What are the costs and benefits of holding inventories
and cash?
Tax shield for the calculation of cost of debt but not for the calculation of the equity stock. Why? Give reason.
(3 marks)
Stock of JJ Company is currently trading at Rs. 150 and intrinsic value of stock is Rs. 163.93. What should be decision of rational investor in this situation (buying or selling)? Justify your answer. (3 marks)
MB Cement Company is a financially sound and the management wanted to declare and pay dividend to its shareholders but sufficient cash is not available to pay dividend.
Required: Being a financial analyst of MB Cement Company, what will be your suggestion to pay dividend and why?
(3 marks)
A 100% Equity (Un-levered) Firm has Total Assets of Rs.50, 000. Weighted average cost of capital for an un-levered firm (WACCU) is 35% and Cost of debt for un-levered firm (rD,U) of 20%. It then adds Rs.20, 000 of Debt. Financial risk increases cost of debt (r D, L) of Levered Firm to 18%.
Required:
· What is the Levered Firm’s cost of equity (r E,L)?
· What will be the WACCL of levered firm?
(5 marks)
Differentiate forward market and future market.
(5 marks)
Rehan’s portfolio consists of two securities namely Attock Petroleum and Barclays bank. Expected risk of Attock Petroleum and Barclays bank are 12% and 14% respectively and weights of these securities are 75% and 25% respectively.
Required: By keeping in view the above situation, how the portfolio risk will be affected in case of perfect positive correlation and perfect negative correlation.
Note: Support your answer with complete working.
(5 marks)
Ali Industries has a “Project M” which is financed by issuing:
1. Bonds to NTN Company of Rs. 715,000 at 9% required rate of return.
2. 5,000 common stocks at par value of Rs. 125 per share. Company is currently paying dividend of Rs. 2.25 and it is expected to grow at constant rate of 5%. Intrinsic value of the share is Rs. 110.
3. Two thousands preferred stock. Dividend on preferred share Rs.5 and its intrinsic value and par value of share is Rs. 100.
Corporate tax rate is 35%.
Required: Calculate weighted Cost of Common Equity
NOTE: Show complete working and formulas, otherwise marks will be deducted.
(5 marks)
Tax shield for the calculation of cost of debt but not for the calculation of the equity stock. Why? Give reason.
(3 marks)
Stock of JJ Company is currently trading at Rs. 150 and intrinsic value of stock is Rs. 163.93. What should be decision of rational investor in this situation (buying or selling)? Justify your answer. (3 marks)
MB Cement Company is a financially sound and the management wanted to declare and pay dividend to its shareholders but sufficient cash is not available to pay dividend.
Required: Being a financial analyst of MB Cement Company, what will be your suggestion to pay dividend and why?
(3 marks)
A 100% Equity (Un-levered) Firm has Total Assets of Rs.50, 000. Weighted average cost of capital for an un-levered firm (WACCU) is 35% and Cost of debt for un-levered firm (rD,U) of 20%. It then adds Rs.20, 000 of Debt. Financial risk increases cost of debt (r D, L) of Levered Firm to 18%.
Required:
· What is the Levered Firm’s cost of equity (r E,L)?
· What will be the WACCL of levered firm?
(5 marks)
Differentiate forward market and future market.
(5 marks)
Rehan’s portfolio consists of two securities namely Attock Petroleum and Barclays bank. Expected risk of Attock Petroleum and Barclays bank are 12% and 14% respectively and weights of these securities are 75% and 25% respectively.
Required: By keeping in view the above situation, how the portfolio risk will be affected in case of perfect positive correlation and perfect negative correlation.
Note: Support your answer with complete working.
(5 marks)
Ali Industries has a “Project M” which is financed by issuing:
1. Bonds to NTN Company of Rs. 715,000 at 9% required rate of return.
2. 5,000 common stocks at par value of Rs. 125 per share. Company is currently paying dividend of Rs. 2.25 and it is expected to grow at constant rate of 5%. Intrinsic value of the share is Rs. 110.
3. Two thousands preferred stock. Dividend on preferred share Rs.5 and its intrinsic value and par value of share is Rs. 100.
Corporate tax rate is 35%.
Required: Calculate weighted Cost of Common Equity
NOTE: Show complete working and formulas, otherwise marks will be deducted.
(5 marks)
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