
Total Marks 5
Starting Date Friday, May 29, 2020
Closing Date Wednesday, June 03, 2020
Status Open
Question Title Capital Budgeting Analysis
Question DescriptionTopic: Capital Budgeting Analysis
Objective: After attempting this activity, students will have better understanding of capital budgeting rules and thus will be able to calculate incremental cash flows with more accuracy for capital budgeting analysis.
Background:
During capital budgeting analysis, analysts have to keep certain rules in mind to calculate incremental cash flows while determining the financial viability of a project. If any of these rules is ignored, it may lead to wrong evaluation. For example, a capital budgeting rule says that after tax cash flows should be considered for evaluation because company’s value is based on the cash flows which it is going to keep, not on those which are sent to the government.
A company, in order to assess the understanding of its internees regarding these rules, presented the following scenario in front of them:
Company is evaluating a project of worth Rs. 5 million by hiring services of an expert analyst. Company promised to pay him Rs. 300,000 for his consultancy, however, will pay only Rs. 100,000 if evaluation depicts that project is not financially viable. Networking capital of Rs. 150,000 will be required in first year of the project. Salvage value of the project is Rs. 250,000 while project life is 5 years.
Requirements:
In the light of above given information, company then asked to answer the following:
What will be the irrelevant cost for the project (mention value of the cost as well)? What will be treatment of networking capital and salvage value while calculating incremental cash flows over the life of project? Financing cost that the company has to bear for this project is 15%. Whether it will be considered relevant while calculating incremental cash flows? Explain by providing logical reasoning.Important Note:
It is advised to consult all the related material including recommended book, updated PPTs of related lectures to get complete understanding of the topic.
Important Instructions:
Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB. Your discussion must be based on logical reasoning and to the point. Avoid irrelevant discussion and unnecessary information. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references. Obnoxious or ignoble answer should be strictly avoided. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via email, will not be replied till the due date of GDB. For Detailed Instructions, please read the GDB # 01 announcement 
SEMESTER Fall 2019
Corporate Finance (FIN722)
Assignment for Post Mid
Due Date: January 14, 2020
Topic: Inventory Management
Learning Outcome: After attempting the assignment, students will be able to
Learn the concept of different costs involved in managing the inventory by a business
Learn to work out total and per unit inventory cost
Background:
Marks: 20
Best Sports Limited (BSL) is renowned for manufacturing sport’s accessories. Company manufactures export quality sport’s bands, bags and gloves. To maintain the quality standards of their products, company is very much concerned about the quality of raw material used in production. After observing the annual demand of its products, it is estimated that production department requires 120,000 kg raw material on annual basis to fulfill the demand. For this, company short listed two of its best suppliers who quoted the following costs:
Raw material Cost (Purchase Price): Rs. 130 / kg
Order Cost: Rs. 110 / order
Additional Information:
Holding cost that the company will have to bear is 3% of the purchase price.
Moreover, supplier A has offered no discount while the supplier B has offered 2% discount if
minimum order size is not less than 8000kg.
Requirements:
Suggest which of the suppliers (A or B) company should choose and for this, you must need to provide the working of following:CalculateEconomicOrderquantity(EOQ)andtotalnumberofordersperyear
Calculate total cost and per unit cost if company chooses supplier A. 3. CalculatetotalcostandperunitcostifcompanychoosessupplierB.
Calculate total annual saving (or loss) based upon the working of part 2 & 3. Note: Provide complete detailed working for each part.
Important Instructions:
Working of each missing value carries certain marks so, it is necessary to provide detailed working of each value to avoid any inconvenience.
Before attempting the assignment, it is advised to consult the relevant lectures, recommended book(s) and the additional material. This additional material has also been provided on VULMS in different lessons. You can view these supplements on VULMS under the link of “lessons” along with PPTs.
Other Important Instructions:
Please also read the following instructions carefully before attempting the assignment solution.
Deadline:
Make sure that you upload the solution file before the due date. No assignment will be accepted through email after due date once the solution has been uploaded by the instructor.
Formatting guidelines:
Use the font style “Times New Roman or Arial” and font size “12”.
It is advised to compose your document preferably in MSWord.
Use black and blue font colors only.
Rules for Marking
Please note that your assignment will not be graded or graded as Zero (0) if:
It has been submitted after due date.
The file you uploaded does not open or is corrupt.
Only in the case of Assignment, 24 hours extra / grace period after the due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.
Note related to load shedding: Please be proactive
Dear students!
It is cheated or copied from other students, internet, books, journals etc. Note:As you know that semester activities have started and load shedding problem is also prevailing in our country now a days. Keeping in view the fact, It is requested to all of you to manage to post your activities as early as possible and don’t wait for the due date. For your convenience activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs.

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?

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?
FIN722 Assignmnet 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?

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. 36,000Lecture # 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 (1T)
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 (1T)
WACC= 0.550.15 + 0.0.050.0727+ 0.40*0.06
WACC= 0.0825 + 0.003635+ 0.024 = 0.1101 or 11.01%