Final-Term Exam (Take-Home) Fall – 2020

Department of Business Administration

Subject: Financial Strategy and Policy Submission Day: Saturday

Instructor: Dr Aitzaz/Dr Nadeem/ Submission Date: 30/jan/2021 at 10 am

Mr.Saad/Mr.Rujaib

Program: MBA Max. Marks: 20

Please follow the instructions carefully:

1. Write your answers in a Word file and upload the file before the due date on Blackboard.
2. Write your name and registration ID on the first page of your Word file.
3. Answer scripts can only be uploaded on Blackboard any time before its deadline.
4. To avoid any unforeseen problems, you are advised NOT to wait for the last hour to
upload your answer script.
5. Submission of answer copy(ies) will be considered acceptable through Blackboard only.
Therefore, do not submit your document through email or any other medium.
6. Use 12 pt. font size and Times New Roman font style along with 1-inch page margins.
7. Follow the requirements of the word limit and the marking criteria while writing your
answers.
8. Provide relevant, original and conceptual answers, as this exam aims to test your ability to
examine, explain, modify or develop concepts discussed in class.
9. Do not copy answers from the internet or other sources. The plagiarism of your answers
may be checked through Turnitin.
10. Recheck your answers before the submission on BlackBoard to correct any content or
language related errors.
11. Double check your word file before uploading it on BlackBoard to ensure that you have
uploaded the correct file with your answers.

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Dear Students
Your Final Examination contains two parts
1. Multiple choice questions test [20 marks]
2. Scenario based questions [20 marks]
The first part of your exam that is MCQS is uploaded on black board and you have to solve
that in BB only. The next part of your exam that are scenario based questions given below.

Q No. 1 Assume that you are given assignment to evaluate the capital budgeting projects of the company
which is considering investing in two Solar Energy projects, “Jamper Solar Project” and “Sajawal Solar
Project”. The initial cost of each project is Rs. 10000 Million. 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 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 current period is Rs 7.36, its expected that the dividend will grow at the constant growth rate of 8%,
and the company’s common stock sells for 80. The tax rate is 50%.

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

Time Jamper Solar Project Sajawal Solar Project Cashflows

Cashflows (amount in Rs. (amount in Rs. Millions)
Millions)
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 marks)
II. Compute each project’s IRR, NPV, payback, MIRR, and discounted payback. (3 Marks)
III. Which project(s) should be accepted if they are mutually exclusive? Explain (2.5 Marks)
IV. Which project(s) should be accepted if they are independent? Explain (2.5 Marks)

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Q No.2: Statement of Financial position for Aroma Corporation is given below for the period ending Dec
31 2020.

*All values given in ‘000 $.

Other Information:
PAT = 320
EBIDTA=428
Rf= 5%
Rm= 15 %
Geared Beta of Aroma’s Industry is 1.3
(Preferred stocks are considered as debt financing)

Profit Margin and Market Share of Aroma Corporation are constantly declining for last 3 years
and various options are being discussed at board level for getting into a new venture with a fresh
Brand Name and better product Quality and shut down the operations in existing name.

A competitor has also offered to acquire operations of Aroma Corporation.

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 On the other hand a group of investors still believe that company has potential to grow due to its
old customer base which are quite satisfied by the offered services and are ready to inject more
debt in the company.

Analyst to CFO has gathered below information to be used in strategic Planning.

Cost of Debt = 18%

Tax Rate = 25%

For coming 5 Years there isn’t any chance of growth in Market share and profit but after 5 years a
constant growth of 9 % is expected.
Future Cashflow for a period of 5 Years:

Yrs Cash Flows

1 106
2 121
3 100
4 112
5- Terminal 100

CEO has advised to have a concrete information about company’s value and a suggestion of using various
range of company’s value is given by Finance director.
Required:
You, as a Financial strategist will be leading the presentation in next Board meeting and you are required
to calculate Value of Aroma Corporation with following methods:
1. Asset Based Valuation [2.5 Marks]
2. Earning Based Valuation [2.5 Marks]
3. Cashflow Based Valuation [2.5 Marks]
4. You are also expected to explain silent features of these 3 methods. [2.5 Marks]