MGT201 Assignment # 1 Solution

Financial Management MGT201



Assignment 1

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market its products to a well_known advertising firm.

The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and

payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.

1. If ABC Corporation applies a required rate of return of 12% to them, what is the present value of this series of payments?

Solution:

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1 15,000 13,392.86

2 15,000 11,957.91

3 15,000 10,676.70

4 15,000 9,532.77

5 15,000 8,511.40

6 15,000 7,599.47

7 15,000 6,785.24

8 30,000 12,116.50

9 25,000 9,015.25

10 10,000 3,219.73

Present Value of series of payments 92,807.83

2. A second company has offered ABC Corporation a payment of Rs.30,000 now and

another final payment of Rs.80,000 at the end of year 3 for the rights to market the

products. Which offer should ABC Corporation accept?

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1 30,000 30,000.00 (As this payment was

made immediately, therefore

carries no interest)

3 80,000 56,942.42

Present Value of series of payments 86,942.42

ABC corporation must accept the proposal whose Present Value of Series of Payment is higher

i.e. 92,807.83

MGT201 Assignment # 2 Solution

MGT201 Assignment # 2 Solution:

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MGT201 Assignment # 2 Solution

MGT201 Assignment # 2 Solution:

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MGT201 GDB # 2 Solution

MGT201 GDB # 2 Solution:

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MGT201 Paper

MGT201 Paper 26-05-2010
Total Questions 36

Total MCQS: 31

risk for other than securities ? 3

Over value Under value of bond? 3

Types of Stocks available in Market 5

A numerical of k= 0.08 Div 1 Rs. , growth rate =20% , what is price of stock?

I have solved it as follows P = DIV / (rCE-g) =9.09 Rs.

DIV = 1 , rCE 0.08 g = .20

MGT201

MGT201 GDB

MGT201 GDB Solution:

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MGT201 Quiz

MGT201 Quiz # 3

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MGT201 Quiz

Question # 1 of 10
Which of the following costs would be considered a fixed cost?Select correct option:Raw materialsDepreciationBad-debt lossesProduction labor
Question # 2 of 10
Expected Portfolio Return = ___________.
Select correct option:rP * = xA rA + xB rBrP * = xA rA - xB rBrP * = xA rA / xB rBrP * = xA rA * xB rB
Question # 3 of 10
Why markets and market returns fluctuate?
Select correct option:
Because of political factorsBecause of social factorsBecause of socio-political factorsBecause of macro systematic factors
Question # 4 of 10
Which of the following can be used to calculate the risk of the larger portfolio?
Select correct option:Standard deviationEPS approachMatrix approachGordon’s Approach
Question # 5 of 10
Which of the following market in finance is referred to the market for short-term government and corporate debt securities?
Select correct option:
Money marketCapital marketPrimary marketSecondary market
Question # 6 of 10
Which of the following would be considered a cash-flow item from an "operating" activity?
Select correct option:
Cash outflow to the government for taxesCash outflow to shareholders as dividendsCash inflow to the firm from selling new common equity sharesCash outflow to purchase bonds issued by another company
Question # 8 of 10
A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations?
Select correct option:
(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100(Rs.100)(PVIFA at 8% for 4 periods)(1.08)(Rs.100)(PVIFA at 8% for 6 periods) - Rs.100Can not be found from the given information
Question # 9 of 10
Which of the following is correct regarding the opportunity cost of capital for a project?
Select correct option:
The opportunity cost of capital is the return that investors give up by investing in the project rather than in securities of equivalent risk.Financial managers use the capital asset pricing model to estimate the opportunity cost of capitalThe company cost of capital is the expected rate of return demanded by investors in a companyAll of the given options

MGT201 GDB

MGT201 2nd GDB:
Your neighbor is a security analyst. He has conducted his research about some stocks in Karachi Stock Exchange (KSE) and his findings are as follows:Stock A will have a return of 18%, stock B will have a return of 20 % and stock C will have a return of 22%, but his findings do not involve the CAPM (Capital Asset Pricing Model). You are a business graduate and when you have used CAPM, you have come to know that:Stock A’s expected return is 15.50%, Stock B’s expected return is 24.63% and Stock C’s expected return is 25.39%.In your opinion, whether the KSE has over-priced or under-priced each stock and in the light of these results, which of these stocks are suitable for investment?
ANS:
KSE Return: Stock A : 18% ------> 15.50%Stock B : 20% ------> 24.63%Stock C : 22% ------> 25.39%for A KSE is over prized&for B, & C KSE has under prized.In my opinion Stock A is more suitable for investment then B or C. It has more return 18% then compared to 15.50%...

MGT201 Quiz

Question # 1
What are two major areas of capital budgeting?
Net present value, profitability index
Net present value; internal rate of return
Net present value; payback period
Pay back period; profitability index

Question # 2
Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, ____________
Both bonds will increase in value, but bond A will increase more than bond B

Both bonds will increase in value, but bond B will increase more than bond A

Both bonds will decrease in value, but bond A will decrease more than bond B

Both bonds will decrease in value, but bond B will decrease more than bond A

Question # 4
The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________.

Probability distribution

Expected return

Standard deviation

Coefficient of variation

Question # 6
Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint?


Cash budgeting

Capital budgeting

Capital rationing

Capital expenditure

Question # 8
Which of the following is a major disadvantage of the corporate form of organization?
Double taxation of dividends

Inability of the firm to raise large sums of additional capital

Limited liability of shareholders

Limited life of the corporate form

Question # 9
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream?
Long-term debt

Preferred stock

Common stock

None of the given options

Question # 10
A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as __________
Probability distribution

The expected return

The standard deviation

Coefficient of variation

Question # 12
Which of the following is not the present value of the bond?
Intrinsic value

Market price

Fair price

Theoretical price

Question # 13
When a bond will sell at a discount?
The coupon rate is greater than the current yield and the current yield is greater than yield to maturity

The coupon rate is greater than yield to maturity

The coupon rate is less than the current yield and the current yield is greater than the yield to maturity

The coupon rate is less than the current yield and the current yield is less than yield to maturity

Question # 14
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?
Discount rate
Profitability index
Internal rate of return
Multiple Internal rate of return

Question # 16
A project that tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows is:

Pay back period

Internal rate of return

Net present value

Profitability index

Question # 17
A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as:

Payback period

Internal rate of return

Net present value

Profitability index

Question # 19
A statistical measure of the variability of a distribution around its mean is referred to as __________.
Probability distribution

Expected return

Standard deviation

Coefficient of variation

Question # 20
What is the present value of Rs.8,000 to be paid at the end of three years if the correct risk adjusted interest rate is 11%?

Rs.5,850

Rs.4,872

Rs.6,725

Rs.1,842

Question # 3
Which of the following is NOT an example of a financial intermediary?
Wisconsin S&L, a savings and loan association

Strong Capital Appreciation, a mutual fund

Microsoft Corporation, a software firm

College Credit, a credit union

MGT201 GDB

MGT201 - Financial Management
One of your friends, Ali has Rs. 5000 of which he can make either of the two investments offered by XYZ Corporation. On the basis of following information, you are requested to advise him which proposal he should prefer keeping in mind the NPV analysis. Support your decision with necessary calculation.
Proposal 1:
This proposal is for the period of 4 years i.e. 2009 to 2012 and the initial investment is Rs. 5000. Cash inflows are given below:

Year
Cash inflows (Rs.)
2009
2000
2010
3000
2011
4000
2012
3000
Proposal 2:
Other option is to invest Rs. 3000 in XYZ Corporation in the year 2009 which will provide him a steady cash inflow of Rs. 1000 for 4 years (year 2009-2012).
And the remaining Rs. 2000 in ABC Corporation in the year 2009 which will provide him a steady cash inflow of Rs. 2000 for 4 years (year 2009-2012).
Whereas, the commercial banks provide 10% return on PLS saving account.

ANSWER:
Proposal 1:
NPV = -IO + SummationCFt/(1+i)^t
Now,
-IO = -5,000CFt = cash inflows for 1st, 2nd,3rd and 4th years are 2000, 3000, 4000 and 3000 respectively.i = 10%t = 4
Putting the values in the above formula:
NPV = -5000 + [2000/(1+0.1) + 3000/(1+0.1)^2 + 4000/(1+0.1)^3 + 3000/(1+0.1)^4]
NPV = +4351 Rs.
Proposal 2:
(i) XYZ Corporation:
-IO = -3000CFt = 1000 for 4 yearsi = 10%t = 4
Putting the values in NPV formula:
NPV1 = -3000 + [1000/(1+0.1) + 1000/(1+0.1)^2 + 1000/(1+0.1)^3 + 1000/(1+0.1)^4]
NPV1 = 169 Rs.
(ii) ABC Corporation:
-IO = -2000CFt = 2000 for 4 yearsi = 10%t = 4
NPV2 = -2000 + [2000/(1+0.1) + 2000/(1+0.1)^2 + 2000/(1+0.1)^3 + 2000/(1+0.1)^4]
NPV2 = 4340 Rs.
By adding NPV1 and NPV2, we'll get
NPV = NPV1 + NPV2NPV = +4509 Rs.
Since, NPV of proposal 2 is higher than proposal 1, so proposal 2 should be preferred.