PAF – Karachi Institute of Economics and Technology City Campus

Course: SFA&D
Faculty: Mr Faisal Dhedhi
Class ID:
Examination: Assignment 01 Date: 16th Feb-19

Total Marks: 04

1) Your brother has just graduated from high school and is seeking your advice as to whether he
should find a job immediately or go to college for four years and then find a job. He estimates
that if he gets a job immediately, he will earn $15,000 per year for the next 40 years. If he goes
to college first, he estimated that he can earn $30,000 for each of the 36 years after he gets out.
(Whether he goes to college or not, he plans to retire 40 years from today.) Assume that his time
value of money is 14% and that all cash flows are ordinary annuities. (If he goes to college first,
he can borrow money at 14% too)

a) What will be the present value of his cash flows if he gets a job immediately?
b) What will be the present value of his cash flows if he goes to college first?
c) What should he do?
2) Sun co.’s bonds, maturing in 7 years, pay 8% interest on a $1,000 face value. However,
interest is paid semi-annually. If your required rate of return is 10%, what is the value of the
bond? How would your answer change if the interest were paid annually?

3) BMM industries pays a dividend of $ 2 per quarter, the dividend yield on its stock is reported at
4.8%. What price is the stock selling at?

4) Blackburn and Smith common stock currently sells for $23 per share. The company’s
executives anticipate a constant growth rate of 10.5 percent and an end-of-year dividend of
$2.50.What is your expected rate of return? If you require a 17% return, should you purchase
the stock