1.Why time value of money is important in your life. What is loan amortization schedule .Why it will be beneficial in your life?

2.Future value of annuity due is always higher than future of ordinary annuity. Justify by giving your own example.

3.What are the components of cost of capital? How will you determine the weights of the sources of the capital? Why we take the existing stockholders required return as cost of retained earnings.

4.When YTM>coupon rate the buyer will buy the bond at a discounted price. Justify this by giving your own example.

5.What is Risk? What is Return? There are three types of investors -risk seekers, risk indifferent and risk averse. Under which category you fall ?explain with example

Problem solving

1.Herber Company has issued 14% $1,000 par value bonds with quarterly compounding and 12 years remaining to its maturity date.Bonds of similar risk are currently selling at a rate of 14 percent .You are planning to buy 10 bonds with $10,000.Can you make it?

2.The Xerox Company last paid their dividend of $2.5 to the stockholders.For the first 4 years the dividend will grow at a 6% and then the rate of growth changes to 4% percent per year for the next 3 years .After that the dividend will grow at 3% for the foreseeable future.The required rate of return is 8 percent. If you want to buy the stock maximum how much you should pay for it?

3.John borrowed $35,000 from a bank at 12 percent semiannually compounded interest to be repaid in 5 years. Calculate the total interest paid in the 4^th year.

4.There are two projects, A and B. the following probability distribution for the projects are given below

AB

____________________________

Initial Investment$9,000$9,000

Annual rate of return

ReturnProb.Return Prob.

_________________ ____

Pessimistic9%0.2511% 0.30

Most Likely150.50 18 0.45

Optimistic 250.25 230.25

a.Compute expected rate of return for each project.

b.Compute variance and standard deviation of rate of return for each project.

c.compute the coefficient of variance.

d.Which project should you take?

Analytical question:

1.The capital structure of Index company is below

SourceTarget market

proportions

___________________________________

Longterm debt40%

Preferred stock10

Common stock equity50

PREFERRED STOCK:The firm has determined it can issue preferred stock at $75 per share par value.The stock will pay an $6.00 annual dividend.The cost of issuing and selling the stock is $2.9 per share.

DEBT:The firm can sell a 15 year, $1,000 par value, and 11 percent bond for $900.A flotation cost of 2.5 percent of the face value.

COMMON STOCK:The dividend expected to be paid at the end of the coming year is $6.07 and selling price is $50.Its dividend payments have been growing at a constant rate for the last 6 years. Six years ago, the dividend was $2.45.The cost of issuing the stock was $2.5.

the firm's marginal tax rate is 35 percent. What is the cost of capital of the firm? If you are a finance manager of the company and your task is to reduce the cost of capital .In this situation how you can minimize the cost. Explain18

2.Projects X and Y have the following expected net cash flows:(7)

Project XProject Y

YearCash FlowCash Flow

0-$500,000-$500,000

1250,000350,000

2250,000350,000

3250,000300,000

4200,000200,000

5150,000

Both the projects are of the same company, Deccan Pharma. The most recently paid dividend was $2 and it is growing at 5% for the infinite period of time. Moreover, the stock is selling for $45.

Assume you are a finance manager of the company. Which project you should Choose based on NPV? Would your decision change if payback method was used? Or Discounted Payback period?

Which method you think is the best to find out the solution and why? Why you are not choosing the other two methods?