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SPRING 2013

FINANCIAL MANAGEMENT (MGT201)

ASSIGNMENT #2

DUE DATE: 04 JULY, 2013                                                                                      MARKS 30

A SPECIAL NOTE:

Dear Student,

Here is the last assignment for your course of MGT201. Before comprehending and attempting the assignment, we would like you to note some of the following important points:

 Graded activities (Assignments/GDBs) are always designed to enhance and assess your conceptual knowledge so it is advisable to put your genuine efforts towards its attempt. You may, however, consult your study resources or to anyone who has requisite financial expertise but the solution should be prepared wholly and solely by you.

 Always remember that copied/cheated solutions not only spoil your grade and but also your knowledge so keep yourself at a safe distance from ready-made and substandard solutions.

 Read the assignment question twice, thrice or even more times in order to comprehend it in its true spirit before preparing its solution. Believe it that you are capable enough to prepare the solution by yourself so just give it a try.

 While preparing your solution, pay your full attention towards the requirements of the assignment and wherever you feel any difficulty, just email us at mgt201@vu.edu.pk. We’ll always be there for your guidance.

LEARNING OBJECTIVES:

After attempting this assignment, the students would be able to:

 Calculate the weights of different investments in a portfolio.

 Calculate the expected return on a portfolio.

 Calculate the weighted average cost of capital for a firm.

 Compare the WACC with the rate of return on any project.

PROBLEM # 1: (15 Marks)

Ms. Nabila invests the following amounts of money in common stocks having expected returns as follows:

Company

Amount Invested

(Rs.)

Expected

Return

Silver Marketing

172,000

0.18

Sumi Incorporation

165,000

0.15

Star Leather Manufacturers

196,000

0.20

Alpha Bank Limited

150,000

0.13

Newland Foods

180,000

0.16

Standard Cement

200,000

0.17

Required:

(a) Calculate the expected return on Ms. Nabila’s portfolio? ( 7 Marks )

(b) What would be the expected return on portfolio if she doubles her investment in Alpha Bank Limited while keeping everything else the same? ( 7 Marks )

(c) What impact this increase of investment in Alpha Bank Limited would have on the expected return of portfolio? Justify your answer with logical reasoning. ( 1 Mark )

PROBLEM # 2: (15 Marks)

Standard Corporation has recently been formed to manufacture leather bags. It has the following components in its capital structure.

(Rs.)

Common Stock

12,000,000

Preferred Stock

4,000,000

Debentures (Debt)

8,000,000

The firm has just paid the dividend of Rs. 2 per share and there is an expected annual growth rate of 10 percent in dividends. The firms’ stock has been priced at Rs. 32 per share. Standard Corporation is currently yielding 12 percent on its debt and its cost of preferred stock is 11 percent. The company has a marginal tax rate of 35 percent.

Required:

(a) Compute the cost of equity for Standard Corporation. ( 5 Marks )

(b) Compute the firm’s weighted average cost of capital (WACC). ( 8 Marks )

(c) Based on the result computed in part (b), should the firm undertake a project having 11 percent rate of return? Support your answer with conceptual rationale. ( 2 Marks )

Please read the following instructions carefully before preparing the assignment solution:

 Do prepare the solution after completely reading and understanding the questions.

Put your genuine efforts in order to understand the concepts thoroughly.

Provide complete calculations for all parts of the questions.

24 hours extra/grace period after the due date is usually available to overcome uploading difficulties. 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.

DEADLINE:

 Make sure to upload the solution file before the due date on VULMS.

 Any submission made via email after the due date will not be accepted.

FORMATTING GUIDELINES:

 Use the font style “Times New Roman”, “Arial” or “Garamond” and font size “12”.

 It is advised to compose your document in MS-Word format.

 You may also compose your assignment in Open Office format.

 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 is submitted after the due date.

 The file you uploaded does not open or is corrupt.

 It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.

 It is cheated or copied from other students, internet, books, journals etc.

----------------------------< GOOD LUCK >----------------------------

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Replies to This Discussion

hina help me

yahe poch rae hun investment increase karnay se return decrease ho raha hai

bahi yh 1213000? just alpha ki double krny sy tu 

1063000 ati hy tu yh kahn sy ?

mtlb phir sy total b krna hy double kr k b nd single b

bhai listen me ny figures confrm krny hy chat me show q nhe ap :'(

faizan bro. plz 

wacc ?? nai smaj aa rahi

baqi ho gya aur 1st qusn main 100 sy multiply ki kahas reason? plz hep yr

172000/1063000*100 is hundrd ki 

thn return sy multy ply

KINDLY UPLOAD THE COMPLETE SOLUTION FAIZAN RAZA....THANKEW

no abdul just divide and thn multiply with rate

hahaha.

         bas 1c mein b kuch jhoot sach likh hi dia ha.. 

           hopefully theik e hoga.

faizan yar file hi upload kr 2 plz

1c kya likha haii ye batao ???

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