Final-Term Exam (Take-Home) Fall – 2020

Department of Business Administration

Student Name: Mehak Fatima Student ID: 46566

Part 2
Bonds [3 marks]
1. Pakistan State Oil (PSO) issues a bond with a par value of PKR1,000, 15 years to maturity, and a
coupon rate of 5 percent paid annually. If the yield to maturity is 4percent, what is the current
price of the bond?
Stocks [10 marks]
2. Dalda Foods is experiencing rapid growth. Dividends are expected to grow at 30 percent
per year during the next three years, 18 percent over the following year, and then 8 percent
per year indefinitely. The required return on this stock is 11 percent, and the stock
currently sells for PKR65 per share. What is the projected dividend for the coming year?
Q3
PARCO is considering a new project that complements its existing business. The machine required
for the project costs $3.9 million. The marketing department predicts that sales related to the project
will be $2.35 million per year for the next four years, after which the market will cease to exist. The
machine will be depreciated down to zero over its four-year economic life using the straight-line
method. Cost of goods sold and operating expenses related to the project are predicted to be 25
percent of sales. PARCO also needs to add net working capital of $150,000 immediately. The
additional net working capital will be recovered in full at the end of the project’s life. The corporate
tax rate is 30 percent. The required rate of return for PARCO is 13 percent. Should PARCO proceed
with the project?
As the NPV of project is positive PARCO should go forward with project.