Question

Requirement-A. KB owns 41% shares of a firm, which has initial endowment of $70,282. The firm has identified three non-divisible feasible projects: Project-X requires $27,727 investment now to generate $31,415 next year; Project-Y requires $21,741 investment now to generate $34,599 next year; and Project-Z requires $48,991 investment now to generate $56,107 next year. The firm invests in projects reasonably to maximise wealth. Average expected rate of return from market is 20%. If KB wants to consume 49% of current dividend now, how much fund would be available to KB in next year? <2 MARKS>

Requirement-B. KD is considering an investment in venture capital that will return nothing in the first two years, $20,712 in the third year and $8,896 a year in perpetuity starting from the fifth year. What is the present value of the investment, given an interest rate of 6.0% per annum? <1 MARK>

Requirement-C. DB, who is 27 years old, decides to use his savings of $27,129 towards his retirement. He places the money in a bank which promises a return of 5.8% per year, compounded monthly, until his planned retirement in 25 years. How much will he have at retirement from this plan?

Answer 1

A

KB Share capital(41%) = $70,282

Total Capital of the firm = $70,282/41%

= $171,420

Invested in Project = $98,459

Balance Capital = $72,961

Calculation of expected NPV of the project:

Year	Cash Flow	PVF @20%	Present Value
	Project - X
0	$ -27,727.00	1	$       -27,727.00
1	$    31,415.00	0.8333	$        26,179.17
	Project-Y
0	$ -21,741.00	1	$       -21,741.00
1	$    34,599.00	0.8333	$        28,832.50
	Project-Z
0	$ -48,991.00	1	$       -48,991.00
1	$    56,107.00	0.8333	$        46,755.83
		Expected NPV	$          3,308.50

Dividend @ 49% = 3,308.50*41%*49% = 664.68

Investment available to KB in next year = $70,282+(3308.5*41%*51%)

= $70,282+691.81

= $70,973.81

B

Year	Cash Flow	PVF @6%	Present Value
1	$                  -	0.9434	$                      -
2	$                  -	0.8900	$                      -
3	$    20,712.00	0.8396	$        17,390.19
4	$1,48,266.67	0.7921	$     1,17,441.09
	Present value of investment	$     1,34,831.28
Cash flow from the 4th	8896/6%
		$ 1,48,266.67

C

Savings = $27,129

Return = 5.8%

Compounding = Monthly

Retirement in 25 years

A = P(1+r/n)^nt

= $27,129(1+5.8%/12)^25*12

= $27,129 (1.0048)^300

= $27,129 * 4.2482

= $115,249.42

At the time of retirement he will have $115,250 (Approx)