Q No. 1Sarfaraz Ahmed is negotiating sports employment contract. His opportunity cost is 12%. He has been offered three possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

Contract

Year 1

Year 2

Year 3

Year 4

Contract 1

3 Million

3 Million

3 Million

3 Million

Contract 2

2 Million

3 Million

4 Million

5 Million

Contract 3

7 Million

1 Million

1 Million

1 Million

As his financial adviser, which contract would you recommend that he accept? (Total Marks 2.5)

Q No. 2 Assume that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, "Expansion Zone North" and "Expansion Zone East". The initial cost of each project is Rs. 10,000. Company discount all projects based on WACC. Further, all the projects are equally risky projects and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is $2.0, its expected that they will grow at the constant growth rate of 8%, and the company's common stock sells for $20. The tax rate is 50%.

The cash flows of both the projects are given in table below:

Time

Expansion Zone North

Cashflows (amount in Rs.)

Expansion Zone East

Cashflows (amount in Rs.)

0

-10,000

-10,000

1

6,500

3,500

2

3,000

3,500

3

3,000

3,500

4

1,000

3,500

Carefully analyze the above table and answer the following questions in detail.

I.Calculate the weighted average cost of capital for this firm? (2.5 marks)

II.Compute each project's IRR, NPV, payback, MIRR, and discounted payback. (2.5 Marks)

III.Which project(s) should be accepted if they are mutually exclusive? Explain (1.5 Marks)

IV.Which project(s) should be accepted if they are independent? Explain (1.5 Marks)

Q No. 3Explain Why you agree or disagree with the following statements. The answer should not be more than three sentences. Be specific in your answer and write only the most relevant explanations

a.If a bond sells at a discount, yield to call is more likely to occur.

b.A firm should select the capital structure that is fully unlevered.

c.Leveraged beta represents fundamental operational risk.

d.All other things held constant; the future value of an ordinary annuity is always having a higher future value than annuity due.

e.MM Proposition I with no tax supports the argument thata firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.