In long term decision making, businesses keep in view the effects of decisions over multiple years.

In short term, the consequences of decisions are only spread over one year or less.

To accept a proposal, we consider incomes and expenses that are relevant for proposal.
4 guidance rules to determine the relevance of an item:
-Customer jo kam k paisy dy ga, kia wo profitability nikalny k liye relevant hy?
-Jo inflow ya outflow is proposal k decision ki wjah sy hoga, wo relevant inflow/outflow hoga
-Aik inflow hona tha lekin is proposal k accept krny ki wjah sy nai hoa, also relevant.
-Aik outflow hona tha is proposal ki wjah sy bach gya, relevant.

Now, read example 1, page 2

Various types of short term decision making; pg 7

Revision of Discounting (see first lecture of AAFR)

Reasons of time value of money

-Inflation
-Risk
-Opportunity to earn

Must review the concept of delayed annuity and perpetuity, will be most commonly used in BFD.

CHAP#2 LONG TERM DECISION-MAKING (PAKA PAKA SWAL AYE GA)

Examples of Long-term decision making:
-Launching a new product (import, manufacture)
-Increase in production capacity
-New plant setup
-Continue or shut-down
-Further processing decisions
-Make or buy decisions

Generally, in all of above except "continue or shutdown" requires initial investments, that’s why they are called
-Jis proposal ko evaluate kr rae hon gy k yeh kam kren ya na kren, usko project bol rae hongy
That’s why above decisions ko project appraisal or investment appraisal b kehty hn

DECISION MAKING TECHNIQUES

-Basic
1. ARR. 2. Payback
-Advance
(Discounted Cashflow techniques)
1. NPV 2. IRR

ARR
(Accounting Rate of Return)
It is based on expected accounting profits from project (i.e., PBIT)
Interest tu isliye par rha kiun k paisy nai hn hmary pas
or tax business k profits py lg rha hota hy
So, if we want to check the feasibility of project, hm interest or tax dono ko ignore kr k profits ko dekhen gy
Projects' ARR= Average annual PBIT
*100
Investment
In above formula, investment is either:
-Initial investment
OR
-Average investment= (Initial investment+RV)/2

Decision Rule:
Accept project if:
Projects' ARR>=Benchmark return

Practice Question:1
Initial Investment=100 million
Life of project=5 years
Expected net operating cashflows:
Year 1= 35 m
Year 2= 40 m
Year 3= 45 m
Year 4= 30 m
Year 5= 25 m
Expected residual value= Zero
Required: Projects' ARR based on initial investment

Total net cash op. cashflow [35+40+45+30+25] 175

Depreciation (100)
Total Profit 75
Annual Profit [75/5] 15
ARR= 15 *100
100
0
Now, if benchmark is 12%, it is feasible but if it is 18% then not feasible

Practice Question:2
Initial Investment= 80 million
Project life= 4 years
Estimated residual value= 20 million
Expected net operating Cashflows:
Year 1= 24 m
Year 2= 30 m
Year 3= 26 m
Year 4= 20 m
Required: ARR, based on both initial and average investment

Based on Initial Investment,

Total net [Link] [24+30+26+20] 100
Depreciation [80-20] (60)
Total profit 40
Annual profit [40/4] 10

ARR= 10 *100
 80
0

Based on Average Investment,

ARR= 10 *100
50
0

2. Payback Period: (Jitna lgaya, wo kitny arsy mn wapis hoga)

It is the time period (i.e., years) after which initial investment is expected to be fully recovered.
Decision Rule:
Accept project if:
Projects' payback <= Co.'s benchmark period

Calculation of Payback:

Example:1
Initial Investment= Rs.100 m
Project life= 5 years
Projected net cashflows:
Year 1= 35 m
Year 2= 45 m
Year 3= 20 m
Year 4= 30 m
Year 5= 15 m
Required: Payback period
Years Cashflow Balance (Cum. Cashflow)
- (100) (100)
1 35 (65)
2 45 (20)
3 20 - Payback period= 3 years
4 30 30
5 15 45

Example:2
Initial Investment= Rs.100 m
Project life= 5 years
Projected net cashflows:
Year 1= 30 m
Year 2= 40 m
Year 3= 50 m
Year 4= 25 m
Year 5= 10 m
Required: Payback period if:
a} cashflows occur at the end of period
b} cashflows occur evenly throughout the period

Years Cashflow Balance (Cum. Cashflow)

- (100) (100)
1 30 (70)
 2 40 (30)
3 50 20 Payback period= 3 years
4 25 45
5 10 55
a] payback period= 3 years

b] payback period= 2+[30/50] 3 years

BAILOUT PAYBACK (understand through question)

Project life= 4 years

Initial investment= 120 m
Net operating cashflows:
Year 1= 40 m
Year 2= 55 m
Year 3= 20 m
Year 4= 35 m

Bailout Cashflow:
End of:
yr.1= 60m
yr. 2=40m
yr. 3=25m

Required: a] payback period

b] bailout payback period
Non-cum
Years Cashflow Balance (Cum. Cashflow) Bailout (dispo
- (120) (120)
1 40 (80) 60
2 55 (25) 40
3 20 (5) 25
4 35 30 -

a] Payback period= 3+[5/35] 3 years

Bailout cashflow mtlb agr hmny aik sal is project sy kama k bhagna chaha tu hm yeh project ksi or ko kitny ka b
b] Bailout payback= 2 years

ADVANCED (DCF Techniques)

1. Net Present Value [NPV]

Net total present value of RELEVANT(wohi 4 batein) cashflows expected from the project discounted at required
-Required rate of return can be given in question as "Cost of capital"/"Weighted average cost of capital" (reason

Year (outflow)/inflow
- (100)
1 40
2 50
3 30
Subsequent cashflows are not comparable to today's outflow of 100 due to time value of money concept
So, discounting krni pary g to reach today's value of future cashflows or net total value calculate kren gy
Decision Rule:
Accept project if its NPV>=0
Question:
Initial investment required= 150 m
Life of project= 4 years

Relevant: Yr.1 Yr. 2 Yr. 3 Yr. 4

-Inflows: 90 140 160 200
-Outflows 40 60 70 80
Required rate of return: 10%

Required: NPV?
0 1 2 3
Inflows 90 140 160
Outflows (40) (60) (70)
Investment (150)
(150) 50 80 90
Discount factor 1 0.909 0.826 0.751
(150) 45.45 66.12 67.62
NPV 111.15

Assumptions for using DCF Technique Questions:

-Initial investment is outflow of time zero.
-Initial investment hoty hi plant/project operational hojaye ga means Year 1 sy hi operating shuru hojae ga
-Cashflows year end py occur hon gy

Question:
Initial investment= 100m
Life= 4 years
Residual value= 20m
Sales Yr. 1 Yr. 2 Yr. 3 Yr. 4
Units (million) 5 6 7 8
Sale price per unit= Rs. 20

Variable production cost= Rs. 8 per unit

Allocated fixed costs= Rs. 15 million per year
Incremental fixed costs= Rs. 10 million per year
Marketing cost of 3 million will be incurred at start of year 3
Required rate of return: 12%
Required: NPV??

0 1 2 3
Sales [20*units] - 100 120 140
Variable cost [8*units] - (40) (48) (56)
Incremental fixed cost - (10) (10) (10)
Marketing cost - (3)
Investment (100)
(100) 50 59 74
Discount factor 1 0.893 0.797 0.712
(100) 44.64 47.03 52.67
NPV 111.71

CASHFLOWS FOR DECISION:

Relevant (Examples):
-Incremental
-Opportunity cost [agr hmary pas koi already resource available tha, usko use kia project mn tu us resource ki o
Irrelevant (Examples):
-Sunk cost (past mn ho chuki)
-Committed
-Interest on loan for asset as well as principal cashflows

2. Internal Rate of Return [IRR]

Expected rate of return from project

Decision rule:
Accept project if IRR>=Required rate of return

NPV ki science pehly smjen gy

Aik project tha srf aik sal ka:
Project 0 1
Inflow/(outflow) (100) 110

Disc. Rate NPV

7% 2.85 mtlb 7% required rate of return sy zyada kama k dy raha (amount
10% - mtlb 10% py jitna kamana chaah rae hn utna kama k dy ga isiliye z
15% (4.35) 15% required rate of return sy kam kama k dy rha kiun k negative
Un discount rates py NPV calculate krni hy jo hmara required rate of return hy

IRR= LR + NPV at LR * (HR-LR)

NPV at LR-NPV at HR
here: assume any 2 discount rates e.g., 8% and 15%

Question:
Life of project= 4years
Initial investment= 75 million
Sales: Yr. 1 Yr. 2 Yr. 3 Yr. 4
in million 38 40 42 45
Variable costs= 30% of sales
Fixed cost= 3 million per year
Required rate of return is 10%
Required: NPV??

0 1 2 3
Sales - 38 40 42
Variable costs (30% of sales - (11.40) (12.00) (12.60)
Fixed costs - (3) (3) (3)
Investment (75) - - -
(75) 23.60 25.00 26.40
Discount factor 1 0.909 0.826 0.751
(75.00) 21.45 20.66 19.83
NPV 6.42
Net cashflows (75.00) 23.60 25.00 26.40
Discount factor (20%) 1 0.833 0.694 0.579
(75.00) 19.67 17.36 15.28
NPV (8.95)

IRR 10% + 6.40 * (20%-10%)

6.40+8.95
IRR 14.17%

-Both NPVs can be negative or positive (so koi preshani ya ghbrany wali bat nai)
-Wo discount rate jispy NPV zero ajaye wo IRR hoga

Other variants of IRR:

-EIRR, Economic IRR (Govt. faisla krty hoye lets say., blue line ka project ka faisla krty hoe us project k apny cas
-MIRR (technical, will be studied after some classes)

Complications in DCF Questions

-Tax
-Inflation
-Working Capital

1. TAX
Tax is a relevant cashflow (outflow)
3 methods to solve one question, lekin hm sb sy safe wala use kren gy baqi 2 b seekhein gy cuz 1 2 questions m

Question
Cost of plant= 120m
Residual value= 20m
Sales Yr. 1 Yr. 2 Yr. 3 Yr. 4
units (in million) 4.00 4.80 5.28 5.02
Sale price per unit= Rs. 25 per unit
Variable cost per unit= 40% of sale price
Fixed cost= 8 million per year
Tax rate= 30%
Tax dep is assumed to be equal to accounting dep which is based on straight line method
Cost of capital= 12%
Required: NPV??

Presentation-1 (best one to do in exams)

- 1 2 3
Units (million) 4.00 4.80 5.28
------------------------------in million--------------------------------
Sales [25*units] 100.00 120.00 132.00
Variable cost[sales*40%] (40.00) (48.00) (52.80)
Fixed costs (8) (8) (8)
52.00 64.00 71.20
Tax (W-1) (8.10) (11.70) (13.86)
Plant (120)
(120.00) 43.90 52.30 57.34
Discount factor 12% 1.00 0.893 0.797 0.712
 (120.00) 39.20 41.69 40.81
NPV 49.09

W-1 Yr. 1 Yr. 2 Yr. 3 Yr. 4

Net cash 52 64 71 67
Dep [(120-20)/4] (25) (25) (25) (25)
27.00 39.00 46.20 42.24
Tax [30%] 8.10 11.70 13.86 12.67

Presentation-2
- 1 2 3
Units (million) 4.00 4.80 5.28
------------------------------in million--------------------------------
Sales [25*units] 100.00 120.00 132.00
Variable cost[sales*40%] (40.00) (48.00) (52.80)
Fixed costs (8) (8) (8)
Dep (25) (25) (25)
27.00 39.00 46.20
Tax 30% (8.10) (11.70) (13.86)
Dep. 25 25 25
Plant (120)
(120.00) 43.90 52.30 57.34
Discount factor 12% 1.00 0.893 0.797 0.712
(120.00) 39.20 41.69 40.81
NPV 49.09

Presentation-3 [Sb sy bakwas tareeka, yeh use nai krna]

Units (million) 4.00 4.80 5.28
------------------------------in million--------------------------------
Sales [25*units] 100.00 120.00 132.00
Variable cost[sales*40%] (40.00) (48.00) (52.80)
Fixed costs (8) (8) (8)
52.00 64.00 71.20
Tax 30% (15.60) (19.20) (21.36)
Tax saving in dep [25m*30%] 7.5 7.5 7.5
Plant (120)
(120.00) 43.90 52.30 57.34
Discount factor 12% 1.00 0.893 0.797 0.712
(120.00) 39.20 41.69 40.81
NPV 49.09

Agr is question mn yeh kaha hota k tax pay krty krty aik sal delay hojata yani tax ki return agly sal bhar k pay kr
srf tax wali line aik column agay khisak jaye ga, yani year 1 ka tax year 2 mn show kren gy or us ky cashflow sy
kren gy

Question:
Same data as above question except depreciation rate is 25% reducing balance method

0 1 2 3
Units (million) 4.00 4.80 5.28
 ------------------------------in million--------------------------------
Sales [25*units] 100.00 120.00 132.00
Variable cost[sales*40%] (40.00) (48.00) (52.80)
Fixed costs (8) (8) (8)
52.00 64.00 71.20
Tax (W-1) (6.60) (12.45) (16.30)
Plant (120)
(120.00) 45.40 51.55 54.90
Discount factor 12% 1.00 0.893 0.797 0.712
(120.00) 40.54 41.10 39.08
NPV 49.17

W-1 Yr. 1 Yr. 2 Yr. 3 Yr. 4

Net cash 52.00 64.00 71.20 67.24
Dep [w-2] (30.00) (22.50) (16.88) (12.66)
Loss - - - (17.97)
22.00 41.50 54.32 36.62
Tax [30%] 6.60 12.45 16.30 10.98
W-2: Depreciation Rs. Million
Cost 120
Yr. 1 dep (30)
90
Yr. 2 dep (22.50)
67.50
Yr. 3 dep (16.88)
50.63
Yr. 4 dep (12.66)
37.97
Yr. 4 loss (17.97)
Residual value 20

Question
Life= 4 years
Cost of plant= 120m
Residual value= 20m
Sales Yr. 1 Yr. 2 Yr.3 Yr. 4
in million 200 240 260 300
Variable costs= 40% of sales
Fixed costs= 8 million per year
For this project, a machine will also be required which will be obtained on lease and following rentals will be pai
Years Yr. 1 Yr. 2 Yr.3 Yr. 4
Rentals (in million) 12 14 17 20
Initial allowance of 10% and normal dep is allowed for plant on reducing balance basis
Tax rate is 30%
cost of capital= 11%
Required: NPV?
0 1 2 3
---------------------Rs. In million---------------------------
Sales 200 240 260
Variable costs [40% of sales] (80) (96) (104)
Fixed costs (8) (8) (8)
Machine rent (12) (14) (17) (20)
(12) 98 119 128
Tax [W-1] (18.30) (30.53) (34.74)
Plant (120)
(132.00) 79.70 88.48 93.26
Disc. @ 11% 1 0.901 0.812 0.731
(132.00) 71.80 71.81 68.19
NPV 181.29

W-1 Yr. 1 Yr. 2 Yr.3 Yr. 4

Net cash 98 119 128 172
Rent paid 14 17 20 -
Rent expense (12) (14) (17) (20)
Dep [W-2] (39.00) (20.25) (15.19) (11.39)
Loss [W-2] - - - (14.17)
61.00 101.75 115.81 126.44
Tax @ 30% 18.30 30.53 34.74 37.93

W-2 Depreciation Rs. Million

Cost 120
Yr. 1 Initial 10% (12)
108
Yr. 1 dep 25% (27)
81
Yr.2 dep (20.25)
60.75
Yr. 3 dep (15.19)
45.56
Yr. 4 dep (11.39)
34.17
Yr. 4 loss (14.17)
Residual value 20

Question
Life= 4 years
Cost of plant= 220m
Residual value= 20m
Sales Yr. 1 Yr. 2 Yr.3 Yr. 4
in million 200 240 260 300
Variable costs= 40% of sales
Fixed costs= 8 million per year
For this project, a machine will also be required which will be obtained on lease and following rentals will be pai
Years Yr. 1 Yr. 2 Yr.3 Yr. 4
Rentals (in million) 12 14 17 20
Initial allowance of 50% and normal dep is allowed for plant on reducing balance basis
Losses can be carried forward
Tax rate is 30%
cost of capital= 11%
Required: NPV?
 0 1 2 3
---------------------Rs. In million---------------------------
Sales 200 240 260
Variable costs [40% of sales] (80) (96) (104)
Fixed costs (8) (8) (8)
Machine rent (12) (14) (17) (20)
(12) 98 119 128
Tax [W-1] - (19.16) (34.66)
Plant (220)
(232.00) 98.00 99.84 93.34
Disc. @ 11% 1 0.901 0.812 0.731
(232.00) 88.29 81.03 68.25
NPV 107.23

W-1 Yr. 1 Yr. 2 Yr.3 Yr. 4

Net cash 98 119 128 172
Rent paid 14 17 20 -
Rent expense (12) (14) (17) (20)
Dep [W-2] (137.50) (20.63) (15.47) (11.60)
Loss [W-2] - - - (14.80)
(c/f)/Profit (37.50) 101.38 115.53 125.59
b/f (37.50)
63.88 115.53 125.59
Tax @ 30% 19.16 34.66 37.68

W-2 Depreciation Rs. Million

Cost 220
Yr. 1 Initial 50% (110)
110
Yr. 1 dep 25% (27.50)
82.50
Yr.2 dep (20.63)
61.88
Yr. 3 dep (15.47)
46.41
Yr. 4 dep (11.60)
34.80
Yr. 4 loss (14.80)
Residual value 20

Question
Cost of plant= 120m
Residual value= 20m
Sales Yr. 1 Yr. 2 Yr. 3 Yr. 4
units (in million) 4.00 4.80 5.28 5.02
Sale price per unit= Rs. 25 per unit
Variable cost per unit= 40% of sale price
Fixed cost= 8 million per year
Tax rate= 30%
Tax dep is 25% reducing balance method
Cost of capital= 12%
Jis sal mn project start hoa, timeline zero us sy pichly sal ka end hy
Required: NPV??
-Ksi b saal k sawal mn by default jo saal project ka pehla saal hy, zero saal (timeline 0), us saal ka start hy, tu p
-Lekin agr sawal waly ny bta dia k zero timeline, jis sal mn project start hoa uska start nai blky pichly saal ka en

0 1 2 3
Units (million) 4.00 4.80 5.28
------------------------------in million--------------------------------
Sales [25*units] 100.00 120.00 132.00
Variable cost[sales*40%] (40.00) (48.00) (52.80)
Fixed costs (8) (8) (8)
52.00 64.00 71.20
Tax (W-1) 9.00 (8.85) (14.14) (17.56)
Plant (120)
(111.00) 43.15 49.86 53.64
Discount factor 12% 1.00 0.893 0.797 0.712
(111.00) 38.53 39.75 38.18
NPV 51.50

W-1 Yr. 0 Yr. 1 Yr. 2 Yr. 3

Net cash 52.00 64.00 71.20
Dep [w-2] (30.00) (22.50) (16.88) (12.66)
Loss - - - -
(30.00) 29.50 47.13 58.54
Tax [30%] (9.00) 8.85 14.14 17.56

W-2: Depreciation Rs. Million

Cost 120
Yr. 0 dep (30)
90
Yr. 1 dep (22.50)
67.50
Yr. 2 dep (16.88)
50.63
Yr. 3 dep (12.66)
37.97
Yr. 4 dep (9.49)
28.48
Yr. 4 loss (8.48)
Residual value 20

2. INFLATION
Cashflows:
-Real cashflows Cashflows estimated for the project ignoring inflation [i.e., based on today's prices]
-Money cashflows/Nomina
Cashflows estimated for the project incorporating inflation

-Incorporating inflation in cashflows:

a} Current sale price= Rs. 50
Inflation rate is 8%
Prices:
Yr. 1 [50*1.08] 54.00
Yr. 2 [54*1.08] 58.32
Yr. 3 [58.32*1.08] 62.99

b} Current price= Rs. 50

Inflation rate is 9%
Yr. 4 price ??
50*1.09^4 70.58

c} Current price= Rs. 70

Inflation:
Yr. 1= 7%
Yr. 2= 9%
Yr. 3= 5%
Yr. 3 price??
70*1.07*1.09*1.05 85.72

Question:
Cost of asset= 150,000
life= 4 years
Residual value= 25,000
Sales Yr. 1 Yr. 2 Yr. 3 Yr. 4
in units 7,000 6,000 6,500 7,200

Current prices Applicable inflation rate

Sales price 15 8%
Variable cost per unit 7 6%
Fixed costs (per year) 12,000 5%
Tax rate is 30%
Tax depreciation 25% reducing balance
Cost of capital= 10%
Required: NPV, IRR, ARR, and payback period

NPV
Yr. 0 1 2 3
Sales 113,400 104,976 122,822
Variable cost per unit (51,940) (47,191) (54,191)
Fixed cost per year (12,600) (13,230) (13,892)
48,860 44,555 54,739
Tax [W-1] (3,408) (4,929) (10,094)
Plant (150,000)
(150,000) 45,452 39,626 44,646
Discount factor @ 10% 1 0.909 0.826 0.751
(150,000) 41,320 32,749 33,543
NPV @ 10% 15,386
(150,000) 45,452 39,626 44,646
Discount factor @ 20% 1 0.833 0.694 0.579
(150,000) 37,877 27,518 25,837
NPV @ 20% (17,977)
IRR= LR + NPV at LR * (HR-LR)
NPV at LR-NPV at HR
IRR 14.61%

ARR

Projects' ARR= Average annual PBIT

*100
Investment
ARR 26.25%

Payback period
Years Cashflow Balance (Cum. Cashflow)
- (150,000) (150,000)
1 45,452 (104,548)
2 39,626 (64,922) 3.240 years
3 44,646 (20,277) Payback period [assuming that cashflows occur eve
4 84,587 64,310 Payback period= 4 years [assuming that cash

Discounted payback mn sara wesy hi hoga, srf 45,452 wali amount ki jgah cost of capital py discounted CF len
41,320 phr jo payback nikly ga wo discounted payback [do yourself]
W-1 Yr. 0 1 2 3
Net cash 48,860 44,555 54,739
Depreciation [W-2] (37,500) (28,125) (21,094)
Loss [W-2]
11,360 16,430 33,645
Tax @ 30% 3,408 4,929 10,094

W-2: Depreciation
Cost 150,000
Yr. 1 dep (37,500)
112,500
Yr. 2 dep (28,125)
84,375
Yr. 3 dep (21,094)
63,281
Yr. 4 dep (15,820)
47,461
Yr. 4 loss (22,461)
Residual value 25,000
[MUST DO] December-2016, Question#5 [a], Suffer limited, Homework Hint: [CIF value py pehly impor
DECEMBER-2023, Question#1
(a) - 1 2 3
NO. of covers 26,000 39,000 52,000
[500*52] [750*52] [1000*52]
-------------------------------Rs. In sterling----------------------
Contribution [CPU(W-1)*units] 576,000 898,560 1,246,003
Fixed cost (400,000) (400,000) (400,000)
176,000 498,560 846,003
Tax @25% (44,000) (124,640) (211,501)
Fit-up cost (1,500,000) - - -
(1,500,000) 132,000 373,920 634,502
Disc @10% 1 0.909 0.826 0.751
(1,500,000) 120,000 309,025 476,711
NPV 368,057
W-1
Current 1 2 3
---------------------------------------Rs. In sterling-------------------------------
GP [50%] [LY*1.04] 25 26.00 27.04 28.12
Variable operating costs (3.85)
[100000/26000]
CPU [LY*1.04] 22.15 23.04 23.96

ARR
PBT
Yr. 1 176,000
Yr. 2 498,560
Yr. 3 846,003
Yr. 4 895,843
Yr. 5 947,677
3,364,084
Dep [1500-100] (1,400,000)
1,964,084
AVG [1,964,084/5] 392,817

ARR 392.81 * 100

800
ARR 49.1%

Payback period Cashflows Cum. Balance

Yr. 0 (1,500,000) (1,500,000)
Yr. 1 132,000 (1,368,000)
Yr. 2 373,920 (994,080)
Yr. 3 634,502 (359,578)
Yr. 4 671,882 312,305
Yr. 5 810,758 1,123,063

Payback period 3.54 years

Conclusion [a]: All of three are financially feasible [question mn standards diye hoye usky accordin
part [b] do yourself: theory waly sawal mn darny ki bjaye businessman k POV sy sochna hy
Real options: What are the other options if we don't accept or do this project, leave it or delay it or enter marke

Inflation rate lgany ki tips

-Agr prices clearly mentioned hn k wo current prices hn [exam mn] tu year 1 sy hi inflation rate lgy ga
-Agr cashflows/prices k bary mn clearly mentioned hy k yeh year 1 ki figures hn tu phr year 2 sy inflation krni h
-Agr inflation rate specifically ksi item sy relate kr k btaya hy tu wo srf usi item py lgy ga [5% increase in variab
-Agr koi specific inflation rate nai dia ksi aik cashflow ya figure sy link kr k, yani pory sawal mn srf aik inflation r
-Residual value or working capital k bary mn agr specifically koi inflation rate nai btaya tu na lgaen rate unpy le
Inflation's effect on discount rate
Required rate of return: [Jo NPV cal. Krny k liye use hota]
Real rate: Inflation is ignored
Money rate/Nominal rate: Inflation is incorporated in rate of return
-Agr project k cashflows mn inflation ignored hy tu hm b real rate use kren gy and same with money/nominal ra

If question has given us Nominal rate/Real rate and we have to convert into Real/Nominal rate, then following is
m = (1+r)(1+i)-1
r = 1+m -1
1+i
where, m= money rate
r= real rate
i= inflation rate
-Exam question mn jo rate hota wo by default nominal hi hota

Question:
Real rate= 8%
Inflation rate= 10%
Money rate= ??
m = (1+r)(1+i)-1
m = (1+0.08)(1+0.10)-1
18.80%

Question:
Nominal rate= 15%
Inflation rate= 7%
Real rate= ??
r = 1+m -1
1+i
r = 1+0.15 -1
1+0.07
7.48%

3. WORKING CAPITAL
= CURRENT ASSETS - CURRENT LIABILITIES
Working capital adjustment can be of following types:
-Adjustment of working capital that converts sales into cash [ho skta business ki nature aesi ho k sales credit py
tu tax k liye hm sales ki figure hi lengy, tax cal. Krny k bad hm working capital ki adj kren gy
-Project k liye ho skta manufacturing k lye advance mn inventory maintain krni pari ho store mn usky liye hmein
k rkha hoga tu jo extra khreeda yani jitna production mn istemal ho rha pehly saal ussy zyada khreed k rkhna pr
khrcha krna pry ga, that is working capital investment.
-Subsequent yrs mn jo cashflow zyada hoa tu outflow, kam hoa tu inflow krengy

Sales xxx xxx xxx

Variable cost (xxx) (xxx) (xxx)
Fixed cost (xxx) (xxx) (xxx)
xxx xxx xxx
Tax (xxx) (xxx) (xxx)
Plant (xxx) xxx
Working capital inv xxx xxx xxx placement
Question:
Project life= 4 years
Working capital balance required at start of project= 50,000
Required: How working capital investment shall be presented?
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Working capital investment (50,000)

[paisa phasa tha jo extra lgaya start py, end of project release hojaye ga]

Question:
Working capital balance will be required as follows:
Start of project= 40,000
Start of year. 2= 48,000
Start of year. 3= 60,000
Start of year. 4= 40,000
Project life= 4 years

Yr. 0 Yr. 1 Yr. 2 Yr. 3

Working capital investment (40,000) (8,000) (12,000) 20,000
-Store ka balance jahan akhri bar ponch gya tha, end py wo release ho rha hy

Question:
Same as above question but inflation rate of 5% on working capital is applicable.

Yr. 0 Yr. 1 Yr. 2 Yr. 3

Working capital investment (40,000) (10,400) (15,750) 19,845

W-1 Balance Cashflow

Yr. 0 40,000 (40,000)
Yr. 1 50,400 [48000*1.05] (10,400)
Yr. 2 66,150 [60000*(1.05)^ (15,750)
Yr. 3 46,305 [40000*(1.05)^ 19,845
Yr. 4 - 46,305

Question:
Same as first question of working capital if inflation rate is 10%

Yr. 0 Yr. 1 Yr. 2 Yr. 3

Working capital investment (50,000) (5,000) (5,500) (6,050)

W-1 Balance Cashflow

Yr. 0 50,000 (50,000)
Yr. 1 55,000 [50000*1.1] (5,000)
Yr. 2 60,500 [55000*1.1] (5,500)
Yr. 3 66,550 [60500*1.1] (6,050)
Yr. 4 - 66,550

Question:
Working capital required at start of project = 60,000
It solely comprises of material inventory
Project life= 4 years
Production will increase by 8% per year.
Inflation rate applicable to material= 5%
Working capital will be affected by production increase as well as material inflation

Yr. 0 Yr. 1 Yr. 2 Yr. 3

Working capital investment (60,000) (8,040) (9,117) (10,339)

W-1 Balance Cashflow

Yr. 0 60,000 (60,000)
Yr. 1 68,040 [60000*1.08*1. (8,040)
Yr. 2 77,157 [68040*1.08*1. (9,117)
Yr. 3 87,496 [77157*1.08*1. (10,339)
Yr. 4 - 87,496

Question:
Same as above question except only 80% of final balance will be realized at end of project
-Jo end py sara inflow dikha rae hn, uska srf 80% inflow show kraengy, yani 20% khraab ho chuki hogi inventory
-Jitni inventory/working capital khraab hojaye ga wo by default tax mn aik allowable deduction hogi akhri saal m

Summary of all above

-Jo initial balance required hy wo zero py outflow aye ga
-Jo final balance hy wo end py inflow aye ga

Lecture# 12
JUNE-2023, MARDI LIMITED, Q#3 [b]
part [b] k liye jo discount rate hy wo part [a] sy ana tha that is 14.5%

Yr. 0 Yr. 1 Yr. 2 Yr. 3

---------------------------------------------Rs. In million---------------------------------
Sales [W-1] 63.87 71.08 76.87
Material [Yr.1: 10m*1.04][LY*1.04*1.05] (10.40) (11.36) (12.40)
Variable conversion (8.16) (8.74) (9.36)
[Yr. 1: 8*1.02][LY*1.05*1.02]
Rent (25) (25) (25) (25)
(25.00) 20.31 25.99 30.11
Tax [W-2] 1.36 (4.27) (5.96)
Equipment (100)
Working capital Inv. (6.39) (0.72) (0.58) (0.63)
(131.39) 20.94 21.13 23.53
Disc @ 14.5% 1.00 0.873 0.763 0.666
(131.39) 18.29 16.12 15.67
NPV (27.77)

W-1: Sales
Yr. 1 63.87 [60.25*1.06] volume year 1 mn nai brha, wo year 2 sy brhy ga
Yr. 2 71.08 [LY*1.05*1.06] Year 2 mn volume b brhy ga or price b brhy g
Yr. 3 76.87 [LY*1.05*1.03]
Yr. 4 83.14 [LY*1.05*1.03]
Yr. 5 89.92 [LY*1.05*1.03]

W-2: Tax: Yr. 1 Yr. 2 Yr. 3 Yr. 4

Net cash 20.31 25.99 30.11 34.57
Rent - - - -
Dep [W-3] (25.00) (11.25) (9.56) (8.13)
(4.69) 14.74 20.55 26.45
Tax @ 29% 1.36 (4.27) (5.96) (7.67)

W-3: Depreciation
Cost 100
Yr. 1 dep [25%] (25)
75
Yr. 2 dep [15%] (11.25)
63.75
Yr. 3 dep (9.56)
54.19
Yr. 4 dep (8.13)
46.06
Yr. 5 dep and loss (46.06)
Bal. -

W-4: Working capital

WC Bal. Change
Yr. 0 6.39 (6.39)
Yr. 1 7.11 (0.72)
Yr. 2 7.69 (0.58)
Yr. 3 8.31 (0.63)
Yr. 4 8.99 (0.68)
Yr. 5 - 8.99

Question:
Project life= 4 years
Initial Investment= 100 million
Net cash inflows based on current prices:
Yr. 1 Yr. 2 Yr. 3 Yr. 4
in million 30 36 40 50
Applicable inflation rates 4% 6% 8% 9%
Real cost of capital= 7%
Required: NPV??
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Net cashflows [W-1] (100) 31.20 39.69 47.62
Disc factor [W-2] 1 0.899 0.793 0.686
(100.00) 28.04 31.46 32.68
NPV 30.34

W-1
Yr. 1 30*1.04 31.20
Yr. 2 36*1.04*1.06 39.69
Yr. 3 40*1.04*1.06*1. 47.62
Yr. 4 50*1.04*1.06*1 64.89

W-2: Disc rate

Yr. 1 (1.07*1.04)-1 11.28%
Yr. 2 (1.07*1.06)-1 13.42%
Yr. 3 (1.07*1.08)-1 15.56%
Yr. 4 (1.07*1.09)-1 16.63%

Yr. 1 1.1128^-1 0.899 To understand disc. Factor working:

Yr. 2 [1/1.1342]*0.899 0.793 Yr. 1 Yr. 2
Yr. 3 [1/1.1556]*0.793 0.686 Inflation 4% 6%
Yr. 4 [1/1.1663]*0.686 0.588 Disc. Rate 11.28% 13.42%
1/1.1663 krny sy amount aik sal pechy yani yr. 3 k
0.686 sy multiply kr k direct start py ly k ayen gy

Lecture # 13
Cost accounting k kuch relevant concepts hn, wo book sy parh leny hy for revision
Complications in Identification of Relevant costs, Read pg#3 to 5 all

December-2019, Q-31, Ghauri Limited, Pg#64

Yr. 0 Yr. 1 Yr. 2 Yr. 3

--------------------------Rs. In million------------------------
Sales [units*5000] 200 400 250
Material:
-AB5 [W-1] (60) (129.60) (87.45)
-CD7 [W-2] (24) (56.64) (38.40)
-EF2 [W-3] (2) (12.96) (8.75)
Labour:
-Skilled (W-4) (40.18) (88.19) (58.81)
-Unskilled (W-5) (8) (17.28) (11.66)
Variable OH (W-6) (21.60) (46.65) (31.50)
Machine (50) 25
Working Capital Inv. (W-7) (100) (8) 108
(150.00) 44.22 40.68 146.43
Disc @ 16% 1 0.862 0.743 0.641
(150) 38.12 30.23 93.81
NPV 12.16 million

W-1: AB5
Yr. 1 Yr. 2 Yr. 3
Required [units*3] 120,000 240,000 150,000
Purchase price 500 540 583
[LY*1.08]
Total (Rs. million) 60 129.60 87.45
W-2: CD7
Required [units*2] 80,000 160,000 100,000
Available in stock 90,000 10,000 -
Purchase - 150,000 100,000
Relevant cost:
-Purchase [LY*1.08] 330 356.40 384.91
-Opportunity cost [LY*1.08] 300 324 350

Total Cost
Yr. 1 [80000*300] 24,000,000
Yr. 2
[10,000*324] 3,240,000
[150,000*356] 53,400,000
56,640,000
Yr. 3 [100,000*384] 38,400,000

W-3: EF2
Yr. 1 Yr. 2 Yr. 3
Required [units*1] 40,000 80,000 50,000
Available 40,000 - -
Purchase - 80,000 50,000

Relevant cost:
Purchase cost [LY*1.08] 150 162 175
Opportunity cost [75-25] 50 - -

Total Cost
Yr. 1 [40000*50] 2,000,000
Yr. 2 [80000*162] 12,960,000
Yr. 3 [50000*175] 8,750,000

W-4: Skilled Labor

Yr. 1 Yr. 2 Yr. 3
Hours required [units*6] 240,000 480,000 300,000
Idle hours available 14,000 18,000 16,000
Replacement workers 226,000 462,000 284,000

Relevant wage rate:

-Idle [LY*1.08] 45 48.60 52.49
[(30000/200)*30%]
-Replacement 175 189 204.12
[35000/200]

Total Cost:
Yr. 1:
-[14000*45] 40,180,000
-[226000*175]

Yr. 2:
-[18000*48.60] 88,192,800
-[462000*189]

Yr. 3:
-[16000*52.49] 58,809,888
-[284000*204.12]

W-5: Unskilled Labor

Yr. 1 Yr. 2 Yr. 3
Hours required [units*4] 160,000 320,000 200,000
Wage rate [LY*1.08] 50 54 58.32
Total 8,000,000 17,280,000 11,664,000

W-6: Variable FOH:

Yr. 1 Yr. 2 Yr. 3
Total hours 240,000 480,000 300,000
Variable OAR 90 97 105
[150*60%][LY*1.08]
Total 21,600,000 46,656,000 31,492,800

W-7: Working Capital required

WC bal. Cashflow
Yr. 0 100 (100)
Yr. 1 100 -
Yr. 2 108 (8)
Yr. 3 - 108

Lecture# 14

MIRR
[Modified IRR]
Knowledge k liye kahani wesy srf formula chaiye question solve krny k liye
Concept [Kahani]
Project: - 1 2 3
Net Cashflows (40,000) 18,000 20,000 15,000
Required return@10% 1 0.909 0.826 0.751
(40,000) 16,364 16,529 11,270
NPV 4,162

Now, compunding 18000, 20000 to year 3

18000*(1.1)^2 21,780
20000*1.1 22,000
15000 15,000
58,780

Now, assume cashflows of a project:

Project: - 1 2 3
(40,000) - - 58,780
Required return@10% 1 0.909 0.826 0.751
(40,000) - - 44,162
 NPV 4,162
Re-investment assumption of NPV
Now, NPV ki inherent limitation or assumption hy k yeh project 4162 tab kama ky dyga agr hm 18000 or agy
jo b cashflows arae hn wo project mn reinvested rehny den mtlb usko withdraw na kren or project k ander hi
pry rae, wahin grow krty rae usi rate py jispy NPV nikali hy

Project: - 1 2 3
Net Cashflows (40,000) 18,000 20,000 15,000
Required return@10% 1 0.909 0.826 0.751
(40,000) 16,364 16,529 11,270
NPV 4,162
IRR is ka jb nikalen gy tu 16% approx kama k dy ga, hmein 10% chaiye tha
Re-investment assumption of IRR
Ab agr hm same compunding kren tu, project hmein 16% tab kama k dyga k is project sy jo paisa mily ga
wo withdraw nai hoga, or wo paisa reinvest hoga kahin or phr sy kamana shuru hojaye ga or wo b 16% py hi
kama k dyga [itefaq sy]

Generally, IRR or NPV ki techniques same conclusion nikal k den g when it comes to a project
Lekin kabi kabi ikhtelaaf ho skta hy
A B
NPV 3,500 4,400
IRR 17% 14%
Ab ikhtelaaf agya tu superior technique NPV hy, cuz NPV ki reinvestment assumption zyada realistic hy as
compare to IRR

Jo log IRR ko pasand krty thy, unhn ny dosri tech nikali k IRR kamtar na ho
Modified IRR
Now, agr project k cashflows thy:
Project: - 1 2 3
(40,000) - - 58,780
Required return@10% 1 0.909 0.826 0.751
(40,000) - - 44,162

40000 (1+?) ^ 3 = 58780

MIRR 13.69%

Conclusion: Agr hm Investment phae or return phase k sary cashflows aik kony mn krden mtlb
extremes py ikathy krlen cost of capital/required rate of return py then, return phase ki figure
divided by investment phase ki figure root ki power no. of years/periods/timelines minus 1
kren, jo answer aye ga wo MIRR hoga
MIRR ka faida yeh hoa k IRR py jo aitraz tha wo khtm hogya

(𝑛&(𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙
MIRR. 𝑣𝑎𝑙𝑢𝑒
= 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝ℎ𝑎𝑠𝑒)/(𝑃𝑉𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑝ℎ𝑎𝑠𝑒)) −1

OR

√(𝑛&(𝑃𝑉 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝ℎ𝑎𝑠𝑒)/(𝑃𝑉𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑝ℎ𝑎𝑠𝑒)∗(1+𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙)) −1

MIRR. =
 ∛(44,162/40000)
MIRR. = ∗1.1 −1

13.69%

Question
Project: - 1 2 3
(30,000) (25,000) 20,000 40,000
Cost of Capital @10% 1 0.909 0.826 0.751
(30,000) (22,727) 16,529 30,053

√(4&63657/52727)∗1.1 −1
NPV 10,930
16,529 30,000
MIRR 30,053 22,727
17,075 52,727
63,657
15.30% is MIRR

JUNE-2024, Question # 01
- 1 2 3
--------------------------Rs. In million----------------------
Gross Margin [W-1] 71,804
Operating expenses [W-2] (6,322)
65,481
Tax @ 29% (18,990)
Terminal value [76781-22266]*7
Investment [W-3] (110,000) (112,000) (114,000)
Tax @ 29% 31,900 32,480 33,060
WC Investment [W-4] (59,836) (4,787)
(78,100) (79,520) (140,776) 41,705
Disc factor @ 10% 1 0.909 0.826 0.751
(78,100) (72,291) (116,344) 31,333
NPV at 10% 66,251
Disc factor @ 20% 1 0.833 0.694 0.579
(78,100) (66,267) (97,761) 24,135
NPV at 20% (20,940)

IRR 17.60%

√(5&( 305,861 )/( 261,326 )) ∗1.12 −1

78,100 29,685
MIRR 71,000 28,710
112,226 247,466

MIRR 15.58%
-----in mill-----
W-1: Gross Margin

Annual Production 2.5 million ton

Current Price Rs. 190,000/ton
Gross Margin
Yr. 3 : 2.5m * 190000* 1.08^3*12% 71,804 Current price hy isliye power 3 py inflate kren gy
Yr. 4 : 71804*1.08 77,548
Yr. 5: 77548*1.08 83,752

W-2: Operating expenses

Yr. 3 : 2.5m*190000*1%*1.1^3 6,322 Currently, gross margin 10% hy or operating profit
Yr. 4: 6322*1.05 6,638
Yr. 5: 6638*1.05 6,970

W-3:
Yr. 1 110,000 Yeh working currency wala topic kr k phr aye g
Yr. 2 112,000
Yr. 3 114,000

W-4: Working Capital Investment

Yr. 3 Sales [71803/12%] 598,363
Yr. 4 Sales [77547/12%] 646,232
Yr. 5 Sales [83751/12%] 697,931
Time WC. Bal Change
2 59,836 (59,836)
3 64,623 (4,787)
4 69,793 (5,170)

Lecture#15

Asset Replacement Decisions [Aik plant purana hogya, tu uski jgah naya lgaen ya usi ko theek kra
Examples:
-Optimum replacement cycle
-Continue (overhaul) or replace
-Purchase of most beneficial plant
In all of above, mainly expenses ki base py decision ho rha hoga

Solutions:
1- NPV/IRR
2- EAC
3- LCM

Overhaul or Replace
Existing plant ko ya tu change kr k naya lana tha ya usi ko theek kra k 2 4 sal or chala lena tha
Do options solve kr rae hongy or best wala woi hoga jisky expenses kam hongy

-Calculate "relevant cash flows" for each option [Generally, operating cashflows for example sales, production c
-Select the most beneficial option

JUNE 2019 (2), Question 10 [a]

Option-1: Overhaul
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Overhauling cost (35)
Maintenance [LY*1.05] (10.50) (11.03) (11.58)
Tax (W-1) 4.84 4.83 4.85
(35.00) (5.66) (6.19) (6.73)
Disc @ 15% 1.00 0.870 0.756 0.658
(35.00) (4.92) (4.68) (4.43)
NPV (48.10)

W-1: Tax
Yr. 1 Yr. 2 Yr. 3 Yr.4
Maintenance 10.50 11.03 11.58 12.16
Dep [W-2] 5.65 5.08 4.57 4.12
Loss [W-2] - - - -
16.15 16.11 16.15 16.27
Tax @ 30% 4.84 4.83 4.85 4.88

W-2: Depreciation
Current WDV [48.5*0.75*(0.9)^5] 21.48
Overhaul 35
56.48
Yr. 1 dep (5.65)
50.83
Yr. 2 dep (5.08)
45.75
Yr. 3 dep (4.57)
41.17
Yr. 4 dep (4.12)
37.06
Yr. 5 dep (3.71)
33.35
Yr. 5 loss (21.86)
11.49

Option-2: Replacement
Yr. 0 Yr. 1 Yr. 2 Yr. 3
New machine (61.25)
Sale of old machine 11.90
Maintenance [old maint*(100/160) (6.56) (6.89) (7.24)
Tax [W-3] 10.81 3.31 3.29
(49.35) 4.25 (3.58) (3.95)
Disc @ 15% 1.00 0.870 0.756 0.658
(49.35) 3.70 (2.71) (2.60)
NPV (40.82)

W-3: Tax
Yr. 1 Yr. 2 Yr. 3 Yr. 4
Maint. 6.56 6.89 7.24 7.60
Dep [W-4] 19.91 4.13 3.72 3.35
Profit [W-4] - - - -
Loss on old machine [11.9-2 9.58
36.05 11.03 10.96 10.95
Tax @ 30% 10.81 3.31 3.29 3.28
W-4: Depreciation
Cost 61.25
Initial (15.31)
45.94
Yr. 1 dep (4.59)
41.34
Yr. 2 dep (4.13)
37.21
Yr. 3 dep (3.72)
33.49
Yr. 4 dep (3.35)
30.14
Yr. 5 dep (3.01)
27.13
Yr. 5 profit 4.14
31.27

Decision: Replacement is better option as expenses are lower than Overhaul (NPV is negative
cuz only expenses are taken into account, higher NPV means lower expense)

Lecture# 16
Optimum Replacement Cycle
Har PPE k bary mn business k bary mn company ny koi na koi policy bnai hogi k har sal 3 sal bad AC ya
chairs change honi hi hn, yeh hy replacement policy/ cycle
Agr ksi buisness ny yeh policy bnai hoi hy tu hmny unko yeh mashwra dena hy k PPE har 4 sal bad change kren
Tu wo wala cycle sb sy behtar hoga jo kam expensive hoga
This is called Optimum Replacement cycle

Methods to solve:
-Equivalent Annual Cost (EAC)
-LCM Method [Least Common Factor]

Example:
Cost of plant 500,000
Annual running & Main.
Yr. 1 32,000
Yr. 2 45,000
Yr. 3 55,000
RV of plant:
-At end of Yr. 2 250,000
-At end of Yr. 3 170,000
Required: 2 year replacement cycle or 3 year replacement cycle [yani is plant ko ainda sy har 2 sal bad change
1) LCM Method
2) EAC Method
Cost of Capital = 10%
-Option 1 or Option 2 directly comparable nai hn kiun k dono k period different hn tu zahir hy zayada years ka z
So, wo options jo recurring nai hn(bas aik dfa hi hony hn) unky liye simple NPV comparison theek hy chahy unka

(1) LCM [Jin options ko hm solve kr rae, unky digits, lets say 4 or 6]
 2 4, 6
2 2, 3 12 is LCM
3 1, 3 Uper walt question mn LCM 6 hoa
1, 1 Tu hm 6 timeline tak phelaen gy
2*2*3

Option-1
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Plant (500) (500)
RV 250
R&M (32) (45) (32)
(500) (32) (295) (32)
Disc @ 10% 1 0.909 0.826 0.751
(500.000) (29.091) (243.802) (24.042)
NPV (902.58)

Option-2
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Plant (500) (500)
RV 170
R&M (32) (45) (55)
(500) (32) (45) (385)
Disc @ 10% 1 0.909 0.826 0.751
(500) (29) (37) (289)
NPV (840.42)

Decision: Option 2 is better as it is less expensive than Option-1

Winter-2012, Q#11, pg-49

Option-1
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Plant (3,200) (3,872)
RV 1,492.992
R&M (149.50) (324.01) (197.71)
(3,200) (150) (2,703) (197.71)
Disc @ 18% 1 0.847 0.718 0.609
(3,200.00) (126.69) (1,941.27) (120.33)
NPV (6,699.44)

Option-2
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Plant (3,200) (4,259)
RV 882
R&M (149.50) (324.01) (730.02)
(3,200) (150) (324) (4,107)
Disc @ 18% 1 0.847 0.718 0.609
(3,200.00) (126.69) (232.70) (2,499.90)
NPV (6,391.77)
Decision: Option 2 is better as it is less expensive

Lecture#17

Summer- 2016, Question no.12, WGL (pg#49)

Agr inflation ho tu LCM method lgy ga hmesha LCM is 12 here so 12 timelines bnen g

Option-1: 3 year cycle

Yr. 0 Yr. 1 Yr. 2 Yr. 3
------------------------------------------------------------------------------
Cost (20.00) (23.15)
Residual Value 4.63
Maintenance (0.66) (0.73) (1.33)
Dep (W-1) (5.00) (3.75) (6.62)
(5.66) (4.48) (7.95)
Tax @ 30% 1.70 1.34 2.39
Dep 5.00 3.75 6.62
(20.00) 1.04 0.62 (17.47)
Disc @ 15% 1.000 0.870 0.756 0.658
(20.00) 0.90 0.47 (11.49)
NPV (42.17)

W-1: Depreciation Cycle-1 Cycle-2 Cycle-3 Cycle-4

Cost 20.00 23.15 26.80 31.03
Yr. 1 dep (5.00) (5.79) (6.70) (7.76)
15.00 17.36 20.10 23.27
Yr. 2 dep (3.75) (4.34) (5.03) (5.82)
11.25 13.02 15.08 17.45
Yr. 3 balance (6.62) (7.66) (8.87) (10.27)
RV 4.63 5.36 6.21 7.18

Option-2: 4 year cycle

Do yourself

(2) EAC [Jb koi cheez use hi aik dfa krni hy, tu hm us cheez ka lmba chalna nai dekhty, bas yeh dek
-Jb koi options bar bar honi hy tu uska comparison nai bnta cuz time periods different hn, isliye hm EAC use krty
-For example, hmein aik machine khreedna, maintain krna 3 sal tak or bech dena aesa hi hy k hm khreedny ki b
lety or hm 3 sal mn per year rent dety, isko kehty EAC, equivalent annual cost

Same example as in LCM

Option-1: 2 Years cycle
- 1 2
cost (500) 250
(32) (45)
(500) (32) 205
Disc @ 10% 1.000 0.909 0.826
(500) (29.09) 169.42
NPV (359.67)

Option-2: 3 Years cycle

 - 1 2 3
Cost (500)
RV 170
R&M (32) (45) (55)
(500) (32) (45) 115
Disc @ 10% 1.000 0.909 0.826 0.751
(500) (29.09) (37.19) 86.40
NPV (479.88)

359.67 = R [1-(1.1)^-2] 479.87 = R [1-(1.1)^-3]

0.10 0.10

R. [option-1] 207.24 R [option-2] 192.96

Decision: Option 2 is better as per year/ per annum cost is lower than option 1
-Inflation ka agr aik hi rate dia hoa sb k liye tu EAC lg skta, lekin agr different hn tu LCM method hi lgana hy, plu

Question# 13, page-50 [a], Kamil Ltd

Year 3, 4 , 5 and 6 year cycles k options ko apas mn compare krengy

Option-1: 3 years Cycle

- 1 2 3
Cost (20,000)
Maintenance cost
Running costs (2,000) (2,400) (2,800)
(20,000) (2,000) (2,400) (2,800)
Disc @ 15% 1.000 0.870 0.756 0.658
(20,000) (1,739.13) (1,814.74) (1,841.05)
NPV (25,395)

Option-2: 4 years Cycle

- 1 2 3
Cost (20,000)
Maintenance cost (1,000)
Running costs (2,000) (2,400) (2,800)
(20,000) (2,000) (2,400) (3,800)
Disc @ 15% 1.000 0.870 0.756 0.658
(20,000) (1,739.13) (1,814.74) (2,498.56)
NPV (27,882)

Option-3: 5 years Cycle

- 1 2 3
Cost (20,000)
Maintenance cost (1,000)
Running costs (2,000) (2,400) (2,800)
(20,000) (2,000) (2,400) (3,800)
Disc @ 15% 1.000 0.870 0.756 0.658
(20,000) (1,739.13) (1,814.74) (2,498.56)
NPV (33,102)
Option-4: 6 years Cycle
- 1 2 3
Cost (20,000)
Maintenance cost (1,000)
Running costs (2,000) (2,400) (2,800)
(20,000) (2,000) (2,400) (3,800)
Disc @ 15% 1.000 0.870 0.756 0.658
(20,000) (1,739.13) (1,814.74) (2,498.56)
NPV (37,318)

R [option-1] 11,122
R [option-2] 9,766 best option
R [option-3] 9,875
R [option-4] 9,861

TIPS:
1- Hm jin options ko compare kr rae hn agr unka time period same hy tu phr yeh LCM or EAC k roly ki zrort hi na
comparison thek hy isi liye June 19 mn hmny NPV hi compare ki thi
2- Hm jin options ko compare kr rae hn, agr wo one off hn recurring nai hn, tu beshak time period different b hn
comparison thek hy
3- Jin options ko compare kr rae unka time period different hy or sari recurring hn one off nai hn, tu phr compar
istemal hoga
4- [Very Specific point] Hm jin options ko compare kr rae hn un mn sy aik recurring hy dosri recurring nai hy lek
connected hn [see b part below]

Question# 13, page-50 [b], Kamil Ltd

Option-1
0 1 2 3
New (20,000) (2,000) (2,400) (3,800)
Equivalent to: (9,766) (9,766) (9,766) (9,766)
Option-2
0 1 2 3
New (20,000) (2,000) (2,400)
Old (5,500) (2,500)

Option-3
0 1 2 3
New (20,000) (2,000)
Old (5,500) (8,000) (3,500)

JUNE-2016, Q#21, pg-56, Homework (must do)

Lecture#18

Financing Decisions
Background story: Hmny aik plant ko use krna hy, yeh faisla ho chuka ab hmein kisi ny kaha k plant khreedny k
Examples:
-Lease vs Buy
Generally, operating cashflows (e.g., sales, production costs) are not relevant
-Lease vs Lease being same in each option. Plus, as uncertainty involved in cashflows estimate is
less, so discounting k liye after tax borrowing rate(Rf) use ho skta hy wrna
questions mn WACC b use hota
 Generally, operating cashflows (e.g., sales, production costs) are not relevant
being same in each option. Plus, as uncertainty involved in cashflows estimate is
-Loan vs lease less, so discounting k liye after tax borrowing rate(Rf) use ho skta hy wrna
questions mn WACC b use hota
Tu idr b hm srf expenses ly rae hn gy, jo zyada cheap option hogi wo ly len gy

(1) Lease vs Buy

December-2023 (website), Q#2,[requirement a k bad sy prhna hy]

Buy Option
- 1 2 3
--------------------------------------------Rs. In million--------------------------------------
Machine (28)
Tax Saving on dep [W-1] 2.03 0.91 0.78
[Dep (w-1)*29%] (28.00) 2.03 0.91 0.78
Disc. Rate [7%*0.71=5%] 1.00 0.952 0.907 0.864
(28.00) 1.93 0.83 0.67
NPV (19.54)

W-1: Dep
Cost 28.00
Yr. 1 dep (7.00)
21.00
Yr. 2 dep (3.15)
17.85
Yr. 3 dep (2.68)
15.17
Yr. 4 dep (2.28)
12.90
Yr. 5 dep (1.93)
10.96
Yr. 5 loss (8.16)
2.80
Lease option
- 1 2 3
--------------------------------------------Rs. In million--------------------------------------
Rental (6) (6) (6) (6)
Tax 1.74 1.74 1.74
(6.00) (4.26) (4.26) (4.26)
Disc @ 5% 1 0.952 0.907 0.864
(6.00) (4.06) (3.86) (3.68)
NPV (19.74)

Decision: Buy option is better as it is cheaper

Lecture#19
Discussion-December -2016 past paper [must must do] homework
TAX wali english ka mtlb
Import
Price: [import cost]
add: duty
answer 1% of sales b lgana or agr 1% of sales higher hoa tu yeh kal ko wapis ly
add: sales tax PBT*25%
answer above mn sy higher lena
add: income tax [ yeh hy asli mano mn minimum tax]
Income tax import k time py gov ko pay krdiya
PBT*25% or income tax jo uper hy, in dono mn sy jo higher hoga wo hmara tax expense smja jaye ga

(2) Lease vs Lease [ aik trf aik ny rent py plant offer kia hoa or dosri trf dosry ny tu hmein better o

Context: agr asset lease py len gy, tu kia wo hmesha wapis krna hoga ya aesa b hoga k end py wo asset
hmara hi ho jaye or hm hi usko market mn bech k RV ko inflow dikhayen
Now, in the light of above context, Lease ki tips:
-Agr sawal mn clearly pta chal rha hy k ownership end py transfer hojani tu asset hmara hi hoga, phr end py RV
-Agr question mn bargain purchase ka option [market sy sasta bechen gy hmein] agya tu obviously hm khreede
gy, isliye RV ko hm end py inflow dikhayen gy, yani khreedty sath hi bech den gy
-Agr lease ki terms mn security deposit ka word arha hy tu uski ownership hmein lazmi transfer honi hi hogi isli
Agr uper wali 3eeno chezain nai btayi hoi question mn, tu by default end py asset wapis chla jaye ga

Question#15, June-2011, (Pg-15)

[is question ki thori c presentation change hy]
Option-1: BAL leasing
Rs. Million
Rental (70) 7.46*(1-(1.04)^-12)/0.04
Security deposit (10)
RV [20*(1.16)^-3] 12.81 -4*4=16
Salary [monthly basis] (14.23) 0.5*(1-(1.0133)^-36)/0.0133
Lubricants (9.39) 1*(1-(1.04)^-12)/0.04
Part Replacement (13.87) 3*(1-(1.08)^-6)/0.08
Overhaul [15*1.16^-2] (11.15)
(115.83)

Dosri option mn srf rental dena hy or 3 sal bad generator wapis krdena [do yourself]
W-1: Calculating cost of capital
80 = 10 + 7.46 [1-(1+?)^-12] -Zero py 80 ko outflow rkh dia
?
IRR 4% per quarter

See, point 3 of question#9, pg 47, JAP recreation

Lecture#20
(3) Lease vs Loan
Only for knowledge
Cost of plant 100,000
life is 4 years
Tax depreciation 25% RBM
RV 15,000
Loan of 100,000 at 10% can be obtained for purchase of plant
Loan will be repayable in full after 4 years
Tax rate is 30%
Required: Buy or loan?

BUY
 - 1 2 3
Plant (100,000)
Tax Saving (W-1) 7,500 5,625 4,219
(100,000) 7,500 5,625 4,219
Disc @ 7% 1 0.935 0.873 0.816
(100,000) 7,009 4,913 3,444
NPV (66,968)

W-1:
Cost 100,000
Yr. 1 dep (25,000)
75,000
Yr. 2 dep (18,750)
56,250
Yr. 3 dep (14,063)
42,188
Yr. 4 (27,188)
15,000

LOAN
- 1 2 3
Plant -
Loan -
Interest (10,000) (10,000) (10,000)
Tax Saving:
-Dep 7,500 5,625 4,219
-Interest 3,000 3,000 3,000
- 500 (1,375) (2,781)
Disc @ 7% 1 0.935 0.873 0.816
- 467 (1,201) (2,270)
NPV (66,968)

-Isliye hm interest ko relevant cashflow nai manty cuz start mn inflow dikha dety hn, 100,000 agr start mn
inflow dikhaya or end py repayment dikhai plus per year interest b bhra us mn, or end py phr 100000
repayment dikha di tu bat wohi ban gye, aik amount ko 7% py discount kr k outflow dikhaya or end py usi
mn 7% hawa (interest) bhr k outflow dikha dia tu effect tu zero hogya
Agr nai smj ayi tu koi bat nai, bas questions mn loan repayment or uspy prny wala interest as a cashflow nai len

-Lease vs loan mein loan or buy aik hi bat hy, lekin agr exams mn ajaye question tu isko lease vs loan hi treat k

JUNE-2010, DS Leasing, Q#18[b]

LEASE Option
- 1 2 3
---------------------------------Rs. In million----------------------------
Rental (7) (7) (7) (7)
Tax Saving 2.45 2.45 2.45
(7.00) (4.55) (4.55) (4.55)
Disc @ 20% 1 0.833 0.694 0.579
(7.00) (3.79) (3.16) (2.63)
NPV (15.40)

LOAN Option
- 1 2 3
---------------------------------Rs. In million----------------------------
Plant -
Loan (W-1) - (7.43) (7.43) (7.43)
Maintenance - (0.60) (0.60) (0.60)
Tax Saving (W-2) 2.28 1.94 1.65
- (5.76) (6.09) (6.38)
Disc @ 20% 1.00 0.83 0.69 0.58
- (4.80) (4.23) (3.69)
NPV (13.65)
Decision: Loan option is more feasible as it is cheaper than Leasing option

W-1
Loan 20
R=?
20. = R([1-1.18]^-4)/0.18 is R mn interest and principal dono wapis kr rae
R 7.43 million
W-2
- 1 2 3
Maintenance 0.60 0.60 0.60
Interest (W-3) 3.60 2.91 2.10
Dep (W-4) 6.50 1.35 1.22 1.09
Loss(W-4) - - - -
6.50 5.55 4.72 3.79

W-3
Date Op. bal Interest Cashflow Balance
Yr. 1 20.00 3.60 7.43 16.17
Yr. 2 16.17 2.91 7.43 11.64
Yr. 3 11.64 2.10 7.43 6.30
Yr. 4 6.30 1.13 7.43 -

W-4: Dep
Cost 20.00
Initial allow. (5.00)
15.00
Yr. 1 (1.50)
13.50
Yr. 2 (1.35)
12.15
Yr. 3 (1.22)
10.94
Yr. 4 (1.09)
9.84
Yr. 4 loss (7.84)
2.00
Lecture#21
JUNE-2010, DS Leasing, Q#18[a]
From the point of view of DS, agr DS breakeven krna chahy tu kitna rental charge krna chaiye usy

-Cost of capital py agr NPV nikalen or wo "zero" ajaye, tu iska yahi mtlb hota k profit utna hi kama k dyga
jitna cost of capital hy, yani business k pas net kuch ni bachy ga
-Business k pas jitna paisa aye ga wo sara investors ko bant den gy

part[b] or sawal k dosry para ki wording mn difference: requirement ki wording ka mtlb hy loan plus interest
equal amount mn wapis hongy, jb k sawal k dosry para ka mtlb hy loan equal amount mn wapis hona hy
jbky uspy interest alag hy
e.g., 20 ka loan ki wapsi krni hy:
2nd para ka mtlb Requirement b ka mtlb
-5+interest -Principal+interest=20
-5+interest -Principal+interest=20
-5+interest -Principal+interest=20
-5+interest -Principal+interest=20

DS
- 1 2 3
Loan 20
Loan Repayment:
-Principal (5) (5) (5)
-Interest (3.20) (2.40) (1.60)
Machine (20)
Rental x x x x
Tax (W-1) - 2.28 1.59 1.27
- (5.92) (5.81) (5.33)
Disc @ 18% 1 0.847 0.718 0.609
- (5.02) (4.17) (3.25)
NPV (12.59) [hmny rental or uska tax abi chora hoa hy]

- 1 2 3
Rental x x x x
Tax -0.35x -0.35x -0.35x
x 0.65x 0.65x 0.65x
Disc @ 18% 1 0.847 0.718 0.609
x 0.55x 0.47x 0.40x
NPV 2.24x

2.24x-12.59 = 0
Rental. = x. = 5.62 million

W-1: Tax
- 1 2 3
Rental income x x x x
Dep (6.50) (1.35) (1.22) (1.09)
Interest - (3.20) (2.40) (1.60)
(6.50) (4.55) (3.62) (2.69)
Tax (2.28) (1.59) (1.27) (0.94)
-*Agr long term decision making mn koi missing figure calculate kra rha ho, tu us line ko khtm krden gy, mtlb c
mn nai lengy, baqi sb wesy hi normal solve kren gy

-Agr uper waly sawal mn sawal wala kehta k kitna rental rkhen k 5million positive NPV ajaye, tu zero ki jgah 5 li
-Agr sawal wala kehta k kia rental rkhen k is transaction py DS 20% return kama rha ho, tu phr NPV zero rkhty o
Uper wali batein page-31 py determination of price mn likhi hoi

JUNE-2013, Q#20, Haala Car rental services, Homework

Sensitivity Analysis
NPV nikalny k liye mainly hm 3 cheezain estimate kr rae hoty:
-Cashflows
-Time period
-Rate
Or cashflows mn mazeed quantities or prices ko b estimate kr rae
Ab Project ki NPV nikali lets say positive agye
YES bolny sy pehly aik bar dobara check kr lena chaiye
Ab sary andazy dobara dekhen, tu thora mushkil hojaye ga
Ab hmein exam mn question dia hoga k project mn is factor ki sensitivity btaen, tu agr aik factor ki
sensitivity project sy related zyada hy tu iska mtlb k is factor mn thori c b her pher hoi tu project gya.
Yeh formula neechy wala har factor k liye alag alag sensitivity niklany k kam aye ga

Illustration-15 (pg#36)

- 1 2 3
Sale price 75,000 36,000 45,000
Material (25,000) (12,000) (15,000)
Other variable OH (10,000) (4,800) (6,000)
Fixed Ohs (3,000) (3,000) (3,000)
- 37,000 16,200 21,000
Tax (W-1) - (6,600) (1,485) 825
Asset (60,000) 10,000
(60,000) 30,400 14,715 31,825
Disc @ 10% 1.000 0.909 0.826 0.751
(60,000) 27,636 12,161 23,911
NPV 3,708

1 2 3
Production(units) 5,000 2,400 3,000

W-1: Tax - 1 2 3
Net cashflows - 37,000 16,200 21,000
Dep (W-2) (15,000) (11,250) (8,438)
Loss (W-2) (15,313)
- 22,000 4,950 (2,750)
Tax @ 30% - 6,600 1,485 (825)

W-2: Dep
Cost 60,000
Yr. 1 dep (15,000)
45,000
Yr. 2 dep (11,250)
33,750
Yr. 3 dep (8,438)
25,313
Yr. 3 loss (15,313)
10,000

Lecture#22
-Aik aik kr k check kren gy k kis factor mn kitni adverse movement b hmary liye qabil e
qabool hogi, yeh sense krna sensitivity analysis hota
Srf adverse change ko check krta hy Sensitivity analysis
Ab sales k ilawa baqi sara ignore krden, bas sales or ussy related tax lety
- 1 2 3
Sale price 75,000 36,000 45,000
Tax (22,500) (10,800) (13,500)
- 52,500 25,200 31,500
Disc @ 10% 1.000 0.909 0.826 0.751
- 47,727 20,826 23,666
NPV 92,220
Sensitivity analysis is to see how sensitive a factor is to any modification or change

Sales 92,220
Maint. (xxx)
Variable OHs (xxx) just like sales, agr hm insbki alag alag NPVs after
Fixed OHs (xxx) tax nikalengy, or inka sum 3718 k equal hi aye ga
3,708

Margin of safety 4.02% iska mtlb hy sales mn 4.02% k ander ander

change acceptable hy, agr 4.02% sy zyada kami
agyi tu project down hojaye ga

Jitna kam percentage of margin of safety aye ga, utna sensitive hy factor
Yani thori si b kami usko hila dy g

Now, Illustration-15 mein fixed overheads tak margin of safety calculate yourself

(v) Next factor: Cost of Plant

- 1 2 3
Plant (60,000)
Tax(W-1) 4,500 3,375 10,125
(60,000) 4,500 3,375 10,125
Disc @ 10% 1.000 0.909 0.826 0.751
(60,000) 4,091 2,789 7,607
NPV (45,513)

MOS 3718 * 100 8.17%

45512

W-1: Dep
Cost 60,000
Yr. 1 dep (15,000)
45,000
Yr. 2 dep (11,250)
33,750
Yr. 3 bal (33,750)
- RV tu li hi nai, isliye idr zero aye ga or sara loss jaye ga

Cost jb ki thi tu RV zero rkhi thi, ab RV jb kren gy tu cost zero aye g

year 3 mn RV 10000 aye g tax usky uper aye ga or isi trah hm same to same wesy hi solve kren gy

Now, for units sensitivity analysis, units sy jo jo factor linked hy, uska cashflow aye ga, sales, material or
variable OHs, in teeno ko likh k or inhi ka net tax likhen gy yani contribution ka tax
Now, do RV and units sensitivity analysis, do yourself

Now, Tax rate sensitivity

Tax (W-1) - (6,600) (1,485) 825
Disc @ 10% 1.000 0.909 0.826 0.751
- (6,000) (1,227) 620
NPV (6,607)

Now, MOS 56.12%

Move tax rate 30% 46.84
Yani agr tax rate 30% sy increase ho kr 46.84% b hogya tu b hmary liye qabil e qabool hy, is sy zyada agr brh g
Ab aesy b MOS nikal skta:
46.84-30 16.84
and, 16.84/30 56.13% tu wohi agya hmary pas, yani hmny increase ki percentage nikali (

Next, requirment is discount rate sensitivity

Hm IRR nikalen gy pehly

- 1 2 3
Sale price 75,000 36,000 45,000
Material (25,000) (12,000) (15,000)
Other variable OH (10,000) (4,800) (6,000)
Fixed Ohs (3,000) (3,000) (3,000)
- 37,000 16,200 21,000
Tax (W-1) - (6,600) (1,485) 825
Asset (60,000) 10,000
(60,000) 30,400 14,715 31,825
Disc @ 10% 1.000 0.909 0.826 0.751
(60,000) 27,636 12,161 23,911
NPV 3,708

Disc @ 20% 1.000 0.833 0.694 0.579

(60,000) 25,333 10,219 18,417
NPV (6,031)

IRR 0.1 + 3,708 * (0.2-0.1)

3,708+6,031
IRR 13.81%
Abi hmny discount 10% py kia hoa hy, tu agr 13.81% tak b pohnch gya tu khyr hy lekin agr is
sy zyada hoa tu ghlt hojaye ga

Ab margin of safety is mn NPV tu nai tu phr aesy b nikal skti hy MOS:

13.81-10 3.81
MOS 38.10%

1 2 3
Production(units) 5,000 2,400 3,000

W-1: Tax - 1 2 3
Net cashflows - 37,000 16,200 21,000
Dep (W-2) (15,000) (11,250) (8,438)
Loss (W-2) (15,313)
- 22,000 4,950 (2,750)
Tax @ 30% - 6,600 1,485 (825)

W-2: Dep
Cost 60,000
Yr. 1 dep (15,000)
45,000
Yr. 2 dep (11,250)
33,750
Yr. 3 dep (8,438)
25,313
Yr. 3 loss (15,313)
10,000

PROJECT PERIOD SENSITIVITY ANALYSIS

yani period kitna kam hojaye ga tu b chaly ga

Original cashflow after disc (60,000) 27,636 12,161 23,911

Cashflow Cum.
Yr. 0 (60,000) (60,000)
Yr. 1 27,636 (32,364)
Yr. 2 12,161 (20,202)
Yr. 3 23,911 3,708 2.84 discounted payback
yani, max 2.84 sal tak b project chal gya tu thek hy
3-2.84 0.16 payback mn itni kami qabil e bardaasht hy
(0.16/3)*100 5.33%

Hmny jis figure ko dekh k han boli wo b urr skti hy, yani NPV 3708
lekin agr 2 projects ko apas mn compare kr rae tu wo NPV ki base py kr rae hoty
tu yeh b dekhna hy k factor wise b aik cheez dosri sy achi hy ya nai

Project A-NPV 5,000

Project B-NPV 3,000
 Now difference in both of above is 2000, tu hmara faisla is 2000 k difference ki wjah sy hoa k project A is
better so jb hm MOS nikla rae hn gy tu numerator mn hm 2000 rkhen gy
Same page, see box

Lecture#23
Haala Car Rental Services discussion
Continue waly option ki aik hi car ko solve kren gy, sell now mn har gari ko alag alag solve krna hy
Rentals khud cal. Krny
Tax waly rental ki deduction ko allow krty,
Profit on disposal sahi mano mn cal. Krny k liye net cashflows mn sy security deposit b minus krna pry ga,
cuz rentals ki tu deduction mil jaye g security deposit end py cost k against adjust hoga

Jin jin questions k sensitivity analysis chory thy wo sb do yourself

Dec-2023, requirement a mn sales volume ka sensitivity analysis krna, tu units hn na, so contribution ka
MOS nikalna hy, contribution k CFs ly k after tax kr k unki NPV or baqi woi MOS ka formula

Dec-16, Q#5 (book), part (b)

Winter-19, Q#31, part(b)

Summer-19, Q#10 (book)

Overhaul NPV (48.82)

Both difference is "8"
Replace NPV (40.82)

b [ii] - 1 2 3
Plant (61.25)
Tax saving on dep 5.97 1.24 1.12
(61.25) 5.97 1.24 1.12
Disc @ 15% 1.000 0.870 0.756 0.658
(61.25) 5.19 0.94 0.74
NPV (38.44)
Golden rule: Jis b factor ki sensitivity nikalni hy, hmesha dekhna hy k us sy Cashflow konsa jura ho
Ab jesa uper dollar rate ki sensitivity nikali hy, tu dollar rate is linked with purchase of new machine and its RV

MOS = 8.00 * 100

38.43
MOS = 20.82%

b [i] - 1 2 3
Difference in maint (3.94) (4.14) (4.34)
Tax 1.18 1.24 1.30
- (2.76) (2.90) (3.04)
Disc @ 15% 1.000 0.870 0.756 0.658
- (2.40) (2.19) (2.00)
NPV (10.08)

MOS. = 8.00 * 100

10.07
MOS. = 79.44%
Lecture#24

Probability [questions mn parts bna k poch skta]

Example:
Sale Price
Probability Price
0.30 40
0.50 35
0.20 30
Sawal mn jis cheez k sath b probability jur gye apko us cheez ko pehly average krna pry ga ab yeh normal sawa
first calculate avg. price
40*0.3+35*0.5*30*0.2 35.50

Dec-21, Q#33, Cooler Ltd

W-1: units-Chilmax
Yr. 1 [2000*0.6+2500*0.4] 2,200
Yr. 2 [2250*0.7*0.6+2500*0.3*0.6]+ 2,530 Yeh probability year 1 sy linked hy, k agr 2000 unit
[2750*0.65*0.4+3000*0.35*0.4] 2250 hony k 70% chances hn, or yr. 1 mn 2000 uni
Yr. 3 [2530*1.1] 2,783 60% thi
Yr. 4 [2783*1.05] 2,922
Yr. 5 [2922*1.05] 3,068

W-2: Contribution-Chillmax
Yr. 1 Yr. 2 Yr. 3 Yr. 4
Sale Price [LY*1.03] 567 583 601 619
Var. cost [LY*1.03] (391) (403) (415) (428)
175 180 186 191
W-3: Contribution-IND100
Sale Price [LY*1.03] 927 955 983 1,013
Var. cost [LY*1.03] (510) (525) (541) (557)
417 430 443 456

W-4: Units-IND100
Yr. 1 Yr. 2 Yr. 3 Yr. 4
Hours required for Chillmax 11,000 12,650 13,915 14,611
[units(w-1)*5]
Spare available 8,000 8,000 8,000 8,000
Hours sacrifice needed 3,000 4,650 5,915 6,611
IND100 units to be sacrifice 375 581 739 826

W-5: Working Capital

Yr. 1 Yr. 2 Yr. 3 Yr. 4
-------------------------------Rs. In million------------------------------
Chillmax sales 1,246 1,476 1,673 1,809
[price(W-2)*units(W-1)]
IND100 Sales (348) (555) (727) (837)
[Price (W-3)*units(W-4)]
 899 921 945 972
WC. Bal (15%) 135 138 142 146

WC bal. Change
Yr. 0 135 (135)
Yr. 1 138 (3)
Yr. 2 142 (4)
Yr. 3 146 (4)
Yr. 4 150 (4)
Yr. 5 - 150
Yahan sy onward solve yourself, sari mehnat bas uper working mn hi thi
Now, sensitivity analysis is question ka lazmi dekhna hy

Correct solution, see attached on portal, aikvalue ghlt agyi hy is solution mn

Lecture#25
JUNE-18, Question#25, OJ limited
-Aik option hy k bas EDS-1 launch kren or aik option k aik sal tak EDS-1 launch kren or saal bad tak EDS-1 bas k
Yeh question last lecture mn jesy question solve hoa tha wesy b hoskta tha, cont. lost dikha k, lekin is mn hmny
Option-1: EDS-1
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Units [Yr-2 onwards:LY*1.05] 25,000 26,250 27,563
-------------------------------Rs. In million-----------------------------------
Contribution 17.63 21.79 26.83
[CPU(W-1)*units]
Fixed OHs [LY*1.08] (5.00) (5.40) (5.83)
Plant (45)
Dep[ignored cuz tax hi nai hy]
Building (25)
(70.00) 12.63 16.39 21.00
Disc. 12% 1.000 0.893 0.797 0.712

√(4&81.62/70)∗1.12
(70.00) 11.27 13.07 14.95

MIRR −1
MIRR 16.38%

Option-2: EDS-Adv 80% chance hn k EDS-adv biky ga, 20% hn k EDS-1 hi rae ga
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Units [W-2] 25,000 32,050 33,653

Sales 41.50 59.34 69.78

Variable Costs (23.88) (32.98) (37.31)
[cost(W-1)*units(W-2)]
Fixed Ohs (5.00) (5.40) (5.83)
Plant (45)
Building (25)
R&D (30)
(70.00) (17.38) 20.96 26.64
Disc. 12% 1.000 0.893 0.797 0.712
(70.00) (15.51) 16.71 18.96

√(4&82.41/85.51)∗1.12
−1
 √(4&82.41/85.51)∗1.12
−1
MIRR
MIRR 11.0%

Decision: EDS-1 should be continued

W-1: CPU Yr. 1 Yr. 2 Yr. 3 Yr. 4

Sales [LY*1.12] 1,660 1,859 2,082 2,332
Material OHs [LY*1.1] (210) (231) (254) (280)
Labor (665) (712) (761) (815)
[Yr. 1: 2*145+3*125]
[Yr. 2 onwards: LY*1.07]
OHs [LY*1.08] (80) (86) (93) (101)
(955) (1,029) (1,109) (1,195)
CPU 705 830 974 1,137

W-2: units and price Yr. 1 Yr. 2 Yr. 3 Yr. 4

EDS-1 25,000 26,250 27,563 28,941
EDS-Adv - 33,500 35,175 36,934

Avg. units 25,000 32,050 33,653 35,335

Ab agr selling price ko b same method sy probability lga di or avg krdia tu effect double hojaye ga, isliye revenu
So, sales revenue ka avg aesy nikly ga, so sales revenue ko 80, 20 kren gy yani units ko price sy multiply kr k a

W-3: Yr. 1 Yr. 2 Yr. 3 Yr. 4

----------------------Rs. In million--------------------
Sales-EDS-1 41.5 48.8 57.4 67.5
[price(W-1)*units] [25000*1660] [26250*1859] [27563*2082] [28941*2332]
Now, 20% of above - 9.76 11.48 13.50

Sales-EDS-Adv - 62 73 86
[33500*1850] [LY*1.05*1.12] [LY*1.05*1.12]
Now, 80% of above 49.58 58.31 68.57

Total Sales 41.50 59.34 69.78 82.07

Lecture#26
Book Question No. 26, Read and see solution (Concept of decision tree)

outcome
0.8 chances circle
Success
Decision Tree [syllabus mn hy] outcome
Example: Develop (3 mill) circle
Failure outcome
Decision point 0.2 chances circle
This is action point , yeh Sell formula
hmny krna hy is py prob. for 10 million outcome
Nai lgy g
circle
 outcome
circle

Jo outcomes hn, unpy prob. Lgy g k is option k hony k itny chance hn

Option-1: Develop
NPV. = [20m*0.7+9m*0.3]*0.8+1m*0.2-3m 20mill hony k 70% chances hn
13.36 million uper wali bat hony k 0.8 chanc

Option-2: Sell Now

NPV. = 10 million

Decision: Option-1 is more feasible as its NPV is greater than that of Option-2

CAPITAL RATIONING
Concept:
Business ko bht sary achy achy projects nazar arae hn, tu sb mn lga dy paisa?
Nahi, cuz paisy nai hn, agr hoty tu sb mn lga dety
Ya tu paisy nai ya phr hm khud hi nai lgana chah rae us project mn
Ab limited resources hn or khuahishein bht sari hn
tu wahan lgaen gy resources jahan sy optimum faida mil jaye

Objective:
Optimum utilization of available funds (i.e., maximization of total NPV)

Capital Rationing

Divisible Projects Indivisible Projects

(i.e., project can be scaled down) (i.e, project cannot be scaled down)

Single Period or Multiple period Trial & error method

Rationing Rationing i.e., Steps:
1- Make all possible combinations
2- Select the combination with highest total NPV
optimum investment mix
using ranking w.r.t optimum
probability index investment mix
using ranking
w.r.t linear
programming

Project Yr. 0 Yr. 1 Yr. 2 onwards

A (50) (60)
B (30) (30)
C (40) (20)
D (100) (30)
(220) (140)
Agr investments hmein srf aik point of time mn chaiye, yani srf Yr. 0 mn tu usko Single period rationing kehty h
Agr multiple periods mn investments chaiye hoti Yr. 0 or Yr. 1 mn jesy uper, lekin paison ki tangi srf aik period m
Lekin agr multiple periods mn investments chaiye hoti Yr. 0 or Yr. 1 mn jesy uper, lekin paison ki tangi dono pe
Lecture#27

Single Period
Divisible
Steps:
1. Calculate NPV of each project
2. Calculate profitibility index of each project
PI = NPV
Investment
3. Rank projects from highest to lowest on the basis of profitability index
4. Invest available funds in projects as per ranking

Example:
Projects Investment NPV
A 40,000 20,000
B 100,000 35,000
C 50,000 24,000
D 60,000 18,000
E 50,000 4,000
Available funds. = 100,000
Requirement: Optimum investment mix if:
a) projects are divisible
b) projects are indivisible

Solution:
PI har aik mn calculate hogi lazmi hi
a) PI rank
A [20000/40000] 0.50 1
B [35000/100000] 0.35 3
C [24000/50000] 0.48 2
D [18000/60000] 0.30 4
E [4000/50000] 0.08 5

Agr single period hy or indivisible ranking hy tab b ranking hmein help dy g

Optimum Investment Mix

Project Investment NPV
A 40,000 20,000
C 50,000 24,000
10% B 10,000 3,500
100,000 47,500
Divisible ka yahi mtlb hy k jitna project hoa utna krlen gy, pora nai kren gy,
jesy uper hmny 10% remaining B mn invest krdia yani scale down

b)
Indivisible
Steps:
1. Calculate NPV of each project
2. Calculate profitibility index of each project
 PI = NPV
Investment
3. Rank projects from highest to lowest on the basis of profitability index
4. Ranking krdi achi bat hy, hm projects k combination bna k check kren gy k
konsa zyada feasible rae ga combination
Ranking ka faida yeh hoga k srf achy achy projects k combinations bna k dekhen gy

b) Option-1

Project Investment NPV

B 100,000 35,000
Option-2
A 40,000 20,000
C 50,000 24,000
44,000
Option-3
A 40,000 20,000
D 60,000 18,000
38,000
Option-4
C 50,000 24,000
E 50,000 4,000
28,000

Jb hm keh rae divisible tu iska mtlb sary projects divisible hn, aesa nai hoga k beech mn kuch indivisible hy
Agr beech mn aik b indivisible agya tu hmein woi combination waly treeky sy hi krna pry ga

Dec-16, Q#28 (book), part (a)

Projects Investment NPV Profitability Index Rank
A 150 18 0.120 4
B 200 34 0.170 1
C 250 24 0.096 6
D 225 24 0.107 5
E 60 9 0.150 2
F 100 14 0.140 3
Investment Plan 1:
Projects Investment NPV
B 200 34
E [60*1.2] 72 10.80
F 100 14
D 128 13.65 [24*(128/225]

500 72.45

Investment Plan 2:
Project Investment NPV
B 200 34
E 72 10.80
A 150 18
F 78 10.92 So, hmny A sy aik uper jo acha tha usko scale down
 500 73.72
Conclusion: Plan 2 is optimum investment mix

part (b) [yeh just situational cheez hy koi alag concept nai bas specific isi question sy related hy]
pehly khud solve krna, phr solution dekhna
wo poch rha k hm agr mazeed projects mn invest krna chahein tu kia kren gy, borrow kren gy
finance tu jo loan len gy unpy interest aye ga, tu interest kesy pay kren gy, or maximum kitna
interest pay krjoskty
Tu obviously projects sy paisy kamaen gy utna hi max pay krsken gy

Other remaining projects:

Yr. 0 Yr. 1 Yr. 2 Yr. 3
-----------------------------------------Rs. In million--------------------------------
22% F (22) 6.60 6.60 6.60
C (300) 108 108 84
D (270) 120 120 120
(592.00) 234.60 234.60 210.60
Disc @ 10% 1.000 0.909 0.826 0.751
(592.00) 213.27 193.88 158.23
NPV 60.23

Disc @ 20% 1.000 0.833 0.694 0.579

(592.00) 195.50 162.92 121.88
NPV (52.83)

IRR 15.33%

Now, must do question#1, page-465, Kailash Limited, December-14

Jis project ki NPV negative arae, usko wesy hi skip krden gy

Lecture# 28

JUNE-22, Question-34, Go Limited [a]

Mango:
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Net Cashflows (30.70) (20.00) 70.50 50.70
Disc @ 10% 1.00 0.91 0.83 0.75
(30.70) (18.18) 58.26 38.09
NPV 47.47

Watermelon:
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Net Cashflows (40.50) (20.80) 50.20 40.30
Disc @ 10% 1.00 0.91 0.83 0.75
(40.50) (18.91) 41.49 30.28
NPV 20.15

Jamun:
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Net Cashflows (50.90) (10.00) 20.30 30.30
Disc @ 10% 1.00 0.91 0.83 0.75
(50.90) (9.09) 16.78 22.76
NPV 19.06

Date:
Yr. 0 Yr. 1 Yr. 2 Yr. 3
Net Cashflows (60.10) (30.60) 30.60 30.60
Disc @ 10% 1.00 0.91 0.83 0.75
(60.10) (27.82) 25.29 22.99
NPV 12.52

Projects Investment
Yr. 0 Yr. 1 NPV PI
Mango 30.70 20.00 47.47 1.55
Watermelon 40.50 20.80 20.15 0.50
Jamun 50.90 10.00 19.06 0.37
Date 60.10 30.60 12.52 0.21
[paison ki tangi srf aik period mn hy Yr. 0 so it single period rationing]
Hm us figure sy divide kren gy
tangi hogi, jo problematic area
ki figures sy divide
[i]
Divisible:
Project Investment NPV
----------------Rs. In million-------------
Mango 30.70 47.47
Watermelom 40.50 20.15
Jamun 50.90 19.06
Date 27.90 5.81 [(12.52/60.10)*27.90]
150 92.50

[ii]
Indivisible:
Project Investment NPV
----------------Rs. In million-------------
Option-1:
Mango 30.70 47.47
Melon 40.50 20.15
Jamun 50.90 19.06
86.68
Option-2:
Mango 30.70 47.47
Melon 40.50 20.15
Date 60.10 12.52
80.14

Decision: Option-1 is more feasible and better as it has more NPV than option-2

Winter-2018, Book, Q#29, Mars limited [b]

Project A or C dono hongy, wrna aik b nai hoga
Multiple rationing ka question hy cuz Yr. 1 mn funds zyada chaiye or present 134 mill hn bas
Option-1: A and C [excess funds 8% likhny ki wjah sy ab NPV nikalny ki bijaye yeh kam hoga]
Yr. 0 Yr. 1 Yr. 2
A&C (400) (70) 878
Other (400) (64) 536
[400*(1.08)^2]+[64*1.08]
(800) (134) 1,414
Disc @ 12% 1.00 0.89 0.80
(800.00) (119.64) 1,126.98
NPV 207.33

Paisy bach isliye rae kiun k B project chor rae hn hm

Option-2: B
Yr. 0 Yr. 1 Yr. 2
B (700) (105) 1,356
Other (100) (29) 148
[100*(1.08)^2]+[29*1.08]
(800) (134) 1,504
Disc @ 12% 1.00 0.89 0.80
(800.00) (119.64) 1,198.95
NPV 279.30

So, option B is better

Indivisble projects mn invest krny k bad jo paisa bach jata, usko normal
questions mn ignore isliye krty k hm assumption use kr rae hoty k wo paisy b
same cost of capital py kahin or invest ho chuka hoga, thus uski NPV zero ajaye
g, isliye hm usko question k answer mn ignore krdety, ab uper waly question
mn mentioned tha k 8% py invested hn excess funds which is different from
cost of capital so isliye hmny likha

Lecture # 29

LINEAR PROGRAMMING
pehly short term decision making k context mn dekhen gy then move kren gy long term py
linear programming mn 2 sy zyada projects nai hngy

Example-6, page#11 [end]

1. Define x and y
x= units of product A
y= units of product B

2. Objective Function
To maximize : hmein balance krna hy cuz resources limited hn, agr x zyada
50x +120y bnaye tu y kam krna pry ga, tu hmny wo answer nikalna jiski
output maximum aye
3. Define Constraints [resources limited hn]
100x + 200y <= 10,000
10x + 30y <= 1,200
x, y >= 0
x + y <=110

4. Plot constraints on graph

100x + 200y =10,000 eq (1)
x= 0 , y= 10,000/200 50 (0,50)
y= 0 , x= 10000/100 100 (100,0)

10x + 30y =1,200 eq (2)

x=0 , y=1,200/30 40 (0,40)
y= 0, x=1,200/10 120 (120,0)

x + y =110 eq (3)
x=0 , y= 110 (0,110)
y=0, x=110 (110,0)

120

100

80

60
b
40
c
20
a d
20 40 60 80 100 120

The shaded area is feasible region, is k ander ander hmein optimum result mily ga

5. Optimum Solution
Point b
x=0, y=40
Total Contribution
=50*0+120*40 4,800

Point c
100x + 200y = 10,000
10x +30y = 1,200
Solving, x=60, y=20
Total Contribution
=50*60+120*20 5,400
[sb points ko aik aik bar solve krlen gy]
Optimum solution is point c, 60 x bnayen gy or 20 y

Now, see steps achi trah sy on page 11 top

Go to page# 32 end, See multiple period rationing and example and relate with above example
Jo uper contribution thi, idr wo NPV hogi
Products idr projects hn

Lecture # 30

Practicing calculations on ICAP online exam software

Assessment master wali file kholen gy exe ki

Capital Rationing Graph on Online software

Winter-2018, Book, Q#29, Mars limited [a]
Since, projects are divisible and there is multiple period rationing, therefore, linear programming will be used a
(1) Define Variables:
x = proportion of project A & C
y = proportion of project B

(2) Objective function:

To maximize 237(W-1)x + 287(W-2)y

(3) Constraints:
T0 400x + 700y <=800
T1. 70x + 105y <=134
Scale up x<=1.5
Scale up y<=1.5

(4) Plot constraints on graph:

400x + 700y = 800 eq. (1)
x=0, y=800/700 =1.14 (0,1.14)
y=0, x=800/400 =2 (2,0)

70x + 105y = 134 eq. (2)

x=0, y=134/105 =1.28 (0,1.28)
y=0, x=134/70 =1.91 (1.91,0)

x = 1.5 eq. (3)

y = 1.5 eq. (4)

For graph, one cell=0.2

1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2

0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

Point-A
Total NPV = 237*0+287*1.14 = 327m

Point-B
Solving 400x+700y = 800
70x+105y = 134
x = 1.4, y = 0.34
Total NPV = 237*1.4+287*0.34 = 429m

Point-C
Solving 70x+105y = 134
x=1.5
x=1.5, y=0.28
Total NPV = 237*1.5 + 287*0.28 = 436m

Point-D
Total NPV= 237*1.5=356

Optimum solution is point C therefore, 150% of project A & C and 28% of project B should be done

W-1: A & C
0 1 2
A cashflows (290) (79) 715
C cashflows (110) 9 163
(400) (70) 878
Disc @ 12% 1.000 0.893 0.797
(400) (62) 700
NPV 237

W-1: B
0 1 2
B cashflows (700) (105) 1,356
Disc @ 12% 1.000 0.893 0.797
(700) (94) 1,081
NPV 287

JUNE-2023, Question#2(a), see from past papers online

DEC-2023, Question#3 (b), part a sy jo values nikli thi unsy a mn capital rationing krni thi
dec 23 mn itni angrezi nai prhni 2 pages guzarny k part b ki english prni hy
figures part b k liye part a sy ani thi, solution py ja k part b jb shuru horha is mn shuru mn aik table bna hoa wo

Chap# 2,3,4,5,6 or 8 all of these are long term decision making chapters in ICAP book
multiple years.

used in BFD.

, that’s why they are called "Investment decisions" and require initial capital.
rae hongy

r k profits ko dekhen gy
recovered.
 Balance+Bailout

(20)
15
20
30

h project ksi or ko kitny ka bech k nikal sken gy

oject discounted at required rate of return

rage cost of capital" (reason in next chapter)

ue of money concept
lue calculate kren gy
 4
200
(80)

120
0.683
81.96

erating shuru hojae ga

4
160
(64)
(10)

20
106
0.636
67.36
oject mn tu us resource ki original cost relevant nai balky opportunity cost relevant hogi, mtlb agr hm is project mn use na

a kama k dy raha (amount positive ayi hy)

n utna kama k dy ga isiliye zero b chal jaye ga decision rule mn
ma k dy rha kiun k negative mn answer hy

4
45
(13.50)
(3)
-
28.50
0.683
19.47
 28.50
0.482
13.74

y hoe us project k apny cashflows tu ly ga hi (ticket wghera), kuch indirect cashflows b ly ga (itna fuel bachy ga mulki sata

khein gy cuz 1 2 questions mn kam ajayen gy

4
5.02
---------------
125.40
(50.16)
(8)
67.24
(12.67)
20
74.57
0.636
 47.39

4
5.02
---------------
125.40
(50.16)
(8)
(25) [Profit nikalny k liye dep minus ki]
42.24
(12.67)
25 [jb profit nikal aya tu dep add back ki cuz dep tu project ka cashflow nai hy]
20
74.57
0.636
47.39

5.02
---------------
125.40
(50.16)
(8)
67.24
(20.17)
7.5 [expense tax bacha kr dy rha na tu isliye add back kia uska effect]
20
74.57
0.636
47.39

return agly sal bhar k pay krty tu phr

ren gy or us ky cashflow sy minus

4
5.02
---------------
125.40
(50.16)
(8)
67.24
(10.98)
20
76.26
0.636
48.46

following rentals will be paid at start of year:

4
-----------
300
(120)
 (8)
-
172
(37.93)
20
154.07
0.659
101.49

Rent ki amount [say, 14m] likhi zroor hoi year 2 mn lekin yeh asal mn year 3 ki payment hy rent ki jo start of th
payment ki wjah sy year 2 mn likhi so iski adjustment tax cal mn pass hogi

following rentals will be paid at start of year:

 4
-----------
300
(120)
(8)
-
172
(37.68)
20
154.32
0.659
101.66

Rent ki amount [say, 14m] likhi zroor hoi year 2 mn lekin yeh asal mn year 3 ki payment hy rent ki jo start of th
payment ki wjah sy year 2 mn likhi so iski adjustment tax cal mn pass hogi

-Agr sawal mn loss ajaye or clearly mentioned hy k loss carried forward ho skta ya phr jis project ko hm appraise
ka business hy [us project ki profitability hi business ki profitability hy] isky ilawa koi kam nai company k pas tu
usko carried forward krna hy or agly sal k profits mn sy minus hojaye ga

-Lekin agr loss agaya or sawal mn mentioned nai hy k carried forward ho skta ya business ka aik hi project nai h
ga tu tax brhy ga or jb loss aye ga tu wo tax bacha k dy ga kiun k us project mn loss ki wjah sy business ka over
hmara tax bachy ga so hm tax inflow dikhayen gy
 0), us saal ka start hy, tu plant purchase b 2025 k shuru mn kren gy isliye uski dep pehli dfa 2025 ki return mn claim hogi
art nai blky pichly saal ka end ho, tu phr uski pehli depreciation foran claim hojaye g [usko hm year zero ki dep keh den gy]

4
5.02
---------------
125.40
(50.16)
(8)
67.24
(14.78)
20
72.46
0.636
46.05

Yr. 4
67.24
(9.49)
(8.48)
49.27
14.78

e., based on today's prices]

 4
146,933
(63,629)
(14,586)
68,718
(9,131)
25,000
84,587
0.683
57,774

84,587
0.482
40,792
 Is question mn tax or acc dep same hy that’s why same dep li, wrna ARR
calculate krty hoye srf accounting dep ka effect len gy cuz Accounting rate of
return hy

ng that cashflows occur evenly throughout the period

ears [assuming that cashflows occur at th end of year]

apital py discounted CF len gy i.e.,

4
68,718
(15,820)
(22,461)
30,437
9,131

t: [CIF value py pehly import duty lgy g phr jo answer aye ga uspy sales tax lgy or phr jo answer aye ga uspy withholding ta

4 5
52,000 52,000

g----------------------
1,295,843 1,347,677
(400,000) (400,000)
895,843 947,677
(223,961) (236,919)
 - 100,000
671,882 810,758
0.683 0.621
458,905 503,417

4 5
g-------------------------------
29.25 30.42
yeh year ki figure di hoi hy tu per unit hm uper no. of covers sy divide kr k nikaly gy

24.92 25.92 As sale price pr variable cost dono py same inflation rate hy that’s why hmny CPU n

diye hoye usky according hmny pta lgaya]

it or delay it or enter market through it etc etc

nflation rate lgy ga

hr year 2 sy inflation krni hy [rate lgana hy]
y ga [5% increase in variable costs]
y sawal mn srf aik inflation rate given hy tu phr wo sab py lgy ga [sales, variable costs, fixed costs etc etc]
aya tu na lgaen rate unpy lekin yeh note likh den alag sy answer mn
ame with money/nominal rate

minal rate, then following is formula:

ure aesi ho k sales credit py honi hn,

kren gy
ho store mn usky liye hmein extra material khreed
ssy zyada khreed k rkhna pry ga, tu wo initially jo
Yr. 4
50,000

Yr. 4
40,000

Yr. 4
46,305

Yr. 4
66,550
 Yr. 4
87,496

aab ho chuki hogi inventory.

deduction hogi akhri saal mn

Yr. 4 Yr. 5
n---------------------------------
83.14 89.92
(13.54) (14.79)
(10.02) (10.74)

(25) -
34.57 64.39
(7.67) 1.93

(0.68) 8.99 -Agr kaha nai k kab working capital balance chaiye tu start of year assume krna
26.23 75.32
0.582 0.508
15.26 38.27

rha, wo year 2 sy brhy ga

hy ga or price b brhy g
Yr. 5
64.39
(25) -Rent expense add back kr k rent paid ko minus kr rae, tu har saal rent tu same hi tha, bjaye isky
(46.06)
(6.67) -End waly para mn likha hoa hy k company ka business itna acha hy k agr loss hoa tu wo adjust h
1.93

Yr. 4
64.89
0.588
38.17
tor working:
Yr. 3 Yr. 4
8% 9%
15.56% 16.63%
nt aik sal pechy yani yr. 3 k end py aye g, phr usko
rect start py ly k ayen gy
ga agr hm 18000 or agy
ren or project k ander hi

ect sy jo paisa mily ga

ye ga or wo b 16% py hi

n zyada realistic hy as
 4
25,000
0.683
17,075

4 5
--------------------
77,548 83,752
(6,638) (6,970)
70,910 76,782
(20,564) (22,267)
381,605 Yeh terminal value us project k 5 sal k bad b chalny sy jo paisa aye ga usko add up

(5,170) -
45,176 436,120
0.683 0.621
30,856 270,796

0.482 0.402
21,786 175,267

power 3 py inflate kren gy

 10% hy or operating profit 9% hy tu mtlb jo difference hy wo operating expenses ka hy, isliye gross margin ka 1% or phr u

gaen ya usi ko theek kra k 3 4 sal or ghseet len?)

ala lena tha

example sales, production costs are irrelevant being same for both options]

Yr. 4 Yr. 5
11.49 [9*1.05^5]
(12.16) (12.76)
4.88 11.50
(7.27) 10.22
 0.572 0.497
(4.16) 5.08

Yr. 5
12.76
3.71
21.86
38.33
11.50

Yr. 4 Yr. 5
31.27 Working capital or RV k uper inflation lga b skty or nai b, lekin exam mn sath note la
-
(7.60) (7.98)
3.28 2.05
(4.31) 25.35
0.572 0.497
(2.47) 12.60

Yr. 5
7.98
3.01
(4.14)

6.85
2.05
aul (NPV is negative
e)

sal 3 sal bad AC ya

E har 4 sal bad change kren ya har 5 sal bad

nda sy har 2 sal bad change kr lia kren ya 3 sal bad] using:

u zahir hy zayada years ka zyada expense hi bny ga

arison theek hy chahy unka time period different hi kiun na ho, lekin jo recurring nature k hn (har 2 sal bad change krna pl
LCM 6 hoa

Yr. 4 Yr. 5 Yr. 6

(500)
250 250
(45) (32) (45)
(295) (32) 205
0.683 0.621 0.564
(201.489) (19.869) 115.717

Yr. 4 Yr. 5 Yr. 6

170
(32) (45) (55)
(32) (45) 115
0.683 0.621 0.564
(22) (28) 65

LCM 6 years
Yr. 4 Yr. 5 Yr. 6
(4,685)
1,741 2,031
(428.51) (261.48) (566.70)
(3,372) (261) 1,464
0.516 0.437 0.370
(1,739.34) (114.29) 542.50

Yr. 4 Yr. 5 Yr. 6

1,111
(227.37) (492.78) (1,110.27)
(227) (493) 1
0.516 0.437 0.370
(117.28) (215.40) 0.20
melines bnen g

Yr. 4 Yr. 5 Yr. 6 Yr. 7 Yr. 8 Yr. 9 Yr. 10

----------------------------------------------------------Rs. In million------------------------------------------------------------------
(26.80) (31.03)
5.36 6.21
(0.88) (0.97) (1.77) (1.17) (1.29) (2.36) (1.56)
(5.79) (4.34) (7.66) (6.70) (5.03) (8.87) (7.76)
(6.67) (5.31) (9.43) (7.87) (6.31) (11.23) (9.31)
2.00 1.59 2.83 2.36 1.89 3.37 2.79
5.79 4.34 7.66 6.70 5.03 8.87 7.76
1.12 0.63 (20.38) 1.19 0.61 (23.81) 1.24
0.572 0.497 0.432 0.376 0.327 0.284 0.247
0.64 0.31 (8.81) 0.45 0.20 (6.77) 0.31

nai dekhty, bas yeh dekhty k sasta konsa hy]

nt hn, isliye hm EAC use krty hn jis mn kharchon ko per year kr k compare krty
esa hi hy k hm khreedny ki bjaye karaye/rent py ly
1-(1.1)^-3]

LCM method hi lgana hy, plus wesy b inflation involvement EAC mn achi nai lg rae, LCM mn ati hy

(3,200)
(3,200)
0.572
(1,829.61)

4 5

(6,000)
(3,200) (3,600)
(9,200) (3,600)
0.572 0.497
(5,260.13) (1,789.84)
 4 5 6

(6,000) (5,000)
(3,200) (3,600) (4,000)
(9,200) (8,600) (4,000)
0.572 0.497 0.432
(5,260.13) (4,275.72) (1,729.31)

M or EAC k roly ki zrort hi nai hy, tu NPV

ak time period different b hn options ki tab b NPV

ne off nai hn, tu phr comparison k liye EAC ya LCM

hy dosri recurring nai hy lekin wo apas mn

4
(3,200)
------------------

4 5
(3,800) (3,200)

4 5 6
(2,400) (3,800) (3,200)

ny kaha k plant khreedny ki bjaye loan py ly lo, ya karaye py ly lo

osts) are not relevant

in cashflows estimate is
e ho skta hy wrna
osts) are not relevant
in cashflows estimate is
e ho skta hy wrna

4 5
-------------------------------------
2.80
0.66 2.93
0.66 5.73
0.823 0.784
0.54 4.49

4 5
-------------------------------------
(6)
1.74 1.74
(4.26) 1.74
0.823 0.784
(3.50) 1.36

er hoa tu yeh kal ko wapis ly lena

ense smja jaye ga

sry ny tu hmein better option choose krna]

ga k end py wo asset

mara hi hoga, phr end py RV ko hm inflow dikhayen gy

ya tu obviously hm khreeden gy or exercise kren

zmi transfer honi hi hogi isliye hm RV ko lazmi inflow dikhayen gy

apis chla jaye ga

1.33
 4
15,000
8,156
23,156
0.763
17,666

4
15,000
(100,000)
(10,000)

8,156
3,000
(83,844)
0.763
(63,964)

100,000 agr start mn

nd py phr 100000
dikhaya or end py usi

nterest as a cashflow nai lena

isko lease vs loan hi treat krna

4
-----------------

2.45
2.45
0.482
1.18
 -Insurance chunky dono mn honi so usko irrelevant consider kia

4 5
--------------------------
2.00
(7.43)
(0.60)
1.33 3.35
(4.71) 3.35
0.48 0.40
(2.27) 1.35

ncipal dono wapis kr rae

4
0.60
1.13
-
7.84
9.58
 na chaiye usy

utna hi kama k dyga

mtlb hy loan plus interest

t mn wapis hona hy

4 5

(5)
(0.80) Maintenance[irrelevant cuz fixed hy or already un logon ko hire
2.00 kia hoa tu paisy deny hi deny
Yeh line nai add kren gy*
0.94 3.02 Aik sal bad tax hona isliye yr. 1 sy likha tax
(2.86) 3.02
0.516 0.437
(1.47) 1.32
-Insurance chunky dono mn honi so usko irrelevant consider kia

4 5

-0.35x
-0.35x
0.516
-0.18x

4 5
yeh line nai likhni
(7.84)
(0.80)
(8.64)
(3.02)
e ko khtm krden gy, mtlb cashflows

PV ajaye, tu zero ki jgah 5 likhty or x nikalty

a ho, tu phr NPV zero rkhty or discount rate 20 rkhty, phr x nikalty

agr aik factor ki

oi tu project gya.
Plant srf aye ga, baqi sb ignore, RV b nai aye g, wo alag factor hy
ara loss jaye ga

hi solve kren gy

ga, sales, material or

ool hy, is sy zyada agr brh gya tu nuqsan mn jaen gy hm

rease ki percentage nikali (change ki, jesy variance cal. Krty)

counted payback
 sy hoa k project A is

g solve krna hy

t b minus krna pry ga,

oga

a, so contribution ka
rmula

4 5
31.27
1.00 (0.34)
1.00 30.93
0.572 0.497
0.57 15.38

y Cashflow konsa jura hoa hy

of new machine and its RV tu isliye hmny woi liye

4 5
(4.56) (4.79)
1.37 1.44
(3.19) (3.35)
0.572 0.497
(1.82) (1.67)
a pry ga ab yeh normal sawal ban jaye ga

y linked hy, k agr 2000 units ki sale hoi tu yr.2 mn

es hn, or yr. 1 mn 2000 units sale hony ki prob

Yr. 5
638
(441) 280+100+100=var cost
197

1,043
(574) Variable cost mn 375 or 120 len gy bas, skilled labour nai lengy cuz usi ko IND100 mn use krna t
470

Yr. 5
15,341

8,000
7,341
918 aik unit k liye 8 ghanty chaoye hoty

Yr. 5
-----------------
1,956

(957)
 999
150

or saal bad tak EDS-1 bas krden or phr EDS-adv bechen 3 sal
st dikha k, lekin is mn hmny MIRR ki base py faisla krna as req. so hmein alag alag dikhany pren gy cashflows

Yr. 4
28,941
--------------------
32.91

(6.30)
10

30
66.61
0.636
42.33

Yr. 4
35,335

82.07
(42.22)

(6.30)
10
30

73.54
0.636
46.74
uble hojaye ga, isliye revenue py lgy gi percentage price py nai
s ko price sy multiply kr k aik hi bar percentage lgai

941*2332]

*1.05*1.12]

0.7 chance outc NPV=20 mill

Good sales ome
ome
e outc
Avg. sales NPV=9 mill
ome
0.3 chance

outcome
circle
mill hony k 70% chances hn 0r 9mill hony k 0.3 chances hn
r wali bat hony k 0.8 chances hn

gle period rationing kehty hn

aison ki tangi srf aik period mn thi tu b wo Single period rationing
kin paison ki tangi dono periods mn hy tu wo Multiple period rationing
mn kuch indivisible hy

jo acha tha usko scale down krdia

sy related hy]

Yr. 4 Yr. 5
--------------------------------
6.60 6.60
60 60
- -
66.60 66.60
0.683 0.621
45.49 41.35

0.482 0.402
32.12 26.77

Yr. 4 Yr. 5
- -
0.68 0.62
- -

Yr. 4 Yr. 5
20.50 (10.00)
0.68 0.62
14.00 (6.21)

Yr. 4 Yr. 5
30.30 30.30
 0.68 0.62
20.70 18.81

Yr. 4 Yr. 5
40.00 40.00
0.68 0.62
27.32 24.84

Rank
1
2
3
4

us figure sy divide kren gy jis period mn paison ki

gi hogi, jo problematic area hy wo idr yr. 0 hy so us
ki figures sy divide kren gy
aye yeh kam hoga]

limited hn, agr x zyada

wo answer nikalna jiski
ye
ve example
programming will be used as follows:
hould be done

ru mn aik table bna hoa wo cashflows hn bas

agr hm is project mn use na krty tu kahan use krty, jo qurbani di wo relevant hy)
itna fuel bachy ga mulki satah pr or itny logon ki jobs lgen g etc etc)
yment hy rent ki jo start of the year
yment hy rent ki jo start of the year

phr jis project ko hm appraise kr rae bas wohi aik hi company

oi kam nai company k pas tu phr ksi b sal mn agr loss ajaye tu

usiness ka aik hi project nai hy, tu is project mn jb profit aye

ss ki wjah sy business ka overall profit kam hojaye ga or aesy
2025 ki return mn claim hogi as deduction
year zero ki dep keh den gy]
er aye ga uspy withholding tax lgy ga]
overs sy divide kr k nikaly gy

te hy that’s why hmny CPU nikal ky usko aik hi bar inflate krdia 4% sy

osts etc etc]

start of year assume krna
ent tu same hi tha, bjaye isky k hm har sal 25 hi less kr k 25 hi add kren, hmny srf last year mn effect dal dia

y k agr loss hoa tu wo adjust hojaye ga mtlb yeh wala loss business ka tax bacha dy ga,yani jis sal loss hy us saal hm log ta
jo paisa aye ga usko add up kr k aik value bta di examiner ny
e gross margin ka 1% or phr usko inflate kia
b, lekin exam mn sath note lazmi likhna hy, is mn hmny lga di
(har 2 sal bad change krna plant) or unka time different hy unky liye NPV sahi comparison nai hy
 Yr. 11 Yr. 12
------------

7.18
(1.71) (3.14)
(5.82) (10.27)
(7.53) (13.41)
2.26 4.02
5.82 10.27
0.55 8.07
0.215 0.187
0.12 1.51
usi ko IND100 mn use krna tha usi ko chillmax mn kr rae
en gy cashflows
mn effect dal dia

is sal loss hy us saal hm log tax saving ly len gy

Lecture # 31

COST OF CAPITAL & CAPITAL STRUCTURE

Is concept py workings questions mn as a working use hoti hn
separate sy iska past paper question mushkil sy hi mily ga

Business Invest
Finance Project

Return

Sources of finance:
Equity (owners) return in form of dividend or capital gain
Borrowing (lenders) return in form of interest or capital gain
Preference Shares

So, business kam sy kam required rate of return itna kamana chahta tha jitni in sources of fin
isliye NPV nikalty waqt hm disc rate cost of capital lety thy

Is chapter mn hm cost of capital ki percentage nikalna seekhein gy

Background context:
Hm jo cost of capital nikalny ki calculations kren gy wo business ki abi ki auqat or market k a
Hmein agr janna k market mn kitna rate chal rha tu ird gird k halat dekhen gy k kitna rate off
Hm is basis py yeh calculations kren gy k Abi ki auqat or halaat dekhty hoye hm janna chah r
investors ki current demand kia chal rae hy, yani kitny percent interest py investor paisy inve
krny ko ready hojae ga

Assumption:
-Wo group of people (pressure groups) jinki force sy price adjust hojati
-Hmary shares/debentures ki jo market values hn, jin pressure groups ny unko adjust kraya h
hy, unhn ny un shares ki price is base py nikali hy k un bari forces ny investor ban k socha hy
share sy kal ko mujy kia mily ga, jo jo cash flow mily ga uski PV nikali gye hy us discount rate
jo unko lgta hy k abi aik munasib rate of return hy, usky mutabiq jo answer nikla hy wo unhn
price set ki hoi hy k bas hm itny hi paisy dy k debentures khreeden gy

Lecture#32
chap-3,page-1

Read preference shares 1.1, irredeemable pg-126

dividend jo dena hy wo, divide kren gy required return py, this will give MV that will be PV
Share ki asal worth hmesha ex-dividend hogi
Market value ko 0 py outflow rkhna hy or baqi cashflows ko inflow rkhna hy

Concept yeh hy k hm yeh janna chah rae hn k abi k halat mn abi ki auqat dekhty hoe investo

Now, 1.2 cost of debt

Investor ka return hmari cost hy
Interest py tax mn deduction milti hy as an expense
Tu hm agr investors ko 10% interest dengy tu hmein un 10% py tax b bachy ga or agr
tax rate 30% hy tu hm 10 rupy tax den gy tu uspy 3 rupy tax bachy ga tu hmein
effectively cost pry g 7 rupy
So, cost of debt mn interest ko net of tax figure likhna pry ga

cost of debt or cost of preference shares mn yahi diff hy k debt mn bas numerator mn interes

Now, see 1.2 (1) & (2) and do Illustartions 2 and 3

Illustration-3
Yr-0 Yr-1 Yr-2 Yr-3 Yr-4
(113) 7 7 7 137
uper waly cashflows ka IRR nikalein gy wo cost of capital hoga
If debt is convertible, then it means either investor can take cash or shares at the end
Ab hoskta end py market value of shares zyada ho cash sy tu jo aqalmand investor hoga wo
agr redeemable debt hn, tu cashflows k end mn dono options mn su higher hi lena hy yani 7 k
hn, end wala higher len gy
Ab jo IRR nikly ga wo cost of debt hoga
Read point-3, convertible and do Illustration-4, 130 or 138 mn sy higher

Bank Loan hy agr tu jo bank ka interest rate hy, usko net of tax ly lein gy bas wohi cost of ca
Read 3 boxes at last of page-127

Cost of equity pg-128

Is mn b formula wohi hoga jo preference shares mn hoga
Ab is mn 2 situations ho skti:
-Ya tu jitna har sal dividend dety utna hi mila kry ga (same formula as preference shares)
-Ya wo grow kry ga (constant growth, yani har sal 6% grow kia kry ga)

Now, see formulae and do Illustration-5 and 6, pg-128 and 129

MV = PV of all future cashflows discounted at investors ka aaj ka required rate of return

MV = Annual dividend (agr har saal same figure rehni hy, tu phr tu sadi prepertuity
r
MV = Year 1 dividend (agr har saal grow krty jana hy cashflow ny)
r-g ab yeh r nikal len gy is equation sy
Now, g "growth rate" question mn given ho b skta or khud b nikalna pr skta hy
-Avg b nikal skty
-Gordon Growth model
Read on page-129

ROE = Return on equity

Owners k lgy hoe paisy py business har sal kitna kamata hy
ROE = 20 million PAT 10% kamaya business ny
200 millionEquity

retention rate: har sal profit ka itna percent retain krlen gy

Illustartion-7 must do
5.8 mn kitni growth hoi k wo 9.5 ban gya
9.5=5.8 (1+g)^4
is sy g nikal aye ga

Lecture#33
Capital Rationing ka sawal jo Hw dia tha, June-23, is mn aik saal isliye lia kiun k:
-Projects prepetuity mn chal rae thy
-5% per annum nai likha hoa
-Likha hoa k agly saal hongy paisy available (paison ki koi tangi nai hogi)
isliye srf aik sal tak invest kia

YIELD CURVE (pg-128)

Kuch experts hoty wo interest rates ki prediction krty k agly itny time mn interest rates itny b
Example
Aik Co. A hy, jo AA rated hy
isky 7% bonds hn redeemable at 20% premium after 4 years.

Required: a) Current market value of bond. b) yield to maturity (YTM)

c) cost of debt for company A

Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5

Credit Rating
AAA 3.60% 3.70% 3.90% 4.20% 4.60%
AA 3.75% 3.95% 4.30% 4.65% 4.94%
A
BBB
BB
Agr achi credit ranking hy ksi company ki tu iska mtlb hy k unko befikar ho
k loan den yeh interest b acha time py den gy or paisy b wapis dengy and
vice versa for bad credit ranking entities
a)
Ab jo 7 mily ga 5 salon mn or end py 127, uski uper credit ranking waly rates py di
MV bond 7.000 + 7.000 + 7.000 +
1.037 1.0395^2 1.043^3

MV bond = 124.12

c) Yr. 0 Yr. 1 Yr. 2 Yr. 3 Yr. 4

(124.12) 4.90 4.90 4.90 124.90

Disc @ 10% 1.000 0.909 0.826 0.751 0.683

(124.12) 4.45 4.05 3.68 85.31
NPV (26.63)

Disc @ 20% 1.000 0.833 0.694 0.579 0.482

(124.12) 4.08 3.40 2.84 60.23
NPV (53.56)

IRR = Kd = 10% + (26.63) * (0.2-0.1)

26.94
IRR 0.12%
Jo uper IRR nikla wo company k POV sy tha jisky deb hn, hm apna cost of capital janna chah r

Agr koi aam individual is bond ko khreedny ka soch rha hy tu bond 125 ka khreedy ga
tu wo investor agr yeh janna chahy k paisy lgany sy uska kitny percent return arha hy,
tu yeh IRR find kry ga from point of view of investor, isko Yield to Maturity kehty hn
tu cashflows hm redemption ki amount or jo payment of interest hogi wo lengy
individuals ka IRR nikalty hoe hm tax ko ignore krty, hmein kia pta kis individual ka kia status

Now, read two boxes on page-128

Q#2, pg-135, Kahn Ltd
Cal. Cost of equity, debt and preference shares yourself must

Ke = D1 + g
MV
6.3 + 5%* 14.55%
66.0
*(6.3/6)^1/1 - 1 5%

Kp = D1
MV
6 7.5%
 80

Kd = I (1-t)
MV
4.8 * 65% 2.60%
120

WACC ?? Finance jo business mn ata usky different sources hoty (already discussed above)
kam az kam hm apna cost of capital utna rkhty thy k investors ko pay krskein unk
in sb sources sy aya hoa paisa business usko srf paisa keh k invest kr rae project
wo jo paisa hy wo in sb sources ka mixture hy
isliye jo required return rkhna chaiye wo b sb rates ka (14.55%, 7.5%, 2.6%) ka m
so, hm WACC nikalty hn jis mn hm in rates ki total MV b use hogy to cal weightage

WACC Value (Rs. Mill) cost % Wx

Equity [192*66] 12,672 14.55% 1,843
Preference shares [7 6,320 7.5% 474
Debentures [64*120] 7,680 2.60% 200
26,672 2,517
WACC = 2,517 9.44%
26,672

Lecture#34

Pg-129, end, CAPM, next chap mn prhaen gy sir

Now, read box under WACC page-130
- Bank mn MV nai, loan amount hi hogi
-Agr koi debt traded nai hy market mn, lekin required rate of return market ka dia hoa ya pta
tu pehly us debt ki MV cal. Kren gy us market rate of return py

CAPITAL STRUCTURE [pg-131]

Sources of finance of business: Ke e.g., 13%
-Owners ny equity di hoga 60
-Lenders ny debt dia hoga 40
Kd e.g., 6%
Kd hmesha Ke sy kam hi hota hy
Equity or debt ki apas k ratio ko Capital structure kehty

WACC = 13%*(60/100)+6%*(40/100)
(business k 10.20%

Agr say, equity ko hm 70 py ly ayen or debt ko 30 py ly ayen tu %age py kia farq pry ga
Tu hmara weighted avg. b barh jaye ga, cuz equity mehngi hoti hy
Objective:
-Business wants k value of business should be maximized
-WACC should be lowest

Theories:
1-Traditional View
Best capital structure wo hota hy jis mn:
-WACC should be lowest so that,
-value of business is maximized

Traditional view k uper aik swaal askta hy, Kd or Ke nikalny ka mushkil data hoga
lekin uska basic maqsad yahi hoga k different gearing levels py diff Ke or Kd nikal k yeh poch
or har level py WACC cal krna pry ga, behtar wohi hoga jis mn WACC lowest arha hoga

Example:
Following gearing levels are being considered:
Option-1 Debt 40% Equity 60% WACC = 16%*60%+8%*0.75*40%
Ke = 16% 12.00%
Pre-tax cost of debt = 8%
Option-2 Debt 50% equity 50% WACC = 18%*50%+9%*0.75*50%
Ke = 18% 12.38%
Pre tax cost of debt = 9%
Option-3 Debt 20% Equity 80% WACC = 13%*80%+8%*0.75*20%
Ke = 13% 11.60%
Pre tax cost of debt = 8%

Required: Which capital structure is better? (tax rate 25%)

So, better is option-3 as its WACC is lowest

2- MM theory (without tax) un mulkon k liye jin mn tax nai hota, ya tax py saving n
Inhn ny kaha k ap jitna mrzi debt len, ap befikar ho k qarza uthayen ap ko araam sy miljaye g
jesy jesy gearing (debt) barhy g, Ke brhy ga, kiun k shareholders ki tension brh rae hoti
MM theory k mutabiq yeh uper wala kaam itna systematic way mn ho rha hoga k WACC sam

Example:
WACC = Ke*We+Kd*Wd debt kam hoa or zyada hoa, WACC py koi farq nai prha
15% = 15% * 100% + 0
15% = 17.25%*80%+6%*20%
15% = 21%*60%+6%*40%
iski example aesy hi hy, aik pehlwan ny rassa kheenchny k liye bht sy bachon ko bulaya
ab jo jo bachy add hoty gye, pehlwan ny accordingly apna zor brhata gya, bas itna k rassa be
So, best capital structure is mn jo mrzi krlo, cuz WACC change nai horha

2.2 MM without tax (131)

Vg = Vu
Vg = Geared company
Vu = Ungeared company
WACC same rae ga tu Market value b same rae g

Keg - Keu = D/E (Keu-Kd)

Keg = cost of capital jb company geared thi
Keu = cost of capital jb company ungeared thi

Example:
A company is currently 30% geared (debt 30%, equity 70%), its Ke is 19% and Kd is 7%
Using MM (without tax), calculate Ke of this company if it was ungeared

0.19-Keu =30/70 (Keu-0.07)

Keu = 15.4%

Now, what will be the Ke if gearing moves to 45%

Keg-0.154 = 45/55 (0.154-0.07)
Keu = 22.3%

Example:
A company's current debt equity is 40, 60 and Ke and Kd are 16% and 6% respectively.
Required: what will be the revise Ke if gearing moves to 50%
Is formula ka maqsad hi yeh hy k pehly Keu nikalna hy phr usky bad revised Keg nikly ga

0.16-Keu =50/50 (Keu-0.06)

Keu = 11%

Keg-0.11 = 50/50 (0.11-0.06)

Keg = 16%

2.3 MM with tax (131)

Ab inhn ny kaha k jitna mrzi debt lena hy mazeed len
cuz tax apko bht faidy dy rha hy
Jitna debt zyada lety jayen gy, utna hi WACC girta jaye ga

Now, see further 3 formulae on pg-133

Aik level of gearing sy dosry level of gearing tak hm Ke b nikal skty or WACC b nikal skty

Example:
Tax rate is 25%.
Current gearing 30 debt 70 equity
Current WACC is 15%
Required: Revised WACC if gearing moves to 50%

Similarly , pehly WACC ungeared nikalen gy phr revised tak ponchy gy

15% = WACCu [1-((30*0.25)/30+70)

WACCu = 16.22%

Now, revised WACC

WACCg = 0.1622*(1-(50*0.25)/50+50)
WACCg = 14.19%

Practice Question# 5, Zubair Ltd, must do yourself

a tha jitni in sources of finance ki cost thi

abi ki auqat or market k abi k halaat k mutabiq kren gy

dekhen gy k kitna rate offer hoa tha tu investor ny accept kia recently
hty hoye hm janna chah rae k
est py investor paisy invest

ps ny unko adjust kraya hoa

y investor ban k socha hy k is
li gye hy us discount rate py
answer nikla hy wo unhn ny
gy

give MV that will be PV

khna hy

auqat dekhty hoe investor hm sy kitna require kry ga tu paisy lend kry ga, hmari nazar sy wo cost of c

x b bachy ga or agr
ga tu hmein

bas numerator mn interest aye ga net of tax kr k

r shares at the end

almand investor hoga wo shares ly ga tu
higher hi lena hy yani 7 k CFs tu leny hi

mn sy higher

ein gy bas wohi cost of capital/debt ban jaye ga

la as preference shares)

quired rate of return

tu phr tu sadi prepertuity)

hflow ny)
a pr skta hy

ye lia kiun k:

me mn interest rates itny barh jaye gy

Yeh experts ki ratings hn, for

example itny sal bad AA rating k
entities k yeh rates chal rae
hngy
anking waly rates py discounting kren gy
127.000
1.0494^4

ost of capital janna chah rae isliye hmny net of tax krna hy

125 ka khreedy ga
ent return arha hy,
aturity kehty hn
gi wo lengy
kis individual ka kia status hy tax return ka
already discussed above)
estors ko pay krskein unka required rate of return
eh k invest kr rae project mn

4.55%, 7.5%, 2.6%) ka mixture hona chaiye

use hogy to cal weightage

market ka dia hoa ya pta hy,

ge py kia farq pry ga

hkil data hoga
Ke or Kd nikal k yeh pocha ja skta hy k btaen in mn sy behtar capital structure konsa hy
C lowest arha hoga

%*0.75*40%

%*0.75*50%

%*0.75*20%

ota, ya tax py saving nai milti

n ap ko araam sy miljaye ga
tension brh rae hoti
ho rha hoga k WACC same rae ga

C py koi farq nai prha

sy bachon ko bulaya
ta gya, bas itna k rassa beech mn hi rae, ksi aik trf na giry
is 19% and Kd is 7%

and 6% respectively.

d revised Keg nikly ga

or WACC b nikal skty

mari nazar sy wo cost of capital hi hoi (cost of preference shares)
re konsa hy
Lecture#35
Chap#4, PORTFOLIO MANAGEMENT
Generally, number deny wala chapter (sawal)
full fledge swal is mn sy na b aye dosry questions mn workings ban k lazmi aye ga exam mn

Revision of Stats formulae: [yad krny hn]

Page-143, 1.4

Aik business ny agly sal kal forecast krni hn Product A ki sales ki, lekin uncertainty hn paka a
so different estimates lgaye, or har estimate ki aik probability likhi k itni sales hony k itny cha
or aik or product B k estimates lgaye lekin un estimates ki prob same as product A li
Business projections mn agr mukhtalif prob use ho rae hn to estimate any amount:
Is k liye bazurgon ny following formulae bnaye:

Mean/Expected value = Σ px

Product A-----x
Product B-----y
Lets, say
Probability Sales (A) Sales (B) p(x - x̄)^2 p(y-ÿ)^2 (x - x̄)
0.15 240 130 1,500 101 (100)
0.10 270 140 490 26 (70)
0.40 320 155 160 0 (20)
0.20 370 165 180 16 30
0.15 500 190 3,840 173 160
6,170 317
Mean x = 340
Mean y = 156

Hm yeh dekhein gy k hmary in andazon mn kitni zyada deviation hy, uncertainty hy original s
uper waly data mn kitni fluctuation hy
Ab uper wali sb chezain dekhny k liye kuch measures hn:
One measure is called Variance = Σ p(x - x̄)^2 6,170
317
Agr deviation zyada hy, mtlb prod ki sales risky hn

Another one is called is Standard deviation =√(Σ𝑝 (𝑥−𝑥̄)^2)

Ab yeh b hoskta 2 products apas mn linked hn

jo ajkal computer chalty hn, spare parts b ajkal k zamany k hisab sy milein gy

Co-relation Co-variance 0.99

 S.D(x) * SD(y)
Co-variance Σ p(x - x̄)(y-ÿ) 1,380

Go through formulae of stats on page-143

1- Portfolio Theory
Application on:
-Market investors
-Project appraisal (i.e., investment appraisal)

1.1- Market investors

Background:
Investor ny faisla krna k aik company mn invest kry ya na kry tu wo srf do cheezon ki base py
-Us share mn investment ka risk
-Return on investment (dividend or capital gain k soorat mn)
Wo jo b faisla kry ga aik share ko isolation mn dekh k nai kry ga, pory combination ka (portfo
yani portfolios mn sy choose krna hy tu portfolio theory uski help kry g
Portfolio theory investors ko help kry g is chez mn k unka investment portfolio kia hona chaiy
Risk [jo k standard deviation sy pta chly ga]
Return [dividend or capital gain]

Portfolio-1 Return Weight

Co. A 18% 40%
Co. B 16% 60%
Portfolio theory aik company k ksi aik
share py apply nai hogi, pory portfolio
Portfolio-2 py apply hogi. PF-1 or PF-2 py
Co. C 20% 30%
Co. D 24% 70%

Portfolio-1 expected return = Weighted avg of Portfolio-1

=18%*0.4+16%*0.6 16.80%

Portfolio-2 expected return = Weighted avg of Portfolio-2

=20%*0.3+24%*0.7 22.80%

Now, if risk of PF-1 and PF-2 is 4% for both, then PF-2 is better cuz return zyada hy
Risk same, return zyada ki base py faisla hoga
Agr return same hy tu risk ki base py faisla hoga

Agr return or risk dono alag hn, tu alag measure nikalna pry ga. e.g.,
Co-efficient of variation = Standard deviation
Return
Jiska Co-efficient of variation kam hoga, wo len gy mtlb us mn risk kam hoga

Now, read Portfolio risk formulae and others on pg-144 W means weight or dosra sign
and decision making on pg-145
Solve Illustration-2

Lecture#36
Illustration-3

Portfolio-1
Probability Co. A (x) Co. B (y) p(x - x̄)^2 p(y-ÿ)^2 p*(x-x)(y-ÿ)
return%
0.40 20.00 14.00 2.30 9.22 4.61
0.20 22.00 20.00 0.03 0.29 (0.10)
0.40 25.00 23.00 2.70 7.06 4.37
Avg 22.40 18.80 5.04 16.56 8.88
2.24 4.07
S.D S.D

√( 〖 0.5 〗 ^2∗5.03+ 〖 0.5 〗 ^2∗16.56+2∗0.5∗0.5∗8.88)

Portfolio return = 22.40%*0.5+18.8%*0.5 20.60%
Portfolio risk. =

3.14 %
Now, must solve portfolio-2 on ur own
Answers of portfolio-2
return = 21.7%
risk = 3.98%
Co-efficient of variation =
Portfolio-1 3.14 15.24% 1% return kamany k liye itna r
20.60

Portfolio-2 3.98 18.34% 1% return kamany k liye itna r

21.70
Portfolio-1 is better as it has less risk than portfolio-2

Now, from the POV of company

1.2-Project Appraisals
Ab yeh faisla hoga k project A mn paisa lgaen ya project B mn
Investment appraisals mn returns ki jgah IRR ajaen gy or shares ki jgah Projects ajaen gy

Read decision-making (b), pg-145

Dec-13, Q#1, Paramount Industries (152-pg)

read question, aesy pta chaly ga k inv appraisal ka long-term decision making wala swal hy y
must do this question on ur own

Lecture#37
CAPM
Capital Asset Pricing Model
Terms:
1-Risk free investment: kuch govt. ki securities hoti hn, bonds bechti hn, ya schemes hoti hn
Agr koi investor un mn invest krta hy, tu investor POV sy risk free hy yani safe investment hy
Govt. ki secrities ya schemes mn jo paisa invest hota hy wo risk free investment hoti hy
e.g., treasury bills

2-Risk free rate of return (Rf)

Govt ki jo uper securities mn invest kia unky uper jo retuen mila kry ga investors ko wo risk f
e.g., return on treasury securities

3-Market Portfolio: Agr ksi cheez ka rate lgwana hy tu uski market mn ja k price pochein gy
or dukaanein wo hongi jo us pori market ka acha sample hon gi, yani agr market mn 2000 tra
Stock market mn wo companies jinky share zyada khreedy bechy jaty hn, transactions ya tra
e.g., KSE 100 index
Tu market portfolio aik aesa khyali combination of wo wali companies hy jin mn zyada sy zya
Un companies mn jo transactions ho rae, analyst smjta baqi pori market ko b wohi represent
cuz unky shares bechny ya khreedny sy stock market up down hoti
In sari companies k combination ko Market portfolio kehty hn

4-Return on Market Portfolio (RM): Koi investor yahi uper wali companies mn invest kr deta p
Tu usko aik sal k ander jo return mila (past data ya future ko dekh k) usko Return on Market

5-Market Risk Premium:

If, RM is 16% and Rf=7%, Rf hmesha RM sy kam hoga, cuz companies mn investment kr k ris
RM-Rf = Market Risk Premium

6-Beta
Ksi b aik company mn aik investor paisa lgata usko risk hota k investment doob jaye g (ordin
ho skta company profit na kma sky, govt. ka koi rule ajaye, tu ab us SH ko risk hy
ho skta employee chor k chaly jaen, ho skta koi case hojaye
Ab risk 2 type ka ho skta:
-due to company specific factors (internal) known as Unsystematic risk
-due to external factors (Market) known as systematic risk
bike py swari krty hoye bike girny ka risk ho skta: aik risk bike chlany waly ki wjah sy (interna
aik us bike ki apny ander koi khrabi hy us wjah sy, ya phr baarish ho rae tu tyre k phisalny ka
Tu internal risk apni smjdari sy avoid kr skty hn, lekin external hm avoid nai krskty
Unsystematic risk: Internal factor ki wjah sy jo risk tha (management khrab thi) wo avoid ho
Systematic risk: External risk jo market ya external factors ki wjah sy risk: govt policies, exch

Now hmein dekhna k beta ki quantity kesy nikly gi: Market portfolio ko hmny standard bna lia
Hm kahein gy k is ka Beta is equal to 1 hy
Co. A ka beta agr 1.4 hy mtlb hy, Co. A mn paisa invest krna pory market portfolio mn paisa

Beta represents ksi b Company ka systematic risk

Formulae:
β (security a) = Cov. (a.M)
Variance M
or
β (security a) = Correlation (a M) * Variance a
Variance M
Total return of investor = Dividend + Capital gain

Now, CAPM
Yeh formula apko (aik Co. ka isolation mn) aik required return nikal k dy ga, ap is formula mn
wo btaye ga k Co. sy itny percent return milna chaiye.

RM = 16% Rf = 7%
Co. A (beta) = 2 double risky than market portfolio
MRP = 16 - 7 = 9%

Co. A sy jo required return hona chaiye, wo 7% tu hona hi chaiye lekin 9% ka double b hona c
So, Co. A (required return) = 7% + 9%*2
25%
so now see formula from book Rf + beta1*MRP1 +beta2*MRP2 +…........
See, applications of CAPM from book and total expected return formula

Agr expected return zyada hy CAPM return sy: tu yeh acha share hy market mn undervalued
Similarly, for second and third scenarios from book

Question#3, Dec-2009 (c), pg-166

Sb Co. k shares k CAPM or expected return nikal len gy
bury waly share nikalein gy

Co. A
β = 0.024 0.741
(0.18)^2
Required return = 8% + 0.741 * (12%-8%)
10.96%
Expected return = 27-25+2 16%
25
Share of Co. A is over-performing

Co. B
β = 0.033 1.019
(0.18)^2
CAPM (required return 8% + 1.019 * (12%-8%)
12.08%

Expected return = 111-106+4 8.5%

106
Share of Co. D is under-performing

Now, do all of the remaining ones yourself must laaazmiiii

part (d)
Portfolio beta = company k individual betas ka weighted avg.
Revised portfolio = jb hm gndy shares ko nikal den gy jo uper c mn nikaly
Achy shares k jo betas hn unka jb hm weighted avg. nikalein gy tu wo pory portfolio ka weigh

Gndy shares ko bech k jo paisa aye ga, unsy achy shares khreeden gy utny hi khreeden gy ji

part (a)
Pory fund ka existing beta
Beta ka formula lga k co-relation wala

part (b)
CAPM return kia expected return sy match kr rha?
kia portfolio apny required return k mutabiq kama rha?

Lecture#38
June-2008, Question-4 Mr. Faraz
Total return of shareholder = P1-Po+D1
Po
P1-Po/Po in above formula is capital gain (answer in percentage)
and D1/Po is dividend yield %

part (a)
Co. A:
β = Cov. (A. m) = 0.021 0.93
Var m (0.15)^2
Required return = 8%+0.93*(0.2-0.08)
Required return = 19.16% =CAPM

Now, do all remaining companies yourself

part (b) first bullet point (estimated value of portfolio)

Agr hmein future estimate krny ki majbori par gye question mn, tu hmein yeh assumption len
(jesy is question mn valuation involve hogyi future ki lekin data is chap k accordingly dia hoa

P1 nikalna hy is question mn hmny

Co. A
19.2% = P1 - 60 + 3.5%
60
P1 = 69.42
Aesy hi baqi companies ka b same nikalna hy P1
Now, price per share or investment ko divide kren gy tu hmary pas no. of shares ajayen gy
Uper jo P1 nikali ussy multiply krlen gy no. of shares ko to estimated value of portfolio

Sab companies k liye aesy hi nikly g, must do yourself

Sb k returns ko add hojaen tu estimated total return on portfolio

Dec-15, Question-5, Akhtar (b)

Beta nikalna hy proposed investment ka jesa Akhtar ny socha tha
Proposed investment uper likhi hoi 20 million
Value (Rs. Mill) Beta
Existing portfolio 50 1.3 given
RL mn inv 10 1.2 given
JL mn inv 10 1.75 W-1

W-1:
16.5% = 6% + β*(12%-6%)
β = 1.75

Now, hmein pory naye portfolio ka expected return chaiye k wo kia hoga
Tu phr hmein sal bad ki expected values btani chaiye thi swal mn tab hm nikalty
Nai btai, so isliye hm assume krty k expected return utna hi hy jitna CAPM hy

Beta of Portfolio
β = 1.3*(50/70)+1.2*(10/70)+1.75*(10/70)
β = 1.35

Expected return = 6% + 1.35 *(12-6)

Expected return = 14.10%

Brief discussion of impact of revised systematic risk:

Beta pehly 1.3 tha jispy wo khush tha, ab jo revised beta nikala wo 1.35 hy
tu ab akhtar ko suggest kren gy k dekh lo agr tm khush ho tu invest krlena

ARBITRAGE PRICING MODEL

CAPM sy srf systematic risk as a whole pta chlta tu yeh model discuss krta further:
k hmein risk ko different factors mn torna chaiye k industry size ki wjah sy kitna risk hy, com
Beta is mn aik sy zyada define hon gy har factor ka alag alag beta nikly ga

Required return = Rf+β1*MRP1+β2*MRP2+β3*MRP3+….......

where, MRP = Rf+β*(Rm-Rf)

June-2022, Question#23, Centaurus Pakistan Ltd

(Best question for practice, must do)
CAPM required rate of return hy so yeh Ke nikalny k liye b istemal hota
investor ka jo required return hoa, wo company ki cost hi hoi na

part (b)
Company ki cost of equity (Ke/CAPM)
Aribitrage Pricing Theory
Ke = Rf+β1*MRP1+β2*MRP2+β3*MRP3+….......
Ke = 4%+1.16*(7%)+0.15*2%+0.22*4%+0.06*3%
Ke = 13.48%

Sawal mn beta sary diye hoye

Now, cal through CAPM
Ke = Rf+β*(Rm-Rf)
4%+1.25*(10%-4%)
Ke = 11.50%

Lecture#39
June-22, Question#23, Centaurus Pakistan Ltd
CAPM method basically equity market k liye bna hoa
Cuz ordinaryshare waly ko preshani zyada hoti k sb ko tu paisa mil jaye ga
End py srf mn reh jaon ga, isko jo risk ya tension hy usko Equity beta kehty hn

CAPM ko debt py b use krskty investor ka required rate of return janny k liye, cuz debt waly i
Farq yeh pry ga k isko hm debt beta bolein gy
and represented by: β is ky formula mn sb wesy hi same aye ga bas return market return on

lekin ICAP ny chunky regular return sy kam chlaya hy tu hm b chla len gy

part (a) Jo CP ny bond issue krdiye thy, unki current market value nikalni hy
Required return = Rf + βd*(Rm-Rf)
=4%+0 (debt beta zero hy)
4%
Market value:
= 15billion * 3% * [(1-1.04)^-10/0.04]+ 16.5 billion * (1.04)^-10
=Rs. 14.86 billion
Yeh value nikal ayi AAA rated bonds ki

Now, gearing ratio: 14.80 30.83%

48
OR
Gearing ratio = 14.80 23.6%
48+14.8

part (c) CAPM waly ko use kr k weighted avg cost of capital nikalen gy
Ke = 11.5%
Kd = IRR of
Cashflows: Yr. 0 Yr. 1 to 10 Yr. 10
(14.80) 15*3%*0.71 16.50
Ab uper waly cashflows ka IRR nikalna hy
tu answer aye ga:
Kd = 3.3%

WACC = 11.5% * 48.00 + 3.3% * 14.80

62.80 62.80
WACC = 9.6%

part (d) mn Ke naya nikly ga (cuz beta change hoa, phase 2 mn), yeh abi seekhna hy

part (e) jb hm naya loan len gy tu hmari credit rating change ho skti, cuz jitna zyada loan
k pta ni wapis kren gy ya nai,
so ho skta credit rating AAA effect hoi ho, tu req e mn likha hoa k CP k corporate bonds ki ma
debt beta pehly 0 sy ab 0.25 b hogya, required rate of return first nikalein gy, or phr part a k

must do part e yourself

part (f)
Kd new aye ga cuz Yr. 0 k cashflow mn change aye ga, 13.05 billion

WACC = 16.54% * 48.00 + 4.64% * 33.05 = 11.69%

48+33.05 48+33.05
jb Ke badal rha hy tu equity ki value b badalni chaiye thi
lekin data nai hy, idr majboran hmein leni pari 48 hi

part a, b, c phase 1 or part d, e, f for phase 2

Must do above question on your own

Alpha Value (⍺)

CAPM ko abi tak hmny srf yeh determine krny mn use kia tha k ksi company mn invest krein
Ab hm 2 companies k shares ko compare kr k dekhen gy, kon ci better hy for investment
Expected CAPM ⍺
Co. A 18% 16% 2%
Co. B 22% 21% 1%
now, read alpha value from book
How will CAPM support k A k shares behtar hn ya B k for investment?

Read box under bond market decisions

is mn likha hoa k agr Yr. 0 py 100 ka outflow hy or Yr. n py 100 ka inflow
tu uska YTM agr nikalein gy tu wo coupon rate k equal hi aye ga

Homework, Summer-2005, Question#6, Azad textile ltd

only discussion in this lecture
har sector ki companies mn sy aik aik choose krni
Debentures waly mn expected return nikalein gy sb ka jiska zyada hoga wo best hogi
YTM yani agr aam sa investor agr aj debenture invest kry tu us investment mn usko kitna ret

Must do above question on your own

Lecture#40 Burai k peechy naiki krny ki aadat dalo

JUNE-2024, Question#4, (ICAP website), QCI Investments Ltd
part (a)

Portfolio Theory:
P
Probability x (%) P(x-̅x)^2
0.20 2.23 6.649
0.50 7.84 0.012
0.30 12.10 5.053
11.71
S.D 3.42 %

̅x= Avg return = 2.23*0.2+7.84*0.5+12.10*0.3

8.00 %
 Q
Probability y(%) P(y-̅y)^2
0.20 1.89 7.474
0.50 7.09 0.417
0.30 13.60 9.398
17.29
S.D 4.16 %

̅y = Avg return = 1.89*0.2+7.09*0.5+13.6*0.3

8.00 %

ZDX with P:
Return = 11%*0.75+8%*0.25
Return = 10.25%

√(Risk
〖 0.75
= 〗 ^2 )∗ 〖 5.12 〗 ^2+ 〖 0.25 〗 ^2∗11.714+2∗0.75∗0.25∗5.12∗3.42∗(−0.6)

Risk 3.40%

ZDX with Q:
Return = 11%*0.75+8%*0.25
10.25%

√( 〖 0.75 〗 ^2 )∗ 〖 5.12 〗 ^2+ 〖 0.25 〗 ^2∗17.29+2∗0.75∗0.25∗5.12∗4.16∗(−0.4)

Risk

Risk 3.55%

CAPM:
ZDX with P:
β = 0.67*0.75+0.46*0.25
0.62

Return = 7%+0.62*(15%-7%)
Return = 11.96%

ZDX with Q:
β = 0.67*0.75+0.52*0.25
0.63
Return = 7%+0.63*(15%-7%)
Return = 12.04%

"P or Q" ka alag return nai nikalna, existing k sath mila k whole portfolio ka nikalna hy
part (b)
is mn jo concept portfolio or CAPM ka prha hy, dono likhny hn or individually dono k fazail bta

For Comparison of two portfolios, we use following methods:

-Co-efficient of variation
-Alpha Value
-Sharp ratio per unit of risk hm Rf sy kitna extra return kama rae hn
-Treynor ratio per unit of risk hm Rf sy kitna extra return kama rae hn

Sharp ratio = Avg return-Rf Read from book

S.D

Treynor ratio= Avg return-Rf Read from book

β
Data sy dekh k idea lgana k konsa method use krna, examiner nai btaye ga

Homework: JUNE-2018, Question#7, Weta Pakistan Ltd.

must do yourself or 4aron methods use kr k krna
b) WPL ka revised expected return usi assumption py nikalna k CAPM hi expected return hy
Beta revised sy new CAPM return nikalein gy

Lecture#41
Discussion of 2 Questions: jo k hmny krny
-Dec-08, Question#9, Mushtaq ltd status wali mehnat is sawal mn lgni
-June-09, Question#10, GHI Ltd Optimal capital structure wo hota jis mn WACC lowest ho

Dec-19, Question#8, Tezgam Investment Ltd (must do)

NAV = Net Asset Value
Funds k assets ki value grow krti hy (funds jb invest krty i.e., mutual funds)
or un assets mn sy jb liability minus krlen tu Net asset hogya
Us fund mn agr abi koi shamil hona chahy ya bahir nikalna chahy
Bahir nikalny wala apny units ki us wqt jitni value hogi wo ly k jaye ga
Jo ana chahy ga wo us wqt invest kry ga jitni market value bnti per unit k hisab sy
Isko kehty NAV, yani jo b in ya out hota fund sy wo NAV ly k ya dy k in ya out hota hy

Front end Load 2%

Agr purchase krny k din NAV 40 rupy tu jo purchase krny aye ga, usko 2 % add kr k price cha
Purchase cost = 40*1.02
40.80
Zyada paisy dy k in hoga

Back end load 3%

NAV thi Rs. 50
Sale value = 50/1.03
48.54
Jo ab apny units bechy ga usko 48.54 rupees milen gy, (50 agr 103 hy tu 100 kia hoga)

part (a)
Fund A:
Sale value 21.55 21.13
1.02
Purchase co
15.92*1.01 16.08
5.05
Gain % 31.40%

A ka beta nikalny k liye formula lgaen gy co-variation ka

Sharp ratio = Return-Rf
S.D
0.59 = 31.41%-10%
S.D
S.D 36.28% (for cal beta)

β = 0.60 * 36.28%
15.11%
β = 1.44

CAPM return = 10%+1.44*(30%-10%)

38.80%

Alpha value = 31.41%-38.8%

= -7.39%
Ab jo b uper kia sb kuch yeh sara salook baqi 2 funds k sath b krna hy

Lecture#42
Total risk (i.e., Standard Deviation)
Debentures mn investment ka main maqsad contractual CFs hasil krna
Shares mn inv ka maqsad: dividend or capital gain (jo company div nai dety wo reinvest krty

Discussion w.r.t equity investment:

Total risk:
Unsystematic (due to Co.'s own factors)
Systematic (due to external factors) reflected by β

Now, we'll divide beta into further:

-Equity Beta
-Asset Beta

Geeli sarak hy, khaddy b hn or dhalwan b, tu kia har bike slip hoga? Nai
Jo giren gi, wo srf road ki wjah sy nai giren g, driver ka apna masla b tu ho skta
Lekin hm assume krty k sb bikes ko same capacity waly log chla rae hn
Abi b har bike k girny ya slip hony ka chance aik jesa hoga? Nai, kiun k bikes different hn
Ab hoskta koi bike khaddy k zyada pass ho ya ksi py sawarian zyada bethi hn

Now, company jis environment mn operate kr rae, jis govt. k under kr rae
ya jis weather conditions k under kaam kr rae, kia yeh factors har company py aik jesa haavi
nai, kiun k har company ki nature alag hy, pharmaceutical, boutique, cars business, food rest
Jin mn import involve hy jin mn export involve hy sb py alg alg effect ho ga
(assuming k sb companies ki management aik jesi capable hy)
Jis company mn gearing zyada hy us k uper zyada effect aye ga as compare to that company
jis mn gearing kam hy

Factors k change hony har company py different level ka asar pry ga

Asset Beta: (covers business risk)
Agr company ny debt na lia hota, ya geared na hoti tu company ka beta kia hota is called As
(Khyali beta)

Equity beta: (covers: both business risk and financial risk)

Jo abi tak prha
Debt beta jo external factors ko samny rkhty hoye debt investors ki tension hy

Asset Beta (βa) = βe * Ve + βd * Vd (1-t)

(wo beta jo ignoring Ve+Vd(1-t) Ve + Vd
debt hota co. ka)

Asset beta mainly business nature ko reflect kr rha

Tu aik industry/sector mn mojod sari companies ka asset beta aik hi hoga

Read Book, 4.2.1 heading, pg-149

Portfolio ka beta: sb betas ka weighted avg krlen

Co. ka:
βe = 1.7
βd = 1.1
Ve 450 million in values ki jgah ratio b di ja skti, tu wo b aesy hi put hon
Vd 80 million
Tax rate: 25%
Cal asset beta?
Asset Beta 1.7 * 450 + 1.1*80(1-0.25)
450+80(1-0.25) 450 + 80

Asset Beta 1.63

Asset Beta = 1.25

Gearing = 45:55
Tax rate = 30%
βd = 0
Find equity beta ?

1.25 = βe * 0.45 + 0
0.45+0.55(1-0.3)

βe = 1.97

Question#13, page-160, Alpha funds (must do yourself best for practice)

Alpha values=expected-CAPM
portolio ka nikalna asset beta tu pehly indiv ka asset beta nikal k uska weighted avg kren gy
pehly equity beta nikalein gy phr us sy asset beta
Beta hm log abi k halat k hisab sy nikal rae tu jo CAPM hota wo b abi k halat k according hi h
expected return b abi k halat k hisab sy hota

Lecture#43

Now, Use of asset beta and equity beta

Investor "invest in" share

(individual) return:
--Dividend Required return: (based on ris
--Capital gain Expected return: (P1-Po+D1)/P

Investor "invest in" Debenture

(individual) return:
--Coupon/Interest Required return: (based on ris
--premium/discount Expected return=IRR

beta reflect krta k business ki market mn changings k sath kia movement hy

market neechy ayi tu yeh bht zyada neechy agya, mtlb zyada risky hy
Investor "invest in" Project
(company A Ltd) return:
--Inflows>outflows

Expected= Required kitna hona chaiye? (j

IRR same as Cost of capital
in debt i.e., weighted avg of Ke and Kd
Ke---- CAPM OR Dividend Mode
Ke=Rf+βe(Rm-Rf) Kd--as studied in chapter-3
Covers:
-Business nature
-Gearing

Jb business ksi project mn invest krta hy tu agr NPV method lgana ho tu Cost of capital sy dis
or agr IRR method lgana ho tu IRR nikal k usko or cost of capital ko compare krty
Hm company ka Ke, Kd or Cost of capital use krny ja rae project appraisal k liye
WACC: Ke or Kd ka weighted avg

Now, agr hm apny hi business ko aur brhany lgy hn tu project ka business nature, existing w
or is project mn jo paisa lgana hy ya tu apny pas sy lgana or agr kahin sy raise b krna hy tu
isi ratio mn krna hy gearing utni hi maintain rae
Hence, jb gearing b change nai honi ya or business nature b same hi rehni tu company ka co
Use ho skta same hi cost of capital jo expansion of business sy pehly tha

Agr project mn paisa lgany sy gearing change ho rae ho ya company ka business nature cha
tu ab cost of capital nai chal sky ga, cuz cost of capital tu existing company
ka hy, cost of capital mn tu company ki business nature or company ki gearing reflected hy
project ki tu nai hy
Is masly ka hal, ab cost of capital nai chly ga iski jgah :
-Project specific discount rate nikly ga; ya phr
-APV method lgy ga (adjusted present value)

Project Specific Discount rate

Agr project diff business nature ka hy
Discount rate = Ke * We + Kd * Wd

Ke = Rf + βe [Rm-Rf]
PROJECT SPECIFIC
project βa = βe E GEARING
specific E+D(1-t)

βa = βe * E
E+D(1-t)
 Industry specific
to which project
relates

Question#2, December-2023, part (a), Malahro Ltd

Asset beta of project:

βa = 1.5 * 2
2 + 1(1-29%)
βa = 1.11

Equity beta of project:

1.11. = βe * 4
4+1(1-29%)

βe = 1.31

Ke for project:
Ke = 7% + 1.31(15%-7%)
Ke = 17.48%

Kd for project
Kd = 7% * 0.71 =4.9%

Project Specific discount rate = 17.48%*(4/5) + 4.9%*(1/5)

14.96%

Homework: JUNE-2023, Question#3(a), from ICAP webiste

DEC-2020, Question# 17, KP Ltd

Lecture#44
Discussion of above both questions, homework
-Book value leni thi equity or debt ki for WACC, wo balance sheet sy ani thi
-Project specific nai hy gearing di hoi tu company wali hi use hogi
-Risk free return assumed hy so βd=0 hoga
-βa nikalein gy, ab likha hoa debt beta is not risk free, tu debt beta nikalein gy
-debt beta k liye wo CAPM formula lg skta
-hm assume kr skty CAPM uska expected return hy, debenture ka expected return uska YTM
-YTM ko CAPM k formula mn rkh k debt beta nikala

December-15, Sandra Ltd, Question#15

Yr. 0 Yr. 1 Yr. 2 Yr. 3

 -------------------------------------Rs. In million-------------------------------------
Total Contribution 1,112.08 1,191.33 1,276.01
[CPU(W-1)*units(W-2)]
Tax [W-3] (176.12) (223.52) (269.01)
Investment (3,500.00)
(3,500.00) 935.96 967.81 1,007.00
Disc. (W-5)
find project specific discount
rate on ur own
[Kd and Ke]

W-1: Yr. 1 Yr. 2 Yr. 3 Yr. 4

Cost per unit
CKD Kit [JPY] 535,500.00 ### 590,388.75 619,908.19
[LY*1.05]
Exchange rate 1.18 1.20 1.22 1.24
[Rs./yen]
631,890.00 ### 720,274.28 768,686.15
Import duty (40%) 252,756.00 ### 288,109.71 307,474.46
Material and Conv 351,000.00 ### 409,406.40 442,158.91
[LY*1.08]
### ### ### ###
Contribution [20%] 247,129.20 ### 283,558.08 303,663.91
### ### ### ###

W-2: Yr. 1 Yr. 2 Yr. 3 Yr. 4

Ferro demand 15,000 15,000 15,000 15,000

Price-Ferris ### ### ### ###

Price-Ferro ### ### ### ###
[LY*1.08]

% difference 12.5% 11.6% 10.7% 9.8%

[difference in price/
ferris price]

Demand shift 30% 30% 30% 40%

Ferris units 4,500.00 4,500.00 4,500.00 6,000.00

W-3: Tax Yr. 1 Yr. 2 Yr. 3 Yr. 4

Contribution 1,112.08 1,191.33 1,276.01 1,821.98
Dep (W-4) (525.00) (446.25) (379.31) (322.42)
Loss (W-4)
587.08 745.08 896.70 1,499.57
Tax @ 30% 176.12 223.52 269.01 449.87

W-4: Dep and loss

Cost 3,500.00
Yr. 1 dep (525.00)
2,975.00
Yr. 2 dep (446.25)
2,528.75
Yr. 3 dep (379.31)
2,149.44
Yr. 4 dep (322.42)
1,827.02
Yr. 5 bal (327.02)
1,500.00

Lecture#45
Adjusted Present Value (APV)
[pehly sir choti choti calculations krwaen gy, usky bad sary dots jor k concept dengy]

Q-1
Project life=4 years
Cost of plant 500 million
Yr.1 Yr.2 Yr.3 Yr.4
Sales: 200 mill 300 mill 360 mill 420 mill
Variable costs 20%
RV of plant 60 mill
Tax rate 30%
tax Depreciation 25% RB
Rf 6%
Rm 14%
Avg βe of industry to 1.65
which project relates
Avg debt:equity of 40:60
industry
Required: Base case NPV
Base case NPV project ki wo NPV hy jo is base py calculate ho rae k sara ka sara project equi
Yr. 0 Yr. 1 Yr. 2 Yr. 3
------------------------------Rs. In mill -----------------------------------------
Sales 200.00 300.00 360.00
Variable costs (40.00) (60.00) (72.00)
Tax [W-1] (10.50) (43.88) (65.31)
Plant (500.00)
(500.00) 149.50 196.13 222.69
Disc rate 15% [W-2] 1.00 0.87 0.76 0.66
(500.00) 130.00 148.30 146.42
NPV 119.39

W-1:
Contribution 160.00 240.00 288.00
Dep [W-2] (125.00) (93.75) (70.31)
Loss [W-2]
- 35.00 146.25 217.69
Tax @ 30% - 10.50 43.88 65.31

W-2: Dep and loss

Cost 500.00
dep yr. 1 (125.00)
375.00
dep yr. 2 (93.75)
281.25
dep yr. 3 (70.31)
210.94
Yr. 4 bal. (150.94)
60.00

W-3:
Industry
βa = 1.65 x 60 = 1.125
60 + 40*0.7

Ke = 6% + 1.125 (14%-6% = 15%

Q-2: Same as above project

But same project will be financed by 50% equity and 50% debt
Issue costs for equity and debt will be 4% and 2% respectively
Issue costs for debt are allowed for tax purposes
Required: PV of issue costs?

2 methods to solve above:

Method-1 Rs. In mill
Issue costs:
-Equity [250m*4%] (10.00)
-Debt [250m*2%] (5.00)
Tax saving on issue costs 1.42
[5m*30%*1.06^-1] Tax aty aty is cost py saal ka end ajaye ga
(13.58) tu jo tax bachy ga wo hmein aik sal discount

Method-2 (preferred method exam POV)

Issue cost:
-Equity [250/0.96] * 4% (10.42) Itna loan raise krna pry ga k net 250 bach ja
-Debt [250/0.98] * 2% (5.10) or jitna raise kren gy gross, utny k uper char
Tax saving on issue cost 1.44
[5.10*30%*1.06^-1]
(14.08)
(250/0.98=255, 255 raise kren gy tu 5 kharch kr k net 250 bachy ga or jb hm raise hi 255 kr

debt ki amount method 1 mn 250m hy or method 2 mn 255m hy, ab next sir method 2 ly k c
Q-3:
Debt will be raised by issuing 10% TFCs redeemable at par after 4 years
Required: PV of tax shield on debt finance

PV of tax shield:
= 255.10 * 10% * 30% hmein har sal itna tax bacha kry ga
so hm annuity lga lengy ispy

= 255.10 * 10% * 30% 1-1.06^-4

0.06
= 26.51

Q-3 (Revised)
40% of the debt finance will be obtained from govt, at a subsidized interest of 8% and
remaining 60% of debt finance will be raised by issuing 10% TFC
both loans will be redeemed at par after 4 years
Required: PV of tax shield on debt finance and PV of govt subisidy

PV of tax shield on debt

= 255.10 * 40% * 8% * 30%
. + * 1-1.06^-4
= 255.10*60%*10%*30% 0.06

= 24.39
Govt, financing ki wjah sy hmein 2% bachat ho rae, us bachat ko hm apni income len gy

PV of Govt. subsidy = 255.10*40%*2%*0.7

= 4.96 hmein 2% sasta loan leny sy 2% py jo tax bachna tha wo ab nai bachy

Vg = Vu + Dit (I or I cancel hogya)

i
Vg. = Vu + Dt

is formulae ka mtlb hy agr koi business ungeared hy tu uski jo worth hy

wohi business agr geared hota tu uski worth zyada hoti ungeared sy cuz usko aik additional b
wo benefit jo ungeared ko nai hy, interest py tax saving ka

APV yeh kehta k project ki zroor NPV nikalo lekin pehly debt ignore kro
APV method yeh hy k base case NPV nikalein or phr usky sath finance raise krny k jo net faid
chunky yeh PV hy tu jo b components nikal rae unki PV ly rae hn
Now,
APV = 120-14.08+24.39+4.96 =135.27

120 k ilawa baqi cheezon k liye discount rate Rf use kia tha lekin pre tax borrowing rate b ho
Hm is project k liye 250 mill raise kr rae lekin agr bank khush ho kr kahein k hm apko 300 mi
beshak hm abi ly 250 ly rae hon gy loan, lekin calculations sari 300 mill ko ly kr hongi, debt c

Lecture#46
Question#18 from book, Shahid Ltd, must do yourself
After tax RV ka mtlb hm sara tax calculate kr k usky bad apko bta rae RV
Apny srf dep cal krni

December-2018, Question#22, Venus Trdaing Ltd

APV Rs. In mill

Base case NPV (W-1) (2.12)
Issue cost (W-2) (1.86)
Tax shield (W-3) 24.52
20.54

Conclusion: As APV is positive, accept the project

W-1 :Base Case NPV Yr. 0 Yr. 1 Yr. 2 Yr. 3

-----------------------------------Rs. In mill-----------------------------------
Billing [1500*10%,25%,35%,30%] 150.00 375.00 525.00
Material[700*40%,20%,20%,20%] (280.00) (140.00) (140.00)
Sub-contracting [150/3] - (50.00) (50.00)
Other Costs [412/2] (103.00) (103.00) (103.00)
- (233.00) 82.00 232.00
Tax (W-1.1)
Advance 375.00 (37.50) (93.75) (131.25)
Retention Money (7.50) (18.75) (26.25)
Plant (250.00)
125.00 (278.00) (30.50) 74.50
Disc @ 13.2% (W-1.3) 1.00 0.88 0.78 0.69
125.00 (245.58) (23.80) 51.36
PV of above cashflows (42.47)
PV of retention money 40.35 isko aik or year add kr k uper b kr skty thy, yeh b thek hy
[1500*5%*1.132^-5]
Base case NPV (2.12)

W-1.1: Tax Yr. 1 Yr. 2 Yr. 3 Yr. 4

-----------------------------------Rs. In mill-----------------------------------
Net cash (233.00) 82.00 232.00 157.00
Dep (137.50) (11.25) (10.13) (9.11)
(370.50) 70.75 221.88 147.89
b/f (370.50) (299.75) (77.88)
(299.75) (77.88) 70.01
Tax @ 30% (21.00)

W-1.2: Dep Rs. Mill

Cost 250.00
Yr. 1 initial (125.00)
125.00
Yr. 1 Normal (12.50)
112.50
Yr. 2 normal (11.25)
101.25
Yr. 3 normal (10.13)
91.13
Yr. 4 normal (9.11)
82.01
W-1.3 point 2 wala beta use kren gy cuz project specific
Ke = Rf+βa(Rm-Rf)
Ke = 9%+0.7*6%
13.2%

W-2: Issue Costs Rs. In mill

Issue cost (2.53)
[250/99%*1%]
Tax saving 0.67
[2.53*30%*1.09^-1]
(1.86)
W-3: PV of tax shield on debt

250/0.99*10%*30% * [1-1.09^-4]
0.09
PV of tax shield on deb 24.52

See, working-3 in solution [examiner ki ghlti]

Running finance ka account bnaya hoa, check kia k overdraft aya ya nai
overdraft py interest prna tha, phr uspy tax bachat aye g
Asal mn examiner sy ghlti hoi k wo miss kr gya 375 ka inflow lena
n k lazmi aye ga exam mn

ekin uncertainty hn paka andaza nai lg skta

k itni sales hony k itny chances hn
me as product A li
ate any amount:

(y - ÿ) p*(x-x)(y-ÿ)
(26) 390
(16) 112
(1) 8
9 54
34 816
1,380

hy, uncertainty hy original sy

for x
for y

79 for x
18 for y

sy milein gy
o srf do cheezon ki base py hoga:

ory combination ka (portfolio) faisla kry ga

ent portfolio kia hona chaiye or is decision making mn 2 chezain dekhy ga investor:

return zyada hy
 kam hoga

means weight or dosra sign means variance

return kamany k liye itna risk lena pry ga

return kamany k liye itna risk lena pry ga

jgah Projects ajaen gy

sion making wala swal hy ya portfolio ka

hti hn, ya schemes hoti hn short term ya long term

hy yani safe investment hy
ee investment hoti hy

y ga investors ko wo risk free rate of return hota hy

mn ja k price pochein gy
ani agr market mn 2000 transactions ho rae tu un 5 dukaano mn 500 ya 600 lazmi ho rae hn
jaty hn, transactions ya trading roz ya zyada hoti (har listed company mn roz shares ki trading nai ho r

nies hy jin mn zyada sy zyada transactions ho rae hn

market ko b wohi represent/reflect kr rae hn

panies mn invest kr deta paisa

k) usko Return on Market portfolio kehty hn.

nies mn investment kr k risk zyada hota beshak company jitni mrzi profitable ya best chal rae ho

estment doob jaye g (ordinary share mn investment k bad),

us SH ko risk hy

ematic risk
(called as Beta) yeh wala risk Beta k through measure hoga
any waly ki wjah sy (internal)
ho rae tu tyre k phisalny ka b risk hy(extrernal)
avoid nai krskty
ent khrab thi) wo avoid ho skta, yani sara paisa Co. A mn invest krny ki bjaye, thora A thora B etc aesy
sy risk: govt policies, exchange rate ka risk etc

o ko hmny standard bna lia

market portfolio mn paisa lgany sy zyada risky hy

l k dy ga, ap is formula mn figures put kren gy

ekin 9% ka double b hona chaiye cuz market sy double risky hy

P2 +…........

hy market mn undervalued hy lekin good performing hy, abi logon ko iski qeemat ka andaza nai hy
 wo pory portfolio ka weighted avg ajaye ga

n gy utny hi khreeden gy jitny current proportion mn khreedy hoe achy shares

 hmein yeh assumption leni pry gi k CAPM jo hy wohi expected return hy
chap k accordingly dia hoa)

s no. of shares ajayen gy

ed value of portfolio

tab hm nikalty
a CAPM hy
o 1.35 hy
st krlena

uss krta further:

wjah sy kitna risk hy, company size ki wjah sy kitna risk hy, inflation interest rates etc etc
alag beta nikly ga

l jaye ga
eta kehty hn

anny k liye, cuz debt waly investor ko b tu tension tu hoti hy, kam hoti

as return market return on debentures ya bonds wala use krein gy

ue nikalni hy

yeh abi seekhna hy

o skti, cuz jitna zyada loan lety utna hi investor ko dar hota

CP k corporate bonds ki market value py kia farq pry ga

nikalein gy, or phr part a ki trah hi market value nikal len gy
 company mn invest krein ya nai kren
etter hy for investment

hoga wo best hogi

estment mn usko kitna return milta nazar arha hy
16∗(−0.4)

rtfolio ka nikalna hy
 dividually dono k fazail bta deny

kama rae hn
kama rae hn

btaye ga

PM hi expected return hy

ota jis mn WACC lowest hota is question mn har level py WACC nikalna hy

al funds)

r unit k hisab sy
k in ya out hota hy

usko 2 % add kr k price charge ki jaye g

3 hy tu 100 kia hoga)

v nai dety wo reinvest krty, us sy business brhta or ultimately market value increase hojaye g)

ected by β
 b tu ho skta

un k bikes different hn
da bethi hn

company py aik jesa haavi hon gy effect kren gy?

ue, cars business, food restaurants etc
ect ho ga

s compare to that company

a beta kia hota is called Asset Beta

ki tension hy

kti, tu wo b aesy hi put hongi

t for practice)

uska weighted avg kren gy

abi k halat k according hi hota

uired return: (based on risk)--CAPM

ected return: (P1-Po+D1)/Po

uired return: (based on risk)--using: Yield curve and zabardasti CAPM b

ected return=IRR

vement hy
uired kitna hona chaiye? (jitny us company ko yeh cost kr rae hn)
t of capital
weighted avg of Ke and Kd (gearing)
-- CAPM OR Dividend Model OR MM Model
as studied in chapter-3

ho tu Cost of capital sy discount krta hy

o compare krty
ppraisal k liye

usiness nature, existing wala hi hoa

ahin sy raise b krna hy tu

hi rehni tu company ka cost of capital ya existing cost of capital company ka is project appraisal k liye

ny ka business nature change ho rha

company
ny ki gearing reflected hy

ROJECT SPECIFIC
GEARING
sy ani thi

a nikalein gy

expected return uska YTM hota hy

Yr. 4 Yr. 5
--------------------------------------
1,821.98 1,950.87

(449.87) (487.15)
1,500.00
1,372.11 2,963.72

Yr. 5

650,903.60

1.26

820,138.53
328,055.41
477,531.62

###
325,145.11
###

Yr. 5
15,000

###
###

8.8%

40%
6,000.00

Yr. 5
1,950.87
 -
(327.02)
1,623.85
487.15

r k concept dengy]

k sara ka sara project equity financed hy

Yr. 4
---------------------------
420.00
(84.00)
(55.52)
60.00
340.48
0.57
194.67

336.00
-
(150.94)
185.06
55.52
 t py saal ka end ajaye ga
a wo hmein aik sal discount krna pry ga

na pry ga k net 250 bach jaye

gy gross, utny k uper charges pren gy

ga or jb hm raise hi 255 kr rae hongy tu phr 2% b isi k uper lgy ga)

ab next sir method 2 ly k chalny lgy hn

d interest of 8% and

hm apni income len gy

achna tha wo ab nai bachy ga that’s why 7% sy multiply kia

sy cuz usko aik additional benefit hota

nce raise krny k jo net faidy hn wo ly len

re tax borrowing rate b hoskta

r kahein k hm apko 300 mill b deny ko tyar hn
0 mill ko ly kr hongi, debt capacity hmari 300 mill hy

Yr. 4
--------------------------
450.00
(140.00)
(50.00)
(103.00) Interest ko totally ignore kr k chal rae cuz agy tax shield mn hojaye ga calculate
157.00
(21.00)
 (112.50)
(22.50)
82.01
83.01
0.61
50.55

b kr skty thy, yeh b thek hy

zmi ho rae hn
hares ki trading nai ho rae hogi)

a best chal rae ho

ure hoga
hora A thora B etc aesy invest krlia

at ka andaza nai hy
tes etc etc
nikalna hy
rease hojaye g)
project appraisal k liye sahi hy
mn hojaye ga calculate
Lecture#47

BUSINESS VALUATION
must appear question in exam

Business ki valuation do cheezon ki value nikalna:

-Company ki equity or finance ki (equity and debt)
-Net assets ki (working capital and non-current asset) NCA, (CA-CL)

For better understanding, this chapter is split into:

-Valuation of business/equity [is mn val techniques prehn gy]
-Valuation in context of acquisition/merger [phr is context mn mix kren gy valuation]

VALUATION OF BUSINESS/EQUITY
Debt valuation Future cashflows ki present value
see page-259, woi chap 1 wali
bs yahi hy debt valuation

1- Equity Valuation: value or price alag alag cheezein hn, value is worth actual
1- Dividend Valuation Methods

No growth Constant Varying growth

in dividend growth in in dividend
dividend
MV = D/Ke MV = PV of all future
MV = dividends discounted @
D1 Ke
Ke-g

Question: A company pays a dividend of Rs.6 per share every year.

Rf 5%, Rm 11%, equity beta 1.25
Current value of share?

Ke = 5% + 1.25 (11%-5%)
Ke = 12.50%

MV = 6/12.50%
MV = 48.00

Question: A dividend of Rs. 8 has just been paid, it is expected to grom at 5% per year
Ke=13%,value of share?

MV = D1
 Ke-g

MV = 8*1.05 105.00
13%-5%

Question: A company paid a dividend of Rs. 7 per share last year, current dividend is due to b
Dividend grows by 4% every year. Ke is 14%, current ex-dividend value

MV = D1
Ke-g
MV = 7*1.04*1.04 75.71 yeh ex-div hi hy by default cuz formula mn D1 samet hm
14%-4% cashflows ly rae tu jo kal prson div milna tha wo tu nai a
hence, ex-div

Question: A dividend of Rs. 10 has just been paid. It is expected to grow by 6% in year 1,
8% in year 2, 5% in year 3 and 4% in year 4 and thereafter
Ke is 16%
Market value?
Yr. 1 Yr. 2 Yr. 3 Yr. 4
6% 8% 5% 4%
dividend 10.60 11.45 12.02 12.50

PV (10.60*(1.16)^-1)+(11.45*(1.16)^-2)+(12.02*(1.16)^-3)+(104.17*(1.16)^-3)
92.09

MV3 = D4 yeh perpetuity

Ke-g
12.50 104.17
16%-4%

Main concept in all of above is MV hogi, future sary dividends ki PV

Lecture#48

2- Asset Based Valuation

This theory says business ki worth usky assets sy maloom hoti

Example:
Current SOFP of AB Ltd:
Assets: Rs. Mill
PPE 180.00
intangible assets 20.00
Current Assets 30.00
 230.00

Equity:
Capital (Rs. 10 each) 60.00
Reserves 90.00

Liabilities:
Liabilities 80.00
230.00

Other information:
Realizable Replacement
values cost
PPE 210.00 218.00
Intangible assets 15.00 8.00
Current assets 25.00 33.00
250.00 259.00
Required: Value per share based on:
a) Book values
b) Realizable values
c) Replacement costs
d) P/B ratio of 2

a)
Value per share Rs. 150m =Rs. 25 share ki book value
6m
b)
Value per share Rs. 250-80 =Rs. 28.3
6m
c)
Value per share Rs. 259-80 =Rs. 29.8
6m

Hm equity ki value nikal rae using value of assets that’s why liab minus ki
Business valuer ki mrzi wo book value ya realizable value ya replacement costs sy asset ki va

d)
Price to book value ratio hy 2 business ki, yani k expert keh rha hy k
Company ka jo share hy, uski worth wo uski book value ka 2 times honi chaiye

value per share = book value per share x P/B ratio

= Rs. 25 x 2
 = Rs. 50

Page-260, Chapter ka dosra page read all formulas

3- Earnings Based Valuation

(i) P/E ratio method: Price/EPS
Experts ny market k halat ko dekhty hoye aik subjective figure btani hy
jo unky hisab sy market mn company k share ki worth earnings ka itny times hona chaiye
e.g., Co. A should be valued at P/E multiple of 8

Value per share = EPS x suitable P/E

OR "for total value of shares"
Value of equity = PAT x suitable P/E ya uper wali ko total no. of shares sy multi

Tu yeh jo number hy yeh expert hi btaye ga

Company mn jitni zyada achaiyan hon gi, yeh ratio utni zyada hogi and vice versa

Ho skta expert ny pori listed companies ki aik ratio btai ho

lekin yeh kaha ho k chunky apki company listed nai hy isliye is ratio sy kam hogi
apki company mn yeh b khamiyan(listed nai hy, gearing zyada hy, management sahi nai hy)

Now, on page-260, read box below Earnings based method and 2.1.1 P/E ratio
Box:
Jis company k liye hm yeh use krna chah rae hn, us company ka profit is sal ka len ya agly sa
dono ly skty
Valuation future prospects ko dekh k krni chaiye
So, now agr is sal ka profit is wjah sy zyada aya k govt sy grant mili thi, tu yeh non-recurring
isliye, non-recurring cheez ko chor den gy

(ii) Earning/Dividend Yield Method

Earning Yield = EPS x 100

price
E.g., Company A should be valued at an earning yield of 15%
Value per share = EPS/suitable earning yield

Value per share = 18 / 15%

= Rs. 120

return on equity jesa concept hy, cuz investor dekhta hy na k share py kitna kamaya compan
or Ke b return hi hota hy required return of investor

Now, read below P/E ratio upto cashflow value pg-261 tak mathod
Question#2, Shinewing Ltd, read question and see solution of first 4 methods just

Lecture#49

4- Free Cashflow
Aik business ki value nikalny k liye us business k cashflows b use ho skty hn
e.g., agr aik debenture ki value nikalni hy tu usky cashflows discounted at investor ka require
Ab shareholder ban k sochein tu wo yeh dekhy ga k yeh share mujy kitna cash kama k dy ga

Dividend valuation method un logon ki soch ko samny rkh k bnaya gya hy jo srf dividend kam
tu valuation methods different logon ki soch ko dekh kr bnaye gye, jinko lgta k business ki wo
unky liye equity valuation method, jinko lgta assets sy unky liye asset valuation method or is

Value = PV of future free cashflows discounted at required rate of return

Aik business k cashfkows ho skty:

-Sales x
-Costs (x)
-Tax (x)
-Capex (x)
-WC Inv (x)
x isko kehty free cashflow to firm (yani busin
Repayment of debt (x)
Interest of payment (net of tax) (x)
x yeh jo paisa reh gya ab is py owners ki naz
or isko kehty free cashflow to equity

Agr acha business hy tu in sb ko add kr k answer positive ana chaiye, kama k dy rha na busin
yani zroori khrchy kr k b jo paisa bachy ga business ki trf sy wo paisa azaad hy
Ab investors ny apna hissa nikalna hy, baqi yeh paisa azzad hy business ki trf sy
investors mn pehly lenders nikalein gy apna paisa

Agr free cashflow to equity ki direct flight lani ho ty:

-Sales x
-Costs (x)
-Interest (x)
-Tax (x)
-Capex (x)
-WC Inv (x)
Repayment of debt (x)
x FCFE
Value of Equity = PV of FCFE discounted at Ke (Ke py isliye discount k srf own

Value of Business = PV of FCFF discounted at WACC (WACC py isliye k dono lender

Value of equity = Value of business - Value of Debt (value of business sy value of

See both formats on page-263 and 2.3.3 on pg-262

(jo uper D1,D2,D3 or D4 nikala tha wo samny rkh k formats dekhny)

Question#12, Fuji Company, page-279

Yr. 1 Yr. 2 Yr. 3

--------------Rs. "000"-------------
Sales [LY*1.09] 5,450.00 5,940.50 6,475.15
Cost of sales [LY*1.09] (3,270.00) (3,564.30) (3,885.09)
Operating costs:
-Variable (817.50) (891.07) (971.27)
-Fixed [LY*1.06] (1,060.00) (1,123.60) (1,191.02)
-Depreciation (W-1) (134.52) (144.02) (155.43)
Interest [990*7.5%] (74.25) (74.25) (74.25)
93.73 143.25 198.09
Tax @ 30% (15.00) (28.12) (42.98)
78.73 115.13 155.12
Dep (add back) 134.52 144.02 155.43
Capex (W-1) (79.20) (95.04) (114.05)
Working Capital (W-2) (24.00) (26.00) (29.00)
110.05 138.12 167.50
Terminal Value 2,457.00
167 x 1.03
10% - 3% 110.05 138.12 2,624.50
Disc @ 10% 0.91 0.83 0.75
100.05 114.15 1,971.82
Value of Equity 2,186.01

W-1: Yr. 1 Yr. 2 Yr. 3

--------------Rs. "000"-------------
Open. Bal 1,266.00 1,345.20 1,440.24
Addition [LY*1.2] 79.20 95.04 114.05
1,345.20 1,440.24 1,554.29
Dep @ 10% 134.52 144.02 155.43
yeh hmesha tax wali dep ly rae hngy
W-2 WC bal. Cashflows working capital 50,000 ko ly b skty thy or i
Yr. 0 270.00 (220+50)
Yr. 1 294.00 (24.00)
Yr. 2 320.00 (26.00)
Yr. 3 349.00 (29.00)

Lecture#50
JUNE-17, Question#21, Mars Petroleum Pvt Ltd

(MPO pehli dfa publicaly share issue krny lgy hn)

Zyada tar achy methods, jo sahi hn, wo P/E and cashflow method hn for valuation
mutliple years mn growth arae, or equity financed hy, Ke ka data dia hy, that’s why Cashflow

Yr. 0 Yr. 1 Yr. 2

--------------------------Rs. In million-----------------
Profit before tax and dep 1,230.00 1,476.00
[LY*1.2]
Dep [LY*0.9] (350.00) (315.00)
880.00 1,161.00
Tax @ 30% (264.00) (348.30)
Dep 350.00 315.00
Capex (2,500.00)
Issue costs (132.00)
[2500*5/95]
Tax saving [132*30%] 39.60
(2,632.00) 1,005.60 1,127.70
Terminal value [1854/15.8%]
(2,632.00) 1,005.60 1,127.70
Disc @ 15.8% 1.00 0.86 0.75
(2,632.00) 868.39 840.96
Value of Equity 7,326.22

W-1
βa = 1.9 x 60 = 1.30
60+40x0.7
Ke = 8% + 1.3 (14%-8%)
Ke = 15.80%

x share price
y no. of shares to be issues

Rs. 7326 m = x eq. (1)

200 m + y
 xy = 2632 eq. (2)
Solving x and y,
x = Rs. 23
y = Rs. 112 m

Question # 3, page-269, Kohat Ltd

(agr hm company ki gearing change kren, lekin business wahin rae, growth ya kahin or inves
(yani loan ly k shares buy back krlen, ratio same hi rae)
3 WACC nikalein gy, aik existing or 2 requirements py

Effect on cost of Capital

-Existing:
Ke = 5.5% + 1.4 (14%-5.5%)= 17.4%
Kd = 9% x 70% = 6.3%

WACC = 17.4% x 458 + 6.3% x 305

763 763
WACC = 12.96%

-80% equity & 20% debt:

βa = 1.4 x 458.00 = 0.95
458+305x0.7
Revised βe = 0.95 x 80 + 20 x 0.7 = 1.17
80
Revised Ke = 5.5% + 1.12 (14%-5.5%) = 15.02%

Assuming that decreasing the debt will result in improvement of credit rating from A to AA:
Kd = 8% x 0.7 = 5.6%

Existing debt= 40%

Revised debt= 305 m x 20 = 153 mill
40
Revised interest= 153 x 8% = 12 mill
Revised interest = 90/12 = 7.5

Revised WACC = 15.02% x 80% + 5.6% x 20% = 13.14%

Now, solve remaining requirement (b) on your own just like above

Lecture # 51
Effect on Corporate value
-Existing value
= 458 mill + 305 mill = 763 mill

-80% equity & 20% debt:

= FCFF 1
WACC - g
= 65.71 (W-1)
13.14% - 4.3% (W-2)

W-1 :
PBIT 90.00
Tax [90*0.3] (27.00)
Dep 20.00
Capex (20.00)
63.00

FCFF 1 = 63(1+4.3%) = 65.71

W-2:
question mn likha hoa k jo existing growth rate hy, wo b aesy formulae sy hi nikla hoa
763 = FCFF1
WACC-g
763 = 63 (1 + g)
12.96% - g
g = 4.3%

Now, do requirement b same as above

VALUATION IN CONTEXT OF MERGERS AND ACQUISITION

Dec-2011, Question#11, Ibn-Seena Ltd

Jb aik company ki worth janna chah rha hoga uska khreedny wala, tu wo apny hisab sy iski va
usky liye yeh aik investment appraisal type cheez hojaye g cuz wo paisa lga rha hoga
Hm ISL hn or APPL khreedna chah rae hn
is sawal mn debt tu hy hi nai, tu jo b value aye g wo equity ki hi aye g

Yr. 1 Yr. 2 Yr. 3

---------------------------Rs. In mill-----------------------------
Sales:
-Generic [LY*1.1] 792.00 871.20 958.32
-Z-11 [LY*1.1] 237.60 261.36 287.50
-Other patented [LY*1.1] 950.40 1,045.44 1,149.98

Variable COS:
-Generic (336.60) (370.26) (407.29)
-Z-11 (71.28) (78.41) (86.25)
-Other patented (285.12) (313.63) (345.00)
Dep (100.00) (100.00) (100.00)
Other fixed costs [LY*1.05] (94.50) (99.23) (104.19)
Selling expenses [Yr. 1:LY*0.7][LY*1 (252.00) (269.64) (288.51)
Admin expenses[Yr.1: LY*0.2][LY*1. (18.00) (18.90) (19.85)
Royalty [patented*8%] (178.20) (196.02) (215.62)
Technical fee [all*3%] (59.40) (65.34) (71.87)
584.90 666.58 757.23
Tax @ 35% (204.71) (233.30) (265.03)
Dep 100.00 100.00 100.00
Terminal Value

480.19 533.27 592.20

Disc @ 20% (WACC) 0.83 0.69 0.58
400.15 370.33 342.71
Value 3,401.20

W-1:
Sales 18,000 m
0.40 0.60
Generic Patented 1,080.00
720.00
Z-11 Others
216 m 864 m

last year variable COS:

Total 630.00
Patented [1080*30%] 324.00
Generic 306.00 306/720 = 42.5% Z-11, pehly patented mn fall k

Patented:
-Z-11 64.80 iska tu 20, 80 mn hi jaye ga cuz uper wali ki tu cost thi tu agr reven
-Other 259.20 yeh dono tu patented hn, jo inki revenue hy woi ratio inki cost ki b h

Lecture#52
Dec-2015, National Airlines, Question#18, page-287 (by default hm equity ki hi val

Yr. 1 (2016) Yr. 2 (2017Yr. 3 (2018

Revenue (W-1) 165,167.77 ### ###
Cost of services
-Cost of fuel (W-2) (73,496.47) ### (83,500.57)
-Other services
Other income (in ratio of revenue) 1,717.57 1,953.64 2,217.89

Remaining do yourself

W-1: Revenue
Yr. 2015
No. of flights = 4.3 mill/180 23,889.00
No. of passengers per flight:
- Normal 160.00
-Govt 20.00
180.00

Total no. of passengers

[160x+20*0.5x]*23,88 = 144,342 mill
x = 35,542 yeh price nikali hy aik ticket ki, ispy ab gov

Yr. 1 (2016) Yr. 2 (2017Yr. 3 (2018

No. of flights 24,844.56 25,838.34 27,130.26
[LY*(1+g)]
No. of passengers per flight
-Normal 169.60 179.78 190.56
[LY*(1+g)]
-Govt 21.20 22.47 23.82
Ticket price 36,252.84 36,977.90 37,717.45
LY*1.02]
Revenue [Rs. Million] 165,167.77 ### ###

W-2:
Yr. 2015
Cost of fuel oer flight Rs. 2,900,247
[69284 mill/23889]

Yr. 1 (2016) Yr. 2 (2017Yr. 3 (2018

Cost of fuel (Rs. Mill) 73,496.47 77,965.05 83,500.57
[LY fuel *1.02*[Link] flights]

Lecture#53
Question#30, June-2023, AP Ltd (a), pg-301 Market price sy jitna uper max offer krskty

Yr. 0 Yr. 1 Yr. 2

--------------------------------------------Rs. In million------------------------------
Pre-tax operating cashflow 4,500.00 5,200.00
[LY+700]
Tax 29% (1,305.00) (1,508.00)
3,195.00 3,692.00
Terminal value of operating CFs
[5183 x 1.02]
15%-2%
Sale of building 2,400.00
Cost saving [75*0.71] 53.25 53.25
Redundancy (120.00)
Capex (1,000.00) (100.00) (100.00)
Tax saving on capex 290.00
Interest [20000*8%*0.71] (1,136.00) (1,136.00)
Terminal value
[(53-100-1136)/15%]
1,280.00 2,302.25 2,509.25
Disc 15% 1.00 0.87 0.76
1,280.00 2,001.96 1,897.35
Value of equity 27,445.25 million
Maximum %age premium to be offered 27445-25000 =9.78%
25000
Lecture#54
Acquisition ki nazar sy agr valuation krni hy company ki tu discount rate acquirer wala

Question#26, June-2021, SL

WACC use krna so FCFF use kr k value of business nikalein gy phr equity tak ponchein gy
value of debt minus kr k, SL ki nazar sy nikalein gy

Yr. 1 Yr. 2 Yr. 3

-----------------------Rs. In mill----------------------------
Sales [LY*1.025] 3,045.00 3,121.12 3,199.15
Expenses (excl. dep) [LY*1.02] (2,448.00) (2,496.96) (2,546.90)
Depreciation (W-1) (950.00) (895.00) (835.50)
(353.00) (270.84) (183.25)
Tax
Dep 950.00 895.00 835.50
Capex (500.00) (400.00) (300.00)
Working Investment (7.50) (7.61) (7.80)
Terminal value (W-2)
[474 (W-2)/7.86%(W-3)]
89.50 216.55 344.45
Disc @ 7.86% 0.93 0.86 0.80
82.98 186.14 274.50
PV 5,351.77
less: debt (1,000.00)
Value of equity 4,351.77

W-1: Dep Yr. 1 Yr. 2 Yr. 3

-----------------------Rs. In mill----------------------------
b/d 9,000.00 8,550.00 8,055.00
Addition 500.00 400.00 300.00
9,500.00 8,950.00 8,355.00
Dep (950.00) (895.00) (835.50)
8,550.00 8,055.00 7,519.50

W-2: Yr. 2025

Sales 3,279.13
Costs (2,597.84)
681.29
WC Inv (10.00) Capex or Working capital ki tax saving bra
Tax (197.00)
474.29
Agr loss ajaye tu tax waly paisy thori dety, wo bas nil hojata tax
Wo project mn tax saving lety thy yeh business hy

W-3:
W-3.1
βa = 2.45 x 50 = 1.43
50+50x0.71

Risk adjusted βe = 1.43 8600+2000x0.71

x
8600
= 1.66
Ke = 3.75% + 1.66 x (6.85%-3.75%)
Ke = 8.93%

W-3.2
Rf 3.75%
Credit Spread 0.86% [0.75%+(1.03%-0.75%)x(8/20)]
4.61%
Kd = 4.61% x 0.71 = 3.27%

W-3.3:
WACC = 8.93% x 8,600.00 + 3.27% x 2,000.00
### 10,600.00
WACC = 7.86%
Credit spread dia hoa yani credit risk ki wjah sy required return Rf sy kitna zyada hona chaiye
100 basis point 1% hota hy

Approach of Question#10, June-11, ARA

Discussion
Yr. 0 Yr. 1 Yr. 2
Investment (xxx)
Loan (500.00) (600.00)
Interest 50.00

If IRR of above cashflows is 20%

IRR mn NPV zero ati hy, yani yr. 1 sy yr. 5 ki PV Yr.0 k cashflows k braber hogi tu hi zero aye

Tu asked yeh question mn k ARA kitni investment kry k 20% kamaye

Itny lmby swal sy hmny Income statement bnani thi PUN ki, Yr. 5 ki (growth or sb kuch mila k
phr Yr. 5 k PAT ko 16 sy multiply kren gy or phr 60% sy kr k investment on yr. 0 nikalein gy

Now, read question again and do it

Lecture#55

Combined Value/Post Merger Value

Co. A Rs. 400 mill Co. T Rs. 250 mill

(Acquirer) (Target)

Bara A (Post merger) Rs.700 mill

(1) Synergy = 700-400-250 = 50 mill

(2) Maximum takeover premium = Synergy

(3) Maximum takeover price = 250 + 50 OR = 700 - 400

(4) If 280 mill is finalized net benefit to Co. A ? = 50 - 30 = 20

OR 300 - 280 = 20 30 in above is takeover premium

Now, read formulas from book in heading 6: Post merger value (end)

Question#7, pg-274, Jazba Ltd

Jazba or Zoom dono mn sy aik solve krna hy lazmi, or dosry ka sol dekhna combined sir krwa
FCFF sy chalna hy
 Yr. 1 Yr. 2 Yr. 3
----------------------Rs. 000------------------------
Sales [LY*1.06] 24,096.98 25,542.80 27,075.37
Operating cost (Sales*70%-dep) (14,164.89) ### (15,915.67)
Dep (LY*1.06) (2,703.00) (2,865.18) (3,037.09)
7,229.09 7,662.84 8,122.61
Tax
Dep 2,703.00 2,865.18 3,037.09
Capex (LY*1.06) (3,010.40) (3,191.02) (3,382.49)
6,921.69 7,337.00 7,777.22
Terminal value

Combined WACC
Value (mill) cost % cost (mill)
Jazba-Equity 20.86 12.26%
[7m * 2.98]

Jazba-Debt 8.94 4.20%

[20.86m * 30/70]

Zoom-Equity 19.07 13.66%

[8m * 2.98 * 4/5]

Zoom-Debt 18.77 5.25%

[8m * 1.92 * 55/45]

Lecture#56

December-2012, GHP, Question#15 (a)

Dono companies ka synergy effect hoga 300 mill per year
(post merger combined value nikalwana chah rha, "following the takeover")
share price poch rha, tu hm combined value of equity nikalny lgy

(a) (i)
Combined Value of Equity Rs. Mill

GHP PAT 6,580.00

IJQ PAT 3,760.00
Synergy 300.00
10,640.00
Value of equity 90,227.20
[10640x8.48(W-1)]
Value per share Rs. 246 per share
[90227m/(300m+200mx1/3)]

W-1:
P/E = 186 8.48
6580m/300m

(ii) Value (Rs. M) Cost%

GHP equity 55,800.00 13%
[186x300m]

IJQ equity 11,600.00 18%

[58*200m]

Ab inka weighted avg krlen gy

Requirement b mn student ban k nai, malik ban k sochna

December-2005, Prodco, Question#9

Valutaion of Combined Co.

is question
mn use nai Combined PAT/Cashflows
hoga cuz no
data Valuation Method

Prodco ki share price py effect tabi bta skein gy jb abi ki price or nai price
yani post merger ki value ko compare kren gy
tu aesy pta chal rha k post merger ka swaal hy

Combined Value of Equity Rs. million

Exisiting Prodco [14m x 8.40] 117.60
Revised Nordik 75.16
[(9.3m-1.5m)x1.2x8.03(W-1)]
Sale of division 10.22
Sale of surplus assets [16-4.5] 11.50
214.48
Post merger shares [14m+45mx2/9] 24 mill
Post merger price of P Rs. 8.94
[214.46m/24m]
Pre-merger price of P Rs. 8.40
Revised price of Nordik Rs. 1.99 part b mn poch rha k aesi kia r
[8.94x2/9]
Existing price of Nordik Rs. 1.66
W-1:
P/E = 1.66 8.03
9.3m/45m

Stock market mn jo prices uper neechy ho rae hoti, wo information ki wjah sy ho rae hoti hn
Agr company past mn bht achi hy, bht top kama rae baap dada k zamany sy achi chali arae h
or uska share bht acha chla krta tha lekin abi uski performance low hogye due to any reason
ya whatever reason, ab wo company wesi nai rae or agly 2 sal k ander ander band hojayegi
tu stock market mn ab b uska share agr same ya high price py bik rha hy, tu log bewaqoof h
or abi b past ki wjah sy mehnga bik rha, aesi market ko weak market kehty jis mn investors k
jb company waqai doob jaye g tab logon ko aqal aye g
Lekin agr logon ny public information jo b company k bary mn market mn available thi, uski b
aesi market ko semi-strong market kehty
Hawai concept hy k sb logon k pas company ki ander ki information available hy, or decision
isko kehty Strong market

Tu yeh 3 forms or market hoti hn

(b)
[ 8.94 x 2/9] 1.99

214.46 m x 2/9 = 1.99

14m + 45m x 2/9

214.46 m * x = 1.83
14m + 45m * x

0.19 0.19 shares of P for 1 share of Nordik

Lecture#57
December-2016, Question#20, Mangal Ltd
Discussion
pehly hi affect hojaen gy prices, jesy hi info public hogi
cuz semi-strong market hy
Acquirer ki jo price change hogi tu target ki price b acquirer ki nayi price k mutabiq change h
bilkul jo pichla sawal tha same aesy hi
Combined ka data hi ni dia, so usi alag alag method sy solve kren gy

(a) Semi Strong

Post merger value Rs. Million
Existing ML [20.5x30m] 615.00
Existing SL [26.5x4m] 106.00
PV of savings 9.27
2.7m x 1-1.14^-5
0.14
Sale of surplus assets 6.80
Redundancy (9.00)
728.07
Post merger price of ML Rs. 20.61
[728.07m/(30m+4mx4/3)]
Pre-merger price of ML Rs. 20.50
Adjusted price of SL Rs. 27.48
[20.61 x 4/5]
Existing price of SL Rs. 26.50

(b) mn again student ban k nai sochna

Lecture#58
Question#19 (a), June-2016, Violent Ltd
swal mn yeh dekhna pry ga k company ki value owners janna chah rae ya acquirers
agr usi company k owners janna chah rae hn tu phr usi company ka data or usi company ki P
agr khreedny ki nazar sy value nikalni hy tu dekhny waly ki nazar badal jaye g or ab acquirer
ab data tu target company ka hoga, lekin P/E ratio konsi lgani hy or discount rate konsa lgan
combined valuation (post merger valso combined value nikalein gy

Post-merger value Rs. In million

Sales 89,760.00
[(20x250x12 + 10x180x12) x 1.1]
Costs (W-1) [(48214+22009)x1.03] ###
PBT 17,430.00
Tax (5,229.00)
PAT 12,201.00

Value of merged entity

Based on P/E ratio [12201x8] 97,608.00
Tax saving [3300x30%] 990.00
98,598.00
Normally business jo aik sal m
98,598 mill x = 24.00 mtlb hy k is wqt business jitna
1500 + 1250x hijaye ga aesy hi, iska mtlb isk
x = 0.525 shares of VTL tu profits calculate krty wqt hm
for every share in BTL lety hn jo entity mn normal tor
lety jesy idr b/f tax loss hmny a
(normally tu PBT sy tax loss ad
 tu profits calculate krty wqt hm
lety hn jo entity mn normal tor
lety jesy idr b/f tax loss hmny a
W-1: VTL BTL (normally tu PBT sy tax loss ad
Rs. In mill
Sales 60,000.00 21,600.00
[20x250x12] [10x180x12]
Costs (48,214.29) ###

PBT 11,785.71 (409.00)

Tax 30% (3,535.71) (216.00) revenue ka 1% cuz loss aya

PAT 8,250.00 (625.00)

[5.5x1500] [-0.5x1250]

Post merger EPS = 12,201 m = Rs. 5.66so yes, this ratio will also be acceptable to
1500+1250x0.525

Co. A
Textile Combined
cashflows
Co. B discount at
pharma combined disc. Rate

Combined Combined combined

value disc. Rate Ke

Ab jb do companies diff nature ki aps mn merge hoi hn tu unka beta combined mn dono entit
Weighted avg mn market values ko weight lety hmesha
portfolio mn beta nikalty thy, jitny shares hn,un shares ki market values k weight mn un k be
tu agr combined business hy tu yahi smjna k yeh portfolio hy, tu agr hm yeh janna chah rae
or pharma ki weightage kitni hy based on market values
tu combined beta nikalny sy pehly hmein combined value pta honi chaiye
lekin combined value tak tu nai ja skty us sy hi beta nikalna or beta combined value or dono
iska hal hota k combined value assume ki hoti hy aksar or assumptions sy hi kam chlana hy
weights k liye swal mn guidance hogi

Lecture#59
June-2018, Tulip Textile Ltd, Question#22
tukry tukry jor k combined value nikalni pry g cuz tukry diye hoe
agr point 6 na hota tu hm TTL ka WACC use kr k hi BTL k 30% retail ki discounting krlety
Value of merged entity equity Rs. million

Existing value of TTL [2900x12] 34,800.00

Value of retail division (W-1) 2,774.44
Sale of manufacturing division [3020x70%x1.5] 3,171.00
Tax on sale of manufacturing div (285.00)
[3020x70%x0.5x30%x1.1131^-1]
Tax benefit on c/f loss [1500x30%x1.1131^-1] 404.00
Annual savings [70mx70%/11.31%] 433.00 hmesha bachat so preperuity
Redundancy [35-(35x30%x1.1131^-1)] (26.00)
41,271.44
Pre-merger price of TTL [3480m/750] 46.40
Post-merger price of TTL 44.45
[41271/(750+250x5/7)]

Existing price of BTL [6000m/250] 24.00

Bid-adjusted price [44x5/7] OR [46.4x5/7] 31.40 OR 33.14

Tu TTL waly khush nai hn gy, BTL waly hn gy

W-1: Yr. 1 Yr. 2 Yr. 3

-----------------Rs million-----------------
Sales [LYx1.1] 1,000.00 1,100.00 1,210.00

PBT 200.00 220.00 242.00

Tax 30% (60.00) (66.00) (72.60)
Dep 25.00 25.00 25.00
165.00 179.00 194.40
Terminal value 5% 3,228.21
[194x1.05]
11.31% - 5% 165.00 179.00 3,422.61

Disc @ 11.31% 0.90 0.81 0.73

148.23 144.47 2,481.73

Value = 2,774.44 million

W-2:
W-2.1:
βa of TTL:
βa = 1.1 x ### = 0.81
34800+17500x0.7

asset beta of manuf ka data nai hy, so majbooran ab retail k beta ko hi BTL whole ka asset b
W-2.2:
βa of retail:
βa = 0.91 x 6,000.00 = 0.77 *500x12=6000
6000+1500x0.7 jesy existing value of TTL nikali
βa(BTL) = βa (retail) x 30% + βa (manuf.) x 7 (asoolan aesy hona chaiye tha, lekin ab da
aset beta of manuf ka data nai hy, so majbooran ab retail k beta ko hi BTL whole ka asset be

W-2.3:
Combined βa = 0.81 x 34,800.00 + 0.77 x 6,000.00
40,800.00 40,800.00
Combined βa = 0.80

Combined βe = 0.8 x 34800+17500x0.7

34,800.00
Combined βe = 1.08

W-2.4:
Combined Ke = 7% + 1.08 x 6% = 13.48%

W-2.5:
Kd = 10% x 70% =7%

W-2.6:
post-merger WACC = 13.48% x 34,800.00 + 7% x 17,500.00
52,300.00 52,300.00

June-22, Question#28
June-24, Question#3 (ICAP)
yeh dono swaal bht achy sy dekhna hy

Lecture#60

Discussion of June-2024, Q#3, ICAP, Azham Beauty Ltd

Operating profit hota, PBIT
range of values mtlb sb techniques lga k amounts nikalni hy
aesy questions mn marks lena easy hota

December-19, Question#25, Karakoram Ltd

Combined value nikalny k do tareeqy:
-Combined earnings, combined CFs py P/E ya discounting kr kr
-Individual, individual kr k or one-off cheezain
part (a)
WACC dia tu mtlb free cashflow to firm
Yr. 0 Yr. 1 Yr. 2
-----------------------Rs million-------------------------
Sales [LYx1.06] 785.46 832.59
COS (392.73) (416.29)
[Yr.1: 494x0.75x1.06]
[Yr.2 onwards: LYx1.06]
Operating exp (75.18) (78.94)
[Yr. 1: (114x0.9-31)x1.05]
[Yr. 2 onwards: LY*1.05]
Dep [494x0.25+114x0.1] (134.90) (134.90)
182.65 202.45
Tax @ 30% (54.80) (60.74)
Depreciation 134.90 134.90
Redundancy (20.00)
Tax saving on redundancy 6.00
Working Capital (W-1) (20.34) (21.56)
(20.00) 248.41 255.06
Terminal value
267x1.03
18%-3%
(20.00) 248.41 255.06
Disc @18% 1.00 0.85 0.72
(20.00) 210.52 183.18
Value of merged business 1,652.73
Debt [165+148] (313.00)
Value of merged equity 1,339.73
Pre-merger value of KL (779.00)
[38x20.5m]
Maximum price to be offered 560.73

W-1: Working Capital

WC bal. Cashflow
[LYx1.06]
0 339.00
1 359.34 (20.34)
2 380.90 (21.56)
3 403.75 (22.85)

Part (b)
Pre-merger Post-Merger
(i) Debt (ii) Shares
PBIT 182.00 182.00
Redundancy (20.00) (20.00)
Interest:
-Existing[165x11%+148x12%] (36.00) (36.00)
-New [450*10%] (45.00) -
81.00 126.00
Tax 30% (24.30) (37.80)
PAT 55.00 56.70 88.20
No. of shares 20.50 20.50 30.88
EPS 2.68 2.77 2.86

Impact on Control No effect will lose 33.6% control

Pre-merger Post-Merger
(i) Debt (ii) Equity
Debt 165.00 763.00 313.00
Equity 779.00 1,339.00 1,339.00
944.00 2,102.00 1,652.00
Gearing 17.5% 36.3% 18.9%

W-2:
Target price 450/12.7m = Rs.35.43
1339 x = 35.43
20.50+12.7x
x 0.817 shares for every share of SL

Shares to be issues 10.38

[12.7x0.817]
Existing shares 20.50
30.88

RECAP of whole Chap

ksi aik security ya share, or debenture ki b value nikalny ka bola ja skta hy
us mn phr wo dividend model lgy ga, e.g., Q-1
asset beta target ka or gearing acquirer ki leni hy, yeh zyada suitable hy

combined value liye hint swal sy hi lena th

ya tu merged entity, combined entity ka word likha hota clearly us sy idea hojata
ya phr kahin sy yeh hint mil rha tha k post merger value nikalni hy, tu post merger means co

ab agli cheez yeh dhondni swal mn k rasta konsa lena hy, combined company ki earnings or
ya phr indivdual individual plus one-off cheezein

Valuation krni hy agr combined company k cashflows use kr ky

tu phr discount rate mn jo Ke hoga us mn combined beta istemal hoga
or combined beta aye ga combined asset beta sy

Agr synergy is trah calculate krni k post merger sy pre-merger minue kr k

e.g., Jazba, Zoom swaal
tu agr valuation P/E method sy hy, then synergy ka effect earnings mn barkat ki wjah sy ana
Agr P/E ratio sy nikli hoi value hy tu wo tu hy hi value of equity, lekin agr hm business ki valu
tu phr synergy cash k efficient use ki wjah sy create hogi
tu business ka agr cash ka potential dekhna ho tu wo cash kia business ka cash hona chaiye
ofcourse business ka yani free cashflow to firm
tu us sorat mn value of pora business hi sahi synergy ki value hogi

DEMERGER
swaal khud hi krna
read from book
Dec-2018, Q#23, Sun Ltd
do yourself
Dec-2012, Q#6,KLR
A, (CA-CL)

niques prehn gy]

mn mix kren gy valuation]

ue is worth actual

grom at 5% per year

current dividend is due to be paid shortly

z formula mn D1 samet hm future k

n div milna tha wo tu nai aya na formula mn

o grow by 6% in year 1,

^-3)+(104.17*(1.16)^-3)
are ki book value

minus ki
cement costs sy asset ki value nikalna chahy

s honi chaiye
a itny times hona chaiye

total no. of shares sy multiply

gi and vice versa

io sy kam hogi
, management sahi nai hy) hn yeh b yeh etc, isliye 8 sy kam hogi

1.1 P/E ratio

rofit is sal ka len ya agly sal ka expected profit len

ili thi, tu yeh non-recurring cheeez hy

re py kitna kamaya company ny

mathod
n of first 4 methods just

ho skty hn
unted at investor ka required rate of return
jy kitna cash kama k dy ga

a gya hy jo srf dividend kamana chahty hn

e, jinko lgta k business ki worth uski equity decide krti
sset valuation method or isi trah cashflows b

te of return

cashflow to firm (yani business)

h gya ab is py owners ki nazar hy

ee cashflow to equity

iye, kama k dy rha na business

aisa azaad hy
usiness ki trf sy
 py isliye discount k srf owners ki nazrein hy is paisy py)

ACC py isliye k dono lenders or owners ki is paisy py nazar hy)

lue of business sy value of equity py ayen gy aesy)

tax following year mn pay hota, pt. 5

50,000 ko ly b skty thy or ignore b krskty thy

hn for valuation
dia hy, that’s why Cashflow method lgy ga

Yr. 3 Yr. 4 Yr. 5

---Rs. In million------------------------
1,771.20 2,125.44 2,550.53

(283.50) (255.15) (229.64)

1,487.70 1,870.29 2,320.89
(446.31) (561.09) (696.27)
283.50 255.15 229.64

issue costs ko outflow dikaheyn gy cuz equity sy paisa r

tu issue costs usky bad kharch honi hn

1,324.89 1,564.35 1,854.26

###
1,324.89 1,564.35 ###
0.64 0.56 0.48
853.21 869.96 6,525.69
e, growth ya kahin or investment objective na ho)

redit rating from A to AA:

mulae sy hi nikla hoa

, tu wo apny hisab sy iski value lgaye ga

wo paisa lga rha hoga

Yr. 4 Yr. 5
In mill------------------------------

1,054.15 1,159.57
223.23 245.56 Z-11 ki quantity wesy hi brhy g lekin yr 4 mn a k srf sales price ki g
1,264.98 1,391.48
 (448.01) (492.82)
(94.87) (104.36)
(379.49) (417.44)
(100.00) (100.00)
(109.40) (114.87)
(308.71) (330.32)
(20.84) (21.88)
(189.75) (208.72)
(76.27) (83.90)
815.02 922.30
(285.26) (322.80)
100.00 100.00
4,238.09 699.49(1+3%)
20% - 3%
629.76 4,937.58
0.48 0.40
303.71 1,984.30

1, pehly patented mn fall krta tha ab generic mn fall krjate ga

li ki tu cost thi tu agr revenue ki 60 40 ratio hy tu cost ki hi woi tu ni hogi

hy woi ratio inki cost ki b hy

default hm equity ki hi valutaion kr rae hoty)

Yr. 4 (2019 Yr. 5 (2020)

### 244,641.94
 ### (95,778.58)

2,375.36 2,544.01

hy aik ticket ki, ispy ab govt wala discount lgy ga

Yr. 4 (2019 Yr. 5 (2020)

28,486.77 29,911.11

190.56 190.56
23.82 23.82
38,471.80 39,241.24

### 244,641.94

Yr. 4 (2019 Yr. 5 (2020)

89,429.11 95,778.58

jitna uper max offer krskty, that is max percentage premium

Yr. 3 Yr. 4 Yr. 5

million--------------------------------------------------------------------
 5,900.00 6,600.00 7,300.00

(1,711.00) (1,914.00) ###

4,189.00 4,686.00 5,183.00
###

53.25 53.25 53.25

(100.00) (100.00) (100.00)

(1,136.00) (1,136.00) ###

###

3,006.25 3,503.25 ###

0.66 0.57 0.50
1,976.66 2,002.99 ###

nt rate acquirer wala

equity tak ponchein gy

Yr. 4
--------------------------
3,279.13
(2,597.84)
(771.95)
(90.66)

771.95
(200.00)
(8.00)
6,034.28

6,507.58
0.74
4,808.15
 Yr. 4
--------------------------
7,519.50
200.00
7,719.50
(771.95)
6,947.55

ng capital ki tax saving braber hy, tu aik ny outflow ana tha aik ny inflow tu dono hi ura diye
 sy kitna zyada hona chaiye

Yr. 3 Yr. 4 Yr. 5

xxx
(500.00) 1,600.00
110.00 160.00 160.00

braber hogi tu hi zero aye g

ki (growth or sb kuch mila k)

ment on yr. 0 nikalein gy

akeover premium

dekhna combined sir krwaen gy

 Yr. 4
----------------------
28,699.89 Jazba 100.00 100.00
### Op. cost 56.00 50.00
(3,219.32) Dep 20.00 20.00
8,609.97 76.00 70.00
dep tu same hi hy, decrease op. cost ki wjah sy aya
3,219.32
(3,585.43)
8,243.85

requirement sy neechy wala para mn likha k srf yeh equity of zoom

ko bid price sy adjust krlen baqi sary current costs of capital hi ly len
or unka weighted avg

akeover")
 Individual Acq. + Prodco k portion ki value
Individual target + Yeh indiv target wo hmsy alag nikalwana chah rha or isi liye usny P
Synergy one-off additions ka data given

t b mn poch rha k aesi kia ratio ho k iska answer 1.99 ki bjaye 1.83 (1.66*1.1) ajaye
n ki wjah sy ho rae hoti hn
zamany sy achi chali arae hy
w hogye due to any reason cases chal pry, baap dada mar gye, govt policy change hoi
nder ander band hojayegi
k rha hy, tu log bewaqoof hn
ket kehty jis mn investors k faisly past ki basis py hoty hn

rket mn available thi, uski basis py faisly change krliye

on available hy, or decision abi public nai hoa hota, prices already adjust hojati hn

yi price k mutabiq change hogi

h rae ya acquirers
ka data or usi company ki P/E ratio or usi ka discount rate
badal jaye g or ab acquirer ki aankh sy dekhna hy
or discount rate konsa lgana yeh acquirer ki soch sy sochna

rmally business jo aik sal mn kamata hy, P/E ratio 8 ka

b hy k is wqt business jitna stable hy, 8 sal tu survive kr
ye ga aesy hi, iska mtlb iski worth 8 guna hy
profits calculate krty wqt hm hmesha recurring cheezein
hn jo entity mn normal tor py hoti, one-off wali alag sy
jesy idr b/f tax loss hmny alag sy tax saving nikali uspy
mally tu PBT sy tax loss adjust hota hy na)
profits calculate krty wqt hm hmesha recurring cheezein
hn jo entity mn normal tor py hoti, one-off wali alag sy
jesy idr b/f tax loss hmny alag sy tax saving nikali uspy
mally tu PBT sy tax loss adjust hota hy na)

enue ka 1% cuz loss aya

o will also be acceptable to VTL

Combined β

eta combined mn dono entities k risk cover hony chaiye na

values k weight mn un k betas ka weighted avg

agr hm yeh janna chah rae k combined portfolio mn textile ki weightage kitni hy

i chaiye
ta combined value or dono hi nai pta
ptions sy hi kam chlana hy

ail ki discounting krlety

esha bachat so preperuity

ko hi BTL whole ka asset beta manna pry ga

 lue of TTL nikali
ona chaiye tha, lekin ab data nai hy)
ko hi BTL whole ka asset beta manna pry ga

11.3%

Yr. 3
------------------------
 882.54
(441.27)

(82.89)

(134.90)
223.49
(67.05)
134.90

(22.85)
268.49
1,833.00

2,101.49
0.61
1,279.03
 (W-2)
share exchange ratio nikalni pry g

l lose 33.6% control[10.38/30.88]

[313+450]:[165+148]

a skta hy

s sy idea hojata
y, tu post merger means combined

ed company ki earnings or cashflows, uski P/E or discount rate

nue kr k

s mn barkat ki wjah sy ana hy

kin agr hm business ki value cashflows sy nikal rae hn

siness ka cash hona chaiye ya equity ka?

cuz equity sy paisa raise krty hi jo cheez business bny ga, hm uski worth nikalny ja rae
a k srf sales price ki growth mn decrease ajaye ga
hi ura diye
h rha or isi liye usny P/E ration di
alny ja rae
Lecture#61
RISK MANAGEMENT
-Currency Risk mostly tested in exams
-Commodity Risk
-Interest rate Risk

Currency Risk Management

Use of exchange rates for foreign currency transactions:

Ksi b mulk mn jo market hy, us market mn products ki buying selling hoti
Un markets mn products ki prices quoted hoti hn,
or usi currency mn jo us mulk ki currency hy

Foreign currency ki market: Forex

Product: Foreign Currency
Product is priced in: Local currency
Exchange rate: Rs. Per $ 280
Forex mn dollar khreed b rae hn gy or bech b rae hngy

Currency ki rate list: Currency Quote

Direct quote
-seedhi seedhi bat hoti
-Price quoted for 1 unit
of FCY
1 dollar 280 rupy ka

Pak: Rs. Per $ 280-284

280 is buying rate
Dukandar/dealer ki nazar mn and 284 is selling rate

Ex-1:
Pak co. will receive ￥240,000
Rs./￥ 1.95-1.98

= 1.95 x 240000 Direct quote

468,000.00

Ex-2:
UK co. will pay €500,000
€/￡ 1.72-1.75
￡ payment = ?
= 500,000/1.72 Indirect quote
290,697.67

Ex-3
US Co. will receive AED 1,000,000
AED/$ 3.61-3.64
$ receipt ?

= 1,000,000/3.64 Indirect quote

274,725.27

Ex-4
Chinese Co. will pay 1,200,000 yuan
Yuan/€ 9.45-9.48
Yuan payment ?

= 1,200,000 x 9.48 direct quote

11,376,000.00 hmny euro pay krna hy, so hmein chaiye euro currency
currency ki dukan py ja k hm euro len gy, wo dukanda
hmein euro bechy ga, so selling rate
Shortcut 1: (apna wala)
transaction tu local currency ki hoti hy na, so hmny yeh dekhna k
dukaan wala FCY hmsy khreed rha ya hmein bech rha
phr us hisab sy rates lgen gy

Shortcut 2: (sir wala)

dukaandar ban k sochna or currency ki aani jaani sochni hy
jo denominator wali currency ki movement hy wo wala rate use hoga

AED/$ 3.61-3.64 neechy waki currency ki movement 3.64 py ruki so wo

AED aye ga dollar jaye ga

Netting:
-Bi lateral netting 4 = R [1-(1.0025)^-7]/0.0025
-Multi lateral netting 0.57715712

-Multi lateral netting

Example:
Co. A owes Co. B $20 mill
Co. C owes Co. B $11 mill
Co. B owes Co. C €7 mill
Co. B owes Co. A ￡4 mill
Co. A owes Co. C €30 mill
Co. C owes Co. A ￡ 12 mill

Settlement currency $
Spot exchange rates:
$/￡ 1.42-1.44 -Mid-point $/￡ 1.43 yeh avg lia buy or sell rate
$/€ 1.10-1.12 $/€ 1.11 cuz hm sb ko pehly dollar
tu actual mn tu sell buy na
Required:
Multi-lateral netting?

Co. A Co. B Co. C

paying -------------receiving--------------
Co. A - 20.00 33.30
Co. B 5.72 - 7.77
Co. C 17.16 11.00 -
Receipts 22.88 31.00 41.07
Payments (53.30) (13.49) (28.16)
(30.42) 17.51 12.91

Yeh hoti hy multi-lateral netting, co.s k apas mn bht sary payable receivable hoty
wo companies apas mn beth k aik currency ty krty hn or phr usi mn apna net payable/receiva
isky bghair 84 mill ka flow hona tha different currencies mn netting sy reduce ho k thora sa r

Dec-2011, Khazoon Corp. solve part b

agr settlement currency na ho, tu parent ki currecny use hogi

Dec-2018, Q#2
must do above questions yourself
is mn yeh b btaya hoa k transaction cost netting krny sy kitni bachy g
percentage lga k

Lecture#62

Hmny future mn foreign currency ka koi cashflow krna hy, or hmein dar
hy k exchange rate kia hoga, yeh jo dar hy this is called currency risk

Hedging:
hedging kr k uncertainty sy bach jaen gy
faida nai hoga

-Money Market
-Forward
-Future
-Option

1-Money Market Hedge

-Hedging a FCY receipt:

Example
US Co. will receive ￡540,000 after 3 months
Spot exchange rate $/￡ 1.34-1.37
Money market: (wo market jis mn multiple currencies mn borrowing or depositing, investm
$ ￡
Borrow 7% 10%
Deposit 6% 9%

Required:
(1) Net $ recipt after 3 months
(2) Effective exchange rate

Solution:

Today discount at After 3 months

Borrow FCY ￡540,000 from customer
￡526,829 FCY rate * loan repay
$/￡ 1.34 convert to
compunding
$ 705,951 $ 716,540 lekin dar hy k 3 months bad
LCY rate** exchange rate sahi nai rae ga
ab is dollar ko invest kren gy

* [540000/(1+10%x3/12)]
**[705,951x(1+6%x3/12)]

so 3 steps:
Borrow
Convert
Invest

Example
UK Co. will receive ￥2,450,000 after 6 months
Spot exchange rate ￥/￡ 610-620
Money market: (wo market jis mn multiple currencies mn borrowing or depositing, investm
 ￡ ￥
Borrow 6% 10%
Deposit 4% 8%

Required:
(1) Net $ recipt after 3 months
(2) Effective exchange rate

Discounting: [2,450,000/(1.1x6/12)]
Borrowed: 2,335,983.34 udhaar lena na tu borrow wala rate

Conversion: 3,767.72

Compounding: 3,842.33 $

effective rate
=2450000/3842
637.63 ￥/￡

Example
UK Co. will pay €650,000 after 6 months
Spot exchange rate €/￡ 1.3-1.33
Money market: (wo market jis mn multiple currencies mn borrowing or depositing, investm
￡ €
Borrow 6% 9%
Deposit 4% 7%

Required:
(1) Net $ recipt after 3 months
(2) Effective exchange rate

Discounting: [650,000/(1.07^(6/12)]
Investment: 628,378.72 udhaar lena na tu borrow wala rate
yeh phal phool k 6 mahiny bad 650,000 hojaye ga tu yeh pay krden gy
Conversion: 483,368.24

Borrow LCY: 497,658.07 $ Receipt k swal mn FCY borrow kren gy

repay loan Payment k swal mn LCY borrow krni

￡payment 497,658

effective rate or jo dosri currency hogi wo invest krd

=650000/497,658
 1.31

Lecture#63

2- FORWARD
Rate pehly hi ty krlena us transaction ka jo agay honi hy

Example:
-Co. A will receive $50,000 on 31-March-25 (i.e., after 3-months)
-It enters into a forward contract with a bank to sell these $ at Rs. 275/$.
-It paid commission of 0.1%

Bank ko faida:
aik tu commission ly lia
dosra wo apni side py reh k safe khel rha hy k itna rate usky liye beneficial hy.

Hmein faida:
hm tu risk or uncertainty khtm krlen gy

Examiner hmsy assume kr rha hota k hmein yeh cheez pta hy k:

agr 31-03 py $50,000 receive hony
or 31-03 py hi $20,000 pay krny
tu $30,000 net hm receipt kr k solve kren gy

Now, do Question#1, part (a), KC Pak

aik payment ka swal hy or aik receipt ka is mn

Question#3, do yourself, Qunaat Industries)

One more variety in forward:

Pak spot rate : Rs/$ 280-284
Bank kehta: 3-month forward premium Rs./$ 2.5-2.80
3-month forward Rs./$ 282.5-286.80

UK spot rate: $/￡1.35-1.38

3-month forward premium $/￡0.02-0.03
3-month forward $/￡ 1.33-1.35

Read, 3rd page, 6.2 heading of Chap#7, table for understanding above

Solve Practice Question#4, Silver Ltd

Company creditor/debtor
hum

Currency ka dukaandar:
Currency dealer
Bank

Forward Closeout
Case-1: Closeout at agreed cashflow date (i.e., transaction date)
jis din paisy leny ya deny thy us din hm mukar gye hn
Ex-1:
On 1-1-25 Co.A entered into 3-month forward for a receipt of
￡50,000 at forward rate of Rs./￡360-364
-On 31-3-25, customer defaulted and did not pay ￡50,000
-Spot rate on 31-3-25
(a) Rs/￡355-357 (b) Rs./￡370-373

(a)
Forward 18,000,000.00 yeh uper bank ko becha cuz forward is
[￡50,000xRs/￡360]
Spot ### bank sy hi itny ly k is spot rate py
[￡50,000xRs/￡357]
This is closeout 150,000.00

(b)
Forward 18,000,000.00 forward pora krna hi krna
Spot ### spot 373 hoga
[￡50000xRs./￡373]
(650,000.00)
(is mn forward ko spot rate sy marty hn)

Ex-2:
On 1-1-25 Co.A entered into 3-month forward for a payment of
$180,000 at forward rate of Rs./$280-284
-On 28-2-25, payment cancelled.
-Spot rate on 28-2-25
(a) Rs/$270-273 (b) Rs./$290-293

(a)
Forward 51,120,000.00 hmny dollar leny thy so forward pora h
[$180,000x284] lekin supplier hi nai jisko wapis krny h
Spot rate ### tu bank kahy ga mujy hi wapis krdo
[$180,000x270] so bank ny hmsy dobara khreed liye d
closeout 2,520,000.00 hm net itna pay kr ayen gy
(b)
Forward ###
Spot 52,200,000.00
[180,000x290]
1,080,000.00

Lecture#64
Case-2 : Closeout before cashflow date
hmein pehly hi pta k cashflow nai hopaye ga so hm pehly hi bank k pas chaly gye

Ex-1:
On 01-01-25, Co.A entered into a 3-months forward for receipt of ￡50,000
at a rate of Rs./￡360-363
-On 01-03-25, Co. A realized that cash will not be recovered from customer
-On 1-3-25:
Spot rate:Rs/￡ 370-374
1-month forward Rs/￡375-378
sterling any ka contract tha na
Solution: Rs. nai ho ska, tu pehly ja k sterling jany k
Original forward 18,000,000.00 aesy yeh transaction apas mn cancel
[￡50,000x360
Another forward ### lekin yeh purchase ka kr ayen gy,
[￡50,000x378] aik mahiny bad wali transaction tu laz
Payment to bank (900,000.00)

(is mn forward ko usky opposite forward sy marna hy)

Ex-2:
On 01-01-25, Co.A entered into a 5-months forward for payment of $150,000
at a rate of Rs./$270-274
-On 01-03-25, Co. A realized that cash will not be paid
-On 1-3-25:
Spot rate:Rs/￡ 280-283
2-month forward Rs./$ 286-289
3-month forward Rs./$ 290-293

Solution:
Original forward ###
[$150,000x274]
Another forward 43,500,000.00
[$150,000x290]
2,400,000.00
Must do, Question#5, Momin Industries

3-FUTURE
Iska markazi khyal or basic concept wohi AAFR waly notes mn

Example:
Match fee 400,000.00

Contract revised:
Win fee 600,000.00 Shart/Joa
Lose fee 200,000.00 ### harny py

Result:
Lost match
Fees 200,000.00
Shart 200,000.00
400,000.00

Won match:
Fees 600,000.00
Shart (200,000.00)
400,000.00
Jis bat sy dar rha, uspy joa lgaya

Example: (kam formal)

A US Co. will receive ￡180,000 on 1-3-25
it wants to hedge this transaction using currency future
hedging date 1-1-25
spot rate on 1-1-25 $/￡1.36
Future market
1/1/2025 Sell ￡contract for
￡180,000 having
maturity of 31-Mar
25 at a price of
$/￡ 1.40
3/1/2025 Buy ￡contracts for 3/1/2025 Spot market
￡180,000 having $/￡1.46-1.49
maturity of 31-Mar Actual cashflow
25 at a price of $receipt ###
of $/￡1.49 [180000x1.46]
On, 01-03-25:
Sell 1.40
Buy 1.49
Loss (0.09) isny wo jo spot market mn exchange rate ka
faida hoa asal ka , usko compensate krdia
Total loss (16,200.00) $
=$/￡0.09x180000
Agr aik mn nuqsan ho rha tu dosry sy faida lazmi ho rha hoga
sb currencies ki price market mn lgy gi, siwaye usky jo us market ki original currency hy or u
jesy pakistan mn rupees ki price tu nai lgy g na market mn? Dollars and other currencies ki lg

Now, with formal steps

Case-1: Future contracts are available for currency to be hedged

Example:
US Co. will receive ￡724,300 on 15-03-25
hedging date 1-1-25
￡future contract size ￡62,500
Spot & future prices:
1/1/2025 3/15/2025
Spot $/￡1.4 $/￡1.32
31-Mar ￡future $/￡1.34 $/￡1.29
30-June ￡future $/￡1.28 $/￡1.23

Solution:
1/1/2025
1-Which contract?
Select the contract having maturity matching our cashflow date
if not available, then select the immediate next one maturity.
31-March future contract selected

2-Type of Contract?
Hm jis currency ka contract krny lgy hn, hmny us currency k sath
kal kia krna hy, agr sell krna hy tu sell now or buy hy tu buy now
Sell now
Buy later
(ratta concept: receipt ka swal hy tu sell now buy later or agr payment ka swal hy tu buy now
ratta wala only for Case-1

3-Number of Contracts
Rule: FCY amount to be hedged
Contract size
=724,300/62500
11.59 or 12 contracts
3/15/2025
4-Spot Transaction
$receipt 956,076.00
[724,300x1.32]

5-Future Contract:
Sell 1.34
Buy 1.29
Gain 0.05
Total $gain = $/￡0.05x￡62,500x12 contracts
37,500.00 $

Requirements:
Net $ receipt:
=956076+37500 993,576.00 $

Effective exchange rate ?

993,576 1.37 $/￡
724,300

Hedge Effectiveness
Loss on spot =0.08x724,300 57,944 $
Gain on future =$37,500

Hedge effectiveness =37500/57944

65%

Lecture#65
June-2008, homework question discussion
Question:
Pak Co. will pay ￡288,600 on 31-5-25
Hedging date is 1-1-25
￡future contract size ￡25,000

Spot and future prices: 1/1/2025 5/31/2025

Spot Rs./￡290 Rs./￡296
31-Mar future Rs./￡297 -
30-June future Rs./￡299 Rs./￡305

Required:
1- Net Rs. Payment
2- Effective exchange rate
3- Hedge efficiency

On 1-1-25
30-June future contract is selected
Buy now, sell later
Number of contracts =288,600/25,000
11.54
or 12 future contracts
Spot transaction
￡payment 85,425,600.00 (yeh hmesha actual wali)
[288,600x296]

Buy (299.00)
Sell 305.00
Gain 6.00
Total gain ￡ =6 x 12 x 25,000
1,800,000.00

1-Net ￡ payment ###

[85425600-1800000]

2-Effective exchange rate 289.76 Rs./￡

= 83625600/288,600

3-Hedge effectiveness
Loss on spot (1,731,600.00)
[6*288,600]
Gain on future 1,800,000.00
68,400.00

Hedge effectiveness =1800000/1731600

104% future waly ko uper rkhna hmesha or s

Yeh jo buy now sell later wala concept hy yeh hmary POV sy hy k hm future market mn ja k c
or jo exchange rates diye hoty buy-sell ya sell-buy, direct indirect quotes mn
wo market k dukandar k POV sy hoty hn

Question:
US Co. will receive €370,200 on 31-5-25
Hedging date is 1-1-25
€ future contract size €25,000

Spot and future prices: 1/1/2025 5/31/2025

Spot $/€1.12-1.14 $/€1.17-1.19
31-Mar future $/€1.20-1.22 -
30-June future $/€1.23-1.25 $/€1.30-1.33

Required:
1- Net $ Receipt
2- Effective exchange rate
3- Hedge efficiency

30-June contract
No. of contracts = 370,200/25,000
14.81 OR 15 contracts

Spot € reciept 433,134.00

[370,200x1.17]

Sell 1.23
Buy (1.33)
Loss (0.10)

Total loss =0.10 x 15 x 25,000

37,500.00

1-Net $ receipt 395,634.00

[433,134-37,500]

2-Effective exchange rate 1.07 $/€

[395,634/370,200]

3-Hedging Efficiency
Gain on spot 18,510.00
[0.05x370,200]
Loss on future 37,500.00
Hedging efficiency = 37,500/18,510
203%

Do Past paper, Question#6(book) for practice, must

Lecture#66
Future ki jo prices chal rae hoti hn, its just like projected score in the cricket match
k abi k halaat k mutabiq future ki maturity date py spot rate kia hoga
experts k best andazy k accordingly
isliye jb future market ki maturity wali date aye g (lets say 31 march) tu us din ka future rate
31 march k din spot rate py close hoga

20 over guzry actual score 180 Projected score 310 130.00

40 over guzry 270 actual runs 340 projected 70.00

Spot 31 Mar €future

1/1/2025 Rs/€270 Rs/€284 14.00 din guzarty ja rae
2/15/2025 Rs/€280 Rs/€289 9.00 kam hota ja rha rate diff
3/10/2025 Rs/€283 Rs/€290 7.00 yani hm date k qareeb pon
3/31/2025 Rs/€292 Rs/€292 - isliye itny k end py a k spo
Jitna abi spot k din or maturity k din ka difference kam hota jaye ga,
wesy hi spot rate or future price k drmian diff kam hota jaye ga, is diff
ko basis kehty hn, uper 14, 9 and 7 basis hn

Ab is sary mn aik assumption use hoti for experts k jesy jesy date future k maturity
k qareeb ati jaye g, wesy hi rate ka difference will reduce to "zero" on straight line basis

On 1-1-25
Spot rate Rs/￡370
31-Mar ￡future abi 12 rupy ka difference hy
Price Rs/￡382 jinhn ny 3 mahino mn khtm hona tha

Now, on 28-2-25 (budget)

spot rate Rs/￡381 tu ab 2 mahiny guzr gye, ab us assumption k tehet
31 Mar future price ? in mn difference kitna reh jana chaiye? 4 ka cuz 8 tu k
so ab price 31 Mar future ki
approx hogi Rs/￡385 (381+4)

On 1-1-25
Spot rate Rs/￡260 18 ka difference
30-June ￡future
Price Rs/￡242

Now, on 30-4-25 (budget)

spot rate Rs/￡245
30 June future price ? 6 ka reh jaye ga
so ab price 30 June future ki uper less thi future ki price
approx hogi Rs/￡239 (245-6) so idr b 6 less kren gy

So, question mn agr hmein hedging date ka data pta hy

future date ki closing price ka data nai pta tu uper wali assumption use kr k hm
khud rate nikal len gy future ka

Exam Question-June-2017
Payments: $ $
8/31/2025 150x$2,500 375,000.00
9/30/2025 200x$2,500 500,000.00
10/31/2025 250x$2,500 625,000.00

Solve this question through Money market, (3 alg alg swal bn gye money market k)

Future:
Buy 31-Aug $future now
Sell 31-Aug $future later

No. of contracts = 375,000/125,000

3.00
Spot payment 39,937,500.00 Rs
[$375,000x106.5]

Future Outcome:
Buy 105.11
Sell 106.71
Gain 1.60
Total gain = 1.6x125,000x3
600,000.00
W-1:
On 1-6
Spot 104.50
31-Aug future 105.11
(0.61)

On 31-8
Spot 106.50
31-Aug future 106.71 technically yeh sahi nai hy, cuz 31 aug py tu spot k eq
[0.61x0.7^3] 0.21 lekin bas exam mn ho rha or examiner b test kr rha isl

Net Payment 39,337,500.00

Ab srf figures hi badalni, now do September wala question

Homework: June-2018 question, uper waly sy agla
Lecture#67
Yeh jo hm forward, future or agy options prhen gy, in mn main cashflow kal ho rha hota yani
lekin kuch cheezain aesi hn jin mn cashflow aj ho rha hota
jesy future ka margin or option ka premium aj security den gy future mn jo transaction krni u
so security jo rkhwai hy usky uper interest charge hoskta hy, or
transaction jb hojaye g tu end py security wapis hogi

Lock-in Rate
Example:
US co. will pay ￡625,000 on 31-3-25
￡future contract size ￡62,500
Spot and future prices:
1/1/2025 3/31/2025
(hedging date)
Spot $/￡1.3 $/￡1.4
31-Mar future $/￡1.36 $/￡1.4

No. of contracts = 625,000/62,500 10.00 contracts

Spot transaction: 875,000.00

[￡625,000x1.4]

Buy 1.36
Sell 1.40
Gain 0.04
Total gain = 0.04x10x62,500
25,000.00

Net $ payment 850,000.00

[875000-25000]

Effective exchange rate 1.36 $/￡

[850000/625000]

Hedge efficiency/effectiveness
Loss on spot 62,500.00
[0.1x625000]
Gain on future 25,000.00

Hedge effectiveness 40%

[25,000/62,500]

Example:
US co. will pay ￡625,000 on 31-3-25
￡future contract size ￡62,500
Spot and future prices:
1/1/2025 3/31/2025
(hedging date)
Spot $/￡1.3 $/￡1.2
31-Mar future $/￡1.36 $/￡1.2

No. of contracts = 625,000/62,500 10.00 contracts

Spot transaction: 750,000.00

[￡625,000x1.2]

Buy 1.36
Sell 1.20
Gain (0.16)
Total loss = 0.16x10x62,500
100,000.00

Net $ payment 850,000.00

[750000+100000]

Effective exchange rate 1.36 $/￡

[750000/625000]

Hedge efficiency/effectiveness
Gain on spot 62,500.00
[0.1x625000]
Loss on future 100,000.00

Hedge effectiveness 160%

[25,000/62,500]

Example:
US co. will pay ￡625,000 on 31-3-25
￡future contract size ￡62,500
Spot and future prices:
1/1/2025 3/31/2025
(hedging date)
Spot $/￡1.3 $/￡1.6
31-Mar future $/￡1.36 $/￡1.6

No. of contracts = 625,000/62,500 10.00 contracts

Spot transaction: ###
[￡625,000x1.6]

Buy 1.36
Sell 1.60
Gain 0.24
Total gain = 0.24x10x62,500
150,000.00

Net $ payment 850,000.00

[1000000-150000]

Effective exchange rate 1.36 $/￡

[750000/625000]

Hedge efficiency/effectiveness
Gain on spot 187,500.00
[0.3x625000]
Loss on future 150,000.00

Hedge effectiveness 80%

[150000/187500]

Uper wali sb mn 1.36 same hi effective exchange rate arha hy

-Agr hmein itefaq sy usi maturity wala future mil jaye jisdin hmny cashflow krna hy
-Agr No. of contracts round figure mn aye, decimal mn na aye
-Agr Single rates hon, buy or sell dono na hon

If uper waly "3 Agr" pory ho rae hn, tu sary steps pory krny k bad end result jo effective rate
wo wohi hoga jo future ki opening price thi, agy future ki prices jesy mrzi change hoi hn
Is conclusion ka faida yahi hy management ko k agr uper waly sary agr pory hogye
tu wo sary steps avoid kr k pehly din waly future rate sy multiply kr k hi gain loss nikal skta

FUTURE QUESTIONS K 3 SCENARIOS:

Future k swalon mn abi tak 3 trah ki shaklein ban rae hn,
aik full fledge normal shakal hy, yani opening date ki future price b pta
or closing date(cashflow date) ka spot b pta hy or future ka rate b
iski example June-2006, Q#6 wala swaal

Now, dosri type ka swal

jis mn hedging date ki future price b hy or spot b hy, cashflow date ki spot hy, future price na
tu iska hal yeh hy k hm wo basis use kr k future ki price nikal len gy or ab yeh normal swal ba
Iski example: June-17 and June-18

3eesri type ka swal

hedging date ka data hy srf, cashflow ki date ka kuch b nai pta
tu swaal phr aesy solve hoga k hmein same maturoty wala future milgya
hm phr angrezi likh den gy k chunky same maturity wala future hy, tu sary steps krny k bad
Now, read, Question#10, June-2012, Alpha Auto Mobiles

Uper wala sara case-1 tha, ab aty case-2 py

Case-2: If Future contracts are available in LCY which are priced in FCY

For example, agr hm py internationally restriction hojaye k hm

dollar khreed skty hn, bech nai skty (srf example ki had tak), restriction lgi
k bech nai skty hm dollar khreed skty
Tu ab mujy apni currency chaiye lekin bech nai paa rae dollar so mn ny flight pakri
or US chali gye, unsy kaha mujy rupee khreedny hn, tu wahan mn ny dollar diye or rupee khr

Tu hm wo kam jo apni market mn nai kr parhy thy, hmny wo kaam ksi or ki market mn ja k k
hm apni market mn rupeya tu nai khreed skty thy na so hm aesi market mn gye jahan rupey

Aik UK Co. hy uski foreign currency Rupees hy ab, wo rupees ko hedge krna chah rha hy
lekin jb future market mn gye tu rupees k tu futures hn hi nai, ab kia kry
cuz waha rupees as a product nai hy, lekin sterling tu hy na jis ki price rupees mn lg rae
tu hmary kam ki 2 currencies tu agye na

Yani jis currency ko hm future mn hedge krna chah rae thy wo future market mn nai mili
lekin hmari apni currency jo thi usky futures mil rae thy usi market mn, jinki price foreign cur
Ulta future hogya yeh

Lecture#68
Example:
UK Co. will receive $726,750 on Apr 30th
￡future contract size is ￡62,500
Spot and future prices:
1/1/2025 4/30/2025
(hedging date)
Spot $/￡1.25 $/￡1.32
30 June ￡future $/￡1.33 $/￡1.39

Required:
Net ￡ receipt
Effective exchange rate
Hedge efficiency

1-Which Contract?
----------Same as case-1-------------
30-June ￡future
Case-1 mn yeh hota tha:
2-Type of contract: (jis currency ka future hy, hmny kal usky sath jo spot m
is case mn: ratta yeh hy k receipt ka swal hy tu sell, buy or agr pay
Payment ka swal hy tu:
Sell-------Buy
Receipt ka swal hy tu:
Buy-------Sell

Cuz hmein market mn dollar bechny nai dy rha tha koi,

￡srf mojoud hn future market mn, dollar hy hi nai
so hmny ja k sterling khreed liya
So, buy now, sell later

3-No of contracts:
Case-1 mn aesy hota tha:
total amount/contract size
$726,750/￡62,500
lekin idr uper tu $ hy, neechy sterling tu isliye hm $ ko sterling mn convert kren gy
($726,750/1.33)/￡62,500
8.74 OR 9 contracts
So formula,
FCY amount to be hedged converted at futures' opening rate
Contract Size

4-Future outcome is case mn step-5 pehly, step-4 bad mn

Buy 1.33
Sell 1.39
Gain 0.06
Total gain = $/￡0.06x￡62,500x9
33,750.00 $
5-Spot Transaction
Net $ = 726,750+33,750 760,500.00 $
ab hm gye market mn
￡receipts = 760,500/1.32 576,136.36 ￡
Net ￡receipt 576,136.36 ￡
Effective rate =726,750/576,136
1.26 $/￡
Hedge Efficiency ￡
Loss on spot 30,831.82
[($726,750/1.25)-($726,750/1.32)]
Gain on future 25,568.18
[33750/1.32]
Hedge Efficiency 83%
(spot wali transaction ka rate uthayen gy, cuz jo gain uper nikla wo tu dollar mn hy, hmein st

Example:
UK Co. will pay €840,300 on Apr 30th
￡future contract size is ￡62,500
Spot and future prices:
1/1/2025 4/30/2025
(hedging date)
Spot €/￡1.20 €/￡1.26
30 June ￡future €/￡1.28 €/￡1.35

Required:
Net ￡ receipt
Effective exchange rate
Hedge efficiency

1-Which Contract?
----------Same as case-1-------------
30-June ￡future
Case-1 mn yeh hota tha:
2-Type of contract: (jis currency ka future hy, hmny kal usky sath jo spot m
is case mn: ratta yeh hy k receipt ka swal hy tu sell, buy or agr pay
Payment ka swal hy tu:
Sell-------Buy
Receipt ka swal hy tu:
Buy-------Sell

Cuz hmein market mn dollar bechny nai dy rha tha koi,

￡srf mojoud hn future market mn, dollar hy hi nai
so hmny ja k sterling khreed liya
So, sell now, buy later
3-No of contracts:
Case-1 mn aesy hota tha:
total amount/contract size
€840,300/￡62,500
lekin idr uper tu $ hy, neechy sterling tu isliye hm $ ko sterling mn convert kren gy
(€840,300/1.28)/￡62,500
10.50 OR 11 contracts
So formula,
FCY amount to be hedged converted at futures' opening rate
Contract Size

4-Future outcome is case mn step-5 pehly, step-4 bad mn

Sell 1.28
Buy 1.35
Loss (0.07)
Total € loss = €/￡0.07x￡62,500x11
48,125.00 €
5-Spot Transaction
Net € = 840,300+48,125 888,425.00 €
ab hm gye market mn
￡payment = 888,425/1.26 705,099.21 ￡

Net ￡receipt 705,099.21 ￡

Effective rate =840,300/705,099
1.19 €/￡
Hedge Efficiency ￡
Gain on spot 33,345.24
(840,300/1.20)-(840,300/1.26)
Loss on future 38,194.44
[48,125/1.26]
Hedge Efficiency 115%

Example:
UK Co. will receive $1,250,000 on Apr 30th
￡future contract size is ￡62,500
Spot and future prices:
1/1/2025 4/30/2025
(hedging date)
Spot $/￡1.25-1.28 $/￡1.33-1.36 FCY uper ho tu indirect quote hy, neec
30 June ￡future $/￡1.39-1.42 $/￡1.45-1.48 product hmesha wo hy jiska future hy
future mn direct quote hy cuz product $ hi hy
Required:
Net ￡ receipt
Effective exchange rate
Hedge efficiency Agr sochna mushkil ho rha
kal hmein dollar milny hn,
30th June ￡ futures with buy now, sell later ab is question mn 1.36 lga
or kal phr dobara ulta lga
No. of contracts = (1,250,000/1.42)/62,500
14.08 OR 14 contracts

Buy 1.42
Sell 1.45
Gain 0.03
Total gain =0.03 x 14 x 62,500
26,250.00 $

Spot transaction:
Net $ =1,250,000+26,250
1,276,250.00 $
Net ￡receipt =1,276,250/1.36 dollar k POV sy dekhna hy rate
938,419.12 ￡

Net ￡receipt 938,419.12 ￡

Effective hedge 1.33 $/￡
(1,250,000/959,586)

Hedge efficiency
Loss on spot 57,444.85
(1250000/1.28)-(1250000/1.36)
Gain on future 19,736.84
(26,250/1.33)

Hedge efficiency 34%

Lecture#69

4-CURRENCY OPTIONS

Terms:
Option is a contract where option holder has a right to purchase/sell the underlying
at an agreed price (i.e., exercise price/strike price) on or uptill agreed date

Forward binding hota, lekin option mn holder ki mrzi hoti

Two parties are involved:
1-Option writer
2-Option holder

Type of option: (according to actions)

1-Call option (option to buy)
2-Put option (option to sell)

Types of option: (according to standardization)

1-OTC option (custom made amount & expiry) (tailor sy silaye kapry)
2-Standardized amount & expiry (ready made kapry)

Forward mn ya tu bank ka faida hona tha ya hmara

Option mn tu bank ka faida hi nai hoga kiun k agr market mn sasta hy
tu hm bank k pas tu nai jaen gy na
Tu is mn bank ka kia faida? Bank charges leta hy option ky or rate wo rkhy ga jis py uski pori
or hm bach jaen gy, tu bank is bat ki jo fees leta wo us ki asal kamai hy

Option premium:
Fees charged by option writer irrespective of whether option is eventually exercised or not.
(uper wali misal)

Example:
US Co. will receive ￡513,400 on 31-3-25
It has following options available:
Strike price ----------------CALL------------------- ----------PUT-----------
March June March June
----------------------Premium $/￡----------------------------
$/￡1.4 0.03 0.04 0.05 0.06

Required:
Net $ receipt if on 31-3-25
Spot rate moves to:
(a) $/￡1.55-1.57
(b) $/￡1.31-1.33

OTC METHOD:
(a) Option exercise?
No
(cuz bank ny kaha hm apsy sterling 1.4 ka khreed len gy, cuz strike price hy, jbky market mn

$
Spot receipt 795,770.00
(513,400x1.55)
Option premium (25,670.00) (0.05 is liye k hm sterling market mn bechen gy, tu pu
(513,400x0.05)
770,100.00

(b) Option exercise?

Yes
$
Option receipt 718,760.00
(513,400x1.4)
Premium (25,670.00)

693,090.00

Traded options:
Case-1: Options are available in market for the FCY to be hedged

Example:
US Co. will receive ￡942,350 on May 15th.
￡option contract size ￡62,500
Option premium:
Strike price ----------------CALL------------------- ----------PUT-----------
March June March June
----------------------Premium $/￡----------------------------
$/￡1.3 0.02 0.03 0.04 0.05
Required:
Net $ receipt if on May 15th
Spot rate moves to:
(a) $/￡1.18-1.21
(b) $/￡1.36-1.39

Step 1: Which Contract?

Same as for future
June ￡option

Step 2: Type of Contract?

Receipt---->Put option
Payment---->Call option
PUT OPTION

Step 3: No. of contracts?

Same as for future
 942,350 =15.1 or 15 contracts
62,500

Step 4: Net Outcome

(a) option exercise? YES
$ 62500 k 15 packets bnayen gy phr option market mn j
Option receipt 1,218,750.00 yeh 62,500 kr k hm market sy lengy lekin ab isr issue y
(62,500x15x1.3) packets bhrny k bad b jo 5000 k ird gird sterling bach g
Premium (46,875.00)
Under hedging 5,723.00
(942,350-62500x15)x1.18
1,177,598.00

(b) option exercise? NO

$
Spot receipt 1,281,596.00
(￡942,350x1.36)
Premium (46,875.00)
($/￡0.05x62,500x15)
1,234,721.00

Example:
US Co. will pay €860,920 on May 15th.
€ option contract size €25,000
Option premium:
Strike price ----------------CALL------------------- ----------PUT-----------
March June March June
----------------------Premium $/￡----------------------------
$/€ 1.2 0.02 0.03 0.04 0.05
Required:
Net $ receipt if on May 15th
Spot rate moves to:
(a) $/€ 1.15-1.18
(b) $/€ 1.27-1.30

Step 1: Which Contract?

Same as for future
June € option

Step 2: Type of Contract?

Receipt---->Put option
Payment---->Call option
CALL OPTION
Step 3: No. of contracts?
Same as for future
860,920 34.44 OR 34 Contracts
25,000

Step 4: Net Outcome

(a) option exercise? NO
$
Spot payment 1,015,885.60
(€860,920x1.18)
Premium 25,500.00
($/€0.03x25,000x34)
1,041,385.60

(b) option exercise? YES

$ 62500 k 15 packets bnayen gy phr option market mn j
Option payment 1,020,000.00 yeh 62,500 kr k hm market sy lengy lekin ab isr issue y
(25,000x34x1.2) packets bhrny k bad b jo 5000 k ird gird sterling bach g
Premium 25,500.00
Under hedging 14,196.00
(860,920-25,000x34)x1.15
1,059,696.00
Agr 2 strike prices di hon, tu do swaal hojayen gy, dono ko solve kr k answer dikha den gy
See past papers solution, (ICAP), Winter-2023, Q-4(b)
Book mn sy Q#25

Lecture#70
June-2022 (1), CM Ltd, Question#20, 21 ya 22 hoga
part (a) waly para k bad sy prhna hy
part (a) ka answer hy k hmein 1,309,950 dollars receive hony hn
(b)
i-Forward:
Forward rate 0.005567
[0.005241+0.000326]
Total Rs. Receipt 235,306,269.09 Rs.
[$1,309,950/0.005567]

ii-Future:
Buy Rs. Future now
Sell Rs. Future later
No. of contracts =1,309,950/0.005298
2,000,000
=123.6 OR 124 contracts

Future outcome:
Buy 0.005298
Sell 0.005596
Gain 0.000298
Total gain =0.000298x2mx124
=$73,904

Spot Transaction:
Total $ = 1,309,950 + 73,904 $1,383,854

Total Rs. Receipt Rs. 247.43 million

[$1,383,854/0.005593]

iii-Option:
yeh indirect quote hy
tu uper exchange rate jo given hy usko divide kr k answer nikal k dekh len gy
So, YES we will exercise option
exercise price hy $/Rs 0.005250, jbky market mn $/Rs 0.005593 hy
yani option exercise kren gy
Rs. Mill
Option receipt 249.51
[$1,309,950/0.005250]
premium (10.00)
239.51

Option ki qeemat beshak hmny zyada di, lekin is mn hm azaad hn

agr spot rate bht acha hojata, tu hm firward or future wo faida na utha paty
jo option mn utha skty hn
Tu agr strategies compare krny ko kaha hy exam mn, agr option moujoud nai tu phr tu simpl
amounts compare kr k hm result nikal len gy
lekin agr option mojoud hy, tu answer k do tukry hongy: aik tu amounts ko compare kren gy
dosra hm option k fazail or faidy b bayan kren gy

Case-2: If Future contracts are available in LCY which are priced in FCY we want to

Example:
UK Co. will receive $647,350 on April 30th
￡option contract size ￡62,500
Option premium ($/￡):
Strike price ----------------CALL------------------- ----------PUT-----------
March June March June
----------------------Premium $/￡----------------------------
$/￡1.3 0.02 0.03 0.04 0.05
Spot rate at hedging date:
$/￡1.25-1.28
Required:
Net $ receipt if on Apr 30th
Spot rate moves to:
(a) $/￡1.15-1.18
(b) $/￡1.4-1.43

1-Which Contract?
Same as case-1
June ￡option

2-Type of contract
Receipt---->Call option
Payment----->Put option
CALL OPTION

3-No. of contracts
FCY amount to be hedged converted at strike price
contract size
647,350/1.3 = 7.97 OR 8 contracts
62500

4-Net Outcome
(a) Option exercise ? NO
￡
Spot receipt 548,601.69
[$647,350/1.18]
Premium (12,000.00) hm ny premium aj pay krna na tu ajka rate uthayen gy
[0.03x62,500x8/1.25] dollar leny hn tu 1.25
536,601.69

Option exercise krni hy ya nai krni, isky liye aik ratta wali chez dono cases mn chal jaye g
agr CALL option hy, tu choty numbers ki trf jana hy yani strike price or spot mn sy jo less hog
agr PUT option hy, tu bary numbers ki trf bhaagna hy

(b) Option exercise ? YES

￡
Option receipt 500,000.00 rate isliye nai lgaya cuz hmein tu sterling mn hi chaiye
[62,500x8]
Premium (12,000.00)
Overhedging (1,893.00)
[(500,000x1.3-647,350)/1.4]
486,107.00

Example:
UK Co. will pay $800,000 on April 30th
￡option contract size ￡62,500
Option premium ($/￡):
Strike price ----------------CALL------------------- ----------PUT-----------
March June March June
----------------------Premium $/￡----------------------------
$/￡1.25 0.02 0.03 0.04 0.05
Spot rate at hedging date:
$/￡1.28-1.31
Required:
Net $ receipt if on Apr 30th
Spot rate moves to:
(a) $/￡1.14-1.16
(b) $/￡1.35-1.38

1-Which Contract?
Same as case-1
June ￡option

2-Type of contract
Receipt---->Call option
Payment----->Put option
PUT OPTION

3-No. of contracts
FCY amount to be hedged converted at strike price
contract size
800,000/1.25 10.24 OR 10 contracts
62500

4-Net Outcome
(a) Option exercise ? YES
￡
Option payment 625,000.00
[62,500x10]
Premium 24,414.06 premium tu hmny dollar mn hi pay krna cuz option ma
[0.05x62,500x10/1.28] so dollar pehly khreeden gy tu pay kren gy, isliye 1.28
Under hedging 16,447.37
[(625,000x1.25-800000)/1.14] jo dollar kam prh rae wo hmein spot py khreed k lany p
649,414.06

Option exercise krni hy ya nai krni, isky liye aik ratta wali chez dono cases mn chal jaye g
agr CALL option hy, tu choty numbers ki trf jana hy yani strike price or spot mn sy jo less hog
agr PUT option hy, tu bary numbers ki trf bhaagna hy

(b) Option exercise ? NO

￡
Spot payment 592,592.59
[800,000/1.35]
Premium 24,414.06
617,006.66

Homework-JUNE-2019, Question#11

Lecture#71
Forward:
-Commission (hedging date)
-Cashflow (cashflow date)

Future:
-Spot transaction (cashflow date)
-Future gain/loss (cashflow date)
-Margin (i.e., security) (hedging date)

Money market:
-Cashflow (cashflow date)

Option:
-Cashflow (cashflow date)
-Premium (hedging date)

Agr swal mn hedging strategies ka comparison krna ho or swal mn interest

rates b hon, tu phr hmein margin py premium py interest b dalna prta hy
cuz wo tu hedging date py hoi thi, so cashflow date tak aty aty comparison
tu same nai rha na dono amounts ka

JUNE-2023 Q-4, (ICAP), MCC group

FCY ko local currency k sath hedge krty hn, abi tak yahi hota aa rha lekin is swal mn
MCC ny yeh policy rkhi hoi k hm dollar ko euro k sath hedge rkhen gy
yani for the time being apni currency dollar ko smjen gy
euro k sath uski hedging kren gy, jb end result dollar mn ajaye ga, usko phr PKR mn convert

Swal jesy hm US co ka krty thy na, wesy isko ly k chalein gy

euro ki jo payments ultimately dollars mn convert hongy, unko dollar reciepts k sath net kren
jo ab answer aye ga, usko spot py pkr mn convert krlen gy

(i) Forward:
Current spot €/$ 0.9606
Forward €/$ 0.0186 kiun k yeh indirect quote hy tu forward discount add h
€/$ 0.9792

$ payment after hedging (3,063,725.00)

[€3m/0.9792]
$ receipt 3,500,000.00
Net $ receipt 436,275.00
Net Rs. Receipt Rs. 95,247,558
[$ 436,275x218.32]

Net € cashflow:
Payment SBG Ltd (1,500,000.00)
Receipts TRK Ltd 2,000,000.00
Payment PGY Ltd (3,500,000.00)
Net payment € (3,000,000.00)

Net $ cashflow
Receipt 2,500,000.00
Receipt 2,000,000.00
Payment (1,000,000.00)
Net payment € 3,500,000.00

(ii) Money Market

Euro investment required 2,954,210.00
[€ 3m x (1+6.2%x3/12)^-1]
$ required for purchase of € 3,075,380.00
[€ 2,954,210/0.9606]
$
$ borrowing repayment on Sep-30 (3,118,435.00)
[$3,075,380x(1+5.6%x3/12)]
$ receipt 3,500,000.00
381,565.00
Net Rs. Receipt Rs. 83,303,271
[$ 381,565 x 218.32]

(iii) Future: (case-1 hy yeh)

Buy now
Sell later

No. of contracts = 3,000,000.00

20,000.00
150.00 Contracts

Spot transaction: $
$ payment 3,062,162.00
[€ 3m/0.9797]

Future Outcome:
Buy 1.0452
Sell 1.0198
Loss (0.0254)

Total $ loss 76,200.00

[0.0254x20,000x150]

Net $ payment (3,138,362.00)

after hedging
$ receipt 3,500,000.00
361,638.00

Net Rs. Receipt Rs. 78,952,808

[$ 361,638x218.32]

(iv) Option: $
Option payment (3,045,685.28)
[€3m/0.9850]
Premium (25,350.00) yeh premium aj pay kia hmny, tu isko
[$25,000x(1+5.6%x3/12)] comparable bnany k liye to cashflow date amounts, hm
$ receipt 3,500,000.00
428,964.72
Net Rs. Receipt Rs 93,651,578
[ 428,964.72x218.32]

Ab in sb ko apas mn compare krna hy:

ICAP solution mn tu forward hi best likha
lekin forward likh k option k fazail b bayan krdeny hn
Chap k 1st and 2nd page read, test ho skti exam mn choti choti cheezein
Cross rate: Pak sy direct yen convert nai ho skty market mn, lekin yeh rates available hn
yen/dollar 310-312 and Rs./$ 270-274, tu hm in dono ko use kr k khud hi rate bna len gy aik
Hmari mrzi hm chahy Rs. To yen bnaen ya yen to Rs. Bnaen
now, read box Cross rate on page 2.
IRPT:
1-1-25 ko agr US mn invest kren tu 8% interest hy lekin agr UK mn invest kren sterling mn to
UK waly ny socha US mn tu zyada kamai hy, tu usny spot py dollar mn convert krdia. Sterling
Aik sal bad 31-12-25
uski dollar amount 8% k interest k sath inflate hochuki hogi
lekin is theory k mutabiq spot rate change hojaye ga, or change hoky wo wohi result dy ga
k UK sy US a kr invest krny waly ko koi faida nai hoga, cuz agr aik aya hy tu phr sary hi US m
Tu is theory ka yahi main theme hy k agr do mulkon mn interests/returns alag hon
jahan interest zyada mil rha hoga, log udr jana shuru kren gy, logon ki is movement ki wjah s
wo wahi rhein gy, jahan agr pehly rehty tu jo b milta

COMMODITY RISK
Wo cheezein jo internationally use hoti, commodity kehlati jesy:
Rice
Wheat
Copper
Gold
Crude oil
Shares (commodity nai hoty, lekin jo uper walon ka tareeqa hy, wohi iska b treeqa hy isliye s
Jo in sb cheezon k exporters hn, unko risk hota k in sb ki price gir jaye g internationally
in sb mn exchange risk (currency risk) tu hy, wo alag hy
Commodity risk ka mtlb hy uper wali items ki price ka risk
inki hedging b through forward future and option hogi
bilkul same treeeqa hoga exact bas udr cases nai hongy
Now read, just before questions, commodity risk ka table from book

Example:
An investor has 6500 shares of Co. A in his portfolio. He intends to sell these shares
on 31st May.
-Future contract size 500 shares
-Spot & future prices:
On 1-1-25 On 31-5-25
Spot 50.00 45.00
31-Mar future 48.00 -
30-Jun future 45.00 39.00
Required:
Net sales proceeds
Effective sale price per share

1-Which contract?
same as currency future
30-June Future

2-Type of Contract?
Seller---->Sell now buy later
Buyer---->Buy now sell later

Sell now, Buy later

3-No. of contracts
Total quantity to be hedged
Contract size
6500 = 13 contracts
500

4-Spot transaction:
Actual Sale proceeds 292,500.00
[6500x45]

5-Future Outcome:
Sell 45.00
Buy 39.00
Gain 6.00

Total gain = 6 x 500 x 13

Rs. 39,000
sab kuch wesa hi hy
Lecture#72
June-2022, CM Ltd, part (a) solve yourself
December-17, Q#18, CPL Ltd (b), part (a) khud krna hy
DBL:
Hedging strategy:
Buy now
Sell later

No. of contracts:
No. of contracts = Total no. of shares to be hedged
Contract size
No. of contracts x = 9,000,000/16.45
contract size
= 0.547 m shares ultimately tu yahi use hoti na tu isliye hmny aesa nikal

Future outcome:
Buy 16.45
Sell (W-1) 17.09
Gain 0.64
Transaction cost (0.30)
[0.15x2]
Interest on margin (0.03)
[16.45x10%x10%x2/12]
0.31
Total gain = Rs. 0.31 x 0.547m = Rs. 0.17 m
Net outcome = Rs. 9.17 mill will be available for investment

W-1:
On 01-12
Spot 16.20
Future price 16.45
0.25

On 01-02
Spot [16.20x1.05] 17.01
Future (bal.) 17.09
0.08 [0.25x1/3]

Lecture#73
Example:
A Co. has 50,000 pounds of copper in stock
It wants to sell on March 31st
Today (1-1-25):
Premium (Rs. Per pound)
-----------------CALL------------------ -------------PUT-------------
Strike price March June March June
Rs. 230/pound 5.00 6.00 7.00 8.00

Required:
Net sale proceeds if on 31st march spot moves to:
(a) Rs./pound 250
(b) Rs./pound 215
Do, yourself

Types of options:
-American style options Yeh maturity/expiry date tak ksi b din exercise ho skti
-European style options Yeh expiry date py hi exercise ho skti only
Swaalon mn by default american style hoti hy

December-2019, Question#19, GIL ltd

options mn srf joa b lgaya ja skta hy, without any commodity
(yeh swal pehly khud krna try, phr dekhna sir ka sol)

Call options of LP1Rs.

Buy (option) 240.00
Maximum price 304.60
64.60
% gain on investment 27%

Total Profit: Rs. Million

60% exercised [250,000x60%x240x10 3.60
40% exercised [250,000x40%x240x20 4.80
Premium [250,000x7] (1.75)
6.65
Call options of SP2
Buy (option) 16.00
Maximum price 19.00
3.00
% gain 19%

Total Profit:
60% exercised [1,000,000x60%xRs.16x10%] 0.96
40% exercised on Nov 30th: 0.72
[100,000x40%(17.8-16)]
Premium [1,000,000x1] (1.00)
0.68

Put options of BD3:

Sell (option) 158.60
Minimum price 150.00
8.60
% gain of strike pr 5%

Total profit: Rs. Million

100% options exercised on 30th Nov 1.80
[500,000x(158.60-155)]
Premium [500,000x4.5] (2.25)
(0.45)

Put options of NM 4:
Rs.
Call (option) 285.50
Minimum price 255.00
30.50
% gain of strike 11%
price

Total Profit Rs million

60% options exercised 5.14
[300,000x60%x285.50x10%]
Premium [300,000x8] (2.40)
2.74
 Indirect quote
-Amount of FCY is
quoted against 1 unit
of LCY
1 rupy mn 0.02 dollar
ajaen gy
Pak: $ per Rs. 1.36-1.39
1.36 is selling and 1.39
is buying rate
ein chaiye euro currency ki dukan wala
uro len gy, wo dukandar

ment 3.64 py ruki so wohi rate len gy

h avg lia buy or sell rate ka
z hm sb ko pehly dollar mn convert krna chah rae
actual mn tu sell buy nai hoa na, isliye avg ly len gy

eivable hoty
pna net payable/receivable calculate krti
y reduce ho k thora sa reh gya
g or depositing, investments ki opportunities available hoti hn)

3 months bad
sahi nai rae ga

g or depositing, investments ki opportunities available hoti hn)

g or depositing, investments ki opportunities available hoti hn)

tu yeh pay krden gy

mn FCY borrow kren gy

al mn LCY borrow krni

ency hogi wo invest krden gy

eficial hy.
 ko becha cuz forward is a binding contract

ly k is spot rate py

rna hi krna

ny thy so forward pora hona hi hona hy

hi nai jisko wapis krny hy dollar
ga mujy hi wapis krdo
sy dobara khreed liye dollars
y kr ayen gy
as chaly gye

contract tha na
pehly ja k sterling jany ka contract b krayen gy
action apas mn cancel hojaye g

hase ka kr ayen gy,

d wali transaction tu lazzmi hogi hi
hange rate ka
nsate krdia

riginal currency hy or usi mn price lgy g

nd other currencies ki lgy in rupees

o be hedged

nt ka swal hy tu buy now sell later)

actual wali)

uper rkhna hmesha or spot ko neechy

future market mn ja k contract kren gy buy or sell ka

cricket match
 tu us din ka future rate

jb 20 over guzry tu yeh fasla tha projected tak

jb 40 guzry tu itna reh gya
yani kuch fasla ty kia tu kam reh gya na

n guzarty ja rae
m hota ja rha rate diff
ni hm date k qareeb ponchty ja rae
ye itny k end py a k spot rate py close hogya

ure k maturity
n straight line basis

assumption k tehet
chaiye? 4 ka cuz 8 tu khtm hogye pehly 2 mahino mn
se kr k hm

ney market k)

31 aug py tu spot k equal hona chaoye tha

xaminer b test kr rha isliye krlen gy wo test kr rha assumption
ow kal ho rha hota yani future mn

mn jo transaction krni uski

 hflow krna hy

d result jo effective rate nikly ga

mrzi change hoi hn
gr pory hogye
hi gain loss nikal skta

spot hy, future price nai hy

or ab yeh normal swal ban jaye ga

u sary steps krny k bad effective rate yehi ajana hy, isliye future hedging ka net result hy 850,000$

h are priced in FCY we want to hedge

ny flight pakri
dollar diye or rupee khreed liye

i or ki market mn ja k kr liya
ket mn gye jahan rupeya product tha

e krna chah rha hy

e rupees mn lg rae

market mn nai mili

n, jinki price foreign currency mn lg rae thi
y kal usky sath jo spot mn krna hota hy, woi aj ja k future market mn kr aty hn)
hy tu sell, buy or agr payment ka hy tu buy, sell

nvert kren gy
u dollar mn hy, hmein sterling mn chaiye)

y kal usky sath jo spot mn krna hota hy, woi aj ja k future market mn kr aty hn)
hy tu sell, buy or agr payment ka hy tu buy, sell
nvert kren gy

indirect quote hy, neechy ho tu direct quote

ha wo hy jiska future hy
r sochna mushkil ho rha hy tu ratta aesy lga len gy:
l hmein dollar milny hn, tu dekhen gy k spot mn konsa rate lgy ga
is question mn 1.36 lga, tu jo kal spot py lgna hy aj wo future py lga len, yani 1.42 future wala
kal phr dobara ulta lga len 1.45

he underlying
o rkhy ga jis py uski pori umeed hogi k yeh exercise nai hona

ually exercised or not.

rice hy, jbky market mn 1.55 ka bik rha tu no exercise

et mn bechen gy, tu put option or march wala rate 0.05)
 phr option market mn jaen gy, cuz market mn packets k bghair kam nai chalta
lengy lekin ab isr issue yeh aya k 62500 k 15 packet bnaye jbky hmein tu customer sy 942,350 milny h
k ird gird sterling bach gye kiun k hmny round off kia tha na contracts ko, unko hm bech ayen gy spot
 phr option market mn jaen gy, cuz market mn packets k bghair kam nai chalta
lengy lekin ab isr issue yeh aya k 62500 k 15 packet bnaye jbky hmein tu customer sy 942,350 milny h
k ird gird sterling bach gye kiun k hmny round off kia tha na contracts ko, unko hm bech ayen gy spot

answer dikha den gy

h len gy

joud nai tu phr tu simply

nts ko compare kren gy

ed in FCY we want to hedge

 tu ajka rate uthayen gy

cases mn chal jaye g

r spot mn sy jo less hoga wo choose kren gy
tu sterling mn hi chaiye na, aesy tu phr $ mn answer ajaye ga
pay krna cuz option market mn sterling tu nai available
pay kren gy, isliye 1.28 rate

spot py khreed k lany pren gy isliye 1.14 rate

cases mn chal jaye g

r spot mn sy jo less hoga wo choose kren gy

ekin is swal mn
ko phr PKR mn convert kren gy end py

reciepts k sath net kren gy

forward discount add hoga

hflow date amounts, hmny interest ka factor dala
h rates available hn
d hi rate bna len gy aik

vest kren sterling mn to 5% interest hy

n convert krdia. Sterling ko

wo wohi result dy ga
a hy tu phr sary hi US mn achuky hn gy zyada faidy k liye
urns alag hon
ki is movement ki wjah sy or phr wapis any ki wjah sy exchange rate aesa move krchuka hoga k faida e

iska b treeqa hy isliye sath prha rae sir)

e g internationally

ll these shares
u isliye hmny aesa nikal lia

-----------
si b din exercise ho skti hy
ho skti only
et result hy 850,000$
1.42 future wala
omer sy 942,350 milny hn, tu phr kuch sterling reh jaen gy
o hm bech ayen gy spot market mn , isko bolty under hedging
omer sy 942,350 milny hn, tu phr kuch sterling reh jaen gy
o hm bech ayen gy spot market mn , isko bolty under hedging
ve krchuka hoga k faida end py ksi ko nai hoga
Lecture#74
INTEREST RATE RISK
Borrowing/Lending

Fixed rate Floating rate

Interest rate is fixed for whole -Interest rate is linked with a
term e.g., 16% base (e.g., KIBOR+2.5%)
-Base rate is revised periodically

Agr hmny ksi bank sy loan ly lia hoa, KIBOR plus 2% py or KIBOR ny kaha
k yeh rate har saal revise hoa kry ga, tu ab loan tu hm ly chuky hn
lekin risk kia hy, risk is mn 2 hoskty:
-Ya tu abi hmny borrow ya invest krna hoga, or dar yeh hy k
jb borrow ya invest kren gy tab kia rate hoga
-Hm floating py borrow ya invest krchuky hn or KIBOR revise hony wala hy
tu revise ho k pta ni kitna ho jaye ga yeh risk
Tu is risk ki uper wali do shaklein hi ho skti hn

Hedging:
1- Forward
2- Swap
3- Future
4- Option

1- Forward Rate Agreement(FRA)

Example:
Co. A wants to borrow Rs. 15 mill after 3 months for 6 months from bank X
CO. A enters into an FRA with bank Y at 6%
After 3-months:
(a) Actual rate 9%
Bank Y pays A 3%
6%

(b) Actual rate -4%

A pays Y -2%
-6%

Bank Y ko yeh faida ho ga k wo risk ly ga, or eventually aesa rate fix hoga jis sy bank Y ko faid
so Bank Y chance ly rha hy
Co. A ko faida k uska rate 6% py hedge hogya
hmein FRAs following formats mn given hn gy:
3-6 FRA
3-9 FRA uper wali example k mutabiq yeh wala FRA len gy, aj sy count krna hy time
Aj sy loan 3 mahiny bad len gy or khtm yeh sb aj sy 9 (6+3) mahiny bad hoga
6-9 FRA

See example on 1st page of chapter.

Example:
A company has a loan of 20 million at KIBOR+2%
KIBOR is revised every 6 months
Next revision is due after 3 months that is on 1st July, 2024
To hedge against next KIBOR, following FRAs are available:
3-6 FRA 8%
3-9 FRA 9%
6-9 FRA 10%

Required: Net interest cost for 6 months ending 31 Dec, 24 if KIBOR on 1st July, 2024 moves t
a) 13%
b) 5%

a) KIBOR=13%
Rs.
Actual interest cost (1,500,000.00)
[Rs.20mx15%x6/12]
FRA receipt 400,000.00
[Rs.20mx4%x6/12]
(1,100,000.00)

b) KIBOR=5% Rs.
Actual interest cost (700,000.00)
[Rs.20mx7%x6/12] FRA waly ny 9% ka wada kia tha,
FRA payment (400,000.00) hmein KIBOR prh rha 5% so hm usko 4%

(1,100,000.00)

SWAP

-Plain Swap:
Example:
-Co. A has a loan of Rs. 15 m at 16%
-Co. B has a loan of Rs. 15 m at KIBOR
 Co. A Co. B
Actual interest (16.00) (KIBOR)
Swap:
A pays to B (KIBOR) KIBOR
B pays to A 16.00 (16.00)
(KIBOR) (16.00)
Fees (0.50) (0.50)
(b hoskti)

Example:
Co. A has a loan of 18 mill at KIBOR+2.5%.
KIBOR is revised annually.
Next revision is due on 1st Jan, 2024
Co. A entered into a SWAP to receive KIBOR against payment of 7%
Additionally, swap fee of 0.2% is also payable.

Required: Net interest cost of Co. A for 2024 if KIBOR moves to:
a) 11%
b) 5%

a) KIBOR = 11%
%
Actual interest (13.50)
SWAP:
A receives 11.00
A pays (7.00)
4.00
Fees (0.20)
(9.70)
Net interest cost Rs. 1,746,000
[18 mill x 9.7%]

b) KIBOR = 5%
%
Actual interest (7.50)
SWAP:
A receives 5.00
A pays (7.00)
(2.00)
Fees (0.20)
(9.70)
Net interest cost Rs. 1,746,000
[18 mill x 9.7%]
Lecture#75
Question#7 (book), Imran Ltd, do yourself SWAP ki practice

Question#5(a), Dec-16, Ramzi Corporation

hmny TFCs issue kiye hoe or KIBOR plus 2% py hn (basis points)
Ab bank ny hmein offer di:
Bank ny kaha: tmein KIBOR sy dar lg rha hy na, hm tumein KIBOR reimburse krden
badly mn tm hmein 7% dy dena
or wo hmsy charges b ly ga 0.2%.

a) i) %
Actual interest (KIBOR+2%)
Swap:
RC receives KIBOR
RC pays (7.00)

Fees (0.20)

(9.20)
yeh jo forward rates diye hoye, is sy yeh nai smjna k yeh FRA ban gya
yeh kal expected KIBOR hn, or tu kahin or diya hi nai hoa so yahi assume kr k chaly

Yr. 1 Yr. 2 Yr. 3 Yr. 4

----------------------------%------------------------------
RC receives 6.50 6.75 7.50 7.75
RC pays (7.00) (7.00) (7.00) (7.00)
Fees (0.20) (0.20) (0.20) (0.20)
(0.70) (0.45) 0.30 0.55

----------------------------Rs. m------------------------------
Net amount (3.50) (2.25) 1.50 2.75
receipt/(payment)

yeh hy sada swap jis mn fixed sy floating and vice versa shift ho rae hoty

-Credit Arbitrage Swap

Example:
Co. A (achi wali) Co. B (buri wali)
Bank offer: Bank offer: iski credit rating
Loan at KIBOR+1% Loan at KIBOR+3% achi nai hogi
Loan at 14% loan at 17% isliye zyada rate offer kia
 %
Difference in floating 2.00
Difference in fixed 3.00
arbitrage gain 1.00
yeh topic hi tab arise ho rha k difference mn difference hy (farq)

Do companies hn, aik achi or aik buri, dono ny loan leny or same amount k leny, buri wali ko m
rates quoted hn, mehngy rates or sasty jo achi company ko offer hoye un mn mismatch ya in
(bank ki naa-ehli), yani agr floating mn ksi achi company sy 2% mehnga rate offer ho rha hy,
achi wali company sy 3% mehnga rate offer horha buri company ko, tu difference mn differen
aesy
Ittefaq sy buri company floating or fixed mn sy us rate mn interested hy jis mn usko compara
mehnga rate mil rha yani fixed and vice versa for achi company

yani Co A or B ko alag alag rates offer hoye, lekin aik fixed rate
mn interested hy or dosra floating mn

Ab inki apas mn mulaqat hogi

KIBOR=13%

Solution: Co. A Co. B

Actual Borrowing (14.00) (16.00)
SWAP:
A pays to B (13.40) 13.40 Agr company B fixed mn inter
B pays to A 14.00 (14.00) py bnaen gy k agr bank sy fixe
kam hoga
(13.40) (16.60) (yeh end wali figures pehly lik
Fees (0.10) (0.10)
(13.50) (16.70) (fees hmesha end py kren gy

Now, see example and explanation of above from book "Credit Arbitrage Swap"
And then do, purana sa swaal 2007 ka

dono companies k floating ka diff or dono k fix fix ka diff

jis mn diff zyada hy buri company ittefaq sy us mn interested hy

December-2018, Question#6, KS Limited

(1) Swap: Fixed Floating

KSL 11.50% K+3%
Counter party 9.50% K+2%
2% 1%
Difference mn difference hy, 1% ka ab jo potential gain hy
uska 60% KSL lena chahy g or 40% Other party
KSL 1st march ko borrow krny ja rha hy, us din k KIBOR sy dar rha hh
usdin KIBOR 11% hoga, tu asal mn yeh 14% pay kr rha hoga

Solution: KSL (%)

Actual Borrowing (14.00) --Floating

Swap:
Other pays to KSL 14.00
KSL pays to other (10.90)
(10.90) --Fixed
Fees (0.10)
(11.00)

Total cost Rs. 82.5 mill

[1500mx11%x6/12]

Lecture#76

3- Interest rate future

Currency Interest
1-Contract size Currency amount to be Amount of borrowing
bought or sold e.g., or lending (e.g.,
￡62,500 Rs.1,200,000)

2-Contract maturity Date on which contract Date on which contract

currecny is to be bought amount is to be borrowed
or sold as per commitment or lent as per commitment
(e.g., 31-Mar future)

3-Contract period xxxxxxxxxxxxxxxxx Period for which contract borrowing

or lending is committed
(e.g., 3-month future) yani 30
june ko invest kren gy itny
arsey k liye

4- Future price e.g., $/￡1.45 e.g., 100 - interest rate

exchange rate at i.e., 91----> interest rate 9%
which buying or selling at which lending or borrowing
of contract currency committed
is committed
5- Contract type
Buy: Commitment to buy Commitment to invest
contract currency
Sell: Commitment to sell Commitment to borrow
contract currency

Example:
A Co. wants to borrow Rs. 48 mill for 5-months
on 01-05-25
Future contract size Rs. 300,000
Future contract period 3- months
Spot & future prices:
1/1/2025 5/1/2025
(hedging date)
Spot 8.0% 9.5%
31-Mar future 91.00 -
30-June future 90.00 88.20

Required:
1- Total interest cost for 5-months
2- Effective interest rate
3- Hedge efficiency

1- Which contract?
-----Same as currency future------
30-june future

2-Type of contract
Borrower Sell now, buy later
Lender Buy now, sell later

Sell now, buy later (for this question)

3-No. of contracts
Formula = Amount of exposure x Exposure period
Contract size Contract period

amount of exposure? exposure period?

jis amount py rate lgny jo rate decide hoga jisdin hmny loan lena ya dena
sy dar rae hm wo rate hmein itny arsy tak takleef ponchata rae ga

So, 48 million x 5 = 266.67 or 267

0.3 million 3
4-Spot Transaction
Actual interest on spot transaction Rs. 1.90 mill
[48mx9.5%x5/12]

5-Future Outcome
(gain borrow lend sy nai, sale buy sy nikalna hy)

Sell 90.00
Buy 88.20
gain 1.80

Total gain = gain% x contract size x no. of contracts x contract period

= 1.8% x 300,000 x 267 x 3/12
= Rs. 0.36 million

1) Net interest cost = 1.9m - 0.36m = 1.54 m

2) Effective interest rate

48 mill x ? x 5/12 = 1.54 mill
Effective rate = 7.7%

3) Loss on spot (interest rate brh gye, tu nuqsan hoa spot py)
loss [48mill x 1.5% x 5/12] Rs. 0.3 mill

4) Hedge efficiency = 0.36/0.3

120%

Example:
A Co. has an investment of Rs. 24 mill at KIBOR+2%
KIBOR is revised every 6-months hmein is bat sy dar nai lgna ch
Next revision is due on 01-06-25 k kibor revise 6 months bad
Future contract size Rs. 300,000 horha jbky contract period 3-
Future contract period 3- months ka hy, yeh mismatch cover ho
Spot & future prices: exposure period mn
1/1/2025 5/1/2025 30 June wala future leny sy hm
(hedging date) is din k halaat k risk ko cover
Spot 6.0% 5.0%
31-Mar future 94.40 -
30-June future 94.80 95.60

Required:
1- Total interest income for 6-months ending 30-11-25
2- Effective interest rate
3- Hedge efficiency

1- Which contract?
-----Same as currency future------
30-june future

2-Type of contract
Borrower Sell now, buy later
Lender Buy now, sell later

Buy now, sell later

3-No. of contracts
Formula = Amount of exposure x Exposure period
Contract size Contract period

amount of exposure? exposure period?

jis amount py rate lgny jo rate decide hoga jisdin hmny loan lena ya dena
sy dar rae hm wo rate hmein itny arsy tak takleef ponchata rae ga

So, 24 million x 6 = 160

0.3 million 3

4-Spot Transaction
Actual interest on spot transaction Rs. 0.3 mill
[24mx7%x6/12]

5-Future Outcome
(gain borrow lend sy nai, sale buy sy nikalna hy)

Sell 95.60
Buy 94.80
gain 0.80

Total gain = gain% x contract size x no. of contracts x contract period

= 0.8% x 300,000 x 160 x 3/12
= Rs. 0.096 million

remaining, do yourself

Question#2 (book), Summer-2019 Q-4 (b), OL, do on your own

Lecture#77

June-2017 Q-3(b), Question#1, JML

jo jo solution kiya jesy uper same wesy hi, lekin sath sath
thori commentary b krni pary g is question mn english vich
or yeh b btana k faida v hoya ya nai

faida 2 tareeqon sy pta lga skty:

-aik tu effective interest rate nikalein, agr effective interest rate
spot rate sy kam hy tu mtlb faida mila hmein
-Or yeh b kr skty k loss on spot or gain on future ko apas mn compare krlen
agr gain on future loss on spot sy zyada hy, tu iska mtlb beneficial rha

tu hedge efficiency type b nikala ja skta or effective rate k through b

Sell now
Buy later

no. of contracts = (3000m/50m) x (12/3) = 240

Spot interest rate Rs. 225 mill

[3000mx7.5%]

Future outcome
Sell 92.40
Buy 92.20
gain 0.20

Total gain = 0.2% x 50m x 240 x 3/12 = Rs. 6 mill

Net interest cost Rs. 219 mill

[225m - 6m]

Effective interest rate = 7.3%

[3000m x ? = 219 m]

Now, solve part (b) of Ramzi Corporation (RC), Q#5, Winter-2016

contract size aesy nikly ga:

No of contracts = Amount of exposure x Exposure period
Contract size Contract period

no. of contracts x contract size = 300m x 8/6

Basis: (yeh woi currency wala tab lgaen gy agr end wali date ki future price nai btai)
01-01-25:
KIBOR 7% 93.00
30-June future 91.20 91.20
1.80
01-05-25:
KIBOR 9.8% 90.20
30-June future ? 89.60
0.60 (jo difference hy wo 1.80
ab btaen 30 June future ki price kia chal rae hogi ka 2/6 reh gya hoga)

Example (for basis calculation)

01-01-25:
KIBOR 6% 94.00 (100-6)
30-June future 95.2 95.20
1.20
31-05-25:
KIBOR 4% 96.00
30-June future ? 96.20
0.20 [1.20 x 1/6]

Question#6, KSL, Winter-2018 (ii)

uper (i) kr chuky hn part iska
(ii)
Sell now
Buy later

no. of contracts = (1500 mill/size) x (6/3)

no. of contracts x size = 3000 mill

Spot interest cost Rs. 86.25 mill

[1500m x 11.5% x 6/12]
(hmny assume kia tha pichly SWAP walypart mn k isko fix mn mar pr rae
tu isny fix hi rate choose kia hoga)

Future outcome:
Sell 90.20
Buy (w-1) 88.80
gain 1.40

Total gain = 1.4% x 3000m x 3/12

= Rs. 10.50 mill
Net interest cost Rs. 75.75 mill
[86.25m - 10.5m]

W-1: (basis wali kahani bnani pry g)

01-12-2018:
KIBOR 9% 91.00
31-Mar future 90.20 90.20
0.80
01-03-19:
KIBOR 11% 89.00
31-Mar future ? 88.80
0.20 (0.80 x 1/4)
Interest rate futures experts ka andaza hota k 3 ya 4 mahiny bad ya jitny
arsy ka future hy usky bad KIBOR kitna chal rha hoga
KIBOR mn phr jo 2% ya 3% jo b add kren gy yeh tu company ki apni
credit rating py depend krta
isliye jo Basis ki calculation hy us mn hm market ka jo rate hy (KIBOR)
wo lety hn srf, 2% or 3% jo extra hota wo nai

INTEREST RATE OPTIONS:

Types of option (w.r.t standardization)

-OTC (over the counter)
-Traded (options on futures)

Types of option (w.r.t

-Call (option to invest)
-Put (option to borrow)

---> Option premium: It is in form of % p.a

yeh jo interest rate future mn hmny basis lgani hy ya option dekhny hn k

exercise kren ya na kren, agar swal mn simple interest rate given hy
tu us sy compare krna hy, lekin agr KIBOR given hy tu phr KIBOR sy hi compare hoga

KIBOR tu Pakistan k liye hy, question mn or countries k b diye ho skty market rates:
LIBOR (lahore inter bank?? hihihihi, nai yeh LONDON INTER BANK OFFER RATE)
EURIBOR
etc etc..

JUNE-2024: (ICAP WEBSITE, last question)

is mn sath sath english ki commentary b krni hy
FRA: 6% 2%
Actual interest cost 2.80 1.20
[€20millx7%x2] [€20mx3%x2]
FRA (0.40) 1.20 itny sary steps krna
[€20mx1%x2] [€20mx3%x2] exam mn zrori nai hy
2.40 2.40 srf english mn aik line
likh skty k FRA 5% py
Effective interest rat 6% 6% hy tu hmara EURIBOR 5%
[€20mx?%x2=€2.4m] sy replace hojaye ga or
EURIBOR + 1% ki wjah sy
FUTURE: hmein effectively 6% cost kry
Sell now ga in any scenario
Buy later

no. of contracts = (20m/0.5m) x (24/3) = 320

6% 2%
Spot interest cost € 2.80 mill € 1.20 mill

Future outcome:
Sell 95.70 95.70
Buy (W-1) 93.95 97.95
1.75 (2.25)
Total gain/(loss) € 0.70 mill € (0.90) mill
[1.75x0.5x320x3/12]
Net total cost € 2.10 mill€ 2.10 mill yeh same isliye arae cuz no
Effective int. rate 5.25% 5.25% of contracts whole number hy, decimal h
tu different aty

W-1: Basis
june future likha hoa, yani 30-juna ka future
01-01-24:
EURIBOR 96.00 (i.e., 4%)
30-June future 95.70
0.30
01-06-24:
EURIBOR 94.00 (i.e., 6%) 98.00 (i.e., 2%)
30-June future 93.95 97.95
0.05 (0.30x1/6) 0.05

OTC options: 6% 2%
Option exercise Yes No
Option/spot 5% 2%
+ risk spread 1% 1%
+ premium 0.6% 0.6%
6.6% 3.6%

Lecture#78

TRADED OPTIONS:
Option to enter future market
isky liye pehly future ka swal solve kren gy

Example:
-A company will borrow Rs. 18.70 mill for 4-months on 01-05-25
-Future contract size Rs. 400,000
-Future contract period 3-months
-On 01-01-25 (i.e., hedging date):
Spot 9%
30-June future 89.00
Required:
Net total interest cost if on 01-01-25:
(a) Spot 12%
Future price 86.50

(b) Spot 6%
Future price 93
(a)
Type of contract
Borrower Sell now, buy later

3-No. of contracts
Formula = Amount of exposure x Exposure period
Contract size Contract period

amount of exposure? exposure period?

jis amount py rate lgny jo rate decide hoga jisdin hmny loan lena ya dena
sy dar rae hm wo rate hmein itny arsy tak takleef ponchata rae ga

So, 18.7 million x 4 62.33 or 62 contracts

0.4 million 3

4-Spot Transaction
Actual interest on spot transaction 0.75 million
[18.7mx12%x4/12]

5-Future Outcome
(gain borrow lend sy nai, sale buy sy nikalna hy)

Sell 89.00
Buy 86.50
gain 2.50

Total gain = gain% x contract size x no. of contracts x contract period

= 2.5% x 400,000 x 62 x 3/12
### 0.16 million

Net interest cost = 0.75m - 0.1 0.59 million

isi trh (b) b solve kr k future ko RAM mn ly ayen
part (b) ki total net interest cost Rs. 0.62 mill nikly g

Ab isi swal ko sir option ka swal bnaen gy

Example:
-Option premium (%):
---------Call--------- ---------Put---------
Strike price March June March June
90.00 0.20 0.25 0.30 0.35
-A company will borrow Rs. 18.70 mill for 4-months on 01-05-25
-Future contract size Rs. 400,000
-Future contract period 3-months
-On 01-01-25 (i.e., hedging date):
Spot 9%
30-June future 89.00
Required:
Net total interest cost if on 01-05-25:
(a) Spot 12%
Future price 86.50

(b) Spot 6%
Future price 93

1- Which Contract?
same as future
June Option

2-Type of contract
Borrower ----> Put option
Lender ----> Call option
Put option

3-No. of contracts:
Same as future
62 contracts

4- Net outcome (future mn hm do dfa market mn jaty thy, aik dfa sell or dosri dfa buy
(a)
Sell (option) 90.00 ab agr hmny future market mn jany ki option li hy
Buy 86.50 tu pehly din (1 jan) hm future market mn nai jayen gy
Gain 3.50 bas jaib mn parchi dal k ghoomty rahen gy
phr jb 1st may aya tu market mn jhaank k dekhein gy
Option exercise ? YES agr gain aya yani faidy hy tu option exercise kren gy
Rs. In mill wrna nai kren gy
Spot interest 0.75
(actual borrowing tu spot py hi honi)
Gain on future (0.22)
[3.5%x0.4mx62x3/12]
Premium 0.02
[0.35%x0.4mx62x3/12]
0.55

(b)
Sell (option) 90.00
Buy 93.00
loss (3.00)

Option exercise ? NO

Rs. In mill
Spot interest 0.37
(actual borrowing tu spot py hi honi)
Premium 0.02 gain wali line bas ghaib hojaye g
[0.35%x0.4mx62x3/12]
0.39

Example:
-Option premium (%):
---------Call--------- ---------Put---------
Strike price March June March June
94.50 0.20 0.25 0.30 0.35
- A company has an investment of Rs. 2.75 mill at KIBOR+1% and KIBOR is going to be revise
-Future contract size Rs. 400,000
-Future contract period 3-months
-On 01-01-25 (i.e., hedging date):
Spot 7%
30-June future 95.00
Required:
Net total interest cost if on 01-05-25:
(a) KIBOR 10%
Future price 89

(b) KIBOR 3%
Future price 97.20

1- Which Contract?
same as future
June Option

2-Type of contract
Borrower ----> Put option
Lender ----> Call option
Call option

3-No. of contracts:
Same as future
No. of contracts = (2.75/0.4) x (6/3) 13.75 OR 14 contracts

4- Net outcome (future mn hm do dfa market mn jaty thy, aik dfa sell or dosri dfa buy
(a)
Buy (option) 94.50
Sell 89.00
Loss (5.50)

Option exercise ? NO
Rs. In mill
Spot interest 0.15 [2.75x11%x6/12]
(actual borrowing tu spot py hi honi)
Premium 0.0035 gain wali line bas ghaib hojaye g
[0.25%x0.4mx14x3/12]
0.1478

(b)
Buy (option) 94.50
Sell 97.20
loss 2.70

Option exercise ? YES

Rs. In mill
Spot interest income 0.055 [2.75x4%x6/12]
Gain on future 3.780 [2.70x0.4x14x3/12]
Premium 0.0035
[0.25%x0.4mx14x3/12]
3.83

HOMEWORK- Question#4, June-2021, Zebra Limited

 is linked with a
BOR+2.5%)
revised periodically

y wala hy

m bank X

fix hoga jis sy bank Y ko faida hoga

 sy count krna hy time
9 (6+3) mahiny bad hoga

OR on 1st July, 2024 moves to:

9% ka wada kia tha,

R prh rha 5% so hm usko 4% pay kren gy
R reimburse krden

assume kr k chaly

Yr. 5
---------------
8.00
(7.00)
(0.20)
0.80

------------------
4.00

rae hoty

ki credit rating
chi nai hogi
liye zyada rate offer kia
 amount k leny, buri wali ko mehngy
hoye un mn mismatch ya inefficiency thi
mehnga rate offer ho rha hy, tu fix mn usi
ko, tu difference mn difference agya

sted hy jis mn usko comparatively zyada

gr company B fixed mn interested hy tu wo rate end

bnaen gy k agr bank sy fixed leta (17%), us sy rate
m hoga
yeh end wali figures pehly likh len gy)

ees hmesha end py kren gy wrna balancing khrab hojaye g)

rbitrage Swap"
orrowing

ch contract
be borrowed
r commitment

hich contract borrowing

committed
th future) yani 30
t kren gy itny

terest rate
nterest rate 9%
ding or borrowing
t to invest

t to borrow

ny loan lena ya dena

akleef ponchata rae ga
mein is bat sy dar nai lgna chaiye
kibor revise 6 months bad
orha jbky contract period 3-months
a hy, yeh mismatch cover hojaye ga
xposure period mn
0 June wala future leny sy hm 01-06-25
din k halaat k risk ko cover kr rae hn
ny loan lena ya dena
akleef ponchata rae ga
mpare krlen

ter-2016
uture price nai btai)

e hy wo 1.80
ya hoga)

ar pr rae
d ya jitny

hny hn k

sy hi compare hoga

skty market rates:

BANK OFFER RATE)
ny sary steps krna
xam mn zrori nai hy
rf english mn aik line
kh skty k FRA 5% py
y tu hmara EURIBOR 5%
y replace hojaye ga or
URIBOR + 1% ki wjah sy
mein effectively 6% cost kry
a in any scenario

iye arae cuz no

whole number hy, decimal hota
ny loan lena ya dena
akleef ponchata rae ga
y, aik dfa sell or dosri dfa buy krny)

mn jany ki option li hy
e market mn nai jayen gy
omty rahen gy
t mn jhaank k dekhein gy
option exercise kren gy
d KIBOR is going to be revised for 6-months on 01-05-25

y, aik dfa sell or dosri dfa buy krny)

Lecture# 79
Chap#7, Foreign Investment Appraisal

Project life same wesy hi jesy long term decision making mn ati thi
cashflows b sary same hi hon gy bas foreign currency FCY mn hn gy
net cashflows phr exhange rate use kr k convert krengy LCY mn
or isky ilawa b hoskty LCY k b cashflows ajayen mazeed, local additional cashflows
phr jo net result aye ga local or foreign cashflows ka, unki phr NPV nikly
g jo k LCY mn hogi

Ab is mn 2 scenarios hn:
1- Jo jitna kamayen gy, ghar ly ayen gy (jo uper btaya sara)
2- is scenario mn foreign cashflows or profits alag nikal rae hngy or koi
na koi sawal mn guidance di hogi jisky according hm dividedn Pakistan mn la rae hngy
or phr LCY cashflows ayen gy and then additional b kuch cashflows LCY k ajayen gy
phr end ka final CF ki NPV nikly g

Chap-7 , June-2021, Q#16, Quick book

agr koi restriction nai hy tu scenario 1 yani jitna kamaye ga project seedha ghar jaye ga

Yr. 0 Yr. 1 Yr. 2 Yr. 3

-------------------------------------TKL----------------------------------
Total contribution (W-1) 40.57 66.68 108.50
Fixed cost (LY*1.03) (12.36) (12.73) (13.11)
28.21 53.95 95.39
Tax 25% (7.05) (13.49)
PPE (W-3) (60.00)
Grant 6.00
Working capital (W-4) (45.00) (4.05) (3.92) (3.71)
(99.00) 24.16 42.98 78.19
Exchange rate 0.041 0.043 0.045 0.047
------------------------------------------Rs. In million-----------------------------
Converted Cashflows (2,414.63) 561.84 955.05 1,663.71
Additional tax (25.07) (45.91)
Loss of existing production 624.00 1,221.17 1,794.02
(W-5) (2,414.63) 1,185.84 2,151.14 3,411.82

Now, cal NPV on your own

W-1: Yr. 1 Yr. 2 Yr. 3 Yr. 4

units 40,000.00 60,000.00 90,000.00 120,000.00
--------------------------TKL----------------------------
Sale price 1,580.00 1,706.40 1,825.85 1,935.40
[Lyx(1+inflation)]
Variable (530.00) (556.50) (578.76) (596.12)
[LYx(1+inflation-3%)]
Component (W-1.1) (35.78) (38.56) (41.49) (43.22)
1,014.22 1,111.34 1,205.60 1,296.06
Total (TKL) mill 40.57 66.68 108.50 155.53

W-1.1: Yr. 1 Yr. 2 Yr. 3 Yr. 4

component (Rs.) 832.00 856.96 882.67 900.32
Exchange rate (W-2) 0.043 0.045 0.047 0.048
Component (TKL) 35.776 38.563 41.485 43.215

W-2: Exchange rates:

TKL/Rs.
Yr. 0 0.041
Yr. 1 [0.041x1.09/1.04] 0.043
Yr. 2 [0.043x1.08/1.03] 0.045
Yr. 3 [0.045x1.07/1.03] 0.047
Yr. 4 [0.047x1.06/1.02] 0.048
Yr. 5 [0.048x1.05/1.02] 0.050
Yr. 6 [0.050x1.05/1.02] 0.052

W-3:
RV [60x1.09x1.08x1.07x1.06x1.05] TKL 84.12 mill

W-4: Working capital

Bal. Cashflow
Yr. 0 45.00 (45.00)
Yr. 1 49.05 (4.05)
Yr. 2 52.97 (3.92)
Yr. 3 56.68 (3.71)
Yr. 4 60.08 (3.40)
Yr. 5 - 60.08

W-5: Yr. 1 Yr. 2 Yr. 3 Yr. 4

Exisiting (nominal) 6,240.00 6,427.20 6,620.02 6,752.42
Reduced 5,616.00 5,206.03 4,825.99 4,430.26
624.00 1,221.17 1,794.02 2,322.16

Lecture#80:

Ab dosry scenario ka swal jis mn sara paisa ghr nai aye ga blky
govt decide kry g k kitna paisa ghr ly k jana
Foreign or Local workings toot jayen g bas

December-2017, Question#15 (book), Moder jitna PAT kamaya bas utna dividend ghr la
Yr. 0 Yr. 1 Yr. 2 Yr. 3
----------------------------------------Rs. Million--------------------------------------
Dividend (W-1) - 14,368.87 16,597.47 18,839.25
Tax 10% - (1,436.89) (1,659.75) (1,883.92)
Investment (52,000.00)
Recovery at end (W-5)

Disc.
Ke jo nikala hoa wo solution sy detail mn dekhna hy, wo hoga discount rate
or NPV nikal len gy

W-1: Yr. 1 Yr. 2 Yr. 3 Yr. 4

Units (million) 3,000.00 3,090.00 3,182.70 3,278.18
[LYx1.03]
----------------------------------------FD Million--------------------------------------
PBTD 420,000.00 467,208.00 ### 578,138.95
[Yr.1: 140x3000][onwards: LYx1.03x1.08]
Dep (W-2) (85,000.00) (76,500.00) (68,850.00) (61,965.00)
Profit on disposal - - - -
Interest income (W-3) - 7,306.06 13,808.45 19,579.34
335,000.00 398,014.06 ### 535,753.30
Tax 25% (83,750.00) (99,503.51) ### ###
PAT 251,250.00 298,510.54 ### 401,814.97
Exchange rates [LYx1 17.49 17.99 18.50 19.03
Converted Dividend 14,368.87 16,597.47 ### 21,117.35

W-2: Depreciation FD million

Cost [50,000x17] 850,000.00
Yr. 1: dep (85,000.00)
765,000.00
Yr. 2 dep (76,500.00)
688,500.00
Yr. 3 dep (68,850.00)
619,650.00
Yr. 4 dep (61,965.00)
557,685.00
Yr. 5 dep (55,768.50)
501,916.50
Yr. 5 profit 100,383.00
602,299.50

W-3: Yr. 1 Yr. 2 Yr. 3 Yr. 4

PAT 251,250.00 298,510.54 ### 401,814.97
depreciation 85,000.00 76,500.00 68,850.00 61,965.00
WC Inv. (3,821.60) (4,251.15) (4,728.98) (5,260.51)
Dividend (251,250.00) (298,510.54) ### ###
Profit on disposal - - - -
81,178.40 72,248.85 64,121.02 56,704.49
b/d - 81,178.40 ### 217,548.28
c/d 81,178.40 153,427.25 ### 274,252.76

Interest 9% - 7,306.06 13,808.45 19,579.34

W-4: WC W-3 sari hmny aik tu interest

bal. cashflow dosra govt ny hmary sary ass
[LYx1.03x1.08] ab govt hmsy 3 assets ly rae
yr. 0 [2000x17] 34,000.00 (34,000.00) plant, WC or hmara bank bala
Yr. 1 37,821.60 (3,821.60)
Yr. 2 42,072.75 (4,251.15)
Yr. 3 46,801.72 (4,728.98)
Yr. 4 52,062.24 (5,260.51)
Yr. 5 57,914.03 (5,851.80)

W-5: FDM
Plant 602,299.50
WC 57,914.03
Bank bal 223,786.47
884,000.00
Rs. In mill 45,168.02
[884000/19.57]
 ional cashflows

stan mn la rae hngy

LCY k ajayen gy

seedha ghar jaye ga

Yr. 4 Yr. 5 Yr. 6

KL-----------------------------------
155.53 165.38 -
(13.51) (13.91) -
142.02 151.47 -
(23.85) (35.51) (37.87)
84.12

(3.40) 60.08
114.77 260.17 (37.87)
0.048 0.050 0.052
illion--------------------------------------------
2,391.11 5,203.37 (728.24)
(79.49) (113.62) (116.52)
2,322.16 2,820.49 -
4,633.77 7,910.23 (844.76)

each year kam kren gy production,ICAP

solution mn answer ghlt hy
Yr. 5
120,000.00
-------------
2,032.17
 (608.05)

(45.92)
1,378.21
165.38

Yr. 5
918.33
0.050
45.916

Yr. 5
6,887.46
4,066.98
2,820.49
a bas utna dividend ghr la skty
Yr. 4 Yr. 5
--------------------------------------
21,117.35 ###
(2,111.73) ###

###

Country risk premium yani

unt rate s mulk mn paisy invest krny ka
jo risk hy
formula sheet print niklwa k ly k jani
Yr. 5 us mn sy formula dekh k country risk premium calculate kren gy
3,376.53

--------------------------------------
643,121.77

(55,768.50)
100,383.00
24,682.75 jo net cashflows hn or jo PAT (I/S) hy us mn farq hy
712,419.02 PAT bhej k jo bach jaye ga wo 9% py reinvest hoga
### yani interest income aye g
534,314.26
19.57 uper FCY ki inflation lgai or neechy rupy ki
27,300.81
 Yr. 5
534,314.26
55,768.50
(5,851.80)
###
###
(50,466.30)
274,252.76
223,786.47 is k uper 9% ab year 2 ki interest income aye g

24,682.75

3 sari hmny aik tu interest income k liye ki hy

ra govt ny hmary sary assets rkh k wo paisy hmein dy deny hhn
govt hmsy 3 assets ly rae hogi
nt, WC or hmara bank balance
m calculate kren gy
Chap#5
Sources of Finance

Topics:
1-Debt Finance
2- Equity finance (i.e., Right issue)
3- Dividend
4- Ratio analysis

RATIO ANALYSIS
Co. A Co. B
Sales 500 m 320 m
GP 100 m 80 m

Ab do companies ki srf sale ko compare kr k sahi result nahi nikala ja skta

same isi trah abi kal agr ksi cricketer ny match khelna shuru kia for example
hassan ali ny, tu us ka comparison hm Saqlain Mushtaq sy nai kr skty
kiun k usny matches zyada khely hn uska experience zyada hy etc etc

Now if we derive percentage

GP margin 20% 25%
80 or 100 apas mn utna comparable nai hy jitna 20 or 25% hy

isliye hm ratios nikalty

Read seedhy seedhy formulae from book

Dividend cover: profit py kitna dividend baant rha business

isky ilawa growth ka formula (jo variance nikalty hm audit working papers mn)
growth mostly SOCI k liye better hoti
cuz SOCI mn performance of entity hoti for the year
jbky SOFP mn position of entity hoti at year end

Chap# 2 to 6 & 8 is long term decision making from ICAP book

now BFD ki book read krni hy lazmi aik dfa
Chap# 7, read kren full

Discussion of June-2024, Q#2, read the answer carefully

ratios formula yaad kr k jani hn
Lecture# 82
Debt Finance:
Read 3rd page of chapter. Pg-211, Terms related to Debt Finance

Exam mn aesy swal pocha jaye ga k bank A sy loan len ya B sy

2 sources mn sy kis source sy finance raise kren
tu jo sasta pr rha hm wo len gy, lekin swaal py b depend krta
ho skta koi bank mehnga loan dy lekin uski conditions (shartein) asan hon
and vice versa

Tu aesy swal solve krny ka koi hard and fast rule nai hy, bas swaal dhyan sy
krna pry ga

Question#1, page# 222, June-2009, ABC Ltd

discussion
dono options k repayment cashflows bnayen gy or 13% py PV nikalen gy
jiski repayment kam arae hoi wo final (after converting sterling into rupee)
See solution

Question#5, June-2013, Harappa Pakistan Ltd

discussion
see solution yourself
is mn 3eeno cases mn btana hy k kin kin halat mn kon kon sa behtar hy
aik debenture sy related kia concern ho skta? Ofcourse aik interest cost
dosra redemption ka tu bas yahi calculate kr k answer mn bta den gy

Question#2, June-2016, Modern Vehicles Ltd

Option-1:
Yr. 1 Yr. 2 Yr. 3
-----------------Rs in mill------------------
Dividend (W-1) 1,475.87 1,667.65 1,879.28
Tax @ 30% (442.76) (500.29) (563.78)
Tax credit 77.68 87.77 98.91
[dividendx5/95]
1,110.78 1,255.13 1,414.40
Disc. @ 11% 0.90 0.81 0.73
PV 1,000.71 1,018.69 1,034.20
PV 3,053.59 itna paisa hmein ghr ponchy ga yeh uski PV hy

W-1: SVI Yr. 1 Yr. 2 Yr. 3

-----------------$ in mill------------------
PBIT [LYx1.1] 40.00 44.00 48.40
Interest (1.46) (0.98) (0.49)
[45x3.25%][30x3.25%][15x3.25%]
PBT 38.54 43.03 47.91
Tax 25% (9.63) (10.76) (11.98)
PAT 28.90 32.27 35.93
Dividend 13.73 15.33 17.07 dividend will be taxed at
[PATx50%x0.95]
Exchange rate 107.50 108.80 110.10

Rs million 1,475.87 1,667.65 1,879.28

Option-2:
Yr. 1 Yr. 2 Yr. 3
-----------------Rs in mill------------------
Dividend (W-2) 1,458.63 1,631.31 1,823.39
Interest [$[Link] 205.33 207.81 210.29
Interest cost (W-2.1) (354.38) (252.00) (129.94)
Exchange gain - - 229.50
[$45mx(110.10-105)]
1,309.58 1,587.12 2,133.24
Tax @ 30% (392.87) (476.14) (639.97)
Tax credit 76.77 85.86 95.97
[div x 5/95]
Loan recovery 4,725.00
loan repayment (1,575.00) (1,575.00) (1,575.00)
(581.52) (378.16) 4,739.23
Disc @ 11% 0.90 0.81 0.73
PV (523.89) (306.92) 3,465.29
PV 2,634.47 itna paisa hmein ghr ponchy ga yeh uski PV hy

W-2: SVI Yr. 1 Yr. 2 Yr. 3

-----------------$ in mill------------------
PBIT [LYx1.1] 40.00 44.00 48.40
Interest [45mx4.25%] (1.91) (1.91) (1.91)
PBT 38.09 42.09 46.49
Tax 25% (9.52) (10.52) (11.62)
PAT 28.57 31.57 34.87
Dividend 13.57 14.99 16.56
[PATx50%x0.95]
Exchange rates 107.50 108.80 110.10

Rs million 1,458.63 1,631.31 1,823.39

W-2.1:
loan rate Interest
Rs mill Rs mill
Initial 4,725.00 7.50% 354.38
Repayment (1,575.00)
3,150.00 8.00% 252.00
Repayment (1,575.00)
1,575.00 8.25% 129.94
Repayment (1,575.00)
-

Do question#6, Dec-2015, RG

Lecture#83
December-2014, Question#7, Energy Gen Limited
LIBOR sy uper wala jo plus k bad aye ga wo EGL ny khud arrange krna hy

Jis bank sy hedge krwaya us ny kaha k LIBOR sy uper wala tm dekho gy

hm tumara loan repay kren gy upto LIBOR apni jaib sy, tm hmein bas utny rupy pay kro gy jo
baqi hm tmary bank ko khud hi deal krliya kren gy lekin LIBOR sy jo uper wali
percentage hy wo tm khud apny bank ko pay kro gy

hmny krna yeh hy k existing loans agr chalty rahen tu 2015 ka un pr interest
kia hoga or dosri option agr hm local bonds py chly gaye tu interest exp for the year 15 kia h

Continue Existing loan (option-1):

Tranche-A
Hedged portion (iski cal rupees mn hony lgi kiun k LIBOR or loan repay tu jahan he
Outstanding loan as at 01-05-2015
USD loan [$45mx 11/29] = $17.07 m (each installment $ 1.55 mill)
PKR loan [$17.07mx72.11] = Rs. 1231 m (each installment Rs. 112 m)

Interest cost:
Loan rate (11.4%) interest
opening bal. 1,231.00 2.85% 35.08
Repayment (112.00) -
1,119.00 2.85% 31.89
Repayment (112.00) -
1,007.00 2.85% 28.70
Repayment (112.00) -
895.00 2.85% 25.51
121.18
Unhedged portion:
Interest cost (uper wali mn rupee mn cal. Isliye chla li thi cuz us mn rate fix tha 72.
loan rate Interest Exchange rate
($ m) ($ m)
opening bal. 17.07 0.71% 0.12 Rs. 104.30
Repayment (1.55) -
15.52 0.71% 0.11 Rs. 106.66
Repayment (1.55) -
13.97 0.71% 0.10 Rs. 109.06
Repayment (1.55) -
12.42 0.71% 0.09 Rs. 111.52

W-1:
rate
at 01-01-15 Rs. 102

at 31-03-15 Rs. 104.30 saal k LIBOR ko quarter mn convert kia

[102 x 1.0285/1.0058]

at 30-06-15 Rs. 106.66

[104.30 x 1.0285/1.0058]

at 30-09-15 Rs. 109.06

[106.66 x 1.0285/1.0058]

at 31-12-15 Rs. 111.52

[109.6 x 1.0285/1.0058]

Solve Trenche B on ur own first

Answer will be (if existing finance continues)

Total finance cost for 2015 Rs. 506.18 m
[121.18+45.20+231.22+108.58]

Option-2: Local Debentures

Hmein kesy pta chly ga k logon ki kia requirement (rate of return) chal rae tu YDM
nikalna pry ga

IRR nikal len gy or iska answer aye ga 12%

Rs million
Interest cost on debentures 429.60
[12% (W-3) x (1231+2349)]
Loan termination penalty 68.19
[($17.07m+$27.5m)x1.5%xRs.102]
497.79

Conclusion:
Loan payoff krna zyada behtar hy

(Aesy swalon mn wording ghor sy dekhni or pory BFD mn kahin kahin

jo prha hy wo test ho rha hoga, so bas ghor krna hy jo smj aye likh dena)

Equity Financing:
Right issue:
Existing shareholders k pas jo right hy pehly unsy paisa liya jaye ga
agr company ko paison ki zrort hoi kbi tu
Issue to existing shareholders at price lower than market price

Theoritical ex right price (TERP) (right issue krny k bad theoretically price kahan chal
Example:
Current Market price Rs. 40
Existing issued share capital 5 mill shares
Co. is considering right issue of 2 for 5 at a price of Rs. 30

(iska formula inventory ka avg rate wala formula hi hy)

Rs million
Total MV of existing shares 200.00
[5 m x 40 ]
Proceeds from right issue 60.00
[2 m x 30]
260.00

TERP Rs. 37.15

[260m/7m]

Value of Right:
Jisky pas yeh parchi hogi, usko say 30 rupy mn aik share mil jaye ga
jiski market worth 37.15 hogi
tu usko faida hoa 7.15 ka
yeh hoti hy value of right:
TERP - exercise price

Value of right = Rs. 7.15 x 2/5

(per existing share) = Rs. 2.86

Agr right issue company logon ko yeh announce kr k kr rae hy k hm is

paisy sy aik project krny ja rae hn
or sath hi us project ki positive NPV 15 mill b announce krdeti hy tu logon ko
jb yeh khabar mily g tu company ki equity ki worth 15 mill sy straight brh jaye g

or ab TERP aesy nikly ga: Rs million

Total MV of existing shares 200.00
[5 m x 40 ]
Proceeds from right issue 60.00
[2 m x 30]
15.00
275.00

TERP Rs. 39.29

[275m/7m]

Question#8 (book), PSD, June-2010, (do yourself)

iski requirement (a) ka pt. 1 or 2 pehly krna
pt 3 mn share price cal krwa rha sal bad ki yani business valuation
or method P/E ratio method available hy

Lecture#84
Do Question#9(book, chapter-sources of finance)

Must read Sources of finance chapter from ICAP book

June-2023 (ICAP website), Question#2 (b) raising finance sy agy

Equity vs debt la swal hy
jis jis ka data hy bs utni ratios nikalen gy question mn
is mn examiner ny btaya hoa k yeh yeh 3 ratios calculate krden

Existing Equity option Loan option

--------------------Rs in mill----------------------
Extract I/S
Operating profit 15,560.00 15,560.00 15,560.00
Interest (4,020.00) (4,020.00) (4,432.40)
PBT 11,540.00 11,540.00 11,127.60
Tax 29% (3,346.60) (3,346.60) (3,227.00)
PAT 8,193.40 8,193.40 7,900.60
Extract-SOFP
Equity 110,310.00 114,434.00 ###
Debt 40,200.00 40,200.00 44,324.00
150,510.00 154,634.00 ###

*4000/0.97=4,124m
Interest cost = 4020+4124x10% 4,432.40

RATIOS: Existing Equity option Loan option

Interest cover 15,560.00 15,560.00 15,560.00
4,020.00 4,020.00 4,432.00
3.87 3.87 3.51

Gearing 40,200.00 40,200.00 44,324.00

150,510.00 154,634.00 ###
27% 26% 29%

EPS 8,193.40 8,193.40 7,900.60

10.00 11.00 10.00
819.34 744.85 790.06

Ab agy sy faidy byan shuru krdeny hy, make sure investor point of view sy sochna
Equity k faidy or debt k faidy sochen gy
Afzal tareeka hy k book prh k jani hy ICAP ki
Aesy hi moo utha k paper deny ni jana

December-2023 attempt, Q#5

Zubani discussion

Report mangi hy usny tu tameez yahi hy k calculation sy shuru nai krna

To: BOD
From: CFO
Subject:------------------------
(isky bad angrezian likhein gy sariiiii, pehly introduction or un angrezi k sath appendix mn ca
calculations ka result angrezion mn likhen gy, or usky bad report k end mn
Conclusion bta den gy, unhn ny jazbaat nai mangy mashwra manga hy
so bas conclusion b thora bht likh den gy bna k)
Simple Kd ka swal hy, teenu k Kd nikalein gy or jiska Kd kam wo best
option, isko bas english vch paa dena paper mn

Ab 2 3 swal zubani zubani or phr khtm

Winter-2012, ABM, discussion
Valuation or sources of finance mix swal hy
Existing (Rs m) New Revised (Rs m), hm is shakal py pon
Existing 4,888.00 1,422.40 6,310.40
(250mx19.55)
TFC 4,888.00 4,577.60 9,465.60
9,776.00 6,000.00 15,776.00

Ab 2nd para mn likha k 80% of MV py right share issue krna chah rae
part (b) ki req. compute the no. of right shares to be issued, ab jo uper new equity nikali
yani 1,422 ko divide krden 80% of MV sy (MV is given)

Req c: 6 mahiny bad ki debt equity check krny ko kaha hy

YTM change hojaye ga 6 mahiny bad TFCs ki value dobara nikalni prhy g
nai waly b or purany b
or equity ki b vnew value nikalein gy
then debt equity ratio calculate krny ko kaha hy
naye waly b 5 sal k liye hi issue hongy
or inki value jo hy hm P/E ratio sy nikalien gy

2nd page of this chapter, read "Choices available to shareholders"

December-2011, Question#13 (book), zubani zubani dekh lein solution
June-2010, Question#14 (book), zubani solution dekh lena just

GURU TIP OF BFD:

Jb b aik chapter complete krlen, tu usky sary questions ko apas mn compare zroor kren
kuch na kuch common zroor hoga or aesy mind mn aik dhaancha sa ajaye ga k flan
topic k question mn yeh yeh cheez lazmi hoti hy
Likh k practice krni hy CBE exam portal py
pers mn)
ga yeh uski PV hy
ividend will be taxed at 5%

ga yeh uski PV hy
utny rupy pay kro gy jo dollar converted at Rs. 72.11/$ or interest KIBOR+0.1% py jo hoga

xp for the year 15 kia hoga

an repay tu jahan hedge krwaya usny dena hy, hmny tu bas LIBOR + wali or jitny rupy bnen

(yeh rupees mn convert kia kiun k jis sy hedge krlia hoa usny hmary sath dollar 72.11 py fix
hoa tu ab hm apni sari hedged portion ki calculation isko rupee mn convert kr k us rupee wali
amount py kren gy)

Tranche A:
-hedged portion ki interest cost
-Unhedged ki int. cost
Tranche B:
-Hedged ki int. cost
-Unhedged ki int. cost
uper waly 4aaron interest ko add kren gy tu hmara interest cost
z us mn rate fix tha 72.11)
xchange rate Interest
(Rs m)
s. 104.30 12.52

s. 106.66 11.73

s. 109.06 10.96

s. 111.52 10.04

nvert kia

rae tu YDM
ically price kahan chali jaye g share ki market mn)
brh jaye g
w sy sochna

k sath appendix mn calculations kren gy or un

m), hm is shakal py ponchny chaiye equity or debt raise krny k bad

r new equity nikali

solution

mpare zroor kren

jaye ga k flan
% py jo hoga

wali or jitny rupy bnen 72.11 k hisab sy wo deny hn)

y sath dollar 72.11 py fix krlia

convert kr k us rupee wali