Business Finance

Subject code: BSC257

FM: 100 marks
PM: 50 marks
SECTION A
MCQs (Attempt all) ……………………………………………… (20×1= 20marks)
1. Maximization of shareholder wealth as a goal is superior to profit maximization because:
a. It considers the time value of the money.
b. Following the shareholder wealth maximization goal will ensure high stock prices.
c. It considers uncertainty.
d. a and c.
2. A statistical measure of the degree to which two variables move together
a. coefficient of variation
b. variance
c. covariance
d. certainty equivalent
3. At what rate must Rs 400 be compounded annually for it to grow to Rs 716.40 in 10 years?
a. 6%
b. 5%
c. 7%
d. 8%
4. The investment decision is the most important of the firm’s three major decisions, when it comes to:
a. Value creation
b. Value addition
c. Value proposition
d. Value deletion
5. Annual cash dividends divided by annual earnings; or alternatively, dividends per share divided by earning
per share is termed as:
a. Earnings per share ratio
b. Proposed dividend ratio
c. Dividend payout ratio
d. expected dividend ratio
6. Mr. X takes a loan of Rs 50,000 from HDFC Bank. The rate of interest is 10% per annum. The
first installment will be paid at the end of year 5. Determine the amount of equal annual
installments if Mr. X wishes to repay the amount in five installments.
a. Rs 19500
b. Rs 19400
c. Rs 19310
d. None of the above
7. The span of time within which the investment made for the project will be recovered by the
net returns of the project is known as
a. Period of return
b. Payback period
 c. Span of return
d. None of the above
8. Projects with __________ are preferred
a. Lower payback period
b. Normal payback period
c. Higher payback period
d. Any of the above
9. ___________ on capital is called ‘Cost of capital’.
a. Lower expected return
b. Normally expected return
c. Higher expected return
d. None of the above
10. The second mortgages pledged against bond's security are referred as:
a. loan mortgages
b. medium mortgages
c. senior mortgage
d. junior mortgages
11. The long period of bond maturity leads:
a. more price change
b. stable prices
c. standing prices
d. mature prices
12. If the coupon rate is equal to going rate of interest then the bond will be sold
a. At par value
b. Below its par value
c. More than its par value
d. Reasoned par vale
13. Financial statements of a company includes
a. Balance sheet.
b. profit or loss account
c. cash flow statement
d. all of the above
14. Balance sheet provides information about the financial position of the enterprise.
a. at a point of time.
b. over a period ot the time
c. for a period of time
d. none of above
15. Working capital turnover ratio can be determined by:
a. ( gross profit / working capital )
b. ( cost of goods sold / net sales )
c. ( cost of goods sold / working capital)
d. none of the above
16. If sales is Rs 5, 00,000 & net profit is Rs 1, 20,000 Net profit ratio is
a. 24%
b. 41%
c. 60%
 d. none of the above
17. Determine stock turnover ratio if, Opening stock is Rs 31,000 , Closing stock is Rs 29,000,
Sales is Rs3,20,000 & Gross profit ratio is 25% on sales.
a. 31 times
b. 11 times
c. 8 times
d. 32 times
18. A portfolio having two risky securities can be turned risk less if
a. The securities are completely positively correlate
b. If the correlation ranges between zero and one
c. The securities are completely negatively correlated
d. None of the above.
19. Working capital is also known as___ capital.
a. current asset
b. Operating
c. projecting
d. Operation capital
20. Working capital is calculated as _____
a. Core current assets less core current liabilities
b. Current assets less current liabilities
c. Core current assets less current liabilities
d. Liquid assets less current liabilities
SECTION B
Short Questions (Attempt any Five) ……………………………………… (5×8= 40 marks)
Qn.1. define a financial management. Explain the major responsibility of financial manager.
Qn.2. What is optimal capital structure? Also explain with suitable example the implications of
financial leverage on return on equity.
Qn. 3. The management of Asmita Publication decides to buy a printing press by taking a loan of
Rs. 30,00,000 for 5 years from Nepal bank Limited. The loan bears a compound annual interest
rate of 10% (k or i) and calls for equal annual installment payments at the end of each year for 5
years.
a. What is the amount of annual payments? PMT
b. Prepare loan amortization schedule.
c. What fraction of payment made in year 4 represents the principle.
Qn.4. you have the following income statement for your corporation. It represents the most
recent year’s operations which ended yesterday.
Particulars Amount
Sales (10,000 @Rs. 20 per unit) 200,000
Less: variable cost (100,000)
Contribution margin 100,000
Les fixed cost (excluding Rs. 20,000 annual depreciation) (50,000)
Earnings before income tax 50,000
Less taxes @50% (10,000)
Net income 40,000
Less preferred dividend (20,000)
Net income to equity holders 20,000
Your boss tells you to answer to the following questions:
a. What is the firm’s breakeven point?
b. What is the firms Cash break-even point?
c. What is the degree of operating leverage, degree of financial leverage and degree of total
leverage?
d. If sales should increase by 10 percent by what percent would net income increase?
e. What is the financial break-even point for the firm?
Qn.5. Makalu company's bonds have a 14% coupon rate. The interest is paid annually and the
bond mature in 12 years. Their par value is Rs. 1000. Market interest rate is 10 percent.
a. Calculate value of each bond at present. If bond are selling at Rs 1100 would on purchase
the bonds?
b. Does the value of bond increase or decrease if market interest increases?
Qn.6. the Shakha Torsteel company has two divisions: Iron Rod and Metal Sheets. Each division
employs debt equal to 30% and preferred stock equal to 10% of its requirements, with the equity
capital used for the reminder. The current borrowing rate is 15%, and the company’s tax rate is
40%. Presently, preferred stock can be sold yielding 13%. The company wishes to establish a
minimum return standard for each division based on the risk of that division. This standard then
would serve as the transfer price of capital to the decision. If the cos of equity of Iron Rod
division is 15.6% and that of metal sheet divisions is 20.6%, what weighed average required
(WACC) returns on investment would you recommend for these two divisions?

SECTION C
Long questions (Attempt any two).............................................................. (2×10= 20 marks)
Qn. 1. Assume that it is now January 1, 2013. On January 1, 2014 you will deposit Rs. 10,000 in
to a saving account that pays 8%.
a. If the bank compounded interest annually, how much will you have in your account on
janyary1? 2017?
b. What would your January 1, 2017 balance be if the bank used quarterly compounding
rather than annual compounding?
c. Suppose you deposit the Rs. 10,000 in 4 payments of Rs. 2500 each on January 1of 2013,
2014, 2015, and 2016. How much would you have in your account on January1, 2017,
based on 8 percent annual compounding?
d. Suppose you deposit 4 equal installments in your account on January 1 of 2014, 2015,
2016 and 2017. Assuming a 8 percent interest rate, how large would each of your
payments have to be for you to obtain the same ending balance as you calculated in part
(a)?
Qn. 2. The ABC manufacturing company has developed the following data regarding a project to
add new production facilities.
state Probabilities Market return Project return
1 0.05 -20 -30
2 0.25 10 5
3 0.35 15 20
4 0.20 20 25
5 0.15 25 30
Calculate the following requirements:
a. Expected return on the project and market.
b. The standard deviation of the project and market returns.
c. The covariance of the project returns with the market returns.
Qn.3. "A rupee hand today is more worth than a rupee at future". State this statement with the
forms of time value of money.

SECTION D
Case study (Attempt any two).............................................................. (2×10= 20 marks)
Qn.1. The Euro-Disney theme park in Bangkok, modeled after the one near Paris. Assume that
Disney already owns the land in Bangkok, on which the theme park is to be built. This land was
acquired several years ago for $5 mil. For a hotel that was never built. The land can be currently
sold for $40 mil. (Assume capital gains are taxed at 20%). In assessing the theme park, you
would:
Ignore the cost of the land, since Disney already owns it
 Use the value of the land at which it was bought ($5 m.)
 Use the market value of the land ($40 m.)
 Other
Required: read above case and write the Externalities / Side-effects
Qn.2. what is agency problem? Explain the potential conflict of interest between shareholders
and manager and between shareholders and creditors. How these conflicts can be resolved?
(Lesson 1)
Qn. 3. Using the following extracted data from balance sheet complete the balance sheet:
Liabilities and equity Amount Assets Amount
Accounts payable ? Cash 360,000
Long term debt 80,000 Accounts receivable ?
Common stock ? Inventories ?
Retained earnings 130,000 Fixed assets ?
Other information:
Debt ratio 50%
Quick ratio 0.80
Total assets Rs. 500,000
Total assets turnover ratio 1.5 times
Gross profit margin 20%
Inventory turnover ratio 5 times

******Good Luck*****