Company XYZ a manufacturer of house hold items and

Company XYZ a manufacturer of house hold items and is working in this sector since last 80 years. This company has total assets of 110 million Rupees. The company’s accounting information indicates that these assets are financed with 60% debt and 40% equity. The company has adopted different ways to generate capital. Both preferred and common stocks are issued by the company, also different types of bonds are sold by this company to accomplish capital requirements. Furthermore loan from financial institutions has also been taken by the company for 60 million Rupees.
Due to prevailing situation of Covid-19 pandemic, the company is facing decline in sales. The management of company is working to control this loss in order to keep their operations smooth. For this purpose company has hired two analysts from market whose major duty is to propose plans to control cost for company. As the company has generating funds by issuance of Coupon bonds with 9 year maturity period. The coupon rate offered to investors is 16% per bond with Rs.1000 par value. The current market price of bond is observed as Rs.780. However investors required rate of return has changed due to current pandemic situation. Therefore company wants to calculate the discount rate that sets the present value of expected future cash flow stream equal to bond current market price, this is because yield on this bond needs to be considered for future capital mix assessment.
Furthermore the company is also selling 15% preferred stock issue at Rs.100 par value and at a current price of Rs.75 a share, there would be need to calculate cost of this stock to decide whether company should issue new stocks in future or not.
Moreover the Company has announced Rs.7 dividend this year. According to investor’s expectations it would grow at the rate of 9% for next 3 years, then at the rate of  8% for next 3 years and then at the rate of 7% thereafter. However the required rate of return of investor prevailing in the market is 15%. The company is also intending to calculate the intrinsic value of its share to check whether its security is overpriced or not in the market with respect to its competitors in the same industry.
The company is also interested in new investment opportunities which could generate more revenues in future. The analysts have suggested that company can generate enough funds after
10 years if it would deposit at least Rs.40, 00,000 today. For this purpose two financial institutions are highlighted by them which are offering maximum return in the market. Institution A is offering 14% interest rate semiannually while institution B is offering 13% quarterly. So there is need to calculate cash position of company after 10 years from these two alternatives to choose appropriate plan.
The analysts have also suggested the management to follow different annuity and perpetuity concepts while issuing and evaluating their bonds so that best options would be chosen while issuing new securities. Therefore there is also need to explain these concepts before Board of Directors to get in depth understanding of calculation of intrinsic value of securities by using different types of annuities as well as perpetuity plans.

Carefully read the information provided above and calculate following for Company XYZ Ltd.

Q5:- Explain different types of Annuity and perpetuity concept with appropriate examples.


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