Question-1

A .Describe the following factors that affect the stock prices?

I.Investor sentiment

II.Impact of interest rates

III.Dividend policy changes

B. Describe Capital Asset Pricing Model. Assume Max stock has a beta of 1.2.If the risk free rate is 7% and market return is 12%.What is the expected return of Max stock?

Question- 2

A. Explain how each of the following would use banker's acceptance:

(I) Exporting firm (II) Importing firm (III) Commercial banks (IV) Investors bank

B. Determine how the annualized yield of a treasury bill would be affected if the purchase price islower. Explain the logic of the relationship.

C. An investor purchased an NCD a year ago in the secondary market for tk. 9,60,000. He redeems it today upon maturity and receives tk. 10,00,000. He also receives interest of tk. 45,000, what is his annualized yield?

D. Assume an investor purchased a six month T bill with a 10000tk par value for 9000 and sold for 90 days later for 9150.What is the yield?

Question- 3

If the economy continues to be strong, Dhaka Company may need to increase its production capacity by about 50% over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Note that the yield curve is currently upward sloping and Dhaka Company is concerned about a possible slowdown of economy because of Bangladesh Bank action to reduce inflation. It needs funding to cover payment for supplies. It is also considering issuing stock or bonds to raise funds in the next year.

a.Assume that Dhaka Company has two choices to satisfy the increased demand for its products. It could increase production by 10% with its existing facilities by obtaining short-term financing to cover the extra production expense and then using a portion of revenue received to finance this level of production in the future. Alternatively, it could issue bonds and use the proceeds to buy a larger facility that would allow 50% more capacity. Which alternative should the company select?

b.Dhaka Company has currently a large amount of debt, and its assets have already been pledged to back up its existing debt. It does not have additional collateral. At this time, the credit risk premium it would pay is similar in the short-term and long-term debt markets. Does this imply that the cost of financing is the same in both markets?

c.Should Dhaka Company consider using a call provision if it issues bonds? Why? Why might Dhaka Company decide not to include a call provision on the bonds?

d.If Dhaka Company issues bonds, it would be a relatively small bond offering. Should the Company consider a private placement of bonds? What type of investor might be interested in participating in a private placement? Do you think Dhaka Company could offer the same yield on a private placement as it could on a public placement? Explain.

e.Financial institution such as insurance companies and pension funds commonly purchase bonds. Explain the flow of funds that runs through these financial institutions and ultimately reaches corporations that issue bonds such as Dhaka Company.