BBA THIRD YEAR SIXTH SEMESTER EXAMINATION, 2010
FINANCIAL MANAGEMENT
Subject Code: 3201
Examination Code: 606
Time -3 hours
Full marks -70
[N.B:- The figures in the right margin indicate full
marks]
Part A – Short Questions
(Answer any five questions)
Marks-5x5 =25
1. Define
finance, business finace and finacial management.
2. Assume
that the risk-free rate is 5% and marker risk premium is 7% what is the
expected rerun for the overall stock market? What is the required rate of return
on a stock that has a beta of 1.2?
3. Differentiate
between NPV and IRR. Which method is best? Why?
4. What
is agency problem? When this problem may arise and how this problem can be
solved?
5. Differentiate
between stock dividend and split. Your company is expected to pay at TK 10.00
per share dividend at the end of the year. The dividend is expected to grow at
a constant rate of 7% a year. The required rate of return on the stock is 15%. What
is the value per share of company’s stock?
6. What
do you mean by weighted average cost of capital (WACC)? Why and how is it
calculated?
7. What
is capital structure? What are the factors that influence the capital structure
decisions?
Part B-Board
Questions
(Answer any three
questions)
Marks- 15x3=45
8. (a)
Why should a financial manager concentrate primarily on wealth maximization
instead of profit maximization as a goal of the corporation? Explain logically.
(b)What
are the major functions of financial managers? How does the notion of risk and
reward govern the behavior of financial managers?
9. (a)
What is CAPM? What are the basic assumptions of it?
(b) What do you mean by portfolio?
Differentiate between profoli risk and stand- alone risk.
(c) Stock X and Y have the following
probability distribution of expected future returns:-
|
Probability
|
X
|
Y
|
|
0.1
|
-10%
|
-35%
|
|
0.2
|
2
|
0
|
|
0.4
|
12
|
20
|
|
0.2
|
20
|
25
|
|
0.1
|
38
|
45
|
(i)
Calculate the expected rate of return
for both stocks.
(ii)
Calculate the standard deviation for
both stocks.
(iii)
Which stock is risky and why?
10. (a) What do you mean by capital budgeting?
Write down the basic steps to be followed in capital budgeting process.
(b)
You are trying to determine whether or not to expand your business by building
a new manufacturing plant. The plant has an installation cost of TK. 12
million, which will be depreciated on straight line to zero over its 4 years
life. If the plant has projected income of Tk. 8, 9, 15 and 13 million over
these 4 years, discount rate is 5% , and corporate tax rate is 40%, then what
is the project’s –
(i)
Net present value (NPV)?
(ii)
Internal rate of return (IRR)?
(iii) Should the project be accepted? Why?
N.B. Present value
factor at 5%
|
Year :
|
1
|
2
|
3
|
4
|
5
|
|
PVIF:
|
0.9524
|
0.9070
|
o.8638
|
0.8227
|
0.7825
|
11. (a) The MPD Corporation has decided in favour
of a capital restructuring. Currently, MPD uses no dept financing. Following
restructuring, however, debt will be 10, 00,000. The interest rate on the debt
will be 9% MPD currently has 2, 00, 000 shares outstanding and price per share
is Tk. 20. If the restructuring is expected to increase EPS, what is the
minimum level for EBIT that MPD’s management must be expecting?
(b)
The financial statement of a company represents: EBIT=Tk. 20,00,000; D=Tk.
10,00,000; Tc=35%; Ksu=10%; Ts=15% and Td=20%.
What
is the value of the levered firm and gain from leverage?
12. A manufacturing firm needs $80,000 to meet working
capital requirement immediately for 3 months. It has the following
alternatives:-
(i)
The company can use trade credit
arrangement on terms of 3/15 net 105
(ii)
It can take a simple interest loan of $1,
00,000 from prime bank @ 13% with 20% compensating balance requirement.
(iii)
The company can also issue commercial
paper with a face value of $1,000 each sold at $950 having 1% floatation cost
for 90 days.
Required:
Calculate the cost of each specific source and the take a decision on which one
will be preferred for the company.
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