Fundamentals of Financial Management Question Banks

This course covers the fundamentals of financial management, financial statement analysis, time value of money, risk and return, bond and stock valuation, cost of capital, capital structure, working capital management, and shareholder distributions.

Write the meaning of financial management.

How does ordinary annuity differ from annuity due?

Define the term risk. How is it measured?

What do you mean by cash break-even?

In what situations a firm prefers stock dividend?

Why does a firm prepare cash budget?

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 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?

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.

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).

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) 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?

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.

(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?

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

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

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

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."

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:

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

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?

Fundamentals of Financial Management

Faculty of Management