Fundamentals of Finance

Define the term finance.

Write the meaning of treasury bill.

Mention the name of four types of financial statements.

What is meant by default risk?

What is the difference between an annuity and a perpetuity?

How do you compute dividend yield? Illustrate.

Differentiate between premium bond and discount bond.

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

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

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

What are financial institutions? Distinguish between depository and non-depository financial institutions.

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

Explain the concept and types of working capital.

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. 

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. 

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?

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? 

Explain the financial goal of the firm. Also discuss its key features.

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?

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]

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

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.

Read the following information carefully and answer the questions that follow:
Roshani Gurung was brought in as assistant to Krishna Thapa, Chairman of Jagadamba Trading Company, who had the task of getting the company back into a sound financial position. Jagadamba's 2026 balance sheets and income statements, together with projections for 2025, are shown in the following tables. The tables also show the 2026 financial ratios, along with industry average data. The 2025 projected financial statement data represent Gurung's and Thapa's best guess for 2025 results, assuming that some new financing is arranged to get the company out of difficulties.

Jagadamba Trading Concern: Balance Sheet

Jagadamba Trading Concern: Income Statement

Note: "E" indicates estimated. The 2025 data are forecasts.

Roshani must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions:
a. Calculate the 2025 current and quick ratios based on the projected balance sheet and income statement data. Compare the liquidity position of the company with 2026 and industry average.
b. Calculate the 2025 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. Compare the firm's utilization of assets with 2026 and industry average.
c. Calculate the 2025 debt ratio, and times-interest earned. How does the company compare with the industry with respect to financial leverage?
d. Calculate the profit margin, return on assets (ROA), and return on equity (ROE) for 2025. Compare the profitability of the company with 2026 and industry average.
e. Describe the limitations of ratio analysis.