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Q No. 1 Sarfaraz Ahmed is negotiating sports employment contract. His opportunity cost is 12%. He has been offered three possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: Contract Year 1 Year 2 Year 3 Year 4 Contract 1 3 Million 3 Million 3 Million 3 Million Contract 2 2 Million 3 Million 4 Million 5 Million Contract 3 ? Million 1 Million 1 Million 1 Million As his nancial adviser, which contract would you recommend that he accept? (Total Marks 2.5) Q No. 2 Assume that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, \"Expansion Zone North\" and \"Expansion Zone East\". The initial cost of each project is Rs. 10,000. Company discount all projects based on WACC. Further, all the projects are equally risky projects and the company uses only debt and common equity for nancing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it nances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is $2.0, its expected that they will grow at the constant growth rate of 8%, and the company's common stock sells for $20. The tax rate is 50%. The cash ows of both the projects are given in table below: Time Expansion Zone North Expansion Zone East Cashows (amount in Rs.) Cashows (amount in Rs.) 0 - 10,000 - 10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 Carefully analyze the above table and answer the following questions in detail. I. Calculate the weighted average cost of capital for this rm? (25 marks) 11. Compute each project's IRR, NPV, payback, MIRR, and discounted payback. (2.5 Marks) 111. Which project(s) should be accepted if they are mutually exclusive? Explain (1.5 Marks) IV. Which project(s) should be accepted if they are independent? Explain (1.5 Marks) 9 No. 3 Explain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specic in your answer and write only the most relevant explanations (Total Marks ?.5, Each 1.5). If a bond sells at a discount, yield to call is more likely to occur. A rm should select the capital structure that is fully unlevered. Leveraged beta represents fundamental operational risk. All other things held constant; the lture value of an ordinary annuity is always having a higher future value than annuity due. e. MM Proposition I with no tax supports the argument that a rm should borrow money to the point where the tax benet 'om debt is equal to the cost of the increased probability of nancial distress. P-F'P'P' 9 No 4 Assume you are a portfolio manager at J S Global Capital Ltd. Recently you came across three attractive stocks and want to create a portfolio investment in these three stocks. The details of the stocks are given below: Company name Volatility Weight in Correlation with the (Standard deviation) Portfolio market portfolio Meezan Bank Ltd 0.25 12% 0.40 Lucky Cement Ltd 0.35 25% 0.60 KB Ltd 0.40 13% 0.50 The expected return on the market portfolio is 8% and its volatility is 10%. The risk-free rate based on central bank's discount rate is 3%. (1.5 marks each) a. Calculate each of the stock's expected return and risk (beta) as compared to the market. b. What should be the expected return of the portfolio based on values calculated in part a. c. Calculate the beta of the portfolio? what does it tells regarding the riskiness of the portfolio? d. Using the values from part c, can you calculate the expected return of the portfolio? Is it similar to your answer in part b? Why or why not? Q No 5 Fauji Fertilizer Corporation expects to generate following free cashows in coming 5 years. Year | 1 2 3 4 5 FCF Rs. Million 51 so r7 7'2 30 After this time period, the free cashows will grow constantly at 3% per year. The rm's cost of capital is 13%. Using the discounted free cashow model, calculate the following. a. What is the enterprise value of Fauji Fertilizer Ltd? {2.5 marks) b. If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer? (2.5 marks) c. Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not? (1 mark)
