Solved Mid Term CF Oct 2014
Bahria University
Islamabad Campus
SOLVED/PINK PAPER Midterm Examination (Fall-2014)
Department of Management Sciences
Instructor Name: Ajab Khan Burki
Program: MBA-3BCD Course: Corporate Finance
Date: October 30, 2014. Time Allowed: 1-1/2 Hrs
Max Marks: 25 Time: 05:30-07:00 PM
Instructions: Attempt all questions. Formula sheet is NOT allowed. Q#01:
Mr. Micheal John, an analyst with Fert Corporation, is estimating a country risk premium to include in his estimate of the cost of equity for a project Fert is starting in Malaysia. Micheal has compiled the following information for his analysis:
Malaysian U.S. dollar-denominated 10-year government bond yield= 9.6%.
10-year U.S. Treasury bond yield= 5.2%.
Annualized standard deviation of Malaysian stock index = 35%.
Annualized standard deviation of Malaysian U.S. dollar-denominated 10-year government bond = 26%.
Project beta = 1.27.
Expected market return = 12.5%.
Risk-free rate = 5.3%.
Calculate the country risk premium and the cost of equity for Omega's Malaysian project.
Solution:
CRP=[0.09-.052][.35/.26]=0.05115
Cost of equity = 0.053+1.27[.125-.053+.05115]=0.2094 OR 20.94%
Q#02:
Hamad and co. is investing PKR 500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is PKR750 million. Hamad and Co., currently has 100 million shares outstanding, with a current market price of PKR 45 per share. Assuming that this project is new information and is independent of other expectations about the company, calculate the effect of the new equipment on the value of the company and the effect on company’s stock price.
Solution:
NPV of the new printing equipment project = $750 million - $500 million = $250 million.
Value of company prior to new equipment project=100 million shares x $45 per share = $4.5 billion.
Islamabad Campus
SOLVED/PINK PAPER Midterm Examination (Fall-2014)
Department of Management Sciences
Instructor Name: Ajab Khan Burki
Program: MBA-3BCD Course: Corporate Finance
Date: October 30, 2014. Time Allowed: 1-1/2 Hrs
Max Marks: 25 Time: 05:30-07:00 PM
Instructions: Attempt all questions. Formula sheet is NOT allowed. Q#01:
Mr. Micheal John, an analyst with Fert Corporation, is estimating a country risk premium to include in his estimate of the cost of equity for a project Fert is starting in Malaysia. Micheal has compiled the following information for his analysis:
Malaysian U.S. dollar-denominated 10-year government bond yield= 9.6%.
10-year U.S. Treasury bond yield= 5.2%.
Annualized standard deviation of Malaysian stock index = 35%.
Annualized standard deviation of Malaysian U.S. dollar-denominated 10-year government bond = 26%.
Project beta = 1.27.
Expected market return = 12.5%.
Risk-free rate = 5.3%.
Calculate the country risk premium and the cost of equity for Omega's Malaysian project.
Solution:
CRP=[0.09-.052][.35/.26]=0.05115
Cost of equity = 0.053+1.27[.125-.053+.05115]=0.2094 OR 20.94%
Q#02:
Hamad and co. is investing PKR 500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is PKR750 million. Hamad and Co., currently has 100 million shares outstanding, with a current market price of PKR 45 per share. Assuming that this project is new information and is independent of other expectations about the company, calculate the effect of the new equipment on the value of the company and the effect on company’s stock price.
Solution:
NPV of the new printing equipment project = $750 million - $500 million = $250 million.
Value of company prior to new equipment project=100 million shares x $45 per share = $4.5 billion.