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Financial Management Home-take Exam for MBA Program

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Added on  2020-10-03

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This is an individual home-take exam on Financial Management for MBA Program students. The exam covers topics such as future value, present value, component costs of debt, preferred stock and common stock, weighted average cost of capital, payback period, discounted payback period, net present value, and internal rate of return.

Financial Management Home-take Exam for MBA Program

   Added on 2020-10-03

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Great Land CollegeDepartment of ManagementMBA ProgramIndividual Home-takeExam on Financial ManagementInstruction: Attempt all the questions and give your answer on the separate sheet. Do not copy from your friendsDo not forget to write your name on answer sheetSubmit on the date of final examQ1) Suppose someone offered to sell you a note calling for the payment of $1,000 in15months. They offer to sell it to you for $850. You have $850 in a bank time depositthatpays a 6.76649% nominal rate with daily compounding, which is a 7% effectiveannualinterest rate, and you plan to leave the money in the bank unless you buythe note. The note isnot risky—you are sure it will be paid on schedule. Shouldyou buy the note? Check thedecision in three ways: (1) by comparing your futurevalue if you buy the note versus leaving your money in thebank; (2) by comparingthe PV of the note with your current bank account; and Q2) Assume Eternalife Company has the following capital structure, which it considers to beoptimal: debt 30%, preferred stock 20%, and common stock 50%. The company’s tax rate is30%. Investors expect earnings and dividends to grow at a constant rate of 10% in the future.Eternalife Company paid a dividend of Br. 4.50 per share last year and its stock currentlysells at a price of Br. 50 per share. Five-year treasury bonds yield 5%, the market riskpremium is 4%, and Eternalife beta is 1.2. The following terms would apply to new securityofferings. Common Stock: New common equity will be raised only by retaining earnings. Preferred stock: New preferred stock could be sold to the public at a price of Br.100 pershare, with a dividend of Br.10, and floatation costs of Br.5 would be incurred. Debt (bond): Debt could be sold at an interest rate of 10%.Required: i)Find the component costs of debt, preferred stock and common stock1
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