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.
- Where do finance graduates may seek career opportunities?
2. Suppose a firm uses a part of cash collected on accounts receivable to buy inventory and leaves the
rest in its bank account. What effect does it make on the firm’s current ratio?
3 Rita established a scholarship scheme that promises to pay needy students Rs. 180,000 per year
forever. How much should she deposit today to get this perpetual payment if the required interest
rate is 12%?
4 Suppose you invested Rs. 35,000 in Stock A that has a beta coefficient of 0.8 and Rs. 40,000 in stock B
that has a beta coefficient of 1.4. What is your portfolio’s beta?
5 How does value of a discount bond change over the time if all other things remain the same?
6 What are the key factors affecting cost of capital?
7 Why NPV method is preferred over IRR?
8 Suppose a company’s sales increased by 10%. As a result its EBIT increased by 25% and net income
increased by 50%. What is its degree of operating leverage? What is its degree of financial leverage?
9 A company, whose current market price per share is Rs. 600, declares 20 percent stock dividend.
What will be its market price per share after stock dividend?
10 What is the cash conversion cycle of a firm with 30 days in inventory conversion period, 20 days in
receivable collection period and 10 days in payable deferral period? What is its working capital
financing requirement if it needs Rs. 4,500 in daily operating costs?
Descriptive Answer Questions
Attempt Five Questions. [5×10=50J
11 Explain the elements of credit policy of a firm with examples.
12 Kantipur Café has Rs. 500,000 of debt outstanding, and it pays an interest rate of 10 percent annually. Its annual sales are Rs. 2 million, its average tax is 30 percent and its net profit margin on sales is 5 percent. If the company does not maintain a times interest earned (TIE) ratio of at least 5 times, its bank will refuse to renew the loan and bankruptcy will result.
a What is Kantipur Café’s TIE ratio? Is the bank likely to renew the loan?
b By what percentage, net profit margin should increase in order to get loan renewed?
13 Mr. Rajesh Devkota needs to accumulate Rs. to buy a second-hand vehicle for his personal
use. He can save only Rs. 125,000 annually out of his earnings, which can be deposited in a bank
account at 12 percent annual compound interest rate. His last deposit will be less than Rs. 125,000 if less is needed to round out to Rs. 1,000,000. How many years will it take Mr. to reach his Rs. 1,000,000 goal? How large will the last deposit be?
a. A company has Rs. 1,000 par value, 14% coupon payment bond outstanding that has 15 years
remaining until maturity. If investor’s required rate of return is 12% what should be the price of bond today?
b. A company just paid IRS. 12.5 in dividend. 1b dividend will grow at 10% per year forever. Assume that shareholders required rate of return is 15% what should be the value of stock today?
15 Narayani Textile Company’s expected dividend per share is Rs. 30 and it is expected to grow at a constant rate of 5 percent. Current price per share is Rs. 300. Its before-tax cost of debt is 10 percent, and its mar • al tax rate is 40 percent. The stock sells at book value.
|Asset||Amount||Liabilities and equity||amount|
|cash||100000||long term debt||400000|
|plant and equipment, net||500000|
|Total assets||Rs 1000000||Total liabilities and equity||Rs 1000000|
a. Calculate the cost of each specific source of long-term financing.
b. Calculate the company’s after-tax weighted average cost of capital.
c. Briefly describe the uses of weighted average cost of capital.
16 Company A and Company B both sell their products at Rs. 8 per unit. However, variable cost per unit for Company A is Rs. 4.8 and that for Company B is Rs. 4. The fixed operating cost for Company A is Rs. 80,000 and for company B is Rs. 120,000.
i. What is the break-even point for Company A? Company B?
ii. Which company should have higher degree of operating leverage? Explain.
iii. At what sales level in units do both companies earn the same level of operating profit?
Analytical Answer Questions
Attempt any TWO Questions. [2*15=30]
17 a What are the major executive functions performed by the financial manager in a corporate firm?
b Discuss the significance of these functions for better financial performance of Nepalese firms.
18 Consider the following probability distribution of market return and the return on Stock A:
|probability||marks return||stock A’s return|
A What are the expected return and standard deviation of market and the Stock A?
B Calculate the covariance between return from market and the Stock A.
C If you form a portfolio investing 60% in market and 40% in Stock A, what are the expected return and standard deviation of this portfolio?
D Calculate beta coefficient of Stock A? What does it indicate?
E If risk-free rate of return is currently 6%, what is the CAPM return for Stock A? Is Stock A worth investing?
19 Consider the following two mutually exclusive projects:
|year||project M||project N|
A Calculate payback period of each project.
B calculate net present value of each project. Which project (s) would you accept?
C Calculate internal rate of return of each project? Which would you prefer?
D Calculate the profitability index of each project.
E Do IRR and NPV methods give conflicting result? Which project would you select if NPV and IRR methods give conflicting results? Why?