Q. No 1. (A). Suppose you want to buy the shares of some companies. Certainly you will be looking at many factors like dividends, risk profile, return etc. You will also look for short term and long term prospects of the firm as well. The above considerations of the investors translate into the demand of share and its prices. What do you think the share prices will reflect i.e. the long term prospect or short terms prospect of the firm? Even if one investor desire to hold the share for 2 years and other for 10 years will it change anything? Show with the help of a small calculation by taking any data of your choice. (10) Q. No. 1 (B). You estimate that by the time you retire in 35 years, you will have accumulated savings of $2 million. If the interest rate is 8% and you live 15 years after retirement, what annual level of expenditure will those savings support? Unfortunately, inflation will eat into the value of your retirement income. Assume a 4% inflation rate and work out a spending program for your retirement that will allow you to increase your expenditure in line with inflation. (5+5=10) Q. No. 2 (A). To finance the purchase of a new factory recently, you've arranged for a 40-year mortgage loan for 80 percent of then $1,400,000 purchase price. The monthly payment on this loan will be $10,300. What is the APR on this loan? What is the EAR in this case? (10) Q. No. 2 (B). What is interest rate risk and what is the relation between interest rate risk and callable bonds. Explain with the help of an example of your own choice. (10) Q. No. 3 (A). A company expects earnings in the current year to be $5 per share, and plans to pay a $3 dividend to shareholders. The company will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose the company will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares. a. What growth rate of earnings would you forecast for the company? b. If the equity cost of capital is 12%, what price would you estimate for the company's stock? c. Suppose instead paying a dividend of $4 per share this year and retained only $1 per share in earnings. If the company maintains this higher payout rate in the future, what stock price would you estimate now? Should the company raise its dividend? (12) Q. No. 3 (B). Under what circumstances the cross over rate will be an important point in capital budgeting. Can it create a problem in project selection? Explain. (8) THE END