Q3: Decision-Making Situations:

a) Wall Mart Inc., after much deliberation at BOD level, decided to issue a new series of Eurodollar bonds on Jan 1, 2011 at par $ 1,000, 12% coupon rate maturing in 30 years with semiannual payments. What was the YTM of bonds on Jan 1, 2011? Calculate price of the bond on Jan 1, 2016, 5 years later, assuming that interest rates had declined to 10%? Calculate current yield on the bond that was purchased on Jan 1, 2016.

b) Blues Inc., would like to estimate its weighted average cost of capital (WACC). On average, bonds issued by Blues yield 9% which reflects cost of debt. Currently, risk-free rate is 3%. Furthermore, Blues shares have a beta of 1.5, and the return on the market is expected to be 10%. Blues target capital structure is 30% debt and 70% equity. If Blues is in the 35% tax bracket, calculate its WACC.

c) Long Island Inc., engaged in the business of manufacturing die casting parts which are used in automobiles is considering to acquire Neil Inc., which is in similar industrial segment but has been struggling for equity infusion which isnt forthcoming, for a sum of USD 300,000/-. Finance team at Long Island expects merger to provide incremental cash flows of about USD 55,000/- a year for 10 years. Cost of capital for this investment is 12% pa. Calculate NPV @ 12% to assess acquisition viability.

d) Assuming that the risk-free rate in Pakistan, RFR=6% and that MRP for a project under consideration at Attock Cement Pakistan is considered to be 5% whereas projects beta coefficient, =2. Calculate the required rate of return on this project.

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