Rs. 15.75 lakhs & P/E multiple of 10.
What is the maximum exchange ratio which the CEO should offer so that he could keep EPS
at the current level, given that the current market price of both the acquirer and the target
company are Rs. 42 and Rs. 105 respectively?
If the CEO borrows funds at 15% and buys out Target Company by paying cash, how much
should he offer to maintain his EPS? Assume tax rate of 30%.
Question 24
XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each share of ABC
Ltd. Relevant financial data are as follows:
Equity shares outstanding 10,00,000 4,00,000
EPS (Rs.) 40 28
Market price per share (Rs.) 250 160
(i) Illustrate the impact of merger on EPS of both the companies.
(ii) The management of ABC Ltd. has quoted a share exchange ratio of 1:1 for the merger.
Assuming that P/E ratio of XYZ Ltd. will remain unchanged after the merger, what will be
the gain from merger for ABC Ltd.?
(iii) What will be the gain/loss to shareholders of XYZ Ltd.?
(iv) Determine the maximum exchange ratio acceptable to shareholders of XYZ Ltd.
Question 25
The following information is provided relating to the acquiring company E Ltd., and the
target company H Ltd:
Particulars E Ltd. H Ltd.
(Rs.) (Rs.)
Number of shares (Face value Rs. 10 each) 20 Lakhs 15 Lakhs
Market Capitalization 1000 Lakhs 1500 Lakhs
P/E Ratio (times) 10.00 5.00
Reserves and surplus in Rs. 600.00 Lakhs 330.00 Lakhs

P a g e | 53
Promoter's Holding (No. of shares) 9.50 Lakhs 10.00 Lakhs

The Board of Directors of both the companies have decided to give a fair deal to the
shareholders. Accordingly, the weights are decided as 40%, 25% and 35% respectively for
earnings, book value and market price of share of each company for swap ratio.
Calculate the following:
(i) Market price per share, earnings per share and Book Value per share;
(ii) Swap ratio;
(iii) Promoter's holding percentage after acquisition;
(iv) EPS of E Ltd. after acquisitions of H Ltd;
(v) Expected market price per share and market capitalization of E Ltd.; after acquisition,
assuming P/E ratio of E Ltd. remains unchanged; and
(vi) Free float market capitalization of the merged firm.
Question 26
Bank 'R' was established in 2005 and doing banking in India. The bank is facing DO OR DIE
situation. There are problems of Gross NPA (Non Performing Assets) at 40% & CAR/CRAR
(Capital Adequacy Ratio/ Capital Risk Weight Asset Ratio) at 4%. The net worth of the bank
is not good. Shares are not traded regularly. Last week, it was traded @Rs. 8 per share.
RBI Audit suggested that bank has either to liquidate or to merge with other bank.
Bank 'P' is professionally managed bank with low gross NPA of 5%.It has Net NPA as 0%
and CAR at 16%. Its share is quoted in the market @ Rs. 128 per share. The board of
directors of bank 'P' has submitted a proposal to RBI for take over of bank 'R' on the basis
of share exchange ratio.
The Balance Sheet details of both the banks are as follows:
Bank ‘R’ Bank ‘P’
Amt. in Rs. lacs Amt. In Rs. lacs
Paid up share capital 140 500
Reserves & Surplus 70 5,500
Deposits 4,000 40,000
Other liabilities 890 2,500
Total Liabilities 5,100 48,500
Cash in hand & with 400 2,500
RBI
Balance with other - 2,000
banks
Investments 1,100 15,000
Advances 3,500 27,000
Other Assets 100 2,000
Total Assets 5,100 48,500
It was decided to issue shares at Book Value of Bank 'P' to the shareholders of Bank 'R'. All
assets and liabilities are to be taken over at Book Value.
For the swap ratio, weights assigned to different parameters are as follows:
Gross NPA 30%
CAR 20%
Market price 40%
Book value 10%

P a g e | 54
(a) What is the swap ratio based on above weights?

(b) How many shares are to be issued?
(c) Prepare Balance Sheet after merger.
(d) Calculate CAR & Gross NPA % of Bank 'P' after merger.
Question 27
The equity shares of XYZ Ltd. are currently being traded at Rs. 24 per share in the market.
XYZ Ltd. has total 10,00,000 equity shares outstanding in number; and promoters' equity
holding in the company is 40%.
PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The estimated present
value of these synergies is Rs. 80,00,000.
Further PQR feels that management of XYZ Ltd. has been over paid. With better motivation,
lower salaries and fewer perks for the top management, will lead to savings of Rs. 4,00,000
p.a. Top management with their families are promoters of XYZ Ltd. Present value of these
savings would add Rs. 30,00,000 in value to the acquisition.
Following additional information is available regarding PQR Ltd.:
Earnings per share : Rs. 4
Total number of equity shares outstanding : 15,00,000
Market price of equity share : Rs. 40
Required:
(i) What is the maximum price per equity share which PQR Ltd. can offer to pay for XYZ Ltd.?
(ii) What is the minimum price per equity share at which the management of XYZ Ltd. will
be willing to offer their controlling interest?
Question 28
H Ltd. agrees to buy over the business of B Ltd. effective 1st April, 2012.The summarized
Balance Sheets of H Ltd. and B Ltd. as on 31st March 2012 are as follows:
Balance sheet as at 31st March, 2012 (In Crores of Rupees)
Liabilities: H. Ltd B. Ltd.
Paid up Share Capital
-Equity Shares of Rs.100 each 350.00
-Equity Shares of Rs.10 each 6.50
Reserve & Surplus 950.00 25.00
Total 1,300.00 31.50
Assets:
Net Fixed Assets 220.00 0.50
Net Current Assets 1,020.00 29.00
Deferred Tax Assets 60.00 2.00
Total 1,300.00 31.50
H Ltd. proposes to buy out B Ltd. and the following information is provided to you as part
of the scheme of buying:
(1) The weighted average post tax maintainable profits of H Ltd. and B Ltd. for the last 4
years are Rs. 300 crores and Rs. 10 crores respectively.
(2) Both the companies envisage a capitalization rate of 8%.
(3) H Ltd. has a contingent liability of Rs. 300 crores as on 31st March, 2012.

P a g e | 55
(4) H Ltd. to issue shares of Rs. 100 each to the shareholders of B Ltd. in terms of the
exchange ratio as arrived on a Fair Value basis. (Please consider weights of 1 and 3 for the
value of shares arrived on Net Asset basis and Earnings capitalization method respectively
for both H Ltd. and B Ltd.)
You are required to arrive at the value of the shares of both H Ltd. and B Ltd. under:
(i) Net Asset Value Method
(ii) Earnings Capitalization Method
(iii) Exchange ratio of shares of H Ltd. to be issued to the shareholders of B Ltd. on a Fair
value basis (taking into consideration the assumption mentioned in point 4 above.)
Question 29
AB Ltd. is planning to acquire and absorb the running business of XY Ltd. The valuation is
to be based on the recommendation of merchant bankers and the consideration is to be
discharged in the form of equity shares to be issued by AB Ltd. As on 31.3.2006, the paid up
capital of AB Ltd. consists of 80 lakhs shares of Rs.10 each. The highest and the lowest
market quotation during the last 6 months were Rs.570 and Rs.430.
For the purpose of the exchange, the price per share is to be reckoned as the average of the
highest and lowest market price during the last 6 months ended on 31.3.06.
XY Ltd.’s Balance Sheet as at 31.3.2006 is summarized below: Rs. lakhs
Sources
Share Capital
20 lakhs equity shares of Rs.10 each fully paid 200
10 lakhs equity shares of Rs.10 each, Rs.5 paid 50
Loans 100
Total 350
Uses
Fixed Assets (Net) 150
Net Current Assets 200
350
An independent firm of merchant bankers engaged for the negotiation, have produced the
following estimates of cash flows from the business of XY Ltd.: Year ended
By way of Rs. lakhs
31.3.07 after tax 105
earnings for
equity
31.3.08 do 120
31.3.09 Do 125
31.3.10 Do 120
31.3.11 Do 100
terminal value estimate 200
It is the recommendation of the merchant banker that the business of XY Ltd. may be
valued on the basis of the average of (i) Aggregate of discounted cash flows at 8% and (ii)
Net assets value. Present value factors at 8% for years
1-5: 0.93 0.86 0.79 0.74 0.68

P a g e | 56

(i) Calculate the total value of the business of XY Ltd.
(ii) The number of shares to be issued by AB Ltd.; and
(iii) The basis of allocation of the shares among the shareholders of XY Ltd.
Question 30
M/s Tiger Ltd. wants to acquire M/s. Leopard Ltd. The balance sheet of Leopard Ltd. as on
31st March, 2012 is as follows:
Liabilities Rs. Assets Rs.
Equity Capital (70,000 shares) 700000 Cash 50,000
Retained earnings 3,00,000 Debtors 70,000
12% Debentures 3,00,000 Inventories 2,00,000
Creditors and other liabilities 3,20,000 Plants & Eqpt. 13,00,000
16,20,000 16,20,000
Additional Information:
(i) Shareholders of Leopard Ltd. will get one share in Tiger Ltd. for every two shares.
External liabilities are expected to be settled at Rs. 5,00,000. Shares of Tiger Ltd. would be
issued at its current price of Rs. 15 per share. Debenture holders will get 13% convertible
debentures in the purchasing company for the same amount. Debtors and inventories are
expected to realize Rs. 2,00,000.
(ii) Tiger Ltd. has decided to operate the business of Leopard Ltd. as a separate division.
The division is likely to give cash flows (after tax) to the extent of Rs. 5,00,000 per year for
6 years. Tiger Ltd. has planned that, after 6 years, this division would be demerged and
disposed of for Rs. 2,00,000.
(iii) The company’s cost of capital is 16%.
Make a report to the Board of the company advising them about the financial feasibility of
this acquisition.
Net present values for 16% for Rs. 1 are as follows:
Years 1 2 3 4 5 6
PV .862 .743 .641 .552 .476 .410
Question 31
A Ltd. (Acquirer company’s) equity capital is Rs. 2,00,00,000. Both A Ltd. and T Ltd. (Target
Company) have arrived at an understanding to maintain debt equity ratio 0.30:1 of the
merged company. Pre –merger debt outstanding of A Ltd. stood at Rs. 20,00,000 and T Ltd.
at Rs. 10,00,000 and marketable securities of both companies stood at Rs. 40,00,000.
You are required to determine whether liquidity of merged company shall remain
comfortable if A Ltd. acquires T Ltd. against cash payment at mutually agreed price of Rs.
65,00,000.
Question 32
CBA Ltd. current PAT is Rs. 90 lakhs EPS is Rs. 6 and the current market price is Rs. 45. It
plans to buy another firm which has current PAT of 15 lakhs. EPS of Rs. 10 and the market
price per share of Rs. 80.
Compute the maximum exchange ratio which CBA Ltd. should offer as to keep EPS at the
current level. If CBA Ltd. borrow funds at 10% rate of interest and buys the other company

P a g e | 57
by making cash payment, how much should it offer to maintain the EPS at current level.
Take tax rate at 40%.

P a g e | 58

P a g e | 59
10. RISK MANAGEMENT
Question1.
Mr. Pranoy has recently purchased 100 shares of Super tools Ltd. at Rs.300 per shares. The
volatility of the stock is 15% per annum. Mr. Pranoy has decided to hold the shares for 6
months. The 6 month European call option on the shares of super tools Ltd. is available at
Rs. 28 per share. The contract size for the option is 100 shares and the delta of call option is
0.35.
You are required to calculate for 90% confidence level
1) VaR for long stock position
2) VaR for long call option position
(Assume 250 trading days in a year).
Question 2
Mr. Binoy has invested Rs.50,000 each in the stocks of Alpha and Beta. The variance of
stocks of Alpha and Beta are 18(%)²and 30(%)² per annum respectively. The correlation of
returns from the two stocks is 0.40.
You are required to
1) Find out the variance of the portfolio.
2) Find out the benefit of diversification.
3) Find out the benefit of diversification if the correlation of return between the two
stocks is -1.
4) Calculate the Value at Risk (VaR) of the portfolio for the correlation of 0.40 at 95%
confidence level.
(Assume 250 trading days in a year)
Question 3
An investor has purchased 300 shares of ACC at a price of Rs. 160 per share. To hedge
against any fall in the stock value the investor also purchased put option on 300 shares
with strike price of Rs.160. The premium is Rs.5 for each share. The delta of put option
ACC´s stock is 0.30, and the standard deviation of the price of ACC stock is 25% p.a.
You are required to calculate 30 –day VaR at 90% confidence level for
The long position in the stock
The long position in the put
The combined position of long stock and long put.
(Assume 250 Trading days in a year).
Question 4
Consider a position consisting of $200,000 investment in gold and &300,000 investment in
silver. The annual volatilities of gold and silver. The annual volatilities of gold and silver are
20% and 15% respectively. The coefficient of correlation between their returns is 0.65.
You are required to calculate the 10-day 97.5% value at risk for the portfolio. By how much
does diversification reduce the VaR?

P a g e | 60
Question 5
An investor has short sold 100 shares of ICICI Bank at a price of Rs.250 per share .To hedge
against any rise in the stock value the investor purchased call option on 100 shares with
strike price of Rs.240. The premium is Rs.12 for each share. The delta of call option on ICICI
stock is 18%p.a.
You are required to calculate 15_day VaR at 95% confidence level for
The short position in the stock
The long position in the call
The combined positions of short stock and long call.
Question6
Mr. Ashish has invested in 200 stocks of cadila at Rs.240 each and 300 stocks of JISCO at
Rs.360 each. The standard deviation of stocks of Cadila and JISCO are 9% and 12% per
annum respectively, The correlation of returns from the two stocks is 0.56.
You are required to
1) Find out the standard deviation of the portfolio.
2) Find out the benefit of diversification.
3) Find out the benefit of diversification if the correlation of return between the two
stocks is -1.
4) Calculate the value at Risk (VaR) of the portfolio for the correlation of 0.56 at 95%
confidence level.
Question 7
The concept of VAR can be understood in a better manner with help of following example.
Suppose you hold Rs. 2 core shares of X Ltd. whose market price standard deviation is 2%
per day. Assuming 252 trading days a year determine maximum loss level over the period
of 1 trading day and 10 trading days with 99% confidence level.
Question 8
Consider a portfolio consisting of a Rs.200, 00,000 investment in share XYZ and a Rs. 200,
00,000 investment in share ABC. The daily standard of deviation of both shares is 1% and
that the coefficient of correlation between them is 0.3. You are required to determine the
10 day 99% value at risk for the portfolio?

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CHAPTER-8 SECURITY ANALYSIS & VALUATION

Days Price of Goodwin Limited (Rs./share)

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

Date Open High Low Closing

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

• The inflation premium increases by 2 percent?

(i) Calculate the present value of stock of ABC Ltd.

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

BUY BACK DECISION

CA. PAVAN KARMELE MOB. 9977223599

III-Valuation of Right Shares

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

1) Yield to first call

CA. PAVAN KARMELE MOB. 9977223599

Date of repayment of principal -- January 6, 2010

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

Conversion of Bonds & Preference Shares

CA. PAVAN KARMELE MOB. 9977223599

Interest Payment Annual, at the end of year

You are required to calculate:

CA. PAVAN KARMELE MOB. 9977223599

(iv) The conversion parity price of the stock.

Bond Duration & Volatility

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

Bond M ---- 7 yrs ZCB ---- Presently yielding 10%

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

Information for high growth and stable growth

Growth in Revenue & EBIT 20% 10%

CA. PAVAN KARMELE MOB. 9977223599

Revenues Rs. 7,500 Crores

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

XYZ ABC Proxy entity for KLM in the same line of

Business Capitalization/ Capitalization/ Capitalization/

CA. PAVAN KARMELE MOB. 9977223599

Assets 1250 2000 1000 4,250

Economic Value Added

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599

CA. PAVAN KARMELE MOB. 9977223599