Page 126 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Year-end Market Beta risk
Investment in Company Initial Price Dividends
Price Factor
A Paper 20 2 55 0.7
Steel 30 2 65 0.8
Chemical 40 2 140 0.6
B GOI Bonds 1000 140 1005 0.99

12. A company currently is maintaining 6 per cent rate of growth in dividends. The last year
dividend was 4.5 per share. Equity share holders required rate of return is 15 per cent.
What is the equilibrium price per share?
13. Karvy is planning to sell equity shares. Mr. Ram wishes to invest in Karvy Company by
purchasing equity shares. The company’s bond has been yielding at 13 per cent. You are
requested by Mr. Ram to calculate his expected rate of return on equity based on bond
yield plus risk premium approach (assuming 3 per cent as risk premium).
14. Sai Enterprises issued 9 per cent preference share (irredeemable) four years ago. The
preference share that has a face value of 100 is currently selling for 93. What is the cost
of preference share with 8 per cent tax on dividend?
15. Company has 50,000 preference shares of 100 at par outstanding at 11 per cent dividend.
The current market price of the share is 90. What is its cost?
Answers: Self Assessment
1. rate of return 2. percentage. 3. capital formation

4. debt 5. Cost of Capital 6. actual profitability
7. marginal 8. Future Cost 9. Spot
10. interest rate 11. discount rate 12. opportunity
13. marginal cost of capital 14. balance sheet 15. composite

6.9 Further Readings

Books Dr Pradeep Kumar Sinha, Financial Management, New Delhi, Excel Books, 2009.
Sudhindra Bhat, Financial Management, New Delhi, Excel Books, 2008.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.
Chandra, P., Financial Management—Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.

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