North South University

School of Business, BBA

FIN 254 (Introduction to Financial Management)

Full Marks: 40

1.

Asset K Asset L

j P𝑟𝐾 Return, 𝑟𝐾 P𝑟𝐿 Return, 𝑟𝐿

1 0.25 12% 0.15 8%

2 0.25 -6% 0.30 8%

3 0.15 1% 0.20 15%

4 0.20 5% 0.05 0%

5 0.15 10% 0.30 -12%

[4+4+2=10]
a) Calculate the expected value of return, 𝑟̅ , for each of the two assets. Which provides the
largest expected return?
b) Calculate the standard deviation, 𝜎𝑟 , for each of the two assets’ returns. Which appears
to have the greatest risk?
c) Calculate the portfolio expected return if you invest 47% of your wealth in K and 53% in L,
of your total wealth of $135,000.

2. With a view to raise large amount of debt financing for expansion purposes, Scented Floral Co.
will issue bonds which would have a maturity of 15 years. The annual coupon interest rate on
the bond is 6% and the par value of each bond is $2000 that pays interest semiannually. If the
yield to maturity is 8% then find out the price of the bond? Upon calculation of the price please
specify what type of a bond is this?
[6]

1
 North South University
School of Business, BBA

3. a) Tender Metals Inc. is planning to raise funding through issuance of bonds. Maturity is 15 years
and the par value is $1000. Calculate the before tax cost of issuing bonds for the company using
the approximation method if the coupon rate is 8%, the flotation costs are 4% and the selling
price is $945 on the bonds.

b) Tender Metals Inc. will also issue preferred stock which is expected to sell for $88 per share.
The cost of selling is expected to be $5 per share. The dividend rate is 10% of the value of each
share. Calculate the cost of issuing preferred stock for the company.

[6+6=12]

4.
a. My company paid its most recent (2021) annual dividend of $2.5 per share. The firm’s
financial manager expects that these dividends will grow at a 3% annual rate over the next
four years. If the firm’s cost of capital, rs, is 7.5%, then find out the price of the stock at the
end of 2021. [6]

b. If my company paid $4.5 per share annual dividend at the end of 2025 and the firm’s
manager expects the dividends to grow at 6% annual rate from then onwards for the
foreseeable future, then please find out the price of the stock at the beginning of 2025 given
the required return, rs is 7.5%. [6]