Simple Interest: Simple interest is the interest computed on the principal for the entire period

it is borrowed. If a principal of Taka P is borrowed at a simple interest of r% per year for a

period of time t year, then simple interest is determined by I= Prt
Where,
I=interest
P=principal

r=rate of interest

t=time
Thus, an amount A due to be paid at the end of period of t years is

A= Principal + Interest

𝑟𝑡
𝑟𝑡

𝑟𝑡
Remarks: The simple interest is charged on yearly basis. But if the time period is given in
months, week or days, then the conversion formula is as given below:

𝐾 𝑀𝑜𝑛𝑡ℎ𝑠= 𝑦 𝑟𝑠 𝑦 𝑟𝑠

Compound Interest: Compound interest is the interest on a particular principle sum is added to
it after each prefixed period the whole amount earns interest for the next period.
If P is the principle amount of n years.The amount of an interest rate r% per year for the period
of n years.The amount of an interest at the end of the first year would become (p × 𝑟).
Therefore, the total amount at the end of the final year is given by,

𝑟
𝑟
Similarly, 𝑟
𝑟
=P(1+r) (1+r)
= 𝑟
So that, 𝑟 for n years.
 When the time difference is in month

then,𝑟

i.e , ( )

Example-1: Find the number of years in which a sum of taka 1234 amount to taka 5678 at 5%
per annum compound interest payable quarterly.
Solution: Given that , P=1234, 𝑛 =5678, t=4, n=?
Solution: Given, P=1234 , ,t=4 ,r=?

𝑟 0.0125

We know, ( )

=> 𝑛

𝑛
𝑥

=> 𝑛

𝑛 𝑦 𝑟𝑠 𝑛𝑠

Example-2: If Tk.500 were invested for 8 years at interest rate of 6% compounded quaterly,
then what will be the compounded interest?
Solution : Given that,

P = 500 Tk, n=8 years, t=4,𝑟

We know that,

( )
𝑡
 Hence, Compounded interest = (An-P) =Tk. (807.24-500)=Tk.307.24 (Ans:)

Example-3: Find the compound interest on Tk.10,000 for 1 year 6 months if the interest is
payable half yearly at the rate of 8% per annum.

Solution: Given that,

P=10,000 Tk, n= 1 year 6 month=3/2 year ,t=2,r=i/t =

We know that,

( )
𝑡

The amount An is the principal amount for next one month period.

Then,

( )
𝑥

logB = 4.0542
 B =11329
Hence, Compound interest =(11329-10000)Tk=1329 Tk. (Ans:)

Example 4: Mr. Habib borrowed Tk. 25,000 from a money lender but he could not repay any
amount of 5 years. According to money lender demands now Tk 35,880 from him. At what rate
percent per annual compound interest did the lender lend his money?

Solution: Given, A=35,880 Tk

P=25000 Tk. , n=5 years , r=?

r=?
Now, We know,

A = (1 + 𝑟)

Hence, the required rate of interest is ,𝑟 𝑥

Example(interest) 5: A man deposited 5000 Tk in a bank that pays 5% per annum every six
month. The man will withdraw Tk 500 from his principal plus any interest accrued at 6 month
period. How much total interest can he expect to receive?

Solution: In this case bank is borrowing 5000 Tk at 5% interest and will pay off its debt
in 10 equal installments of Tk 500 each 6 months. The interest to be paid for first six
month period is,

I = PRT = (5000 X .005 X =125

2nd installment I = (4500 X 0.005 X )= 112.50

3rd installment I = (4000 X 0.005 X )= 100.00

………………………………………………………..
 10th installment I = (4000 X 0.005 X )= 100.00

Total interest paid by the bank is:

125 + 112.50 + 100 + … + 25.00 + 12.50

=12.50 + (2 X 12.50) + (3 X 12.50) + ………+ (10 X12.50)

= 12.50(1 + 2 + 3 + …………..+ 10)

=687.50 tk

Example-6: A person desires to buy a house. If the person borrow 400000tk at 12% interest for 26
months, find the simple interest the person paid the first month & the portion of the house purchased
with the first payment of 50000tk.

Soln:
P = 400000, r = 12% t= 1/2

Now, I = Prt = (400000 X 0.12X 1/2 ) =4000 tk

Since the first payment is 50000Tk., the person as purchased the (50000- 4000) = 46000Tk.
Toward this house with his first payment 46000Tk. is applied to the reduction of this debt and is
called the reduction of his principle. Thus in the next month he owes only
(400000 - 46000) = 354000Tk.

Depreciation: In the case of depreciation, the principal value goes on decreasing every year
by a certain constant amount. In this way after a certain period the reduced/diminished value
becomes the principal value.

The formula is,

where,

P= Original value of the asset,

i= Rate of depreciation,
An= Scrap value at the end of time period

This formula is known as “Reducing Balance Depreciated value Formula”.

Example-1: A machine is depreciated in such a way that the value of the machine at the end
of any year is 90% of the value at the beginning of the year . The actual cost of the machine is
Tk.10,000 but it is sold only for Tk.300 due some defects. Calculate the number of year
during which the machine was in use?

Solution: Given that ,

P=10,000, 𝑛
We Know that,
𝑟

𝑜 𝑜 𝑛
𝑛 𝑦 𝑟𝑠 𝑛𝑠

Example-2: The life of machine is estimated 15 Years. The original cost of the machine is
12000 and the depreciation on the reducing installment system being charged at 10% per
annum. Find out the scrap value of the machine after the end of its life.
Solution:
Given that,
We Know that,

𝑛𝑠

Annuity : A Sequence of fixed annual payments made at uniform time intervals is called an
annuity .
Annuity may be classified into two categories.
 1. Annuity certain : The first and least date of an annuity is fixed , then the annuity
is called an annuity certain .For example , installment payments. It is divided into
two categories.
a) Annuity due :When the payments are made at the beginning of the successive
intervals ,the annuity is called an annuity due .For example ,rent or leases is called
an annuity due.
b) Annuity ordinary or immediate : When the payments are made at the end of the
successive intervals, the annuity is called an annuity immediate or ordinary. For example,
mortgages, loans is called annuity immediate.
2. Contingent annuity : In case the term of payment depends on some uncertain event, then
the annuity is called contingent annuity. For example ,Insurance premium which is
terminated with the death of the insured person.
Deferred annuity : If the payments are deferred (or delayed) for a certain number of years,
then it is called deferred annuity.
Present value of an annuity immidiate : Present value of an annuity is the current value of the
total amount of annuity at the end of the given period.

Let A be the annuity, P the present value, r the rate of interest per unit per year and n be the
number of years. Then the first payment of P becomes at the end of,

First year =

2nd year =

……………………

nth year =

Thus the present value P of an annuity ,which is the sum of the present values of all the
payments ,is given by,

P= + + …………………… +
 = [1+ +…………………+ ]

= [

= [ ]

= [ ]

= [1- ]

= [ 1-(1+r)-n]

=A

Example-1:Equipment is purchased on an installment basis, such that taka 5000 is to be paid

on the signing of the contract and four yearly installments of tk 3000 each payable at the end
of the 1st,2nd and 4th year. If interest is charged at 5% per annum, what would be the cash down
price?

Solution: 𝑜 𝑓 𝑛𝑑 𝑡ℎ 𝑝𝑟 𝑠 𝑛𝑡 𝑣 𝑢 𝑜𝑓 𝑓𝑜𝑢𝑟 𝑛𝑠𝑡 𝑚 𝑛𝑡, 𝑤 𝑢𝑠 𝑡ℎ 𝑓𝑜𝑟𝑚𝑢

𝑟 𝑟

𝑣 𝑛 𝑟 𝑛𝑑 𝑛 ℎ 𝑛

]…..(i)

Let, x=

logx=-4log1.05=-4X0.0212

x=0.8226

From (i),
P= [1-0.8226]

=10644

Hence the cash down price would be Tk.(5,000+10,644)=15,644

(ii) Present value of annuity: The formula is

𝑟 𝑟

𝑟 𝑟 𝑟

𝑟
𝑟 𝑟 𝑟

𝑟
𝑟 𝑟

𝑟 𝑛

*Amount of immediate annuity is 𝑀= 𝑟

** Present value of deferred annuity is =

Present value P of an annuity deferred for m years i.e annuity to begin at the end

of years and to continue for n years is given by =[

Example 19: If money is worth 6% compounded once in two months. Find the present value
and the amount of an annuity whose annual rent is 1800 which is payable once in two
months for 5 years .

Solution: Given,

r=6%/6=0.01 ,n=5 × 6 = 30

A(amount due after every two months )=

We know, P=
 [ ]

Now , 𝑀= 𝑟

=10435.46746 (Ans)

Example 20: A man borrows Tk 6000 at 6% and promises to pay both principal amount of the
interest in 20 annual installments at the end of each year.What is the annual payment
necessary?

Solution: Given, P=6000 Tk, r=6%=0.06 & n=20 . A=?

We know, P=

(Ans)

Example 21: A man retires at the age of 60 years & his employer gives him pension of 1200
for the rest of his life. Reckoning his expectation of life to be 13 years and that interest is at
4% per annum. What single sum is equivalent to this pension?

Solution: Here, A=1200, r=4%=0.04,n=13,P=?

We know,
P=
* + (Ans)

Problem-22:
A company intends to create a depreciation fund to replace at the end of the 20th years as sets
closing Tk 5,00,000. Calculate the amount to be retained out of profits every year if heinterest
rate is 5%.
Solution: Given ,M=5,00,000 , r =5%=0.05 ,n=20 ,A=?

Applying the formula,

𝑀= 𝑟 -1]

-1]

………………………………………………..(1)

Let x=

x=antilog (0.4240)
x=2.655
Now substituting this value of x in equation (1) we have,

𝑥
𝑝𝑝𝑟𝑜𝑥
 Amortization:
A loan with a fixed rate of interest is said to be amortization if both principle and interest are
paid by a sequence of equal payments made over equal periods of time.
* + 𝑝

( )

* +

Ex -24: What monthly payment is necessary to pay off a loan of taka 800 at 18% per annum in
two years? in three years.

Solution:

For two years loan ,R=tk. 800,𝑛 ,𝑟 p=?

We know, * +

* +

(Ans)

For 3 years loan, R = 800, r = 0.015, n=36

𝑟
[ ]
𝑟

* +

P= 28.92. (Ans.)

Sinking fund: Quite after a person with a debt decides of accumulate sufficient funds to pay
off his or her debt by agreeing to set aside enough money each month (or quarter or years) so
that
,when the debt becomes payable ,the money set aside each month plus interest canned equals
the debt .this type of fund created by such a plan is called a sinking fund.
 Problem: A company buys a machine for taka 100000. Its estimated life is 12 years and scrap
value is taka 5000. What amount is to be retained every years from the profit and allowed to
accumulate at 5% C.I for buying a new machine at the same price after 12 years.

Solution:

Given , F = cost – scrap value = (100000 – 5000) = 95000,

n= 12 , i= 5%=0.05 , requirement A = ?

We know,

𝑛𝑠

Problem: A limited company intends to create a depreciation fund to replace at the end of 25th
years assets costing 100000 taka. Calculate the amount to be retained of profits every year if the
interest rate is 3%.

Solution: F=100000, n=25, i=3%=0.03 , A=?

We know,

𝑛𝑠

Problem:

A machine costs company taka 52000 and its effective life estimated to be 25 years. A sinking
fund in created for replacing the machine by a new model at the end of its life time, when its
scrap realige a sum of taka 2500 only. The price of the new model estimated to be 25% higher
than the price of the present one. Find what amount should be set aside every year, out of the
profits for the sinking fund, if it accumulates as 31/2 percent per annum compound.

Soln:
 Given, cost(old machine) = 52000

Cost (new machine) = 52000 + (52000 x25%)=65000

F = cost – scrap value = (65000 = 2500) = 62500

n = 25, i = 31/2 = 0.035

𝑛𝑠

Math of Amortisation:

Problem:

A loan of 1000tk is to be paid in 5 annual payments interest being at 6% per annum

composed interest and first payment being made after a year. Analyse the payments into these
on account of amortization of the principle.

Soln:

Given, R = 1000,

n = 5, i = 6% = 0.06, A= ?

We know,

ℎ 𝑛 𝑛𝑠

Problem: A man borrow taka 20000 at 4% C.I and agrees to pay both the principle
and interest in 10 equal installment at the end of each year. Find the amount of each
installment.
Solution :
Given that,
R = 2000, i = 4% = 0.04, n = 10 then A = ?

A = 2470 (answer)

Problem: A man borrows Taka 1500 promising to repay the sum borrow and the proper interest
by 10 equal yearly installments, the first two falling due in 1 year’s time . Reckoning C.I at 5%
p.a. Find the value of the annual installment?

Solution :
Given that,

R=1500, n=10, i=5%=0.05, A=?

R=A[

A = 194.20 (answer)

Problem:

A man borrows taka 1000 on the understanding that it is to be paid back in four equal
installments at intervals of six months, the first payments at intervals of six months, the first
payment to be made six months after the money was borrowed. Calculated the amount of each
installment reckoning C.I at 2 ½ % per half year.
Solution: Given, R= 1000, n=4, i=2 ½ % =0.025, A=?

R=A [ ]

1000 = { }

1000 = A (3.756)

⸫A= 266.24 Taka (Answer)

Revenue: Revenue is the total amount of money, an entity earns from variety of sources. Income
on the other hand is the total amount of money earned after all expense are deducted.

 Gross revenue =price of goods or services number of units sold or a number of

customer.
 Total cost=fixed cost + variable cost.

 Marginal revenue, 𝑤 𝑡ℎ𝑜𝑢𝑡 𝑑 𝑠 𝑟 𝑚 𝑛 𝑡 𝑜𝑛

 Marginal cost,

 Profit=

 Prove that: .
Proof: we know that, profit=

Problem: A procedure has the probability of discriminating between the domestic and foreign

market for a product where the demands respectively are

Total cost where . What price will be producer changed in

order to maximize profit

(a) with discrimination between the market

(b) without discrimination between the market

(c) compare the profit differential between discrimination & non-discrimination.

Solution: we know,

Given that ,
Hence, MC will be the same at all levels of output. In the domestic market,

………………………………….. (i)

From (i) we get,

=110

For foreign market

……………………………(ii)

From (ii) we get ,

67.5 (Ans)

b) let 𝑝 𝑝 𝑝

given,
Now,

𝑑
𝑀
𝑑

Now,

𝑀 𝑀

With discrimination,

Since,

Profit (Ans)

Without discrimination,

Profit (Ans)
 Amortization Schedule:

Problem: A $15000 loan is to be repaid over 10 years at 𝐽12 = 18% . Construct the first three
lines of the repayment schedule using,
(i). Amortization method
(ii) Sum of digit method

(i) Solution:

Given that , 𝐽

,n=10 years=120 month, = $15000(𝑜𝑢𝑡𝑠𝑡 𝑛𝑑 𝑛 )

We know,

Payment No Periodic Interest Rate Principal Outstanding

Payment 1.5% Repaid Principal
1. $270.28 $225.00 $45.28 $15000
$14954.72
2. $270.28 $224.32 $45.96 $14908.76
3. $270.28 $223.63 $46.65 $14862.11

(ii) Total interest = 120(270.28) 15000

= $17433.6
Now,
𝑆 = 1 + 2 + 3 + ⋯ + 12
𝑆 = 120 + 119 + 118 + ⋯ + 1

2S=121+121+…………121
𝑆 =7260
Interest for 1𝑠𝑡 payment=
Interest for 2𝑛𝑑 payment=
Interest for 3𝑟𝑑 payment=

Payment No Periodic Interest Principal Outstanding

Payment Allocated Repaid Principal
1. $270.28 $288.15 $15000
$15017.87
2. $270.28 $285.75 $15033.34
3. $270.28 $283.35 $15046.41

Problem: Mr. Adnan borrow $2000 to be repaid with quarterly over 2 years of J12 = 24%.
Construct a complete amortization schedule.

Solution:
Given, A = 2000(outstanding
principal) n = 2 years
= (2 X 4) = 8
𝐽 𝑣 𝑟𝑦 𝑚𝑜𝑛𝑡ℎ

Now,

(1 + i)12 = (1.02)12

Therefore, i = 0.061208

= 6.12% (quarterly)

We know , |
=223.62$

Payment No. Periodic Payment Interest Rate Principal repaid Outstanding

Principle
1200$
1 323.62 122.42 201.20 1798.80
2 323.62 110.10 213.52 1585.28
3 323.62 97.03 226.59 1358.69
4 323.62 83.16 240.46 1118.23
5 323.62 68.44 255.18 863.05
6 323.62 52.83 270.79 592.26
7 323.62 36.25 287.37 304.29
8 323.62 18.60 304.89 0
2588.89 588.89 2000
 Partial payment: Financial obligations are sometimes liquidated by a series of partial
payment during the term of obligation. Then it is necessary to determine the balance due on
the final due date.

There are two common ways to allow interest the credit on short term transactions.

Merchant’s Rule: The entire debt and each partial payment earn interest to the final
settlement date. The balance due on the final date is simply the difference between the
accumulated values of the debt and accumulated value of the partial payment.

U.S. Rule: The interest on the unpaid balance of the debt is computed is line a partial
payment is made. If the payment is greater than the interest due, the deference is used to
reduce the debt. If the payment is less than the interest due it is held without interest until
other partial are made. Whose some exceed the interest due at the time the lost of there
partial payment.

The balance due on the final date is the outstanding balance after the lest partial payment
carried to the due date.

Problem: Gurdon borrow $1000 on Jan 15, 1995 at 16% He paid $350 on April 12, 1995, $20 on August
10, 1995 and $400 on October 3, 1995. What is the balance due on December 01, 1995 under Merchant $
U.S rule?

Solution: Merchant rule:

320 days

233 days

April 12 August 10 October 3

Jan 15 Dec 1
$350 $20 $400 59 days

113 days

If we consider Dec 01, 1995 as focal date then,

 * + * + * + 𝑥
𝑥

U.S Rule:
87days $350 120days $20 54days $400 59days
Jan 15 Dec 01
April 12 August 10 October 3

Amount due on April 12 is * +

Interest for 120 days * +

The Payment on August 10 is $20 which less than interest is held without interest.

Interest for days is,

* +
Amount due on October 3 is

Payment of $20 & $400 is = - 420.00

=$320.66
Interest for 59 days is =$320.66[0.16 ×
Amount due on December 1 is = (320.66 + 8.29) =$328.95
i) Outstanding principle =
Where, R=payment, n=period, i=per period interest repaid,ℎ instalment (1
< ≤ 𝑛).

ii) Interest = [1 (1 + ) (𝑛 +1)]

iii) Principal repaid = (1 + ) (𝑛 +1)
= [1 (𝑛 +1)]; V=(1 + ) 1

Problem: A loan is being repaid with 20 annual installment at J1 = 9%. In what installment
are the principal and interest portion most nearly equal to each other.

Solution: Given that, 𝐽1 = 9% = 0.09 =i ; n = 20

In the 𝑡ℎ payment
Interest, i= [1 (1 + ) (𝑛 +1)]

= [1 (1 + 009) +1)]
Principal= (1 + ) (𝑛 +1);

Now,

[ +1)] = (1 + 0.09) +1)

Or,[ +1)] = (1 + 0.09) +1)

Or,[ +1)] = (1.09) +1)

Or,1= 2(1.09) +1)

Or, log(0.05) = -(20-k+1)log(1.09)

k=12.956=13

In the 13𝑡ℎ payment interest principal are most likely equal.

Problem: Riyad borrowed $15000 to buy a car. The loan will repay over 3 Years with monthly
payments at J12=6%. Find the total interest paid in the 12th payments of 2nd year.

payments R= A/ an≦I =$ 456.33

Outstanding principal after 1 year is P = A(1+i) k - RS k≦i

= – 456.33 x S 12≦0.005

= $10296.08

Outstanding principal after 2nd year is P

= – 456.33 x S 24≦0.005

=5302.04

Total principal repaid in the 2nd year is= (10296.08-5302.04)

=4994.04

The balance of the 12-payment made in the 2nd year represents interest.

Hence, interest paid =12(346.33)-4994.04

= $481.92 (Ans.)
Outstanding Principal:

There are two methods that can be used to find the outstanding principal P on a debt A
being amortized by equal payments R over n period at interest rate i per period.

including the last one is equal.

P=Ra(n-k) ≦i

Retrospect

Prospective method: Looking ahead the outstanding principal P just after kth payment is
equal to discounted value of (n-k) payments ive Method: Looking back in time, the
outstanding principal P just after Kth payment is equal to the accumulated value of (n-k)
payments, including the last one is equal to the accumulated value of the kth payment made
to date:

P =A (1+i) k – R Sk≦i Where Sk≦i=

 Show that the payments made in retrospective and prospective method both are
same.

Proof: We know that,

P=A(1+i)k- Sk≦i -------- (1)

Substituting A= Ra(n-k) ≦i in equation (1) and get

P= Ra(n-k) ≦i (1+i) k- Sk≦i

=R[ ] -R[ ]

P= (proved)
Bond: A bond is written contact between the user (borrower) and the investor (lender) which
satisfies

1. The face value or the denomination of the bond which is stated on the front of the bond.
This is usually a round figure that is $100, $200 etc.
2. The redemption date or maturity date is the date on which the loan will be repaid.
3. The bond rate which is the rate at which the bond pays interest on its face value at regular
time interval until the maturity date. This rate is computed semiannually.
4. The redemption value which is the amount of money promised to be paid on the
redemption date.
Some notation:

F = Face value of the bond

C = Redemption value of the bond

r = Bond rate per interest period

i = Yield rate per interest period

P = Purchase price of the bond to yield rate

Problem: A $1000 bond that pays interest at Jn=12% is reducible at per at the end of 10 Years.
Find the purchase price yield 10% compared semiannually.

Solution: Given, F= $1000, r=12%/2 =0.06

n=2 x 10= 20
Fr= (1000 x 0.06) = 60, C=$ 1000, i=10%/2=0.05
We know that P=Fran¬i + C(1 + 𝑟) 𝑛

20
=60 x a 20¬0.05 +1000((1 + 0.05)

=$ 1124.62 (ans.)

Problem:
A $1000 bond redeemable at per on December 1, 1998, pays Semiannual coupons at J2=9%.
The bond is bought on June 1st, 1996. Find the purchase price and construct a loan schedule if
the desired yield is 8% compound semiannually.
Soln : Given , F=1000, r=9%/2 =0.045 , n=5
C=1000, i=8%/2 =0.04, Fr= (1000 x 0.045) =45
Ci = (1000 x 0.04) = 40

We know, P=C+ (Fr -Ci) a n¬i

=1022.26

i.e. the bond is purchased at a premium of $22.26.

Date Bond interest Interest back Principal Bank Value

payment value at yield Adjustment
4%
June 1,1996 0 0 0 1022.26
Dec 1,1996 45 40.89 4.11 1018.15
June 1,1997 45 40.73 4.27 1013.88
Dec 1,1997 45 40.56 4.44 1009.44

June 1,1998 45 40.38 4.62 1004.82

Dec 1,1998 45 40.19 4.81 1000.01
$225 $202.74 $22.25

Dividend Policy: Dividend policy involves the decisions to pay out earning or return the stock
holder for reinvestment in the form
Dividend Policy of John E. Walters Model: According to this model price of the share will be,

Where, P0= market value of the share R= Interest rate of return Ke=K= capitalization rate
 Dividend Policy of modiglini and Miller model (M-
M):
Assumption by M-M model:
1. The firm operate in perfect capital market.
2. There is no corporate rate
3. The firm has fixed investment policy
4. There is no risk and uncertainity exists
5. There is no flowtation cost and transaction cost
6. The investors and managers have the same information about firm
feature prospects.
 7. The financial avarage has no efffct on cost of capital
Mathematical operation related to M-M model:
1. Initial value of the share will be equal to the value at the end of the period after giving
dividend i.e,

……………………….(1)

where,
P0= Initial value/market price of the share of time
zero

P1= Market price of the share at the end of time

period,

D1= Dividend at the end of the period one,

K= The cost of the equality capital.

2. If there is no source of capital internally then the capitalized value of the company will
be equals to the multiple of the existing number of share.
If the number of share is n then

𝑛 𝑛 𝑛 ……………………….(2)

3. If the company issued new shares for investing in a new venture then equation will be,

𝑛 𝑛 𝑛 𝑛
……………………………(3)

where, Δn is the number of new share and Δn=n

ΔnP1= Fund raised by issuing new share,

nD1= Dividend
If the company invest in all the new project then the number of new shares will be,
 𝑛 𝑛 ⋯

Where, 𝑛 retained earning

= fund available for investment

From we get,

𝑛𝑝𝑜 𝑛 𝑛 𝑛 𝑝 𝑛

𝑛 𝑛 𝑝

Where, V is the values of the firm which doesn’t depend on dividend.

Problem: A company belong to a risk class for which the approximation capitalization rate is
10%. If currently has outstanding 25,000 shares selling at TK 100 each. The firm is
contemplating the declaration of a dividend of Tk 5 per share at the end of current Financial
year. If expects to have a net income of Tk 2,50,000 and a proposal of Tk 5,00,000. Show that
the M-M model the payment of dividend does not effect the value of the Firm.

Solution: a) Value of the firm when dividends are paid

i) = (1+k)- Here, = 100

=100(1+0.1)-5 k=10%=0.1

=105 =5

ii) No. of additional shares to be issued

= Here, I=5,00,000

= E=2,50,000

= shares N=25,000

iii) Value of the firm

V=
 ( )
=

=25,00,000

b) Value of the firm when dividends are not paid

= (1+k)- =100(1+0.1)-0

=110

Problem 33: You are the financial manager of food l.t.d.Assertain whether the dividend
payment ratio is optimize according to walter model

Ordinary share capital

Tk.20,00,000 Earning of the firm

Tk. 2,60,000 Dividend paid Tk.

1,50,000

Price earning ratio (P/E): 12.5

times Number of shares 20,000

(i) What would be the optimum price earning ratio that does no effect the value of the firm?
(ii) Will your decision change if price earning ratio is 8 instead of 12.5?

Solution(i):

Here, Earning per share(EPS)

𝑟𝑛 𝑛 𝑝 𝑟 𝑠ℎ 𝑟
𝑛𝑜 𝑜𝑓 𝑠ℎ 𝑟

Dividend per share

(DPS)=

𝑠ℎ 𝑟 𝑝𝑡
𝑓 𝑣 𝑢
𝑛𝑜 𝑜𝑓 𝑠ℎ 𝑟

Capital of unitary, k= =0.08

According to the Walter model, Market price of the Share:

𝑟 𝑆 𝑣
𝑑𝑣

Here r>k, so optimum payment ratio will be 0% i.e, the price of the share of that pay out ratio

(b) if P/E ratio is lines then k=1/2 =0.125 and the price of share at that ratio
 The price will change is Tk. 76.

And the optimum payment ratio is lac cause r<k, decling first

Analysis of rank and return:

Def : Risk is the probability that the firm will be unable to pay its bill as they become due (L.J
Gitman )Risk is defined as the variability if possible return from a project (J.C Vor )

Causes of business risk:

1. Natural risk
2. Technical risk
3. Economic risk
4. Time risk
5. Risk of changing demand
6. Risk of changing price
7. Bad belt risk
8. Political risk
9. Inflation risk
10. State risk
11. Exchange risk
 Microeconomics
The Demand Function

The relation between demand and price is called demand function, it is denoted by q=D(p),
where q=quantity , and p=price.

Properties of demand function (DF):

(i) 𝑞 ≥ 0, 𝑝 ≥ 0
(ii) Q is continuous function.
(iii) 0≤𝑞≤ 𝑛𝑑 0 ≤ 𝑝 ≤ where A and B are positive constant.
(iv) For a single value of p, q gives single value.
(v) Demand is monotonically decreasing due to increasing of

price. The equation q = a – bp is called demand equation.

Example:

Let the price of apple be Tk, 100 per kg. At this moment consumer buy 600 kg. If the price
decrease by Tk. 20, then consumer buys 610kg. What is our demand function?

Solution:
We know, Here,
q = a – bp
Given that
𝑑𝑞 p = 100 tk
𝑑𝑝 q = 600 tk
dq = (610 – 600)kg = 10 kg
dp = 20 tk

From (i) a =650

So the required equation is q = 650 – 0.5p

Supply function (SF): The relation between supply and price is called supply function, it is

Denoted by q = S(p) and the Supply equation is q = c + dp. Where, q = quantity , and S = supply.

Properties of supply function (SF):

(i) 𝑞≥ 𝑝≥
(ii) Q is continuous function.
(iii) For a single value of p, q gives single value.
(iv) Supply is monotonically increasing due to increasing of price

Equilibrium point/price: The point where the demand curve and supply curve is intersect to
each other is called the equilibrium point or equilibrium price.
From the graph we get, the intersecting point 𝑞 𝑝 of demand and supply curve.

i.e. the equilibrium point is 𝑞 𝑝 .

Example: Let 𝑞 𝑝 be demand equation and 𝑆 𝑞 𝑝 be supply equation.

Find

(i) the equilibrium price and quantity.

(ii) If the tax tk-3 impose per unit quantity then what will be the cost and
production?

Solution:

Given that,

𝑆 𝑞 𝑝 ----------------------------(i)

𝑞 𝑝 -----------------------------(ii)

For equilibrium position D =S

𝑜𝑟 𝑞

If 𝑝 𝑡ℎ 𝑛 𝑝
p= 4.93 then q=2.25

(2) from (i)

9q = 40 – 4p ----------------------------------(iii)

From (ii)

𝑝 √ 𝑞

For imposing tax tk 3 then let the new price

𝑝 √ 𝑞

𝑜𝑟 𝑝 √ 𝑞

𝑜𝑟 𝑝 (√ 𝑞 )

𝑜𝑟 𝑞 𝑝 -------------------------(iv)

equilibrium position D = S

𝑝 𝑝

𝑜𝑟 𝑝 𝑝 𝑝

𝑜𝑟 𝑝 𝑝

𝑜𝑟 𝑝 𝑝

But 𝑝 is not granted.

So, 𝑝 and from (iii) 𝑞

Elasticity of demand: The rate of change of demand due to the change of price is called
elasticity of demand. It is denoted by ‘e’
In mathematically,

𝑡 𝑜𝑓 ℎ 𝑛 𝑜𝑓 𝑑 𝑚 𝑛𝑑 𝑑 𝑟 𝑠 𝑜𝑛 𝑑 𝑚 𝑛𝑑
𝑛
𝑡 𝑜𝑓 ℎ 𝑛 𝑜𝑓 𝑝𝑟 𝑛 𝑟 𝑠 𝑛 𝑝𝑟

𝑑𝑞⁄
𝑞
𝑑𝑞 𝑝
𝑛
𝑑𝑝⁄ 𝑑𝑝 𝑞
𝑝

If 𝑛 then the demand is elastic demand.

If n < 1, then the demand is inelastic demand.

Example:

If q = 18-2p² for p = 2.q 10 find (1) Elasticity of demand (ii) If price increase by

5% then find the change of supply and new elasticity of demand.

Solution:

(i) Given that, q = 18-2p². 𝑝

We have

At p = 2 we get

Then η = 8. = 1.6

i.e. n = 1.6 >1 so the demand is elastic demand.

(ii) if price increase by 5%, then the new price is

P₁ = P(1+0.05)

At p = 2, P₁ = 2(1+0.05) = 2.1

But q = 18-2p²

For p = P₁ = 2.1, q=18-(2.1)² = 9.18

The change of supply is,

dq = 10-9.18 =0.82%

And then

ED=η= = 1.64

Cobb-Douglas model:

The model Q= 𝐿 𝐾 is known as Cobb-Douglas model.

Where Q is production function,

L is labour function for the production

K is capital function for the production

Properties of Cobb-Douglas model:

(i) It is a linear homogeneous production function.

(ii) It's marginal productivity is constant.

(iii) It follows the microeconomic law. i.e Q = αQ+ (1-α)Q

(iv) The total production will be finished if we pay according to marginal productivity rule.

Proof the properties of the Cobb-Douglas model:

Proof (i): We have, Q= 𝐿 𝐾

If the element of production is increases by A times, then the new production function

=A 𝐿 𝐾 =A 𝐿 𝐾

This completes the proof.

Proof: (ii) we have , Q= 𝐿 𝐾 K Now, =w= 𝐿 𝐾

M.p of labour=M𝑝

𝐿 𝐾 = M.p of capital = M

If the elements of production is increases by λ times. Then the new production function is,
 =A 𝐿 𝐾

𝐿 𝐿 𝐾
𝐿

Again 𝐿 𝐾 =(1- 𝐿 𝐾 =

𝑛𝑑
𝐿 𝐿 𝐾
i.e Marginal probability is constant (proved)

(iii) we have the total production Q=WL+rK

Since, W= & r=

Then Q=L. +K. ………………………………………………………………(i)

Also we know that , Q=A𝐿 𝐾

𝐿 𝐾
𝐿 𝐾
𝐿 𝐿
𝐿 𝐾
𝑛𝑑 𝐿 𝐾
𝐿 𝐿 𝐾 𝐾

From (i) we get Q=L. 𝐾

Which follows the microeconomic law.

Production function follows microeconomic law .(proved)

Average revenue: An average revenue is the revenue per unit commodity sold .

i.e A.R= 𝑝 𝑞

Marginal revenue: Marginal revenue is the additional amount taken by selling one more unit.

M.R= 𝑟 𝑣 𝑛𝑢 𝑡 𝑛𝑡ℎ 𝑢𝑛 𝑡 𝑟 𝑣 𝑛𝑢 𝑡 𝑛 𝑢𝑛 𝑡

Cost function: the cost production of an individual term is known as cost function
i.e c=c(q)

Average cost: the ratio between the total cost and quantity is called average cost .

i.e A.c= T/q= total cost/quantity

Marginal cost : Marginal cost is the additional amount required to produce one more unit of
the commodity ,Since the quantity q are typically in the thousands or millions.

I,c M.C= = 𝑞

Profit: If the profit is denoted by 𝑞 𝑞 𝑞 then for the maximum and minimum
profit is 𝑞 i.e when R’(q)=c’(q) the maximum profit occure.

Problem: Let the demand function be q=400-2p and average cost c(q)=5+ q/50. Find the
maximum profit .

Solution :

Given that , Demand function q=400-2p and average cost c(q)=5+q/50

But we know , the producer revenue is R(pq)=pq

R(q)=q.

Here, q=400-2p => P=

R(q)= 𝑞

The profit function is

𝑞 𝑞 𝑞

=> 𝑞 𝑞 -(5+ q/50)……………….(i)

=> 𝑞 𝑞

The maximum profit

=> 𝑞 𝑞

=>q=
=> 𝑞

From (ii) we get 𝑞 , so 𝑞 has a maximum profit.

Now the maximum profit is 𝑞 𝑥 𝑥

𝑞 𝑡𝑞 𝑛𝑠𝑤 𝑟

Problem: show that

Or, show that the revenue fail with the increasing of prices .

Solution: By the definition produces revenue is R(p,q)=pq……………………………….(1)

And the demand function is q=D(q)…………………………..(2)

Now the equation (1) &(2) we get

R(p,q)=p.D(p)

=> 𝑝 𝑝 𝑝 𝑝

(proved)

Problem : id demand is D(P)=2/p , while supply is S(p)=-1+p. Find the equilibrium price p and
equilibrium quantity q.

Solution:

given that ,

D(P)=2/p & S(p)=-1+p

But at the equilibrium stage , demand=supply i.e D(p)=S(p)

𝑝
𝑝

𝑝 𝑝

𝑝 𝑝

𝑝 𝑝
So, p=2,-1 . But price cannot be negative . then p=2 . Hence the equilibrium price is 2.

Again we know, q = D(p) =

So at the equilibrium price (p=2), the equilibrium quantity is q = = 1 . (Answer)

Problem: Show that the demand curve D(p) = has co-efficient of elasticity identically one.

i.e. Revenue is constant with price.Find all such curves.

Solution: We have, D(p) = ,  D’(p) = -

We know , the elastic demand is, = -p = -p.

= 1

Which shows that the revenue is constant with price.

P R=R(q)

c=c(q)
O
q

Problem: If the revenue be R(p,q) = pq = q.D-1(q). Then show that the marginal revenue is,

= p(1- )

Solution: Given that, R(p,q) = pq = q.D-1(q) ------------------(1)

Therefore, D-1(q) = p ---------------(2)

From (1).We get,

= q. [D-1(q)] + D-1(q)

= q. + p = p (1+ )

= p (1+ ) = p (1- )

 = p (1- ) (shown)

Ordinary Differential Equation:

A differential equation which contains only one independent variable is called ordinary
differential equation.

Example: = Ay, where A is a constant.

Problem: An attack submarine is cruising at 40 knots at a depth of 1000 feet when suddenly
the reactor scrams. After 1 minute way has dropped to 30 knots. How long does the crew
have to make repairs before forward motion falls below steerageway of 2 knots ?

Solution: Consider,

h ‘ ’

h ‘ ’

h ’

 Inertial force =  External force ------------------ (1)

But,the intertial force is,

F = ma = m𝑣̇ = m --------------- (2)

Also,the water resistance against such a craft is more or less proportional to the square of
its velocity i.e. ∞ 2

 R = - kv2 (Negative sign reflects that the resistance is in opposition to the velocity) -------
----(3)

Which is also called external force.

From (1) we get,

m = -kv2

or, =- v2

or, = - cv2 --------------(4)

 +cv2= 0; which is our required model.

Subject to

Time (t) Velocity

0 40 knots

1 30 knots

? 2 knots

From (4) we get,

= ct – c1 ---------------------- (5)

When t = 0 then v = 40 then from (5) we get, c1 = -

When t = 1 then v = 30 then from (5) we get, C =

Now,from (5) we get,

 = +

or, = + [when v=2]

or, = -

 t = 57 Min (Answer)

Problem: h ’ h h
temperature Ta =20F . Although initially at 70F ,the inside temperature T has fallen to
65F after 1 hour. How long before the inside temperature reaches the damaging
temperature of 32F ?

Solution: Let ,Q be the heat.

T be the room temperature.

From this problem we have,

̇∞ -Ta)
̇ = U (T-Ta) ------------------------------------ (1)

The rate that heat is being liberated from the interior is proportional to the rate at which
the interior is dropping in temperature. i.e.

̇∞ ̇

or, ̇ = -M ̇ ----------------------------- (2)

From (1) and (2) we get,

̇ = - (T-Ta)

or, = - (T-Ta)

or, =-cdt

or, log(T-Ta)= - ct+logc1

or, log(T-Ta)= loge e -ct+logc1

or, log(T-Ta)=loge(e -ct c1)

or, T-Ta=e -ct c1

T=e -ct c1 +Ta --------------------------(3)

This is the required model.

Now,Subject to

Time(t) Temperature

0 70 F

1 65 F

? 32 F

From (30 we get,

When t = 0 then T =70 F .Then, 70=c1 e 0+20

c1 = 50 --------------------(4)

When t = 1 then T =65 F .Then c = 0.10536

Putting the value of c and c1 in equation (3) we have,

T = 50e -0.10536t + Ta

or, 32=50e-0.10536t + 20 [when T=32 and Ta=20]

or, e-0.10536t =

or, -0.10536t = log( )

t  13.545 Min. (Answer)

Problem: (Mass spring motion) The mass m is sliding along frictionless horizontal table
restrained by a spring with spring constant k. Motion is assumed linear. The displacement x
= x(t) of the mass m is measured from equilibrium (rest).

Solution:

Newton's method:

Inertial force, F = ma =m𝑥̈

But, the external force is the restoring force of the spring= -kx

i.e. ̅ = -

By Newton's Law,

F= ̅

Or, m𝑥̈ = -kx

 m𝑥̈ + kx = 0

Hamiltonian method:

Kinetic Energy, = m𝑥̇ ………………………………………..(3)

But, the potential energy is the work done moving m against the force of the spring from
equilibrium to its present position x.

i.e. =∫ 𝑦𝑑𝑦

But, the internal energy is .Then by Hamiltonian's law,

̇
Or, +∫ 𝑦𝑑𝑦=
 ̇
 + =

Problem: (Rolling spring-mass motion)A mass m of radius r and moment of inertia I is

rolling without slippage along a horizontal table restrained by a spring of constant k.

Motion is along a straight line, and displacement x is measured from equilibrium.

Solution:

Newton's method:

Here, internal force is the sum of the linear and rotational force.

̈ ̈
i.e. ̅ = F+ =m𝑥̈ + = m𝑥̈ + [ ̈

While the external force is, overline, ̅ = -

By Newton's law we have,

̅ =, ̅

̈
Or, m𝑥̈ + =-kx

 (m + ) 𝑥̈ +kx=0

Hamiltonian Method:

The sum of linear and rotational kinetic energy is,

T= m𝑥̇ + I ̇

And, the potential energy is,

V=
But the initial energy is .Then by Hamiltonian,

T +V =

Or, m𝑥̇ + I ̇ + =

̇
̇ ( )
 + =

Problem: A drake spies a duck on the bank and begins swimming toward her. Model his
path.

Solution:

Consider, the river velocity = ⃗⃗⃗ = + j

the dark position is r(x(t), y(t)).

Therefore the dark velocity is = ⃗⃗⃗⃗ = 𝑥̇ i+𝑦̇ j

Also, the dark speed =

And, the dark position = P(0,b)

Thus, the dark velocity=Current velocity + darks own velocity

̅
Or,𝑥̇ i+𝑦̇ j=- +| |

Or,𝑥̇ i+𝑦̇ j=- +

√

Or,𝑥̇ i+𝑦̇ j=- +

√

Here,𝑥̇ =the rate or change in X-direction= - -

√

√
𝑥̇ = ………………………………………….(2)
√
Again, 𝑦̇ = ………………………………………….(3)
√

But,

√
𝑥̇ = =
√

𝑦̇ = =
√

Now,

√
= =
√

 =
√

This is the required path of the model.