MANAGEMENT DEVELOPMENT INSTITUTE (MDI) NMP-XIII CORPORATE FINANCE FOR ENHANCING VALUE (First Quiz) (Open book) Time Allowed: 10 minutes MM: 6 Note: Attempt all the questions. All questions carry equal marks. Correct answers should be marked by darkening the circles in the answer sheet provided. 1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to: a. Maximize expected total corporate profit. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e.

Maximize expected net income. 2. Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of Rs. 9. 25 at the end of Year 2. In addition, you expect to sell the stock for Rs. 150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today? a. 164. 19 b. 75. 29 c. 107. 53 d. 118. 35 e. 131. 74 Step-wise Solution to Q. No. 2: Stock price = = = Rs. 118. 35. 3.

Order nowGomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? a. 0. 25% b. 0. 50% c. 0. 70% d. 1. 00% e. 1. 25% Step-wise Solution to Q. No. 3: Effective annual rate: Bank A:8%, monthly. EARA = = = 8. 30%. Bank B:9%, interest due at end of year EARB = 9%. 9. 00% – 8. 30% = 0. 70%. 4.

You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent? 012%123456Periods ||||||| 012,0002,0002,0000-2,000 a. Rs. 3,277 b. Rs. 4,804 c. Rs. 5,302 d. Rs. 4,289 e. Rs. 2,804 Solution to Q. No. 4: Discount rate | 0. 12| | | Year| Cash Flows| PV factor| PV of Cash Flows| 0| 0| 1| 0| 1| 1| 0. 8929| 0. 8929| 2| 2000| 0. 7972| 1594. 3878| 3| 2000| 0. 7118| 1423. 5605| 4| 2000| 0. 6355| 1271. 0362| 5| 0| 0. 5674| 0. 0000| 6| -2000| 0. 5066| -1013. 2622| | | | 3277| 5. Foster Industries has a project which has the following cash flows: YearCash Flow -Rs. 300. 00 1 100. 00 2 125. 43 3 90. 12 4 ? What cash flow will the project have to generate in the fourth year in order for the project to have a 15% rate of return? a. Rs. 15. 55 b. Rs. 58. 95 c. Rs. 100. 25 d. Rs. 103. 10 e. Rs. 150. 75 Solution to Q. No. 5: Value of missing cash flow = PV = -Rs. 300 + (Rs. 100) (0. 8696) + (Rs. 125. 43) (0. 7561) + (Rs. 90. 12)(0. 6575) PV = -Rs. 58. 95. Now, solve for CF4: Rs. 58. 95 (1. 15)4 = Rs. 103. 10. Financial calculator solution: Enter the first 4 cash flows, enter I = 15, and solve for NPV = Rs. 58. 945. The future value of Rs. 58. 45 will be the required cash flow. PV = -58. 945; N = 4; I/YR = 15; PMT = 0; solve for FV = Rs. 103. 10. 6. You deposited Rs. 1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? a. Rs. 1,171 b. Rs. 1,126 c. Rs. 1,082 d. Rs. 1,163 e. Rs. 1,008 Solution to Q. No. 6: Time Line: 02% 1 2 3 4 5 6 —–+— +— +—+—-+—-+ -1,000FV =? Numerical solution: FV = Rs. 1, 000(1. 026) = Rs. 1, 000(1. 1262) = Rs. 1, 126. 20 = Rs. 1, 126 (rounded off). Financial calculator solution: Inputs: N = 6; I = 2; PV = -1,000; PMT = 0. Output: FV = Rs. 1, 126. 16 = Rs. 1, 126(rounded off). 7. Assume that you will receive Rs. 2,000 a year in Years 1 through 5, Rs. 3,000 a year in Years 6 through 8, and Rs. 4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows? a. Rs. ,851 b. Rs. 13,250 c. Rs. 11,714 d. Rs. 15,129 e. Rs. 17,353 Solution to Q. No. 7: Time Line: 014%1 2 3 4 5 6 7 8 9Yrs +——-+——+——–+———+——-+——–+——-+—–+– PV =? 2,0002,0002,0002,0002,0003,0003,0003,0004,000 Numerical solution: PV = Rs. 2,000((1-(1/1. 145))/. 14) + Rs. 3,000( )+ Rs. 4,000(1. 149)= Rs. 2,000(3. 4331) + Rs. 3,000(2. 3216)(0. 5194) + Rs. 4,000(0. 3075) = Rs. 6,866. 20 + Rs. 3,617. 52 + Rs. 1,230. 00 = Rs. 11,713. 72 = Rs. 11,714 (rounded off). Financial calculator solution: Using cash flows

Inputs: CF0 = 0; CF1 = 2,000; Nj = 5; CF2 = 3,000; Nj = 3; CF3 = 4,000; I = 14. Output: NPV = Rs. 11, 713. 54 = Rs. 11, 714 (rounded off). 8. A zero coupon bond is a bond that a. Pays interest at maturity b. Is issued at par and redeemed at par c. Provides compensation to the investors in the form of capital appreciation. d. Is also termed as deep discount bond e. Both c and d 9. If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond? a. The yield on the 10-year bond is less than the yield on a 1-year bond. b.

The yield on a 10-year bond will always be higher than the yield on a 1-year bond because of maturity premiums. c. It is impossible to tell without knowing the coupon rates of the bonds. d. The yields on the two bonds are equal. e. It is impossible to tell without knowing the relative risks of the two bonds. 10. If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. a. True b. False 11. If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than the effective annual rate. . True b. False 12. Which of the following is most correct? a. The present value of a 5-year annuity due will exceed the present value of a 5-year ordinary annuity. (Assume that both annuities pay Rs. 100 per period and there is no chance of default. ) b. If a loan has a nominal rate of 10 percent, then the effective rate can never be less than 10 percent. c. If there is annual compounding, then the effective, periodic, and nominal rates of interest are all the same. d. Answers a and c are correct. e. All of the answers above are correct.