Part-A

Answer to the Question No.1

A. Calculate and interpret the following ratio for 2018: Quick ratio, Fixed assets turnover, TIE
ratio, DSO, OPM, ROI (any Four).

ANS:
𝑪𝑨−𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
1.Quick Ratio = 𝑪𝑳

𝟐𝟎𝟎𝟎−𝟕𝟓𝟎
= 𝟏𝟎𝟑𝟎

= 1.21 times.

𝐒𝐚𝐥𝐞
2. Fixed assets turnover = 𝐅𝐢𝐱𝐞𝐝 𝐚𝐬𝐬𝐞𝐭𝐬
𝟏𝟕𝟎𝟎
= 𝟏𝟒𝟓𝟎

= 1.172
𝐀𝐜𝐜𝐨𝐮𝐧𝐭 𝐫𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞𝐬
3. DSO = 𝐀𝐯𝐠.𝐒𝐚𝐥𝐞𝐬 𝐩𝐞𝐫𝐝𝐚𝐲

𝟒𝟎𝟎
= 𝟒.𝟔𝟓𝟕𝟓

= 85.88
= 86 days
𝐄𝐁𝐓𝐈
4. OMP = 𝐒𝐚𝐥𝐞𝐬 x 100
𝟑𝟕𝟎
= x 100
𝟏𝟕𝟎𝟎

= 21.76 %
 Answer to the Question No.1
B. Differentiate between direct and indirect transfer of fund with diagram and
examples considering Bangladeshi financial markets and institutions.
ANS:
Differentiate between direct and indirect transfer of fund are given below :
Direct Transfer Indirect Transfer
The first wat is through direct transfer The second way is indirect transfer though
investment bankers.
It refers to transfer of assets from one type Investment bank refer to a financial
of tax-deferred retirement plan on institution that help individual and
account to borrower corporation to raising their capital by
underwriting.
Direct are not transfer are not considered The also act as the clients agent when
to be distributions and not taxable as issuance of securities such as stock and
income on subject to any penalties for bond.
early distribution.

Diagram Of direct and indirect transfer of fund :

Three ways of transfer financial capital in the economy

1.Direct transfer of 2. Indirect transfer using 3.Indirect transfer using the

fund the investment banker financial intermediary

The Business firm (a The business firm (a The business firm (a

savings deficit unit) savings deficit unit ) savings deficit unit)

Firm’s Funds
Firm Securities
Securities Fund
Funds securities
(dollars of savings)
(stocks, Marketable
bond
Securities
Marketable
Securities
Savers(savings surplus Securities Funds
unit)

Savers
(Savings Intermediary’s
funds
surplus units) securities

Savers(Savings
surplus units)
 Answer to the Question No.2
A. Differentiate between spot versus future market, corporate charter versus bylaws with
examples.

ANS:

Differentiate between spot versus future market are given below :

What is
Counterparty Risk
Trade Settlement Period
Hedging Against Risk
Spot marketing
A spot market or cash market
is where the exchange of
financial instruments settle
immediately. Stocks and
currencies are the most well
known spot market
instruments.
Margin in the spot market is
an upfront fee with the broker
and is not related to
counterparty risk.
While this is contradictory to
the term “spot”, two working
days are for the transfer of
cash from the buyer to the
seller.
Hedge in spot markets
Future market
The futures markets include
various instruments like
commodities, stock indexes,
currencies and select stocks.
Futures exchanges utilize two
types of risk mitigation
techniques to reduce the risk
of this occurring: (1)
performance bonds and (2)
maintenance margin.
In the futures markets, the
underlying asset has a
specific settlement date in the
future.
That’s why Traders use the
futures market

Differentiate between corporate charter versus bylaws are given below :

Corporate charter
A charter is a legal document, which is
created for a profit or nonprofit organization
It is often called articles of incorporation and
makes up the essence of the organization as a
legal entity.
By laws
Bylaws are also legal documents that define
the internal structure and guidelines of an
organization .
In other word they create the framework for
the governance of the inner working and daily
operations of the organization .
B. Explain the major objectives and limitations of fundamental analysis and differentiate between
ordinary and extra ordinary income with example.

ANS:

Objectives of Fundamental Analysis are given below :

1. Company stock valuation

2. Projection on its business performance.
3. Evaluate management and make internal business decisions
4. Calculate a company’s credit risk
5. Make financial forecasts
Limitations of fundamental analysis are given below :
1. Assumptions need to be taken in intrinsic value calculation
2. Works only for longer term investments.
3. Only focuses on qualitative factors and ignore qualitative factors.
4. Inability to detect frauds.
5. Time taken to do fundamental analysis is so large.
6. Markets may be faster to react than financial data.
Differentiate between ordinary and extra ordinary income given below :

Ordinary income Extra ordinary income

Ordinary income is any type of income earned by
an organization on individual that is taxable at
ordinary rates .
Long term capital gains and qualified dividends
are not considered ordinary income as they are
both taxed differently .
In a corporate setting, ordinary income comes
from regular day-to-day business operations,
excluding income gained from selling capital
assets.
Extraordinary items consisted of gains or
losses from events that were unusual and
infrequent in nature that were separately
classified, presented and disclosed on
companies' financial statements.
Extraordinary in January 2015 the financial
accounting standards board eliminated the
concept of extraordinary income.
FASB discontinued the accounting treatment
for extraordinary items to reduce the cost and
complexity of preparing financial statements.

For example, if you have a job for which you
get paid by the hour, your hourly wage is
considered ordinary income.
XYZ Co. feels that the current capacity of
manufacturing buses is limited, and there is a lot
of scope in the market for increasing revenue.
Keeping this in mind, the management has
approved to go ahead with investing in a new
plant for increasing production capacity. It is a
non-recurring transaction; however, the same can
be taken an increase in capital assets rather than
classifying it as an extraordinary loss.
 C. To supplement your planned retirement in exactly 42 years, you estimate that you need
to accumulate $220,000 by the end of 42 years from today. You plan to make equal, annual,
end-of-year deposits into an account paying 8% annual interest.
I. How large must the annual deposits be to create the $220,000 fund by the end of 42
years?
II. If you can afford to deposit only $600 per year into the account, how much will you
have accumulated by the end of the forty-second year?

ANS:

1. To get Amount of each annual payment,

( 1+0.08)42 −1
PMT=FV A42 ÷( )
0.08
220000
PMT =
304.244
PMT = $ 723.10

2. To calculate the future value, FVA,

( 1+0.08)42−1
FV A42 = PMT x ( 0.08 )

Future value (FA A42) = $600 x (304.22)

FVA = $ 182546.40
 Part-A
Answer to the Question No.1

A. Mr. Mamun borrowed Tk. 115,000 at a 12.5% annual rate of interest to be repaid over 5 years.
The loan is amortized into five equal end-of-year payments. The loan has processing fee of 1.25%
and early settlement fee is 2.75%.
Requirements:
I. Calculate the annual end-of-year loan payment.
II. Prepare a loan amortization schedule showing the interest and principal breakdown of each
of the five loan payments.
III. Explain why interest decreased gradually in this process?
IV. If the borrower wants to go for loan settlement at the end of year 3, what will be trade-off?

ANS:

1. Loan amortization
(1.165)5
115000= PTM (1-1÷ )
0.165
= 2.82
PTM = 115000 ÷2.82
= $ 40780.14

B. Define agency problem? Explain different mechanisms to minimize the agency problem of a
business enterprise in Bangladesh, label some high cases from Bangladesh.

ANS:

What Is the Agency Problem?

The agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in another's best interests. In corporate finance, the agency problem usually refers
to a conflict of interest between a company's management and the company's stockholders.
Different mechanisms to minimize the agency problem
A central tenet of agency theory is that there is potential for mischief when the interests of
owners and managers diverge. In those circumstances, and for a variety of reasons, managers
may be able to exact higher rents than are reasonable or than the owners of the firm would
otherwise accord them. While that foundational element of agency theory is secure, other
elements derived directly from agency theory are far less settled. Indeed, even after some 75
years of conceptualization and empirical research, the three principal approaches that have long
been proposed to mitigate the fundamental agency problem remain contentious. Accordingly, we
provide a review of the fundamental agency problem and its mitigation through independence,
equity, and the market for corporate control.