Q No. 1 Explain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations (Total Marks 6, Each 1.5).

1. Treasury bills are riskier than corporate bonds
2. A firm should select the capital structure that is fully unlevered.
3. Leveraged beta represents fundamental financial risk.
4. 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.

Q No. 2 Khurram Ali is negotiating his employment contract. His opportunity cost is 15%. He has been offered two 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	4 Million	4 Million	4 Million	4 Million
Contract 2	10 Million	1 Million	1 Million	1 Million

As his financial adviser, which contract would you recommend that he accept? (Total Marks 4)

Q No 3 Assume you are a portfolio manager at JS 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 (Standard deviation)	Weight in Portfolio	Correlation with the market portfolio
Engro Ltd	25%	0.30	0.40
Lucky Cement Ltd	12%	0.30	0.60
FFC Ltd	13%	0.40	0.50

The expected return on the market portfolio is 8% and its volatility is 10%. The risk-free rate based on central banks discount rate is 3%. (Total Marks 6, 1.25 marks each)

a. Calculate each of the stocks 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 4 FFC is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 4%; the market risk premium, RPM, is 5%; and the firms tax rate is 40%. Currently, FFC has beta of 1.5. What would be FFCs estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure, decide based on the cost of equity computations? (4 Marks)

Q No 5 Hassan textile anticipates reaching a sales level of Rs. 6 million in one year. The company expects earnings after taxes during the next year to equal Rs.400,000. During the past several years, the company has been paying Rs.50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Hassan textile during 2018 follow.

Hassan textile Ltd. Balance Sheet as of December 2018
Cash	Rs. 200,000	Accounts payable	Rs. 600,000
Account Receivables	400,000	Notes payable	500,000
Inventories	1,200,000	Long-term debt	200,000
Fixed Assets, net	500,000	Stockholders equity	1,000,000
Total Assets	Rs. 2,300,000	Total liabilities and equity	Rs. 2,300,000

Hassan textile Ltd. Income Statement for the Year ending December 2018

Sales	Rs. 4,000,000
Expenses, including interest and taxes	Rs. 3,700,000
Earnings after taxes	Rs. 300,000

1. Using the percentage of sales method, calculate the additional financing Hassan textiles Ltd. will need over the next year at the Rs. 6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2019, assuming that a sales level of Rs. 6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable (3 marks)
2. If the Hassan textiles banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company? (2 marks)