Fundamentals of Financial Management Question Banks

Explain the significance of working capital management.

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).

[5]

3.

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.

[5]

4.

(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?

[5]

5.

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

Debt	30%
Preferred stock	20
Common equity	50
	100%

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.

[5]

6.

(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?

[5]

State of economy	Probability	Stock A	Stock B
1	0.3	5%	25%
2	0.4	10	15
3	0.3	15	5

Year	1	2	3	4	5
Cash Flows Rs.	600,000	800,000	800,000	600,000	500,000

Fundamentals of Financial Management

Faculty of Management