COMSATS University Islamabad, Lahore Campus

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Sessional 1 Fall 2020
Course Title: Financial Management Course Code: MGT330 Credit Hours: 3(3,0)
Instructor Imran ur Rehman Programme Name: BBA
Semester: 5th Batch: BBA Group: Section D Date:
Time Allowed: 70 minutes (Including uploading time) Maximum Marks: 10
Student’s Name: Reg. No.
Important Instructions / Guidelines:
 Attempt all questions. Read all questions carefully before attempting.
Q.1
Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabricated metal parts for
customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of
Bluestone recently held a board meeting during which he extolled the qualitites of the corporation. The
company, he stated confidently, had the capability to build any product and could do so using a lean
manufacturing model. The firm would soon be profitable, claimed the CEO, because the company used
state-of-the-art technology to build a variety of products while keeping inventory levels low. As a
business student, you have calculated some ratios to analyze the financial health of the firm. Bluestone’s
current ratios and quick ratios for the past 6 years are shown in the table below:

Ratio 200 2010 201 2012 2013 2014

9 1
Current Ratio 1.2 1.4 1.3 1.6 1.8 2.2
Quick Ratio 1.1 1.3 1.2 0.8 0.6 0.4

Required
What do you think of the CEO’s claim that the firm is lean and soon to be profitable? (Marks 3)

Q.2

Maple Leaf Electric Company Limited (MLECL) uses only common equity and debt. It can borrow
unlimited amounts at an interest rate of 10% as long as it finances at its target capital structure, which
calls for 45% debt and 55% common equity. Its last dividend was Rs.2, its expected constant growth rate
is 4%, and its common stock sells for Rs.20. MLECL’s tax rate is 40%. Two projects are available:
Project A has a rate of return of 13%, while Project B’s return is 10%. These two projects are equally
risky and about as risky as the firm’s existing assets.

Required:
a. What is its cost of common equity? (Mark 1)
b. What is the WACC? (Marks 2)
c. Which projects should MLECL accept? (Mark 1) (Total Marks 4)

Q.3
A mining company is considering a new project. Because the mine has received a permit, the project
would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional
Rs.10 million at Year 0 to mitigate the environmental problem, but it would not be required to do so.
Developing the mine (without mitigation) would cost Rs.60 million, and the expected net cash inflows
would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would
be $21 million. The risk-adjusted WACC is 12%.

Required:
a. Calculate the NPV with and without mitigation. (Marks 2)
c. Should this project be undertaken? If so, should the firm do the mitigation? (Marks 1)
(Total Marks 3)