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IBF Final

This document contains a 7 question numerical assessment for a business finance course. It includes questions about calculating required rates of return for stock portfolios, bond yields, stock prices, weighted average cost of capital, and risk measures like coefficient of variation. The questions require calculations using concepts like beta, cost of debt, dividend growth rates, tax rates, and analysts' economic forecasts.

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Raja Usama
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37 views

IBF Final

This document contains a 7 question numerical assessment for a business finance course. It includes questions about calculating required rates of return for stock portfolios, bond yields, stock prices, weighted average cost of capital, and risk measures like coefficient of variation. The questions require calculations using concepts like beta, cost of debt, dividend growth rates, tax rates, and analysts' economic forecasts.

Uploaded by

Raja Usama
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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PAF – Karachi Institute of Economics and Technology

Course: Introduction to Business Finance


Faculty: Ali Sajid
Class ID: 105333 Total Marks:40
Examination: Final (Fall-2020) Date:
Student Name: ID:

Numerical Section (25 Marks)

(Marks: 4.5)
1. Stock X, Stock Y, and the market have had the following returns over the past four years.
Year Market X Y
1999 11% 10% 12%
2000 7% 4% 3%
2001 17% 12% 21%
2002 -3% -2% -5%
The risk-free rate is 7 percent. The market risk premium is 5 percent. What is the required rate of return for a
portfolio that consists of $12,000 invested in Stock X and $6,000 invested in Stock Y?

(Marks: 2)
2. A bond with a face value of $1,000 matures in 12 years and has a 10 percent semiannual coupon. The bond has
a nominal yield to maturity of 7 percent, and it can be called in 5 years at a call price of $1,050. What is the
bond’s nominal yield to call?

(Marks: 2)
3. A 15-year bond with a 10 percent semiannual coupon has a par value of $1,000. The bond may be called after 8
years at a call price of $1,050. The bond has a nominal yield to call of 7 percent. What is the bond’s yield to
maturity, stated on a nominal, or annual basis?

(Marks: 3)
4. Whitesell Technology has just paid a dividend and is expected to pay a $2.5 per-share dividend at the end of the
year. The dividend is expected to grow 30 percent a year for the following four years. After this time period, the
dividend will grow forever at a constant rate of 6 percent a year. The stock has a required rate of return of 15
percent. What is the expected price of the stock two years from today?
(Marks: 4)
5. You have been given the following projections for Cali Corporation for the coming year.
Sales = 8,000 units.
Sales price per unit = $12.
Variable cost per unit = $4.
Fixed costs = $12,000.
Bonds outstanding = $15,000.
kd on outstanding bonds = 6%.
Tax rate = 40%.
Shares of common stock outstanding = 10,000 shares.
Beta = 2.0
kRF = 6%.
kM = 9%.
Dividend payout ratio = 40%.
Growth rate = 8%.
Calculate the current price per share for Cali Corporation.

(Marks: 5)
6. Heavy Metal Corp. is a steel manufacturer that finances its operations with 35 percent debt, 15 percent
preferred stock, and 50 percent equity. The interest rate on the company’s debt is 12 percent. The preferred
stock pays an annual dividend of $2.5 and sells for $22 a share. The company’s common stock trades at $25 a
share, and its current dividend (D 0) of $3 a share is expected to grow at a constant rate of 9 percent per year.
The flotation cost of external equity is 10 percent of the dollar amount issued, while the flotation cost on
preferred stock is 8 percent. The company estimates that its WACC is 12.5 percent. Assume that the firm will not
have enough retained earnings to fund the equity portion of its capital budget. What is the company’s tax rate?

(Marks: 4.5)
7. The CFO of Brady Boots has estimated the rates of return to Brady’s stock, depending on the state of the
economy. He has also compiled analysts’ expectations for the economy.
Economy Probability Return
Recession 0.1 -23%
Below average 0.1 -8%
Average 0.3 9%
Above average 0.4 17%
Boom 0.1 24%
Given this data, what is the company’s coefficient of variation?

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