Beruflich Dokumente
Kultur Dokumente
[N.B. – Questions must be answered in English. The figures in the margin indicate full marks. Examiner will
take account of the quality of language and of the way in which the answers are presented. Different
parts, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. (a) What is Efficient Market Hypothesis (EMH)? Explain the differences between three forms of
EMH. 4
(b) Konika Ltd. is considering manufacturing a new product. This requires machinery costing Tk.
20,000 with a life of four years and a terminal value of Tk.5,000. Profits before depreciation
from the project will be Tk.8,000 per annum. An investment of working capital of Tk.2,000
will be required for the duration of the project.
Tax allowances on the machine are 25% p.a. reducing balance. At the end of the project’s life
a balancing charge or allowance will arise equal to the difference between the scrap proceeds
and the tax written down value.
Tax is payable at the rate of 35%. Tax cash flows on profits occur in the same year as the
profits giving rise to the tax charge.
The cost of capital is 15%.
Should the project be accepted? Show your justifications. 6
(c) Tarana Pharmaceutical Company may buy DNA testing equipment costing Tk.60,000. This
equipment is expected to reduce clinical staff labour costs by Tk.20,000 annually. The
equipment has a useful life of 5 years, but falls in 3-year property class for cost recovery
(depreciation) purposes. No salvage vale is expected at the end. The corporate tax rate for
Tarana is 38 percent, and its required rate of return is 15 percent. (If profits before taxes on
the project are negative in any year, the firm will receive a tax credit of 38 percent of the loss
in that year.) On the basis of this information, what is the net present value of the project? Is
it acceptable? 4
(d) In Problem 1(c), suppose 6 percent inflation in labour cost savings is expected over the last 4
years, so that savings in the first year are Tk.20,000, savings in the second year are Tk.21,200
and so forth.
(i) If the required rate of return is still 15 percent, what is the net present value of the
project? Is it acceptable? 3
(ii) If the working capital requirement of Tk.10,000 were required in addition to the cost of
the equipment and this additional investment were needed over the life of the project,
what would be the effect on net present value? (All other this are the same as in part i.) 3
Required:
(a) Calculate the cost of each source of financing, as specified: 5
(1) Long-term debt, first Tk.450,000.
(2) Long-term debt, greater than Tk.450,000.
(3) Preferred stock, all amounts.
(4) Common stock equity, first Tk.1,500,000.
(5) Common stock equity, greater than Tk.1,500,000.
(b) Find the break-even points associated with each source of capital, and use them to specify
each of the ranges of total new financing over which the firm’s weighted average cost of
capital (WACC) remains constant. 4
(c) Calculate the weighted average cost of capital (WACC) over each of the ranges of total new
financing specified in part (b). 4
(d) Using your findings in part (c) along with the investment opportunities schedule (IOS), draw the
fims’s weighted marginal cost of capital (WMCC) and IOS on the same set of axes (total new
financing or investment on the x axis and weighted average cost of capital and IRR on the y axis). 4
(e) Which, if any, of the available investments would you recommend that the firm accepts?
Explain your answer. 3
3. (a) What is an efficient portfolio? What are the limitations of portfolio theory analysis? 3
(b) You have identified two quoted shares which you believe will exhibit negative correlation in
their possible returns over the next year, as follows:
State Probability Predicted rate of return
X Y
A 0.30 25% 14%
B 0.45 22% 18%
C 0.25 12% 20%
The End