CULTY OF

MMERCE&
NAGEMENT
UDIES
ffiffiA HELAHTYA

University of Kelaniya, Sri Lanka,

Master of Business Administration Degree Examination

I.INWERSITY OF KELAI{IYA
Faculty of Commerce and Management Studies

. 201612017 Academic Year - Year I - Second Semester

I Corporate f inance - MBA 61043/1\,18A 61043(R)

I

Sunday 16ft September 2018

No of pages 08

Inqtructions tg, E4ndidates

1. Ilo NOT open this paper until frnstructed by the superyisotr.

2. You musf NOT write in your flmswer booklet utrtil
instructed by the supervisor.

3. Time allowed Thrse hours (03).

4, ITumher of questions ssYen (07).

5. Answer any five (05) questions.

6. Begin each answer om fl separate page in the answer

booklet. Suhrnit aII workings.

Page 1 of I
 Question 01
a) Distinguish between Finance and Financial Management.

(06 Marks)
b) "Financial manager acts in the shareholders best interests by making crucial financial
decisions" state the most appropriate goar of the Financial Management.

(04 Marks)
c) What are the other possible goals of Finansial Management (other than the answer
provided in section (II) above)?

(04 Marks)
State how agency problern emerge in to an organization and what are the agency costs?

(06 Marks)
(Total20 Marks)

Question 02
a) You are planning to invest your savings of Rs. 300,000 in a fixed deposit. The bank
manager has offered you following rates.

D l l percent compounded annually

ii) 10.75 percent compounded semi-annually
iii) 10.5 percent compounded quarterly

Under the above altemative rates which option do you select to invest your savings?
Explain your answer with necessary computations.

(04 Marks)
b) Your friend is celebrating her 35th birthday today and wants to start saving for her
anticipated retirement at age 65. She wants to be able to withdraw Rs. 12,500,000 from her
savings account on each birthday for20 years following her retirement; the first withdrawal

will be on her 66th birthday. Your friend intends to invest her money in a local bank, which

offers l0 percent interest p€r year, She wants to make equal annual payments on each
birthday into the account established at the local bank for her retirement fund.
i) If she starts making these deposits on her 36th birthday and continues to make deposits
until she is 65 (the last deposit will be on her 65th birthday), what amount should she
deposit annually to be able to make the desired withdrawals at retirement?

(06 Marks)

Page 2 of I
ii) Suppose your friend has just inhsrited alarge sum of money. Rather than making equal
annual payments, she has decided to make one lump.sum payment on her 35th birthday

to cover her retirement needs. What amount does she have to deposit?
(03 Marks)
iii) Suppose your friend's employer will contribute Rs. 350,000 to the account every year

as part of the company's profit-sharing plan. In addition, your friend expects a Rs.
17,500,000 distribution from her father's savings on her 65th birthday, which she will
also put into the retirement account. What amount should she deposit annually now to

be able to make the desired withdrawals at retirement?

(07 Marks)

(Total20 Marks)

Question 03
a) How do you define risk irr Uorporate Finance? In terms ofmeasuring systematic risk in
a company what kind of information you are required to collect?
(04 Marks)

b) Distinguish between diversifiable and non-diversifiable risk by providing two examples

for eachtype of risk.
(06 Marks)

c) "Capital Asset Pricing Model (CAPM) is one of the widely accepted models in
Corporate Finance" What are the useful applications of that model a company and a
stockholders?
(02 Marks)

d) Suppose you are the fund manager of a Rs. 8 million invested fund. 'the fund consists

of 4 stocks with the following investments and betas:

Stock Investment Beta

Proportions (%)
A 10 1.5

B t5 (0.50)

C 25 1.25

D 50 0.75

Total 100

Page 3 of I
 If the market required rate of return is 14 percent and the risk free rate is 6 percen! what

is the fund's required rate of retum?

(08 Marks)
(fotal20 Marks)

Question 04
Mr Silva, a practicing lawyer, is residing at Rajagiriya at his own house. His wife is a legal
officer at Chamber of Commerce and he has two children both ofthem are schooling. Mr. Silva
is having a Kia Sportage SUV with 1960 cc and he has purchased an ALTO petrol motor car
for his wife with current market value of Rs. 2,000,000. Currently, he spends Rs. 12,000 per
month for fuel of his wife's car. At present they take electricity supply from the Ceylon
Electrioity Board (CEB) and the average monthly electricity usage is 200 units which cost them
Rs.4180.
Mr. Silva is planning to purchase a Solarpanel system to generate electricity instead of getting
the service from CEB. He believes that it is possible to transfer from CEB service to Solar
system from I't January 2019.1t is estimated thatthe identified Solar system will produce 600
units of electricity per month and the system will cost Rs 1,100,000 with a 15 year useful life
and after that it will have zero salvage value.
Mr Silva is planning to fix two air condition machines from lst January 2019. One machine
will cost him Rs. 80,000 and it will have a useful life of 15 years with no salvage value. It is
estimated that one AC machine will require 50 units of electricity per month (CEB price per
unit is Rs 45). Further, if the solar panel system is fixed he is planning to sell the small motor
car (ALTO) at Rs. 1,800,000 on lstJanuary 2019 and buy a used eleotric c,ar at 2,700,000 on
the same day. It is estimated that the electric car will require 200 units of electricity per month.
After 15 years the electric car will be sold at Rs, 400,000. During the week ends Mr. Silva's
wife is at home and he plans to use the Electric car instead of his car and to save the fuel cost
ofRs 1500 per week.
He is plaruring to buy a Solar water heating system on lst January 2019 if he is continuing to
use CEB electricity. It will cost him Rs. 100,000. If he is going for Solar panel system he is
planning to buy an electic water heating machine at Rs. 35000 and it is estimated that it will
require 30 units of electricity per month. Currently the excess units of elechicity is not
purchased by the CEB and he does not believe thatthe excess units generated will be purchased

by CEB.

Page 4 of I
Mr. Silva has enough savings to make the investment and it will create him an opportunity cost
af l2%. You are required to advise him on this matter. Cur,rently Mr Silva does not pay taxes
(Total20 Marla)

Question 05
a) Lakdiva PLC has never estimated its cost of capital and use cost of debt as the cost of
capital for the investment decision making. Mr. Ravidu Perera the new finance controller
ofthe company has provided you following data and request to compute Weighted Average
Cost of Capital for the company. (You are required to compute component cost of capital
separately).
.i) The following is the capital structure ofthe company as at 31. lZ .ZAn

Equity shares at nrarket value (Rs) 1,000,000

IfiYa preferenc$ shares (Rs. 100 per share) 400,000
8% debentures (Rs.) 600,000

2*000000

ii) Market'price of the company's share is Rs. 100 and last dividend paid was Rs. 4.
Dividend growth rate is 5%.
iii) Par value of the debentures is Rs. 100. Debentures mature in 5 years and currently sell

for Rs. 96. The company is in 30% tax basket.

(l I Marks)
b) According to MM proposition 1, with taxes: a firm's optimal capital structure is at
100% debts. Do you agree ? explain

(06 Marks)
c) What are the factors which influence planning of the capital structure in practice

(03 Marks)
(Total 20 Marks)

Question 06
a) Identifr what are the main two types of short term financing policies that can be
implemented by a firm.

(04 Marks)

Page 5 of 8
b) Company A's average carrying cost and shortage cost per current asset are Rs. 56 and
Rs.32 respectively. What type of short term financing policy from your above answer

(part I) would be more appropriate for company A?

(02 Marks)

0) You are given following information relating to a manufacturing company.

Item Beginning End
Inventory 50,000 70,000

Accounts reaeivables 15,000 25,000

Accounts payable 25,000 35,000

Credit sales and cost of sales were Rs.500, 000 and Rs.300, 000 respectively.
'i) Calculate operating and cash cycles for the above company and interpret your
answers
(06 Marks)

ii) Assume cornpany wish to extend an additional credit period of 10 days for its
debtors. What would be the impact on operating cycle and cash cycle
(02 Marks)

d) Following information are relating to a company and you are required to calculate net
working lapital requirement for this company
Raw material Cost per unit Rs 50.00
Direct Labor cost Rs 20.00
Total cost Rs 70
Selling price Rs 100
Production capacity 104,000 units
Raw material conversion period average 4 weeks
Finished goods in stock average 3 weeks
Credit allowed by suppliers' average 4 weeks
Credit allowed to debtor average 6 weeks
Cash in hand Rs 200,000
(06 Marks)

(Total 20 Marks)

Page 6 of I
Qustion 07
a) LankaD Company is a manufacturer of product o'A" and the company is importing raw
material from AMEX Company, which is a USA based company.
LankaD Company wish to import 1500USD worth of goods by lst December, and
normally it remits cash to AMEX company through Bank LankaB.
Exchange rate movements for the last 6 months are as follows
Month (2018) January March April klay June July
Exchange Rate I54.55 155 .97 157.64 159.09 158 .25 159.70
{LKR/rJSD)
Source: CBSL
.D Based on the movements of the exchange rate identify whether LankaD
company is exposing to a risk

(03 Marks)
ii) LankaD Company has entered into athree months' forward contract with
AMEX Company (Assume Three months' Forwards rate is LKRl60ruSD)
and if the three months' spot rate is LKRl59/$ calculate the payoff of the

t"1- company.

(02 Marks)
iiD suggest a strategy to the LankaD company to bring that payoffto a null

(04 Marks)
iv) Is it possible to use futures contract for the given situation? Justi$ your answer.

(03 Marks)
b) Following information is relevant for medium sized business Kumudu and Son's

Current FCFF Rs 3,000,000

Thrget debt to capital 0.25

Market value of debt Rs 15,000,000

Shares outstanding tr,450,000

Required return on equity 14.00/o

Cost of debt 9,00rt

Long-terrn growth in FCFF 3.0%

Tax rats 25%

Page 7 of I
i) Calculate Kumudu and Son's Weighted Average Cost ofCapital (WACC).
(02 Marks)
ii) Calculate firm value of Kumudu and Son's. (04 Marks)
iv) Calculate value of equity of Kumudu and Son's
(02 Marks)
(Total 20 Marks)

Page I of I