University of the Punjab, Gujranwala Campus

Department of Commerce
Final Term
Corporate Finance
Email: mcpugc@gmail.com

Question No. 01 Short Questions Marks (5*6) = 30

i. A firm has a total value of $10 million and debt valued at $4 million. What is the
weighted average cost of capital if the after-tax cost of debt is 10% and the cost of equity
is 13%?
ii. Amreli Steels’s stock trades at PKR 120 a share. The company is contemplating a 2 for 1
stock split. Assuming that the stock split will have no effect on the total market value of
its equity, what will be the company’s stock price following the stock split?
iii. Explain Agency Theory.
iv. Explain Bankruptcy cost and its types.
v. What is meant by optimal capital structure? Explain with diagram.
Question No. 02 Long Questions Marks (45)
i. Clarke Equipment currently pays a common stock dividend of $3.50 per share. The
common stock price is $60. Analysts have forecast that earnings and dividends will grow
at an average annual rate of 6.8 percent for the foreseeable future. What is the cost of new
equity if the issuance costs per share are $3? (15)
ii. Vargo, Inc., has a beta estimated by Value Line of 1.3. The current risk-free rate (short
term) is 7.5 percent, and the return on market portfolio is 16 percent. What is the cost of
equity capital for Vargo? (10)
iii. Walther Enterprises has a capital structure target of 60 percent common equity, 15
percent preferred stock, and 25 percent long-term debt. Walther’s financial analysts have
estimated the marginal, after-tax cost of debt, preferred stock, and common equity to be 9
percent, 15 percent, and 18 percent, respectively. What is the weighted cost of capital for
Walther? (10)
iv. Explain types of cash dividend and standard method of cash dividend payment. (10)

***End of Question Paper***