## Tribhuvan University | Old is Gold

Year: 2071 (2014) / B.B.S. / Second (II) Year / MGMT

Fundamentals of Financial Management (MGT 215)

Full Marks: 100 | Time: 3 Hrs

Candidates are required to give their answers in their own words as far as practicable. The figures in the margin indicate full marks.

** Group “A” (Short Answer Questions) [80]**

** Attempt any EIGHT questions.**

1. What is wealth maximization? Why is wealth maximization a superior goal to profit maximization? Explain. [3 + 7]

2. Explain the types and importance of financial statements. [10]

3. Define net float. How do firms use float to increase cash management efficiency? [4 + 6]

4. Briefly explain the five Cs used to evaluate credit standard. [10]

5. The past five years’ rate of return from Stock A and Stock B are as below: [3 + 3 + 3 + 1]

Year | Return on Stock A | Return on Stock B |

2007 2008 2009 2010 2011 | 10% 30 -10 5 10 | 15% -10 25 20 15 |

i. Compute the average return on Stock A and Stock B.

ii. Determine the standard deviation of return on Stock A and Stock B.

iii. Suppose an investor forms a portfolio of the two stocks investing 50 percent of his/her funds in each stock. Compute the return of the portfolio and the portfolio standard deviation.

iv. Interpret the result.

6. The following data apply to Mechi Tea Company (Rs. In million)

Cash and marketable securities ______Rs. 100.00

Sales __________________________ Rs. 1,000

Fixed assets ____________________ Rs. 283.50

Net income ____________________ Rs.50.00

Quick ratio _____________________ 2.0 X

Current ratio ____________________ 3.0 X

Days sales outstanding (DSO) ________ 40 days

Return on equality (ROE) ___________ 12 %

Calculation is based on a 360 days.

Mechi Tea Company has not issued any preferred stocks. The company’s liabilities consist only common equity, current liabilities and long-term debt.

a. Find company’s (1) account receivable, (2) current liabilities, (3) current assets, (4) total assets, (5) return on assets, (6) common equity, and (7) long-term debt.

b. List the limitations of ratio analysis. [7 + 3]

7. (a) NMB Bank Ltd. Pays 7.25 percent interest, compounded annually, on time deposits. The Sanima Bank pays 6.5 percent interest compounded quarterly.

(i) Based on effective interest rates, in which bank would you prefer to deposit your maoney?

(ii) Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? In answering this question, assume that funds must be left on deposit during the entire compounding period in order for you to receive any interest. [4 + 2]

(b) Prajita borrowed Rs 56,500 student loan when she was a student at Tribhuvan University at 12 percent interest rate per annum. If she repaid Rs. 10,000 per year, how long, to the nearest year, it took her to repay her loan? [4]

8. Himalayan company has the following capital structure, which it considers to be optimal:

Debt _____________ 25%

Preferred stock _____ 15

Common stock _____ 60

Total capital ________ 100%

The company’s tax rate is 40 percent, and investors expected earnings and dividends to grow at a constant rate of 9 percent in the future. The company paid dividend of Rs. 26 per share and its stock currently sells at a price of Rs. 600 per share. These terms would apply to new security offerings:

Common: New common stock would have a floatation cost of 10 percent.

Preferred: new preferred stock could be sold to the public at a price of Rs. 100 per share, with a dividend of Rs. 11, floatation costs of Rs. 5 per share would be incurred.

Debt: Debt could be sold at an annual interest rate of 12 percent.

a. Find the component cost of debt, preferred stock, retained earnings, and new common stock.

b. Calculate the weighted average cost of capital assuming that common stock financing requirements are ali met by retained earnings.

9. (a) Suppose Delta company is planning to issue bonds with a 15-year maturity, a Rs. 1,000 per value, a 10 percent coupon rate, and annual interest payments. If the going rate of interest on such bonds in the market is 12.5 percent. At what price the company should offer the bonds? [5]

(b) Delta Company is expected to pay a Rs.25 per share dividend at the end of the year. The dividend is expected to grow at a constant rate of 5 percent a year. The investors required rate of return on the stock is 15 percent. What should be the appropriate value of the common stock? [5]

10. Write notes on any Two: [5 + 5]

a. Economic order quantity

b. Common size statements

c. Dividend payout schemes

** Group “B” (Comprehensive Answer Questions) [20]**

** Attempt any ONE question.**

11. What does gross working capital mean? How is it different from net working capital? Explain the determinants of size of working capital. [5 + 5 + 10]

12. Sahara Electronic Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of Rs. 700,000 at time zero, and Rs. 1,000,000 in year 1. After-tax cash inflows of Rs. 250,000 are expected in year 2, Rs.300,000 in year 3, Rs 350,000 in year 4, and Rs. 4000,000 each year thereafter through year 10. While the product line might be viable after year 10, the company prefers to be conservative and end all calculations at that time. [5 + 5 + 3 + 3 + 4]

(a) If the required rate of return is 15 percent, what is the net present value of the project? Is it acceptable?

(b) What is its internal rate of return?

(c) What would be the case if the required rate of return was 10 percent?

(d) What is the projects payback period?

(e) What are the merits and demerits of net present value and internal rate of return?

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