Fundamentals of Corporate Finance

bbsfourth year

This course "Fundamentals of Corporate Finance" is about how effectively financial resources are raisedand used in a business corporation. It helps students to learn effective management of financial resources ina corporate firm and equips them with the necessary skills to do so.

Chapter Wise Notes Question Banks Syllabus Chapter Wise Questions

Faculty of Management

2077

Bachelor of Business Studies

Fundamentals of Corporate Finance

FIN 250

Full Marks: 100

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"

Brief Answer Question : Attempt All questions .

[10*2=20 ]

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

[2]

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

[2]

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

[2]

Distinguish between primary market and secondary market.

[2]

State the major types of financial institution in Nepal.

[2]

Write the meaning of financial derivatives.

[2]

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?

[2]

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.

[2]

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?

[2]

10.

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?

[2]

"Section B"

Descriptive Answer Questions : Attempt any FIVE questions .

[5*10=50 ]

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

[10]

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

[10]

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.

[10]

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.

[10]

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

Income Statement for year ended December 31, 2016


Sales	Rs. 845,000
Costs	(657,000)
Other expenses	(17,500)
Earnings before interest and taxes	Rs. 176,000
Interest paid	(12,500)
Taxable income	Rs. 158,000
Taxes (35%)	(55,000)
Net income	Rs. 102,700
Dividends	Rs. 30,810
Addition to retained earnings	Rs. 71,890

Balance Sheet as of December 31, 2016

Assets		Liabilities and Owners' equity
Current assets		Current liabilities
Cash	Rs. 23,000	Accounts Payable	Rs. 62,000
Receivables	37,000	Notes payable	15,000
Inventory	79,000	Total Current Liabilities	Rs. 77,000
Total current assets	Rs. 139,000	Long-term debt	144,000
Fixed assets		Owners' equity
New plant and equipment	375,000	Common stock and paid-in surplus	Rs. 100,000
		Retained earnings	193,000
		Total owners' equity	Rs. 293,000
Total assets	Rs. 514,000	Total liabilities and equity	Rs. 514,000

a. Assume that sales for 2017 are projected to grow by 20 percent. Interest expenses will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets and accounts payableincrease spontaneously with sales. If the firm is operating at full capacity, what external financing is needed to support the 20 percent growth rate in sales?

b. Prepare pro forma balance sheet for the year ending 2017. Use AFN to balance the pro forma balance sheet.

[10]

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 $\text{Can}\$1.15 / \$1$ and the six-month forward rate is $\text{Can}\$1.19 / \$1$ .

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?

[10]

"Section C"

Analytical Answer Questions : Attempt any TWO questions .

[2*15=30 ]

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

[15]

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):

Forgo cash discounts (granted on a basis of "3/10, net 30") and pay on the final due date.
Borrow Rs. 5,000,000 from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance.
. 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?

[15]

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?

[15]