Financial Management Study Material

FINANCIAL
MANAGEMENT
STUDENT ID:
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Question 1
PAT for AAR Ltd for year 2018 = $ 500,000
Ownership of Karina Adams in AAR Ltd = 10%
Dividend payout = 60%
Hence, total dividend paid by the company in 2018 = PAT*Dividend Payout = 500,000*0.6 =
$300,000
Dividend income for Karina Adams on June 1 2019 = (10/100)*300,000 = $ 30,000
Total expenditure expected by Karina in 2019 = 5,000 (Furniture) + 35,000(Billings) = $ 40,000
Since Karina does not have any savings and the dividend income in 2019 is only $ 30,000, hence
for meeting the expenditure of $ 40,000, a loan of $ 10,000 would be taken.
Expected PAT for AAR Ltd for year 2019 = $500,000*1.2 = $600,000
The dividend payout remains the same and hence dividend income expected by Karina on June
1, 2020 = (10/100)*(60/100)*(600,000) = $ 36,000
Interest levied on the loan assumed in 2019 = (8/100)*10,000 = $ 800
Amount available for consumption in June 2020 = 36,000 – 10,000 (repayment of loan) – 800
(payment of interest) = $ 25,600
Question 2
a) Cost price of house = $ 750,000
Down payment required = 20%
Hence, quantum of loan required = 750,000*(1-0.2) = $ 600,000
The EMI (Equal Monthly Installment) can be computed using the following formula.

For the given case, P = $600,000, R = 7.2% pa or 0.6% per month, N=10 years or 120 months
Hence, EMI = (600000*0.006*1.006120)/(1.006120-1) = $7,028.51
Using the above EMI, the amortization table for the first 36 months is listed below.
Relevant Explanation:

1) Closing loan balance = Opening loan balance – Principal repayment
2) Principal repayment = EMI – Interest
3) Interest = Opening loan balance * Interest rate per month
Loan amount outstanding at the end of three year = $ 462,687.16
New interest rate applicable = 9.6% p.a. or 0.8% per month
Loan amount = $ 462,687.16
Time period remaining =7 years or 7*12 =84 months
The following formula can be used to estimate the new EMI.
New EMI = (462,687.16*0.008*1.00884)/(1.00884-1) = $7,585.87
b) Assuming now the EMI remains the same, then the value of N needs to be found for
discharging the loan using the following formula.
Here, EMI = $7,058.21, R=9.6% p.a. or 0.8% per month, P = $ 462,687.16
7058.21 = (462,687.16*0.008*1.008N)/(1.008N-1)
Solving the above N = 94 months
Since three years had already passed, thus the pending loan without any increase in rate would
have been discharged in 84 months. Thus, additional payments required = 94-84 = 10 months
Question 3