Numerical

i am a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two Birmingham 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 financing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is Rs. 332.90, its expected that they will grow at the constant growth rate of 8%, and the company's common stock sells for Rs. 3329. The tax rate is 50%.

The cash flows of both the projects are given in table below:

Time Expansion Zone North Expansion Zone EastCashflows (amount in RS

Cashflows (amount in Rs.)

0 -10000 -10000

1 6500 3500

2 3000 3500

3 3000 3500

4 1000 3500

Carefully analyze the above table and answer the following questions in detail.

I.Calculate the weighted average cost of capital for this firm?

II.Compute each project's IRR, NPV, payback, MIRR, and discounted payback.

III.Which project(s) should be accepted if they are mutually exclusive? Explain

IV.Which project(s) should be accepted if they are independent? Explain

Numerical

Explain Why you agree or disagree with the following statements.. Be specific in your answer and write only the most relevant explanations

a.If a bond sells at a discount, yield to call is more likely to occur.

b.A firm should select the capital structure that is fully unlevered.

c.Leveraged beta represents fundamental operational risk.

d.All other things held constant; the future 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 firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.

Numerical

Assume you are a portfolio manager at World Bank Ltd. Recently you came across three attractive stocks and want to create portfolio investment in these three stocks. The details of the stocks are given below:

Company Volatility(Standard Dev.) Weight in Portfolio Correlation with market portfolio

Newyork Bank Ltd 0.25 12% 0.40

Swiss Bank Ltd 0.35 25% 0.60

Lundback bank 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?

Numerical

Fuchs Corporation expects to generate following free cashflows in coming 5 years.

Year 1 2 3 4 5

FCF (Rs. Million) 51 70 77 72 80

After this time period, the free cashflows will grow constantly at 3% per year. The firm's cost of capital is 13%. Using the discounted free cashflow model, calculate the following.

a. What is the enterprise value of Fuchs Ltd?

b. If Fuchs 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 Fuchs?

c. Suppose that the stocks of Fuchs are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not?