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Q#1
On January 1 2020, Farhan Limited has issued 12% bonds with par value Rs 750,000 and
redemption value Rs 825,000, with interest payable half yearly. The redemption yield on the bonds
is 4% half yearly. The bonds are redeemable on June 30, 2023. The market value of the bond is
_________?

Year 0 1 2 3 4 5 6 7
PV factor at 4% 1 0.962 0.925 0.899 0.855 0.822 0.79 0.76

A) Rs 877,521
B) Rs 857,425
C) Rs 885,039
D) Rs 897,025

Q#2
Following are the expected figures for the next period of Falak Limited:

Rs in Millions
Sales 45
Materials (27)
Other costs (9)

Following are relevant ratios Days

Inventory days 35
Receivable days 50
Payable days 45

What will be the working capital required for the next year?

A) 5.13 million
B) 5.39 million
C) 5.42 million
D) 5.96 million

Q#3
Al-Wahid Industries Ltd desired to acquire 100% shares in AL-Maalik ltd. Both companies operate
in the same industry and have similar gearing levels of 17%. Cost of equity of Al-Wahid industries
Ltd is 21%. Al-Wahid Industries Ltd has estimated that the takeover will increase its annual
cashflows over the next few years by the following amounts:

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Rs in Million
After tax (But before interest
Year cashflows)
2021 29.4
2022 37.2
2023 40.8
2024 60.7

Al Maalik has 8% irredeemable debentures of Rs. 77 million trading at par. Tax rate is 29%.
If Al-Wahid ltd makes a bid of Rs 195 million for the entire share capital of Al Maalik Ltd, it would
increase the shareholder’s wealth by_______?
(Hint: Use free cash flow to equity (FCFE) of the target company (i-e cashflows after interest)]

Year 0 1 2 3 4
PV factor at 21% 1 0.826 0.683 0.564 0.467
A Rs. 21.81 million
B Rs. 19.61 million
C Rs. 22.44 million
D Rs. 20.07 million

Q#4
Elite Manufacturing Ltd is considering to reduce its production startup cost by manufacturing
longer runs of the same product. Estimated Savings from the increase in efficiency are Rs 260
million per year. However, inventory turnover will decrease from eight times a year to 50 times a
year. Costs of goods sold are Rs 48,000 million on an annual basis. The required rate of return on
investment in inventories is 15 percent. The opportunity cost is greater/lower than the savings
by_____?

A) 40 Million
B) 48 Million
C) 45 Million
D) 41 Million

Q#5
A company is about to pay dividend of Rs. 5 on its common stock. The shares are currently quoted
at Rs 56 each. The dividend is expected to grow at the rate of 6% per annum. The cost of retained
earnings for the company is _____?

A) 15.73%
B) 12.40%
C) 17.56%
D) 16.39%

Q#6

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The following information is available for ABC Company:

Rs in Millions
Capital expenditure 195.6
Debt repayment 211.4
Depreciation 90.8
Net profit before tax 824
Tax Rate 29%
Then free cashflow to equity is:

A) 260.6 Million
B) 240.5 Million
C) 268.8 Million
D) 298.3 Million

Q#7
In order to finance its new projects, Awami Company has offered 3 to 7 rights at Rs.50 per rights
share to its existing shareholders. Current market price of each share is Rs 67.50. Under this
condition, the Value of right is_____?

A) 12.25
B) 13.55
C) 14.20
D) 11.22

Q#8
Al-Wahid Limited wants to forecast its free cash flow for the next three years. Current free
cashflow along with expected annual increase in various items is as follows:

Rs in
Expected annual increase million
EBIT 5% 1500
Tax 30% of EBIT 450
Depreciation 4.50% 255
Capital expenditure 3% 450
Working Capital
requirement 3.50% 180

By what percentage will free cash flow have increased between now and the end of year 3?

A) 22.55%
B) 19.07%
C) 21.70%
D) 20.77%

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Q#9

Abid Ltd
Statement of finacial position
as at Dec 31,2019
Rs in
millions
Long term Assets 312.5
Long term Loans 162.5

The company has entered into a contract to supply goods to a big chain of super stores next year. To
honor this contract, substantial increase in production is required. Consequently, the company will
have to increase its long term assets by 20%.
Long term assets to long term ratio is required to be maintained at 2:1
What is the maximum amount of additional amount of long term loan that should be borrowed?

A) 33 Million Rs
B) 25 Million Rs
C) 35 Million Rs
D) 32 Million Rs

Q#10

Following is the data available for Alpha Limited in relation to Product X:

Monthly demands (units) 5000

Cost of finance per annum 12%
Rs.
Purchase price per unit 115
Storage costs per annum 35
Cost per order 450

Economic Order Quantity (EOQ) is______?

Q#11
Nabeel Limited has a debt finance totaling Rs 120 million at a pre-tax rate of 9%. There are 60
million equity shares with a current market value of Rs 55 each and an equity Beta of 1.22.
Corporate tax rate is 29%. Debt beta is 0. Asset beta is_______?

A) 1.19
B) 1.52
C) 1.28
D)1.81

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Q#12
Ammar Limited’s share is listed at Rs 40 per share. Required rate of return of the company is 10%.
Currently, the company is expected to pay dividends of RS.2 per share for the following year which
is expected to grow 4% annually. How much the share of the company is overvalued or
undervalued?

A) Rs. 13.33 overvalued

B) Rs. 15.67 undervalued
C) Rs 15.67 overvalued
D) Rs 13.33 undervalued

Q#13
Cuttlery products limited has earnings before interest and taxes of Rs 150 million. Tax rate is 29%.
Company’s required rate of return on equity in absence of borrowing is 20%. In the absence of
personal taxes, what is the value of company under Miller and Modigliani Model (MM Model) with
Rs 200 million in debt?

A) Rs 525.4 million
B) Rs 590.5 million
C) Rs 499.3 million
D) Rs 634.7 million

Q#14
Al-Wahid Ltd Company is planning to acquire all the outstanding stocks of Abdul Majid Limited
through an exchange of stock. Al-Wahid Ltd has offered Rs 125 per share in Abdul Majid Ltd.
Financial Information for the two companies is as follows:

Al Wahid Al Majid
Ltd Ltd
Net Income after tax (Rs) 105,000,000 22,000,000
Shares outstanding 12,000,000 4,500,000
Market price of stock (Rs) 250

Combined EPS is _______?

A) 8.912
B) 8.722
C) 8.611
D) 8.555

Q#15
Asif Limited’s current ratio is 0.75. It wants to improve this ratio by reducing the short-term loan.
To achieve this objective, the directors have directed to change credit terms from two months to
one and half months. This action will _______ operating cycle and _________ current ratio.

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A) Increase; Decrease
B) Increase; Increase
C) Decrease; Increase
D) Decrease; Decrease

Q#16
Kashif Limited has a perpetual debt, the market value of which is Rs 25 million. The marginal
corporate tax rate is 30%, the marginal personal tax rate on debt income is 20 percent, and the
marginal personal tax rate on stock income is 15%. The present value of the tax shield is ______?

A) 6.41 million
B) 5.82 million
C) 7.22 million
D) 6.98 million

Q#17
Investment limited, faced with the issue of limited financial resources, can initiate only few projects
though it has many lucrative proposals on hand. The cost of capital of the company is 20% per
annum. Following are the three most attractive products that have been shortlisted for further
evaluation:

Rs in millions
Cashflows
Project Time 0 Time 1 Time 2 Time 3
Alpha -660 220 620 320
Beta -780 110 775 410
Theta -810 410 715 380

It is expected that availability of the capital will be limited to Rs 1,600 million at commencement.
These projects are not divisible i-e they can not be accepted partly.
Rank the projects according to their respective profitability indexes.

A) Theta, Beta and Alpha

B) Alpha, Beta and Theta
C) Beta, Theta and Alpha
D) Theta, Alpha and Beta

Q#18
Cashflows relating to a project are as follows:

Rs in "000"

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Year Cashflows
0 (21,000)
1 (8,400)
2 29,400
3 25,200

The discounted payback period for a cost of capital of 20% is ______?

N 0 1 2 3
PV factor at 20% 1 0.833 0.694 0.579

A) 3.02 years
B) 2.81 years
C) 2.75 years
D) ?

Q#19
Suppose a Company has operating profits of Rs 35 million. It employs net assets of Rs 180
million and the market determined required return (WACC) is 12%. Economic Value Added (
EVA) is ____million?

A) Rs 35
B) Rs 21.6
C) Rs 4.2
D) Rs 13.4

Q#20
The Market Price of a 12% bond of nominal value Rs 100 is Rs 95 ex interest. The tax rate is
29%. Calculate the cost of its debt if the bond is irredeemable.

A) 8.84%
B) 8.97%
C) 10.82%
D) 9.99%

Q#21
Wasim Limited’s common stock has a present market share price per share of Rs 28. A 6 month
Call-option has been written on the stock with an exercise price of Rs 30. Presently the option
has a market value of Rs 3. At the end of the 6 months, you estimate the market price of the
stock to be Rs 24 per share with a probability of 0.1, Rs 28 with a probability of 0.2, Rs 32 with a
probability of 0.4, Rs 37 with a probability of 0.2, and Rs 43 with a probability of 0.1. What is the
expiration value of the option if that expected value of share price should prevail?

A) RS 2.50

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B) RS 2.90
C) RS 2.25
D) RS 2.85

Q#22
Following net cashflows relate to a project undertaken by Aakaash Limited:

Years
1 2 3 4 5
Cashflows ( Rs in millions) 150 250 400 450 300

Other Information:

Rs in millions
Initial investment in asset 1025
Residual value after 5
years 125

For depreciation use straight line method.

Return on Capital Employed using average capital invested is___________?

A) 12.68%
B) 24.70%
C) 22.61%
D) 18.25%

Q#23
Punjab Cement Ltd. Needs capital of Rs 315 million for its new projects. After a long deliberation,
the directors of the Company finally decided to offer right share to their current shareholders. The
current market price of each share is Rs.18 and rights price will be Rs 12 each.
The company is currently achieving a profit after tax of 25% on the Capital Employed, which is
expected to be maintained in the future as well. Capital structure of the company is as follows:

Rs in
millions
50 million ordinary shares of Rs 10
each 500
Retained Earnings 250
750

After rights issue, the EPS will be_________?

A) Diluted by Rs 0.89

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B) Increased by Rs 0.56
C) Diluted by Rs 0.26
D) Increased by Rs 0.92

Q#24
Assuming that annual lease payments are in advance, tick the amount of annual lease payment
given the following information:

Purchase Price Rs 46,000,000

Implicit interest Rate 11%
Lease period 6 years
Expected Residual Value Rs 3,000,000

A) RS 9,454,200
B) RS 9,954,500
C) RS 8,954,300
D) RS 9,054,700

Q#25
On the basis of following information, what will be WACC?

Cost of Equity 18%

Cost of Debt 9%
Market value of equity in the firm (Rs in
millions) 1,200
Market value of debt in the firm (Rs in
millions) 800
Tax rate 29%

A) 14.55%
B) 14.81%
C) 13.95%
D) 13.36%

Q#26
The risk-free rate of return is 9%. The average market return is 13%. Beta factor of a share is 0.8
and it is expected to earn an annual dividend of Rs 6, with no capital growth. Expected value of
share is_______?

A) RS 47.72
B) RS 49.18
C) RS 51.80
D) RS 45.36

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Q#27
The current market price of Awan Limited’s stock is Rs.20 and the exercise price of option is also
Rs.20. The option has 30 days to expiration and at the end of 30 days there is a:

- 0.3 probability that the stock will have a market price of Rs 10

- 0.4 probability that it will be Rs 20, and
- 0.3 probability that it will be Rs 30.

The expected value of the option at the end of 30 days is _______?

A) RS 30
B) RS 3
C) RS 4.5
D) RS 20

Q#28
Kardar sport Ltd is considering a new product line to supplement its range line. It is anticipated
that the new product line will involve cash investments of Rs 700,000 at time 0 and Rs 1 million in
year 1. After tax cash inflows of Rs 250,000 are expected in year 2, Rs 300,000 in year 3, Rs 350,000
in year 4, and Rs 400,000 each year thereafter through year 10. What is the project’s payback
period?

A) 6 YEARS
B) 5 YEARS
C) 6.5 YEARS
D) 5.5 YEARS

Q#29 (Descriptive)
Retained earnings can be used to finance the capital expenditure. However, using retained earning
as a means of capital expenditure has its own advantages and disadvantages. Mention them briefly.

Q#30 (Descriptive)
While taking an investment decision why do you think that using EPS to assess the performance of
the company is not worthwhile?

Q#31 (Descriptive)
Short-term financing is generally riskier than long-term financing. Nonetheless, it has some
significant advantages, which cannot be overlooked. You are requested to elucidate the advantages
of short term financing. (5 marks)

Q#32 (Descriptive)
A Company planning to grow by pursuing a policy of ‘organic’ internal growth, would need to take
into account certain factors. Explain these factors in brief. (5 marks)

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Q#33
Which one of the following is not a type of financial lease agreement?
A) Indirect leasing
B) Sale and Leaseback
C) Leveraged Leasing
D) None of these

Q#34
How can a firm provide margin of safety if it cannot borrow on short notice to meet its needs?
A) By shortening the maturity schedule of financing
B) By maintaining a low level of current assets (especially cash and marketable securities)
C) By increasing the level of fixed assets (especially plant and equipment)
D) By lengthening the maturity schedule of financing

Q#35 (Descriptive)
Stakeholders legitimately interested in the activities of an organization falls into three broad
categories.
Enumerate them giving few examples of each one. (3 marks)

Q#36
If coupon rate is equal to going rate of interest then bond will be sold:
A) Below its par value
B) Seasoned par value
C) At par value
D) More than its par value

Q#37
___________ lease, an important source of finance, is a real estate lease where the lessee maintains and
insures the leased asset rather than the lessor in a full service lease.
A) An operating lease
B) A net
C) A financial
D) A sale and leaseback

Q#38
A bidder that offers a higher price to the first fixed quantity of shares tendered and a lower second
price for all remaining shares is engaging in ____________?
A) a financial acquisition
B) a strategic acquisition
C) Shark repellant
D) A two-tier tender offer

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Q#39
Raheel Ltd desires to acquire Dawood Ltd by exchanging shares. Raheel Ltd will issue 2 shares of its
stock for each share of Dawood Ltd. Following information pertains to the companies

Raheel Dawood
Limited Limited
Net income (Rs) 810,000 210,000
Shares outstanding 425,000 52,000
EPS (Rs) 6 8
Market Price of stock (Rs) 50 60

Raheel Limited expects the P/E Ratio for the combined company to be 16. What is the expected
share price after the acquisition?

A) 32.63
B) 30.85
C) 31.96
D) 33.25

Q#40
A lease is regarded as a capital lease if it meets any one of the following condition except:

A) The lease period is equal to or greater than, more than 50 percent of the economic life of the
asset
B) The lease contains an option to purchase the asset at a bargain price.
C) The lease transfers title to the asset to the lessee by the end of the lease period.
D) At the beginning of the lease the present value of the minimum lease payments equals or exceeds
___ percent of the fair value of the leased property to the lessor.

Q#41
Which one of the following is the preferred order (pecking order) in which companies prefer to use
different sources of finance?

A) Retained earnings, Debt, Equity

B) Debt, Retained earnings, Equity
C) Retained earnings, Equity, Debt
D) Debt, Equity, Retained earnings

Q#42
Total assets divided by common equity is a formula used for calculating:

A) Turnover multiplier
B) Graphical multiplier
C) Equity multiplier

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D) Stock multiplier

Q#43
____________ is the process of putting restrictions on the projects that can be undertaken by the
company or the capital that can be invested by the company. This aims in choosing only the most
profitable investments for the capital investment decision.

A) Capital rationing
B) Transaction rationing
C) Optimal rationing
D) Marginal rationing

Q#44
There is ________ relationship between EVA and NPV.

A) Economic
B) Inverse
C) No
D) Direct

Q#45
Cost of equity of Shalimar limited, an ungeared company is 15%. It is considering to introduce debt
in the capital structure. The loan is available at the rate of 8% per annum. After taking out the loan,
the ratio of debt to equity will be 1:2. Assume that the tax rate is 29%. The revised WACC if
Shalimar Limited takes out the loan will be ___________?

A) 17.99%
B) 16.05%
C) 13.55%
D) 18.60%

Q#46 Descriptive
Capital rationing maybe necessary in a business due to external factors i-e hard capital rationing.
What causes hard capital rationing? (3 marks)

Q#47 Descriptive
Financial risk is a risk that a company would not be able to meet its obligation to pay back its debts.
How do the following stakeholders view this type of risk?
- The company as a whole
- Lenders
- Ordinary Shareholders (3 marks)

Q#48

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Sardar limited paid a dividend of Rs 500 million this year. The current return to shareholders of the
companies in the same industry as Sardar limited is 15%, although it is expected that an additional
risk premium of 4% will be applicable to Sardar Industries Ltd, being a smaller and unquoted
company. What will be the expected valuation of Sardar Ltd if the dividend is expected to grow at a
rate of 5% per annum into the foreseeable future?

A) 3530 Million
B) 3750 Million
C) 3975 Million
D) 3690 Million

Q#49 Descriptive
According to the theory presented by Modigliani and Miller (MM), the financial structure has no
impact on the cost of capital and therefore the debt to equity ratio has no impact on the value of the
project. While presenting their theory, they made certain assumptions. Briefly explain these
assumptions. (4 marks)

Q#50
Modern Product Limited’s relevant information over the last three years are as follows:

Rs in
millions
2017 2018 2019
Pretax earnings 7000 7196 7412
Tangible assets 30150 30578 31118

Current return on asset ratio for the industry as a whole is 20% and the company’s weighted
average cost of capital (WACC) is 11%.
Calculate the fair value of the company’s intangible assets, assuming an average tax rate of 29%.

A) 6523.45 Million
B) 6588.61 Million
C) 6133.57 Million
D) 6968.33 Million

Q#51 (Descriptive)
The foremost purpose of a merger or a takeover is to create value. There are number of reasons due
to which mergers will result in value creation. Elucidate five motives behind mergers and
takeovers. (5 marks)

Q#52
What remains after we subtract operating costs and capital expenditures necessary to at least
sustain cashflows from total firm revenues?
A) Strategic Cashflows

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B) Earnings before interest and tax (EBIT)

C) Free cashflows
D) Net Income

Q#53
A single, overall cost of capital is often used to evaluate projects because:

A) It acknowledges that most new investment projects offer about the same expected return
B) It avoids the problem of computing the required rate of return for each investment
appraisal
C) It acknowledges the facts that most new investment projects have about the same degree of risk.
D) It is the only way to measure a firm’s required rate of return

Q#54
Which one of the following is not a systematic risk?
A) Changes in interest rate
B) recessions
C) Losses caused by labor problems
D) fluctuations in currencies

Q#55

Home Products Limited is evaluating following three investment proposals. If only the
project in question is undertaken, the expected present values and the amounts of investment
required are:
Rs. ‘000’
Project Investment Expected PV
1 200,000 290,000
2 115,000 185,000
3 270,000 400,000
If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and
present values will simply be the sum of the parts.
With projects 1 and 3, economies are possible in investment because one of the machines acquired
can be used in both production processes. The total investment required for projects 1 and 3
combined is Rs.440,000.
If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing
the products but not in investment. The expected present value of future cash flows for projects 2
and 3 is Rs.620,000.
Which of the following project/ combination of projects is with highest NPV?

A Project 1 and 3
B Project 1 and 2
C Project 2 and 3
D Project 3

Q#56

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Pak Textile Limited and Omni Textile Limited are considering the merger in a new company, Silver
Textile Limited that will increase the earnings by 20% due to synergy effect. Following information
relates to the companies before merger:
Rs. in million
PTL OTL
Equity and liabilities
Share capital (Rs. 10 each) 500 500
Retained earnings 200 70
Total equity 700 570
Debt 1,000 400
1,700 970

Earnings (net profits after tax) 150 100

The financial advisor of the firm has projected the growth in corporate earnings by 25%, if the
economic growth is slow and 40%, if the growth is high (applicable for both the companies).
Probability of high growth and slow growth are 0.30 and 0.60 respectively. P/E multiple of textile
composite sector is 8 and is projected to grow at 9 and 10 for slow and high growths, respectively
while weaving sector companies will remain trading at P/E multiple of 6 in any case. After the
merger, the new company will be listed in textile composite sector and will be valued accordingly.

Considering the above facts, expected value of Omni Textile Limited is ____________.

A 15.24

Q#57
Dawar Limited wants to forecast its free cash flow for the next three years. Current free cash flow
along with expected annual increase in various items is as follows:

Expected annual increase Rs. million

EBIT 5.5% 2,250
Tax - - 652.5
Depreciation 5.0% 382.5
Capital expenditure 3.5% 675
Working capital requirements 4.0% 270

The applicable tax rate for the company is 29%.

By what percentage will free cash flow have increased between now and the end of year-3?

A 20.77%
B 40.11%
C 15.05%
D 22.37%

Q#58
Saad Limited is contemplating to make a bid to take over Khan Textile Limited. Both companies are
in the same industry having similar gearing levels of 18%. WACC of Saad Limited is 19%. Saad
Limited has estimated that the takeover will increase its annual cash flows over the next few years
by the following amounts:

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Rs. in million
Year After-tax (but before interest) cash flows
2021 15.60
2022 18.30
2023 23.70
2024 onward 29.10

Khan Textile Limited has 8% irredeemable debentures of Rs.31.5 million trading at par.
If Saad Limited makes a bid of Rs. 97 million for the entire share capital of Khan Textile Limited, it
would increase shareholders’ wealth by ___________________.

Hint: Use the FCFs of the target company (i.e., cash flows before interest)

Year 0 1 2 3 4
PV factor at 19% 1 0.840 0.706 0.593 0.499

A Rs. 2.65 million

B Rs. 2.71 million
C Rs. 2.22 million
D Rs. 2.48 million

Q#59
Shariq Industries Limited desires to acquire 100% shares in Kamaal Limited. Both companies
operate in the same industry and have similar gearing levels of 17%. Cost of equity of Shariq
Industries Limited is 21%. Shariq Industries Limited has estimated that the takeover will increase
its annual cash flows over the next few years by the following amounts:
Rs. in million
Year After-tax (but before interest) cash flows
2021 29.40
2022 37.20
2023 40.80
2024 onward 60.70

Kamaal Limited has 8% irredeemable debentures of Rs.77 million trading at par. Tax rate is 29%.
If Shariq Industries Limited makes a bid of Rs. 195 million for the entire share capital of Kamaal
Limited, it would increase the shareholders’ wealth by________________.

[Hint: Use free cash flow to equity (FCFE) of the target company (i.e., cash flows after interest)]

Year 0 1 2 3 4
PV factor at 21% 1 0.826 0.683 0.564 0.467

A Rs. 22.44 million

B Rs. 21.81 million
C Rs. 19.61 million
D Rs. 20.07 million

Q#60

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The conversion option on an 8% convertible bond expires in 3 years’ time; if unconverted it is

redeemable at par in 10 years’ time; conversion is for 20 ordinary shares, the current share price
being 370 paisa. The current required return on unconvertible bonds with a 10 year maturity is
12%. The conversion value of its security is ________.

A Rs. 68.8
B Rs. 70
C Rs. 77.4
D Rs. 74

Q#61
At January 01, 2019, Noble Cables Limited had issued 6 years term finance certificates (TFCs) for
financing another project that has increased the existing balance of Rs. 52 Million to 90 Million. The
coupon rate of TFCs is 11% payable annually and the expected IRR is 15%. The prevailing
commercial rate for similar risk bonds is KIBOR plus 3%. As per accounting policy undertaken by
the company, the TFCs to be amortized at cost. KIBOR is 13% currently equivalent to risk free rate.
Determine the market price of TFC (ex-interest) as at December 31, 2019.

A Rs.135.1
B Rs.100.0
C Rs.100.34
D Rs.111.34

Q#62
Zone Limited is all equity financed with Rs.100 million issued shares, the current share price being
Rs.2.8. It is considering a major expansion which will require Rs.60 million of new finance and it has
been decided to use a 1 for 4 rights issue to raise the money. The net present value of the expansion
is Rs.10 million, this is not reflected in the above price but will become known before the shares
commence trading ex-rights.

If an investor A is holding 100,000 shares in Zone Limited, how many rights should be sold in order
that the investor does not have to spend or take receipt of any cash because of the rights issue?

A 21,429 shares
B 25,000 shares
C 342,857 shares
D 400,000 shares

Q#63
Which of the following firms would most appropriately be valued using an asset-based model?

I. An energy exploration firm in financial distress that owns drilling rights for offshore areas.
II. A paper firm located in a country that is experiencing high inflation.
III. A software firm that invests heavily in research and development and frequently introduces new
products.

A I only
B II only
C III only
D All of these

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Q#64
Suppose an analyst estimates equity value by discounting free cash flow to equity (FCFE) at the
weighted average cost of capital (WACC) in the FCFE model and estimates firm and equity value by
discounting free cash flow to the firm (FCFF) at the required return on equity in the FCFF model.
The analyst would most likely:

A Overestimate equity value with the FCFE model and underestimate firm value and equity
value with the FCFF model.
B Underestimate equity value with the FCFE model and overestimate firm value and equity
value with the FCFF model.
C Underestimate equity value with the FCFE model and underestimate firm value and equity
value with the FCFF model.
D Overestimate equity value with the FCFE model and overestimate firm value and equity value
with the FCFF model.

Q#65
Mr. Khan owns 1% of the equity of Stark Limited, an ungeared company. A friend Mr. Hamad
recommends Mr. Khan to switch his funds to similar but geared company Jamal Limited. In order to
maintain the risk associated with each investment, it is suggested that Mr. Khan buys 1% of the
equity of Jamal limited and invest his remaining funds in Jamal’s bonds. The companies incomes an
capital structures are show below:
Jamal Limited Stark Limited
Rs. Rs.
Rs. 10 Ordinary shares: nominal value 3,000,000 4,500,000
: market value 1,875,000 3,750,000
5% Bonds : nominal value 1,500,000 -
: market value 1,500,000 -
Profits before bond interest 375,000 375,000
Bond interest 75,000 -
Annual dividend 300,000 375,000

Calculate the price of Jamal Limited’s equity at which it would no longer pay Mr. Khan to switch
funds, assuming that other factors remain constant.

A Rs.33,750,000
B Rs.2,250,000
C Rs.3,675,000
D Rs.3,000,000

Q#66
An investor purchased a 7 percent coupon bond at par for Rs.1,000 immediately after the payment
of a coupon and held it for 18 months. Coupons were received semi- annually and reinvested at the
stated annual rate of 4 percent compounded semi- annually. The bond price when sold was
Rs.950.41. Which of the following is closest to the value of the reinvested coupons from the bond in
the investor’s portfolio?

A Rs.70.7
B Rs.107.11
C Rs.71.41

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D Rs.156.6

Q#67
Gwadar Home Products Limited is evaluating following three investment proposals. If only the
project in question is undertaken, the expected present values and the amounts of investment
required are:
Rs. ‘000’
Project Investment Expected PV
1 200,000 290,000
2 115,000 185,000
3 270,000 400,000
If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and
present values will simply be the sum of the parts.
With projects 1 and 3, economies are possible in investment because one of the machines acquired
can be used in both production processes. The total investment required for projects 1 and 3
combined is Rs.440,000.
If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing
the products but not in investment. The expected present value of future cash flows for projects 2
and 3 is Rs.620,000.
Which of the following project/ combination of projects is with highest NPV?

A Project 1 and 2
B Project 1 and 3
C Project 2 and 3
D Project 3

Q#68
Global Textile Limited and National Textile Limited are considering the merger in a new company,
Silver Textile Limited that will increase the earnings by 20% due to synergy effect. Following
information relates to the companies before merger:
Rs. in million
GTL NTL
Equity and liabilities
Share capital (Rs. 10 each) 600 600
Retained earnings 300 80
Total equity 900 680
Debt 1,100 500
2,000 1,180

Earnings (net profits after tax) 250 200

The financial advisor of the firm has projected the growth in corporate earnings by 20%, if the
economic growth is slow and 50%, if the growth is high (applicable for both the companies).
Probability of high growth and slow growth are 0.20 and 0.70 respectively. P/E multiple of textile
composite sector is 9 and is projected to grow at 10 and 11 for slow and high growths, respectively
while weaving sector companies will remain trading at P/E multiple of 6 in any case. After the
merger, the new company will be listed in textile composite sector and will be valued accordingly.

Considering the above facts, expected value of National Textile Limited is ____________.

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A 16.80
B 14.53
C 24.80
D 13.75

Q#69
Following net cash flows relate to a project undertaken by Atif Limited:

Years
1 2 3 4 5 6
Cashflows ( Rs in millions) 300 500 700 1050 650 400

Other Information:

Rs in millions
Initial investment in asset 2050
Residual value after 6 years 250

For depreciation use straight line method.

Return on Capital Employed using average capital invested is___________?

A) 12.68%
B) 14.63%
C) 20.29%
D) 24.45%

Q#70 (Descriptive)
Describe three main reasons for soft & hard capital rationing? (3)

Q#71 (Descriptive)

What are the different methods of measuring value of a company and its shares? (4)

Q#72 (Descriptive)

Sensitivity analysis has its own weaknesses. Mention them in short. (5)

Q#73 (Descriptive)

What is meant by Market efficiency? Briefly explain each form of market efficiency. (4)

Q#74 (Descriptive)

Explain each form of efficiency for fundamental analysis. (3)

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Q#75 (Descriptive)

Explain each form of efficiency for technical analysis. (3)

Q#76 (Descriptive)

What factors determine the optimal mix of financing I.e, the capital structure that results is
maximum value? Mention briefly any three of them (3)

Q#77 (Descriptive)

There are some limitations of Traditional Yield Measurement. Briefly explain (5)

Q#78 (MCQs)

Which one of the following best describes the constant growth dividend discount model?

a) It is the formula for the PV of a finite, uneven cash flow stream.

b) It is the formula for the PV of an ordinary annuity.
c) It is the formula for the PV of a growing annuity
d) It is the formula for the PV of a growing perpetuity.

Q#79 (MCQs)

Which of the following is consistent with an aggressive approach to financing working capital?

a) Financing some long term needs with short term fund.

b) Financing seasonal needs with short term funds
c) Financing short term need with short term fund
d) Financing permanent inventory buildup with long term debt.

Q#80 (MCQs)

The asset beta (unlevered beta) is the beta of a company on the assumption that the company uses
only ------- Financing.

a) Equity financing
b) Equity, short term and long term financing.
c) Equity and long term financing
d) Equity and short term financing

Q#81 (MCQs)

Which of the following is another name for the required return on a stock?

a) Dividend payout
b) Value
c) Retention ration

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d) Discount rate

Q#82 (MCQs)

There are several ways in which uncertainty can be deal with in project appraisal. Which of is
following is not a way to deal with uncertainty?

a) None of these
b) Sensitivity analysis
c) Discount payback
d) Payback period

Q#83 (MCQs)

A would be acquirers offer to buy stock directly from shareholder is referred to as a----------

a) Takeover
b) Joint venture
c) tender offer
d) White knight

Q#84 (MCQs)

A merger that signals to the investors in the market place a change in strategy or operating
efficiency that cannot be conveyed in another manner is referred to us----------

a) Bootstrapping effect
b) The wealth effect
c) The information effect
d) Strategic effect

Q#85 (MCQs)

A firm that acquires another firm as part of its overall business strategy is engaging in-------

a) A shark repellent
b) A strategic acquisition
c) A two tier tender offer
d) A financial acquisition

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