B Both mutual funds

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Question 1.

a) The process through which the company is capable of increasing earning capacity is known as profit maximization,on the other hand the ability of the company in increasing the value of stock is known as wealth maximization.

Wealth maximization is a better operative criteria then profit maximization on following ground:

  • Profit maximization avoids time value of money but wealth maximization recognizes it

  • Profit maximization is a short term objective where wealth maximization is long term objective

Sample is needed

b) Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. A key difference is that most ETFs are index-tracking. Mutual funds can track indexes but most are actively managed.

c) three main types of businesses organizations are followings:

sole proprietorship, partnership and corporation.




Low start-up cost

Unlimitied liability

Enjoy greatest freedom form regulation

Lacks continuity of owner is absent

Decision making freedom

No check and balances on decisions taken

Minimal working capital required

Difficult raisin capital

Tax advantage to owner

Limited to bank and franchise dealings

All profits to owner

Profits can be shared




Benefit of collaboration

Unlimited liability of partnership

Tax advantages

Differences and conflicts

Business Confidentiality

Slower decision making

More partner, more Funds

Lack of community

Easier to form & run business

Joint accountability

Sole proprietorship



Easy formation

Limited resources


Limited business life

Prompt decisions

Unlimited liability

Easy dissolution

Scale of Business & expertise

d) 2019-year Dividend Payout Ratio.

Dividend Payout Ratio= (Dividends Paid)/ (Net Income) =$1,900,000/$7,660,000=0,25(for 2019)

dividends paid for 2020.

0.25=Dividends paid/$19,280,000

Dividends paid=$4,820,000

Answer: Dividends paid is $4,820,000

Question 2.

  1. Ex-dividend is the time period between the announcement and payment of dividends, and the registration date is the day on which the shareholder must formally own shares in order to eligible forcdividents

  2. (A)

  3. (B) Investment bank

  4. (B) False

  5. (A) True

  6. 1-c



  1. (E)

Question 3.

  1. Calculation of net present values.

NPV=∑Cash flowst/(1+r)^t-IO

r=required rate of return


Option A:

Cash Flow= 150 000$,
Initial investment=100 000$ ,
r=14% ,
inflation rate=3%,
tax 20%

NPV=(150 00$/(1+0.14)^1=131 578.95$-100 000$=31578.95

Option B:
Cash Flow= 270 000$,
Initial investment=200 000$ ,
inflation rate 3%,
tax 20%

NPV=(270 00$/(1+0.14)^1)= 36 842.11$

  1. Calculation of Profitability Index
    PI=Present value of future cash flow/Initial Investment

Option A:
Cash Flow= 150 000$,
Initial investment=100 000$ ,
inflation rate=3%,
tax 20%

PI=31 578.95$/100 000$= 0.3158 or 38.58%

Option B:

Cash Flow= 270 000$,

Initial investment=200 000$ ,
inflation rate=3%,

PI=36 842.11$/200 000$=0.1842 or 18.42%

  1. Option A:
    Cash Flow= 150 000$,
    Initial investment=100 000$ ,
    inflation rate=3%,

NPV= 131 578.95$-100 000$=31578.95$

100 000$=150 000/(1+IRR)^1 IRR+1=1.5

Option B:
Cash Flow= 270 000$,
Initial investment=200 000$ ,
inflation rate=3%,

200 000=270 000/(1+IRR)^1


  1. If there is no capital ratio constrains we should choose according to NPV.

If there is capital ratio constrains we should choose according to PI.

  1. NPV is one of the tools companies use for capital budgeting purposes. Companies calculate NPV by determining expected cash inflows and outflows for a project and then discounting all of those cash flows with a discount rate. The advantage of NPV over IRR is that it has more inputs and more flexibility.

Companies use IRR to calculate the feasibility of a project by finding the rate of the return the project has to earn to break even. If the IRR is higher than the required rate of return, then that means that the project will create value. An IRR lower than the required rate of return decreases value. IRR has no discount rate or risk assumptions.

According to reinvestment assumption, we should use IRR. Because, NPV does not have a reinvestment rate assumption, while IRR does. For IRR, the reinvestment rate assumption may change the outcome of the IRR.

Question 4.

  1. Bonds

Face Value = $1,000

Market Price = $1,020

C = 6% 20 yrs

Float. = 4%

Tax = 34%

Net price after float. = 1,020(1-0.04) = 979.2

979.2 = 60×(PVIFA20,7%) + 1,000×(PVIF20,7%)

979.2 = 894.04

Kd = 0.07 + (20.8/105.96) = 7.27%

After tax kd = 7.27×(1-0.34) = 4.79%

Preferred Stock

D = $2.5

P = $35

float. = $3

kps = Dividend/Net price = 2.5/35-3 = 7.81%

Common Stock

D = $4

g = 4%

P =$50

float. = $5

kcs = D1/NP + g = 4×1.04/ 50-5 + 0.04 = 13.24%

Source of Capital

Market Values


After tax







Preferred Stock





Common Stock





kwacc =9.52%

Question 5.

Question 6.

Question 7.

Question 8.

Question 9.

Question 10.

  1. The Formula for Effective Annual Interest Rate= ( 1+ i/n)n-1


i= Nominal interest rate

n=Number of periods



Effective Annual Interest Rate= ( 1+ 0,10/2)2-1

Effective Annual Interest Rate= (1+0.05)2-1

Effective Annual Interest Rate= 1,1025-1

Effective Annual Interest Rate= 0,1025 or 10,25%

Answer: 0,1025 or 10,25%

  1. 15 % is to be maintained as Compensating balance or as the minimum amount.

15% of the loan balance is minimum demand deposit. Let us assume that the added funds must be borrowed and left idle in the firm’s accounts. The amount borrowed is more than $20,000 constitutes only 85% of the total borrowed funds. So, it can be written as follows:



So, the interest will be paid on $23,529,411

Interest paid can be calculated as follow:

Interest= Borrowed amount*Interest Rate*Number of months/12

Interest= $1,176,470

Effective Annual Cost of Credit:

APR= $1,176,470/20,000*365/180

APR= 0,0588 *1/0,5

APR=0,1176 or 11,76% ( Cost of the loan)

  1. Data:

Amount required = $20,000

Interest rate= 10%


Interest can be calculated as follow:

Interest= 20,000*0,10*6/12

Interest= $1,000

Loan amount can be calculated os follow:

Loan amount= $20,000-$1,000

Loan amount= $19,000

EAR=(1+0,10/2)2 -1

EAR= 1,1025-1

EAR= 0,1025 or 10,25%

Answer: annualized rate of interest on the loan now is 10,25%

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