NATIONAL UNIVERSITY OF MODERN LANGUAGES

DEPARTMENT OF MANAGEMENT SCIENCES

MAIN CAMPUS

FINAL PAPER
OF
Corporate Finance
SUBMITTED TO: SIR ABDUL WAHID
SUBMITTED BY: Nooria Arshad

ROLL NO. : 9171098

CLASS : BBA-8-C
DATE : 17th June. 2021

System ID : MF-17-ID -385

BACHELOR OF BUSINESS ADMINISTRATION

SESSION: 2017 – 2021

Question no.1:

0
 Currently a stock pays a dividend per share of $43.37. A security analyst projects
the future dividend growth rate over the next five years to be 21.0%, 18.0%, 15.0%, 13.5%,
11.5% and then 11.0% each year thereafter to infinity. The levered cost of equity capital
for the firm is 11.4% per year. What is the stock’s value? Do you think change in dividend
policy cause in change in stock price?

Stock Valuation:

Ke 11.4%
N 0 1 2 3 4 5 Infinite
g 21.0% 18.0% 15.0% 13.5% 11.5% 11.0%
Dividend 43.37 52.4777 61.92369 71.21224 80.82589 90.12087 100.0342
25008.54
Dividend 52.4777 61.92369 71.21224 80.82589 25098.66
PV of Dividend 47.107451 49.89838 51.51089 52.48192 14629.34

Stock Value 14830.33

Analysis:
Construct a two-stage discounted dividend model. In stage one, explicitly forecast the
firm’s dividend over a five-year horizon. In stage two, forecast the firm’s dividend from year six
to infinity and calculate its continuation value as the present value of this infinitely growing
annuity. Then, discount the future dividends and the date 5 continuation value back to the present
to get the stock’s value

Fundamental analysis is the only way to spot the cheap ones. It is a method of valuing a
stock by measuring its intrinsic value on the basis of related economic, financial and other
qualitative and quantitative factors. From macro-economic factors, such as the state of the
economy and conditions of the industry, to microeconomic factors like the effectiveness of the
company's management and many others can affect the valuation of a stock.

So, the stock value is 14830.33.

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Question No.2:
A corporation is trying to decide whether to lease a machine for five
years and pay the residual purchase cost to buy the machine in the last year of the
lease or buy the machine now. The annual lease payment would be $4,100 with
payments made at the beginning of each year. The residual purchase cost would
be $12,600 to be paid at the beginning of the fifth year. The lease payments are
standard business expenses that reduce the corporation’s tax liability accordingly.
$45,700 can be borrowed from the bank to buy the machine now. Annual loan payments
would be made for 5 years at a 6% interest rate. The machine can be
fully depreciated in a straight line manner over 5 years. Both the loan interest
payment and the depreciation provide tax shields against a corporate tax rate of
40%. The appropriate discount rate for both alternatives is the after-tax cost of
debt, where the corporation’s cost of debt is assumed to be the same as the loan
rate. Should the corporation lease or buy?

Lease Vs. Buy

0 1 2 3 4 5
Lease Payment $ 5,400.00 $ 5,400.00 $ 5,400.00 $ 5,400.00 $ 5,400.00
Payment after Tax Sheild $ 3,240.00 $ 3,240.00 $ 3,240.00 $ 3,240.00 $ 3,240.00
Residual Payment $ 12,600.00
Total Payment $ 3,240.00 $ 3,240.00 $ 3,240.00 $ 3,240.00 $ 15,840.00
Present Value $ 3,240.00 $ 3,127.41 $ 3,018.74 $ 2,913.84 $ 13,750.43
Total Payment $ 26,050.42

Loan and Buy 0 1 2 3 4 5

Principal Balance $ 45,700.00 $ 37,592.98 $ 28,999.55 $ 19,890.51 $ 10,234.92 $ -
Instalment $ 10,849.02 $ 10,849.02 $ 10,849.02 $ 10,849.02 $ 10,849.02
Interest Component $ 2,742.00 $ 2,255.58 $ 1,739.97 $ 1,193.43 $ 614.10
Principal $ 8,107.02 $ 8,593.44 $ 9,109.04 $ 9,655.59 $ 10,234.92

Depriciation $ 9,140.00 $ 9,140.00 $ 9,140.00 $ 9,140.00 $ 9,140.00

Interest $ 2,742.00 $ 2,255.58 $ 1,739.97 $ 1,193.43 $ 614.10
Total $ 11,882.00 $ 11,395.58 $ 10,879.97 $ 10,333.43 $ 9,754.10
Tax Sheild $ 7,129.20 $ 6,837.35 $ 6,527.98 $ 6,200.06 $ 5,852.46
Benefit $ 4,752.80 $ 4,558.23 $ 4,351.99 $ 4,133.37 $ 3,901.64

Instalment after Tax Benefit $ 6,096.22 $ 6,290.78 $ 6,497.03 $ 6,715.64 $ 6,947.38

PV $ 5,751.15 $ 5,598.78 $ 5,455.03 $ 5,319.42 $ 5,191.48
Total Payment $ 27,315.85

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 EBIT 10000 100002 Column3
Leasepayment 5400 0
EBT 4600 100002
TAX 1840 40000.8 38160.8
EAT 2760 60001.2

0.036

Analysis:

If you choose to buy a machine like car, you pay for the entire value of a
vehicle; regardless of how long you keep it or how many miles you put on it. If
you choose to lease a car, on the other hand, you only pay for a portion of a
vehicle’s total value, which is the portion that you use during the time you are
driving it. In other words, you’re paying for the vehicle’s depreciation throughout
the lease term. The biggest difference between buying and leasing a car is
ownership. Buying a vehicle gives you complete ownership to do what you want
with it, while leasing a vehicle only gives you temporary ownership with
restrictions on what you can do with it. If you wish you customize your vehicle, or
think it will undergo excessive wear and tear, buying is a better option. Another
advantage of buying a vehicle is the freedom to sell or trade it anytime—a lease
term has early-termination charges if you end the lease early.

The present value of the lease cost is $26,050. The present value of the buy
cost is $27315.85. So in this case, the corporation should lease.

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Question no.3:
To purchase a house, you take out a 30-year mortgage. The present value (loan amount) of the
mortgage is $237,832. The mortgage charges an interest rate / year of 7.27%. What is the annual
payment required by this mortgage? How much of each year's payment goes to paying
interest and how much to reducing the principal balance? If after 15 years, you want to payoff
entire amount, what should you pay?

Pv 237832
N 30
I 7.27%

Installment ($19,688.47)
N Installments Interest Principal Amount Balance

1 19688.47 17290.3864 2398.0836 235433.92

2 19688.47 17116.0457 2572.424278 232861.49
3 19688.47 16929.0305 2759.439523 230102.05
4 19688.47 16728.4192 2960.050776 227142.00
5 19688.47 16513.2235 3175.246467 223966.76
6 19688.47 16282.3831 3406.086886 220560.67
7 19688.47 16034.7606 3653.709402 216906.96
8 19688.47 15769.1359 3919.334076 212987.62
9 19688.47 15484.2003 4204.269663 208783.36
10 19688.47 15178.5499 4509.920068 204273.44
11 19688.47 14850.6787 4837.791256 199435.64
12 19688.47 14498.9713 5189.498681 194246.15
13 19688.47 14121.6948 5566.775235 188679.37
14 19688.47 13716.9902 5971.479794 182707.89
15 19688.47 13282.8636 6405.606376 176302.28
16 19688.47 12817.176 6871.293959 169430.99
17 19688.47 12317.633 7370.83703 162060.15
18 19688.47 11781.7731 7906.696882 154153.46
19 19688.47 11206.9563 8481.513745 145671.94
20 19688.47 10590.3502 9098.119795 136573.82
21 19688.47 9928.9169 9759.553104 126814.27
22 19688.47 9219.39739 10469.07261 116345.20
23 19688.47 8458.29581 11230.17419 105115.02
24 19688.47 7641.86214 12046.60786 93068.41
25 19688.47 6766.07375 12922.39625 80146.02
26 19688.47 5826.61554 13861.85446 66284.16
27 19688.47 4818.85873 14869.61127 51414.55
28 19688.47 3737.83799 15950.63201 35463.92
29 19688.47 2578.22704 17110.24296 18353.68
30 19688.47 1334.31238 18354.15762 0

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Analysis:
 Amortization can refer to the process of paying off debt over time in regular installments
of interest and principal sufficient to repay the loan in full by its maturity date.
With mortgage and auto loan payments, a higher percentage of the flat monthly payment
goes toward interest early in the loan.
 The interest on an amortized loan is calculated based on the most recent ending balance
of the loan; the interest amount owed decreases as payments are made. This is because
any payment in excess of the interest amount reduces the principal, which in turn, reduces
the balance on which the interest is calculated. As the interest portion of an amortized
loan decreases, the principal portion of the payment increases. Therefore, interest and
principal have an inverse relationship within the payments over the life of the amortized
loan.
 An amortized loan is the result of a series of calculations. First, the current balance of the
loan is multiplied by the interest rate attributable to the current period to find the interest
due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.)
Subtracting the interest due for the period from the total monthly payment results in the
dollar amount of principal paid in the period.
 The amount of principal paid in the period is applied to the outstanding balance of the
loan. Therefore, the current balance of the loan, minus the amount of principal paid in the
period, results in the new outstanding balance of the loan. This new outstanding balance
is used to calculate the interest for the next period.
 The calculations of an amortized loan may be displayed in an amortization table. The
table lists relevant balances and dollar amounts for each period. In the example below,
each period is a row in the table. The columns include the payment date, principal portion
of the payment, interest portion of the payment, total interest paid to date, and ending
outstanding balance.
 So, the last amount of balance is zero.