TRIBHUN UNIVERSITY

Full Marks: 60
FACULTY OF MANAGENT Time: 3hrs
Office of the Dean
2011
BIM/Sixth Semester / FIN201: Business Finance
Candidates are required to answer the questions in their own words as practicable.
Group “A” [101=10]
Indicate whether the following statements are ‘True’ or ‘False’. Support your answer with reason.
1. Finance is only concerned with raising funds.
2. Wealth maximization objective ignores time value of the benefits.
3. Treasury securities are exposed to default risk.
4. Co-efficient of variation is calculated by dividing expected return by standard deviation.
5. If monthly periodic rate is 1 percent, the effective annual rate will be 12 percent.
6. It is reasonable to assume constant growth stock would have gks.
7. Rs. 100 worth today is equal to Rs.100 after 10 years if the interest rate is zer0.
8. A company’s cash conversion cycle will increase if company reduces the average days sales outstanding on
its accounts receivable.
9. Stretching accounts payable days is cost free method of financing a business.
10. Compensating balance increase the effective cost of bank loan.

Group “B”
Short Answer Questions: [65=30]
11. Why wealth maximization is the superior goal for the firm? Discuss.
12. The real risk free rate is 2 percent. Inflation is expected to be 3 percent this year, 4 percent next year and then
5 percent thereafter. The maturity risk premium of 0.0003(t-1), where, t is number of year to maturity. What
is the nominal interest rate on 3-year, 5-year, 7-year and 10-year Treasury bond?
13. You are thinking to buy a car for Rs.1,400,000 but you have only Rs.400,000 in hand. So you plan to borrow
from Himalayan Bank. The nominal interest rate is 12 percent and equal annual installment payments are to
be made at the end of the each year for 5 years.
a) What is the size of loan you required?
b) What is the amount of installment of be paid?
c) What fraction of payment made in year 1 represents the principal?
14. A 10- year corporate bond has a par value of Rs.1,000 and 9 percent annual coupon rate, may be called in 4
years at a call price of Rs.1,060. The bond sells for Rs.1,100. (Assume that the bond has just been issued)
a) What is the bond’s yield to maturity?
b) What is the bond’s yield to call?

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 15. Everest Company currently paid a dividend of Rs.20 per share. This dividend is expected to grow at a 8
percent per year for the next 3 years after which it is expected to grow at constant 5 percent per year for the
foreseeable future. If your required rate is 10 percent, how much would you pay for this stock?
16. NTC has an average inventory conversion period of 60 days and receivable collection period of 30 days.
Accounts payable period is 30 days after they arise. The annual sales are Rs.3,600,000.
a) Calculate the firm’s Cash Conversion Cycle (CCC)
b) Calculate the amount needed as working capital.
c) Discuss how CCC can be reduced?
Group “B”
Comprehensive answer questions:
Read the following case and analytically answer the following questions: [210=20]
17. Koshi Company needs to arrange working capital amounting Rs.2,000,000 for the coming year. It can raise
the fund from the following sources:
a) Obtain the needed fund by no longer taking discount and thus increasing its accounts payable. Koshi
Company buys on term of 2/10,Net 60.
b) It can borrow from its bank on a simple interest of 12 percent but 10 percent compensation balance is
required.
c) It can borrow the needed fund at discounting interest of 10 percent and 5 percent compensating
balance is required.
d) Borrow on an installment loan at a rate of 8 percent add on interest rate basis.
Based on the effective annual cost, which source is least expensive? What additional qualitative factors should
the company consider reaching a decision?
18. Stock X and Y have the following probability distribution of future returns:
Probability Return of Stock X Return of Stock Y
0.1 -10% -25%
0.2 5% 0%
0.3 15% 20%
0.3 20% 25%
0.1 30% 35%
a) Calculate expected return of Stock X and Y.
b) Calculate standard deviation of Stock X and Y.
c) Calculate the co-efficient of variation of Stock X and Y.
d) What is the expected return on portfolio if you invest 60% on stock X and 40% on Stock Y?
e) Which stock do you prefer for investment?
f) Would you think that forming a portfolio of these two stocks reduces the risk?

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