Table of Contents

**Business Finance Old Question Paper Year 2016**

**Group “A”**

**Brief answer questions: [10*1=10]**

- The investment decision of a firm is concerned with deciding on which financing sources are to be used to finance an investment.
- Net cash flow differs from firm’s net income because of depreciation and other non-cash expenses and income
- There is an inverse relationship between the value of a bond and its required rate of return.
- The constant growth dividend model does not hold true when growth rate is greater or equal to investor’s required rate
- If we combine perfectly negatively correlated assets, we can eliminate the risk using minimum variance weight.
- Depreciation is non-cash operating expenses. It is deducted only for tax reporting purposes but it is added back to the net income of the project to determine net cash flow.
- Presently a firm is selling at the term 3/15, net 45. Its sales will increase if it sells at the term 3/15, net 30.
- If National bank offers 12 percent interest and applies monthly compounding; the effective interest rate of National bank is 12.68 percent.
- Depreciation is a major component of cash budget.
- Net working capital can be defined as the difference between total assets and current liabilities.

**Group ‘B’**

**Short Answer Question: [6×5=30] **

11. What is wealth maximization? Why is wealth maximization a superior goal to profit maximization?

12. The management of Himalayan Publishing Company Limited decided to buy a Printing Press by taking a loan of Rs 1,00,000 for 3 years from Nepal Bank Limited. The loan bears a compound annual interest of 10 percent and calls for equal annual instalment payments at the end of each of the 3 years.

- What is the amount of annual payment?
- Prepare a loan amortization schedule.
- What fraction of payment made in year 2 represents the principal?

13. Shikhar Company is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect that the company to begin paying dividends, with the first dividend of Rs 10 coming 3 years from today. The dividend should grow rapidly at rate of 20 percent per year during Years 4 and 5. After Year 5, the company should grow at a constant rate of 5 percent per year. If the required return on the stock is 10 percent, what is the value of stock today? If stock price in the market is Rs 300, would you purchase the stock?

14. Consider the following scenario analysis:

Scenario | Probability | Rate of Returns | |

Stock A | Stock B | ||

Recession | 0.30 | 5% | 30% |

Normal economy | 0.40 | 10 | 15 |

Boom | 0.30 | 15 | 0 |

- Calculate the expected rate of return and standard deviation for each stock.
- Calculate portfolio return and standard deviation if equal amount of money is invested in each stock. Does portfolio help to diversify the risk? [3+2]

15. National Public Utilities issued a bond that pays Rs 90 in interest, with a Rs 1,000 par value. It matures in 20 years. Your required rate of return is 8 percent.

- Calculate value of the bond at present.
- If actual price of bond at present is Rs 900, what will be approximate yield to maturity? [13+2]

16. Star Trade Link expects to sell 7,200 pieces of small calculator this year.

The cost of placing an order from its supplier is Rs 250. Each unit costs Rs 50 and carrying costs are 20 percent of the purchase price.

- What is the economic order quantity?
- What is the total carrying and ordering inventory cost?
- At what inventory level should an order be placed?
- If the supplier offers 1 percent quantity discount on orders of 1800 units or more, should the firm offers the discount offer?

**Group ‘C’**

** Comprehensive Answer Questions:**

17. You are analyzing two proposed capital investment; project A and project B. each project have cost of Rs 600000, and the cost of capital for each project is 10%. The projects expected net cash flows are as follows.

Expected net cash flow | ||

Year | Project A | Project B |

1 | Rs 300000 | Rs 350000 |

2 | 300000 | 200000 |

3 | 300000 | 250000 |

**Calculate:**

- Payback period
- Net present value (NPV). Which one project would you select if projects are mutually exclusive?
- Internal rate of return (IRR)
- List the merits and demerits of payback period and NPV.

**18. Following are the data available for Fewa Resort and Industry average.**

Balance Sheet of Fewa Resort as, on December 31, 2017

Account payable | 64500 | Cash | 38750 |

Notes payable | 42000 | Inventory | 168000 |

Other current liabilities | 58500 | Receivables | 120750 |

Total current liabilities | 165000 | Total current asset | 327500 |

Long term debt | 128250 | Net fixed asset | 146250 |

Common equity | 180000 | ||

Total liabilities and equity | 473750 | Total assets | 473750 |

**Income statement of Fewa Resort for the year ended December 31, 2017**

Sales revenue | 803750 | |

Less: cost of goods sold | ||

Material | 358500 | |

Labor | 226500 | |

Heat, light and power | 34000 | |

Indirect labor | 56500 | |

Depreciation | 20750 | 696250 |

Gross profit | 107500 | |

Less: selling price | 57500 | |

General expenses | 15000 | 72500 |

Earnings before interest and tax | 35000 | |

Interest expenses | 12250 | |

Earnings before tax | 22750 | |

Less: tax 40% | 9100 | |

Net income after taxes | 13650 |

**Industry average **

- Current Ratio = 2 times
- Days sales outstanding = 40 days
- Total assets turnover = 2 times
- Profit margin = 2.5%
- Return on assets = 5%
- Return on equity = 10%
- Debt ratio = 50%

**Required**:

- Calculate the above indicated ratios for Fewa resort.
- Assess the strengths and weaknesses of Fewa Resort.

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