Mr Ali has an option of investing in one project from the proposed three different projects. The initial investment and cash flows are given below. (r = 12%)

years

Cf - project 1

Cf - project 2

Cf - project 3

0

(10,000)

(28,000)

(22,000)

1

1000

3000

4000

2

880

7000

1000

3

6000

8000

1000

4

4000

12000

9000

5

2000

7500

11500

6

3650

6400

8900

a.Calculate payback for all three projects[1 marks]

b.Calculate discounted payback for all three projects[1 marks]

c.Calculate NPV for all three projects[2 marks]

d.Calculate profitability index for all three projects[1 marks]

e.Calculate IRR for all three projects[2 marks]

f.Write a detailed comment on which project Mr Ali must invest on the basis of above calculated criteria's and why he must ignore the other projects. [5 marks]

Q2ABC private limited as given the dividend of $5 last year and has promised to increase the dividend by 8% each year for the next four years.

a.Find out the dividend of each of the next four years. [2 marks]

b.If the stocks are selling at $120 at the end of fourth year, find out the price of stock today, assuming expected return as 12%. [2 marks]

c.Write a detailed comment on what will happen to the today's selling price of the stock if the expected return is increased from 12% to 16%. [3 marks]

d.If the stocks are selling at $90 today, find out the price of stock at the end of fourth year, assuming expected return as 12%. [2 marks]

e.Write a detailed comment on what will happen to the selling price of the stock at the end of fourth year if the expected return is decreased from 12% to 8%. [3 marks]

Q3 Exerpt taken from Engro Corporations press release:

"Engro Corp is one of Pakistan's largest conglomerates, in operation for over 45 years, and with businesses ranging from fertilizers to power generation. Currently Engro Corp's portfolio consists of seven businesses which include chemical fertilizers, PVC resin, a bulk liquid chemical terminal, industrial automation, foods, power generation and commodity trade.

Engro Corporation Limited has announced the launch of the second issue of the Engro Rupiya Certificates savings option, which provides investors with an unprecedented 14.5% (coupon) rate of return. This issuance follows the successful launch of the certificates in October 2010.

The second release of Engro Rupiya Certificates also offers profit payments twice in a year for a minimum amount of PKR 25,000, invested for a period of 3 years. The product offers investors the option to encash the certificates at any time, with the profit accumulated from the date of purchase to the date of encashment. Engro has also provided a unique service for the convenience of its customers, enabling certificate holders to conduct transactions and receive profit payments at home."

1.Assuming the yield to maturity on the bond is 11.25%, calculate the price of the bond at the time of issue [2 marks]

2.Assuming the yield curve is flat and doesn't shit, calculate the bond price two years after the issue? [2 marks]

3.Compare your answer to part 1 and justify. [2 marks]

4.Evaluate the relevance of the types of risk for this bond. [5 mark]

Q4. You are 20 years old and have completed your BBA and want to pursue further education but you don't want to take money from your father. Your plan is to start working and earn enough money so that you can finance your degree on your own and get yourself enrolled in five years' time. You estimate that the annual cost of doing an MBA 5 years from today will be PKR 400,000 and the program will be two years long. You will need the money at the beginning your program so that you are not worried about how to clear your dues during your studies. Luckily you go for a job interview and they hire you and you start working at a salary of PKR 25,000. So you decide that 50% you will deposit in a saving account at a 10% rate with monthly compounding for your further studies and the remaining amount you will use for your daily expenses.

1.Will you be able to meet your goal at this current saving rate? [2 marks]

2.What percentage of your salary should you save if you want to have exactly your university expenses amount? [2 marks]

3.How would your answer to part 1 change if the saving account rate changed to 5%? Comment on your answer. [2 marks]

If you are given an option to invest at the 10% saving rate with monthly compounding or 10.5% semiannual compounding, which would you chose? Explain your answer.