Assignments: Strategic Financial Management

Mr. Jalal Abdullah has recently heard about the announcement by Peshawar Development Authority (PDA) to sell shops in a bidding process in Phase 6 of Hayat Abad, Peshawar. According to the expectations of Mr. Afridi, the prices  in the bidding process will be near 5500,000 rupees plus 350,000 government taxes. The shop will be given at a lease for 99 years. The shop can be used in any of the two alternatives: 

1. Give the shop on rent for 45000 rupees per month, with 10% increase per anum

2. Instead of renting, Mr. Abdullah can use the shop for starting his own grocery store. Since Abdullah is employed in a government organization, he will have to hire another person on profit sharing ratio of 75% (Abdullah ):25% (the other partner). The profit will be determined as follows. 

    a. 8% gross profit margin on total sells of grocery

    b. Utility and wages are usually 1% of the total sells

    c. Monthly sales will be 800,000 rupees, with 10% annual increase.

Mr. Abdullah will have to contribute another 1100,000 as a working capital in the shop if he opts for option 2. 

The discount rate for option 1 is 13.5%, whereas it is 14% for option 2. Income from the shop is taxable under taxation rules for individuals businesses (You can find taxation slabs in the table given below)

Requirements: 

1. Show with the help of calculations (NPV, IRR, PI, and Payback) whether Mr. Abdullah should buy the shop with regard to each option

2. Which of the two option should be opted for. 

INCOME TAX SLAB RATES FOR BUSINESSMEN IN PAKISTAN FOR YEAR 2013-14

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Details of Assignment

Write detailed notes on the following:

1. Discuss why WACC is important for firms? How WACC can influence the financing decisions of firms?

2. Explain the irrelevance theory of capital structure of Miller and Modigiliani?

3.  What are the different methods of valuation of assets? Explain each method.

4. Discuss in detail the concept of EVA and MVA, why these measure are used and for what purpose?

5. Explain the different criteria for project evaluation, i.e. NPV, IRR, PI, Payback methods

6. Write short notes on the following:

    a. Theories of capital structure

    b. Theories of dividend policy