Set

Time: 3 Hours Full Marks: 100

Subject: Financial Management Pass Marks: 50

Candidates are required to give their answer in their own words as far as
practicable. The given in the margin indicate full marks.
Group A: Brief Answer Questions
Attempt ALL Questions [10×2=20]
1. What is Capital intensity ratio?
2. What are capital budgeting techniques?
3. What is Capital assets pricing model? What is the equation od SML?
4. List out the factors affecting capital structures.
5. What is net float?
6. Define purchase power parity.
7. Project A has initial cost of Rs 50 million and present value of future expected cash flows
of Rs 52.2 million. Project B's initial cost is Rs 42.5 million and present value of future
expected cash flows of Rs 45.3 million. Which project or projects would you select if
they are mutually exclusive? If they are independent?
8. Assume 3-month US T-bills have a nominal rate of 8 percent while default free European
bond that mature in 3 months have a nominal rate of 6 percent. In the spot. exchange
market, one Euro equals $1.15. If interest rate parity holds, what is the 6-month
forward exchange rate?
9. The XYZ Company is trying to determine its optimal inventory policy.
10. The following relationships and conditions exist for the firm:
Annual sales are 120,000 units
The purchase price per unit is Rs. 500.
The Carrying cost is 20% of inventory value.
The fixed costs per order are Rs. 600.
The optimal safety stock is 500 units, which are ready in hand
Lead time: 2 days
Assume 360 days in year
a. What is the economic order quantity?
b. What is the optimal number of orders to be placed?

Group B: Short Answer Question

Attempt any SIX Questions [6×5=30]
11. Define financial management? What are the major responsibilities of a financial manager.
12. How does operating leverage different from financial leverage?
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13. Lumbini Flour Mills (LFM) buys and then sells (as flour) 2.45 million kg of wheat
annually. It purchases the wheat in multiples of 2,000 kg. Ordering costs, which include
grain elevator removal charges of Rs 350, are Rs 500 per order. Annual carrying costs are
2 percent of the purchase price of Rs 25 per kg. The company maintains a safety stock of
200,000 kg. The delivery time is 1 week. (Assume 50 weeks in year).
a. What is the economic order quantity?
b. What are the total inventory costs, including the costs of carrying the safety stock?
c. At what inventory level should a reorder be placed to prevent having to draw on the
safety stock?
d. Wheat processor agrees to pay the elevator removal charges if LFM purchases wheat
in quantities of 500,000 kg. Would LFM be advantageous to order this
alternative quantity?
14. Jagadamba Foods is considering changing its credit terms from 2/15, net 30 to 3/10, net
30 in order to speed collections. At present, 40 percent of non-default customers take the
2 percent discount. Under new terms, discount customers are expected to rise to 50
percent of the non-default customers. However, DSO is expected to decrease from 27
days to 22.5 days under proposed policy. The change does not involve a relaxation of
credit standards; therefore, bad debt losses are not expected to rise above their present 2
percent level. However, the more generous cash discount terms are expected to increase
sales from Rs 2 million to Rs 2.6 million per year. The company's variable cost ratio is 75
percent, the interest rate on funds invested in accounts receivable is 9 percent, and the
firm's marginal tax rate is 40 percent. What is the incremental profit from the change in
credit terms? Should the changes be made?
15. A new company is going to determine appropriate capital structure for its capital
requirement of Rs 2,000,000. It can either issue 10% debt or 15% preferred stock or
common stock of Rs 100 per share. The company is expected to have a 25 percent tax
rate and EBIT of Rs 400,000. The following two financing plans are proposed.
Structure I: Common stock of Rs 1,400,000 and rest debt capital
Structure II: Common stock of Rs 700,000; debt capital Rs 500,000 and rest preferred
stock
Determine indifference point EBIT and EPS under the indifference point EBIT.
Also suggest for appropriate capital structure at current EBIT of Rs 400,000.
16. Consider the rate of return associated with stock J and NEPSE return given in the
following:
Year NEPSE return Return on stock J
2018 15% 20%
2019 10 15
2020 -5 5
2021 20 20
2022 10 20
(a) Calculate the mean and standard deviation of stock J and Market
(b) Beta coefficient of stock J.
(c) If risk-free rate is 6 percent, what is required rate of return on stock J?
 Set
17. A firm has the following relationships the ratio of assets to sales is 55 percent. Liabilities
that increase spontaneously with sales are 20 percent. The profit margin on sales after
taxes is 6 percent. The firm's dividend payout is 40 percent.
a. If the firm's growth rate on sales is 16 percent per annum, what percentage of the sale
increase in any year must be financed externally?
b. If the ratio of assets to sales and ratio of liabilities to sales are 0.55 and 0.15
respectively, profit margin increases from 6 percent to 8 percent and dividend payout
ratio is 20 percent, at what growth rate in sales will the external financing requirement
percentages be exactly zero?

Group C: Long Answer Questions

Attempt any THREE questions [3×10=30]
18. What is meant by multinational corporation? Describe the reasons of multinational
growth.
19. Butwal supplier Inc 2006 financial statement are shown below:
Balance sheet as on December 31, 2006 (in thousands)

Cash Rs.70,000
Account payable Rs.3000
Account receivable Rs.13,000
Notes payable Rs.5000
Inventory Rs.20,000
Accruals Rs.2000
Total current assets Rs.40,000
Total current liabilities Rs.10,000
Net fixed assets Rs.40,000
Mortgage bond Rs.20,000
Total Debt Rs.30,000
Common stock Rs.44,000
Retained earnings Rs.6000
Total assets Rs.80,000 Total liabilities & equity Rs.80,000
Income statement for December 31, 2006 (in thousands)

Particulars Amounts (Rs.)

Sales 35,000
Less: Operating cost 30,000
EBIT 5000
Less: interest 1500
EBT 3500
Less: tax@50% 1750
Net income 1750
Dividend (40%) 700
Additional to retained earnings 1050
a) Assume that the company was operating at fully capacity in 2006 with regard to all
items except fixed assets. Fixed assets in 2006 were being utilized to only 70 percent of
capacity. By what percent could 2007 sales increase over 2006. Sales without the need
for an increase in fixed assets.
(b) Now suppose 2007 sales increase by 25% over 2006 sales. How much additional
external capacity will be required? Assume that the company can't sell any fixed assts.
Use pro-forma income statement to determine the additional retained earnings.
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(c) What would be additional external capital required, if 2007 sales increase by 60%
above 2006 sales. Also construct Pro-forma balance sheet for 2007 at this level, if AFN
is raised as additional noted payable.
20. Sanghrila Company is considering changing its credit terms from 2/10 net 30 to 3/10 net
30, in order to speed collections. At present, 40 percent of the Company's customer takes
discount and under new terms, it is expected to rise 50 percent.
Regardless of the credit terms, half of the customers who do not take the discount are
expected to pay on time under existing policy but it is expected 60 percent under new
policy, whereas the remainder will pay 10 days late. The change will also affect in the
present 1.5 percent level of bad debt to 2 percent. Due to this discount terms it is
expected to increase in sales from Rs 4 million to Rs 4.5 million per year. The variable
cost ratio is 75 percent, the cost of funds invested in accounts receivable is 12 percent,
and the marginal tax rate is 40 percent. Should the Sanghrila change its credit terms?
21. Consider the following two mutually exclusive projects:
Year Cash flow (X) Cash flow (Y)
0 (Rs.180,000) (Rs.18,000)
1 10,000 10,000
2 25,000 5,000
3 25,000 3,000
4 360,000 1,000
You require 15 percent return on your investment.
a. Which investment project will you choose based on following criteria and why? (i)
NPV criterion (ii) IRR criterion.
b. Which project will you choose if there is conflict between NPV and IRR
criteria and why?

Group D
Comprehensive Answer Question [20]
22. A firm is considering purchasing a replacement machine the existing machine can run for
5 more years producing annual revenues of Rs 60,000 with cash expenses of Rs 30,000
its current book value is Rs 20,000 and it is being depreciated at Rs 4,000 per year down
to a zero-book value. The machine could be sold today to net Rs 8,000 it could be sold in
5 years to net Rs 5,000. The replacement machine will cost Rs 50,000 plus an additional
Rs 20,000 to transport it to the factory and install it. It will generate revenues of Rs
90,000 but will have cash expenses of Rs 40,000. It will be depreciated using the straight-
line method over a 5-year period at which time it will have a book value of Rs 20,000 and
a cash salvage value of Rs 25,000. The replacement machine will require additional
working capital of Rs 5,000 to be permanently tied up. The firm decides to finance the
cost of the machine by taking loans and the cost of transportation and installation and the
working capital by using its equity. The loan is available from a bank at 15% interest rate.
The cost of equity of the firm at present is 18% the firm uses weighted average cost of
capital to evaluate the investment proposal. The firm is 40% tax bracket the tax on capital
gain/loss is same as in the case of ordinary income. Should the firm make the
replacement?
Base your answer on the payback period, NPV and IRR.