FIN622 GDB # 1 Solution

FIN622 GDB No. 1 Solution

Project A
Initial Investment = 45000
Years 1 2 3
Cash Flows 20000 20000 20000
Calculation:-
NPV = -Io + CF1/(1+r)t + CF2/(1+r)t + CF3/(1+r)t
NPV = - 45000 + 20000/(1+0.14)1 + 20000/(1+0.14)2 + 20000/(1+0.14)3
NPV = -45000 + 17543.859 + 15389.350 + 13499.430
NPV = - 45000 + 46432.639
NPV = 1432.639
Project B
Initial Investment = 70000
Years 1 2 3
Cash Flows 20000 26000 30000
Calculation:-
NPV = -Io + CF1/(1+r)t + CF2/(1+r)t + CF3/(1+r)t
NPV = - 70000 + 20000/(1+0.14)1 + 26000/(1+0.14)2 + 30000/(1+0.14)3
NPV = - 70000 + 17543.859 + 20006.155 + 20249.145
NPV = - 70000 + 57800
NPV = - 12200

Project C
Initial Investment = 50000
Years 1 2 3
Cash Flows 30000 28000 35000
Calculation:-
NPV = -Io + CF1/(1+r)t + CF2/(1+r)t + CF3/(1+r)t
NPV = - 50000 + 30000/(1+0.14)1 + 28000/(1+0.14)2 + 35000/(1+0.14)3
NPV = - 50000 + 26316 + 21545 + 23624
NPV = - 50000 + 71485
NPV = 21485

1) On the basis of NPV approach, which project(s) you would select if the projects are independent and why?
Reference:
MGT201 (Page 47)
Independent: implies that the cash flows of the two investments are not linked to each other
Solution:-
If the projects are independent then I will select Project C 1st and after that I will select Project A on 2nd because both have Positive NPV.
2) On the basis of NPV approach, which project(s) you would select if the projects are mutually exclusive and why?
Reference:
MGT201 (page 47)
Mutually Exclusive: means that you can invest in ONE of the investment choices and having chosen one you cannot choose another.
Solution:-
I will Select Project C because it has positive NPV and also have greater amount Rs. 21485.

FIN622 Quiz # 1 Solution

FIN622 Quiz # 1 Solution

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FIN622 Assignment # 1 Solution

Assignment No. 1 Marks: 20


ABC corporation stock is selling for Rs. 150 per share according to Karachi stock exchange market summary. A rumor about the company has been heard that the firm will make an exciting new product announcement next week. By studying the industry, it is being concluded that this new product will support a growth rate of 20% in dividend for two years. After that it is expected that the growth rate in dividend will decline to 6% and remains same onwards. The firm currently pays an annual dividend of Rs. 4.

The rate of return on stocks like ABC corporation is 10%.

Required:

I. Find out the values for D1, D2 and D3 (8 Marks)

II. What will be the price of stock (P2) at the end of year 2? (4 Marks)

III. What will be the present value (P0) of stock? (6 Marks)

IV. Should we buy stocks of ABC Corporation at Rs. 150? (2 Marks)

solution:

Find out the values for D1, D2 and D3

D1= 4 (1+0.2) =4.8

D2= 4.8 (1+0.2) =5.76

D3=5.76 (1+0.05) =6.11

What will be the price of stock (P2) at the end of year 2?

P2= 5.76 (1+0.2)/ .1-0.05

P2=138.24

What will be the present value (P0) of stock?

PO= 4.8/(1+.1)1 + 5.76/(1+.1)2 + 6.11/(1+.1)3 + 128.31/(1.1)3

= 110

Should we buy stocks of ABC Corporation at Rs. 150

As the present value of the stock is less then the current selling price so the stock

should not be purchased

FIN622 Assignment # 2 Solution

FIN622 Assignment # 2 Solution:

Download the link: http://www.fileserve.com/file/fKQG6wF

FIN622 Paper

paper of Fin622 held on 26th May:


Total questions were 32

28 MCQs and 4 Subjective Questions; of 3,3,5 and 5 marks respectively

MCQs were mostly from the attached file

Subjective Questions were:

1) Interest tax shields are valuable, why don't all tax paying firms borrow as much as possible. Marks 5

2) Following table shows the returns on ABC stock 2003-2007. ( Rate of returns were given for all years and we had to calculate variance). Marks 5

3) In ques no. 3 following data was given: Marks 3

Expected rate of return on market portfolio 14%

T-bills yield 6%

Expected return (investor) 10%

Calculate Beta of stock=?

4) Differentiate b/w systematic and unsystematic risk. Marks 3

FIN622

FIN622 Problem No: 2 Solution

Working:
No. of orders=required Units/Order quantity

= 200000/200000= 1 order
= 200000/150000=1.333 orders

= 200000/100000=2 orders

= 200000/50000= 4 orders

= 200000/20000= 10 orders

= 200000/10000= 20 orders

Ordering cost =Number of orders x Cost per order

Order size of 200000 = 1*50= 50

Order size of 150000 = 1.333*50

= 66.5Order size of 100000 = 2*50

= 100Order size of 50000 = 4*50

=200Order size of 20000 =10*50

=500Order size of 10000 = 20*50= 1000

Carrying cost = Average ordering quantity x Carrying cost per unit

Order size of 200000 = 100000*.06= 6000

Order size of 150000 = 75000*.06= 4500

Order size of 100000 = 50000*.06= 3000

Order size of 50000 = 25000*.06= 1500

Order size of 20000 = 10000*.06= 600

With order size of 10000 = 5000*.06= 300

(b) What kind of trends do you find in ordering costs and carrying costs while decreasing the order size?There is negative trend in ordering and carrying cost.(c) Which order should be placed by Mr. Saleem according to the table and why?Mr. Saleem should place an order of 20,000 books .Because at this point there is EOQ. and total cost is minimum.And also RU/EOQ =200000/18257.42 (10 order approximately) (d) Calculate economic order quantity. Is your answer consistent

with your findings in part (a).Solution:EOQ =2xRUxOCUC x CC%= 2*200000*50/.06=333333333.33EOQ = 18257.42

FIN622

Dear Students.... FIN622 Assignment Solution of Problem#1....
Cost of component: Common stock
Do = 1.75, g = 5% = 0.05, Po= Rs. 25
D1 = 1.75 (1 + 0.05) = 1.75 (1.05) = 1.84
Re = (1.84 / 25) + 0.05
= 0.073 + 0.05 = 0.12 or 12.00 %
WACC BV: Common Stock
Weightage of common stock (BV) x Re = 0.47 x 0.12 = 0.056
WACC MV : Common Stock
Weightage of common stock (MV) x Re= 0.52 x 0.12 = 0.06
Weightage of Preferred Stock (BV):
MV of preferred stock / Total Capitalization MV = 2,500,000 / 48,000,000= 0.05
Weightage of Bonds (BV):
BV of Bonds / Total capitalization BV = 12,000,000 / 42,500,000= 0.28
WACC BV: Bonds
(Bond weightage BV x Cost of bond) (1 – Tax rate) = (0.28 x 0.09) (1- 0.35)= (0.025) (0.65)= 0.016
WACC MV:
Bonds(Bond weightage MV x Cost of Bond) (1 – Tax rate) = (0.26 x 0.09) (1 - 0.35)= (0.023) (0.65)= 0.015
Weightage of Loans (MV):
MV of Loans / Total Capitalization MV = 8,000,000 / 48,000,000= 0.17
Overall WACC (BV):
WACC common stock + WACC preferred stock + WACC Bonds + WACC Loans= 0.056 + 0.72 + 0.016 + 1.36 = 2.15
Overall WACC (MV):
WACC common stock + WACC preferred stock + WACC Bonds + WACC Loans = 0.06 + 0.60 + 0.015 + 1.22 = 1.89

FIN622

FIN622 GDB Answer:

Following are the effect on the liquidity and profitability by moving from conservative working capital policy to aggressive working capital policy:-Conservative PolicyUse permanent capital for permanent assets and temporary assets.Aggressive Policy.Use short term financing to finance permanent assets.Effect on liquidity1. In aggressive policy the company will move to low level of investment in current asset so that the liquidity position also becomes low.2. In conservative policy the firm use some portion of long term debt to acquire temporary current assets as compared to aggressive policy the firm use short term finance debt to acquire temporary current assets as a result in aggressive policy the ratio become equal (low liquidity position as compared to conservative policy).3. Keeping in view of two above aggressive policies the company may be gone to a negative net working capital which is very risky.Effect on profitability1. Aggressive policy support low level of production & sales. As a result the profit will also low if there is not any good marketing tactics are used or the betterment of the quality of the product.2. Lender prefers high liquidity level but in aggressive policy the level of liquidity is low. The company cannot get short term finance for current assets. As a result the profit will also become low.

FIN622 GDB

ANSWER: 1

1- Should maintain the Debt Equity ratio to stable the stock price and control the dividend to maintain the stock price.
2- To hold the dividend and increase the proportion to increase the price of stock.