POKHARA UNI VERSI TY

Level: Bachelor Semester Spring Year : 2005

Programme: BBA Full Marks : 00
!ourse: Finance " #ime : $hrs%
Candidates are required to give their answers in their own words as far
as practicable.
The figures in the margin indicate full marks.
Attempt all the questions.
% a& 'escri(e the role o) )inancial manager in a corporation%
(& *ive the arguments in )avor o) value ma+imi,ation as a goal o) the
(usiness )irm%
c& 'istinguish (et-een s.stematic risk an/ uns.stematic risk%
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2% a& Assume that it is no- 0anuar. 1 223% 4n 0anuar. 1 2221 .ou -ill
/eposit 5s% 1000 into a savings account that pa.s 3 percent%
i& ") the (ank compoun/s interest annuall.1 ho- much -ill .ou have
in .our account on 0anuar. 1 20026
ii& 7hat -oul/ .our 0anuar. 1 20021 (alance (e i) the (ank use/
8uarterl. compoun/ing rather than annual compoun/ing6
(& Morang Brothers invests 5s% 9 million to clear a tract o) lan/ an/ to
set out some .oung trees% #he trees -ill mature in 0 .ears1 at -hich
time Morang Brothers plans to sell the )orest at an e+pecte/ price o)
5s% 3 million% 7hat is Morang Brothers: e+pecte/ rate o) return6
c& Prepare an amorti,ation sche/ule )or a 5s% million%$ .ear percent
loan%
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$% a& !alculate the value o) the 0;.ear (on/ -ith a 2 percent coupon% #he
current market interest rate is 2 percent% #he par value o) the (on/ is
5s% 1000% 7hat is the value o) the (on/ i) interest is pa.a(le
semiannuall.% 7h. these t-o values are /i))erent6
(& Ama,on%!om:s1 a .ear en/ /ivi/en/ is 5s 01 current market price o)
the stock is 5s 00 an/ the gro-th rate is 5< in its earnings1 -hat is
the re8uire/ rate o) return on such stock6 Point out1 /ivi/en/ .iel/
an/ capital gain also in .our calculations%
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9% a& #he pro=ects have the )ollo-ing cash )lo-s: 0

Year Pro=ect A Pro=ect B
0 ;5s% 200 ;5s% 200
30 00
2 30 00
$ 30 00
9 30 ;
i& 7hat is the pa.(ack perio/ o) each pro=ect6
ii& ") the opportunit. cost o) capital is percent1 -hich o) these
pro=ects is -orth pursuing6 Suppose that .ou can choose onl. one
o) these pro=ects% 7hich -oul/ .ou choose6
iii& ") the opportunit. cost o) capital is percent1 -hat is the
pro)ita(ilit. in/e+ )or each pro=ect6
iv& 7hat are the internal rates o) return on pro=ects A an/ B6
v& ") there is con)lict result (et-een >P? an/ "55 metho/1 -hich
metho/ is pre)era(le an/ -h.6
(& @+plain the limitations o) pa.(ack perio/ metho/ o) capital (u/geting
pro=ect evaluation techni8ue%
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5% a& Suppose there are three e8uall. risk. outcomes )or the econom.1 the
e+pecte/ return on Auto stock an/ *ol/ stock are as )ollo-s:
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5ate o) 5eturn A<&
Scenario
Pro(a(ilit. Auto Stock *ol/ Stock
5ecession
B$ ;3 C20
>ormal
B$ C5 C$
Boom
B$ C3 ;20
i& !alculate the e+pecte/ return on Auto stock an/ *ol/ stock
ii& !alculate Stan/ar/ /eviation o) each stock%
iii& !alculate coe))icient o) variation o) each stock
iv& ") .ou )ormulate the port)olio o) Auto an/ *ol/ stock1 (.
investing D5< on Auto an/ 25< on *ol/1 -hat is port)olio
e+pecte/ return1 an/ stan/ar/ /eviation6
v& 'o .ou think that a(ove port)olio is -orth)ul6 7h.6
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(& Follo-ing /ata are availa(le )or AB! !ompan.:
5s% in million
Book value Market value
2< Bank loans
2< 'e(enture loans
4r/inar. shares
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#he cost o) e8uit. is estimate/ to (e 5<% #he corporate ta+ rate is $0<%
7hat is the compan.:s -eighte/ average cost o) capital un/er (ook value
an/ market value (asis6 7hich (asis is more relevant to evaluate the
investment pro=ect an/ -h.6
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a& AB! !ompan. currentl. is all;e8uit. )inance/% "t has 01000 shares
o) e8uit. outstan/ing1 selling at 5s%00 a share% #he )irm is
consi/ering a capital restructuring% #he lo- /e(t plan calls )or a /e(t
issue o) 5s%2001000 -ith the procee/s use/ to (u. (ack stock% #he
high;/e(t plan -oul/ e+change 5s%9001000 o) /e(t )or e8uit.% #he
/e(t -ill pa. an interest rate o) 0 percent% #he )irm pa.s no ta+es%
") earning (e)ore interest an/ ta+ -ill (e either 5s%201000 or 5s%
$01 0001 -hat -ill (e earnings per share )or each )inancing mi+ )or
(oth possi(le values o) @B"#6 ") (oth scenarios are e8uall. likel.1
7hat is e+pecte/ @PS un/er each )inancing mi+6 "s the high /e(t mi+
pre)era(le6
(& Shares in Ace La(oratories are selling )or 5s%90 per share% #here are
million shares outstan/ing% 7hat -ill (e the share price per share in
each o) the )ollo-ing situation6
i& #he stock splits )ive )or )our%
ii& #he compan. pa.s a 25 percent stock /ivi/en/%
iii& #he compan. repurchases 001000 shares%
iv& #he compan. pa.s 5s%2 per share cash /ivi/en/%
c& Suppose that FYG !ompan. nee/s to raise 5s%0 million )or E
months% Bank A 8uotes a simple interest rate o) D percent (ut re8uires
the )irm to maintain an interest;)ree compensating (alance o) 20
percent% Bank B 8uotes a simple interest rate o) 3 percent (ut /oes not
re8uire an. compensating (alances% Bank ! 8uotes a /iscount interest
rate o) D%5 percent an/ also /oes not re8uire compensating (alances%
7hat is the e))ective Aor compoun/& annual interest rate on each o)
these loans6 7hich option FYG !ompan. shoul/ choose6 7h.6
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a& A large consulting )irm or/ers photocop.ing paper (. the carton% #he
)irm pa.s a 5s%$0 /eliver. charge on each .ear% #he total cost o)
storing the paper1 inclu/ing )orgone interest1 storage space1 an/
/eterioration1 comes to a(out 5s%%50 per carton per month% #he )irm
uses a(out 1000 cartons o) paper per month%
i& Fill in the )ollo-ing ta(le
4r/er si,e
00 200 250 500
4r/ers per month
#otal or/er cost
Average inventor.
#otal carr.ing costs
#otal inventor. costs
ii& !alculate the economic or/er 8uantit.% "s .our ans-er
consistent -ith .our )in/ings in part Aa&6
(& !alculate the accounts receiva(le perio/1 accounts pa.a(le perio/1
inventor. perio/1 an/ cash conversion c.cle )or the )ollo-ing )irm%
7hat shoul/ (e the cash conversion c.cle1 lo- or high6 Ho- /o .ou
shortene/ the cash conversion c.cle6
"ncome statement /ata:
Sales 51000
!ost o) goo/s sol/ 91200
Balance sheet /ate:
Beginning o) Year @n/ o) Year
"nventor.
Accounts receiva(le
Accounts pa.a(le
500
00
250
E00
20
220
c& A )irm o))ers terms o) 2B51 net $0% !urrentl.1 t-o;thir/s o) all
customers take a/vantage o) the tra/e /iscountI the remain/er pa.s
(ills at the /ue /ate%
i& 7hat -ill (e the )irm:s accounts receiva(les perio/6
ii& 7hat is the average investment in accounts receiva(le i)
annual sales are 5s%20 million6
iii& 7hat -oul/ likel. happen to the )irm:s accounts
receiva(le perio/ i) it change/ its terms to $B51 net $06
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