ACC501 Practice Questions Lectures 19-45

ACC501 – Business Finance · (Lesson # 19 – 45) · IMPORTANT INSTRUCTIONS:

Dear Students,

• You are required to solve/attempt all the questions on your own. DO NOT send the solution of any question to the teacher via Email or MDB because the solution file will also be uploaded in a few days. (Any query relevant to these questions will be addressed in the upcoming interactive live session of the course.)
• You must consult the relevant lesson before attempting any question. In case you have any problem while attempting the question, you may note it down for the discussion in the upcoming interactive live session. DO NOT send any questions through MDB or Email.
• Once the solution file is uploaded, you may compare your attempts with the actual solution of the questions.
• The questions provided in this file are solely for practice purposes. If you try to attempt/solve these questions with due attention, you may be able to attempt the numerical questions in exam as well.
• For practicing MCQs, you are advised to attempt the ‘Formative Assessment Quizzes’ available in the “Reading” tab of Lessons # 22, 27, 32, 36 and 45.
• As far as theoretical questions are concerned, you are advised to watch video lectures carefully and consult the handouts along with recommended book(s).

Good Luck,

Instructor ACC501

(Lesson # 19 – 45)

1. The nominal rate is 12%, and the inflation rate is 5%. Find out the real rate according to Fisher’s formula.

Q2. Suppose XYZ Company issues a 3-year zero coupon bond with a face value of Rs. 5,000. The initial price is set at Rs. 3,043 with a yield to maturity of 18%. What will be the value of implicit interest expense in each year?

3. Estimate the real rate with the help of the Fisher effect equation if: the nominal rate is 11% and the inflation rate is 4%.
4. Calculate the price of a share of stock of ABC Corporation if it pays Rs.25 per share dividend every year. This policy continues indefinitely, and the required rate of return is 20%.

Q5. In both the cases given below, what will be the current price of stock?

1. If ABC company on its shares is giving a fixed dividend of Rs. 16 per share per annum which will continue indefinitely with a required rate of return of 24%.
2. If XYZ Company on its shares is giving a dividend of Rs. 13 per share with 26% required rate of return; it is expected that after one year these shares will be worth Rs. 120.

Q6. Suppose Ali Corporation has a policy for paying Rs. 70 as a dividend per share each year. If the policy seems to be continued for an infinite period, what would be the value of share stock with the required rate of return of 45%?

Q7. Ali Corporation has just paid a dividend of Rs.3 per share. The dividend of this company grows at a steady rate of 7% per year. What will be the dividend in 5 years?

8. Ali Corporation pays a Rs. 9 per share dividend a year from today. If the dividend grows at a steady rate of 5% per year, what will be the dividend per share at the end of each of the first two years? (Note: Dividend is paid at the end of the first year)

Q9. Suppose that the current dividend is Rs.3.5, the discount rate is 11% and the dividend grows at a constant rate of 4%. What is the current price of this stock?

10. In case, a current dividend is Rs. 3.20, the discount rate is 11% and the growth rate is 4%. Calculate the dividend and stock price in 5 years.

Q11. If a firm’s common stock currently pays an annual dividend of Rs. 2.10 per share, while the required return on the common stock is 11 percent. Estimate the value of common stock when:

1. Dividends are expected to grow at an annual rate of 0 percent to infinity.
2. Dividends are expected to grow at a constant annual rate of 6 percent to infinity.
3. Calculate the current stock price (Po) and stock price after one year (P1) of Ali Corporation with the help of the following information:

D1 · g · R

For current period 5% 13% For future period (after 1 year) 8% 15%

13. The stock of Ali Corporation is selling for Rs.25 per share. The next dividend is Rs.1.7 per share and it is expected to grow by 11% indefinitely. Compute the return offered by this stock.
14. Ali Corporation is selling its stock for Rs. 25 per share. The next dividend is Rs.1.5 per share and the required rate of return is 16%. Compute the capital gains yield.

Q15. If a stock is selling for Rs. 30 per share; the next dividend is Rs. 1.5 per share; and it is expected to grow by 11% more or less indefinitely. What dividend yield, capital gain yield, and total return this stock can offer?

Q16. If a project will generate cash flows of Rs. 10,000 for next 7 years; for which initial investment is required of Rs. 40,000. What will be the Net Present Value (NPV) of the project at a discount rate of 12%? Is it feasible to invest in this project?

17. The expected cash flows over the 3-year life of a Project are Rs.2,500, Rs.4,500, and Rs.6,000 respectively. The project cost is Rs.7,000. Compute NPV given that the discount rate is 10%.

Q18. If a project has a total up-front cost of Rs.70,000; while the cash flows are Rs.35,000 in the 1st year, Rs.25,000 in the 2nd year, and Rs.30,000 in the 3rd year. What would be the NPV of the project at a discount rate of 10%? Is the project feasible?

19. Compute the Average Accounting Return for the project having a cost of Rs. 600,000 with a life of 5 years and zero salvage value. Revenues are given below:

Years

Net Income (Rs.) 160,000 200,000 150,000 120,000 100,000

20. Calculate the IRR for the project which has an initial investment of Rs. 90 million and is followed by the cash flow of Rs. 35 million in year 1, Rs. 45 million in year 2, and Rs. 25 million in year 3. Also, specify whether the project is feasible or not if the required rate of return is 12%. (Note: Show complete working of the trial-and-error method with interpolation formula.)

Q21. A project generates cash flows of Rs. 600, Rs. 800, and Rs. 1,000 for year 1, year 2, and year 3 respectively. What is the payback period for the project if there is an initial cost of Rs. 2,400?

22. An investment costs $75 and the present value of future cash flows is $150. Compute and interpret the Profitability Index (PI) for this investment.
23. Calculate the projected operating cash flows of a project if EBIT, Depreciation, and Taxes are given as Rs. 30,000, Rs. 15,000, and Rs. 10,000 respectively.