BBS Fundamentals of Financial Management

Write the meaning of financial management. 

Describe the wealth maximization goal of a firm. Why is wealth maximization a superior goal to profit maximization? Explain.

What do you mean by wealth maximization goal of the firm?

What is financial management? Explain the functions of financial management.

What do you mean by profit maximization?

Explain the concept and functions of financial management.

What are the functions of managerial finance?

How does wealth maximization goal overcome the drawbacks of profit maximization goal?

What is financial management?

What is wealth maximization? Why should a firm concentrate primarily on wealth maximization instead of profit maximization? Explain.

Following data apply to Hi-Tech Company (Rs in Thousand)Cash and marketable securities Rs 100Sales Rs 1,000Fixed assets Rs 283.50Net income Rs 50Quick ratio 2.0 ×Current ratio 3.0 ×Days sales outstanding (DSO) 40 daysReturn on equality (ROE) 12%Calculation is based on a 360 days.Hi-Tech has not issued any preferred stocks.Find : Hi-Tech's (1) account receivable, (2) current liabilities, (3) current assets, (4) total assets, (5) total debt and (6) return on assets.

(a) What do you mean by financial statements? Describe the major types of financial statements.(b) Primal Transport Company has current assets of Rs. 2,000,000 and current liabilities of Rs. 1,000,000. What effect would the following transactions have on the firm's current ratio?a. Two new trucks are purchased for a total of Rs 800,000 in cash.b. The company borrows Rs 500,000 on short-term basis to carry an increase in receivables of the same amount.c. Additional common stock of Rs 1,000,000 is sold and the proceeds invested in the expansion of several terminals.

State the name of three main financial statements.

Who are the users of ratio analysis? How do they measure liquidity position and profitability of a firm? Explain.

The following data apply to Sagarmatha Company.

Calculation is based on 360 days. Sagarmatha has not issued any preferred stock. 

a. Find Sagarmatha's current assets.

b. What are the limitations of ratio analysis?

Following data apply to Hi-Tech Company (Rs in Thousand)

Calculation is based on a 360 days.

Hi-Tech has not issued any preferred stocks.

Find Hi-Tech's (1) Account receivable, (2) Current liabilities, (3) Current assets, (4) Total assets and (5) Return on assets. (5)

b. Kathmandu Gift Center produces and sells dolls. Each unit is solid for Rs. 80. The fixed costs are Rs. 3,00,000. Variable costs are Rs. 50 per unit.

i. How many units must be sold to achieve the break-even point?

ii. What is the degree of operating leverage at sales of 15,000 units? 

How does ordinary annuity differ from annuity due?

The management of Pashupati Publication Pvt. Ltd. decided to buy a printer taking a loan of Rs 300,000 for 3 years from Bank of Asia. The loan bears an annual interest of 10 percent and calls for equal annual installment payments at the end of each of the 3 years.a. Calculate amount of annual payment.b. Prepare loan amortization schedule.c. Calculate equal monthly installment (EMI).

How does perpetuity differ from annuity?

Assume that it is now January 1, 2024. On January 1, 2025, you will deposit Rs. 400,000 into a savings account that pays 10 percent.a. If the bank compounded interest annually, how much will you have in your account on January 1, 2028b. What would your January 1, 2028, balance be if the bank used quarterly compounding rather than annual compounding.c. Suppose you deposit the Rs. 400,000 in 4 payments of Rs. 100,000 each on January 1 of 2025, 2026, 2027, and in 2028. How much would you have in your account on January 1, 2028, based on 10 percent annual compounding?

How does annual rate differ from effective rate?

The management of Mountain Resort Pvt. Ltd. decided to buy a printer taking a loan of Rs. 100,000 for 3 years from City bank. The loan bears and annual interest of 10 percent and calls for equal annual installment payments at the end of each of the 3 years.a. Calculate amount of annual payment.b. Prepare loan amortization schedule.c. Write the equation to calculate the monthly equal instalments.

How is perpetuity different from annuity?

The New Kanchan Company's current EPS is Rs. 6.50. It was Rs. 4.42 five years ago. What was the past growth rate in earnings?

Assume that 1 year from now you plan to deposit Rs. 1,000 into a savings account that pays a nominal rate of 8 percent. 

a. If the bank compounds interest annually, how much will you have in your account 4 years from now?

b. What would your balance be 4 years from now. If the bank used quarterly compounding rather than annual compounding?

 c. Suppose you deposited the Rs. 1,000 in 4 payments of Rs. 250 each at the end of Years 1, 2, 3, and 4. How much would you have in your account at end of year 4, based on 8 percent annual compounding?

 d. Suppose you deposited 4 equal payments in your account at the end of Years 1, 2, 3 and 4. Assuming an 8 percent interest rate, how large would each of your payments have to be for you to obtain the same ending balance as you calculated in part a?

How does effective rate differ from nominal rate?

Assume that it is now January 1, 202. On January 1, 2021, you will deposit Rs. 1,00,000 into a savings account that pays 10 percent.

a. If the bank compounded interest annuall, how much will you have in your account on January 1, 2024?

b. What would your January 1, 2024, balance be if the bank used quarterly compounding rather than annual compounding?

c. Suppose you deposit the Rs. 1,00,000 in 4 payments of Rs. 25,000 each on January 1 of 2021, 2022, 2023, and 2024. How much would you have in your account on January 1, 2024, based on 10 percent annual compounding?

d. Suppose your deposit 4 equal installments in your account on January 1 of 2021, 2022, 2023, and 2024. Assuming on 10 percent interest rate, how large would each of your payments have to be for you to obtain the same ending balance as you calculated in part (a)?

Define the term risk. How is it measured?

What is beta coefficient and what objective does it serve?

Stock Y has a beta of 1.45 and expected return of 17 percent. If the risk free rate is 6 percent and market risk premium is 7.5 percent Is the stock correctly priced?

Consider the probability distribution of alternative rates of return associated with stock A and B given in the following.

a. Calculate the expected return and standard deviation of Stock A and Stock B.

b. What are the covariance and correlation coefficient between Stock A and Stock B?

c. If you form a portfolio of Stock A and Stock B comprising 70 percent wealth in Stock A and the rest in Stock B, calculate the risk and return of your portfolio. Are you able to diversify the risk forming the portfolio?
d. Covariance between stock B and market is 140 and standard deviation of market is 9 percent. If risk free rate is 6 percent and market risk premium is also 4 percent, calculate required rate of return on stock B. Is stock B overpriced or underpriced?

 Define the term portfolio.

Assume that the risk-free rate is 6 percent and the market risk premium is 8 percent. Beta of Stock J is 1.5. Calculate required rate of return on Stock J.

 Consider the following information associated with Stock A and Stock B given in the following table.

a. Which one stock is more risky? Which one stock would you prefer? 

b. If you form a portfolio of Stock A and Stock B comprising 60 percent wealth in Stock A and the rest of Stock B, calculate the risk and return of your portfolio. 

c. Assume risk-free rate and market return are 8% and 15% respectively. Covariance between Stock A and the market return is 54 and the variance of market return is 36, calculate the beta of Stock A. What is the required rate of return on Stock A? 

Lumbini Hotel has just issued 8 percent coupon bonds on the market with 7 years to maturity. Bonds have par value Rs 1000. The bonds make annual payment and currently sell for Rs 850. What is the approximate YTM?

(a) Bishal Electronic Company has just paid a cash dividend of Rs 20 per share. Dividend is expected to grow at a steady rate of 5 percent per year forever. Investors require 15 percent return from investment. Calculate value of stock at present P₀ and at the end of the fifth year, P₅?(b) Suppose City Bank sold an issue of bonds with a 10-year maturity, a Rs 1,000 par value, a 12 percent coupon rate, and semi-annual interest payments. Market interest rate is 10 percent. Calculate value of bond at present. Would you purchase the bond if it is trading at Rs 1050?

Janakpur Sweets Company is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 10 percent during the next 2 years, at 8 percent in the third year, and at 5 percent constant rate thereafter. Company's last dividend was Rs 20, and the required rate of return on the stock is 15 percent.a. Calculate the value of the stock today.b. Calculate value of stock at the end of year 1, (P₁).c. Calculate the dividend yield and capital gain yield for the first year.

Suppose Bagmati Textile Company sold an issue of bonds with a 10-year maturity, a Rs 1,000 par value, a 10 percent coupon rate, and annual interest payments.i. If the investors' required rate of return on such bonds is 12 percent. At what price would the bonds sell?ii. If actual price is Rs 900, calculate yield to maturity.

Write the meaning of financial assets with examples.

City bank has just issued 10 percent coupon bonds on the market with 15 years to maturity. Bonds have par value Rs. 1000. The bonds make annual payment and currently sell for Rs. 900. What is the current yield?

Mega Company recently paid a dividend, D₀, of Rs. 40. The dividend is expected to grow at the rate of 10 percent per year for the next 3 years. There after dividend is expected to grow at a constant rate of 3 percent per year forever. The cost of equity is 18 percent.a. What is the stock's intrinsic value today, P₀?b. Calculate dividend yield and capital gain yield for the first year.

Everest 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 the future, and if required rate of return on stock is expected to remain 12 percent, what is company's expected stock price 5 years from now?

 Mega Bank has just issued bonds with an annual coupon rate of 8 percent, 7 years maturity and Rs 1,000 per value.

a. If an investor required rate of return is 10 percent, how much can he/she pay for the bond at present? If bond is trading at Rs. 900, would you suggest the investor to purchase the bond?

b. How does value of the bond change with the change in market interest rate?

 Himalaya Power Company has just paid a cash dividend of Rs. 30 per share. Dividend is expected to grow at a steady rate of  6 percent per year forever. Investors require 16 percent return from investment.

a. Calculate value of stock at present.

b. What is dividend yield for the first year?

c. What will be the stock worth at the end of the third year, P3?

Mega Company has the following capital structure, which it considers to be optimal:

Mega's current dividend per share is Rs 15. Investors expect future earnings and dividends to grow at a constant rate of 6 percent per year forever. The company's stock currently sells for Rs 180 per share. New common stock can be sold for Rs 150 per share. Preferred stock can be sold with a dividend of Rs 12 to the public at a price of Rs 90 per share. Debt can be sold at an interest rate of 10 percent. Assume the applicable tax rate is 40 percent.

a. Calculate the cost of each capital component.

b. Calculate the weighted average cost of capital (WACC) assuming equity requirement is fulfilled from retained earning only.

Consider the probability distributions of alternative rates of return associated with Stock A and Stock B given in the following table

a. Calculate the expected return and standard deviation of Stock A and Stock B.

b. What are the covariance and correlation coefficient between Stock A and Stock B?

c. If you form a portfolio of Stock A and Stock B comprising 50 percent wealth in Stock A and the rest in Stock B, calculate the risk and return of your portfolio. Also interpret the results."

Sahara Company has the following capital structure, which it considers to be optimal:

Sahara's current dividend per share is Rs 30. Investors expect future earnings and dividends to grow at a constant rate of 5 percent per year forever. The company's stock currently sells for Rs 280 per share. New common stock can be sold for Rs 250 per share. Preferred stock can be sold with a dividend of Rs 14 to yield at a price of Rs 95 per share. Debt can be sold at an interest rate of 10 percent. Assume the applicable tax rate is 30 percent.

 a. Calculate the cost of each capital component.

 b. Calculate the weighted average cost of capital (WACC) assuming equity requirement is fulfilled from external equity only.

c. What are the uses of cost of capital?

Consider the probability distribution of alternative rates of return associated with Stock A and Stock B given in the following table.

a. Calculate the expected return and standard deviation of Stock A and Stock B.

b. What are the covariance and correlation coefficient between Stock A and Stock B.

 c. If you form a portfolio of Stock A and Stock B comprising 40 percent wealth in Stock A and the rest in Stock B, calculate the portfolio return and standard deviation. Also interpret the results.

d. What advantage an investor can achieve by investing his/her fund in the combination of stock A and Stock B instead of investing total fund either in stock A or Stock B? Explain.

Lumbini Hotel has the following capital structure, which it considers to be optimal:

Lumbini's current dividend per share is Rs 30. Investors expect future earnings and dividends to grow at a constant rate of 5 percent per year forever. The company's stock currently sells for Rs 300 per share. New common stock can be sold for Rs 250 per share. Preferred stock can be sold with a dividend of Rs 12 to yield at a price of Rs 92 per share. Debt can be sold at an interest rate of 10 percent. Assume the applicable tax rate is 30 percent.

     a. Calculate the cost of debt, cost preferred stock, cost of internal and external equity.

     b. Calculate the weighted average cost of capital (WACC) assuming equity requirement is fulfilled from retained earning only.

The cost of common stock is always higher than that of debt capital. Justify.

The small tool company was recently formed to manufacture a new product. The company has the following capital structure in the beginning of the year 2021.

The common stock sells for Rs. 200 a share on this data. Last year company paid divided of Rs. 20 per share and expected to grow at the rate of 10 percent. The company has a marginal tax rate of 40 percent. 

a. Compute the firm's weighted average cost of capital. 

b. Is the figure computed in (a) is an appropriate acceptance criteria for evaluating new investment proposal?

 The following table gives structure of Gandaki Cement Company:

Current interest rate on new debt is 10 percent. The firm's marginal tax rate is 30 percent. Gandaki Cement Company has just paid dividend Rs 30 per share. Dividend is expected to grow at 6 percent per year forever. Current market price per share is Rs. 400.

a. Calculate company's after tax cost of new debt and new cost of common equity, assuming that new equity comes only from retained earnings.

b. What will be the company's weighted average cost of capital? Assume the company maintains present capital. 

What do you mean by cash break-even?

A firm has DOL of 1.5 times and DFL of 2 times. Its net income is Rs 40,000. What is its degree of total leverage? If sales increases by 10 percent, what will be its new net income?

What do you mean by financial risk?

How does the operating BEP differ from cash BEP?

A firm has DOL of 2 times and DFL of 3 times. Its net income is Rs 200,000. What is its degree of total leverage? If sales increases by 10 percent, what will be its new net income?

Write the meaning of capital structure and list out any two factors affecting capital structure decision.

A firm has DOL of 1.2 times and DFL of 2.5 times. What is its degree of total leverage? If sales increases by 10 percent, by what percent net income will increase?

The Everest Trading Company has operating profit of Rs. 40,000, interest expenses of Rs. 6,000 and preferred dividend of Rs. 8,000. If it pays taxes at the rate of 25 percent, what is its financial BEP?

Lumbini Sugar Mills has degree of operating leverage (DOL) of 2 at its current production and sales level of 10,000 units. The resulting operating income figure is Rs. 1000. 

a. If sales are expected to increase by 20 percent from the current 10,000 units sales position, what would be the resulting operating profit figures? 

b. At the company's new sales position of 12,000 units, what is the firm's new DOL figure?

What do you mean by breakeven point?

Lambini Transportation (Pvt.) Ltd. is considering to run micro bus service from Butwal to Pokhara. A deluxe bus costs Rs. 2,000,000 and it will run the bus service for 5 years to come. Annual net cash inflows for five years will be as follows:

        a. What is the payback period of the project? Should Lumbini Transportation (Pvt) Ltd. run the bus service from Butwal to Pokhara if its maximum cost recovery period is 3 years?

        b. If the required rate of return of the project is 10 percent, what is the NPV of the project? Should Lumbini Transportation (Pvt) Ltd. run the bus service?

        c. Calculate internal rate of return (IRR) of each project. Should the company run the bus service?

        d. Which method of evaluating the project is superior? Why?

Lumbini Furniture (Pvt) Ltd. is considering these two projects: Project X and Project Y. Each project has a cost of Rs 20,000,000, and the cost of capital for each project is 15 percent. The expected net cash flows are as follows:

a. Calculate the expected return and standard deviation of Stock A and Stock B.

b. What are the covariance and correlation coefficient between Stock A and Stock B.

c. If you form a portfolio of Stock A and Stock B comprising 40 percent wealth in Stock A and the rest in Stock B, calculate the portfolio return and standard deviation. Also interpret the results.

 d. What advantage an investor can achieve by investing his/her fund in the combination of stock A and Stock B instead of investing total fund either in stock A or Stock B? Explain.

You are a financial analyst for the Gaurishanker Herbal Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Project X and Project Y. These projects are mutually independent projects. Each project has a cost of Rs 100,000 and the cost of capital for each project is 10 percent. The expected net cash flows are as follows:

• a. Calculate PBP of each project. If firm has set a maximum payback period of three years, suggest as to which project's should be accepted?

• b. Calculate net present value (NPV) of each project. Which project's should be accepted?

• c. Calculate the internal rates of return (IRR) of each project's. Evaluate the project on the basis of IRR   

• d. Which method of evaluating the project is superior? Why?

List three advantages of net present value method over pay back method.

Generation X Ltd. has identified the following two mutually exclusive projects:

 A project with initial cost of Rs 400,000 generates total present value of Rs. 300,000 over it's five years of life. What is the project's profitability index? Is the project worthwhile?

A company has a target capital structure that consists of 70 percent debt and 30 percent equity. The company anicipates that it's capital budget for upcoming year will be Rs. 8,000,000. If the company has net income of Rs. 5,000,000 and it follows residual dividend payout policy, what will be it's dividend payout ratio?

 Happy Travel Tours Ltd. is considering to run tourist bus from Sauraha to Kathmandu. A tourist bus costs Rs. 1,000,000 and it will pay daily for 4 years to come. Annual net cash inflows for four years will be as follows:

Assume the required rate of return of the project is 12 percent.

a. Define payback period. What is the payback period of the project? Should the company run tourist bus from Sauraha to Kathmandu if it's maximum cost recovery period is 3 years?

b. Define net present value (NPV). Calculate the NPV of the project. Should the company tourist bus service?

c. Define IRR. What is the IRR of the project? Should the company run tourist bus service?

Why does a firm prepare cash budget?

Gurash Pvt. Ltd. uses 10,000 units of a product per year on a continuous basis. The product has carrying costs of Rs 20 per unit per year and fixed costs of Rs 1000 per order. What is its EOQ?

Delicious Biscuit Company's inventory conversion period is 30 days, and an average collection period is 40 days. Account payable is paid approximately 20 days after they arise. Calculate the firm's operating cycle and cash conversion cycle.

Explain the significance of working capital management.

Sagarmatha Company uses 500,000 units of a product per year on a continuous basis. The product has carrying costs of Rs 10 per unit per year and fixed costs of Rs 1000 per order. What is its EOQ?

Delta Company's inventory conversion period is 40 days, and an average collection period is 50 days. Account payable is paid approximately 30 days after they arise. Calculate the firm's cash conversion cycle.

Explain the concept and importance of working capital management in Nepalese manufacturing and trading company.

Write about the elements of credit policy.

Bagmati Noodles Company's inventory conversion period is 25 days, and an average collection period is 50 days. Account payable is paid approximately 35 days after they arise. Calculate the firm's operating cycle and cash conversion cycle.

Describe the concept of working capital and working capital management. Also discuss about the factors affecting size of working capital of a firm.

What are the motives for holding cash?

Sindhu Company has been procuring in a lot size of 1000 (EOQ) units, material cost per unit is Rs. 20, ordering cost is Rs. 100 and estimated holding cost is 20 percent of unit cost per unit. What is the annual requirement in units?

Why is the management of working capital important in a business? How does the good credit policy of a firm helps in management of working capital? Explain.

State the motives of holding cash.

 Sajha Pustak expects sales of 10,000 geometry boxes of a year, which cost the firm Rs. 200 per box. It has estimated that carrying costs are 10 percent of inventory value. The firm's order costs are Rs. 1000 per order. How many boxes should the firm order?

Describe the concept of working capital and working capital management. Discuss the importance of working capital management in manufaturing and trading industries. 

In what situations a firm prefers stock dividend?

(a) Describe the major factors affecting dividend policy of a firm(b) Karnali Herbal Company (KHC) expects next year's net income to be Rs 12 million. The firm's current debt ratio is 60 percent. KHC has Rs 15 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend model, how large should company's dividend payout ratio be next year?

Write the meaning and reasons of stock repurchase.

Mega Company expects next year's net income to be Rs 8 million. The firm's current debt ratio is 60 percent. The company has Rs 10 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend model, how large should company's dividend payout ratio be next year?

What is stock repurchasing in the context of dividend policy?

(a) Himalaya Company expects next year's net income to be Rs. 12 million. The firm's current debt ratio is 60 percent. Himalaya has Rs. 15 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend model, how large should Himalaya Company's dividend payout ratio be next year?(b) Sahara Company has the following shareholder's equity account:

  The current market price of the stock is Rs. 300 per share. What will happen to this account and to number of shares outstanding if company pays a 20 percent stock dividend? What would be new selling price of common stock after the 20 percent stock dividend?

Consider the probability distribution of alternative rates of return associated with Stock A and Stock B given in the following table.

    a. Calculate the expected return and standard deviation of Stock A and Stock B.

    b. What are the covariance and correlation coefficient between Stock A and Stock B?

   c. If you form a portfolio of Stock A and Stock B comprising 70 percent wealth in Stock A and the rest in Stock B, calculate the risk and return of your portfolio. Also, interpret the result.

In what situations should a firm consider the use of stock dividend?

How does stability and growth of sales affect the divident of a firm?