IBF Final Paper

Q.1 What is the approximate annual cost to forgo the cash discount of “3/10, net 45” after the first ten days? If the interest rate charged on debt by banks is 18%, should the firm avail the discount or let it go? Why you choose this answer, one line reason.

Q2 Zeal Pak Cement is considering the purchase of a new machine to enhance productivity and ensure timely completion of export orders.  The machine will cost Rs 1,500,000 plus Rs 100,000 for shipping and installation cost. Financial Analyst forecasts that revenues will increase by Rs 500,000 for each of the next 5 years. The discount rate is 11%

  1. Calculate Initial Cash Outflow.
  2. Find payback period. If the cut-off period is 4 years, should the project be chosen? Why you choose this answer? One line reason
  3. Find discounted payback period. If the cut-off period is 4 years, should the project be chosen? Why you choose this answer? One line reason
  4. Decide should this project be accepted as per NPV rule. Why you choose this answer? One line reason
  5. Decide should this project be accepted as per IRR. Why you choose this answer? One line reason
  6. Decide should this project be accepted as per Profitability Index. Why you choose this answer? One line reason

 

Q3 Kamal Shoes has taken debt of Rs 20 million at the rate of 20% from MCB and another debt of Rs 20 million from HBL at 20%. The company has obtained equity financing through issuance of stocks. Total size of equity is 50 million. Analysts think that the appropriate risk premium for Kamal Shoes is 7%. Other information includes following details. Kamal Shoes has currently paid a dividend of Rs 3 per share. The market price of stock of Kamal Shoes is Rs 50. The expected constant growth rate in dividend is 5% which will remain same throughout the period of analysis.

  1. Calculate cost of equity under Dividend Discount Model.
  2. Calculate cost of equity under Cost of Debt plus Risk Premium Approach.
  3. Calculate Weighted Average Cost of Capital using different estimated values of cost of equity under part a and b.

 

Q 4 List any 5 companies whose current market price is now below par value (usually Rs 10) and 5 companies whose stock price is above Rs 100 (Hint: Visit Pakistan Stock Exchange Website https://dps.psx.com.pk/ and sort the data by last day closing price, i.e. LDCP).

 

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