## Tribhuvan University | Faculty of Management

BIM / Sixth Semester / FIN 201: Business Finance

Year: 2014 (2071)

Full Marks: 60 | Time: 3 Hrs

Candidates are required to give their answers in their own words as far as practicable.

** Group “A” [10 X 1 = 10]**

** Indicate whether the following statements are ‘True’ or ‘False’. Support your answer with reason.**

1. Modern theory of finance state that the primary goal of the firm is to maximize total profit of the firm.

2. A bond’s call provision gives the company the right to redeem the bond before maturity.

3. The standard deviation of a two-asset portfolio in linear to weight of assets included in the portfolio.

4. The present value of a security that promises to pay Rs. 7,000 in 15 years at 8 percent discount rate is Rs 4,500.

5. A firm has an average age of inventory of 90 days, an average collection period of 40 dys, and an average payment period of 30 days. The firm’s operating cycle is 160 days.

6. The market segmentation theory of the term structure explains the shape of yield curve depends on the liquidity preference of the investors and borrowers.

7. In constant growth model, the value of stock is independent upon the investor’s planned holding period.

8. Net working capital can be defined as the portion of the firm’s current assets financed with long term funds.

9. Companies prefer to borrow funds on a secured basis because the administrative costs of secured loan are often lower than unsecured basis.

10. A floating lien is a loan in which the lender receives a security interest or general claim on the company’s entire fixed asset.

** Group “B”**

** Short Answer Questions: [6 X 5 = 30]**

11. Describe the organizational structure of finance function in a corporate firm.

12. Assume that the real risk free rate is 3 percent and the inflation is expected to be 8 percent in year 1, and 5 percent in year 2, and 4 percent thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2 – year and 5- year Treasury bonds both yield 10 percent:

a. What is the maturity risk premium on 2-year bond?

b. What is the maturity risk premium on 5-year bond?

c. Why do maturity premium on two bonds differ?

13. (a) Suppose you had just celebrated your 19th birthday. A rich uncle set up a trust fund for you that will pay Rs. 100,000 when you turn 25 years. If the relevant discount rate is 11 percent, how much is this fund worth today?

(b) You have just joined the investment-banking firm of Pandey Company. They have offered you two different salary arrangements. You can have Rs. 30,000 per year for next two years of Rs. 20,000 at the end of second year, along with Rs 30,000 signing bonus today. If the interest rate is 12% compounded quarterly, which offer do you prefer?

14. Delta Company currently paid a dividend is expected to grow at a 10 percent per year for the next 3 years after which it is expected to grow at 5 percent per year for the foreseeable future. If your required rate is 12 percent, how much would you pay for this stock?

15. The Nepal Soap Factory is attempting to establish a current assets policy. Fixed assets are Rs 600,000 , and the firm plans to maintain a 50 percent debt-to-assets ratio. The interest rate is 10 percent on all debt. Three alternative current asset policies are under consideration: 40, 50 and 60 percent of projected sales. The company expects to earn 15 percent before interest and taxes on sales of Rs 3 million. The company’s effective tax rate is 40 percent. What is the expected return on equity under each alternative?

16. The Johnson company expects that it will need Rs 600,000 cash for August, 2014. Possible means of financing are: (a) Establish a one year line of credit for Rs 600,000. The bank requires a 2 percent commitment fee. The interest rate is 21 percent. Funds are needed for 30 days. (b) Forgo cash discount on a 2/10, net 40 credit term. (c) Issue Rs. 600,000 face amount, 20 percent commercial paper for 30 days. Which financing strategy should be collected?

** Group “C” – Comprehensive answer questions:**

** Read the following information and answer the questions given below: [2 X 10 = 20]**

17. A 10 year, 12 percent annual coupon bond with a par value Rs 1,000 may be called in 4 years at a call price Rs 1060. The bond currently Sells for Rs 1,100 (assume the bond had just been issued).

a. What is the bond’s nominal annual yield to maturity?

b. What is the bond’s annual yield to call?

c. What is the bon’s current yield?

18. Consider the following probability distribution of rate of returns associated with stock A and B.

Probability | Return from Stock A (%) | Return from stock B (%) |

0.2 0.4 0.3 0.1 | 10 15 6 (2) | 12 10 9 (4) |

a. Calculate the expected return and standard deviation of each stock.

b. Calculate the covariance and correlation coefficient between stock A and B.

c. If you form a portfolio investing 40 percent fund in stock A and 60 percent in stock B, what are the expected return and standard deviation of your portfolio?

d. Which investment would you prefer? Stock A, stock B or the portfolio? Why?