Q1. 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

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.

Q2. Mr. Rafiq owes Mr. Ahmed Rs. 7000 to be due in 5 years and Rs. 15,000 to be due in 7 years. How much should Mr. Rafiq pay at the end of 6 years which may be acceptable to Mr. Ahmed if money is worth 8% compounded semi-annually?

Q3. Mr. Ghani wants to deposit his savings of Rs. 50,000 in a bank which offers 8% interest compounded semi-annually to withdraw Rs. 2,500 at the end of each six months from the date of deposit. How many withdrawals will he or his heir (in case of his death) be able to make before the entire amount is exhausted?

Q4. Lucky cement Co. is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, R_f, is 5%; the market risk premium, RPM, is 6%; and the firms tax rate is 40%. Currently, Luckys cost of equity is 14%, which is determined by the CAPM.

1. What would be Luckys estimated cost of equity if it changed its capital structure to 40% debt and 60% equity?
2. What would be Luckys estimated cost of equity if it changed its capital structure to 50% debt and 50% equity?
3. Based on cost of equity estimations, should the firm change its capital structure? if yes, which point is optimal if the target is to minimize the cost of equity of the firm?

Q5. 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	10%	0.30	0.5
FFC Ltd	20%	0.40	1.5
Fatima Fertilizer Ltd	15%	0.30	1.0

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%.

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 above 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?