This document contains information for three financial management questions. Question 1 provides details on an investment project with a 3 year life that requires an initial investment of Rs. 450,000. It asks to calculate after-tax cash flows each year and evaluate the project NPV. Question 2 asks to calculate the fair value of three stocks based on their dividend payment schedules and a cost of equity of 10%. Question 3 provides rates of return for risk-free and market portfolios and asks about the expected return on a stock with beta of 0 using CAPM and whether a stock is overpriced or underpriced based on its dividend, sale price, and beta of 0.8. Contact information is provided for answersheets.

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Strategic Financial Management
1. You are considering an investment project. The project has a life of three years.
Project Information:
Initial investment into a new machine, which would cost Rs.4,50,000. Machine is to be
depreciated to zero over three years (straight line depreciation) with no salvage value at
the end.
Operating revenue is expected to be Rs. 6,00,000 per year.
Operating costs for raw materials expected to be Rs.3,00,000 per year.
Assume tax rate is 30% and the discount rate is 20%.
a. Compute after-tax cash flows every year.
b. Evaluate the project NPV. Would you accept the project? (10 Marks)
2. Compute the fair value of the following three stocks. Assume cost of equity to be 10%
Stock A is expected to pay a uniform dividend of Rs. 3.50 per share forever.

2. Stock B is expected to pay a dividend of Rs. 2.00 per share next year. Dividends are
expected to grow at 5% YOY per year forever.
Stock C has paid a dividend of Rs. 2.50 per share in the current year. The dividend is
expected toincrease by Rs. 0.50 per year for the next three years. Thereafter, dividend is
expected to remain constant.
3. Rate of return on treasury bills (risk-free short-term government papers) is around
6%. The expected rate of return on a market portfolio is 14%. Applying the capital asset
pricing model (CAPM), answer the following:
a. What is the expected rate of return on a stock with a beta of 0? Is it a risk-free
investment?
b. A stock currently trades at Rs. 60 per share. The stock is expected to pay a dividend of
Rs. 5 per share next year and you expect to sell the share then for Rs. 65. You estimate
the beta of the stock to be 0.8. Is the stock overpriced or underpriced?
For answersheets contact
info.answersheets@gmail.com
+91 95030-94040