Financial Management Question Paper 2018

Financial Management Question Paper 2018 – Tribhuvan University | BBA

Financial Management Question Paper 2018

 

Group ‘A’

Brief Answer Question                       [1 mark]

Indicate whether the following statements are ‘True’ or ‘False’. Support your answer with reasons. 

1) The treasurer is typically the firm’s chief accountant who is responsible for the preparation of financial statements and budgets. 

2) Cost of debt and Cost of Pref. share capital, both require tax adjustment.

3) The Lumbini Finance Company’s (LFC) current stock price is Rs. 160. If new stock can be sold to net the firm Rs. 144 per share, LFC’s percentage flotation cost is 10 percent. 

4) In mutually exclusive decision situation, the firm can accept all feasible proposals.

5) Standard Limited has a DOL of 2 at its current production and sales level of 10,000 units. Its current operating profit is Rs. 1000. If sales were expected to increase by 20 percent from the current 10,000 unit sales position, the new operating profit would be Rs 1200.

6) A company’s current market price per share is Rs. 250. If company declares 25% stock dividend, market price per share after stock dividend will be Rs. 200. 

7) If a firm bas easy access to money market, it prefers larger cash dividend 

8) Holding more cash in vault results more profit to the firm.

9) The expression “3/10, net 45 means that the customers receive a 10 percent discount if they pay within 3 days; otherwise, they must pay within 45 days with no discount.

10) A firm has ratio of assets to sales 55 percent and the ratio of spontaneous liabilities to sales 20 percent. The profit margin on sales after taxes is 40 % percent. The dividend payout is 40 percent. If the firm’s growth rate on sales is 16 percent per annum, 8.9 percent increase in sales must be financed externally.

Group ‘B’

Short Answer Questions       [5*6=30]

11) How would you define business ethics? What are the basic areas of concern for business ethics?

12) Firm HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has Rs, 20 million assets, has Rs. 4 million of EBIT, and is in the 40% tax bracket. Firm HL, however, has a debt ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt ratio and pays only 10% interest on its debt. 

a. Calculate the rate of return on equity (ROE) for each firm.

b. Observing that HL has a, higher ROE, LL’s treasure is thinking of raising the debt ratio from 30% to 60% even though that would increase LL’s interest rate on all debt to 15%. Calculate the new ROE for LL.

13) CG Company currently has 500,000 shares of stock outstanding that sell for Rs 600 per share. Assuming no market imperfections and tax effects exist, compute the number of shares outstanding and the market price per share after:  

a. 3 for 2 stock split

b. 20% stock dividend

c. 2 for 5 reverse stock split

14) You are given the following information:

Sales for the year just ended were Rs. 50,000 and cost of goods sold was Rs. 30,000.

Items Beginning (Rs) Ending (Rs)
Inventory 5000 7000
Account Receivables 1600 2400
Account Payable 2700 4800

a. How long does it take to collect its receivables?

b. How long does inventory stay around before it is sold?

c. How long does it take to pay its bills?

d. Compute the operating cycle and cash conversion cycle.

e. What measures should management take to improve cash conversion cycle?

15) The XYZ Company is trying to determine its optimal inventory policy. The following relationships and conditions exist for the firm:

  • Annual sales are 120,000 units
  • The purchase price per unit is Rs. 500.
  • The carrying cost is 20% of inventory value.
  • The fixed costs per order are Rs. 600.
  • The optimal safety stock is 500 units, which are already in hand
  • Lead time: 2 days
  • Assume 360 days in year

a) What is the economic order quantity?

b) What is the optimal number of orders to be placed?

c) How frequently should the order be placed?

d) What is the re-order point?

e) What is the maximum inventory the company will hold?

f) What is the average inventory the company will hold? SS

g) What is the firm’s annual total inventory costs disregarding the safety stock?

h) What is the annual total inventory costs including the safety stock?

16) Nepal Mining Corporation’s 2017 Balance sheet is shown below:

Balance Sheet as of Dec. 31, 2017

Assets Rs Liabilities and equity Rs
Cash 18000 Accounts payable 22000
 Receivables 42000 Notes payable 13000
Inventories 25000 Accruals 9000
Total current assets 85000 Total current liabilities 44000
Net fixed assets 115000 Mortgage bonds 50000
Common stock 66000
Retained  earning 40000
Total assets 200000 Total liabilities and equity 200000

The company was operating at full capacity with regard to all assets. Sales in 2017 were Rs. 2,50,000 and it is expected to increase by 20 percent in 2018. Profit margin is 7 percent and dividend pay-out ratio is 65 percent

  1. What is the capital intensify ratio of the firm? A
  2. Determine the additional investment needed in asset for 2018.
  3. What amount of additional spontaneous liabilities will be available in 2018?
  4. What is the addition to retained earning in 2018?

Group ‘C’

Comprehensive Answer Questions    [2*10=20]

17) Lumbini Vision Company (LVC) has Rs. 200 million total net assets at theend of 2017. It plants to increase its production machinery in 2018 by Rs. 50 million. Bond financing, at an 11 percent rate, will sell at par, preferred will have an 11.5 percent interest payment and will be sold at a par value of Rs. 100 common stock currently sells for Rs. 50 per share and can be sold to net Rs. 45 after floatation costs. There is Rs. 10 million of internal funding available from retained earnings. Over the past few years, dividend yield-has been 6 percent and the firm’s growth rate 8 percent. The tax rate is 40 percent. The present capital structure shown below is considered optimal. 

Debt
4% coupon rate Rs. 40 million
7% coupon rate 40 million
Total debt 80 million
Preferred stock 20 million
Common stock (Rs. 10 par) 40 million
Retained earning 60 million
Equity 100 million
Total assets

a) How much of the Rs. 50 million must be financed by equity capital ifthe present capital structure is to be maintained? 

b) How much of the equity funding must come from the sale of new common stock? 

c) Calculate the component costs of:

  • New debt
  • New preferred stock
  • Retained earnings
  • New equity

d) What is LVC’s average cost of equity for 2018?

e) What would be LVC’s WACC if only retained earnings were used to finance additional growth that is, Rs. 20 million was raised? 

f) What is the WACC when Rs. 50 million is raised?

g) What is the WACC on Rs. 30 million raised over Rs. 20 million?

18) ABC (Pvt.) Ltd. is considering purchasing new machine which costs Rs.3,00,000 including installation and shipping charges. The machine is expected to generate Rs 100,000 sales revenue for 10 years and its operating costs will be Rs. 50,000. At the end of 10 years, the book value of machine will be Zero, and it is anticipated that the machine will be sold for Rs. 100,000. The investment tax credit is 10 percent. Company will follow straight line depreciation. If the machine is undertaken, company will have to increase its net working capital by Rs 75,000. Marginal corporate tax rate applicable to the company is 40 percent. Assume 12 percent cost of capital.

  1. What will be the initial investment outlay of the machine?
  2. What will be annual depreciation of the proposed machine?
  3. What will be the operating cash flows of the machine?
  4. What will be terminal cash flow?
  5. Calculate net present value. Is the machine acceptable?

Standard Limited has a DOL of 2 at its current production and sales level of 10,000 units. Its current operating profit is Rs. 1000. If sales were expected to increase by 20 percent from the current 10,000 unit sales position, the new operating profit would be Rs 1200.

 

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