Financial Management Old Question Paper Year 2015 | Tribhuvan University | BBA
Brief answer questions: (10x 1=10)
Indicate whether the following’ statements are ‘True’ or ‘False’. Support your answer with reasons.
1) Cost of internally generated equity capital is zero because it requires no flotation cost a s an external issue.
2) There may be conflicts in decisions given by Net Present Value (NPV) and Internal Rate of Return (IRR) while selecting independent project.
3) Other things remaining the same, the degree of financial leverage increase as the firm increase its debt capital.
4) The optimal capital structure is the mix of long-term sources of financing where the weighted average cost of capital is minimum.
5) When company declares dividend and stock goes ex-dividend date, the market price of stock decreases.
6) Preemptive right gives the right to the existing shareholders to purchase the new shares at market price at the time of new issue.
7) If a firm changes its credit policy form ‘net 30’ to ‘net 45, it will bear more opportunity loss than before changing credit policy.
8) The longer the inventory conversion period, the shorter the cash conversion cycle.
9) The firm which adopts conservative working capital policy carries a high level of current assets to sales.
10) In credit term, 2/10, net 30, 2 percent cash discount will be offered if payment is made within 30 days.
Short Answer Questions [5*6=30]
11) Consider the following information and determine the cost of capital for the different sources of capital:
- A 9 percent coupon bond with 5 years to maturity is currently trading at Rs. 800 and floatation charge is 5 percent. Corporation tax rate is 40 %.
- A 12 percent preferred stock trading at par.
- The expected dividend yield is 6 percent, growth rate is 8 percent, and current market price is Rs. 50 per share. net proceed from the sale of stock is Rs. 45.
- If the firm uses 35 percent from debt, 15 percent from preferred stock,20 percent from equity capital for the total capital budget. Determine the weighted average cost of capital of the firm by using the above
12) Your division is considering the following two investment projects and that the investment will produce the following after-tax cash flows:
|Project X (Rs)||(5000)||2000||2000||2000||2000|
|Project Y (Rs)||(5000)||3000||15000||1000||500|
- Determine the payback period (PBP) of each project.
- Determine the internal rate of return (IRR) for each of the projects.
- Determine the net present value (NPV) of each project if cost of capital is 10 percent.
- Determine the modified internal rate of return (MIRR) of each project.
- If the two projects are independent, which project/ projects should be undertaken?
- If the two projects are mutually exclusive, which project should be undertaken?
13) The selling price per unit is Rs. 25; variable cost per unit is Rs. 15 and fixed costs are Rs. 100,000 which includes Rs. 60,000 depreciation.
- Determine gain or loss at production and sales of 8,000 units and of12,000 units.
- Calculate BEP in units.
- Find cash BEP in units, if firm is producing and selling 4,000 units. Are creditors felling that firm is going to be bankruptcy if it is slow in paying bills?
- Calculate required sales units for desired operating profit of Rs. 10,000.
14) The Delta Inc. has the following shareholder’s equity accounts:
|Common stock (100000 shares at Rs 10 par)||1000000|
|Additional paid in capital||200000|
|Total shareholder’s Equity||4000000|
The current market price of the stock is Rs. 50 per share. What will happen to these accounts and to the number of shares outstanding with (a) 10 percent stock dividend and (b) a 5- for 2 stock split?
15) The following inventory data have been established for the Everest Company
Annual sales are 676,000 units
Purchase price per unit is Rs. 12
Carrying cost is 10 percent of the purchase price 2
Fixed ordering cost per order is Rs. 24
Order must be placed in multiples of 100 units
Safety stock is 10,000 units
Two weeks are required for delivery
- Determine the EOQ
- At what level should an order be placed?
- Calculate the total cost at EOQ level.
What do you mean by ‘goods in transit’?
16) Chaudhary industries sell on terms 3/10, net 30. Total sales for the year are Rs 900,000. Forty percent of the customers pay on tenth day and take discounts; the other 60 percent pay, on average, 40 days after their purchases.
- What is the average amount of receivables?
- If the firm can earn 12 percent return on its short-term fund, what is the opportunity cost of its funds tied up in the form of account receivable?
Comprehensive Answer Questions [2*10=20]
17) The following analytical income statement for Gorkha Corporation reflects last year’s operations.
|Less: variable cost||3200|
|Less: tax (50%)||500|
- What is the degree of operating leverage?
- What is the degree of financial leverage?
- What is the degree of combined (total) leverage?
- If sales should increase by 10 percent, by what percent would earning before tax (EBT) increase?
- If the firm uses 15 percent preferred stock of Rs. 50,000 what would the EBIT for financial BEP if the tax rate is 50 percent?
18) a. A firm is purchasing an asset to replace an existing asset. The purchase price is Rs 500,000 plus an additional Rs 50,000 to transport and install it. It will operate more quickly than the asset that it replaces and therefore will tie up additional inventory worth Rs 50,000. The firm has an existing asset that can be sold for Rs 100,000. It will cost Rs 10,000 to remove it so that it can be delivered to the buyer. The book value on the existing asset is Rs 70,000. The tax rate is 50 percent. Find out the net cash outlay to the firm.
b) Crystal Clear Inc., is considering two mutually exclusive projects’ expected net cash flows are as follows (Cash flows are in Rs ‘000):
|0||(Rs 1000)||(Rs 1000)|
- Calculate payback period of two projects. Which project would you recommend based on PBP analysis?
- If the required return of Crystal is 10 percent, what is Net Present Value (NPV) of the two projects? Which project should be chosen?
- What is each project’s Modified Internal Rate if Return (MIRR) at a cost of capital of 12%?
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