Financial Management (Ba 3601) Assignment Spring 2020 - Bba 6 A

FINANCIAL MANAGEMENT (BA 3601) ASSIGNMENT
SPRING 2020 – BBA 6 A

Attempt All Questions:
Marks: 25
IMPORTANT instructions:
 Read all the questions carefully and then solve in this file. In case your answers are handwritten,
insert the image of the solution below each question. Type-written solutions are also
acceptable.
 Marks of each question are mentioned at the end of each question.
 Solved assignment must be e-mailed to me at “[email protected]” by May
31st, 2020. Make sure you also mention your name, section and ID in the subject of the e-mail.
 Non-submissions of the assignment will be marked “0” on ZABDESK Recap Sheet.
 Group assignments are not allowed.
Student’s Name Noor Nabi Shaikh Registration Number 1711125
Question # 1: A company has a bond issue outstanding with the following features: (3 Marks)
 Par value = Rs. 1000

 Coupon Rate = 9.2 percent
 Nine years remaining to maturity
 Coupon payments are made semi-
annually
 Bond currently sells for 120 percent of
par
a) What is the current yield on bond?
b) The YTM? (Use short-cut formulae)
c) The effective annual yield?
Question # 2:
a) Suppose Potomac Corporation has a $100 par value preferred stock that pays an annual
dividend of $7. If investors require an 8 percent return on this preferred stock, what should be
its intrinsic value? (2 Marks)
b) Assume the current market price of Potomac Corporation’s preferred stock is $85, what would
be the expected rate of return? If an investor’s required rate of return is 8 percent, should the
investor consider buying the preferred stock? (2 Marks)
Question # 3: An investor is analyzing an investment. The expected one-year return on the investment is
25 percent. The probability distribution of possible returns is approximately normal with a standard
deviation of 16 percent. (4 Marks)
a) What are the chances that the investment will result in a negative return?
b) What is the probability that the return will be greater than 10 percent? 20 percent? 30 percent?
40 percent? 50 percent?
Question # 4: Consider two stocks (A & B) with the following data:
State of Economy Probability of State of Return of Stock A if Return of Stock B if

Economy state occurs state occurs
Recession 0.20 - 15% 20%
Normal 0.50 20% 30%
Boom 0.30 60% 40%
What are the expected returns and standard deviations for these two stocks? (4 Marks)
Question # 5: Suppose Wal-Mart Stores, Inc., a major retailer, is considering a project proposal that
requires storing additional merchandise. The firm now has excess storage capacity suitable for the new
proposal. If Wal-Mart does not use the storage capacity for the new project, it could rent the space for
$250,000 a year. Should Wal-Mart attach a cost to this storage space if corporate managers decided to
go ahead with the new project? (2 Marks)
ANSWER: No, Walmart should rent out the storage space, as there is an opportunity to earn revenue
and it could use the earned revenue to store additional merchandise in an alternative manner.
Question # 6: A firm plans to replace an old machine with a new, more efficient one, which has greater
production capacity. An analyst estimates that adopting the new machine will result in the following
revenues, operating costs, and depreciation. For simplicity, assume that the changes in revenues,
expenses, and depreciation are the same each year and that the marginal tax rate is 34 percent. (3
Marks)
With New Machine With Old Machine

Sales Revenue $ 110,000 $ 100,000
Operating Costs 55,000 60,000
Depreciation 15,000 14,000
What are the after tax incremental operating cash flows of each year for this replacement project?
Question # 7: Assume two projects with cash flows as follows:
Project A’s Year 0 Year 1 Year 2 Year 3 Year 4

Cash Flows -100,000 30,000 40,000 50,000 60,000
Project B’s Year 0 Year 1 Year 2 Year 3 Year 4

Cash Flows -100,000 40,000 30,000 30,000 20,000
Assuming a 10 percent cost of capital, what is the Net Present Value & Profitability Index of Projects A
and B? Based on your answer, suggest whether which projects should be undertaken if both the projects
are independent. (5 Marks)

Financial Management (Ba 3601) Assignment Spring 2020 - Bba 6 A

Uploaded by

Copyright:

Available Formats

Financial Management (Ba 3601) Assignment Spring 2020 - Bba 6 A

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Management (Ba 3601) Assignment Spring 2020 - Bba 6 A

Uploaded by

Copyright:

Available Formats

FINANCIAL MANAGEMENT (BA 3601) ASSIGNMENT

SPRING 2020 – BBA 6 A

Student’s Name Noor Nabi Shaikh Registration Number 1711125

 Par value = Rs. 1000

State of Economy Probability of State of Return of Stock A if Return of Stock B if

With New Machine With Old Machine

Project A’s Year 0 Year 1 Year 2 Year 3 Year 4

Project B’s Year 0 Year 1 Year 2 Year 3 Year 4

You might also like