A 10 year preference share of face value INR 500 has been floated by Martial Munich Ltd. The firm confirms to pay a dividend of 12 percent to be calculated on a quarterly basis. The preference share is redeemable at a premium of INR 20 percent. You are required to calculate the present value of this preference share if an investor’s required rate of return is 16 percent.

Also, at what required rate of return of the investor, will the present value of all the future inflows be equivalent to the cash outflow?

(ii) A firm named Boomerang Pvt Ltd. has 6 different projects: G – L up for review. Information with respect to these projects have been given below –

Year	Project G	Project H	Project I	Project J	Project K	Project L
0	- 1000	- 1000	- 1000	- 1000	- 1000	- 1000
1	1000	100	400	500	400	500
2		200	300	500	400	500
3		300	200	500	400	10000
4		400	100		400
5		500	500		400
Payback period	1.0	4.0	4.0	2.0	2.5	2.0
NPV	-90.91	65.26	140.60	243.43	516.31	7380.92

(all figures are in crores)

The firm has a required rate of return is 10 percent.

As a student of corporate finance, you are required to explain on how the payback period technique provides misleading information about the following situations –

1. Project G.
2. Project H vs Project I.
3. Project J vs Project K.
4. Project J vs Project L.

However, there are situations where the payback period is useful. Provide an example where payback period is useful or efficient as a decision-making concept in Finance.

Answer rating: 100% (QA)

i Calculation of the Present Value of the Preference Share The preference share pays a dividend of 12 on a quarterly basis and is redeemable at a premium of 20 The face value of the preference share i... View the full answer