COMSATS University Islamabad, Lahore Campus

Sessional 2 – Semester Spring 2019

Course Title: Business Finance Course Code: MGT232 Credit Hours: 3(3,0)
Course Instructor: Samya Tahir, Zafar Malik, Sundus Saleem Program Name: BBA, BSAF
Semester: 4th Batch: SP 18 Section: A,B and C Date: 01-12-2020
Time Allowed: 3 Hours Maximum Marks: 50
Student’s Name: Reg. No. CIIT/- /LHR
Important Instructions / Guidelines:

 Attempt any 5 Questions. All questions carry equal marks

 Answer all questions in the answer booklet provided.
 Read the questions carefully before answering.
 Show complete working for the numerical questions.

Q # 1:
A) How funds are channelized in the financial environment between the demanders and suppliers
of funds?

B) What different types of corporate bonds a company can issue in capital markets? How yields
on these bonds can be calculated?
(Marks 5+5)

Q # 2:

1) Assume that you just won the state lottery. Your prize can be taken either in the form of
$40,000 at the end of each of the next 25 years (that is, $1,000,000 over 25 years) or as a single
amount of $500,000 paid immediately. You decide to choose the payment alternative - that has
the higher present value.

a. If you expect to be able to earn 5% annually on your investments over the next 25
years, ignoring taxes and other considerations, which alternative should you take? Why?

b. Would your decision in part a change if you could earn 7% rather than 5% on your
investments over the next 25 years? Why?

2) Define and differentiate between ordinary and due annuity. Which for always has greater
future value and why?

(Marks
6+4)
Q # 3:
Sorbond Industries 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, assuming this required return?

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 # 4:

(1) Caribbean Reef Software has 8.4 percent coupon bonds on the market with 9 years to
maturity. The bonds make semiannual payments and currently sell for $955 in the
market. What is the semiannual YTM and effective annual YTM?

(2) The Mangold Corporation has two different bonds currently outstanding. Bond M has a
face value of $20,000 and matures in 20 years making 5% annual coupon payments.
Bond Z also has a face value of $20,000 and a maturity of 10 years; it makes no coupon
payments over the life of the bond. If the required return on both these bonds is 9%, what
should be the current value of both the bonds? Why there are differences in the prices of
both bonds?

(Marks 5+5)
Q # 5:
Lakson Industries’ most recent annual dividend was $1.80 per share (D o = $1.80), and the firm’s
required ate of return is 11%. Find the market value of Lakson’s shares when dividends are
expected to grow at 8% annually for 3 years, 6% for next 4 years followed by zero percent
growth in years 7 to infinity. Interpret this value.
(Marks 10)
Q # 6:

(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

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)