FIN630 Idea Solution:-

Part 1
i) ROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
Turnover = Sale or COGS / Total Asset

ROA=Net Income/Total Assts =500,000/80, 00,000 =0.0625
ROA = 0.0625 or 6.25%

ii) ROE=Net income/Shareholder Equity =500,000/10, 00,000= 0.5
ROE = 0.5 or 50%
ROE = ROA / Leverage
Leverage = Total Assets / Share Holder Equity

iii) EPS=Net Income/Common Stock =500,000/100,000= 5
EPS = Rs.5 /share
EPS = Profit available for share holder / Average common shares
outstanding
Part 2

Value of bond A= Rs. 787.05
value of bond B= Rs. 344.42
iii) EPS=Net Income/Common Stock =500,000/100,000= 5
EPS = Rs.5 /share
EPS = Profit available for share holder / Average common shares
outstanding

Bond Valuation:
The price of a bond should equal the present value of its expected cash flows. The coupons
and the principal repayment of $1,000 are known, and the present value, or price, can be
determined by discounting these future payments from the issuer at an appropriate required
yield, r, for the issue. To solve for the value of an option-free coupon bond.
n
P = Σ ct / (1 + r)t + FV / (1 + r) n
i = 1
iii) EPS=Net Income/Common Stock =500,000/100,000= 5
EPS = Rs.5 /share
EPS = Profit available for share holder / Average common shares
outstanding

Where;
P = the present Value or price of the bond today (time period 0)
c = the semiannual coupons or interest payments
FV = the face value (or par value) of the bond
n = the number of semiannual periods until the bond matures
r = the appropriate semiannual discount rate or market yield

ROE = 0.5 or 50%
EPS = Rs.5 /share

value of bond A= Rs. 787.05
value of bond B= Rs. 344.42

ROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
Turnover = Sale or COGS / Total Asset
and
ROE = ROA / Leverage
Leverage = Total Assets / Share Holder Equity
and
EPS = Profit available for share holder / Average common shares
outstanding

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