Brief Answer Questions<br>Attempt ALL questions.
[10×2=20]What is meant by wealth maximization goal of a firm?
What are the major limitations of ratio analysis?
How do you calculate value of a zero coupon bond?
A stock has required rate of return 12 percent, a beta of 1.5 and the expected return on the market is 10 percent. What must the risk-free rate be?
What is the present value of Rs 100,000 due in year 6, discounted at 12 percent?
How do you compute profitability index and take investment decision based on profitability index?
A company’s fixed operating costs are Rs. 800,000, its variable costs are Rs. 30 per unit, and the product’s sales price is Rs. 70. What is the company’s operating break-even point?
Write the meaning of capital structure.
How do you determine EOQ using equation? Illustrate.
Current market price per share of Sahara Company is Rs.300. If company declares 20 percent stock dividend, calculate adjusted market price per share after stock dividend.
Descriptive Answer Questions<br>Attempt only FIVE questions.
[5×10=50]Describe the concept and functions of financial management.
Himalaya Tea Company has provided you the following financial statements along with the relevant industry average ratios.
Balance Sheet as on December 31, 2024
| Accounts payable | Rs 80,000 | Cash | Rs. 50,000 |
| Notes payable | 60,000 | Marketable securities | 40,000 |
| Other current liabilities | 40,000 | Account receivables | 100,000 |
| Inventories | 200,000 | ||
| Long term debt | 100,000 | Fixed assets | 350,000 |
| Common stock | 200,000 | Accumulated depreciation | (90,000) |
| Retained earnings | 170,000 | ||
| Total liabilities and equities | Rs 650,000 | Total assets | Rs. 650,000 |
Income statement for the year ended December 31, 2024
| Sales revenue | Rs 1,500,000 |
| Less: Cost of goods sold | 1,050,000 |
| Gross profit | Rs 450,000 |
| Less: Operating expenses | 182,000 |
| Earnings before interest & taxes | Rs 268,000 |
| Less: Interest expenses | 18,000 |
| Earnings before taxes | Rs 250,000 |
| Less: Tax at 40% | 100,000 |
| Net Income after taxes | Rs 150,000 |
Industry average
| Current ratio | = 2 times | Quick ratio | = 1time |
| Total assets turnover | = 3 times | Profit margin | = 3% |
| Times interest earned ratio | = 7 times | Return on assets | = 9 % |
| Return on equity | = 12.9% |
a. Calculate the liquidity, turnover and profitability ratios for the Himalaya Tea Company as indicated above.
b. Access the strengths and weaknesses of financial position of the company based on above ratios.
[7+3]
The management of Kantipur Hotel Pvt. Ltd. decided to buy an equipment taking a loan of Rs. 300,000 for 3 years from Kumari Bank. The loan bears an annual interest of 10 percent and calls for equal annual instalment payments at the end of each of the 3 years.
a. Calculate amount of annual payment.
b. Prepare loan amortization schedule.
[4+6]
You are given risk return characteristics of Stock A and Stock B in following table:
| Stock A | Stock B | |
| Return | 16% | 12% |
| Standard deviation | 10% | 6% |
| Covariance between RA and RB | -60 |
a. Which stock is more profitable?
b. Which stock is more risky?
c. If you form a portfolio of stock A and B comprising 60 percent wealth in stock A and the rest in stock B, calculate the risk and return on your portfolio.
d. Which investment would you prefer? Stock A or Stock B or the portfolio? Why?
[2+2+4+2]
Mahakali Agro Company was recently formed to manufacture a new product. The company has the following capital structure
| 9% Debentures | Rs. 6 million |
| 10% Preferred Stock | 2 million |
| Common Stock | 8 million |
The common stock sells for Rs 300 a share, and the company’s expected dividend is Rs 15. Dividend is expected to grow at 8 percent per year forever. The company has a marginal tax rate of 40 percent. Calculate the firm’s cost of debt after tax, list of preferred stock, cost of common equity and weighted average cost of capital.
[2+2+3+3]
Write notes on any TWO:
a. Du Pont equation
b. CAPM
c. Residual dividend policy
[5+5]
Analytical Answer Questions<br>Attempt any TWO questions.
[2×15=30]Explain the concept and types of working capital. Also discuss about the determinants of size of working capital of a firm.
Mountain Energy Company is well known company is energy sector. It produces various equipment used by Hydropower Company. Mountain Energy has issued bonds and common stocks to raise capital. You are given key information related to the bonds and common stocks for valuation purpose.
Bonds: Par value Rs. 1,000, coupon rate 8.5 percent, Total maturity 15 years which was sold 5 years ago.
Stocks: Par value Rs. 100, Current dividend Rs 20 per share, dividend is expected to grow at 10 percent per year for next three years and there after growth rate will be 5 percent per year for ever.
a. If investor’s required rate of return from bonds is 10 percent, what should be the value of bonds at present?
b. Describe the relationship between required rate of return and value of bonds.
c. If your required rate from stock is 15 percent, compute value of the stock.
[5+3+7]
Nepal Mine Company (NMC) is planning to purchase Hydraulic Truck to collect the mines raw material. Truck with compacting system costs Rs. 6,000,000. The company estimates that it will generate the annual net cash flows of Rs. 2,500,000 each year for the first and second year, Rs. 1,500,000 for third year and Rs. 2,000,000 each year for fourth and fifth year. Required rate of return of the company is 10 percent.
a. What is the payback period of the project? Should NMC purchase the Truck if its maximum cost recovery period is 3 years?
b. What is the NPV of the project? Should NMC purchase the Truck?
c. What is the IRR of the project? Should NMC purchase the Truck?
d. Which method NPV or IRR is superior? Why?
[3+5+5+2]