Mr. X has excess cash of 50 lakhs which he wants to invest in short-term marketable securities. Expenditure relating to this investment will be -…
CA Final · Advanced Financial Management · PYQS · May 2025
Mr. X has excess cash of 50 lakhs which he wants to invest in short-term marketable securities. Expenditure relating to this investment will be - 1,25,000 and the securities invested will have an annual yield of 9%. Mr. X seeks your advice - (i) as to the period of investment so as to earn a pre-tax income of 5%. (ii) as to the minimum period to break-even his investment expenditure.
Suggested Answer and Working Notes:
(i) Pre-tax Income required on investment of 50,00,000 Let the period of Investment be 'P' and return required on investment - 2,50,000 (₹ 50,00,000 x 5%) Accordingly, (₹ 50,00,000 x 9/100 x P/12) - 1,25,000 = 2,50,000 P = 10 months (ii) Break-Even its investment expenditure (₹ 50,00,000 x 9/100 x P/12) - 1,25,000 = 0 P = 3.33 months or 3 months 10 days
Topics: Security Valuation
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