Fundamentals of Corporate Finance

Why might conflicts arise between stockholders and debt holders?

Differentiate between primary markets and secondary markets.

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

Define the term financial leverage.

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?

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.

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.

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

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?

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?

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

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

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?

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 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.

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?

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.

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?

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?