BBS Fundamentals of Corporate Finance

Write the meaning of corporate finance.

"A financial manager should make decisions that maximize shareholder wealth." In the light of this statement, what managerial actions a financial manager should take to maximize shareholder wealth? Explain.

Write the meaning of business ethics.

Explain the potential conflict of interest between shareholders and managers, and between shareholders and creditors. How these conflicts can be resolved?

Why might conflicts arise between stockholders and debt holders?

Assume that the interest rate on a 1-year T-bond is currently 7% and the rate on a 2-year bond is 9%. If the maturity risk premium is zero, what is a reasonable forecast of the rate on a 1-year bond next year?

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% the third year. The maturity risk premium is estimated to be 0.1 x (t - 1)%, wheret = number of years to maturity. The liquidity premium on relevant 3-year securities is 0.25% and the default risk premium on relevant 3-year securities is 0.6%.

a. What is the yield on a 1-year T-bill?

b. What is the yield on a 3-year T-bond?

c. What is the yield on a 3-year corporate bond?

What is an agency relationship?

Define the term default risk.

Distinguish between money markets and capital markets

Mention four responsibilities of financial manager.

The real risk-free rate is \( r^* = 3\% \) inflation rate is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities?

Explain the reasons for managing risk?

The yield on 1-year Treasury securities is 6%, 2-year securities yield 6.2%, 3-year securities yield 6.3%, and 4-year securities yield 6.5%. There is no maturity risk premium. Using expectations theory forecast the yields on the following securities:
a. A 1-year security, 1 year from now
b. A 1-year security, 2 year from now
c. A 2-year security, 1 year from now
d. A 3-year security, 1 year from now

Why should the financial manager work together with other functional managers?

What do you mean by agency problem between shareholders and creditors?

How does the goal of stock price maximization benefit the society?

Star Traders buys under terms of 1/10 net 40. Star Trader does not take discount and pays on 50th day. What is the annual percentage cost of stretching accounts payable? Assume 360 days in a year.

The Kathmandu Electronic Company intends to borrow Rs 800,000 to support its short-term financing requirements during the next year. The financing alternatives offered by the bank include:

Alternative 1: A discount interest loan with a simple interest of 15 percent and no compensating balance requirement.

Alternative 2: A 14 percent simple interest loan that has a 15 percent compensating balance requirement.

Alternative 3: Rs 1 million revolving line of credit with simple interest of 12 percent paid on the amount borrowed and a 1 percent commitment fee.

a. Compute the effective cost (rate) of each financing alternative assuming Kathmandu borrows Rs 800,000. Which alternative should it use?

b. Discuss the factors other than cost to be considered while choosing a bank for short-term loan.

Star Traders buys under terms of 3/8 net 50. Star Trader does not take discount and pays on 60th day. What is the annual percentage cost stretching accounts payable? Assume 360 days in a year.

Modern Printing Press estimates that it will need an additional Rs 500,000 for the month of June due to the seasonal nature of its business. It has three options available to provide the needed funds:

a. Establish a one-year line of credit for Rs 500,000 with a commercial bank. The commitment fee would be 1 percent, and the interest charged would be 12 percent per annum on the used funds. No minimum time on the use of the money.

b. Forego the June trade discount of 2/10, net 40 on Rs 500,000 of accounts payable.

c. Issue Rs 500,000 of sixty-day commercial paper at a 9 percent per annum interest rate. Since the funds are only required for only 30 days, the excess funds are invested in 6 percent per annum marketable securities for the month of July. The total transaction fee on purchasing and selling the marketable securities is 0.5 percent of the fair market value

i. Calculate rupees cost of each alternative. Which alternatives result in the lowest rupees cost?

ii. Is the source with the lowest expected cost necessarily the source to select? Why or why not?

The Pawlowski Supply Company needs to increase its working capital by Rs. 4.4 million. The following three financing alternatives are available (assume a 365-day year):

i. Forgo cash discounts (granted on a basis of "3/10, net 30") and pay on the final due date.

ii. Borrow Rs. 5 million from a bank at 15 percent interest, This alternative would necessitate maintaining a 12 percent compensating balance.

iii. Issue Rs, 4.7 million of six-month commercial paper to net Rs. 4.4 million. Assume that new paper would be issued every six months. Commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest cost to the issuer.Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was no more than 2 percent per annum.

a. Calculate the annual percentage cost for each alternative.

b. Which alternative should Pawlowski select? Why?

c. What additional qualitative factor should Pawlowski consider before reaching a decision?

What is the annual percentage cost of trade credit (based a 360-day basis) under the credit terms of 2/10, net 70?

Weathers Catering Supply, Inc., estimates that because of the seasonal nature of its business, it will require an additional Rs. 2,000,000 for 6 months. Weathers Catering Supply, Inc. has the following four options available for raising the needed funds.
i. State Bank has offered to lend the funds at a 9 percent annual rate subject to a 10% compensating balance. The principal of loans would be payable at maturity as a single sum.
ii. Frost Finance Co. has offered to lend the funds at a 9 percent annual rate with discount-loan terms. The principal of loans would be payable at maturity as a single sum.
iii. Forgo the trade discount of 2/10, net 40 on Rs. 2,000,000 of purchase
iv. Issue Rs. 2,000,000 of 180 day commercial paper at a 9.5 percent per annum interest rate. The total transactions fee, including the cost of backup credit line, on using commercial paper is 0.5 percent of the amount of the issue.
a. Calculate the cost of each financing alternative?
b. Is the source with the lowest expected cost necessarily the one to select? Why or why not?

Dabur Nepal wishes to borrow Rs 100,000 for one year from NBL. The annual interest rate of the loan is 10 percent. The interest is paid on a discount basis and 10 percent compensating balance is required. What is the effective interest rate for the Dabur Nepal?

The Phulchoki Supply Company needs to increase its working capital by Rs. 4,400,000. The following financing alternatives are available (assume a 365-day year): 

1. Forgo cash discounts (granted on a basis of "3/10, net 30") and pay on the final due date. 
2.  Borrow Rs. 5,000,000 from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance. 
3. . Issue Rs. 4,700,000 six-month commercial paper to net Rs. 4,400,000. Assume that new paper would be issued every six months. (Note: Commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest cost to the issuer)a. Which alternative should Phulchoki Supply company select? 

b. Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was... 

c. Is the source with the lowest expected cost necessarily the source to select? Why or why not? 

What are the key features of operating lease?

Delta Company can lease equipment for three years, making annual payments of Rs 300,000 per year at the end of each year or they can buy the equipment for Rs 600,000. At the end of third years, the equipment will have salvage value Rs 120,000 which is both book salvage value and cash salvage value. The firm's before tax cost of debt is 10 percent. The company uses straight-line depreciation and has a 40 percent tax rate.

a. Calculate cost of leasing.

b. Calculate cost of purchasing. Should the machine be leased or purchased?

How does operating lease differ from financial lease?

Mega Company can lease equipment for three years, making annual payments of Rs. 150,000 per year at the end of each year or they can buy the equipment for Rs. 300,000. At the end of third years, the equipment will have no salvage value. The firm's before tax cost of debt is 10 percent. The company uses straight-line depreciation and has a 40 percent tax rate..

a. Calculate cost of leasing.

b. Calculate cost of purchasing. Should the machine be leased or purchased?

c. The appropriate discount rate for cash flows used in the analysis is the firm's after-tax cost of debt, why?

Suppose you want to buy a computer and local bank will lend you Rs. 100,000. Their loan will be fully amortized over 5 years, and the nominal interest rate will be 12% per annum. What will be the annual installment?

Suppose you borrowed Rs. 300,000 on a student loan at a rate of $10\%$ and must repay it in three equal installments at the end of each of the next 3 years. How large would your payments be?

Hari is interested in buying a motor bike. He is applying for Rs. 125,000, 3-year loan. The loan will be fully amortized over the next 3 years. Current interest rate is 12 percent. How much should be paid by Hari for the yearly installment of loan?

Bagmati Company has 400,000 shares outstanding and the firm's charter provides for a cumulative voting procedure. The company has seven directors. What is the minimum number of shares needed to ensure the election of one director?

What are advantages and disadvantages of long term bonds as a source of long-term financing? Explain.

The Himal Cement Company has planned to raise long-term fund. Recently it has announced a rights offer to raise Rs 50 million for a new plant. The stock has Rs 100 par value and currently sells for Rs 250 per share, and there are 1,000,000 shares outstanding.

a. Why do companies prefer rights offering instead of further public offering?

b. If the subscription price is set at Rs 100 per share, how many shares must be sold? How many rights will it take to buy one share?

c. What is the value of a right? What is the ex-rights price?

d. Show the wealth of Mohan Thapa, a shareholder with 2,000 shares and Rs 100,000 cash balance before the offering.

e. Show Mr. Thapa's wealth after rights offering assuming that the exercises all his rights.

Sahara Company has 320,000 shares outstanding and the firm's charter provides for a cumulative voting procedure. The company has seven directors. What is the minimum number of shares needed to ensure the election of one director?

Describe the methods of issuing securities.

The Himalayan Herbal Company has planned to raise long-term fund. Recently it has announced a rights offer to raise Rs 80 million for a new plant. The stock has Rs 100 par value and currently sells for Rs 250 per share, and there are 1.6 million shares outstanding

a. What is the maximum possible subscription price? What is the minimum?

b. If the subscription price is set at Rs 100 per share, how many shares must be sold?

c. How many rights will it take to buy one share?

d. What is the value of a right?

e. What is the ex-rights price?

f. Show how a shareholder with 2,000 shares before the offering and no desire (or money) to buy additional shares is not harmed by the rights offer

Differentiate between primary markets and secondary markets.

Who are the key participants in the transactions of financial institutions?

The Bowman, Inc., currently has 320,000 shares outstanding. The stock sells for Rs. 400 per share. To raise Rs. 20 million for a new particle accelerator, the firm is considering a right offering at Rs. 250 per share.

a. How many shares will have to be sold?

b. How many rights are required to purchase one new share?

c. What is the value of a right?

d. A shareholder has 1,000 shares and Rs. 50,000 cash balance before the offering. Show the stockholders wealth before rights offering and after rights offering if all rights are exercised.

National Power earns Rs. 20 million after taxes and has 1,000,000 shares outstanding. Earnings per share are thus Rs. 20, and the stock sells for Rs. 500. To finance a planned expansion, the company intends to raise Rs. 100 million worth of new equity funds through a rights offering. Suppose the subscription price is set at Rs. 400.
a. How many shares will have to be sold?
b. How many rights are required to purchase one new share?
c. What is the value of a right?
d. What will the price per share be after the rights offer?

What are primary motives behind merger? Discuss the four economic types of mergers with suitable examples.

Distinguish between primary market and secondary market.

State the major types of financial institution in Nepal.

Write the meaning of financial derivatives.

Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, will remain at 2% and that maturity risk premium on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premium increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-years or longer term T-bonds. 

a. Calculate the average expected inflation rate for 1-, 2-, 3-, 4-, 5- and 10- year treasury securities. 

b. Calculate the maturity risk premium for 1-, 2-, 3-, 4-, 5- and 10- years Treasury securities. 

c. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, and 10- year treasury securities.

Explain reasons why companies employ risk management techniques? How the futures contact and swaps can be used to reduce risks? Explain with examples.

Roal Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. Presently there are 350,000 shares outstanding at Rs. 760 each. There will be 70,000 new shares offered at Rs. 700 each.

Required:

a) What are the advantages of rights offering?

b) How many rights are associated with one of the new shares?

c) Compute the theoretical value of a right.

d) What is the ex-right price of stock?

e) Suppose your total assets consist of 500 shares of Roal Shoe Co. and cash Rs. 50,000. What is your wealth position before and after the right offering if you sell 200 rights and exercise 300 rights?

Write the meaning of cumulative preferred stock.

Why do firms issue convertible bonds?

Hi-Tech Ltd. has warrants outstanding that allow the holder to purchase 3 shares of stock for a total of Rs 60 for each warrant. Currently, the market price per share of Hi-Tech is Rs 18. Investors hold the following probabilistic beliefs about the stock 6 months hence:

a. What is the present theoretical value of the warrant?
b. What is the expected value of stock price 6 months hence?
c. What is the theoretical value of the warrant 6 months hence?
d. Would you expect the present market price of the warrant to equal its theoretical value? If not, why not?

Why preferred stock is called hybrid security?

Define the term warrant.

Alpha Paint Corporation has a convertible subordinated bond with a coupon rate of 10 percent. It has a face value of Rs. 1,000 and matures in 10 years. The common stock is currently selling at Rs. 200 per share. The conversion ratio is 4 and the interest rate on similar risk bond is 12 percent.

a. What is the conversion price?

b. Calculate initial conversion value

c. Compute initial conversion premium.

d. What are the reasons for using convertible securities?

Under water Technology stock is currently trading at Rs. 300 a share. What is the value of call option if exercise price is Rs. 250.

Why is preferred stock called hybrid security? Explain the key features of preferred stock.

You notice that shares of stock in the Patel Corporation are going for Rs. 50 per share. Call option with an exercise price of Rs. 35 per share are selling for Rs. 10. How much you can earn from this mispricing if the option expires today?

Why is preferred stock called hybrid security? Explain the advantages and disadvantages of preferred stock from company's view point 

Suppose you have purchased a call option of Unilever Limited. Each call option entitles you to purchase one stock of the company at a price of Rs. 1200. The option premium for one call option is Rs.30. The expiration period of the option is 3 month. If the stock price of the company becomes Rs. 1500 at the expiration date. Calculate value of call option.

Why preferred stock is hybrid form of long-term financing? Describe the merits and demerits of preferred stock financing.

Write about the importance of financial plan.

Koshi Company's balance sheet is given below:

Sales are expected to increase from Rs 2,000,000 in 2024 to Rs 3,000,000 in 2025. Firm's after-tax profit margin is forecasted to be 10 percent and its payout ratio will be 80 percent.

a. What is the firm's additional fund needed for the year 2025 if company is running at full capacity? Use AFN equation.

 b. Prepare Koshi Company's pro-forma balance sheet of as of December 31, 202

What is operating plan?

Janakpur Textile Company's balance sheet is given below:

Sales are expected to increase from Rs. 10,000,000 in 2023 to Rs. 15,000,000 in 2024. Firm's after-tax profit margin is forecasted to be 10 percent and its dividend payout ratio will be 70 percent. .

a. What is the firm's additional fund needed for the year 2024 if company is running at full capacity? Use AFN equation. b. Prepare Janakpur Textile Company's pro-forma balance sheet of as of December 31, 2024

What is the annual percentage cost of trade credit (based a 360-day basis) under the credit terms of 2/10, net 40?

Magee Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Magee's balance sheet as of December 31, 2018, is shown here (Rs millions):

Sales for 2018 were Rs. 350 million, while net income for the year was Rs. 10.5 million. Magee paid dividends of Rs. 4.2 million to common stockholders. Sales are projected to increase by Rs. 70 million or 20 percent during 2019. The firm is operating at full capacity. Assume that the profit margin and dividend payout ratios remain constant.

a. Using the equation, calculate the external funds needed for next year.

b. Construct Magee's pro forma balance sheet for December 31, 2019. Assume that all external capital requirements are met by bank loans and are reflected in notes payable.

The most recent financial statements for Ramailo Tours Company are shown below:

                             Income Statement for year ended December 31, 2016

                     Balance Sheet as of December 31, 2016

What do you mean by optimal capital structure?

What do you mean by optimal capital structure?

Define the term financial leverage.

A company's sales, variable costs and fixed cost are Rs. 500,000, Rs. 300,000 and Rs. 100,000 respectively. It has borrowed Rs. 200,000 at 10 percent. Calculate the degree of financial leverage.

Rise Against Corporation is comparing two different capital structure an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 210,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and Rs. 2.28 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

a. If EBIT is Rs. 500,000, which plan will result in the higher EPS?

b. If EBIT is Rs. 750,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?

A company's sales, variable costs and fixed cost are Rs. 7,500,000, Rs. 4,500,000 and Rs. 1,500,000 respectively. Calculate the degree of operating leverage.

Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and Rs. 90,000 in debt. Plan II would result in 7,600 shares of stock and Rs. 198,000 in debt. The interest rate on the debt is 10 percent. Assuming that the corporate tax rate is 40 percent.
a. Compare both of these plans to an all-equity plan assuming that EBIT will be Rs. 48,000. The all-equity plan would result in 12,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?
b. What are the break-even levels of EBIT for each plan as compared to that for an all equity plan?

David Baseball Bat Company currently has Rs. 3,000,000 in debt outstanding, bearing an interest rate of 12 percent. It wishes to finance a Rs. 4,000,000 million expansion program and is considering three alternatives: additional debt at 14 percent interest (option 1), preferred stock with a 12 percent dividend (option 2), and the sale of common stock at Rs 100 per share (option 3). The company currently has 800,000 shares of common stock outstanding and is in a 40 percent tax bracket.

a. If earnings before interest and taxes are currently Rs. 1,500,000 what would be earnings per share for the three alternatives assuming no immediate increase in operating profit?

b. Determine the indifference point between the debt plan and the common stock plan.

List out two major reasons for going global market.

Define the term "purchasing power parity"

(a) How does multinational financial management differ from domestic financial management?

(b) The nominal interest rate on six-month T-bills denominated in NR is 12 percent, while the nominal interest rate on six-month default free Japanese bonds is 6 percent. In the spot exchange market, one Yen equals NR 0.90. If interest rate parity holds.

i. What is the six-month forward exchange rate?

ii. What is the premium on forward Yen?

List out any four reasons for going global.

What do you mean by purchasing power parity?

Kapil set out to tour Singapore in January 2024. He had set aside NR 300,000 for his tour. On January 16, 2024, he went to Baluwatar and exchanged NR 300,000 for SGD. On that very day, Nepal Rastra Bank's Bid rate for one unit of SGD was NR 69.13 and its Ask rate was NR 69.61 for one unit of SGD. Unluckily he had to cancel his trip to Singapore on January 22 for next couple of months. So, he again exchanged SGD for NR at the same rate quoted on January 16.

a. How much SGD did he receive after exchanging NR 300,000 on January 16.

b. How much NR did he receive on January 22 after selling the SGD?

c. What is his gain or loss in buying and selling of SGD?

d. What percent did he gain or lose his money?e. What is the Bid/Ask percentage spread?

Assume that today one Canadian dollar is worth 0.6667 U.S. dollar. How many Canadian dollars would you receive for one U.S. dollar?

Define forward and future contracts. Differentiate between forward and future contracts?

Given the following Exchange Rate for 31 July 2020

a. How much money would be realized by Nepalese exporter for U.S. Dollar 1,000?
b. How much money would be payable for European Euro 10,000?
c. You had Rs, 100,000 with you while traveling to USA. You had them converted into U.S. Dollar. However, your decision to travel cancelled. The U.S. Dollar you had now are required to be converted in Nepalese rupees. What is the profit or loss by this transaction?
d. The current spot exchange rate between U.S. Dollar and Nepalese rupees is: NPR 120.05/US$ and the 1-year forward rate is: NPR 125.01/US$. The expected inflation rate in Nepal is 8.5 percent. What is the expected inflation rate in US?

A television set sells for 1000 U.S. dollars. In the spot market, $1=110 Japanese yen. If purchasing power parity holds, what should be the price (in yen) of the same television set in Japan?

The most recent financial statements for Fleury, Inc., Follows:

                          Balance Sheet as of December 31, 2018

Sales for 2019 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. If the firm is operating at full capacity and no new debt or equity is issued.
a. Based on above information construct the firm's pro forma income statement for next year.
b. Construct the firm's pro forma balance sheet for next year.
c. What external financing is needed to support the 20 percent growth rate in sales?

Suppose the spot exchange rate for the Canadian dollar is Can $ 1.05 US $ and the six month forward rate is Can $1.07 US $.

a. Which is worth more, a U.S dollar or a Canadian dollar?

b. Assuming absolute purchasing power parity holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can $ 2.50?

 c. Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?

 d. Which currency is expected to appreciate in value?

e. Suppose the Japanese yen exchange rate is ¥ 80 = US $ 1, what is the cross-rate in terms of Japanese yen per Canadian dollar?

Assume 3-month US T-bills have a nominal rate of 8 percent, while default free European bond that mature in 3 months have a nominal rate of 6 percent. In the spot exchange market, one Euro equals $1.15. If interest rate parity holds. What is the 6-month forward exchange rate?

a. Suppose the Japanese yen exchange rate is ¥118 = $1, and the British pound exchange rate is £1 = $1.81. 

i. What is the cross-rate in terms of yen per pound? 

ii. Suppose the cross-rate is ¥204 = £1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing. 

b. Suppose the spot exchange rate for the Canadian dollar is Can$1.15 / $1 and the six-month forward rate is Can$1.19 / $1.

i. Is the US dollar selling at a premium or a discount relative to the Canadian dollar?

ii. Which currency is expected to appreciate in value?

Explain the concept and types of mergers. Also discuss the rationales behind the mergers and acquisitions.

Explain different types of mergers. Also discuss the rationales behind the mergers and acquisitions.

Define merger and acquisitions? Describe the concepts of horizontal, vertical and conglomerate merger. Also explain the growing need of mergers and acquisition in bank and financial institutions in Nepal.

What do you mean by mergers and acquisitions? Discuss the significance of mergers and acquisition in Nepal.