Midterm Summer - 2021

Department of Business Administration

Subject: Financial Strategy & Policy Submission Day: Saturday

Instructor: Mr. Salman Badami Submission Date: Aug 07, 2021
Program: MBA Max. Marks: 25

Please follow the instructions carefully:

1. Write your answers directly on the Black Board (recommended) or upload word file before the due date
on Blackboard.
2. Write your name and registration ID on the first page of your Word file.
3. Answer scripts can only be uploaded on Blackboard only during the submission time.
4. To avoid any unforeseen problems, you are advised to follow the Guide lines communicated by the Faculty
Members.
5. Submission of answer copy(ies) will be considered acceptable through Blackboard only. Therefore, do not
submit your document through email or any other medium.
6. Use 12 pt. font size and Times New Roman font style along with 1-inch page margins.
7. Follow the requirements of the word limit and the marking criteria while writing your answers.
8. Provide relevant, original and conceptual answers, as this exam aims to test your ability to examine,
explain, modify or develop concepts discussed in class.
9. Do not copy answers from the internet or other sources. The plagiarism of your answers may be checked
through Turnitin.
10. Double check your word file before uploading it on BlackBoard to ensure that you have uploaded the correct
file with your answers.

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Part I – Attempt all questions

Q No. 1) In case of dividend payment, what should be the strategy of the Company if future investment opportunities
are available? Why? How and in which form investors will get return? (3 Marks)

Q No. 2) Jimmy is considering the purchase of a residential plot. This will cost him $32,000. He will finance 70%
of the purchase price (i.e., make a 20% down payment) at an interest rate of 8 percent, with bi-monthly payments
over one year. How much money will she still owe on the loan at the end of 4 months (to the nearest dollar)?
(3 Marks)

Q No. 3) Bosco Corporation is currently operating in Pharmaceutical Business. The company is planning to diversify
its business line and operate in Food Business as well. Company has asked its analyst to calculate WACC for its
new business.

The book value of Company’s debt is $18Mn and sells at a price of 104% of face value. The yield to maturity on
the bond is 4% and coupon rate of 6%. The firm has 70,000 preferred stocks that sells at a price of $42 and pays
an annual dividend of $2.5/share. The Company paid a common stock dividend of $4/share last year and its stock
currently sells at a price of $58 per share. Risk free rate is 6%, market risk of return is 13% and beta is 0.94. The
total book value of the firm's equity is $27 million; book value per share is $37. The firm's tax rate is 35%.
Calculate WACC for Bosco Corporation’s new business line. (7 Marks)

Part II - Multiple Choice Questions. Write the correct option only in answer sheet.

All questions carry equal marks weightage – 1 Mark each (12 Marks)

1. Compared to investing in a single security, diversification provides investors a way to:

A. decrease the probability of low returns
B. increase the expected rate of return
C. decrease the volatility of returns

2. You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000; $5,000;
and $2,000 respectively. What is the future account value at the end of year 6 if you can earn 10% compounded
annually?
A. $21,000.00
B. $25,178.10
C. $27,695.91

3. An efficient market hypothesis states in which all public information is reflected in current market prices is
classified as:
A. Weak form efficiency
B. Semi strong efficiency
C. Strong form efficiency

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4. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is Ke = 10.5%,
and the expected constant growth rate is g = 6.4%. What is the stock's current price?
A. $17.39
B. $19.46
C. $18.29

5. Interest rates and bond prices?

A. move in the same direction
B. sometimes move in the same direction, sometimes in opposite directions
C. move in opposite directions

6. You want to have $1,000,000 when you retire in 30 years. You expect to earn 12% compounded monthly over
the entire 30-year period. How much money per month must be deposited?
A. $37.00
B. $286.13
C. $443.97

7. If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable
conclusion?
A. The stock has a low level of risk
B. The market is undervaluing the stock
C. The market is overvaluing the stock

8. An expected final price of stock is $70 and an expected capital gain is $25 then an original investment would
be?
A. $95
B. $70
C. $45

9. Corporation B is a normal-growth company that expects to earn 13% on reinvested earnings. If the company
pays 30% of its earnings as dividends, what will be the stock’s dividend growth rate?
A. 3.90%
B. 17%
C. 9.10%

10. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a $20,000
initial investment?
A. $93,219
B. $99,061
C. $915,240

11. If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price
of a bond and YTM is the bond's yield to maturity.)
A. P0 > par and YTM < the coupon rate
B. P0 > par and YTM > the coupon rate
C. P0 < par and YTM < the coupon rate

12. Dividend yield is 25% and current price is $40 then dividend yield will be?
A. $65.00
B. $10.00
C. $160.00

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