LAHORE UNIVERSITY OF MANAGEMENT SCIENCES

SULEMAN DAWOOD SCHOOL OF BUSINESS

Intermediate Finance

Roll Number:

Time: 120 minutes Total Marks: 100

Final Examination

Instructions:

1. Please write your roll numbers at the start of the examination.

2. Please answer all questions. All questions carry equal marks.
3. In case of any confusion, please write your concern in the paper and any assumption which underlie your
written answer and marking will be adjusted accordingly. Invigilators/ Instructor will not be able to help
during the exam even if you consider a question completely wrong.
4. Please give reasons for your statements. Unsubstantiated statements would carry no value. For numerical type
questions, please provide all the working. Otherwise you would be awarded zero marks even for a right
answer.
5. Any attempt to engage in any discussion or to look at the paper of a fellow candidate is strictly prohibited.
Such incidents will be reported and appropriate disciplinary action will be taken.
6. Cell phones are not allowed in exam. Using them as calculators would result in immediate cancellation of
paper.
7. No extra sheets would be provided
8. Kindly check that total number of questions is 14.

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1. What factors affect price volatility of bonds? Explain briefly.

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2. What are the limitations of Macaulay and Modified Duration?

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3. Under what conditions promised yield to call and realized yield of a bond would be the same? Give an
example to explain differentiating between American and European Call options.

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4. What are the effects of call and put options on the interest rate sensitivity of a bond?

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5. What are the limitations of dividend discount model?

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6. What are the costs and benefits of using trailing or forward Price to Earnings Ratios?

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7. What are the assumptions of Markowitz Portfolio Theory?

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8. What is meant by efficient portfolio? Please explain.

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9. Give an example to show that how Capital Asset Pricing Model be used to calculate the price of a stock?

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10. DDO Industries is considering expanding into a new product line. Earnings per share are expected to be $
15 in the coming year and are expected to grow annually at 5% without the new product line but growth
would increase to 7% if the new product line is introduced. To finance the expansion, DDO would need to
cut its dividend payout ratio from 80% to 70%. If DDO’s equity cost of capital is 11%, what would be the
impact on DDO’s stock price if they introduce the new product line? Assume the equity cost of capital will
remain unchanged.

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11. PPL has EBITDA of $2,766,000,000 and 410 million shares outstanding. PPL also has $1,963 million in
debt and $ 0.509 billion in cash. If PPL has an enterprise value to EBITDA multiple of 1.7, estimate the
value for a share of PPL stock.

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12. PTCL plans to pay $1.84 per share in dividends in the coming year. Its equity cost of capital is 8%.
Dividends are expected to grow by 0.4% per year in the future. Estimate the value of PTCL’s stock.

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13. Consider the following returns:

Stock X
Realized Stock Y
Year End Return Realized Return
2004 20.1% -14.6%
2005 72.7% 4.3%
2006 -25.7% -58.1%
2007 56.9% 71.1%
2008 6.7% 17.3%
2009 17.9% 0.9%

What is the covariance between Stock X's and Stock Y's returns?

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14. Consider the following covariances between securities:

Duke Wal-Mart

Duke 0.0568 0.0037

Wal-Mart 0.0037 0.1413

What is the variance of a portfolio that is made up of a $6000 investments in Duke Energy and a $4000
investment in Wal-Mart stock?

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