Financial Management

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Page 26 of 29 Suggested Solution By Prof. F.R. Tariq For any query please contact at azeez786@hotmail.com, 0333-4233770, 0321-4401660 ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD LEVEL MBA Semester Autumn 2002 Paper Financial Management CC. 562/5535 Maximum Marks 100 Time Allowed 3 Hrs Pass Marks 40 NOTE ATTEMPT FIVE QUESTIONS. ALL CARRY EQUAL MARKS Q. 1 Cheryl’s Menswear feels that its credit costs are too high. By tightening its credit standards, bad debts will fall from 5 percent of sales to 2 percent. However, sales will fall from $100,000to $90,000 per year .The variable cost per unit is 50 percent of the sale price, and the average investment in receivables is expected to remain unchanged. (a) What cost will the firm face in…show more content…
6 Easi Chair Company is attempting to select the best of three manually exclusive projects. The initial investment and after tax cash inflows associated with each project are shown in the following table. Cash flows Project A Project B Project C Initial Investment $60,000 $100,000 $110,000 Cash inflows (CF), Year 1-5 $20,000 $31,500 $32,500 a) Calculate the payback period for each project. b) Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13 percent. c) Calculate the internal rate of return (IRR) for each Project. d) Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why. Q. 6 Answer : - (Refer to Question 7 of Autumn 2003) Q.7 Redenour Supply has an issue of $1,000-par-value bonds with a 12 percent coupon interest rate outstanding. The issue pays interest annually and has 16 years to it maturity. (a) If the bonds of similar risk are currently earning a 10 percent rate of return, how much the Redenour Supply bond sell for today? (b) Describe the two possible reasons that similar risk bonds are currently earning a return below the coupon

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