BBA
THIRD YEAR SIXTH SEMSESTER EXAMINATION, 2007
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. Answer any five questions
from part-A and three questions from Part –B. All parts of each question must
be answered consecutively.]
Part
A – Short Questions
1. (a)
What is meant by a “perfect capital market”? What role does the perfect capital
market assumption play in financial theory?
(b) Define agency costs. What
mechanisms exist that encourage managers to act in the best interest of the
shareholders?
2. (a)
Define and distinguish between systematic risk and unsystematic risk.
(b) Define and discuss the
properties of CAPM and APT.
3. (a)
Why are capital budgeting decisions so important to the success of a firm?
(b) Describe how NPV profiles are
constructed.
4. (a)
Define business and financial risk.
(b) Dances Scientific Corporation
produces satellite earth stations which sell for BDT 100000 each. The firm’s
fixed cost, F, is BDT 2 million; 50 earth stations are produced and sold each year;
profits total BDT 5, 00,000 and the firm’s assets (all equity financed) are BDT
5 million. BDT 4 million to investment and BDT 5, 00,000 to fixed operating
cost. This change will have the following effects:-
1 Reduce
variable cost per unit by BDT 10000
2 Increase
output by 20 units
3 The
sales price on all units will have to be lowered to BDT 95,000 to permit sales
of the additional output.
The
firm had tax loss vary forwards that cause its tax rate to be zero, its cost of
equity is 15 percent, and it used no debt. Should the firm make the change?
5. (a)
Differentiate between the Modigliani & Miller’s dividend theory & the
Gordon’s bird in the hand theory.
(b)Explain the factors that
influence a firm’s dividend policy decision.
6. (a)
Define credit policy and explain the four credit policy variables.
(b) What is a credit scoring system
and what are some sources of credit information’s?
7. (a)
Define and discuss the four economic classifications of merger.
(b) What is a hostile takeover?
What are some defensive tactics that firms can use to resist hostile takeover
attempts?
Part B- Broad Questions
8. (a)
What is the efficient frontier? How an investor chose his or her optimal
portfolio from among the efficient set?
(9) Black berry Corporation is
considering three possible capital projects for the next years. Each project
has a 1-year life and project returns depend on next year’s state of the
economy. The estimated rates of return are shown in the table:-
Market Condition
|
Probability
|
Rates of
|
Return
if State
|
Occurs
|
A
|
B
|
C
|
||
Pessimistic
|
0.25
|
20%
|
18%
|
28%
|
Most likely
|
0.50
|
28
|
26
|
24
|
Optimistic
|
0.25
|
32
|
36
|
20
|
Also assume that Black Berry
Corporation is going to invest one-third of its available funds in each
project. Black Berry will create a portfolio of three equally weighted
projects.
Requirements:
i.
Find each project’s expected rate of
return, variance, and standard deviation.
ii.
What is the expected rate of return,
variance, and standard deviation of the three projects portfolio?
9. (a)
Differentiate between the yield to maturity and the yield t call.
(b) Find the yield to maturity (YTM)
using suitable technique on BEXTEX’ s semi-annual coupon bond given that the
bond price=$1049, the coupon rate=8%, the face value=$1000, and there are 8
years remaining until maturity.
(c) M&J has an outstanding of $
1,000 par value bond with an 14% coupon interest rate. The bond has 10 years
remaining to its maturity date. If interest is paid annually, find the value of
the bond when the required return is 13%, 14% and 15%. Also indicate for each
case whether the bond is selling at a discount, at a premium, or at its par
value.
(d) KODAK is considering a cash
purchase of the stock of General Motor. During the year just completed, GM
earned $4.25 per share and paid cash dividends of $2.55 per share (Do=$2.55).
GM’s earnings and dividends are expected to grow at 25% per year for the next 3
years, after which they are expected to grow at 10% per year to infinity. What
is the maximum price per share that KODAK should pay for GM if it has a
required return of 45% on investments with risk characteristics similar to
those of GM?
10. (a)
What advantages does the MIRR have over the regular IRR in capital budgeting?
(b) What are the basic conditions
that can lead to conflicts between the NPV and IRR methods?
(c) you are the financial analyst
of CRABEXPO LTD. The director of capital budgeting has asked you to analyze two
proposed capital investments, Projects-EXPO-I and EXPO-II. Each Project has a
cost of BDT 10, 00,000 and the cost of capital for both projects is 13%.The
project’s net expected cash inflows are as follows:-
Year
|
EXPO-I
|
EXPO-II
|
1
|
650000
|
325000
|
2
|
350000
|
325000
|
3
|
350000
|
325000
|
4
|
200000
|
325000
|
(1) Calculate each project’s Net present Value (NPV), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR)
(2) Prepare
the NPV Profiles for the said projects.
11.
(a) Why debt is considered as the
cheapest source of finance?
(b)
Explain why the cost of new common stock is higher than the cost of retained
earnings.
(c)
As a financial analyst of a large corporation, you are required to determine
the weighted average cost of the company using (I) Book value weights and (ii)
Market value weight. The following information is available:-
The company’s present book value
capital structure is:-
Sources of
Capital
|
Amount (TK)
|
Debentures
(Tk. 100 per debenture)
|
8,00,000
|
Pref.
stock (Tk. 100 per share)
|
4,00,000
|
Equity
Shares (Tk. 10 per share)
|
8,00,000
|
Total
capital
|
20,00,000
|
All the securities are traded in the capital market. Recent prices are:-
Debentures
Tk. 110 per debenture
Preference
shares Tk. 120 per share
Equity
shares Tk. 22 per share
Anticipated
external financing opportunities are:-
(i)
Tk. 100 per debenture redeemable at par,
10 year maturity, 14 percent coupon rate, 4 per cent floatation costs.
(ii)
Tk. 100 preference share redeemable at par,
10 year maturity, 15 percent dividend rate, 5 percent floatation cost.
(iii)
Equity shares: Tk. 2 per share
floatation costs and sale price TK.22.
In
addition, the dividend expected on the equity share at the end of the year is
Tk. 2 per share, the anticipated growth rate in dividends is 7 percent and the
firm has the practice of paying all it’s earning in the form of dividends. The corporate
tax rate is 40 percent.
12.
(a) Why is cash management important?
What are the motives for holding cash?
(b)
General Pharmaceuticals Ltd. Is planning to adopt a three monthly time spam
sub-divided into monthly intervals for the cash budget?
A.
The following information is available in respect of its operation:-
Particulars
|
Months
|
||
January
|
February
|
March
|
|
Sales
|
60
|
70
|
90
|
Purchases
|
3
|
3.5
|
4
|
Direct
Labour
|
10
|
12
|
14
|
Manufacturing
Overheads
|
12
|
14
|
16
|
Administrative
Expenses
|
5
|
5
|
5
|
Distribution
Expenses
|
4
|
6
|
8
|
Raw
Material (30 days credit)
|
18
|
22
|
26
|
B. Assume the following financial flows during the three months reriod:-
(a)
Inflows: 1. Interest received in January is BDT 2
lakh; in March BDT 2 Lakh;
2. Dividend received in
January and March BDT 4 lakh each;
3. Sale of shares in
March BDT 260 lakh.
(b)
Outflows: 1. Interest paid during
January is BDT 80 lakh;
2. Dividends paid during January and February is
BDT 4 lakh each;
3. Installment payment on
machine is March is BDT 40 Lakh;
4. Repayment of loan in
March is BDT 120 Lakh.
C.
Assume that 10% of each month sales are for cash, the balance 90% are on
credit. The terms and credit experience of the firm are:-
1. No cash discount;
2. 2% of credit sales is
sales return and bad debt loss;
3. 50% of the credit sales
will be collected within 30 days of the sale and the rest
50% will be collected within 60 days of the sales.
Requirement: using
the above information prepare a cash budget for the three months horizon.
(c)
Square Pharmaceutical is to finance a working capital need of BDT 12,00,000.
The funds are needed for one year. The company is considering the following
options:-
A
bank loan of BDT 1500000 could be made available from City Bank at 13 percent
annualized interest rate which is paid at the maturity and that will require 10
percent compensating balance.
Lloyds
Factoring House Ltd. Will busy Square’s Accounts Receivable of BDT 1400000 per
month which have an average collection period of 30 days. The factor charges 2
percent commission and advances up to 85 % of the face value of the NR at 15%
annual interest. It has been estimated that the factoring services will save
BDT 50000 per month as the cost of credit administration and bad debt loss.
Requirement:
What is the least costly method of financing the inventory needs of the firm?
0 comments:
Post a Comment