**Fundamentals of Financial Management**

**Subject Code: MGT215**

DRG Vlogs https://www.dhanraj.com.np presents you the new question/exam paper of the subject Fundamentals of Financial Management Mgt215 BBS Third Year 4 Years Program of the year 2077-2021 which was held on February 25, 2021 (Falgun 13, 2077).

Candidates are required to give their answers in their own words as far as practicable.

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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 effective rate differ from nominal rate?

3. Define the term portfolio.

4. State the motives of holding cash.

5. How does stability and growth of sales affect the divident 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 of a year, which cost the firm Rs. 200 per box. It has 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 | |

Coffecient 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 tourist bus service? (4+5+6=15)

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