**Solution of Graded Activity for Pre Mid**

**Lecture # 9**

Q1: What will be cost of equity if a company has paid a dividend of Rs. 4 at constant growth rate of 4% while stock’s current price is Rs. 60?

ke = ( D1 / P0 ) + g Where

D1 (Expected div.)= D0 (1+g)

ke = (4*1.04/60)+0.04 ke = 0.0693 + 0.04

ke = 0.1093 or 10.93%

**Lecture # 12**

Q2: Output level is 8,000 units with variable cost of Rs. 6 per unit and total fixed cost Rs. 60,000. If sale price is Rs. 9 per unit then what will be the profit / loss?

Total cost = Total FC + Total VC

Total cost = 60,000 + (6*8,000)

Total cost = 60,000 + 48,000 = Rs. 108,000

Total revenue = Sale price * Output level Total revenue = 9 * 8,000 = Rs. 72,000

Profit / loss = Total revenue – total cost = 72,000 – 108,000 = Rs. -36,000 There is a loss of Rs. 36,000

**Lecture # 14**

Q3. Suppose a portfolio consists of three projects A, B & C where each project requires an initial investment of Rs. 65,000. If present value of cash flows of projects A, B & C is Rs. 80,000, Rs. 73,000 and Rs. 82,000 then what will be ranking of each project based upon profitability index criterion?

Projects
Initial Investment (Rs.)
PV of cash flows (Rs.)
PI = (PV/Initial Investment)
Ranking
A
65,000
80,000
1.23
2
B
65,000
73,000
1.12
3
C
65,000
82,000
1.26
1

**Lecture # 15**

Q4: There are two states of economy, Boom & Recession. Probability of occurrence of Boom is 45% while Recession is 55%. Suppose stock A expected return in Boom (state of economy) is 12% while in Recession is 7%. Stock B expected return in Boom (state of economy) is 20% while in Recession is 3%.

If an investor invests 70% in stock A and 30% in stock B then what is the total expected return of the portfolio?

Total Expected return (Stock A) = 0.120.45 + 0.070.55

Total Expected return (Stock A) = 5.4% + 3.85% = 9.25%

Total Expected return (Stock B) = 0.200.45 + 0.030.55

Total Expected return (Stock B) = 9% + 1.65% = 10.65%

Total Expected Return (portfolio) = 0.70 * 0.0925 + 0.30*0.1065

Total Expected Return (portfolio) = 0.06475 + 0.03195 = 0.0967 or 9.67%

**Lecture # 18:**

Q5: A capital structure consists of 10% preferred stock, 55% common equity and 40% debt. Company’s preferred stock is currently selling for Rs. 55 per share and paying dividend of Rs. 4. If cost of common equity is 15% and after tax cost of debt is 6% then what will be WACC?

Cost of preferred stock **(Kps) = D / P**

Kps = 4/55 = 7.27%

WACC=Wce * Kce + Wps * Kps + Wd Kd (1-T)

WACC= 0.550.15 + 0.100.0727+ 0.400.06 WACC= 0.0825 + 0.00727+ 0.024 = **0.1138 or 11.38%**

Note: A solution with weightage of 5% of preferred stock will also be considered correct WACC=Wce * Kce + Wps * Kps + Wd Kd (1-T)

WACC= 0.550.15 + 0.0.050.0727+ 0.40*0.06

WACC= 0.0825 + 0.003635+ 0.024 = **0.1101 or 11.01%**