A. State any assumptions, if needed.

B. Only answers and workings that are clear and legible will get full credit.

C. Assume 15% as the discount rate, if it is not available.

Finance Garage is the name of an advisory set-up by a failed business school professor, who is popularly called as Professor by everyone. Although, Professor was a pathetic teacher he was very successful as an Advisor. Finance Garage (FG, hereafter) earned reputation as a true one-stop-solution for all financial services and advisory needs of both Corporates as well as individuals. Professor manages the firm single handedly and he is the only employee of the FG, of course he runs the show with a handful of MBA students working as interns. Because of the rich exposure an MBA student gets at FG there is a waiting list of students who want to pursue their internship at FG.

Every morning Professor walks in to the office around 10 am and prepares for the appointments lined up for the day. From 1.00 pm onwards the clients will walk in and he will complete the day's business by 3.00 pm everyday. Some of the client meetings happen over lunch hosted by the clients!!

As the Professor is walking in his neighbor came to him and asked for an advice on paying his child's school fee. The school gave two payment plans - a) a one-time payment of Rs 27,000 or @ Rs 9250 per term (both payable at the beginning of the period). There are three terms in an academic year.

Sitting in his chamber Professor realized that a total of three meetings are scheduled for the day with each one being very important. Given the shortage of time Professor started carefully reading the details of each case.

The first meeting is with a high net-worth investor Ms. Saraswathy. She purchased a bond at a price of Rs. 104,800 that pays a coupon of 8% and a face value of Rs 100,000. This bond matures in 5-years from now. After investing in the bond yesterday She heard about another opportunity that pays a coupon of 5% PA in the first year, 7% PA in the second year, 9% PA in the third year, 10% PA in the fourth year and finally 12% PA in the fifth year. The price of this bond is Rs. 110,000 and a maturity of 5 years. She is anxious to know whether she made a mistake buying the 8% bond.

The second client is Mr. Selva also an individual investor who swears by equity and is sometimes swayed by market buzz. He invested in the stock of Dandiya Enterprises whose promoter is very close to the government. Dandiya paid a dividend of Rs 5/- just a while ago and the market buzz is the incumbent government will lose to the opposition party in the elections whose results are awaited. Because of the adverse government, Dandiya Enterprises will experience a negative growth rate of 8% P.A. in the forthcoming five years. In the subsequent years the stock will grow perpetually at a long-term growth rate of 15% per annum. If the required rate of return is 18% what will be the value of the stock with these changes.

The third and final client is Mr. Nihal representing M/s. Raymobile Motors which is a very profitable company. It needs financial analysis of an investment in a new production machine for Rs. 1000,000. The purchase of this machine will result in an increase in sales revenues of Rs. 425,000 in the first year and the associated expenses (excluding depreciation) are 25% of the revenues. The revenues will be growing at 10% PA. They will incur Rs 25,000 as consultancy fee to the Professor. Because of the new machine overheads will increase by Rs 20,000 pa. Working capital required during the operational life of the project @ 5% of the next-year sales to be invested at the beginning of the year. It will be recovered after the useful life of the machine which is 5 years. Assume straight-line depreciation, that this machine is being depreciated down to zero, a 35 percent marginal tax rate, and a required rate of return of 12 percent.

Professor called you to prepare suitable recommendations to Saraswathy, Anand and Nihal along with the necessary workings. Specifically, he wants analysis and workings to answer the following questions:

1. Did Saraswathy committed a mistake investing in 8% coupon bond? Show with necessary details. (4 marks)

2. What will be the value of the stock of Dandiya Enterprises? (4 marks)

3. What will be the recommendation to Nihal? Show the initial investment, annual operating cashflow and the terminal cashflow. (9 marks)

4. What will be your recommendation to the neighbor? Why? (3 marks)