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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:

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FORMATTING GUIDELINES:

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

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

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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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tariq bhai ap kahan hai ahkir

jb solution ni daina hta tu sath likhty q hain assignmnt solution ? plz koi kr 2 30 marks ka sawal hy

itna tarsa rhy ho sb kash per e laita may

isi ko copy paste kr ln ?

Thanx to Allah Almighty 
have successsfully completed my assignment

THANKEW THANKEW FAIZAN RAZA 4 UPLOADING SOLUTION OV MGT201....

TNKS MR FIZAN . MAY ALLAH BLESS U WITH MALE BABY. HEHEHEHEHE CHALO MAGNAM KE SPORT GADE KE DWA DATAIN HA APKO WO APKE NEKAL A JAYA

100% Correct solution of MGT201 2nd Assignment by +♦6^6 FAIZAN RAZA...:
)


1a)

Company                               Amount Invested             Expected return

silver marketing                               172,000                      .18

Sumi incorporation                           165,000                       .15

Star Leather                                   196,000                       .20

Alpha bank                                     150,000                       .13

Newland Foods                                180,000                       .16

Standard Cement                             200,000                       .17

Total                                                    1,063,000

Expected portfolio return= 172,000/1063,000*.18+165,000/1063,000*.15+196,000//1063,000*.20+150,000/1063,000*.13+180,000/1063,000*.16+200,000/1063,000*.17

=.1667 or 16.67%

1b)

Company                               Amount Invested             Expected return

silver marketing                               172,000                      .18

Sumi incorporation                           165,000                       .15

Star Leather                                   196,000                       .20

Alpha bank                                     300,000                       .13

Newland Foods                                180,000                       .16

Standard Cement                             200,000                       .17

Total                                                    1,213,000

Expected return = 

172,000/1213,000*.18+165,000/1213,000*.15+196,000/1213,000*.20+150,000/1213,000*.13+180,000/1213,000*.16+200,000/1213,000*.17

=.1620 or 16.20%

1c) Impact of doubling the investment is negative as the volume of the total investment is increased.

2a)

Cost of Equity  =  (Next Dividend per share/Market value of share)+growth rate

Cost of Equity = [2*(1+.10)/32]+.10

Cost of Equity = 16.88%

2b)

WACC = E/v*Re + P/V*Rp + D/V*Rd(1-TC)

WACC = (12,000,000/24,000,000*.1688) + (4,000,000/24,000,000*.11) + (8,000,000/24,000,000*0.12*.65)

WACC = 12.87%

2c)

The proposed project is not feasible to undertake as its rate of return is lower to the company's Wacc.

That's it....

 

Diclaimer:

Solution is uploaded by  +♦6^6 FAIZAN RAZA. Neither me, nor the admin of the forum is responsible for the result based on the solution provided. you must proud n thankful to the owner of this site.

Thanks with Regards,

 +♦6^6 FAIZAN RAZA

MBA 3.5 5th semester

Blessed member of VUstudents.ning.com

stay tuned with this forum....



Read more: 100% Correct solution of MGT201 2nd Assignment by +♦6^6 FAIZAN RAZA... http://vustudents.ning.com/group/mgt201financialmanagement/forum/to...

you are required to calculate Rate of equity in first part. which will b calculated by employing Gordon dividend growth model. formula of which is:

Re = {Do x(1+g)/Po}+ g

you have all the figures in question just put the fig in above formula you will have Cost of Equity(Re)

then in b your asked to calculate WACC, formula is E/v*Re+P/v*Rp+D/V*Rd*(1-tax rate)

E=12m

V=24m(12m+4m+8m)

Re=16.88% (calculated in a)

P=4m

Rp=11% (given)

D= 8m

Rd=12% (given)

Tax rate is 35% also given

Just put the fig n enjoy the value of WACC

RE FORMULA IS:

Re = {Do x(1+g)/Po}+ g

 

first question allocate weight with investment. use this formula

E(R) = w1R1 + w2R2 + ...+ wnRn

Cost of equity will find through Gordon divident growth model. I hope this will help all

 2nd question  include preffered stock which have little different formula which i past here

WACC = Wd x Rd (1-T) + We x Re + Wp x Rp

WACC = E/V × Re + +P/V*Rp +D/V × Rd × (1 - Tc)
= 12,000,000 / 24,000,000 x 16.875% +4,000,000/24,000,000 x 11%+ 
8,000,000/24,000,000 x 12% (1-35%)
= 0.5 x 0.1687 +0.1667 x 0.11 +0.333 x 0.12 ( 1-0.35)
= 0.08435 +0.01833 +0.0399 x 0.65 
= 0.08435 +0.01833+ 0.02599
= 0.1287 = 12.87%

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