COMSATS University Islamabad, Lahore Campus

Final – Semester Spring 2020

Course Title: Business Finance Course Code: MGT232 Credit Hours: 3(3,0)
Course Instructor: Samya Tahir Program Name: BBA
Semester: 4th Batch: FA 18 Section: Date:
Time Allowed: 3 Hour Maximum Marks: 50
Student’s Name: Reg. No. CIIT/- /LHR

Q. No. 1:
You intend to deposit $300 per year in a credit union for the next 10 years, and the credit union
pays an annual interest rate of 8%.
a. Determine the future value that you will have at the end of 10 years, given that end-of-period
deposits are made and no interest is withdrawn, if

(1) $300 is deposited annually and the credit union pays interest annually.
(2) $150 is deposited semiannually and the credit union pays interest semiannually.
(3) $75 is deposited quarterly and the credit union pays interest quarterly.

b. Use your finding in part a to discuss the effect of more frequent deposits and compounding of
interest on the future value of an annuity.
(Marks 10)

Q. No. 2

You are considering investing in a security that has the following distribution of possible one-
year returns:

a. What is the expected return and standard deviation associated with the investment?
b. Calculate Coefficient of Variation of investment.
(Marks 10)

Q. No. 3:
Company ABC 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 V 0, assuming this required return
calculated in part (a)?

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 No. 4:
Company ABC common stock just paid its annual dividend of Rs. 10 per share. The required
return on the common stock is 12%. Estimate the value of the common stock under each of the
following assumptions about the dividend:

a. Dividends are expected to grow at an annual rate of 0% to infinity.

b. Dividends are expected to grow at a constant annual rate of 5% to infinity.

c. Dividends are expected to grow at an annual rate of 5% for each of the next 3 years,
followed by a constant annual growth rate of 4% in years 4 to infinity.

(Marks 2.5+2.5+5)

Q No. 5:

(a) The 9 % coupon-rate bonds of the ABC Company have 15 years remaining to maturity.
The current market value of one of these $1,000-par value bonds is $700. Interest is paid
semiannually. Company places a nominal annual required rate of return of 14 percent on
these bonds. What dollar intrinsic value should company place on one of these bonds
(assuming semiannual discounting)?

(b) How funds are channelized in the financial environment between the demanders and
suppliers of funds
(Marks 5 + 5)