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    2 S-Problems

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    jamthedamnit

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    2 S-Problems

    Uploaded by

    jamthedamnit
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    2.S-Problems

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    11 views3 pages

    2 S-Problems

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    jamthedamnit

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    © All Rights Reserved
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    of 3

    Numerical Problems in Financial Management

    Return and Risk


    Problem 1: Portfolio Return Calculation
    Calculate the expected return of a portfolio consisting of two assets with the
    following characteristics:
    • Asset A: Expected return = 10%, Standard deviation = 15%
    • Asset B: Expected return = 8%, Standard deviation = 10%
    The weights of Asset A and B in the portfolio are 60% and 40% respectively.
    Solution:
    Expected return of portfolio = (0.60 × 0.10) + (0.40 × 0.08) = 0.096 = 9.6%

    Problem 2: Risk and Return Analysis


    An investor is considering two stocks:
    • Stock X: Expected return = 12%, Standard deviation = 20%
    • Stock Y: Expected return = 10%, Standard deviation = 15%
    Determine which stock offers a better risk-adjusted return using the Sharpe
    ratio, assuming the risk-free rate is 4%.
    Solution:
    0.12 − 0.04 0.08
    Sharpe ratio for Stock X = = = 0.40
    0.20 0.20
    0.10 − 0.04 0.06
    Sharpe ratio for Stock Y = = = 0.40
    0.15 0.15
    Both stocks have the same Sharpe ratio, indicating similar risk-adjusted returns.

    Problem 3: Capital Asset Pricing Model (CAPM)


    Use the CAPM to estimate the expected return of a stock with a beta of 1.2, a
    risk-free rate of 5%, and an expected market return of 10%.
    Solution:
    Expected return = 0.05 + 1.2 × (0.10 − 0.05) = 0.05 + 0.06 = 0.11 = 11%

    Time Value of Money


    Problem 4: Present Value Calculation
    Calculate the present value of 50,000 to be received after 5 years, assuming a
    discount rate of 8%.
    Solution:
    50, 000 50, 000
    Present Value = = ≈ 34, 039
    (1 + 0.08)5 1.469

    1
    Problem 5: Future Value Calculation
    If you invest 1,00,000 today in a fixed deposit that pays an annual interest rate
    of 6%, compounded annually, what will be the value of your investment after 5
    years?
    Solution:

    Future Value = 1, 00, 000 × (1 + 0.06)5 = 1, 00, 000 × 1.338 = 1, 33, 800

    Problem 6: Annuity Calculation


    Calculate the monthly payment required to accumulate 5,00,000 in 10 years,
    given an annual interest rate of 7%, compounded monthly.
    Solution:

    Number of monthly payments = 10 × 12 = 120


    5, 00, 000
    Monthly payment =   ≈ 3, 781
    1−(1+0.07/12)−120
    0.07/12

    Capital Budgeting
    Problem 7: NPV Calculation
    Evaluate a project with an initial investment of 2,00,000 and expected annual
    cash flows of 60,000 for 5 years. Use a discount rate of 12% and calculate the
    Net Present Value (NPV).
    Solution:
    60, 000 60, 000 60, 000 60, 000 60, 000
    NPV = −2, 00, 000+ + + + +
    (1 + 0.12)1 (1 + 0.12)2 (1 + 0.12)3 (1 + 0.12)4 (1 + 0.12)5

    NPV = −2, 00, 000 + 53, 571 + 47, 877 + 42, 734 + 38, 095 + 34, 021
    NPV = 12, 298

    Problem 8: IRR Calculation


    Calculate the Internal Rate of Return (IRR) for a project that requires an initial
    investment of 1,50,000 and generates cash flows of 50,000 annually for 4 years.
    Solution: Solve using financial calculator or Excel: IRR 17.11%

    Problem 9: Payback Period


    A project costs 3,00,000 and is expected to generate annual cash flows of 1,00,000.
    Calculate the payback period for the project.
    Solution:
    3, 00, 000
    Payback Period = = 3 years
    1, 00, 000

    2
    Working Capital Management
    Problem 10: Working Capital Requirement
    Calculate the working capital requirement for a company with current assets of
    10,00,000 and current liabilities of 6,00,000.
    Solution:

    Working Capital = Current Assets−Current Liabilities = 10, 00, 000−6, 00, 000 = 4, 00, 000

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