COMSATS University Islamabad, Lahore Campus

Sessional 1 – Semester Spring 2020

Credit
Course Title: Business Finance Course Code: MGT232 3(3,0
Hours:
)
Course Instructor: Samya Tahir Program Name: BBA

Batch
Semester: 4th FA 18 Section: A,B,C Date:
:

Time
3 Hour Maximum Marks: 50
Allowed:
Student’s Name: Reg. No. CIIT/- /LHR

Q. No. 1:

A) How funds are channelized in the financial environment between the demanders and suppliers
of funds?
B) An insurance agent is trying to sell you an immediate- retirement annuity, which for a single
amount paid today will provide you with $12,000 at the end of each year for the next 25 years.
You currently earn 9% on low-risk investments comparable to the retirement annuity. Ignoring
taxes, what is the most you would pay for this annuity?
(Marks 10)

Q. No. 2:
You wish to determine the future value at the end of 2 years of a $15,000 deposit made today
into an account paying a nominal annual rate of 12%.

a. Find the future value of your deposit, assuming that interest is compounded
(1) annually
(2) quarterly
(3) Monthly

b. Compare your findings in part a, and use them to demonstrate the relationship between
compounding frequency and future value.
(Marks 10)

Q. No. 3:

(a) Four securities have the following standard deviation and correlation coefficient:

correlation coefficient

σ(%) A B C D

A 10 1.0

B 8 0.6 1.0

C 20 0.2 -1.0 1.0

D 16 0.5 0.3 0.8 1.0

Note: Correlation coefficient between B and C is -1.0 and between C and D is 0.8

Assuming equal weights for each stock, what are the standard deviations for the following
portfolios? which portfolio would an investor prefer and why?

(1) B and C
(2) C and D
(b) When is the coefficient of variation preferred over the standard deviation for comparing asset
risk? Give example

(Marks 8+2)
Q No. 4:
Company ABC has a beta of 1.45. The risk-free rate is 8 percent and the expected return on the
market portfolio is 13 percent. The company currently pays a dividend of $2 a share, and
investors expect it to experience a constant growth in dividends of 10 percent per annum for
many years to come.
a. What is the stock’s required rate of return according to the CAPM?

b. What is the stock’s present market price per share V 0, assuming this required return
calculated in part (a)?

c. What would happen to the required return and to market price per share if the beta
were 0.80? (Assume that all else stays the same).

d. Interpret the effect of change in beta (part c.) on required return and market price per
share.

(marks 2+2+3+3)

Q. No. 5

(1) The most recent (2003) annual dividend payment of Warren Industries, a rapidly growing
boat manufacturer, was $1.50 per share. The firm’s financial manager expects that these
dividends will increase at a 10% annual rate, g1, over the next 3 years (2004, 2005, and
2006) because the introduction of a hot new boat. At the end of the 3 years (the end of
2006), the firm’s mature product line is expected to result in a slowing of the dividend
growth rate to 5% per year, g2, for the foreseeable future. The firm’s required return, ks,
is 15%. Estimate the current (end-of-2003) value of Warren’s common stock.

(2) What is a Preffered stock? If a preffered stock has a 15%, $100 par value issue
outstanding. The appropriate discount rate is 12%. What is the value of the Preffered
stock?

(Marks 7 + 3)