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BBA 3rd Semester Test Exam
Principles of Finance; Chapter(s): Risk and returns, Lease Vs. Borrow Financing
Time: 1 Hour 30 Minutes; Full Marks- 50; Pass Marks: 20

01. Use the basic equation for the Capital Asset Pricing Model (CAPM) to
work each of the following problems:

i. Find the required return for an asset with a beta of .90 when the risk-
free rate and market return are 8% and 12%, respectively. (2)
ii. Find the risk-free rate for a firm with a required return of 15% and
beta of 1.25, when the market return is 14%. (2)
iii. Find the market return for an asset with a required return of 16% and
a beta of 1.10 when the risk-free rate is 9% (2)
iv. Find the beta for an asset with a required return of 15%, when the
risk-free rate and market return are 10% and 12.5% respectively. (2)

02. Mr. Rahman creats a portfolio having a standard deviation of 32%.

The return on the treasury bill which is tax free is 3.5%. If the expected
market return is 16% and the market standard deviation is estimated to
be 22%, calculate the return on the portfolio created by Mr. Rahman.(2)

03. Risk-return features of two securities Share Moon and Share Star are
given below-

Share Moon Share Star

Expected Returns (%) 15 20
Standard Deviation (%) 10 15
Covariance (%) 120

Requirements:
(A) What is the correlation between this two securities? (2)
(B) What is the expected return and risk of a portfolio combined in equal
proportions? (4)

04. Suppose the required rate of return on a portfolio with beta of 1.2 is
18% and the risk free rate is 6% According to CAPM what is the expected
rate of return of this portfolio? (3)
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05. Stocks X and Y have following probability distribution of expected
future returns:

Probability Stock X Stock Y

0.1 -10% -35%
0.2 2 0
0.4 12 20
0.3 20 25
0.1 38 45

An investor seeks opinion as which stock he should invest that you

recommend the investor buy? Explain. (5)

06. Sourav Steel Company is considering the purchase of a Tk. 6,000

asset in the three year. SLD (Straight Line Depreciation) category with a
four year write off or entering into two sequential operating leases for
two years each. (8)

Under the operating leases, the annual payments would be Tk. 1,400 on
the first lease and 2,600 on the second lease. If the firm purchases the
asset, it would pay annually to amortize a Tk. 6,000 loan over four years
at 10% interest. Based on the firm's 30% tax rate and following formation
related to depreciation:
Year Depreciation %
1 .333
2 .445
3 .148
4 .074
The firm is required to determine whether it will go for "Lease
Agreement" or "Borrow Agreement" (8)

07. A company wants to install a server system in the office. The market
value of the system in the office. The market value of the system is 5 lacs.
The company has two options to get the server.
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Option A:
The company approaches to a leasing company who agrees to buy the
system and rented to the company at an early rent of Tk. 70,000 for 8
years. The lease payment would be payable at the beginning of the year.

Option B:
The company can borrow Tk. 5 hundred thousand from a bank,
repayable at 8 instalments @Tk. 87,000 per year. The company has to
pay interest at 8% on the unpaid balance. The residual value of the
server after 8 years would be Tk. 20,000. The company practices Straight
Line Method of depreciation. And operates @45% tax bracket.
Cost of capital is 10%

Requirement: (8)
In which option the finance manager walk for to get the server system.

08. Hasan Company Limited needs to acquire a new machine costing Tk.
5,00,000. There are two alternative ways of financing.

1. To take lease from Janata Bank @15% interest payable at the end of
each year in equal installments for four years.

2. To take lease from Union Capital for four years with an annual
payments of Tk.2,20,000 to be paid at the end of each year the lease has
a maintenance expenses of Tk.5,000 each year.
Which alternative the company should accept. Assume the corporate tax
rate is 30% and SLM of depreciation is applicable. (8)

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