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BBS 3rd Year Foundation of Financial Systems Model Question

This document contains sample questions for a third year Bachelor of Business Studies (BBS) exam on the foundations of financial management. It includes three groups of questions - brief answer questions worth 2 or 10 marks each, brief answer questions worth 10 marks each, and analytical answer questions worth 15 marks each. Students must attempt all questions in the first group, five questions from the second group, and two questions from the third group. The questions cover topics like financial management, capital budgeting, working capital management, time value of money, risk and return, cost of capital, and dividend policy.

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Nirajan Silwal
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11K views

BBS 3rd Year Foundation of Financial Systems Model Question

This document contains sample questions for a third year Bachelor of Business Studies (BBS) exam on the foundations of financial management. It includes three groups of questions - brief answer questions worth 2 or 10 marks each, brief answer questions worth 10 marks each, and analytical answer questions worth 15 marks each. Students must attempt all questions in the first group, five questions from the second group, and two questions from the third group. The questions cover topics like financial management, capital budgeting, working capital management, time value of money, risk and return, cost of capital, and dividend policy.

Uploaded by

Nirajan Silwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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BBS 3rd Year Foundation of Financial

Systems Model Question


Bbsnotes.com
TRIBHUVAN UNIVERSITY (TU)
Fundamentals of Financial Management
Subject Code: MGT215
Year: III Year (Third Year)/MGMT
Program: BBS 4 Years Program
Level: Bachelor
Year: 2077-2021
FM:100
PM:35
Time: 3hrs

The figures in the margin indicate full marks.

Group "A"

Brief Answer Questions (10x2=20)

Attempt ALL questions.

1. What is financial management?

2. How does the effective rate differ from the nominal rate?

3. Define the term portfolio.

4. State the motives of holding cash.

5. How does stability and growth of sales affect the dividend of a firm?

6. What do you mean by breakeven point?


7. Assume that the risk-free rate is 6 percent, and the market risk premium is 8
percent. Beta of Stock J is 1.5. Calculate required rate of return on Stock J.

8. Sajha Pustak expects sales of 10,000 geometry boxes for a year, which cost
the firm Rs. 200 per box. It has been estimated that carrying costs are 10
percent of inventory value. The firm's order costs are Rs. 1000 per order. How
many boxes should the firm order?

9. A project with initial cost of Rs 400,000 generates total present value of Rs.
300,000 over it's five years of life. What is the project's profitability index? Is
the project worthwhile?

10. A company has a target capital structure that consists of 70 percent debt
and 30 percent equity. The company anicipates that it's capital budget for
upcoming year will be Rs. 8,000,000. If the company has net income of Rs.
5,000,000 and it follows residual dividend payout policy, what will be it's
dividend payout ratio?

Group "B"

Brief Answer Questions (5x10=50)

Attempt FIVE questions.

11. What is wealth maximization? Why should a firm concentrate primarily on


wealth maximization instead of profit maximization? Explain. (4+6=10)

12. Consider the following information associated with Stock A and Stock B
given in the following table.

Stock A Stock B
Average rate of return 12% 18%
Standard deviation of returns 6% 8%
Covariance of stock returns -38.4
Coefficient of correlation of stock returns -0.8

a. Which one stock is more risky? Which one stock would you prefer? (2)
b. If you form a portfolio of Stock A and Stock B comprising 60 percent wealth
in Stock A and the rest of Stock B, calculate the risk and return of your
portfolio. (4)

c. Assume risk-free rate and market return are 8% and 15% respectively.
Covariance between Stock A and the market return is 54 and the variance of
market return is 36, calculate the beta of Stock A. What is the required rate of
return on Stock A? (4)

13. Mega Bank has just issued bonds with an annual coupon rate of 8 percent,
7 years maturity and Rs 1,000 per value.

a. If an investor required rate of return is 10 percent, how much can he/she


pay for the bond at present? If bond is trading at Rs. 900, would you suggest
the investor to purchase the bond?

b. How does value of the bond change with the change in market interest
rate? (7+3=10)

14. Himalaya Power Company has just paid a cash dividend of Rs. 30 per
share. Dividend is expected to grow at a steady rate of 6 percent per year
forever. Investors require 16 percent return from investment.

a. Calculate value of stock at present.

b. What is dividend yield for the first year?

c. What will be the stock worth at the end of the third year, P3? (5+2+3=10)

15. The following table gives structure of Gandaki Cement Company:

Debt Rs. 80 Million


Common equity Rs. 120 Million
Total liabilities and equity Rs. 200 Million

Current interest rate on new debt is 10 percent. The firm's marginal tax rate is
30 percent. Gandaki Cement Company has just paid dividend Rs 30 per share.
Dividend is expected to grow at 6 percent per year forever. Current market
price per share is Rs. 400.

a. Calculate company's after tax cost of new debt and new cost of common
equity, assuming that new equity comes only from retained earnings.

b. What will be the company's weighted average cost of capital? Assume the
company maintains present capital. (6+4=10)

16.
a. Following data apply to Hi-Tech Company (Rs in Thousand)

Cash and marketable securities Rs. 100


Sales Rs. 1,000
Fixed assets Rs. 283.5
Net income Rs. 50
Quick ratio 2.0 x
Current ratio 3.0 x
Days sales outstanding (DSO) 40 days
Return on equity 12%

Calculation is based on a 360 days.

Hi-Tech has not issued any preferred stocks.

Find Hi-Tech's (1) Account receivable, (2) Current liabilities, (3) Current assets,
(4) Total assets and (5) Return on assets. (5)

b. Kathmandu Gift Center produces and sells dolls. Each unit is solid for Rs. 80.
The fixed costs are Rs. 3,00,000. Variable costs are Rs. 50 per unit.

i. How many units must be sold to achieve the break-even point?

ii. What is the degree of operating leverage at sales of 15,000 units? (3+2=5)
Group "C"

Analytical Answer Questions (2x15=30)

Attempt TWO questions.

17. Describe the concept of working capital and working capital management.
Discuss the importance of working capital management in manufaturing and
trading industries. (7+8=15)

18. Assume that it is now January 1, 202. On January 1, 2021, you will deposit
Rs. 1,00,000 into a savings account that pays 10 percent.

a. If the bank compounded interest annuall, how much will you have in your
account on January 1, 2024?

b. What would your January 1, 2024, balance be if the bank used quarterly
compounding rather than annual compounding?

c. Suppose you deposit the Rs. 1,00,000 in 4 payments of Rs. 25,000 each on
January 1 of 2021, 2022, 2023, and 2024. How much would you have in your
account on January 1, 2024, based on 10 percent annual compounding?

d. Suppose your deposit 4 equal installments in your account on January 1 of


2021, 2022, 2023, and 2024. Assuming on 10 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)? (4+4+4+3=15)
19. Happy Travel Tours Ltd. is considering to run tourist bus from Sauraha to
Kathmandu. A tourist bus costs Rs. 1,000,000 and it will pay daily for 4 years to
come. Annual net cash inflows for four years will be as follows:

Year Cash Flows (Rs.)


1 400,000
2 400,000
3 600,000
4 500,000

Assume the required rate of return of the project is 12 percent.

a. Define payback period. What is the payback period of the project? Should
the company run tourist bus from Sauraha to Kathmandu if it's maximum cost
recovery period is 3 years?

b. Define net present value (NPV). Calculate the NPV of the project. Should the
company tourist bus service?

c. Define IRR. What is the IRR of the project? Should the company run a tourist
bus service? (4+5+6=15)

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