CORPORATE FINANCE FOR ENHANCING VALUE
Time Allowed: 10 minutes MM: 6
Note: Attempt all the questions. All questions carry equal marks. Correct answers should be marked by darkening the circles in the answer sheet provided.
1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to: a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
2. Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of Rs. 9.25 at the end of Year 2. In addition, you expect to sell the stock for Rs. 150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today? a. 164.19
Step-wise Solution to Q.No. 2:
Stock price =
= = Rs.118.35.
3. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? a. 0.25%
Step-wise Solution to Q.No. 3:
Effective annual rate:
Bank A:8%, monthly.
= = 8.30%.
Bank B:9%, interest due at end of year
EARB = 9%.
9.00% - 8.30% = 0.70%.
4. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent?
Solution to Q.No. 4:
Discount rate | 0.12| | |
Year| Cash Flows| PV factor| PV of Cash Flows|
0| 0| 1| 0|
1| 1| 0.8929| 0.8929|
2| 2000| 0.7972| 1594.3878|
3| 2000| 0.7118| 1423.5605|
4| 2000| 0.6355| 1271.0362|
5| 0| 0.5674| 0.0000|
6| -2000| 0.5066| -1013.2622|
| | | 3277|
5. Foster Industries has a project which has the following cash flows:
What cash flow will the project have to generate in the fourth year in order for the project to have a 15% rate of return? a. Rs. 15.55
b. Rs. 58.95
Solution to Q.No. 5:
Value of missing cash flow =
PV = -Rs.300 + (Rs.100) (0.8696) + (Rs.125.43) (0.7561) + (Rs.90.12)(0.6575) PV = -Rs.58.95.
Now, solve for CF4:
Rs.58.95 (1.15)4 = Rs.103.10.
Financial calculator solution:
Enter the first 4 cash flows, enter I = 15, and solve for NPV = Rs.58.945. The future value of Rs.58.945 will be the required cash flow. PV = -58.945; N = 4; I/YR = 15; PMT = 0; solve for FV = Rs.103.10.
6. You deposited Rs.1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? a. Rs.1,171