: Explain whether the following statements are true or false. Justify your answer.

GC

a) If interest rate increase the price of a shorter maturity bond will decrease more then a longer maturity bond.

For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). ..: b) If rating agencies downgrade a bond, the yield to maturiy on the bond will increase.

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c) the longer the duration of the bond, the higher will be the reinvestment risk

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d) The income from bond is more uncertain compared to the income from shares

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: e) Managers want to maximize the intrisic value of the stock not the market price of the stock.

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Q2

.: Cheeko Limited is a company in Pakistan that focuses on producing pet products, it currently has 10 million shares outstanding. The company is in its nascent stage and all earnings are currently being reinvested. In other words, the company does not pay any dividends to its shareholders and does not plan to do so in the near future. A major mututal fund is considering purchasing cheeko ltd's stock for investment. The fund manager has estimated that the company's free cash flow for the next four years is likely to be as follows: PKR 10 million, 3 million, 15 million and 6 million. After the fourth year free cash flow is projected to grow at a constant 7%. The company's WACC is 12%, its debt and preferred stock total 60 million.

a) What is the present value of the free cash flows projected during the next four years? (show workings)

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.: b) What is the firm's terminal value? (show workings)

For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). ..: c) What is the firm's total value today? (show workings)

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.: e) What is an estimate of price per share? (show workings)

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.: f) If the actual share price is 100 per share, formulate a trading strategy for the stock.

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Please fast