EXAM WRAPPERS

Objective of exam wrapper is twofold

1. To guide you for time management
2. To give you a taste of upcoming exam questions
A cheat sheet is provided at the end of this document to help you find accuracy level of your
answers.

Important Notes:
Non-graded practice questions covering lectures # 1-8 and graded assignment covering lectures
# 9-10 had already been given. These will help you improve weak understandings by going
back to the readings provided and consulting books along with managing time appropriately
to secure good grades.
Along with PPTs of Lecture #11, a supplement is available on topic of payback and
discounted payback period. In the provided supplement, payback and discounted payback
capital budgeting techniques have bene tried to explain by using formula method instead of
table method explained in video lecture. During examination, you may use any of the method.
Along with PPTs of Lecture #11, a supplement is available in which summary of all capital
budgeting techniques has been provided.
Along with PPTs of lecture # 12, a supplement on topic of sensitivity analysis is available.
In the provided supplement, sensitivity analysis has bene tried to explain with help of a simple
example.
Along with PPTs of Lecture #16, a supplement is available in which summary of all RISK
and RETURN formulas (for a single stock and for a portfolio) discussed in lecture # 15
& 16 has been provided. Similarly, supplements on different topics have been provided in
some other lectures on VULMS of the course.
Students are advised to consult the recommended books along with video lectures, updated
PPTs and supplements provided along with PPTs in different lectures to prepare for midterm examination.

Please fill following before you start attempting wrapper questions.

How much time did you spend on these activities?

Time spent/week

Ideally required time

Watching video lectures and updated PPTs

3 hrs.

Reading supplements

15 min

Practicing concept especially numerical from textbook

2 hrs.

Reviewing your own notes

15 min

Solving self-assessments

10 min

Total

5 hrs. 40 min

EXAM QUESTION WRAPPER

Q1: Suppose sale price of beta product is Rs. 50 per piece. Total fixed cost required for its
production is Rs. 100,000 while variable cost is Rs. 300,000. Total 20,000 pieces produced
which are more than the quantity required to reach at break-even means production is now
generating profit.
Requirement: What would be the revenue generated by this production at breakeven level?
Q2: By keeping in mind the concept of single period capital rationing, how capital budgeting
techniques are useful in selection of projects?
Q3: Suppose an equally weighted portfolio carries four stocks with following expected return and
beta:
Stock 1: Expected return = 20% and beta = 1.8
Stock 2: Expected return = 12% and beta = 0.6
Stock 3: Expected return = 30% and beta = 2.7
Stock 4: Expected return = 15% and beta = 1.3
Requirement: What will be the expected return and beta of the portfolio?
Q4: Suppose a stock has beta of 1.8 with market expected return of 13%. If return on T-bills is
3.5% then what will be expected return of this stock?

CHEAT SHEET
Question 1: Formula for calculating breakeven revenue (revenue generated when production
reaches at breakeven level) is:
BE revenue = FC/CS ratio
CS ratio = Contribution margin /sales per piece = (Sales per piece variable cost per piece) / sales
per piece
(Hint: Total variable cost is given while variable cost per unit can be calculated by dividing the
total variable cost with total units produced.
So variable cost = 300,000/ 20,000 = Rs. 15 / piece
CS ratio = (50-15)/50 = 0.7
BE revenue = 100,000 / 0.7 = Rs. 142,857.14
Question 2: Answers may vary little. Marks will be awarded for correct concept. However, the
most possible correct answer has been provided below:

If company has multiple opportunities to invest but also facing scarcity of resources then
company has to go for capital rationing means ranking the projects and then allocate the
available finances based upon their ranking.

In this regard, recommended capital budgeting techniques for ranking of projects are Net
Present Value (NPV) and Profitability Index (PI).

Ranking of projects based upon NPV leads to selection of large size projects while PI technique
ignores the size of project.

PI technique sometimes become useful to use when company is much lacking the finances to
invest because PI ignores the size of project due to which it sometimes assign lower rank to
project which is very large in size.

However, analysts usually rank projects by using both techniques (NPV & PI) and then choose
the project(s) based upon available finances.

Question 3:
(Hint: As portfolio is equally weighted so weigh of each stock in the portfolio is 100/4 = 25%)
Expected return of the portfolio E(Rp) = Wn *E(Rn)
(Note: Wn = weight of a stock and E(Rn) = expected return of a stock)

E(Rp) = 0.25(0.20)+0.25(0.12)+0.25(0.30)+0.25(0.15)
E(Rp)= 0.05+0.03+0.075+0.0375 = 0.1925 or 19.25%
Portfolio Beta = Wn * (Stock beta)n
p = 0.25(1.8)+0.25(0.6)+0.25(2.7)+0.25(1.3)
p = 0.45+0.15+0.675+0.325 = 1.6
Question 4:
(Hint 1: In lecture # 6-7, Dividend Discount Model (DDM) is studied for determining expected
return of a stock. However, DDM is not useful if stock is not paying any dividend. In such case,
another method known as Capital Assets Pricing Model (CAPM) is helpful in determining such
returns. Also note that Security Market Line (SML) is graphical representation of CAPM).
Formula of CAPM is:
E(Ri) = Rf + {E(Rm) Rf} x i
(Hint 2: E(Ri) = expected return of stock, Rf = risk free rate, E(Rm) = expected market return, i
= beta of the stock.)
(Hint 3: Rate offered on T-bills is considered as risk free rate of return)
E(Ri) = 3.5 + (13 3.5) x 1.8
E(Ri) = 3.5 + 17.1= 20.6%
(Note: This expected return of the stock is also known as cost of common stock. So, two
methods have been taught so far is this course for determining cost of common stock, one is
DDM and second one is CAPM)