FIN101: Principles of Finance/ WACC of the firm/risky as the firm’s current operations

For Instructor’s Use only

Instructions – PLEASE READ THEM CAREFULLY

• This assignment is an individual
• The Assignment must be submitted only in WORD format via the allocated folder on Blackboard.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work transparent and well presented. This also includes filling in your information on the cover page.
• Students must mention question number clearly in their answers.
• Late submitted assignments will NOT be entertained.
• Avoid plagiarism. The work should be in your own words; copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) No pictures containing text will be accepted and will be considered plagiarism).

Submissions without this cover page will NOT be accepted.

Assignment Question(s):                                                        (Marks 5)

Q1: Alaman Corp. just paid a dividend of $2.15 yesterday. The company is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Alaman require a rate of return of 15 percent, what should be the market price of Alaman’s stock ? (1 mark)

Answer

Q2: Carrefour is expecting its new center to generate the following cash flows:

1. What is the payback period for this new center. (1 mark)
2. Calculate the net present value using a cost of capital of 15 percent. Should the project be accepted? (1 mark)

Answer

Q3: Alfa corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm’s tax rate is 40%. (2 marks)

1. Calculate the WACC of the firm.
2. The firm is considering a project that is equally as risky as the firm’s current operations. This project has initial costs of $280,000 and annual cash inflows of $66,000, $320,000, and $133,000 over the next three years, respectively. What is the net present value of this project?

Answer

Q4: 2 Marks

Comment on the Saudi Debt Market. How active is the Saudi Debt Market? What are the prospects of the Debt Market in Saudi Arabia?

Support your answer with valid references.

Answer