Corporate Finance

Corporate Finance
Course Title
Corporate Finance
Course Code
F-302
Assignment On
Mathematical Problems
Submitted To
Md. Masud Chowdhury

Lecturer
Dept. of Finance & Banking
Submitted By
Pankaze Pada Bhoumik

ID: 11132603
Session: 2010-11
3 Year 1st Semester
rd
Dept. of Finance & Banking
Jatiya Kabi Kazi Nazrul Islam University

Trishal, Mymensingh
Submission Date: 26th August, 2013

Table of Contents
1|Page
Corporate Finance
Serial Chapter Name Problem No Page No

No.
01 Problem 1 02-03
Problem 2 04-05
Sustainable Growth
Problem 3 06-07
2 Problem 1 08-10
Financial Projection
Problem 2 11-13
Or
Pro forma Statement Problem 3 14-16
3 Problem 1 17-19
Problem 2 20
Risk Problem 3 21
& Problem 4 22-24
Return Analysis
Problem 5 25-26
Problem 6 27-29
Problem 7 30-32
Problem 1
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Corporate Finance
Total Industries has $40 million in shareholders equity and sales of $ 150 million last year.
(a) Its target ratios are assets to sales ratio0.40 net profit margin 0.07 debt-equity ratio 0.50
and earnings retention 0.60 if these ratios correspond to steady-state model what is its
SGR?
(b) If instead of these ratios, what would be the SGR for next year if the company moved
from steady-state and had the following longest? Assets to sales ratio 0.40 net profit
margin 0.06; debt equity ratio 0.45; dividend of 15 million and no nets equity financing.
Solution
Requirement (a)
We know that SGR under Steady-State model:-
B ( NPS )(1+ EQD )

SGR =
[ AS ][ B ( NPS )(1+ EQD )]
Where,
B = Earnings retention = 0.06
NP/S = Net profit margin = 0.07
D/EQ = Debt-equity ratio = 0.05
A/S = Total assets to sales ratio = 0.40
By putting the values in SGR formula in case of Steady-state model we get.
B ( NPS )(1+ EQD )

SGR =
[ AS ][ B ( NPS )(1+ EQD )]
( 0.60 0.07 ) (1+0.30)
( 0.40 )
SGR = ( 0.60 0.07 ) (1+0.50)

0.063 0.063
SGR = 0.400.063 = 0.337 = 0.1869 = 18.69% Ans.
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Corporate Finance
Requirement (b)
We know that SGR under Changing model.
( EQD )( AS )
( EQo + New EQ Dividend ) 1+
1
1
SGR = NP D S [ S0
1( )( EQ A )
)(
1+
S
Where,
EQ0 = Beginning equity = $40 million
New EQ = New equity = $0 million
Dividend = $5 million
1
S/A = Total sales to asset ratio = 0.42
S0 = $150 million
By putting the values in SGR formula in case of changing model we get.
( EQD )( AS )
1
1
SGR = NP D S [ S0
1( )( EQ A )
)(
1+
S
( 40+05 ) (1+ 0.45 ) ( 0.421 ) 1

1
SGR = [
[
1 0.06 ( 1+ 0.45 ) (
0.42 ) ]
1 150
120.833333
(0.00067) 1
SGR = [( 0.7929
SGR = 0.165 = 1.65% Ans.
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Corporate Finance
Problem-2
Zippo industry has equity capital of tk 12 million, total debt of tk 8 million and sales last year of
tk 300 million.
(a) It has target assets to sales ratio of 0.33367 a target net profit margin of 0.04 a target debt-
equity ratio of 0.6667 and a target earning retention rate of 0.70 in steady state model what
is its sustainable growth rate?
(b) Suppose now the company has established for next year a target assets to sales ratio of
0.62 a target net profit margin of 0.05 and a target debt-equity ratio of 0.08 it wishes to pay
an annual dividend of tk 0.30 million and raise tk 1 million in equity capital next year what
is its sustainable growth rate too next year? Why does it differ from that in part (a)?
Solution
Requirement (a)
B ( NPS )(1+ EQD )

SGR =
[ AS ][ B ( NPS )(1+ EQD )]
Where,
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Corporate Finance
B ( NPS )(1+ EQD )

SGR =
[ AS ][ B ( NPS )(1+ EQD )]
( 0.75 0.04 ) (1+0.6667)
( 0.33367 )
SGR = ( 0.75 0.04 ) (1+0.6667)

0.050001 0.050001
SGR = 0.333670.050001 = 0.283669 = 0.1763 = 17.63% Ans.
Requirement (b)
( EQD )( AS )
1
SGR = NP D S [ S 0 1
1(
S )( EQ )( A )
1+
Where,
EQ0 = Beginning equity = Tk.12 million
New EQ = New equity = Tk. 1 million
Dividend = Tk. 3 million
1
S0 = Tk. 30 million
( EQD )( AS )
1
1
SGR = NP D S [ S0
1( )( EQ A )
)(
1+
S
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Corporate Finance
1
( 12+13 ) (1+0.80 ) ( 0.62 ) 1
1
SGR = [
[
1 0.05 ( 1+0.80 ) (
0.62 ) ]
1 30
36.870894
SGR = [( 0.854939 (0.03333333) 1
SGR = 0.4377 = 43.77% Ans.
The company has moved from steady-state with higher target operating efficiency a higher debt
ratio and the sale of common stock all of those things profit a high rate of growth in sales next
year. Unless further changed in this direction occur the SGR will decline in future years.
Problem- 3
Apex Ltd had equity capital of $ 1 million debt of $80 million and sales of last year $30 million
the company has the following target ratios during 2003: D/E= 0.80, A/S=0.60, net profit margin
0.06, B=0.70. Furthermore the company has a new equity of $25 million and paid dividend of $
10 million during 2003.
Calculate sustainable growth rate for the company for 2003:
Solution
Requirement (a)
B ( NPS )(1+ EQD )

SGR =
[ AS ][ B ( NPS )(1+ EQD )]
Where,
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Corporate Finance

B ( NPS )(1+ EQD )

SGR =
[ AS ][ B ( NPS )(1+ EQD )]
( 0.70 0.06 ) (1+0.80)
( 0.70 )
SGR = ( 0.70 0.06 ) (1+0.80)

0.0756 0.0756
SGR = 0.600.0756 = 0.5244 = 0.1441 = 14.41% Ans.
Requirement (b)
( EQD )( AS )
1
SGR = NP D S [ S 0 1
1( )( EQ A )
)(
1+
S
Where,
EQ0 = Beginning equity = Tk.1 million

New EQ = New equity = Tk. 25 million
Dividend = Tk. 10 million
1
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Corporate Finance
S0 = Tk. 30 million
( EQD )( AS )
1
1
SGR = NP D S [ S0
1( )( EQ A )
)(
1+
S
( 0.601 )
( 1+2510 ) ( 1+ 0.80 )
1
1
SGR = [
[
1 0.06 ( 1+0.80 )(
0.60 )]
1 30
48
SGR = [( 0.82 (0.03333333) 1
SGR = 0.9512 = 95.12% Ans.
Problem- 1
The following income statement and balance sheet relate to Bata Ltd.
During 2004
Bata Ltd.
Income statement
For the year ended 2004
Particulars Taka
Net sales 15000
Less: costs of goods sold 12300
Gross profit 2700
Less: Fixed operating costs except Depreciation 900
EBITD 1800
Less: Depreciation 500
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Corporate Finance
EBIT 1300
Less Interest 400
EBT 900
Less: Taxes 40% 360
Net Income 540
Less: Dividends 270
Addition to Retained Earnings 270
Bata Ltd.
Balance Sheet
As at 31st Dec-2005
Liabilities Taka Assets Taka
Accounts payable 300 Cash 150
Accounts 600 Accounts Receivable 1800
Notes payable 400 Inventories 2700
Long term Bond 3000 Net plant and equipment 3800
Common stock 1300
Retained earnings 2850
Total 8450 Total 8450
Additional information:-
1) Assume that the sales and operating cost will be 10% higher in 2005 than in 2004.
2) Further assume that the company currently operates at full capacity so it will need to
expand its plant capacity in 2005 to handle the additional operations.
Required:-
(a) Prepare a pro forma income statement for 2005
(b) Prepare a pro forma balance sheet for 2005
Solution
Requirement-1:- Pro forma income statement
Bata Ltd. Company

Pro forma Income statement
Particulars 2004 2005 2005
Results forecast forecasts
Net sales 15000 X1.10 16500
Less: costs of goods sold 12300 X1.10 13530
Gross profit 2700 2970
Less: Fixed operating cost except 900 X1.10 990
depreciation
EBITD 1800 1980
Less: Depreciation 500 X1.10 550
EBIT 1300 1430
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Less Interest 400 400

EBT 900 1030
Less: Taxes 40% 360 412
Net Income 540 618
Less: Dividends @50% 270 309*
Addition to retained earnings 270 309
Indicates dividend for the year 2004 and it is assumed same percentage for 2005*
Bata Ltd. Company

Pro forma Balance Sheet
As on 31st Dec-2005
Cash 150 X1.10 165
Accounts Receivable 1800 X1.10 1980
Inventories 2700 X1.10 2970
Total current assets 4650 5115
Net plant and Equipment 3800 X1.10 4180
Total Assets 8450 9295
Accounts payable 300 X1.10 330
Accruals 600 X1.10 660
Notes payable 400 400*
Total current Liabilities 1300 1390
Long term Bond 3000 3000**
Common stock 1300 1300***
Retained earnings 2850 +309**** 3159
Additional Funds needed - 828.5*****
Total Liabilities and equities 4850 9295
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Notes:-
Indicates 2004 figures carried over 2005*

Indicates 2004 figures carried over 2005**
Indicates 2004 figures carried over 2005***
Represents the addition to retained earnings from 2004 Pro forma income statement****
Calculated by determining total liabilities from total assets*****
Problem-2
The following Image standard income statement and balance sheet relate to Tata Ltd 2001
Tata Ltd.
Income Statement
Particulars Taka
Net sales 28200
Less: Cost of goods sold 17200
Goods profit 11000
Less: Fixed operating cost expect depreciations 7800
EBITD 3200
Less: Deprecation 600
EBIT 2600
Less: Interest 440
EBT 2160
Less: Taxes @ 40% 8664
Net Income 1296
Less: Dividends 516
Addition to retained earnings 780
Tata Ltd.
Balance Sheet
Balance Sheet as 31st Dec.2001
Liabilities Tk. Assets Tk
Accruals 500 Accounts Receivable 1680
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Bank loan 8900 Pre paid expense 130

Long term Bond 4930 Net plant and 1490
Equipment
Common stock 8000
Retained Earning 1660
Additional Informations:
i) Assume that the sales and operation costs will be 15% high in 2002 than 2001
ii) Further assume that the company currently operations in fall clarity sale will need to
expand its plants capacity in 2002 to handle the additional operations.
Required:
a) Prepare pro forma income statement to 2002
b) Prepare pro forma balance sheet for 2002
Solution
Tata Ltd.
Pro forma Income Statement
Particulars Results Forecast 2002
2001 basis 2002 Forecast
Net sales 28200 X1.15 32430
Less: cost a of goods sold 17200 Xi1.5 19780
Less: Fixed operation costs except 7800 X1.15 8970
deprecation
EBIT 600 X1.15 690
Less Interest 2600 2490
EBT 440 440
Less: Taxes @ 40% 2160 2550
Net Income 864 1020
Less: Dividend 1296 1530
Addition to Retained Earning 516 609
When net income 1296 then dividend 516

516
When net income 1 then dividend = 1296
516
1530=609
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Requirement- 2: Pro forma Balance Sheet
Tata Ltd.
Performa Balance sheet
As on 31st Dec 2002
Results Forecast Forecast
basis
Cash 1120 X1.15 1288
Prepaid expenses 130 X1.15 149.5
Total Current Assets 14200 16330
Net plant cost equipment 11190 X1.15 13213.5
Total Assets 25690 29543.5
Accruals 500 X1.15 575
Notes payable 1040 1040a
Total Current Liabilities 2200 2374
Bank loan 8900 8900b
Long term bond 4430 4930c
Common stock 8000 8000d
Retained Earnings 1660 +921e 2581
Additional fund needed - 2755.5f
Total Liabilities and Equipments 25690 29543.5
a) Indicates 2001 figures carried over 2002

b) Indicates 2001 figures carried over 2002
c) Indicates 2001 figures carried over 2002
d) Indicates 2001 figures carried over 2002
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Corporate Finance
e) Represents the addition to retained earnings from 2001 Pro forma income statement.
f) Calculated by determining total liabilities from total assets
Problem 3
Bata Ltd.
Income statement
Particulars Taka
Net sales 15000
Less: costs of goods sold 12300
Gross profit 2700
Less: Fixed operating costs except Depreciation 900
EBITD 1800
Less: Depreciation 500
EBIT 1300
Less Interest 400
EBT 900
Less: Taxes 40% 360
Net Income 540
Less: Dividends 270
Addition to Retained Earnings 270
Bata Ltd.
Balance Sheet
As at 31st Dec-2005
Liabilities Taka Assets Taka
Accounts 600 Accounts Receivable 1800
Long term Bond 3000 Net plant and equipment 3800
Common stock 1300
Retained earnings 2850
Additional information:-
3) Assume that the sales and operating cost will be 15% higher in 2005 than in 2004.
4) Further assume that the company currently operates at full capacity so it will need to
expand its plant capacity in 2005 to handle the additional operations.
Required:-
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Corporate Finance
(c) Prepare a pro forma income statement for 2005

(d) Prepare a pro forma balance sheet for 2005
Solution
Bata Ltd.
Pro forma Income statement
For the year ended 31st December 2005
Net sales 15000 X1.15 17250
Less: costs of goods sold 12300 X1.15 14145
Less: Fixed operating costs except 900 X1.15 1035
Depreciation
EBITD 1800 2070
Less: Depreciation 500 X1.15 575
EBIT 1300 1495
Less: Interest 400 400
EBT 900 1095
Less: Taxes 40% 360 438
Net Income 540 657
Less: Dividends 290 353
Addition to regained earnings 250 304
When net income 540 then dividend 290

290
290
When net income 1530 then dividend = 540 657=353
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Requirement- 2: Pro forma Balance Sheet
Bata Ltd.
Pro forma Balance Sheet
As on 31st December 2005
Results Forecast Forecast
basis
Cash 150 X1.15 172.5
Total current assets 4650 5347.5
Net plant and Equipment 3800 X1.15 4370
Total Assets 8450 9717.5
Accounts 600 X1.15 690
Notes payable 400 400
Total current liabilities 1300 1435
Long term Bond 3000 3000
Common stock 1300 1300
Retained earnings 2850 +304 3154
Additional Funds needed - 828.5
Total Liabilities and equities 4850 9717.5
a) Indicates 2004 figures carried over 2005

b) Indicates 2004 figures carried over 2005
c) Indicates 2004 figures carried over 2005
d) Indicates 2004 figures carried over 2005
e) Represents the addition to retained earnings from 2004 Pro forma income statement.
f) Calculated by determining total liabilities from total assets
Problem 1
The two companies has possible outcomes and probability
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Possible Probability Asset A Asset B

Outcomes
Pessimistic .25 13% 7%
Most likely .50 15 15
Optimistic .25 17 23
Total 1.0
Requirements:-
a) Expected rate of return
b) Standard deviation
c) Co-efficient of variation
d) Which project the investor should choose
Solution
Required solution (a)
Expected return for asset A
We know that,
n

E( R A)= Pr i (Ri)
i=0
Now,
n

E( R A)= Pr i (Ri)
i=0

E( R A) = {(0.25.13) + (0.50.15) + (0.25 17)}

E( R A) = 0.15

E( R A) = 15%
Expected return for asset B

We know that,
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n

E( R B )= Pr i (Ri)
i=0
Now,
n

E( R B) =
Pr i (Ri)
i=0

E( R B ) = {(0.25.07) + (0.50.15) + (0.25 .23)}

E( R B ) = 0.15

E( R B ) = 15%
Required solution (b)

The following table shows the necessary calculation
Possible Asset A PRi Asset B PRi
Outcomes (RB-

(RA- R

R )2
A )2 B
Return% (RX- PRi Return% RRi

(RB- R
RA RB

R )2
X )2 B
1 13 4% .25 1% 7% 64% .25 16%

2 15 0 .50 0 15 0 .50 0
3 17 4 .25 1 23 64 .25 16
Pri
(RA- R A )2
2% Pri
(RB- R )2
B
32%
Standard deviation for Asset A:-

P ri ( R a R a) 2
= 2
= 1.41%
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Standard deviation for Asset B:-
= P ri (RB RB ) 2
= 32
= 5.66%
Required solution (c)

Co-efficient of variation for Asset A

CV = Expected cash flow
1.41
= 15
= 0.094
Co-efficient of variation for Asset B

CV = Expected cash flow
5.66
= 15
= 0.3773
Required Solution (d)

Hence the CV of asset A is lower than the CV of Asset B. So the company should invest in asset
A.
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Problem 2
Suppose you have the following information:
Security Amount Invested Expected Return
A $1000 8%
B $2000 12%
C $3000 15%
D $4000 18%
a) What are the portfolio weights?
b) What is the expected return on this portfolio?
Solution
Required solution (a)
Total amount invested
= $ (1000+2000+30004000)
= $ 10000
The portfolio weights are given below:

1000
For Security A = $ 10000 = 0.10
$ 2000
For Security B = $ 10000 = 0.20
$ 3000
For Security C = $ 10000 = 0.30
$ 4000
For Security D = $ 10000 = 0.40
Required solution (b)
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Expected return on this portfolio

n

E( R P)= W i

E ( R i)
i=0
= (.10 8%) + (.20 12%) + (.30 15%) + (.40 18%)

= .80% + 2.4% + 4.5% 7.2%
= 14.19% Ans.
Problem 3
Consider a three stock portfolio consisting of stocks X, Y and Z with expected returns of 12%,
20% and 17% respectively. Assume that 50% of investible funds are invested in stock X, 30% in
Y and 20% in Z.
Calculate portfolio expected return.
Solution
We know that,
The expected return on any portfolio can be calculated as
n

E( R P)= W i

E ( R i)
i=0
Where,
E (RP) = Expected return from portfolio
Wi = Proportion invested in asset i
E (Ri) = Expected return from asset i
n = Number of assets in portfolio
n

E( R P)= W i

E ( R i)
i=0
= {(0.5012%) + (0.3020%) + (0.2017%)}

= 6% + 6% + 3.4%
= 15.4%. Ans.
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Problem 4
Stocks X and Y have the following historical returns:
Year stock X Returns Stock Y Returns
1996 -18% -14.50%
1997 33 21.80
1998 15 30.50
1999 0.50 -7.60
2000 27 26.30
Calculate the portfolio risk of the security of 50% weights is placed in each stock X and Y.
Solution
For Stock X

Expected Return ( R ) X
= (-18% + 33% + 15% + 0.5% + 27%) 5

=11.5%
For Stock Y

Expected Return ( R Y )
(14.5 +21.8 + 30.50 7.6 +26.30 )

5
=11.30%
We know that,
n

E( R P)= W i

E ( R i)
i=0
Where,
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Now,
n

E( R P)= W i E (Ri)
i=0
= (.50 11.5%) + (.50 11.30%)

= 5.75% + 5.65%
= 11.40%
Stock X Stock Y
Year Return% RX2 Return% RY2 RXRY
(RX- R (RY- R
RX RY
)2
X )
Y 2
1996 -18 870.25 324 -14.50 665.64 210.25 261

1997 33 462.25 1089 21.80 110.25 475.24 719.40
1998 15 12.25 225 30.50 368.64 930.25 457.50
1999 0.50 121 0.25 -7.60 357.21 57.76 -3.80
2000 27 240.25 729 26.30 225 691.69 710.10
RX = (RX- RX2= RY = (RY- RY2 = RXRY
57.5
R X )2 2367.25 11.3
R )
2365.19- =2144.2
Y 2
0
=1706 =1726.7
4
The standard deviation for Stock X
R

x 2
x R

= n

i=0

= 1706
51
= 20.65%
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Standard deviation for Stock Y

R

x 2
x R

= n

i=0

= 1726.74
51
= 20.78%
We know that Co-efficient correlation:
Rx 2

R y 2

N }

2
y
R
=
2
x
R
n
{
i=1

R x R y R R x y
57.5 56.5
2114.2
5
=
{2367.25
57.52
5
}{2365.19
56. 52
5
}
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1494.45
= 1706 1726.74
=0.87
Therefore the portfolio standard deviation is:-
12 1
W 2 2 2 +2 W 1 W 2 ( 2)
p
= 2
( W 1 1 ) +

p
= (.50 20.65 ) +( .50 20.78 ) +2 .50 .50 0.87 20.65 20.28
p
= 20.03% Ans.
Problem 5
Consider the following information:
Economy Probability Security N Security M
Revision 0.50 -20% -30%
Boom 0.20 70% 10%
Normal 0.30 25% 90%
If the portfolio weight for cash stock is 0.50 determine the portfolio expected return.
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Solution
Expected return for security N
We know that,
n

E( R N)= Pr i (Ri)
i=0
Now,
n

E( R N)= Pr i (Ri)
i=0

E( R N) = {(0.50-20) + (0.2070) + (0.30 25)}

E( R N) = -10% + 14% + 7.50%

E( R N) = 11.50%
Expected return for security M

We know that,
n

E( R M) =
Pr i (Ri)
i=0
Now,
n

E( R M) =
Pr i (Ri)
i=0

E( R M ) = {(0.50-30) + (0.2010) + (0.30 90)}

E( R M ) = -15% + 2% + 27%

E( R M ) = 14%
We know that,
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n

E( R P) =
W i E (
R
i)
i=0
Where,
Now,
n

E( R )=
P
W i E (Ri)
i=0
= (.50 11.5%) + (.50 14%)

= 5.75% + 7%
= 12.75%
Home Work
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Problem 6
Based on the following in formations calculate the expected returns and standard deviation for
the equally weighted porfolio
State of Probability of Return of A Return of B
Economy state
Recession 0.30 15% 20%
Normal 0.40 10% 15%
Boom 0.30 7% 11%
Solutions
Expected return for A
We know that,
n

E( R A )= Pr i (Ri)
i=0
Now,
n

E( R A) =
Pr i (Ri)
i=0

E( R A ) = {(0.3015%) + (0.4010) + (0.30 7)}

E( R A ) = 4.5% + 4 + 2.1

E( R A ) = 10.60%
Expected return for B
We know that,
n

E( R B )= Pr i (Ri)
i=0
Now,
n

E( R B )= Pr i (Ri)
i=0

E( R B ) = {(0.3020%) + (0.4015) + (0.3011)}
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E( R B ) = 6% + 6 + 3.3

E ( R B) = 15.3%
We know that,
n

E( R P)= W i E (
R
i)
i=0
Where,
Now,
n

E( R P )= W i E(Ri)
i=0
= (.50 10.6%) + (.50 15.3%)

= 5.3% + 7.65%
= 12.95%
Standard Deviation for Stock A

R

A R A 2
Pri

n

i=0

0710.6 2
2 2
= 0.30 ( 1510.6 ) + 0.40 ( 1010.6 ) + 0.30

= (.30 19.36 ) + ( 0.40 0.36 )+ ( 0.30 12.96 )

= 9.84
=3.14%
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Standard Deviation for Stock B

R

B R B 2
Pri

n

i=0

1115.3 2
2 2
= 0.30 ( 2015.3 ) + 0.40 ( 1515.3 ) +0.30

= (.30 22.09 ) + ( 0.40 0.09 ) + ( 0.30 18.49 )

= 12.453
=3.53%
We know
Co-variance
A R A
Cov AB
B R B
= ( R }Pri }
R
={ ( 1510.6 ) (2015.3)0.30+ ( 1010.6 ) (1515.3)0.40+ ( 0710.6 ) (1115.3)0.30 }
= 6.204+ 0.072 + 4.644

= 10.92
We know
Co-efficient of correlation
Cov AB
AB=
A B
10.92
= 3.14 3.53
= 0.99
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We know,
Portfolio Standard Deviation
12 1
2
W 2 2 +2 W 1 W 2 ( 2)
p
= 2
( W 1 1 ) +

p
= (.50 3.14 ) +( .50 3.53 ) +2 .50 .50 0.99 3.14 3.53
2 2
p
= 3.12% Ans.
Problem 7
Securities X and Y have the following characteristics
Security X return% Probability Security Y return % Probability
30% 0.10 -20% 0.05
20 0.20 10 0.25
10 0.40 20 0.30
5 0.20 30 0.30
-10 0.10 40 0.10
a) Calculate the expected return and risk of return for each security
b) Calculate the expected return and risk of returns for the Probability of X and Y placing
equal weight to each.
Solutions
Requirement (a)
Expected return for Security X
32 | P a g e
Corporate Finance
We know that,
n

E( R X) =
Pr i (Ri)
i=0
Now,
n

E( R X)= Pr i (Ri)
i=0

E( R X) = {(0.1030%) + (0.2020) + (0.40 10) + (0.205) + (0.10-10}

E( R X) = 3% + 4 + 4 + 1 - 1

E( R X) = 11%
Expected return for Security Y

We know that,
n

E( R Y)= Pr i (Ri)
i=0
Now,
n

E( R Y)= Pr i (Ri)
i=0

E( R Y) = {(0.05-20%) + (0.2510) + (0.30 20) + (0.3030) + (0.1040)}

E( R Y) = -1% + 2.5 + 6 + 9 + 4
33 | P a g e
Corporate Finance

E( R Y ) = 20.5%

Possible Security X PRi Security Y PRi
Outcomes (RX-
R
(RY-

R )2
Y
Return% (RX- PRi X )2 Return% (RY- PRi

RX RY

R 2
R
X ) Y )2
1 30 361% .10 36.1% -20% 1600% .05 80%
2 20 81 .20 16.2 10 100 .25 25
3 10 1 .40 .40 20 0 .30 0
4 5 36 .20 7.2 30 100 .30 30
5 -10 441 .10 44.1 40 400 .10 40
Pri
(RA- R A )2
104% Pri
(RB- R B )2
175%
Standard deviation for Security X:-

P ri ( R X R X ) 2
= 104
= 10.2%
Standard deviation for Security Y:-

= P ri (RY RY )2
= 175
= 13.23%
Requirement (b)
We know that,
n

E( R P)= W i

E ( R i)
i=0
Where,
34 | P a g e
Corporate Finance
Now,
n

E( R )=
P
W i E (Ri)
i=0
= (.50 7.4%) + (.50 19.5%)

= 3.7% + 9.75%
= 13.45%
We know,
Portfolio Standard Deviation
W 2 2 2
p 2
( W 1 1 ) +
=

p
= ( 0.5 10.2 ) +(0.5 13.23)
2 2
p
= 8.35 Ans.
35 | P a g e

Corporate Finance

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Corporate Finance

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Corporate Finance

Md. Masud Chowdhury

Pankaze Pada Bhoumik

Dept. of Finance & Banking

Jatiya Kabi Kazi Nazrul Islam University

Submission Date: 26th August, 2013

Serial Chapter Name Problem No Page No

B ( NPS )(1+ EQD )

By putting the values in SGR formula in case of Steady-state model we get.

B ( NPS )(1+ EQD )

We know that SGR under Changing model.

By putting the values in SGR formula in case of changing model we get.

( 40+05 ) (1+ 0.45 ) ( 0.421 ) 1

SGR = 0.165 = 1.65% Ans.

We know that SGR under Steady-State model:-

B ( NPS )(1+ EQD )

By putting the values in SGR formula in case of Steady-state model we get.

B ( NPS )(1+ EQD )

We know that SGR under Changing model.

By putting the values in SGR formula in case of changing model we get.

SGR = 0.4377 = 43.77% Ans.

B ( NPS )(1+ EQD )

NP/S = Net profit margin = 0.06

By putting the values in SGR formula in case of Steady-state model we get.

B ( NPS )(1+ EQD )

We know that SGR under Changing model.

EQ0 = Beginning equity = Tk.1 million

By putting the values in SGR formula in case of changing model we get.

SGR = 0.9512 = 95.12% Ans.

Bata Ltd. Company

Less Interest 400 400

Bata Ltd. Company

Indicates 2004 figures carried over 2005*

Bank loan 8900 Pre paid expense 130

When net income 1296 then dividend 516

Requirement- 2: Pro forma Balance Sheet

a) Indicates 2001 figures carried over 2002

(c) Prepare a pro forma income statement for 2005

When net income 540 then dividend 290

Requirement- 2: Pro forma Balance Sheet

a) Indicates 2004 figures carried over 2005

Possible Probability Asset A Asset B

Expected return for asset B

Required solution (b)

Return% (RX- PRi Return% RRi

1 13 4% .25 1% 7% 64% .25 16%

Standard deviation for Asset A:-

Standard deviation for Asset B:-

Required solution (c)

Co-efficient of variation for Asset B

Required Solution (d)

The portfolio weights are given below:

Required solution (b)

Expected return on this portfolio

= (.10 8%) + (.20 12%) + (.30 15%) + (.40 18%)

= {(0.5012%) + (0.3020%) + (0.2017%)}

= (-18% + 33% + 15% + 0.5% + 27%) 5

= (.50 11.5%) + (.50 11.30%)

1996 -18 870.25 324 -14.50 665.64 210.25 261

The standard deviation for Stock X

Standard deviation for Stock Y

We know that Co-efficient correlation:

Therefore the portfolio standard deviation is:-

Expected return for security M