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 b. 75.29 c. 107.53 d. 118.35 e. 131.74 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% b. 0.50% c. 0.70% d. 1.00% e. 1.25% Step-wise Solution to Q.No. 3:
Effective annual rate: Bank A: 8%, monthly. EARA = = = 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.