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The major differences between simple interest and compound interest are as follows −Simple interestIt is the percentage interest on total principal amount.Low returns.Principal is constant.Growth of both principal and interest is constant.Interest will be charged only on principal amount.Easy to calculate.Formula: PTR/100.Compound interestIt is the percentage interest charged on principal and accrued interest.High returns compared to simple interest.Both principal and accrued amounts changes because of addition of interest during the period.Principal and interest will grow at pace.Interest will be charged on both principal and interest.Difficult to calculate, when compared to simple interest.Formula = P(1+(r/100))^t – PRead More
The major differences between compounding and discounting techniques in time value of money are as follows −Compounding techniqueIt is a process of calculating future value using present investment.It determines money gained by an investment.It is also called as present value.Compound interest rate.Uses future value/compounding factor.Its formula is Fv= Pv(1+r)^nAmount increases in this method.Right side to left (time line).If the rate is low then, future value will decrease and if the rate is high then, future value will increase.Discounting techniqueIt calculates future cash flows using present value.It determines the amount to be invested to get maximum future gains.It is also called ... Read More
Time value of money tells, what would be the worth of value of your present money in future. In other words, it tells about the worth of today’s money in future. Money potential increases with time.If you invest your today’s money, for which you will get interest, it will automatically increase the value of money. Factors like inflation and purchasing power are to be considered, while investing the money because both can erode the value.Time value of money helps investors to take decisions about where to invest, when to invest. It also helps us to understand about interest, inflation, risk ... Read More
SolutionThe solution is explained below −Future value = to be calculatedPresent value =Rs. 2500/-Interest rate = 10%Time = 2 years Fv = Pv * [1 + (i/n)] ^ (n*t) Fv = 2500 *[1+ (10%/1)] ^ (1*2) Fv = 2500 * [1 + 0.1] ^2 Fv = 2500 * [1.1] ^2 Fv = 2500 * 1.21 Fv = 3025/-
Following are cash flow for P1 and P2Year12345Project 1 (P1)40004600580072003500Project (P2)40004800360054003500Year 1Year 2Year 3Year 4Year 50.9250.8920.7490.6710.602Present value Rs.1/- @10% (discounted factor) using present value tableSolutionThe solution is stated below −For Project 1 (P1) −Initial investment = Rs. 35000/- YearDiscounted factorReturnsNet present value10.9254000370020.89246004103.230.74958004344.240.67172004831.250.602350021072510019085.6 Present value = Rs.19085.6/- Return on investment = (25100-19085.6)/35000 => 0.17184 => 17.184% For Project 2 (P2) − Initial investment = Rs. 23000/- YearDiscounted factorReturnsNet present value10.9254000370020.89248004281.630.74936002696.440.67154003623.450.602350021072130016408.4 Present value = Rs.19085.6/- Return on investment = (21300-16408.4)/23000 => 0.21268 => 21.268% Hence, from the above calculations: Return on investments for P2 is more than P1 So, project P2 is selected.
Assets (Rs.)Liabilities (Rs.)Owners’ equity (Rs.)5000022000XXX11600XXX560010000055000XXX50000XXX290004500016000XXX41300XXX36500SolutionThe solution is explained below −We know accounting equation => Assets = Liabilities + Owner’s equityAssets (Rs.)=Liabilities (Rs.)+Owners’ equity (Rs.)50000=22000+2800011600=6000+5600100000=55000+4500050000=21000+2900045000=16000+2900041300=4800+36500
SolutionThe solution is explained below −We need to calculate preferred dividends, net interest expense before calculating financial breakeven pointPreferred dividends = preferred stock * 6% = 150*6% => $9 millionNet interest expense = total interest expenses – interest income= 150*6% => $9 millionNet interest expense = total interest expenses – interest income= 15 million – 2 million => 13 millionFinancial breakeven = (PD/1-TR)+ NIE= (9/ (1-28%)) + 13= 12.5 + 13= $ 25.5 million(Here, PD = preferred dividends, TR = Tax rate and NIE = Net Interest Expense).
The major differences between accounting breakeven point and financial breakeven point are given below −Accounting breakeven pointIt is the number of units sold to cover costs.It is an easy method.Cost per unit, fixed cost and variables cost are required to calculate the breakeven point.Accounting breakeven point = (TFC/PPU)-VC (Where TFC= Total fixed cost, PPU = price per unit, VC = variable costZero operating margin is calculated.Financial breakeven point −It is the number of units sold to cover costs.It is an easy method.Cost per unit, fixed cost and variables cost are required to calculate the breakeven point.Accounting breakeven point = (TFC/PPU)-VC ... Read More
Amount in RsAfter tax cost in %Equity share capital75000013%Retained earnings48000014%Preference share55000011%CapitalDebentures5750009.75%2355000SolutionThe solution is mentioned below −Amount in Rs.XAfter tax cost inYEquity share capital750000 (A)(A)/(Z)=0.32 (x1)0.13 (a)(a)*(x1)=0.0416Retained earnings480000 (B)(B)/(Z)= 0.20 (x2)0.14 (b)(b)*(x2)= 0.028Preference share capital550000 (C)(C)/(Z)= 0.23 (x3)0.11 (c)(c)*(x3)= 0.0253Debentures575000 (D)(D)/(Z)= 0.25 (x4)0.0975 (d)(d)*(x4)= 0.0244Total (Z)23550000.1193Weighted average cost of capital = 11.93%That means, company is paying 11.93% premium to the investors.
Number of outstanding shares2500000Price of each shareRs. 48/-Market value for bondsRs. 30000000/-Risk free rate ( 10 year treasury)2.75%Cost of rate of return on company bonds (cost of return)5.90%Corporate tax22.25%Investor risk premium5.60%Company stock beta1.25SolutionThe solution is mentioned below −Market value (A) = no.of shares * price => 2500000 * 48 => Rs. 120000000/-Determine company debt = 30000000Cost of equity = 2.75% +5.60*1.25 => 0.0975Cost of debt = 5.90*(1-22.25%) => 0.046Weight of cost of capital = (R/V*Ke)+(D/V)*Kd*(1-tax rate)=(120000000/150000000)*0.0975 + (30000000/150000000)*0.046= 0.078+0.0092= 0.0872= 8.72 %