Ahsanullah University of Science and Technology: Course No: BBA 223 Course Name: Financial Management

Date of Examination: 05.06.
2021
AHSANULLAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

School of Business
BBA Program
Semester Final Examination, Spring 2020
Year: 2nd Semester: 2nd
Course No: BBA 223
Course Name: Financial Management
Time: 3 (Three) hours Full Marks: 60
Use single answer script
Instructions: i) Answer script should be hand written and should be written in A4 whitepaper.
You must submit the hard copy of this answer script to the Department when
the university reopens.
ii) You must write the following information at the top page of each answer
script:
Department: Program:
Course no: Course Title:
Examination: Semester (Session):
Student ID: Signature and Date:
iii) Write down Student ID, Course number and put your signature on top of every
single page of the answer script.
iv) Write down page number at the bottom of every page of the answer script.
v) Upload the scan copy of your answer script in PDF format through provided
google format the respective course site (i.e., google classroom) using
institutional email within the allocated time. Uploading clear and readable
scan copy(uncorrupted) is your responsibility and must cover the full page of
your answer script. However, for clear and readable scan copy of the answer
script student should use only one side of a page for answering the questions.
vi) You must avoid plagiarism, maintain academic integrity, and ethics. You
are not allowed to take any help from another individual and if taken so can
result in stern disciplinary actions from the university authority.
vii) Marks allotted are indicated in the right margin.
viii) Necessary charts/tables are attached at the end of the question paper. You
may use graph papers where necessary.
ix) Assume any reasonable data if needed.
x) Symbols and characters have their usual meaning.
xi) Before uploading rename the PDF file as CourseNo_StudentID.pdf
e.g., BBA111_190202001.pdf
The answer script (one single pdf file) must be uploaded at designated location in the provided
google form link available in the Google classroom
Page 1 of 4
[Answer any 5 (five) out of the following 7 (seven) sets of questions. Marks allotted are
indicated in the margin. Use graph paper if required]
1. a. What is the goal of the firm and, therefore, of all managers and employees? Discuss how 3
one measures achievement of this goal.
b. How do market forces-both shareholder activism and the threat of takeover act to prevent 3
or minimize the agency problem? Explain.
b. ABC Enterprise Limited ended the year with a net profit before taxes Tk. 365,000 in 4
2018. The company income is subject to a (30%+ last digit of your ID) tax rate and
committed to pay Tk. 30,000 in preferred stock dividend. The company has 150,000
shares in common stock currently outstanding.
Required:
i. Calculate earnings per share of the Company.
ii. If the company paid dividend Tk. 0.55 per share, how many amount would go to
retained earnings and cash dividend.
d. Differentiate between broker market and dealer market. 2
2. a. How do the price earnings ratio and the market to book value ratio provide a sense for the 3
firm’s return and risk?
b. Irvin enterprise is considering the purchase of a new piece of equipment to replace the 9
current equipment. The new equipment costs Tk. 75,000 and requires installation cost of
Tk. 5,000. It will be depreciated under MACRS using 5-years recovery period. The old
piece of equipment was purchased 2-years ago for an installed cost of Tk. 50,000 using
MACRS method with useful life of 3 years. The old equipment can be sold today for Tk.
55,000 net of any removal or cleanup costs. As a result of the proposed replacement, the
firm’s investment in account receivable and inventories are expected to increase by Tk.
55,000 and Tk. 60,000 respectively; whereas account payable is increased by Tk.75,000.
The firm pays taxes at a rate of 30%+ last digit of your ID. After five years the project
will be terminated, the new machine can be sold at Tk.25,000. The old machine can be
sold at Tk. 2,000 after removal of all costs.
Required:
i. Calculate he book value of old piece of equipment. Find the initial invest associated
with the proposed equipment replacement.
ii. Calculate the Terminal Value.
Page 2 of 4
3. a. A listed company’s balance sheet for year 2018 and 2019 is given below. The overall 6
value of the stockholders’ equity has risen from Tk. 2,370,000 to Tk. 9,080,000. Use the
statements to discover how and why that happened.
Balance Sheet (Partial)

2018(tk.) 2019(tk.)
Common Stock ($1.00 par)
Authorized: 5000000 shares
Outstanding: 1200000 shares 2019 1,200,000
600000 shares 2018 600,000
Paid in capital in excess of par 250,000 5,500,000
Retained Earnings 1,520,000 2,380,000
Total stockholders’ equity 2,370,000 9,080,000
The company paid a total dividend of Tk. 240000 during the fiscal year 2019.
Required:
i. What was the net income for fiscal year 2019?
ii. How many new shares did the corporation issue and sell during year 2019?
iii. What was the average price per share of the new stock sold during year 2019?
b. Steel Enterprises’ earnings per share for the period 2011 to 2020 are summarized in the 6
table below. Use this information to calculate the dividend per share for each of the years
and compare each of the dividend policy.
Year EPS Year EPS
2020 Tk. 2.40 2015 Tk. 1.64
2019 2.00 2014 1.28
2018 1.79 2013 1.01
2017 -0.95 2012 0.98
2016 -0.85 2011 0.86
Required:
i. For positive earnings only, payout (20%+last digit of your ID) of earnings.
ii. Pay Tk.0.75 per share and increase to 0.85 per share when earnings per share exceed
Tk. 1.60 per share.
iii. Pay Tk. 0.75 per share and pay an extra dividend of 0.50 per share when the earnings
per share exceed Tk. 1.60.
iv. Pay Tk. 0.75 per share and pay an extra dividend of 50% of earnings above Tk. 1.50
per share.
4. a. What is the general relationship among operating leverage, financial leverage, and the 4
total leverage of the firm? Do these types of leverage complement one another? Why or
why not?
b. Azad printing press is considering two possible capital structures A and B, Shown in the 8
following table. Assume any tax rate from 35% to 40%.
Sources of Structure A Structure B
Capital
Long Term Debt Tk. 75,000 at (10% + last digit Tk. 50,000 at (12% + last digit
of your ID) coupon rate of your ID) coupon rate
Preferred Stock Tk. 10,000 with and 18% Tk. 15,000 with an 18%
annual dividend annual dividend
Common Stock 8,000 shares 10,000 shares
Page 3 of 4
Calculate :
i. Two EBIT-EPS coordinates for each of the structures by selecting any two EBIT
values and finding their associated EPS values.
ii. Graph two capital structures on the same set of EBIT-EPS axes.
5. a. What is capital structure? Write down the proposition of M-M theory. 3

b. Differentiate between breakeven point and financial breakpoint with example. 2
c. Firm X has sales of 100,000 units at $2.50 per unit, variable operating cost of Tk. 1.80 7
per unit, and fixed costs of Tk. 6,500. The company has loan of 100,000 with interest of
(6%+ last digit of your ID). Firm Y has sales of 100,000 units at Tk. 3.50 per unit,
variable operating cost of Tk. 1.20 per unit, and fixed costs of Tk. 25,500. The company
has loan of 200,000 with interest of (8%+ last digit of your ID).
Required:
i. Compute the degree of operating, financial, and total leverage for the firm X and Y.
ii. Compare the relative risks of the two firms.
6. a. Discuss the different types of bonds. 4
b. Mountain Mining Company has an outstanding issue of convertible bonds with a Tk. 8
1200 par value. These bonds are convertible into 40 shares of common stock. They have
an annual coupon interest rate (8%+last digit of your ID) and a 25 year maturity. The
interest rate on a straight bond of similar risk is currently 13% to 15%.
Required:
i. Calculate the straight bond value.
ii. Calculate the conversion value the bond when the market price of the common
stock is Tk. 20, Tk. 30, Tk. 32, Tk. 35, and Tk.50 per share.
iii. For each of the stock prices given in part ii, at what price would you expect the
bond to sell? Why?
7. a. Differentiate among convertibles, stock purchase warrant, and Option contract. 4
b. Mr. X is considering either leasing or purchasing a new Chrysler convertible that has a 8
manufacturer’s suggested retail price of $33,000. The dealership offers a 3-year lease that
requires a capital payment of $3,300 ($3,000 down payment + $300 security deposit) and
monthly payments of $494. Purchasing requires a $2,640 down payment, sales tax of
6.5% ($2,145), and 36 monthly payments of $784. He estimates the value of the car will
be $15,000 at the end of 3 years. He can earn (2%+last digit of your ID) annual interest
on his savings and is subject to a 8% to 10% sales tax on purchases. Make a reasonable
recommendation to Mr. X using a lease-versus-purchase analysis that, for simplicity,
ignores the time value of money.
Required:
i. Calculate the total cost of leasing.
ii. Calculate the total cost of purchasing.
iii. Should Mr. X lease or purchase?
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Date of Examination: 05.06.

AHSANULLAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

Balance Sheet (Partial)

5. a. What is capital structure? Write down the proposition of M-M theory. 3

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