BBA Fundamentals of Finance

Real risk-free rate is 4 percent. Average inflation premium for five year is 8 percent. If maturity risk premium on 5-year security is 2 percent, what is the yield on 5-year securities?

Explain the determinants of market interest rate.

An analyst evaluating securities has obtained the following information. The real rate of interest is 2% and is expected to remain constant for the next 3 years. Inflation is expected to be 3% next year, 3.5% the following year, and 4.5% the third year. The maturity risk premium is estimated to be 0.40 percent. The liquidity premium on relevant 3-year securities is 0.30% and the default risk premium on relevant 3-year securities is 0.60%.
a. Calculate average inflation rate for 3 years period.
b. What is the yield on a 1-year T-bill?
c. What is the yield on a 3-year corporate bond?

What is meant by default risk?

Assume that it is now January 1, 2025. The rate of inflation is expected to be 5 percent throughout year 2025. However, investors expect the inflation rate to be 6 percent in 2026, 7 percent in 2027 and 8 percent in 2028. The real risk-free is 2 percent. Assume that no maturity risk premiums are required on bonds with 5 years or less to maturity. The current interest rate of 5-year T-bonds is 9 percent.
a. What is the average expected inflation rate over the next 4 years?
b. What should be the interest rate on 4-year T-bonds?
c. What is the expected inflation rate in 2029 or year 5?
d. How does maturity risk affect the interest rate of a bond?

Prime commercial bank charges a monthly interest rate of 3 percent on its credit card loans. What is the effective interest rate on the loan?

What is the present value of Rs 10,500 due in year 5, discounted at 8 percent?

The management of Jaya Publishing Company Limited decided to buy a printer by taking a loan of Rs 100,000 for 3 years from Sanima Bank Limited. The loan bears a compound annual interest of 10 percent and calls for equal annual installment payments at the end of each of the 3 years.
a. What is the amount of annual payment?
b. Prepare a loan amortization schedule.

Find the future value of the following ordinary annuities.
a. FV of Rs 400 each 6 months for 5 years at a simple rate of 12 percent, compounded semiannually.
b. FV of Rs 200 each 3 months for 5 years at a simple rate of 12 percent, compounded quarterly.
c. The annuities described in parts (a) and (b) have the same amount of money paid into them during the 5-year period and both earn interest at the same simple rate, yet the annuity in part (b) earns more than the one in part (a) over the 5 years. Why does this occur?

What is the difference between an annuity and a perpetuity?

6.

Annual interest rate (quoted rate) is 8 percent. Compute effective rate if interest is compounded quarterly.

7.

Compute future value at the end of 5th year of following cash flow stream assuming bank offers 10 percent annual interest.
a. Rs 500,000 is deposited at present.
b. Rs 800,000 is deposited at the end of the second year.
c. Rs 100,000 is deposited at the end of each year for next five years.

8.

The management of Sahara Resort has decided to buy a computer taking loan of Rs 300,000 for 3 years from City bank. The loan bears an annual interest of 12 percent and calls for equal annual installment payments at the end of each of the three years.
a. Calculate amount of annual payment.
b. Prepare loan amortization schedule.
c. If banks calls for monthly payment, what will be equal monthly installment (EMI)? [3+4+3]

Ragmati Textile Company has just issued Rs 1,000 par, 10% coupon bond with maturity of 7 years. Interest is paid semiannually. If investor's required rate of return is 12 percent, calculate value of the bond at present.

How do you compute dividend yield? Illustrate.

Differentiate between premium bond and discount bond.

Calculate the value of following bonds assuming investors' required rate is 10 percent.
a. Rs 1000 par value bond with 9 percent coupon.
b. Rs 1000 par value zero coupon bond with 7 years of maturity period.
c. Rs 1000 par value, 12 percent coupon bond with 10 years of maturity period.

A preferred stock pays dividend of Rs 15 per share. Investor's required rate of return is 12 percent. What is the value of the preferred stock?

Why is preferred stock called hybrid security?

Asked on 2023 Exam

"Common stocks are generally considered as riskier than bonds". Do you agree? Why?

Sagarmatha Company's current stock price is Rs 360 and its last dividend was Rs 24. In view of company's strong financial position and its consequent low risk, its required rate of return is only 12 percent. If dividends are expected to grow at a constant rate in future, and if required rate of return on stock is expected to remain 12 at percent, what is company's growth rate and expected stock price 3 years from now?

Read the following information carefully and answer the questions that follow:

The Annapurna Company has Rs 100 million in total assets at the end of 2023. The Company has been growing rapidly during last five years. It has some other good investment opportunities for which it needs additional long-term funds amounted to Rs 50,000,000. The company plans to raise required funds through bonds, preferred stock and common stock. Company has Rs 10,000,000 internal equity to finance new project.

The Company is interested in measuring its cost of its specific type of capital as well as its overall capital cost. Current investigations indicate that the following costs would be associated with the sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.

Debt: It can sell a 10 year, Rs 1,000 par bond with a 9 percent coupon for Rs 970. An underwriting fee of 2 percent of the face value would be incurred in the process.

Preferred stock: 12 percent preferred stock having face value of Rs 100 can be sold for Rs 95. A fee of Rs 5 must be paid to the underwriters.

Common Stock: The company's common stock is currently selling for Rs 500 per share. The company expects to pay a dividend of Rs 50 per share at the end of the coming years. Its dividend is expected to grow at a 6 percent per year forever. It is expected that in order to sell the new common stock, it must be underpriced Rs 60 and therefore will reach the market at Rs 440 per share. The company must also pay a Rs 20 per share underwriting fee. The present capital shown below is considered to be optimal.

Debt	Rs 40,000,000
Preferred stock	Rs 10,000,000
Common Equity	Rs 50,000,000
Total	Rs 100,000,000

As a consultant of the company, please give the answer of the following.

a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?
b. How much of the equity funding must come from the sale of new stock?
c. Calculate the component cost of:
1. New Debt
2. New preferred stock
3. Retained earnings / internal equity
4. New equity
d. What would be the company's weighted average cost of capital (WACC) if only retained earnings were used to finance additional growth?
e. What is the weighted average cost of capital when Rs 50 million is raised?
f. Briefly explain the uses of WACC

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6.

What assumption does the normal growth model of DDM make about dividends?

7.

The prevailing selling price of a stock of Paiyukhola Fabric is Rs 210 and recently paid dividend is Rs 20 per share (D0 = Rs 20). The earnings, dividend and price are expected to grow at rate of 5 percent per year. What is the required rate of return on company's stock? What is the expected price of a stock one year from today?

Why should we calculate cost of debt on after tax basis?

The following data were taken from the financial statements of the Dhaulagiri Company for the year 2022. The norms given below are composite industry average on various sources for industry composite data.
The Company is interested in measuring its cost of its specific type of capital as well as its overall capital cost. Current investigations indicate that the following costs would be associated with the sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.
Debt: It can sell a 10 year, Rs 1,000 par bond with a 9 percent coupon for Rs 970. An underwriting fee of 2 percent of the face value would be incurred in the process.
Preferred stock: 12 percent preferred stock having face value of Rs 100 can be sold for Rs 95. A fee of Rs 5 must be paid to the underwriters.
Common Stock: The company's common stock is currently selling for Rs 500 per share. The company expects to pay a dividend of Rs 50 per share at the end of the current years. Its dividend is expected to grow at a 6 percent per year forever. It is expected that in order to sell the new common stock, it must be underpriced Rs 60 and therefore will reach the market at Rs 440 per share. The company must also pay a Rs 20 per share underwriting fee. The present capital shown below is considered to be optimal.

Component	Amount
Debt	Rs 40,000,000
Preferred stock	Rs 10,000,000
Common Equity	Rs 50,000,000
Total	Rs 100,000,000

As a consultant of the company, please give the answer of the following.
a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?
b. How much of the equity funding must come from the sale of new stock?
c. Calculate the component cost of:
1. New Debt
2. New preferred stock
3. Retained earnings / internal equity
4. New equity
d. What would be the company's weighted average cost of capital (WACC) if only retained earnings were used to finance additional growth?
e. What is the weighted average cost of capital when Rs 50 million is raised?
f. Briefly explain the uses of WACC.

Explain the application of cost of capital in financial decision making.

Shalimar Paints has the following capital structure which it considers to be optimal.

Debt	30%
Preferred stock	15%
Common stock	55%

The company's tax rate is 30 percent, and the investor expected earnings and dividends to grow at a constant rate of 4 percent in the future. The company paid a dividend of Rs 20 per share last year, and its stock currently sells at a price of Rs 208 per share. These terms would apply to new security offerings.
New common stock would have a floatation cost of 5 percent.
New preferred stock could be sold at a price of Rs 100 per share with a dividend of Rs 9. Floatation cost of Rs 6 per share would be incurred.
Debt could be sold at an annual interest rate of 10 percent.
a. Find the component cost of debt, preferred stock, retained earnings, and new common stock.
b. Calculate the WACC assuming common stock financing requirements are all met by retained earnings.

How does cash conversion cycle affect the size of working capital?

Lumbini Company have inventory conversion period of 35 days, and accounts receivable period is 30 days. Account payable is paid in 25 days. The company spends Rs 6 million operating cycle investments each year. Assume a 360-day year:
a. Calculate company's operating cycle and cash conversion cycle.
b. Calculate amount of financing required to support the company's cash conversion cycle.
c. How management might be able to reduce the cash conversion cycle.

How does inventory conversion period affect the size of working capital?

Explain the concept and types of working capital.

Siddhartha Manufacturing Company turns its inventory 8 times each year, has an average payment period of 35 days, and collection period of 60 days. The company's annual investment for operating cycle is Rs 3.5 million. Assuming a 360-day year.
a. Calculate the company's operating and cash conversion cycle.
b. Calculate the company's daily cash operating expenses. How much negotiated financing is required to support its cash conversion cycle?