Financial Management MIMB Assignment solution
Total Marks: 100
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SECTION –A
Q1. Attempt all (10X1=10)
1 “Shareholder wealth” in a firm is represented by:
a) the number of people employed in the firm.
b) the book value of the firm’s assets less the book value of its liabilities
c) the amount of salary paid to its employees.
d) the market price per share of the firm’s common stock.
2 ___________________ of a firm refers to the composition of its long-term funds and its capital structure.
a) Capitalisation
b) Over-capitalisation
c) Under-capitalisation
d) Market capitalization
3. ____________ is defined as the length of time required to recover the initial cash out-lay.
a) Payback-period
b) Inventory conversion period
c) Discounted payback-period
d) Budget period
4. What are the earnings per share (EPS) for a company that earned Rs. 100,000 last year inafter-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in retainedearning at the year end?
a) Rs. 100,000
b) Rs. 6.00
c) Rs. 0.50
d) Rs. 6.50 activities
5. ____________ enhance the market value of shares and therefore equity capital is not free of cost.
a) Face value
b) Dividends
c) Redemption value
d) Book value
6. Consider the below mentioned statements: 1. A company is considered to be over capitalized when its actual capitalization is lower than the proper capitalization as warranted by the earning capacity 2. Both over-capitalization and under-capitalization are detrimental to the interests of the society. State True or False:
a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
7. Which of the following would NOT improve the current ratio?
a) Borrow short term to finance additional fixed assets.
b) Issue long-term debt to buy inventory.
c) Sell common stock to reduce current liabilities.
d) Sell fixed assets to reduce accounts payable.
8. A firm’s operating cycle is equal to its inventory turnover in days (ITD)
a) plus its receivable turnover in days (RTD).
b) minus its RTD.
c) plus its RTD minus its payable turnover in days (PTD).
d) minus its RTD minus its PTD
9. Uses of funds include a (an):
a) decrease in cash.
b) increase in any liability.
c) increase in fixed assets.
d) tax refund.
10 The point of tangency between risk return indifferences curves and efficient frontier highlights: a Optimal portfolio
b Efficient portfolio c Sub-optimal portfolio d None of the above
SECTION –B
Q2. Attempt any 10 (10X5=50)
1. Is the price of future the best estimate of the currency exchange rate ?
2. Assuming a company wishes to distribute money to its shareholders , is it better to distribute dividends or to repurchase shares ?
3. Define Leasing?
4. Are there any ways to analyze and value seasonal business ?
5. What does “stock Dividend” mean? Give example
6. Which parameter better measures value creation; THE EVA , the CVA or the economic profit and Why ?
7. How could we project exchange rates in order to be able to forecast exchange differences?
8. “Audit begins where accountancy ends”? Discuss
9. Distinguish between internal Audit and Independent Audit?
10 Define Capital Structure ? Which Capital structure should be considered when calculating the WACC for a subsidiary valuation?
SECTION C
Q3. Attempt any 2 (20X2=40)
1. Ridag Co operates in an industry which has recently been deregulated as the government seeks to increase competition in the industry.Ridag Co plans to replace an existing machine and must choose between two machines. Machine 1 has an initial cost of $200,000 and will have a scrap value of $25,000 after four years. Machine 2 has an initial cost of $225,000 and will have a scrap value of $50,000 after three years. Annual maintenance costs of the two machines are as follows:
Year 1 2 3 4
Machine 1 ($ per year) 25,000 29,000 32,000 35,000
Machine 2 ($ per year) 15,000 20,000 25,000
Where relevant, all information relating to this project has already been adjusted to include expected future inflation. Taxation and tax allowable depreciation must be ignored in relation to Machine 1 and Machine 2.
Ridag Co has a nominal before-tax weighted average cost of capital of 12% and a nominal after-tax weighted average cost
of capital of 7%.
A) In relation to Ridag Co, which of the following statements about competition and deregulation are true?
(1) Increased competition should encourage Ridag Co to reduce costs
(2) Deregulation will lead to an increase in administrative and compliance costs for Ridag Co
(3) Deregulation should mean an increase in economies of scale for Ridag Co
(4) Deregulation could lead to a decrease in the quality of Ridag Co’s products
A 1 and 4
B 2 and 3
C 1 and 3
D 2 and 4
B) What is the equivalent annual cost of Machine 1?
A $90,412
B $68,646
C $83,388
D $70,609
C)Which of the following statements about Ridag Co using the equivalent annual cost method are true?
(1) Ridag Co cannot use the equivalent annual cost method to compare Machine 1 and Machine 2 because they
have different useful lives
(2) The machine which has the lowest total present value of costs should be selected by Ridag Co
A 1 only
B Both 1 and 2
C 2 only
D Neither 1 nor 2
2. Examine the role of Bank Credit in financing of Working Capital. What are the types of Bank Credit? Discuss
3. PV Co, a large stock-exchange-listed company, is evaluating an investment proposal to manufacture Product W33,which has performed well in test marketing trials conducted recently by the company’s research and development
division. Product W33 will be manufactured using a fully-automated process which would significantly increase noise levels from PV Co’s factory. The following information relating to this investment proposal has now been prepared:
Initial investment $2 million
Selling price (current price terms) $20 per unit
Expected selling price inflation 3% per year
Variable operating costs (current price terms) $8 per unit
Fixed operating costs (current price terms) $170,000 per year
Expected operating cost inflation 4% per year
The research and development division has prepared the following demand forecast as a result of its test marketing
trials.
The forecast reflects expected technological change and its effect on the anticipated life-cycle of Product W33.
Year 1 2 3 4
Demand (units) 60,000 70,000 120,000 45,000
It is expected that all units of Product W33 produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product W33 is planned to end. For investment appraisal purposes, PV Co uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation.
Required:
(a) Calculate the following values for the investment proposal:
(i) net present value;
(ii) internal rate of return; and
(iii) return on capital employed (accounting rate of return) based on average investment.
(b) Briefly discuss your findings in each section of (a) above and advise whether the investment proposal is financially acceptable.
(c) Discuss how the objectives of PV Co’s stakeholders may be in conflict if the project is undertaken.
Q4. Attempt any 1 (20X1=20)
CASE: 1
M/S. Marutham Investment Bond 2013 was issued in January 2014, with a maturity period of 2 years. With a Coupon payment of 7% per annum made every 6 months with Face value of Rs.100. What is the YTM for the bond, if the prevailing market price was Rs. 84 as at January 2014?
CASE: 2
Calculate the Working Capital requirement for a manufacturing Firm for
the Level of activity of 80,000 Units. You may assume that production is
carried on evenly throughout the year and Wages & Overhead expenses
accrue similarly and a time period of 4 weeks is equivalent to a month.
Description Amount (Rs.) Other Information
(Per Unit)
Raw materials 45 • Raw materials in stock: Two weeks
• Materials in Process: One week
• Finished Goods in stock: Two weeks
• Credit allowed by Suppliers: Half Month.
• Credit allowed to Customers: 4 weeks.
• Overheads Two weeks
Direct labor 20
Overheads 37.5
Total Cost 102.5
Profit 22.5
Selling price 125
Cask at Bank is expected to be Rs. 40,000. Also 80% of the sales are
credit sales for the firm. Any other data if required may be assumed.
