Fundamentals of Financial management
Full Marks: 100
Pass Marks: 35
Candidates are required to give their answers in their own words as far as practicable. The figures in the margin indicate full marks.
Brief Answer Questions [10×2=20]
Attempt ALL Questions.
1 What is financial management?
2 Write the meaning and uses of free cash flow.
3 How does effective rate differ from nominal rate?
4 How do you determine value of coupon bond with finite maturity?
5 In what situations should a firm declare stock dividend?
6 A firm has DOL of 2 times and DFL of 2.5 times. Its EBIT is currently Rs. 20,000 and net income is Rs. 9,000. What is its degree of total leverage? If sales increase by 10 percent, what will be new net Income?
7 Assume that the risk-free rate is 8 percent and the market risk premium is 6 percent. Beta of Stock J is 2. Average rate of return on Stock J is 18 percent. Is Stock J correctly priced?
8 Star Traders expects sales of 10,000 copies of Fundamentals of Financial Management in a year ,which cost the firm Rs. 500 per copy. It has estimated that carrying costs are 2 percent of inventory value. The firm’s order costs are Rs. 2,000 per order. How many copies should the firm order?
9 Mechi Teaching Company is concerned about managing cash efficiently, On the average, inventories have an average age of 50 days, and receivable are collected in 60 days. Accounts payable are paid 30 days after purchase, what is he cash conversion cycle?
10 Shikhar Company has a capital structure, which consists of 60 percent debt and 40 percent equity. The company anticipates that its capital budget for the upcoming year will be Rs. 1,500,000. If the company reports net income of Rs. 1,200,000 and if follows a residual dividend payout policy, what will be the amount of dividend?
Descriptive Answer Questions
Attempt FIVE Questions. [5×10=50]
11 How does financial structure differ from capital structure? Describe the factors that affect capital s&ucture of a firm.
12 You need to accumulate Rs. 100,000. To do so, you plan to make of Rs. 17,500 per year, with the first payment being made a year from today, in a bank account which pays 6 percent annual interest. Your last deposit will be more than Rs. 17,500 if more is needed to round out to Rs. 100,000.How many years will it take you to reach your goal of Rs. 100,000, and how large will the last deposit BE?
13 Complete the 2018 balance sheet for royal industries using the information that follows it.
|marketable securities||25000||notes payable||……..|
|inventories||………..||long term debt||…….|
|net fixed assests||…………||stockholders equity||600000|
|total fixed assets||total liabilities and stockholders equity|
The following financial data for 2016 are also available:
a sales totaled rs 1800000
b The gross profit margin was 25 percent.
c Inventory turnover (Cost of goods sold/inventory) was 6.0.
d There are 360 days in the year.
e The average collection period was 40 days.
f The current ratio was 1.60.
g The total assets turnover ratio was 1.20.
h The debt ratio was 60 percent.
14 Suppose High-Tech Manufacturing Company sold an issue Of bonds with a 10-year maturity ,Rs. 1,000 par value, a 10 percent coupon rate, and annual interest payments
a, Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 8 percent. At what price would the bonds sell?
b. Suppose that, 2 years after the initial offering, the going interest rate had risen to 12 percent At what price would the bonds sell?
c Suppose that the conditions in part (a) existed that is, interest rates fall to 8 percent 2 years after the issue date. Suppose further that the interest rate remained at 8 percent for the next 10 years. Describe what would happen to the price of the company’s bonds over time?
15. Alpha Company recently paid a dividend Of IQs. 30. Dividend is expected to grow at a constant rate of 5 percent per year forever. The firm’s cost of equity is 15 percent.
a. Calculate the intrinsic value of stock.
b. What is dividend yield for the first year?
c. Calculate value of the stock at the end of the third year, P3.
16. The following table gives earnings per share figures for the Mega Trading Company during preceding 5 years. The firm’s common stock is now (1/1/2017) selling for Rs. 70 per share, and the expected dividend at the end of the current year 2017 is 60 percent of the 2016 EPS. Because investors expect past trend to continue, 8 may be based on the earnings growth rate.
Current interest rate on new debt is 10 percent. The firm’s marginal tax rate is 30 percent. ITS capital structure, considered to be optimal, is as follows:
Debt 120 million
Common equity 180 million
Total liabilities and equity 3000 million
a. Calculate company’s after-tax cost of new debt and the cost of common equity assuming that new equity comes only from retained earnings.
b. What is the company’s weighted average cost of capital, again assuming that present structure is maintained?
c. List out the important factors affecting the cost of capital.
Analytical Answer Questions
Attempt any TWO questions. [2×15=30]
17. What is working capital management? Why is the management of working capital important in a business? Explain the role of cash budget in the management of working capital.
18. Stock A and Stock B have the following historical returns:
|YEAR||RETURNS Ra||RETURN Rb|
a Calculate the average rate of return for each during the period 2012 through 2016
b Assume that someone held a portfolio consisting of 50 percent of Stock A and 50 percent Of Stock B. What would have been the realized rate of return on the portfolio in each year from 2012 through 2016? What would have been the average return on the portfolio during this period?
c Calculate the standard deviation Of returns for each stock and for the portfolio.
d Calculate the coefficient of variation for each stock and for the portfolio.
e If you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio?
19. Narayani Transportation (Pvt.) Ltd. is considering to run tourist bus from Chitawan to Kathmandu, A tourist bus costs Rs. 5,000,000 and it will ply daily for 5 years to come. Annual net cash inflows for five years will be as follows:
a what is the payback period of the project? should Narayani transportation run tourist bus from chitwan to kathmandu if its maximum cost recovery periods is 3 years?
b The required rate of return of the projects is 10 % .what is the NPV of the project? should Narayani Transportation not to run tourist bus service.
c What is the IRR of the projects? should Narayani transportation run tourists bus service from chitwan to kathmandu.