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Muhammad Huzaifa Y.
CFA level III Candidate 2019 with 5 years of teaching experience
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Economics
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Question:

Habib Group is a Pakistani multinational conglomerate operates in the following lines of business with segment revenue (as a percentage of total revenue): Apparel: 30% Health Care Equipment: 30% Media: 25% Energy: 28% What is the sector classification for this group, based on the Global Industry Classification Standard

Muhammad Huzaifa Y.
Answer:

Since media and apparel are part of consumer discretionary, therefore, adding both revenues will give the max percentage from this sector than others. Consumer disc 55% Health-care 30 Energy 28 Therefore, consumer discretionary is the answer.

Corporate Finance
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Question:

Honda Motors is evaluating a new piece of equipment that will automatically install power windows in cars coming off the production line. The equipment cost is \$3.5 million, and the firm estimates that the present value of the annual cost savings from installing the equipment is \$2.8 million. The production manager is also considering purchasing a module that will allow the equipment to be used for Honda's SUV production. The additional module represents a real option with a cost of \$1.1 million dollars. The production manager estimates that adding the module would give Honda cost savings of an additional \$2.0 million. What is the profitability of the project before and after considering the real option?

Muhammad Huzaifa Y.
Answer:

The profitability of the project before considering the real option is the difference between the cost savings and the cost of the equipment, or 2.8M-3.5M= \$700,000. The profitability of the project after considering the real option = NPV (based on the project alone) cost of option + value of the option. The cost of the option is \$1.1 million, while the value of the option is \$2.0 million. Profitability after option = 0.7M-1.1M+2.0M = \$200,000.

Finance
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Question:

John is an investor and he buys a share at the beginning of the year 2X10 (t=0) for \$135. At the end of the year 2X10 (t=1), he buys another share at the market value of \$160. Both the shares give the dividend of \$4 per share during this year. At the end of year 2X11 (t=2), John sells both the shares for \$210 each. Calculate the annual time-weighted rate of return of John’s investment.

Muhammad Huzaifa Y.
Answer:

Step 1: There are two holding periods in this question. Holding period 1: Value at the beginning of 2X10=\$135 Dividends paid= \$4 Value at the end of 2X10=160 Holding period 2: Value at the beginning of 2X11=\$320 (two shares @ \$160 each) Dividends paid= \$8 (two shares@ \$4 each) Value at the end of 2X10= \$420 Step 2: Calculate the HPR HPR 1: [(160+4)/135]-1=21% HPR 2: [(420+8)/320]-1=33.75% Step 3: Calculate annual time weighted rate of return: (1+time weighted rate of return)^2 = (1.21)(1.3375)= 27.22%

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