Question 1: [5.0 Marks] Suppose that you have just graduated from college and want to buy a car. Your parents have made you two wonderful offers. The first offer is that they will give you two equal payments of 32,000 SAR at the end of each of the next two years, while the second offer is that they will grant you their 2016 Lexus car which can be sold for 61,000 SAR guaranteed today. Answer following questions: a) Assuming the applicable discount rate is 6%, which offer should you accept today and why? Show your computations. [2.0 marks] b) If you decided to accept the second offer and deposit the 61,000 SAR today in your savings account with an annual interest rate of 9%, compounded monthly, what will be the value of your investment after 5 years? [2.0 marks] c) What is the main difference between annuity and perpetuity? [1.0 mark] Question 2: [5 marks] Al Arabiya Corporation is a growing company in which is expected to pay 3 SAR, 4.50 SAR, and 6 SAR as dividends per share in the coming three years, respectively. Then, starting from the 4th year its dividends are expected to grow at a constant rate of 4.5% per year forever. Answer following questions assuming Al Arabiya's equity cost of capital is 12% : a) What would be the expected price of Al Arabiya's shares right after it pays the third year dividend of 6 SAR? [2 marks] b) How much would an investor pay for one share of Al Arabiya's equity now, considering the company's current dividend payout scheme provided above? [2 marks] c) List two limitations of using the dividend discount model to value a stock. [1 mark] Question 3: [5.0 marks] Saudi Electricity Company has issued Islamic bonds (Sukuk) to raise additional capital and fund future projects as part of achieving the Kingdom of Saudi Arabia 2030 Vision. On the website of the Saudi Exchange (Tadawul), you find following information regarding the Saudi Electricity' bond: 10year maturity, 200,000 SAR face value, and coupon rate of 4.6% APR with quarterly payments. Assuming the appropriate yicld to maturity on the Saudi Electricity's bond is 9.1%. Answer following questions: a) Draw the cash flows for the Saudi Electricity's bond of a timeline that depicts the given information accurately. b) At what price the bond of Saudi Electricity must be trading for today? [1.5 marks] c) Does the bond trade at discount, par, or premium? Briefly explain the renson. [1.5 marks] Question 4: [4.0 marks] Suppose last year you bought 400 shares of ABC at 150 SAR per share and bought 200 shares of XYZ at 200 SAR per share. This year, the prices of ABC's stock rose to 170 SAR per share and XYZ's stock fell to 190 SAR per share, and neither stock paid dividends. When you invested in those stocks, you knew that the standard deviation for ABC was 35%, standard deviation for XYZ was 22%, and correlation between them was 0.43 . Answer following questions: a) What were the weights for ABC and XYZ in your investment portfolio when you just invested in these stocks? b) What was the realized return of ABC and XYZ ? c) What was the return of the entire portfolio? [1.0 mark] [1.0 mark] d) What is the volatility of the portfolio? [1.0 mark] [1.0 mark] e) What happened to the total risk (as measured by the standard deviation) of the portfolio according to portfolio theory? Briefly explain why. [1.0 mark] Question 5: [5.0 Marks] A startup company is considering two ways of financing the purchase of accounting software with a cost of 150,000 SAR. The company's accountants believe that the software is not only useful to automate the process of financial reporting and help reduce errors but also it will save time and money. The firm could borrow 150,000 SAR from either Alinma Bank with an 5.75% APR, compounded monthly or from the Saudi Investment Bank with an 5.78% APR, compounded semiannually. Answer following questions: a) Compute the effective annual rate (EAR) of the loan from each bank. [3.0 marks] b) Which bank should the company choose to borrow from based on your answer in Part A and why? [1.0 mark] c) Why would the company make its decision based on the EAR rather than the APR, [1.0 mark]