Published by: Dikshya
Published date: 27 Mar 2023
POKHARA UNIVERSITY
Level: Bachelor Semester-Spring Year :2021
Programme: BBA/BI/IT Full Marks: 100
Course: Essentials of finance Pass Marks: 45:
Time: 3hrs
Candidates are required to give their answers in their own words as far as practicable.
The figures in the margin indicate full marks.
Section "A"
Very Short Answer Questions
Attempt all the questions. [10x2]
1. Define financial management.
2. What are the limitations of financial statement analysis?
3. Explain various types of financial institution.
4. Define the relationship between market interest rate and value of bond.
5. Define systematic risk and unsystematic risk.
6. Neco co. can issue preferred stock of Rs. 100 par a share which pays 11% dividend annually. If required rate of return is 10 percent and the stock currently selling at Rs 105 per share, would you buy the stock?
7. Define cost of capital.
8. What do you mean by payback period?
9. Why is time value of money concepts so important in finance?
10. Define yield to maturity.
Section "B"
Descriptive Answer Questions
Attempt any six questions. [6x10]
11. Explain the responsibilities of financial manager.
12. Stock X and Y have the following probability distribution of expected future returns:
|
Probability |
0.1 |
0.2 |
0.3 |
0.3 |
0.1 |
|
Return on X(%) |
(10) |
2 |
12 |
20 |
38 |
|
Return on Y(%) |
(35) |
0 |
20 |
25 |
45 |
a) Calculate the expected rate of return for stock X and Y.
b) Calculate the standard deviation of expected rate of return for X and Y.
c) Is it possible that most investors might regard stock Y as being more risky than stock X? Explain which stock do you prefer for the investment.
13. You have just joined the investment banking firm. It has offered you two different salary arrangements. You can have Rs. 300,000 per year for next two years or Rs. 200,000 at the end of the second year, along with Rs. 300,000 signing bonus today. If the interest rate is 12 percent compounded quarterly, which option do you prefer?
14.) Garment Export Company limited has Rs. 5,000,000 of debt outstanding, and it pays an interest rate of 12 percent annually. Its annual sales are Rs. 20,000,000, its average tax is 25 percent and its net profit margin on sales is 3 percent. IF it does not maintain a times interest earned (TIE) ratio of at least 4 times, its bank will refuse to renew the loan and bankruptcy will result.
a) What is the company's TIE ratio? [5]
b) By what percentage, net profit margin should increase in order to get loan renewed? [5]
15. Compute the component cost and weighted average cost of capital from the following information extracted from Brij Enterprises.
a) Interest rate on debenture is 16 percent and marginal income tax rate is 30 percent.
b) Rs. 100 preferred stock, dividend of 18% and flotation cost is 2 percent.
c) Common stock of Rs. 100 is netted at Rs. 98, expected dividend and growth rate are 12 percent and 7 percent respectively.
d) The total capital of Rs. 10 million consists of Rs. 4 million common stock, Rs. 4 million debentures and Rs.2 million preferred stock.
16. a) Due to recession in the economy, the inflation rate expected for the coming year is only 3.5%. However, the inflation rate in year 2 and thereafter is expected to be constant at the same level above 3.5%. Assume that the real risk free rate is 2% for all maturity and the expectation theory fully explain the yield curve, so, there is no maturity risk premium. If 3 year treasury security yields 3 % more than 1 year Treasury bond, What inflation is expected after year 1.
b) Define financial market. Explain it's types.
17. a) Damu Shoe Company has outstanding a 10 percent bond issue with a face value of Rs. 1000 par bond and three years to maturity. Interest is paid annually. The bonds are privately held by Nepal Life Insurance Company. Nepal Life wishes to sell this bond and is negotiating with another party. It estimates that in current market conditions, the bond should provide a nominal annual rate of 14 percent. What price per bond should Nepal Life is able to realize on the sale?
b) Mayos Noodles is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 12 percent during the next two years, at 10% in third year and a constant rate of 4% thereafter. Company's last year dividend was Rs. 10 and required rate of return on the stock is 15%. Calculate the value of stock today. (Unit-6 bond and stock valuation.)
Section "C"
Case Analysis
18. Read the case situation given below and answer the questions that follow: [20]
You have been asked by the president of the ABC Construction Company to evaluate the proposed acquisition of a new equipment. The equipment's basic price is Rs 5.00.000, and it would cost another Rs 50,000 to modify it for special use. Installation and transportation cost are Rs 25,000 Rs 35,000 respectively. Assume that the equipment falls into MACRS 3 years class depreciation method. The equipment would be sold after 4 years for Rs 20,000 and it would require an increase in net working capital (spares parts inventory) of Rs 20,000. The equipment would have no effect on revenues, but it is expected to save the firm Rs. 2, 00,000 per year in before tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent.
a) What is the initial cash outlay required for the new equipment?
b) What are the operating cash flows in year 1 to 4?
c) What are the additional (none operating) cash flows in year 4?
d) If the project's cost of capital is 10 percent, should the equipment be purchased?