Institute of Management Studies, University of Peshawar

Subject: Corporate Finance

Time: ……. Hours Paper for: MBA

Note: Each MCQ has one mark.

(1). “Dividend Discount Model” has the following limitations:

a) Is based on future projection of cash flow
b) Deals with the past information of company
c) Does not consider the market risk
d) Both (a) and (b)
(2) Multiple growth model of dividend assumed:
a) The dividend does not increase with passage of time
b) The dividend increases in the faster rate in the beginning years and then constantly
grow
c) The dividend increases with constant growth
d) All of the above
(3). If intrinsic value is greater than market value, then the assets are:
a) Undervalued
b) overvalued
c) correctly valued
d) None of the above
(4).IV = Interest installment/ required rate of return is a formula used to calculate the intrinsic
value of:
a) Zero coupon bond
b) Non-Zero Coupon Bond
c) Preferred stocks
d) None of the above
(5).WACC is used to calculate the:
a) Cost of equity
b) Cost of debts
c) Cost of capital
d) None of the above
(6) The calculation of WACC is based on:
a) Historical values
b) Market values
c) Both (a) and (b)
d) Book values
(7). CAPM assumes the relationship between returns and……………………..
a) Systematic Risk
b) Non-systematic Risk
c) Both (a) and (b)
d) None of the above
(8). In Pakistan, which rates are used as risk-free return:
a) Treasury Bills used by State Bank of Pakistan
b) Repo rate
 c) KIBOR rate
d) All of the above
(9) Corporate taxation is deducted from:
a) Cost of Capital
b) Cost of Debts
c) Cost of Equity
d) None of the above
(10). Cash conversion cycle (CCC) is calculated with the help of following formula....................
a) Inventory turnover + Account receivable turnover – payable turnover in days.
b) Inventory turnover + payable turnover in days – Account receivable turnover
c) Payable turnover in days + Account receivable turnover – Inventory turnover
d) None of the above

Part B Time: …………. Mints

(1). The capital structure of a company shows the liabilities of Rs. 30,000 and equity of Rs.
60,000. In addition, the cost of equity is 7 percent and cost of debts is 5 percent with taxation on
corporate earnings is 25 percent. Based on the information provided, calculate the WACC. (5)

(3). Suppose a firm current dividend is Rs. 6 per share, the dividend increases at 6% in the first
stage for 4 years and grows at a constant growth of 3% thereafter, required rate of return
(discount rate) is 8%, calculate the intrinsic value of the firm? (5)

Current dividend is Rs. 6/ Share

Dividend increases at 6% in the first stage for 4 years
Constant growth of 3%
Required rate of return (discount rate) is 8%

Period Dividend Calculations Amount Present Value

1 D1 6 x 1.061 1.06 0.9815
2 D2 6 x 1.062 1.1236 0.9633
3 D3 6 x 1.063 1.1910 0.9455
4 D4 6 x 1.064 1.2625 0.9280

5 D5 1.2625 x 1.03 1.3004

(4). A share produces Rs. 100 equal instalment of dividend over an infinite period of time in the
form of perpetuity. Moreover, its discount rate is 6%; calculate its intrinsic value.
(5)
(5). Company Y has preferred stock outstanding with par value of Rs. 200, dividend per share of
Rs. 15, and a current market value of Rs. 290 per share. Calculate the discount rate of the
preferred stock.
(5)

(6). The Company X has Rs. 500 par value zero-coupon bonds outstanding. The company bonds
are currently trading at Rs. 300 with 10 years to maturity. Calculate the required rate of return on
debts? (5)

Part C

Q 1: What you learnt in this course? (10)