Fundamentals of Financial Management

bbssecond year

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.

Chapter Wise Notes Question Banks Syllabus Chapter Wise Questions

Faculty of Management

2081

Bachelor of Business Studies

Fundamentals of Financial Management

MGT 215

Full Marks: 100

Pass Marks: 35

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"

Attempt All questions

[10*2=20 ]

What do you mean by profit maximization?

[2]

How does annual rate differ from effective rate?

[2]

State the name of three main financial statements.

[2]

Write the meaning of financial assets with examples.

[2]

What is stock repurchasing in the context of dividend policy?

[2]

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

[2]

Write about the elements of credit policy.

[2]

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?

[2]

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?

[2]

10.

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.

[2]

"Section B"

Attempt any Five questions .

[5*10=50 ]

Explain the concept and functions of financial management.

[10]

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

[10]

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.

[10]

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.

[10]

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

Debt	40%
Preferred Stock	10
Common equity	50
	100%

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.

[10]

(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:

Common Stock (100,000) share @ Rs.100	10,000,000
Additional Paid in Capital	5,000,000
Retained earning	15,000,000
Shareholder's equity	30,000,000

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?

[10]

"Section C"

Attempt any Two questions

[2*15=30 ]

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

[15]

Consider the probability distribution 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	0%	35%
2	0.4	10	15
3	0.3	20	- 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 70 percent wealth in Stock A and the rest in Stock B, calculate the risk and return of your portfolio. Also, interpret the result.

[15]

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:

Year	Expected Net Cash Flows
	Project X	Project Y
0	(Rs 100,000)	( Rs 100,000)
1	40,000	50,000
2	40,000	60,000
3	40,000	40,000
4	40,000	18,000

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?

[15]

Year	Expected Net Cash Flows
	Project X	Project Y
0	(Rs 100,000)	( Rs 100,000)
1	40,000	50,000
2	40,000	60,000
3	40,000	40,000
4	40,000	18,000

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?