(b) Tripex Consolidated Industries owns Rs.1.5 million in 12 percent bonds of Solow Electronics Company. It also owns 100,000 shares of preferred stock of Solow, which constitutes 10 percent of all outstanding Solow preferred shares. In the past year, Solow paid the stipulated interest on its bonds and dividends of Rs.3 per share on its preferred stock. The marginal tax rate of Tripex is 34 percent. What taxes must Tripex pay on this interest and dividend income?

Q. 2 (a) Saleem has inherited Rs. 25,000 and wishes to purchase an annuity that will provide him with a steady income over the next 12 years. He has heard that the local savings and loan association is currently paying 6 percent compound interest on an annual basis. If he were to deposit his funds, what year-end equal-dollar amount (to the nearest Rupees) would he be able to withdraw annually such that he would have a zero balance after his last withdrawal 12 years from now?

(b) Just today, Fawlty Foods, Inc.’s common stock paid a Rs.1.40 annual dividend per share and had a closing price of Rs.21. Assume that the market’s required return, or capitalization rate, for this investment is 12 percent and that dividends are expected to grow at a constant rate forever.

i. Calculate the implied growth rate in dividends.

ii. What is the expected dividend yield?

iii. What is the expected capital gains yield?

Q. 3 (a) What connection, if any, does a firm’s market value have with its liquidation and/or going-concern value? Could a security’s intrinsic value to an investor ever differ from the security’s market value? If yes, under what circumstances?

(b) A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon rate of 15 percent. If the bonds are alike in all other respects, which will have the greater relative market price decline if interest rates increase sharply? Why?

Q. 4 (a) The long-term debt section of the balance sheet of the Queen Anne’s Lace Corporation appears as follows:

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9 1/4% mortgage bonds Rs. 2,500,000

12 3/8% second mortgage bonds 1,500,000

10 1/4% debentures 1,000,000

14 1/2% subordinated debentures 1,000,000

Rs. 6,000,000

If the average earnings before interest and taxes of the company are Rs.1.5 million and all debt is long term, what is the overall interest coverage?

(b) A company has total annual sales (all credit) of Rs.400,000 and a gross profit margin of 20 percent. Its current assets are Rs.80,000; current liabilities, Rs.60,000; inventories, Rs.30,000; and cash, Rs.10,000

i. How much average inventory should be carried if management wants the inventory turnover to be 4?

ii. How rapidly (in how many days) must accounts receivable be collected if management wants to have an average of Rs.50,000 invested in receivables? (Assume a 360-day year).

Q. 5 (a) Define and explain weighted average cost of capital. Do the funds provided by sources such as accounts payable and accruals have a cost of capital? Explain.

(b) Define operating leverage and the degree of operating leverage (DOL), how are the two related? Also define financial leverage and the degree of financial leverage (DFL), how are they related?