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Brief Answer Questions:
[10 × 2 = 20]What do you mean by social responsibility?
State causes of agency problem between shareholders and manager.
Write the meaning of financial plan.
Differentiate between payback period and discounted payback period.
Assume that the risk-free rate is 4 percent and the market risk premium is 6 percent. What is the required rate of return on stock X with its beta of 1.5?
A firm has net income of Rs 15 million. Firm's debt ratio is 40 percent. Firm has investment opportunity of Rs 20 million. What would be firm's dividend amount if it uses residual dividend policy?
What are the motives of holding cash?
Beta Company sells on credit terms of net 30. Its accounts are, on average, 40 days past due. If annual credit sales are Rs 18 million, what is the Beta's amount of accounts receivable? Assume 360 days a year.
Write the meaning of stock repurchase.
You can buy an Apple Laptop at Yen 160,000 in Japan. The same Laptop costs Nepalese Rs 120,000 in Nepal. What is the exchange rate between Nepalese Rupee and Japanese Yen as per purchasing power parity?
Short Answer Questions: (answer any SIX)
[6 × 5 = 30]Describe financial management decisions.
How does size of profit, liquidity position and investment opportunity affect dividend policy of a firm? Explain.
Describe features of optimal capital structure of a business corporation.
Koshi Chemical Fertilizer Centre (KCFC) sells 3,380,000 bags of lawn fertilizer annually. The fixed costs of placing and receiving are Rs 480 per order. The cost price of fertilizer is Rs 600 per bag. The annual cost of carrying this inventory item is 20 percent of the cost price. KCFC maintains 15,000 bags of fertilizer as safety stocks. The fertilizer supplier requires 2 weeks of lead time from order to delivery of the fertilizer.
a. What is the economic order quantity of fertilizer for KCFC?
b. What is the total inventory cost of fertilizer for KCFC?
c. What should be re-ordered point (level) of fertilizer for KCFC?
Birat Trading Company (BTC) is considering changing its credit terms from 'net 40' to 'net 50', in order to increase sales. At present, average collection period is 45 days and it will be 60 days under proposed plan. The change will also affect in the present 2 percent level of bad debt to 2.5 percent on all credit sales. Due to change in credit terms, it is expected to increase in sales from Rs 6 million to Rs 7.2 million per year. The variable cost ratio is 70 percent, the cost of funds invested in accounts receivable is 10 percent, and the marginal corporate tax rate is 30 percent. Should BTC change its credit terms?
XYZ Company has 100,000 shares outstanding. The current market price of the company is Rs 300 per share. Par value of stock is Rs 100 per share. Assume no tax effect and no market signaling effect; calculate number of shares and market price per share.
a. If XYZ declares a 10 percent stock dividend.
b. If XYZ declares 2-for-1 stock split.
Suppose the exchange rate between US dollar and Indian Rupees (INR) is INR 83.22 per US dollar and the exchange rate between the Nepalese rupees (NPR) and Indian rupees (INR) is NPR 1.60 per INR. What is the cross exchange rate of NPR to US dollar? Also interpret the result.
Long Answer Questions: (answer any THREE)
[3 × 10 = 30]What is multinational financial management? Differentiate between domestic financial management and multinational financial management.
Consider the Balance Sheet of Hulas Metal Company (HMC) as on December 31,2023 given below:
Balance Sheet of Hulas Metal Company as on December 31, 2023
| Assets | Amount (Rs) | Amount (Rs) | |
|---|---|---|---|
| Cash | 50,000 | Accounts payable | 60,000 |
| Accounts receivable | 70,000 | Accruals | 50,000 |
| Inventories | 130,000 | Notes payable | 40,000 |
| Total current assets | 250,000 | Total current liabilities | 150,000 |
| Net fixed assets | 250,000 | Common stock | 200,000 |
| Retained earnings | 150,000 | ||
| Total Assets | 500,000 | 500,000 |
Sales in 2023 were Rs 1,000,000 and which are expected to increase by 25 percent or to Rs 1,250,000 in 2024. All assets are utilized to full capacity. The profit margin of the HMC is 8 percent and the firm is expected to maintain a retention ratio of 40 percent.
a. What is the additional fund needed (AFN) of the HMC? Use AFN equation to estimate additional fund needed.
b. Prepare projected balance sheet of HMC for the year 2024 and verify the amount of AFN as calculated in part 'a.
Consider the following probability distribution and returns of stock X and stock Y:
| Economic conditions | Probability | Return of stock X (%) | Return of stock Y (%) |
|---|---|---|---|
| First | 0.30 | 10 | 30 |
| Second | 0.40 | 15 | 20 |
| Third | 0.30 | 20 | 10 |
a. Calculate expected return of stock X and stock Y.
b. Estimate standard deviations of stock X and stock Y.
c. Compute the covariance and correlation between returns of stock X and stock Y.
d. If you form a portfolio with investment of your 50 percent funds in stock X and rest in stock Y, calculate the expected return and risk of your portfolio.
Consider the following income statement of Delta Manufacturing Company (DMC):
| Income Statement of DMC as on December 31, 2023 | |
|---|---|
| Particulars | Amount Rs |
| Sales (10,000 units @ Rs 40 per unit) | 400,000 |
| Less: Variable costs(10,000 units @ Rs 20 per unit) | 200,000 |
| Contribution margin | 200,000 |
| Less: Fixed costs | 100,000 |
| Earnings before interest & Tax (EBIT) | 100,000 |
| Less: Interest | 20,000 |
| Earning before tax (EBT) | 80,000 |
| Less: Tax @ 30 percent | 24,000 |
| Earnings after tax or net income | 56,000 |
At present, DMC has total number of 10,000 shares outstanding.
a. What is the earning per share of DMC?
b. Calculate operating the break-even point for DMC.
c. Calculate the degree of operating leverage, degree of financial leverage and the degree of combined (total) leverage.
d. What would be percentage increase in net profit if DMC increases sales by 20 percent?
Comprehensive / Case / Situation Analysis Questions:
[20]Suppose you are BBA graduates from Tribhuvan University with finance specialization and have been appointed as financial manager of Gandaki Hydropower Company (GTC). As financial manager, you should make various financial decisions such as investment, financing, working capital and dividend decisions. At present, Chief Financial Officer of GTC has asked you to analyze two proposed projects: Project X and Project Y to make appropriate capital investment decision. The projected initial investment and expected net cash flows of projects are as follows:
| Year | Cash Flows of Project X (Rs) | Cash Flows of Project Y (Rs) |
|---|---|---|
| 0 | (500,000) | (500,000) |
| 1 | 200,000 | 300,000 |
| 2 | 200,000 | 200,000 |
| 3 | 200,000 | 200,000 |
| 4 | 200,000 | 100,000 |
Cost of capital of each project is 10 percent. You are asked to answer the following questions:
a. What is payback period? Calculate payback period of each project.
b. Calculate net present value of each project.
c. Which project/projects should be accepted if they are independent projects?
d. Which project should be chosen if they are mutually exclusive projects? Why?
e. Calculate internal rate of return of each project.