Financial Management BBA Third Year Sixth Semester Examination, 2008

BBA THIRD YEAR SIXTH SEMESTER EXAMINATION, 2008

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

(Answer any five questions)

Marks-5x5 =25

1.      Why should a financial manager concentrate primarily on wealth maximization instead of profit maximization as a goal of the corporation? Explain logically.

2.      (a) How does an investor choose his or her optimal portfolio from among the efficient set?

(b) What is the primary difference between APT and the CAPM?

3.      (a) Define cash management

 (b) What are the objective of cash management?

4.      (a) What is a portfolio of assets?

(b) How is the riskiness of a portfolio measured?

5.      (a) What are some factors which effect business risk?

(b) What is the optimal capital structure under the MM model with corporate taxes?

6.      (a) Why are capital budgeting decisions is important to the success of a firm?

(b) Briefly describe how the modified IRR (MIRR) is calculated. How it is differ with regular IRR?

7.      (a) Explain the factors that influence a firm’s dividend policy decision.

(b) Define synergy. Is synergy a valid rationale for mergers? Describe several situations that might produce synergy gains.

Part B- Broad Questions

(Answer any three questions)

Marks 15x3=15

8.      (a) Why is the SML a straight line?

(b) What are the difference between the capital market line (GML) and the security market line (SML)?

(c) Mr. Henry can invest in highbull stock and slowbeat stock. His projection of the returns on these two stocks is as follows:-

State of Economy	Probability of state Occurring	Return on Highbull Stock(%)	Return on Slowbear Stock(%)
Recession	0.25	-2.00	5.00
Normal	0.60	9.20	6.20
Boom	0.15	15.40	7.40

(i)                Calculate the expected return on each stock.

(ii)             Calculate the standard deviation of returns on each stock.

(iii)           Calculate the covariance and correiation between returns on the two stocks.

9.      (a) What steps ar involved in estimating the each conversion cycle?

(b) Define mergers. What are the essential differences between purchase and pooling methods of accounting for mergers?

(c) The C.B turner Company Ltd. Wants Tk 40 lakh as working capital. There following alternative modes of financing are available:-

(i)    Forgo cash discount granted on a basic of “3/15, net 45” and pay on the final due date.

(ii) Borrow Tk. 50 lakh at 14 percent interest maintaining 15 percent Compensating Balance, interest payment are made in advance.

(iii)                       Issue Tk 44 lakh at of six month commercial paper to net 40 lakh. Further assuming that the firm would prefer the flexibility was no more than 2.5 percent p.a. Which alternative should the company select and why?

10.  (a) Define flotation cost. How does it affect cost of capital?

(b) Mention three factors that affect the cost of capital are generally beyond the firm’s control .

(c) The BD Food Ltd. Has the following capital structure which indicates the optimum capital structure:

Types of capital	Amount
Common stock capital (Tk. 100 per share)	20,00,000
14% Preferred stock (Tk 1,000 per share)	10,00,000
15% debenture (Tk 2,500 per share)	15,00,000
Retained Earnings	5,00,000
Total capital:	50,00,000

Other information:

(i)    Current market price of common stock is Tk.150. Current year the company declared a dividend of Tk.15 per share . The company expects that the dividend will increase at 10% annual rate forever.

(ii) The company’s preferred stock is redeemable after 5 years at 10% premium. Floatation cost is 20% of sales price. Currently the preferred stock sales at Tk 1,200.

(iii)                       The maturity period of deventure is 10 years. After 10 years the debenture is redeemable at 12% premium. But currently sales at 5% dicount. The flotation cost of debenture is 1.5% of its face value.

If the corporate tax rate is 40%. Personal tax rate is 25% .You are required to calculate the overal cost of capital as well a specific cost of the firm.

11. (a) What are the bassic assumptions of perfect capital market?

(b) Altex group is considering investing in either of two mutually exclusive projects, X and Y. The firm has a 14% cost of capital and the risk free ate is currently 9% . The initial invested cash inflows and certainty equivalent factors associated with each of the project’s are shown in the following table:

Initial Investment	Project X Tk. 40,000		Project Y Tk. 56,000
	Cash Inflows	Certainty Equivalent Factors	Cash Inflows	Certainty Equivalent Factors
Year	Tk		Tk
1	20,000	.90	20,000	.95
2	16,000	.80	25,000	.90
3	12,000	.60	15,000	.85
4	10,000	.50	20,000	.80
5	10,000	.40	10,000	.80

          

         Calculate the certainty equivalent net present value for each project. Which is preferred using this risk adjust technique?

12. The following tabulation gives earning per share figures for Hunt manufacturing during the preceding ten years. The firm’s common stock 14000 shares outstanding is now selling for $50 a share and the expected dividend for the counting year (1996) is 50% of EPS for the year. Investors expect. Past trends to continue. So g may be based on the historical earnings growth rate.

Year	EPS ($)
1986	2.00
1987	2.16
1988	2.33
1989	2.52
1990	2.72
1991	2.94
1992	3.18
1993	3.43
1994	3.70
1995	4.00

         The current interest rate on new debt is 8 percent. The firm’s marginal federal –plus-state tax rate is 40 percent. The firm’s market value capital structure considered to be optimal is as follows:-

Debt	$3000000
Common equity	$7000000
Total capital	$10000000

(i)                Calculate the firm’s after tax cost of new debt and of common equity assuming new equity comes only from retained. Calculate the cost of equity assuming constant growth

(ii)             Find the firm’s WACC assuming no common stock is sold.

(iii)           How much can be spent for new capital investments before external equity must be sold?

(iv)           What is the WACC beyond the retained earnings break point if new common stock can be sold to the public at $50 a share to net the firm $45 a share?

(b) A company’s expected dividend now is Tk 3.48 per share. Its dividends are expected to grow at 15% for six years and then at a rate of 8% indefinitely. The capitalization rate is 12%. What is the price of the share today?