# Q No. 1 1 3 Million 3 Million 3 Million 3 Million

Gull Khanis negotiating sports employment contract. His opportunity cost is 12%. He has been offered three possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

Contract Year 1 Year 2 Year 3 Year 4

2 2 Million 3 Million 4 Million 5 Million

3 7 Million 1 Million 1 Million 1 Million

As his financial adviser, which contract would you recommend that he accept?

**Q No. 2 **Assume that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, "Expansion Zone North" and "Expansion Zone East". The initial cost of each project is Rs. 10,000. Company discount all projects based on WACC. Further, all the projects are equally risky projects and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is $2.0, its expected that they will grow at the constant growth rate of 8%, and the company's common stock sells for $20. The tax rate is 50%.

Time Expansion Zone North Expansion Zone East Cashflows

Cashflows (amount in Rs.) (amount in Rs.)

0 - 10,000 - 10,000

1 6,500 3,500

2 3,000 3,500

3 3,000 3,500

4 1,000 3,500

Carefully analyze the above table and answer the following questions in detail.

I. Calculate the weighted average cost of capital for this firm?

II. Compute each project's IRR, NPV, payback, MIRR, and discounted payback.

III. Which project(s) should be accepted if they are mutually exclusive? Explain

IV. Which project(s) should be accepted if they are independent? Explain

** Q No. 3** Explain Why you agree or disagree with the following statements.

a. If a bond sells at a discount, yield to call is more likely to occur.

b. A firm should select the capital structure that is fully unlevered.

c. Leveraged beta represents fundamental operational risk.

d. All other things held constant; the future value of an ordinary annuity is always having a higher future value than annuity due.

e. MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.

** Q No 4 **Assume you are a portfolio manager at JS Global Capital Ltd. Recently you came across three attractive stocks and want to creat a portfolio investment in these three stocks. The details of the stocks are given below:

**Company name Volatility (Standard deviation) Weight in Portfolio Correlation with the market portfolio**

Meezan Bank Ltd 0.25 12% 0.40

Lucky Cement Ltd 0.35 25% 0.60

KE Ltd 0.40 13% 0.50

The expected return on the market portfolio is 8% and its volatility is 10%. The risk-free rate based on central bank's discount rate is 3%.

a. Calculate each of the stock's expected return and risk (beta) as compared to the market.

b. What should be the expected return of the portfolio based on values calculated in part a.

c. Calculate the beta of the portfolio? what does it tells regarding the riskiness of the portfolio?

d. Using the values from part c, can you calculate the expected return of the portfolio? Is it similar to your answer in part b? Why or why not

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