Table of Contents
Financial Management Old Question Paper Year 2016 | Tribhuvan University | BBA
Group “A”
Brief answer questions: (10x 1=10)
Indicate whether the following’ statements are ‘True’ or ‘False’. Support your answer with reasons.
1) An investment decision of a firm is also called executive finance function.
2) Bheri Bottlers Company’s common stock has beta of 1.20. If the risk-free rate is 5 percent and market risk premium is 10 percent then cost of equity of the company is 11 percent.
3) In general, the cost of external equity for a firm is higher than the cost of internal equity because of the floating costs.
4) The optimal capital structure is the composition (mix) of the various long-term sources of financing which maximizes the weighted average cost of
5) The price of the ABC Company’s stock is Rs 700. If a company declare and paid 10% stock dividend, new stock price after stock dividend will be Rs 636.36.
6) Three major components of credit policy are credit standards, credit terms and collection policy
7) It order frequency (time between two orders) of goods is less than (delivery) time of a firm, there is existence of goods in transit.
8) If Inventory conversion period is 20 days, receivable conversion period is30 days and payable period is 10 days which implies that the cash conversion cycle is 60 days.
9) A firm can speed up its cash collection by using lock-box system and concentration banking.
10) If a firm’s cash disbursement exceeds to its cash collection results cash deficit of the firm which requires bank borrowings to cover both deficits and minimum cash balance.
Group “B”
Short Answer Questions [5*6=30]
11) What is financial management? Why wealth maximization goal is superior to profit maximization goal?
12) You have developed the following8 analytical income statement for your It represents the most recent year’s operations, which ended yesterday.
| Sales | 20000000 |
| Variable Sales | 12000000 |
| Revenue before fixed cost | 8000000 |
| Fixed cost | 5000000 |
| EBIT | 3000000 |
| Interest Expenses | 1000000 |
| EBT | 2000000 |
| Taxes (50%) | 1000000 |
| Net income | 1000000 |
Your supervisor in the controller’s office has just handed you a memorandum that asking tor written responses to the following questions:
- At this level of output, what is the degree of operating leverage?
- What is the degree of financial leverage?
- What is the degree of combined leverage?
- What is the firm’s break-even point in sales rupees?
- If sales should increase by 20 percent, by what percent would earnings before taxes (and net income) increase?
13) In 2014, the Roster Company paid dividends total Rs 3,600,00 on net income of Rs10,800,000. For the past 10 years, earnings have growth at a constant rate of 10 percent. However, in 2015, earning are expected to prefer larger jump up to Rs 14,400,000, and the firm expects to have profitable investment opportunities of Rs 8,400,000. It is predicted that Roster will not be able to maintain this higher level of earnings growth and the company will return to its previous 10 percent growth rate. Calculate Roster’s total dividends for 2015 if it follows each of the following policies:
- Its 2015 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
- It continues the 2014 dividend payout ratio.
- It uses a pure residual dividend policy (40 Percent of Rs 8400,000investment is financed with debt).
14) The Bansbari Company must arrange financing for its working capital requirements which total Rs 100,000 for the coming year. Company can (a)borrow from its bank on a simple interest basis (interest payable at the end of the loan) for one year at a 10 percent rate; (b) borrow on a 3 month, but renewable, loan at an 9.5 percent rate; or () obtain the needed funds by no longer taking discounts and thus increasing its accounts payable. Company buys on terms of 1/20, net 60. What is the effective annual cost of the least expensive type of credit, assuming 360 days per year? Which source the company should choose?
15) The following information for inventory has been provided for the Karnali Juice Company:
Orders must be placed in multiples of 100. Annual sales are 100,000 units. Purchase price is Rs 50 per unit. Carrying cost is 20 percent of the purchase price, ordering cost is Rs. 200 per order. Safety stock is 5,000 units. Two weeks are required for delivery of goods.
- Calculate the EOQ.
- Calculate total cost of inventory.
- Calculate re-order point.
16) The Alpha Corporation’s balance sheet in given below:
Balance Sheet for the year ended December 31, 2015.
| Assets | Rs | Liabilities and equity | Rs |
| Cash | 10000 | Accounts payable | 20000 |
| Receivables | 40000 | Notes payable | 30000 |
| Inventories | 50000 | Accruals | 10000 |
| Total current assets | 100000 | Total current liabilities | 60000 |
| Net fixed assets | 400000 | Long term debt | 140000 |
| Common stock | 200000 | ||
| Retained earning | 100000 | ||
| Total assets | 500000 | Total liabilities and equity | 500000 |
Sales in 2015 were Rs 200,000 which is expected to increase by 20 percent in 2016. All assets and current liabilities are proportional to the sales and the company has no idle capacity of its assets. The profit margin of company in 2015 was 10 percent which is expected to maintain at the same level in 2016. The Alpha Corporation maintains its retention ratio of 40 percent in 2016.
- Determine addition to retained earnings for 2016.
- Use formula method and determine the additional funds needed for 2016.
Group “C”
Comprehensive Answer Questions [2*10=20]
17) A certain company has the following capital structure which it considers to be optimal.
| Sources | Promotion |
| Debt | 25% |
| Preferred stock | 15% |
| Common stock | 60% |
The company’s tax rate is 40% percent, and investor expected earnings and dividends to grow at a constant rate of 9 percent in the future. The company paid a dividend of Rs 3.60 per share last year (Do) and its stock currently sells at a price of Rs 60 per share. These terns would apply to new security offerings.
Common stock: New common stock would have a floatation cost of 10
Preferred stock: New preferred stock could be sold to public at a price of Rs 100 per share; with a dividend of Rs 11. Floatation costs of Rs 5 per
Debt: Debt could be sold at an annual interest rate of 12 percent.
- Final the component costs of debt, preferred stock, retained earningsand new common stock.
- Calculate the WACC assuming that common stock financingrequirements are all met by retained earnings.
- Briefly explain the uses of WACC.
18. I. Delta Company is considering the following two investment projects and after-tax cash flows of the projects are given below:
| Year | 0 | 1 | 2 | 3 | 4 |
| Project X (Rs) | (30000) | 10000 | 10000 | 10000 | 10000 |
| Project Y(Rs) | (30000) | 15000 | 12000 | 8000 | 5000 |
- Determine the net present value (NPV) of each project if cost of capital is 10 percent.
- It the two projects are independent, which project/projects should be selected?
- If the two projects are mutually exclusive, which project should be chosen?
II. Parasi Cement Factory (PCF) is considering to purchase an automated plant at cost price of Rs. 10,000,000 plus an additional cost Rs 1,000,000 for transportation and installation. It requires additional working capital of Rs2,000,000. The life of the automated plant is 5 years. The cash salvage value of the plant at the end of 5 years will be Rs 1,000,000. The plant falls into MACRS 5-year class life. The depreciation rates of the plant for five years are 20 percent, 32 percent, 19.2 percent, 11.52 percent and 11.5 percent respectively. If the plant is purchased, it generates annual Rs.10,000,000 and it requires annual operating cash expenses Rs 5,000,000. The corporate tax rate is 40 percent.
- What is the initial cash outlay of PCF?
- What is annual operating cash flow of PCF?
- What are terminal and final year’s cash flows of PCF?
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