Financial Management question, Hons 3rd Year Exam 2020, Accounting Department
BBA (Hons) Third Year Exam 2020
Subject Code: 232513
Subject: Financial Management (In English)
Time: 4 hours Full Marks: 80
[N.B: Answer the questions from each group chronologically]
Answer any ten questions:
a) What is business ethics?
Ans: The standards of conduct by which ones action are budget as right of wrong, honest or dishonest, fair on unfair are ethics.
(b) Define IRR.
Ans: The discount rate that equates the present value of the future net cash flows from an investment project with the projects initial cash outflows is called IRR.
(c) What is cost driver?
Ans: Any output measures of resources and activities is called cost driver.
d) Define marginal cost.
Ans: The additional cost resulting from producing and selling one additional unit is called marginal cost.
e) What is budget?
Ans: Budget is a blue-print of plan of action to be followed during a specified period of time for attaining some decided objectives.
f) What is an EPS?
Ans. EPS (Earning per share) is the amount earned during the particular period on behalf of each outstanding share of common stock.
(g) What is cash dividend?
Ans. If the dividend is paid in the form of cash to the shareholders is called cash dividend.
(b) Define stock split.
Ans. A stock split is a corporate action that increases the number of the corporation’s outstanding shares by dividing each share, which in turn diminishes its price.
i) What is right shares?
Ans. Right shares are those shares which are issued to existing shareholders.
i) What is gross working capital?
Ans. Total amount invested in the current assets of a company is termed as gross working capital.
(k) Elaborate BSEC.
Ans. Bangladesh Securities and Exchange Commission.
l) What is Economic Order Quantity (EOQ)?
Ans. The order size associated with minimized cost is called Economic Order Quantity.
Answer any five questions: (4 x 5 = 20)
2. Discuss the principles of business finance.
3. What do you mean by wealth maximization?
4. What is the difference between NOI and NI approach?
5. The stock of Maya Company is being sold for Tk. 200. The company wants to issue rights to subscribe for one additional at Tk. 175 for each of 10 held, What will be the theoretical value of
a) a right when the stock is selling rights or
b) Market price of a share when it goes ex-rights?
6. What are the differences between operating lease and financial lease?
7. Metro Co has a policy of maintaining a minimum cash balance of Tk. 1,00,000. The standard deviation of the company’s daily cash flows is Tk. 40,000. The annual interest rate is 15%. The transaction cost of buying on selling securities is Tk. 30 per transactions.
(a) Lower limit
(b) Upper limit
(e) Average cash balance
8. Cost of an asset is Tk. 25 lakh. A 6 years lease of the asset is proposed to yield 10% return to the lessor ignoring taxes. The salvage value is Tk. 1,00,000. Determine equal lease rental if payments are made quarterly.
9. From the following data show that D/P ratio does not affect the total returns of the share using MM model. Earning per share Tk. 20.
(The figures in the right margin indicate full marks.)
Answer any five questions: 10 × 5 = 50
10. (a) Define financial management
b)Discuss social responsibility of financial management.
11. ABC Ltd. has constructed a table, shown below, that gives expected cash inflows and certainty equivalent factors for these cash inflows. These measures are for a new machine with a five year life that requires an initial investment of Tk. 9,50,000. The firm has a 15% cost of capital and the risk free rate is 10%:
Year CFAT(Taka) Certainty
1 4,00,000 1.0
2 4,00,000 0.8
3 4,00,000 0.6
4 4,00,000 0.4
5 4,00,000 0.2
Required: (a) What is the net present value (unadjusted for risky?
(b) What is the certainty equivalent net present value?
12. The two companies U = Unlevered and L = Levered, belong to same risk class. These two firms are identical in every respect except that ‘L’ company has 10% debentures of Tk. 30 lakhs. The other relevant information are as follows:
Details Firm U (Tk.) Firm L (Tk)
EBIT 6,00,000 6,00,000
Less: Interest. 3,00,000
Earnings to Equity holders 6,00,000 3,00,000
(Cost of capital (Ke) 0.15 0.20
Market value of equity (S) 40,00,000 15,00,000
(+) Market value of debt (B). 30,00,000
Total value of the firm(V) 40,00,000. 45,00,000
Overall cost of capital (Ko) 15% 13.33%
Debt equity ratio (B/S) 0 2.00
Assume that an investor hold 10% equity shares of firm L.
(i) Show the arbitrage process and the amount by which he could reduce his outlay through the use of leverage.
(ii) According to Modigliani and Miller, when will this arbitrage process come to an end?
13. Sun Ltd. has a cost of equity of 12%, the current market value of the firm is Tk. 25,00,000 @ Tk. 25 per share. Assume values for 1 (new investment), E (earnings) and D (Dividends) at the end of the year as I = Tk. 14,00,000, E = Tk. 6,00,000 and D = Tk. 2 per share. Show that under the MM assumption, the payment of dividend does not affect the value of the firm.
14. The Big Boss Corporation has announced a rights offer to raise Tk. 30,00,000 for a new journal, the journal of financial express. This journal will review potential articles after the author pays a non refundable reviewing fee of Tk. 3,000 per page. The stock is selling Tk. 60 per share currently and there are 2,40,000 shares outstanding.
i) If the subscription price is set Tk. 50 per share, how many shares must be sold?
ii) How many rights will it take to buy one share?
(iii) What is the ex-right price?
(iv) What is the value of a right?
(v) Show how a shareholder with 1,000 shares before the offering and no desire to buy additional shares is not harmed by the right offer.
15. From the following information presented by a manufacturing company prepare a working capital requirement forecast statement for the next year: Expected monthly sales 64,000 units at Tk. 20 p.u. The anticipated ratios of cost to selling price are:
Raw materials 50%
Budgeted overheads Tk. 40,000 per week. Overhead expenses included depreciation of Tk. 8,000 per week. Planned stock will include raw materials for Tk. 1,92,000 and 16,000 units of finished goods. Materials will stay in process for 2 week credit allowed to customers is 5 weeks, credit allowed by suppliers is I month. Lag in payment of overhead is 2 weeks. 25% of sales may be assumed against cash and cash in hand is expected to be Tk. 1,00,000. Assume that production is carried on evenly throughout the year and wages and overheads accrue similarly. A time period of 4 weeks is equivalent to a month.
16. a) Discuss the advantages and disadvantages of lease.
b) Distinguish between lease and purchase.
17. a) What is agency conflict?
b) Discuss in brief the various techniques of overcoming agency problem.