FIN722 Assignment 1 Solution and Discussion

Short Questions
Following are few short questions covering some topics from premid content of this course. Main purpose of this activity is to help students in preparation for their midterm examinations. While attempting this assignment, need to keep following points in your mind:
Mark will be awarded only if answer is correct
So each question carries only 1 mark and thus total marks of this activity are 5.
Although working does not carry any mark, however, working will help you to understand
the complete concept and may ultimately be fruitful in your preparation for midterm.
It is strongly recommended to consult the video lectures and PPTs for successfully
attempting this activity
Important Note: It is appreciable to upload the solution file on VULMS of the course against assignment # 1 till December 5, 2019. However, you will also be provided with 1 day grace period i.e. in case you missed to upload the solution till due date, you can avail grace day and can upload the solution file till December 6, 2019.
Following are the questions:
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?
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?
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?
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?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?